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

Ladies and gentlemen, thank you for standing by, and welcome to the DFI Retail Group Holdings 2022 Annual Results Briefing Conference Call. 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. Well, good morning, everyone. Thank you for joining us for our 2022 full year results presentation. First, I'd like to move on to the presentation disclaimer, which you've all seen before. So if we can make sure we maintain our position in terms of what that disclaimer represents, that would be great. In terms of the agenda, I'll go through the sort of key highlights for the year, and then I'll hand over to Clem who'll take us through the financial results, and then I'll come back with an update of progress in each of the individual business units and then an outlook in terms of where we think 2023 might turn out. So moving on to the highlights for the year, we're actually pleased that subsidiaries sales were in line with the prior year given last year's level of panic buying and also encouraged by the level of earnings recovery in the second half with a $132 million positive profit swing between the first half and the second. We also saw strong growth in Health and Beauty with double-digit like-for-like sales in each key market and encouraging underlying growth in Grocery with PB was 40% ahead of 2019. Convenience business also performed strongly in the second half. And despite significant availability challenges and trading restrictions, our key earnings remained stable year-on-year. We also benefited from improving performance trends from associates and recognizing the increasing importance of competing both off-line and online, we're now investing in to drive long-term value. I'll now hand back to Clem to run through the financial results.

Thank you, Ian. Good morning, everyone. Let me take you through DFI's Group results for 2022. Let's start with revenue and underlying profit. First thing to note on this slide is that we've added 2 columns on the end, highlighting the improving second half trend. Now in terms of total revenue, including associates, our revenue was at $27.6 billion, minus 1% on the year. And given the enormous trading volatility we faced in 2022, we are pleased with the overall group sales performance being in line with last year. In terms of subsidiaries sales, we were at $9.174 billion, in line with last year. And what we see here really is as COVID -- as we have normalized our grocery retail sales, we've seen strong performance in Health and Beauty. Our subsidiaries underlying profit ended up at $209 million and down from $314 million. But when you look at the second half, our underlying operating profit for subsidiaries was at $133 million, up $57 million on the first half. Now after deducting tax, accounting and finance charges, our subsidiaries underlying profit was $64 million as against $145 million last year. Now our share of associates and JV profit actually narrowed. In terms of loss, we went from $40 million to $35 million. So what we saw was a better improvement for Robinson. So Robinsons went from $14 million to $24 million. The Yonghui loss narrowed from $90 to $80. And all this was offset by Maxim's that had a very good second half following a weak first half. So our underlying profit attributable to shareholders ended at $29 million, down from $105 million. But as Ian pointed out earlier, we've seen $132 million swing in profit from the first half to the second half, our second half underlying PAT was $80 million. In terms of nontrading adjustments, our nontrading adjustments amounted to negative $143 million. And the biggest change here really was our impairment of Robinsons. So as you know, we conduct annual impairment calculations each year. And because of the volatility in interest rates, it's affected our discount rate, which has in turn impacted the carrying value of our investments in Robinsons. And as a result, we've taken a write-down there. So our reported profit attributable to shareholders was negative $115 million versus $103 million last year. Our underlying EPS was at 2.14%, and our total dividend for the year was $0.03, and we declared a second half dividend of $0.02, and this is in keeping with maintaining a strong balance sheet. Let's turn to sales. In terms of sales for the year, when you look at our grocery retail business, our grocery retail sales were just under $3.9 billion, down 7% in the year. But when you adjust for effectively our discontinued Indonesia food business, that sales number is negative 4% on the year. And again, when you think about the strong panic buying we had in 2021, 2022's performance of $3.9 million is fairly strong. In terms of Convenience sales, our convenience sales ended at $2.26 billion, plus 1% on the year, and that's despite losing 12,000 trading days in China throughout the year and actually just under 3,000 trading days in Hong Kong. The LFLs of our convenience businesses improved quarter-by-quarter through the year. In terms of Health and Beauty, we ended at just over $2 billion, up 12% on the year. And as Ian mentioned, we've seen double-digit growth in all our major markets. As for IKEA, we ended at $839 million, plus 3% on the year, and that's despite losing 5,000 trading hours and having essentially global chain disruptions with availability throughout most of the year. And when you look at our key associates, overall, associate sales are broadly flat, minus 1% on the year. Maxim's ended up at $2.5 billion, up 3% on the year. And what we saw with Maxim's was a strong sales recovery in Southeast Asia throughout the year. In terms of Hong Kong, Hong Kong was impacted with the dine-in restrictions in Hong Kong between January and April. But what we did see was an encouraging second half performance in Maxim's with mooncake sales reaching good levels. In terms of Yonghui, Yonghui sales were down 3% to $12.7 billion. And sales held up here, really. Online penetration is at 15%. But what we did see is, this performance is good given the severe lockdowns we had throughout China, predominantly in the second half. Robinsons ended at just over $3.1 billion, up 3%. And what we saw here was a strong recovery in performance in all their markets and all their different segments. And again, what we saw was an improving trend, particularly strong in Q2 and Q3. Now, if we turn to Subsidiaries operating profit. And again, if we start with Grocery retail here, we saw Grocery retail profits at $91 million, down from $151 million in 2021. And this really reflects the impact of the annualization of COVID, particularly in Southeast Asia and inflationary pressures that we've seen in the market. Convenience Stores performance was at $51 million worth of profit. And as I mentioned earlier, this is really based around a strong profit recovery in the second half. First half, we were breakeven. And you can see that on the right-hand side so second half profitability was at $51 million and full year was at $51 million. Because of the strong sales performance in Health and Beauty, we see this reflected right through into profit. Our profit for the year in Health & Beauty was at $94 million, up from $56 million, a 66% improvement on the year. IKEA's profit is solid, in line with last year. And as I said earlier, and that's despite losing 5,000 trading days -- trading hours. Our SG&A costs are $147 million, up from $76 million. And here, the main movement here is we're choosing to incubate our investments in digital in this line. Now going forward, we don't see our SG&A costs being higher than -- much higher than this. This is broadly where we expect it to now. So our operating profit overall was at $209 million, down 33% on the year. But as you can see on the right-hand side, our second half performance was $133 million, a swing of $57 million on the first half. Now in terms of cash flow, what we've seen here is a solid cash flow. You can see at the bottom of the page, our net debt has ended at $866 million, a loss -- a net debt of $866 million as against $844 million for 2021. Now bear in mind, this is a big improvement on the June position of $995 million. So our net debt has improved significantly over the half. Now things to point out here, our working capital has improved, and that's really despite having an earlier Chinese New Year. Our operating cash flow at $279 million has also improved, and we've seen that improve strongly in the second half. And our CapEx is broadly in line with last year. There's a bit of catch-up CapEx this year given the COVID situation in 2021. In terms of our relationships with our banks, they're still strong, and we're comfortable with where we are with our net debt position. In summary, 2022 was a challenging year, and the performance of our food business was encouraging despite being impacted by the annualization of COVID and inflationary pressures across all our markets. Our Convenience business recovered strongly in the second half. Our Health & Beauty business has seen double-digit growth with profit improving. Our IKEA earnings remain solid, and that's despite the challenges that we faced, and we continue to invest in Digital. Now we are seeing some positive momentum with the opening of the China-Hong Kong border. So we're looking forward to a better 2023. Thank you. And let me hand you back to Ian.

Okay. Well, thank you, Clem. I'd just like to go through the business updates and then finish with an outlook for 2023, if I may. This is an individual chart, which we've shown a number of times. There's a brief reminder of our core transformation strategy and its key business enablers that we first shared in 2018. It's a plan that we've executed on despite all the COVID challenges still shapes our thinking today. Moving on to the individual businesses. If we start with North Asia, where we benefited from solid like-for-like sales during the year, combined with strong underlying profit growth well ahead of 2019. Supported by strong trading and improving service metrics, our brand reception with customer continues to grow, and our grocery offline business is now well supported by an increasingly effective online proposition. We've launched new formats in both mass and upscale are enjoying double-digit growth post renewal. Our business investment in value through EDLP and Own Brand developments are paying dividends now as we experienced an increase in sales densities and increase in basket size and a growing market share. Moving on to Southeast Asia. Grocery markets continue to be challenging. While sales in 2022 annualized against movement restriction sales benefits of 2021, profits were impacted further by substantial increases in utility costs. We're in Singapore, as an example, energy costs have increased by over 70% as well as the government imposed increases in minimum wages as well. That said, we saw a strong improvement in like-for-like trends in the second half with our price investment campaigns improving both by perception and customer trust. Our new formats, particularly CS Fresh, are being well received by customers. And following the successful launch of Yuu Rewards in Hong Kong, it has been introduced into Singapore in partnership with Temasek with over 1 million members joining since its launch less than 6 months ago. It's also worth mentioning that we made that decision to transition our Malaysian food business to new ownership. We are proud of the substantial progress made in reinvigorating the Giant brand in Malaysia and grateful for the committed efforts of our teams there to deliver significant change. That said, we believe it's in the best interest of the brand and our team members to place the business in local hands to take it on from here. This does not imply that we've given up on Grocery or in Malaysia. It actually gives us the potential to advance trading opportunities in a more focused and productive way, focusing on health and beauty in Malaysia, already a strong business for us and to double down on progress in terms of our food business in Singapore. It's also worth mentioning that we are also encouraged by our development in Cambodia, where we are now market leaders with close to 100 stores on the ground. Whether it's in Southeast Asia, grocery or North Asia grocery, one important factor in improving our value perception and our value position has been a successful implementation of our own brand strategy. We've now introduced over 3,000 new own brand items to the range, mainly through the introduction of the Meadows brand. We have won over 230 quality awards adding further credibility to the offer. And by way of example, Meadows is now the #1 snack brand in Singapore across the total market. We are enjoying double-digit volume growth with market-leading own brand sales penetration. The range is being extended now to offer value alternatives in key categories coming up against established well-known brands and adding further to the own brand opportunity. An additional 500 SKUs are planned for 2023 as well as exploring the opportunity to provide own brand into other markets where we don't currently compete on a B2B basis. What was once a proposition weakness, we now believe is a business strength. Moving on to Health and Beauty. We enjoyed double-digit like-for-like growth in Hong Kong, coupled with very strong profit growth also. We also were awarded with our strongest ever market share position through developing an effective balance between EDLP price reassurance and fewer and more compelling promotions. Mannings also has the highest participation of active rewards members. The combination of all these trading initiatives has built further brand trust, which bodes well for the further growth, now that bodes for China reopening for the first time in 3 years. Our Guardian business in Southeast Asia also had an encouraging year with double-digit like-for-like sales growth across all key markets and profit returns doubling year-on-year. Inflationary pressures have been challenging, but business efficiency measures are certainly helped mitigate the impact. Despite COVID constraints, we will put in over 150 new stores during 2022 and we anticipate our store expansion plans to continue through 2023 and beyond, supported by the development of more comprehensive and complementary online offer. As with our Food business, Own Brand is playing an increasingly important role in supporting our value proposition. Over 1,000 new Health and Beauty own brand products were introduced in 2022. With our refresh range on cotton and paper in Hong Kong being named as retail product of the year, over 80 million units have been sold since the relaunch, and we now have our strongest own brand penetration ever in the #1 brand position in our stores across multiple categories. In Mannings, for example, 1 every 4 items now purchased by our customers is an own brand item, and there are further 1,000 new items planned for launch in 2023. Moving on to 7-Eleven. Once again, our Convenience business has faced challenges, particularly in China, where we lost over 12,000 trading days to COVID lockdowns. I'm pleased to say that what we have seen a strong profit recovery from 7-Eleven in the second half with double-digit sales growth in Singapore as movement restrictions have eased as well as an improving sales momentum in Hong Kong. With the substantial easing of restrictions in China as we enter 2023, it all begins to bode well for better trading time for 7-Eleven going forward, particularly since some of our more aggressive partners have chosen to exit the market in [ brand Yuu ] altogether. In terms of IKEA, as well as the DFI businesses, has faced its own share of disruption challenges. 5,000 trading hours are lost to cover restrictions, mainly in Indonesia, where global supply chain challenges also impacted availability. Despite these issues, like-for-like sales were still positive. Profitability remained stable and store expansion continued. Indonesia trading space has tripled since 2017. The central new warehouse capacity has been added in Taiwan and innovative small store formats in [indiscernible] Hong Kong with promising results. We therefore remain very confident in our case future profit contribution to the group. We have known for some time the importance of building and executing a strong digital strategy, especially in our key market of Hong Kong. It was this realization that drove the launch of Yuu Rewards in 2020 as a DFI catalyst for digital change. Yuu Rewards is the clear brand leader in terms of loyalty in Hong Kong with 99% brand awareness, over 4.3 million members and over 2 million specific personalized offers provided to customers targeted to match their individual specific needs. We now have a number of strong complementary program affiliates in key sectors such as banking, fuel, insurance and travel, providing a service ecosystem for our customers and as a result, develop not only a strong membership base, but importantly, a best-in-class customer loyalty retention rate. Yuu Rewards has now been launched in Singapore in partnership with Temasek, as I mentioned earlier. It was the #1 downloaded app in Singapore in quarter 4, attracting over 1 million consumers to join the program. We have confidence that Yuu will continue to be a source of real competitive advantage in both of these important markets. What the success of Yuu Rewards allows is the ability for us to open the door to broader development of our O2O strategy. We've recruited a highly experienced team to lead the change, and we have now developed Yuu-to-me online as a further step in developing the Yuu ecosystem, offering a one-stop, one-drop experience across our key offline retail brands. It's still early days as we take our foundational steps, but our e-commerce sales in Hong Kong doubled last year, and our online service metrics are already matching global standards, supported through a combination of store pick and pack outlets and a purpose-built e-commerce fulfillment center in Hong Kong. It's a critical and significant investment for us, but one where we can build competitive advantage over time through the collective strength of our stable and strong retail brands. As a company, we recognize we have responsibility not only to our shareholders and our customers, our team members, but also the communities we serve as well. In 2021, we launched our CSR strategy and have made good progress, we believe, in advancing our CSR and sustainability credentials. We have reduced food waste by 40% since 2017, launched food donation programs in multiple countries, made early steps in reducing plastic usage and made real progress in identifying ways in which we can reduce our energy usage and carbon emissions. Following detailed analysis, we now have confidence in declaring our commitment to halving our carbon emissions by 2030 and targeting a net 0 carbon position by 2050. These are not empty promises, but backed by detailed research and action plans that give us genuine confidence in our ability to deliver on our commitments is a major step forward for the group. So I'd now like to move on to the business outlook, having covered the various business segments in the recent slides. There's no doubt that COVID impacts in recent years and the understandable actions taken by governments to protect their people have as a consequence impacted our business performance significantly. That said, we have not stood still wringing our hands. We believe that our transformation plan has built a strong, solid foundation, allowing us to weather the storm better that we might otherwise have done and providing us with optimism for our trading prospects in 2023. More recently, we've experienced improving performance trends in most balancing markets as clearly evidenced by the rising trend of performance between the second half and the first. We're investing in new, more opinion formats and channels to support future growth and continue to attract and retain good quality people. While prevailing macroeconomic challenges cannot be dismissed, I'm grateful for the hard work of our teams for the underlying progress we've made and have growing confidence in the group's ability not only to retain, but actually enhance its competitive position over time. Thank you for listening.

Thank you. Ladies and gentlemen, this concludes our conference for today. Thank you all for your participation. You may all now disconnect.