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 2023 Half Year 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 this morning for the DFI Retail Group 2023 Half Year Results Presentation. I'd just like to remind you a number of the different conditions that apply to this particular call, which I know you've seen before. And then moving on quickly to the agenda. I'll just run through some highlights for the half. Bring Clem in to talk through the financial results, and I'll come back with some business updates for the different banners around the country and territories that we have and then briefly look at the business outlook. So moving on to the performance highlights. We've been very encouraged by the underlying performance of the business in the first half. The impact of Malaysia groceries excluded, underlying subsidiary sales actually increased by 4%. Even more encouraging is the substantial improvement in our profits against the same period last year, while associates profitability improved significantly, with Maxim's particular performing well, we also delivered a fivefold increase in our subsidiary profits against the same period last year. In terms of grocery retail sales, they had a softer result when compared to last year as they annualize the exceptional sales performance in early 2022, given the panic buying of COVID Wave 5. Our confidence in our underlying performance is demonstrated by the sales momentum in North Asia, which showed an improved performance in the second quarter as the annualization impact cleared. After challenging quarter 1 for Southeast Asia, we also saw a much improved performance in the quarter 2 as well. We've also been encouraged by the significant improvement in health and beauty across both North Asia and Southeast Asia, with strong double-digit growth virtually across the board. As sales came back strongly, allowing us to leverage the cost base. We have benefited from profitability growing significantly faster than sales. We've also benefited from good like-for-like sales growth in each of our convenience markets, too, as foot traffic in each market return to more normal patterns. This improved market and sales dynamics have led to a very strong improvement in profitability when compared to last year. IKEA sales are broadly in line with last year as in deep as profit, which was supported by strong cost control and improving performance trend quarter-on-quarter. I'd now like to hand over to Clem to talk you through the financial highlights.

Thank you, Ian. Good morning, everyone. I will take you through a summary of DFI's results for the first 6 months of June 23. Starting with revenue and profit. Our total revenue, including associates and JVs was at $13.488 billion, marginally down 4% year-on-year, primarily due to reduced revenues at Yonghui. If we exclude Yonghui, total revenues for the group were up plus 7% year-on-year. Our subsidiaries revenues were at $4.574 billion, in line with last year, but 4% up if we exclude our Malaysia grocery business, which we divested earlier this year in March. Subsidiaries operating profit was $86 million, more than doubled from $37 million last year, a very encouraging performance. After deducting tax, accounting and finance charges, our subsidiaries' underlying profit was $40 million, and as Ian mentioned, increased fivefold relative to the first half of last year. Share of Associates and JVs underlying loss improved significantly from a loss of $60 million last year to a loss of $7 million this year, primarily driven by significant profit recovery from Maxim's and reduced losses at Yonghui. Underlying profit attributable to shareholders was $33 million and $85 million positive profit swing compared to the first half of last year. Non-trading items were $25 million, a loss of $25 million, but mainly driven by the crystallization of $44 million foreign exchange losses from the disposal of our Malaysian grocery retail business. Reported profit attributable to shareholders was, therefore, $8 million compared to a loss of $58 million last year. And earnings per share was at $2.47, with total dividend declared at $0.03, up from $0.01 last year, highlighting our confidence in the underlying business. Now turning to sales. Our total sales -- our total food sales were at $2.870 billion, down 7% last year. But if we exclude our Malaysian grocery business, this goes from minus 7% to minus 1% down on the year. Our grocery retail sales were at $1,688 billion, down 16%. But again, excluding Malaysia, our grocery retail sales are down 7%. And as Ian mentioned, our grocery retail sales softened as we annualize exceptional sales in the first half of '22. But we are encouraged to see stronger LFL trends in grocery retail in the second quarter. Our convenience store sales were at $1.182 billion, plus 9% with all markets performing strongly. And our Health and Beauty sales were at $1.210 billion, up 23% with strong LFL performances from all businesses. IKEA sales were at $400 million, down 2%, but broadly in line with last year, impacted by lower store visitations, particularly in Q1. We've seen sales trends improve in Q2. As for our key associates, Maxim's reported sales of $1.371 billion, a substantial 37% sales growth driven by the recovery of restaurant traffic across markets, particularly here in Hong Kong. Yonghui sales were $5.758 billion, down 17%. The annualization of panic buying during COVID in China in the first half of '22 has had an acute impact on Yonghui sales performance. However, profit has improved, and Robinson sales at $1.744 billion were up 9%. May I remind you that the results for Yonghui and Robinsons are for the 6 months ending 31st of March. Now moving to our subsidiaries operating profit. Total food profit was $40 million, $7 million down on last year. Our grocery retail profit was $14 million, $34 million down on last year. The shortfall was mainly driven by a reduction of profit in North Asia grocery as a result of annualization of exceptional sales in the first half of last year during COVID wave 5. It's also worth noting that excluding digital investments, our underlying PBIT for the first half of '23 would be broadly in line with the first half of '19. Our convenience store profit was $27 million, up $27 million on this time last year, driven by a strong recovery of foot traffic as borders reopened and tourists came back. Health and Beauty profit was at $100 million, up 155% from last year, again, underpinned by borders opening and increased tourist traffic. And IKEA profit was broadly in line this year with last year at $14 million. Our SG&A costs remained well controlled, slightly up on last year at $68 million. But please bear in mind this number includes our digital -- some of our digital investment costs. Overall, our operating profit post IFRS16 was therefore $128 million, up $51 million from last year. Finally, turning to cash flow. Overall, the group's net debt position remains well managed. Our overall net debt is down to $883 million, an improvement of over $100 million on the first half of '22. This has mainly been driven by improved working capital, disciplined CapEx spending and better trade. Our operating cash flow nearly doubled to $149 million from $76 million last year, and our free cash flow was at $44 million, a positive swing of nearly $100 million compared to the first half of '22. In summary, as borders reopen and things return to normal, it's very encouraging to see our businesses begin to bear fruit and make tangible improvements on our financial results. I'll now hand you back to Ian. Thank you.

Thank you, Clem. So just moving on to the individual business units. Let's take a look at grocery retail in North Asia cost. As mentioned earlier, the year-on-year softening, the performance of North Asia grocery retail was not as a result of particularly poor sales performance in the half, as a result of the business annualization of the exceptional sales benefit in the first half of '22, given the panic-buying of COVID Wave 5. Our confidence in the strength of the welcome marketplace brands is further reinforced by the significant improved like-for-like sales trend in quarter 2 compared to quarter 1 as well as the fact that Wellcome continued to gain market share during the last 6 months, underpinned by strong value position and delivering our highest ever share of fresh food. Our development of new formats continue to be well received by customers as well as remodeling around 300 stores in the last 2 years. We've now opened 5 new Wellcome Fresh stores with each reporting double-digit sales and profit growth post launch. In addition to offline, we've invested heavily in digital by enhancing both our team capabilities and badly needed improvements in the infrastructure, each of which are supporting a double-digit growth in O2O sales growth over the [indiscernible] last year. Yuu Rewards continues to grow from strength to strength and exceed expectations with over 4.5 million members, spending over 2.5 billion points and the scale of the program now greatly enhancing our data analytics capability. Moving on to grocery retail in Southeast Asia. While we're greatly encouraged by current performance of grocery sales in North Asia, the performance in Southeast Asia grocery remains challenging due to a combination of factors. Market sentiment is more cautious, particularly in Singapore, driven by rising cost of living pressures with food inflation, higher rents and taxes impacting consumer sentiment. The sales further challenge due to a longer-term overall net reduction population as the cost of living rises and also short-term net outflow in Singapore and is leaving on vacation outweighing the tourist returning. And while we would not necessarily predict these net movements reflect a material change in population overall, it certainly had a bearing on our first half performance. All that said, there are a number of encouraging performance points. Our upscale format is performing well after upgrades, particularly new CS Fresh brands, where converted stores are frequently delivering double-digit sales growth. Yuu Rewards launched in late October 2022 has already reached over 1.3 million members with a strong sales penetration achieved in each of our banners. E-commerce remains an important development focus, and we're working on programs which we are confident about accelerate E-commerce sales in conjunction with agreements with key digital partners. Cambodia is also worthy of note, was only 11 stores on the ground in 2017. We've grown the network to almost 100 stores on the ground now establishing a market-leading position in the country. Moving on to Health and Beauty, starting with North Asia. The most significant beneficial change for the group in the half came as a result of the Hong Kong, China border reopening. Mannings, in particular, is a very well regarded and trusted brand among tourist and the return has supported significant like-for-like sales growth for our North Asia Health and Beauty business as evidenced by our stores and identified tourist clusters significantly outperforming the rest of the portfolio. As a result, profit has more than tripled during the period, benefiting from higher sales and improved margin mix. strategic programs introduced over recent years, such as the launch of Own Brand and reinvestment in value, have brought local customers back to Mannings and the return of the tourist population has further driven basket size as well as footfall. The combination of which has enabled Mannings to achieve its highest market share position ever. Mix of sales has benefited from greater level of consumer demand for health care products, a [ catch ] in which we enjoy market leadership and high top of mind awareness and trust from consumers. The health leadership has also expanded into Own Brand. In the vitamins category, for example, 1 in 5 vitamin sold [indiscernible] now an Own Brand and for some products, that ratio is as high as 1 in 2. Overall, Mannings Own Brand is now the #1 brand across Mannings, reaching an average of 1 in every 3 baskets with over 1,000 products launched in the past year and 1,500 more to come in 2023, with a major beneficial change for Health and Beauty across the board. Moving on to Health and Beauty in Southeast Asia. Momentum was also strong for Guardian in Southeast Asia with strong like-for-like sales versus all markets. This is underpinned by everyday low price programs we introduced during the COVID period, which have remained in place, further reinforced by effective in-store execution and promotional optimization. Our strong value proposition was further reinforced by the continued Own Brand development with several hundred new products launched in the past year with many more to come in the second half. Own Brand volume penetration is now well over 20%, a number unheard of a few years ago. We are also seeing consistent gains in market share as a result of our customer proposition strategy in each of our Southeast Asia Health and Beauty markets. These performances provide us with further confidence to continue to grow our store network. We now have almost 1,200 Health and Beauty stores on the ground across Southeast Asia markets with over 50 new stores opened during the period. We expect the store expansion to accelerate with over 100 net new openings for the second half. Our store expansion plan is further supported by the development of a new value store concept, which has been tested in certain markets and well received by customers. This, we believe, provides us with more scope to take the Guardian brand into local communities beyond the successful operations we currently have. This is a real opportunity to accelerate growth in our Southeast Asia markets, greatly supported by the value proposition of Own Brand now brings. Not only to be recognized the importance of continuously optimizing our brick-and-mortar proposition. We've also recognized the value of digital innovation, and we've invested in further enhancing the fulfillment capability to bring better services to customers in each market. As a result of that, we've seen double-digit growth of our O2O business in both sales and volume terms, which bodes well for our future O2O ambition. Moving on to 7-Eleven. It's been another encouraging set of results at 7-Eleven with strong like-for-like sales growth across all markets. Our business in South China reported accelerating growth trends with stronger like-for-like growth in second quarter versus the first quarter. The strong sales performance across the board has also led to a significant improvement in underlying profit as well, moving from just breaking even last year to a $27 million profit for the first half of 2023. We're confident about the future growth given the team's commitments to continued innovation in our product range, new format development, which is enhancing our brand profile and strong loyalty program initiatives. With [indiscernible] behind us, we are confident about the future of 7-Eleven where we now have over 3,200 stores across the group. Taking a look at IKEA for the quarter. but like-for-like sales performance has been more challenging, largely resulting from softening consumer sentiment, which is having a bearing on propensity to purchase last ticket items plus a degree of go forward of large item sales during COVID. What's encouraging is the improvement in like-for-like sales quarter-on-quarter as consumer behavior returns to some degree of normality. Given the challenging trading conditions for the top line, the team are focused on cost control, which has led to profitability levels being maintained versus last year. IKEA continue to maintain its market leadership position in each of our markets, outstripping all competitors in terms of brand awareness. Format innovation continued with a number of smaller format stores developed in each market, the latest of which a combination of store blending IKEA with Marketplace opened 2 weeks ago Olympic City in Hong Kong. Since 2017, through a combination of opening more blue boxes and creative development of smaller units, we've moved a number of IKEA touch points from 17 in 2017 to over 50 today. Our much needed new Taiwan fulfillment centre became fully operational in May 2023, consolidating 5 separate warehouses, run previously into one large unit with much better stock management capability supporting not only sales of IKEA's full range across all bricks-and-mortar stores, but also critical in advancing IKEA Taiwan online performance, which has been seriously compromised due to the previous warehouse footprint. For the past few years, investment has been dedicated to create a seamless experience for our current IKEA customers and the omnichannel strategy has laid a strong foundation for both IKEA's online and offline growth for the future. And now I'd like to take a look at the outlook going forward through our business outlook. We've been encouraged by the improving performance in all our businesses. We expect the strong growth from our Health and Beauty business to continue. Now borders have reopened, we expect tourist traffic still recover to pre-COVID levels. The transformation program introduced 6 years ago has allowed the group to generate financial headroom, investing operating standards and enhance our value proposition to customers as well as free up capital to develop new formats. We are confident the group will continue to report improved performance in FY '23 versus FY '22. As song says, The Only Way is Up. I firmly believe the foundations of the organization are stronger today than they have been for many years, and the company is well positioned for future growth in many banners and markets. I'd like to thank all my colleagues from around the company, though remarkably challenging these years have been, they have shown remarkable resilience on effort, and I wish them all the greatest success for the future. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all now disconnect.