Dis-Chem Pharmacies Limited (DCP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to our first webcast earning results presentation. It has been a turbulent couple of weeks. And as a group, we have had to keep both our customers and employees at ease, not only by putting specific measures in place but also by assisting where we can. In the current period, with the challenges of the prior period strike coming to an end and the decentralization of the wholesale space now concluded, the group continued to focus on return on invested capital to ensure optimal results to our shareholders over the long term. This has resulted in the necessary inventory reduction and rationalization without compromising stock availability. Cash generated from operating activities, which takes into account the effect of the return on capital focused, increased by ZAR 671 million, or 115% from the prior period. It is unclear what the future may hold. But for now, it's all hands on deck as we work together towards a better tomorrow. COVID-19 protocols have increased operating costs significantly. I'm going to start with the presentation by going through a couple of the highlights, after which Rui, Craig, Saul and Christopher will discuss our financial and operational performances. I will then take you through our outlook for the rest of the year. During the 12-month period from the 1st of March 2019 to the 29th of February 2020, our group revenue increased by 12% to ZAR 24 billion and total income by 10% to ZAR 6.8 billion. Our continued focus on return on invested capital is paying off, and it shows in the improvement in our net working capital days from 38 to 33 and the ZAR 780 million increase in cash on hand. The retail revenue increased by 11% to ZAR 22 billion, due to a combination of positive like-for-like sales growth of 4%, the opening of 18 new stores and the acquisition of Culemborg, Springbok and the TLC Medipark pharmacies. The group had a total of 170 stores at the year-end. The wholesale revenue increased by 14% to ZAR 17 billion with Quenets and the TLC driving external wholesale revenue, which grew by 23.3%. We are happy to announce that our wholesale division is at an EBITDA breakeven level. We have successfully rolled out our Clinic Connect concept in all our clinics, which is a telemedicine solution and believe that this could be a game changer in the primary health care market. The Dis-Chem clinic cost of service to the patient is much lower and has increased the scope of our clinic sisters to professionally facilitate using our telecommunication with GP. We are also pleased to see that the medical insurers are on board with this concept too. I will now hand over to Rui to take you through the financial highlights.

Good morning, everyone. Thank you, Ivan. We start on Slide 5. And as we described at interim, the group adopted the full retrospective approach to IFRS 16 and what that means is that the interest and depreciation replace the operating lease expense. It's slightly dilutive to earnings in the current year, even though we've restated prior year numbers. As we said previously, and there's a slight change in dividend approach, as I'll discuss later, but when we consider the dividend policy, the change in IFRS 16 won't affect the way that we apply the dividend policy. If we move to Slide 6 and we look at the statement of comprehensive income, which we described, and I'll take you through line by line, just a few points to highlight. As we did at interim, we include both FY '20 and FY '20 excluding once-offs against FY '19 and FY '19 excluding once-offs. On the slide, the green numbers highlighted under total income and other expenses are the lines which the once-offs are affected, again I'll describe it later. But from a total income perspective, the base was inflated by the unearned rebate release in the prior year. And in other expenses, we had a net differential of around ZAR 10 million if you take the bonus release and the strike costs in the prior year. In the current year, we just had an overhang of ZAR 19 million in the other expense line. Just 2 points. The tax rate remains consistent year-on-year. And then from a finance cost perspective, if you exclude the effect of IFRS 16, there was a lower interest in the second half as we realized more cash from the return on invested capital exercise that was a focus and interest as it relate -- in relation to working capital reduced from ZAR 77 million to ZAR 61 million, and we expect that to continue going forward. If we move to Slide 7, the statement of financial position, not much has changed from FY '19 to FY '20, except for the working capital balances as a function of return on invested capital. We described these in detail, but effectively, creditors remaining flat, stock reducing by 12% and trade and other receivables being maintained at a constant debtor days, which we talk through separately. If we move to Slide 8, this just highlights the return on invested capital in terms of cash flow summary. So you can see cash flow from operating activities increasing by over 115%, almost to the quantum of ZAR 700 million. And we believe that the cash flow statement is important when considering some of the accounting changes, such as IFRS 16, and this highlights the strength of the balance sheet that's come across over the period. At interim, we spoke about the changes that we had made and the stock rationalization that we had realized. And it's nice to see that at year-end, this has materialized into an increased cash balance. Cash generated for the year increased by over ZAR 700 million. And the only other point worth noting is that cash flow from financing activities reduced as a result of the refinancing of the ABSA loan in the first half of the financial year. If we move to revenue, Ivan spoke about the 12% group growth. If you break that down into our segments, Retail revenue grew 10% as we continue to grow share and benefit from our maturing store base. Wholesale grew at 14%, a combination of both internal and external wholesale, and external wholesale growing faster as we will talk about later than internal wholesale. Internal wholesale being slightly affected by the stock rationalization that we went through. And then you see like-for-like retail growth at 4% and sales price inflation at 2.2%, still impacted by the lower SAP that affected the financial year. And obviously, the price competition in some of the fast-moving consumer good markets and the baby markets that affected the trading period. If we move to Slide 10. This is the normal waterfall graph that we put together across an annual year. So on the right-hand side of the graph, you can see the trading -- 12% trading period. Just some points worth noting. If you look at the bottom bar, we continue to -- as a function of our site identification, we continue to perform well from a trading density perspective and a weighted trading density perspective in our new stores with weighted trading density at around ZAR 64,000 per square meter. The performance of our stores in the second year, again, higher than previously at ZAR 75,000 per square meter. Talking about -- talking to the maturation of our stores, where we have seen pressure, and we believe we'll continue to see TC pressure, which is important from a cost management perspective is in our maturing base, where the trading density number has come down to ZAR 102,000 per square meter. That's a function of a constrained consumer environment and a little bit of co-location in some instances, but predominantly a strained consumer environment. And it talks to the importance of cost management, especially in these mature stores. And in terms of wholesale, we've added ZAR 412 million in additional wholesale sales, driving external wholesale growth. We'll specifically talk about that breakdown between TLC Quenets and the independent pharmacies as we go through the presentation. In terms of total income, I think one of the key themes that we explained at half year was the effect on total income which takes into account transactional margin and back-end terms from suppliers that the rationalization had. We've now shown a full year picture, and I refer you to the once-off columns. If you recall, the FY 2019 margin was influenced by the release of the unearned rebates and slightly inflated at 8.7%. Excluding that, we see margin at 8.1% in Wholesale in FY '19 and 8.1% in Wholesale in FY '20. That takes into account that the fees generated in Wholesale from a logistic perspective can only be accounted when the services performed, and you see the consistency of the wholesale margin. If you look at retail margin, the retail business is where the biggest effect of the rationalization of inventory and the lower purchases has been felt because of the growth rebate sitting in there. It was at 28.6% in FY '19. It's a 27.7% in FY '20. But importantly, there's been a shift from 27.5% to 28.5% from the first half to the second half as the majority of the inventory rationalization happened in the first half of the '20 financial year. So again, important to acknowledge that the margin of 28.6% was held in the second half of the year as we got some level of normalized purchased, albeit much lower than sales growth. And we talked to that in the return on invested capital slide, where you show -- where we show the growth of back-end terms ahead of purchases growth, again an output of the return on invested capital exercise. If we go to retail operating expenditure, again, very similar to the first half of the year. And again, I refer you to the columns excluding once-offs because of the bonus change, a depreciation and amortization, a function of the new accounting standard, IFRS 16, no cash consequence. Occupancy costs talk around the ancillary rental costs, and you can see the pressure of utilities and electricity on that number. As a group, it's a cost that we need to control, and we have invested in certain technologies to better manage the power maintenance and management in store. Employment costs growing at 14.3%. This cost is a cost that especially highlight -- especially when looking over the COVID period, which we talk to you later in the presentation, is a cost that needs to be very well-managed across what we think is going to be a turbulent trading period. And then other operating costs being well-managed at 7.6%, which is just our use of better marketing assets and marketing distribution channels. If you look at the wholesale operating expenditure, again, I refer you to the once-offs columns. The employment cost, again, influenced slightly by the change in the bonus policy. But overall, wholesale costs managed well at 5.2% growth and essentially a function of the investment in technology, which allows us greater visibility of productivity as well as customer performance, and Chris will talk to the individual supply profitability output that we've been able to generate from this space. A big reason why wholesale operating expenditures arrived at the EBITDA breakeven. And when we talk about EBITDA, we talk about EBITDA breakeven, excluding IFRS 16. If we move on to operating profit, operating profit, again, from a trading perspective, makes more sense to look at the once-offs columns from FY '20 to -- FY '19 to FY '20. The operating margin declining by 8.7% -- the operating profit declining by 8.7% in retail and then a significant improvement in wholesale as we move closer to -- as we move past the EBITDA breakeven closer to the operating profit mark, meaning that the total group operating profit was down 1.4%. That doesn't take into account, as we've said, the effect on total income margin that was -- that happened as a result of the rationalization of our inventory process. If that -- if you take operating profit and you filter down into earnings per share and HEPS. Again, if you focus on FY '20 excluding once-offs and FY 2019 excluding once-offs, a more normalized base in FY '19 at ZAR 0.76 per share and FY '20 at ZAR 0.71 per share, a decrease of 6.3%. And I think for the first time in the group over the last 3 years, a normalized base from a cost perspective across FY '20 with the potential uptick in total income margin that we demonstrated and highlighted in the second part of the year. Ivan spoke about the working capital improvements. This just breaks working capital down in to the 3 levers. Debtors days slightly increasing from 21 to 23 , a function of 2 levers, one being a slightly -- a slight change in mix as a result of increased wholesale sales and obviously, a debtor book that comes along with that. I think it's important to highlight that what we've seen across the COVID period and again, we talk about it later, is the resilience of independent pharmacy and pharmacy in general with high-growth categories being pharmacy and health care, and it talks to the recovery ability of our debtor book. And we also took advantage of preferential pricing from an SAP license perspective, and that's accounted for as a prepayment, which is the other reason for the slight uptick in debtors days. Inventory days are down from 102 to 96. As a result of the way the calculation works, this 96-day number is very much influenced by the opening inventory balance. If you look at how we see it and how we look at operational rolling days stock cover, which takes the last 91 days' worth of trade and looks at the stock balance there. Operational rolling day stock coverage at 79, which implies that the actual net working capital position is at 17 days, which is a big shift for the group and essentially means that in terms of capital deployment, less capital can be deployed to growing the store base and more capital can be allocated to either returning back to shareholders or investing in other assets. Creditor days, even off a lower creditor balance, remaining at 85. So again, the same principle as inventory days. The operational creditor days would be slightly higher than 85, a function of continued supply chain finance drive and we've seen significant support of the supply chain finance tool that we made available to our suppliers across the COVID period as there was a need for cash. If we move to cash management, again, everyone would be familiar with the slide. I think in many instances, I've spoken to the different elements of it. But I think some important points worth noting. Obviously, a significant change in working capital movements, again a function of the delivery of the ROIC exercise. Dividends, as we've spoken about being withheld and then CapEx and proceeds on disposal, which I'll talk about in the next slide, needs to be considered together with the acquisition of the 3 new stores. And then the last point around loans and treasury shares as a result of our share scheme, we've invested around ZAR 15 million in shares for the financial -- for the FSP plan, and we continued to reduce the contingent consideration that is the liability to our franchisees from the acquisition of their businesses at listing. And there's 2 years remaining in that contingent consideration payment. If we shift to capital management, so very consistent with last year, less being spent in total CapEx. So ZAR 360 million compared to the ZAR 395 million of last year. That is a function of the number of stores within that capital management process. In FY 2019, there was 21 stores. In FY 2020, capital management or capital deployed to new stores was 20 -- was 18. That needs to be read in conjunction with the 3 stores that we acquired. And if you look at maintenance CapEx to turnover, as we've explained, maintenance is on a needs basis. It normally cycles every 7 years. If you just look at the metrics and represents around 40% of the initial start-up cost of the store, slightly down on last year at 0.6%, meaning the total CapEx to turnover down to 1.5% of turnover compared to 1.8% of last year. And from an outlook perspective, still an expectation to be around ZAR 7,000 per additional square meter of floor space added. Ivan will talk to our view on outlook and trading space in -- when he concludes the presentation in outlook. But still looking to add 21 stores at around 23,000 square meters of space in this financial year. If we move to retail trading performance, myself, Craig and Saul will take you through the retail trading performance with specific references to trading performance from my perspective, the ROIC output from Craig's perspective and then just some color on loyalty and e-commerce from Saul's perspective. If we look at Slide 20, that just shows you, as we've done before, the relationship between revenue and transactional gross margin. One of the levers in the return on invested capital exercise was to maintain an increased transactional gross margin ahead of revenue as we continue to analytically understand price elasticity across all of our SKUs. You can see by reference to the total column that the change in transactional margin, which is essentially the stock margin or the stock margin that runs through our tool, has increased at 12.2%, above the 11% sales growth in retail. If you look across categories, we still continue to see pressure in the Dispensary space as a result of aggressive pricing in OTC space by our competitors. It's become, together with the primary care market, a market where many businesses are looking to take share and important for us to match up our price. Personal Care and Beauty and Healthcare and Nutrition, we've seen transactional gross margin grow ahead of revenue, again a function of the elasticity or the price elasticity exercise or ROIC exercises that the categories have been focused on. And then quite interesting to see that Baby Care has grown almost 40% on transactional margin, close to 9% or 8.8% in revenue. If you recall, and if you have a look at our presentations of last year, we grew revenue ahead of the group with respect to Baby as we invested in price, but we sacrificed margin in the previous period. Our margin growth was around 1%. And what it does show us is how sensitive to price the Baby maintenance category is, and it talks to the acquisition of Baby City around ensuring that we have some form of offering to the consumer that creates stickiness to the Baby purchase. You can see, as is evident from both our market share and the movement in revenue and margin over the 2 respective years, our investment in price can influence market share changes. But nice growth in transactional margin in the Baby space. If we look at core category market shares, we continued to gain market shares across all of our core categories despite very tough trading environments. Dispensary continues to do well, and we'll talk about some of the initiatives around chronic adherence management that we've driven and continues to add value in this space. Personal Care and Beauty and Healthcare and Nutrition also continue to take share. Worth noting that in Healthcare and Nutrition space, our internally developed brands, Biogen -- the Biogen brand is the largest vit and supp brand in South Africa. And we continue to gain share, albeit having more than 50% of the vit and supp market with our share currently at 55.2%. And as we spoke about at interim, the acquisition of the additional brands now being very positive as we managed to rationalize inventory and grow those respective brands that we had bought from Ascendis. The Baby Care category, and it's in line with the comment that I made earlier around the change in revenue and transactional -- and change in transactional margin and the sensitivity of price points in that category slightly down from 10.3% to 10.2%, again highlighting the importance of having a dedicated Baby retail space and playing in the Baby hard category that we speak about, which talks to prems, clothing, so the higher margin, first-time mom purchase. If we move to Slide 22, and this just shows a more granular market share performance of our subcategories. Again, gaining share in Personal Care and Healthcare and Nutrition, across nearly all of our subcategories. The Baby category, which talks to the point that I made earlier in Slide 20 and 21, you can see the sensitivity on price and how it affects share. All of those subcategories talk to the maintenance space, apart from clothing, which is a subcategory where we are a small player in at the moment and require space to expand into. I'm now going to hand over to Craig to talk about the ROIC strategy and the improvement in working capital.

Thank you, Rui, and good morning to everyone. I hope that you're staying safe and positive during these remarkable times. I'm primarily going to tap through the numbers relating to return on invested capital. This follows our commitments to the market at the end of FY '19 and at the half year 2020. As mentioned then, we focused intensely on improving our return on invested capital position during the last financial year. The 4 primary levers being margin, trade terms, stock and creditor days. From a transactional margin perspective, as Rui said, we saw growth ahead of turnover, which is really positive. This was driven by a more strategic approach to pricing. So with more frequent market analysis using surveys from the likes of Nielsen as well as closer monitoring of product and category-specific price elasticity. We look to optimize promotional margin as well through more rigorous analysis of return on the different promotion mechanisms, looking at promo mix as well as timing. And we also focused on increasing promotional discount recovery and reducing margin loss during prime periods through optimizing supplier funding mechanisms, such as tele. And we continue to pursue private label opportunities in categories that make sense and through expanding our existing offering which cover price fighters, value and premium segments. Looking at trade terms, this played out in line with our expectations. I had mentioned in previous presentations that we had moved to a more centralized and standardized approach to trade term negotiations, and this has yielded strong results. We focused a lot of effort and resources into renegotiating terms with the majority of our vendor base. And from this, managed to extract higher terms percentages whilst ensuring we provide value to suppliers in the form of services. These increased fee-for-service rebates are generally off a fixed cost base and our stickier to negotiate away from compared to your more general rebates. This approach resulted in terms growth of 11.3% from prior year despite purchases growth for the year of only 2.6%, and that's on the back of the stock rationalization program that we mentioned which would have also impacted the income line. That said, the terms as a percentage of purchases increased, which provides us a strong base to work off going forward. We also placed a strong focus on commercializing our growth by adding growth rebates to terms contracts where they were not already in place. And we are often the fastest-growing channel in the lives of our suppliers. It makes sense for them to take advantage of this, and we would want to participate in that shared value. Due to the reduction in purchases in FY '20, we would expect to see the majority of this benefit coming through in the 2021 financial year numbers. From a stock perspective, at the half year, we emphasized the amount of work being done on rationalizing stock and buying efficiency, the end goal being improving free cash flow. And Rui showed earlier, cash and cash equivalents up ZAR 781 million for the period. And despite the significant SAP related buying on the pharma side, at the year-end, we saw a total stock release of ZAR 609 million when compared to Feb '19. We also saw a reduction in rolling stock days from 82 to 79. This takes into account a 91-day cost of sales from year-end back. And normalized trade in our wholesale environment post strike also allowed us more efficient replenishment cycles and a focus on reducing excess stock, and that is low stock turns. Then in line with improving buying efficiency, we continued to roll out our automated forecasting and replenishment program. This gained further momentum with 197 suppliers now on board at the various levels of automation. Creditors days were up from the half year, but in line with 85 days seen at Feb '19. This along with optimized stockholding in our distribution centers, so stock days reducing below the creditors days number, rolling credit -- the rolling stock days, that is, for the first time. Suppliers to continue to enjoy our supply chain finance solution, which allows us to increase competitors days while facilitating better terms at a very affordable rate for the suppliers. And we -- as we already said, we saw substantially increased usage across the COVID period, as you would expect, with the solution allowing for better ability to manage cash flow and great flexibility. I'm really eager to show the next slide to you, which contains and clearly illustrates the improvements on working capital. Here we show a view of creditors days relative to operational days stock cover. So again, stock days relative to 91 days cost of sales. As you can see, per the yellow dotted line on the graph, we maintained strong creditors days from the previous work done in terms of negotiations and with the help of the supply chain finance platform. At year-end FY '20, this was at 85 days relative to operational stock days at 79, which, at a group level, is reflected on the gray line and that had moved from 100 days at the end of FY '19. The 2 green lines on the graph had context with the darker green showing store stock levels and the lighter green line showing DC stock at the same point in time. You can see that prior to decentralization at our single DC, we ran stock at under 40 days. Then through the period from FY '18 to -- in FY '19, we experienced the 2 strikes, but also saw the decentralization theme playing out with days stock increasing to a high of 51 in the DC or slightly over 51 and 48 in stores for a total of, just as said, under 100 for the group as we stocked up the additional DCs across the country. Then you can see as efficiencies improved, we started to experience the benefits of decentralization on working capital to the point where stock days at our multiple DCs were at 32 at financial year end FY '20, which is lower than at predecentralization levels. From the end of FY '19, you can see the necessary work which we had to do on rationalizing stock coming through, with days stock cover moving, like I said, at a group level from 100 to 79. You can see the stock reduction was primarily in the DC environment. If you look at the green lines at the bottom where the DCs, the stock days dropped from 48 to 32 at the end of the financial year. And then store stock was only reduced by about 10% over the same period, saying that we rationalized, but did our best to avoid compromising store stock availability. These stock levels, we believe, are now closer to optimal levels, whilst there's still maybe a couple of days improvement we can find in some of our mature stores in retail. Thank you. I'm now going to hand over to Saul.

Thank you, Craig. Good morning, everyone. This is Saul Saltzman speaking. I would like to take you through the highlights of our loyalty program and e-commerce sales. We have 9.7 million customer profiles, of which 5.5 million are benefit members on CRM, up from 8.8 million and 4.7 million, respectively. We have over 30% our new loyalty members that are under the age of 30. Our total for youth loyalty customers, which is ages 18 to 25, have signed up since the launch on Youth Day 2018 is 332,505. Benefit members contribute 73% to front shop revenue. Our value partner contribution is at 53.7%, the partners, as you can see, on the slide. Loyalty redemption rate is at 98.1%, up from 90%, which speaks to loyalty redemption as a function of value as the higher the usage, the higher the engagement. Baby members increased to 266,028 members, up from 135,000. With this number nearly doubling, we have great opportunity to synergize our loyalty and partner contribution offering within Baby City, shifting us ahead of the opposition. So far, our app download numbers are at 183,000, driven by chronic dispensing initiative, comprehensive above-the-line advertisement, digital strategy and member statements. On e-commerce, I'm proud to report our online revenue for financial year 2020. As illustrated in the graph, our online sales grew by 27% year-on-year, with our uptick contradictionary, especially since September, where we had 48% growth. Compared to the same previous year, December enjoyed a 78% growth. This was achieved by upgrading our platform, introducing a new look and feel with enhanced user experience, making system and process improvements. We opened 7 new hub stores to facilitate the increase in demand and digitized our benefits magazine. We also integrated the Pack My Meds app. We continued to look for opportunities to improve our last-mile delivery. The situation is rapidly changing shopping behavior as consumers look to e-commerce and adapt to the changing landscape living with COVID-19. As we have seen exponentially in sales growth and within the online space, our sales from 1 March to 26 March, just prior to the lockdown, increased 375% against the same period last year was 27th March to 30th April having 262% growth and the largest impact from 1 May as more goods became available to 490%.

Thanks, Saul. If we make reference to Slide 29, I would allude to the opportunity that we see in the primary care space. And what we've tried to illustrate there is just the way that we see our differentiated clinic infrastructure and winning and retaining both our patients and how that -- and how some of the assets that we've acquired previously have started to integrate into this solution. So on the left-hand side of the slide, denoted by a funnel, this is how we see ourselves winning patients, again underpinned by clinic offering. So you can see that we make reference to the primary care clinic offering. There, with the introduction of our telemedicine solution, we are able to ensure different access to health care than in the traditional sense with people accessing health care through a clinic infrastructure. What that means is it means more convenience, wider access and a cheaper cost in terms of entering health care. We will continue to increase the number of stores. We will add clinics to the Baby City acquisition. And we have enough data, especially around adherence and analytical function of health window, to start diagnosing the undiagnosed, which we believe is a fundamental driver of potential chronic patients considering the drop-off that we're seeing in chronic patients across the medical insurance market. Once won, these customers are then recycled within our customer -- within our stores. So telemedicine allows us the ability to renew a script in the chronic environment. Once that script is renewed, we then manage the adherence on that script. And if you think about adherence management and we talk about the return that we've seen as a result of the health window acquisition we spoke about in the prior year, we do that through both patient ready parcels, which is facilitated through a call center. We do it digitally through Pack My Meds, as Saul has spoken about. And the reason for the digital and the call center solution is purely to ensure that we can touch our broader base at the appropriate levels of cost. And then we monitor nonadherence and intervention. Intervention is done through the delivery of health content, and it talks to the point of also diagnosing the undiagnosed. So we believe the more content, the more relevant content we provide, we've seen a relationship between that and high adherence. And then we facilitate that either through in-store collection or delivery. If we move to health window and how it primarily and the importance of the assets in terms of primary care and the retention of patients. The left-hand side just shows since implementations and since the acquisition of the business, how we've grown relative to comparative pharmacies. So we've grown 10.2% in units, we look at this as units and not value, versus 4% growth in comparative pharmacies. If you look at the right-hand side of the graph, you can see the distinct change, uptick since the introduction of health window into our platform and since we've digitized the Pack My Meds solution and offered it to the broader chronic base. If we move on to what that means from a return perspective on Slide 31. So when we acquired it, we had an average dispense per annum across the chronic population of 6.4 dispenses. We've increased that to 6.9 dispenses, just shy of 7 dispenses per annum across the entire population. For every single dispense, it means new foot traffic into the store. And that means from a value perspective, it translates into ZAR 154 million in the chronic sales gains. If you look at the concept of adherence and the importance of that relative to the 10%, you can clearly see that the adherence-driven growth at 5.5% or the ZAR 154 million I've spoken about and being above the natural organic growth of 4.5%, which inherently is above the rest of the competitive landscape. And essentially, it's adherence that's driving chronic growth in a very, very challenging chronic market as we see downscaling of medical insurance products and less new chronic entrants into the market. If we then just look at the different engagements, we've specifically spoken about the channel of Pack My Meds, which is digital engagement around chronic ordering. This just shows you the total Pack My Med orders since we initiated the Health Window asset or the Health Window project. It was just shy of 1,200 orders at the beginning. And you can see now that we are close to 10,000 orders, which talks to the uptake and the convenience element of the Pack My Meds solution. Important to note that across April, as we went into lockdown, it's highlighted and almost educated the customer base as to the benefits of this digitized channel. And when you break that into the monthly app orders or the monthly Pack My Meds orders, so Pack My Med orders are facilitated through an SMS, whereas the app orders are facilitated through a download app that Saul spoke about. You can see the correlation of growth between the 2. And you can see the importance of having a channel that sits outside of an application based channel for older consumers. Before we speak about Clinic Connect, we felt it's appropriate to just play a video to give you a sense of what it means in store. We think it summarizes the solution relatively well. And then I'll give you some indications as to the metrics that we're seeing in that space. [Presentation]

So I think some of the important principles that comes out of the concept of Clinic Connect. The first one is lower cost, the second one is access and the third one is convenience. It's quite a different type of engagement with health care, if you think about it relative to the traditional GP engagement. On Slide 33, these are certain metrics that we've seen now that we've implemented Clinic Connect or the telemedicine solution to our clinical infrastructure that lives across all our stores. The conversion rate is an important tool to manage cost. So essentially, what that shows you is the relationship between nurse only consults and video med consults. So in theory, when the nurse passes that patient through to the doctor and consult for the acute condition themselves. Important to note that we are extending and continue to extend the scope of service of our nurses as we believe that nurse-led health care is fundamental to the primary care market. If you look at the second graph, it just shows you the outcomes. And I think the important thing here is to look at the relationship between the number of scripts and the video med consults. So as we expected, the correlation is high, meaning that the patient has a one-stop solution in terms of script or script renewal and -- from a doctor and then obviously, the script facilitation from our pharmacist in-store. So as opposed to a situation where they went through an ordering process in a GP, then had to drive to another pharmacy, they can all do this in the space of 15 minutes through our Clinic Connect solution. And then importantly, as Ivan alluded to, when we initially started this Clinic Connect process, and we saw the opportunity in primary health care and believe that we're well positioned because of our differentiated clinic offering, it was very much a cash solution. So we saw patients that bought into the concept of lower cost of health care at the same value, but we're paying out of pocket. We've now seen the medical schemes come on board and see it in the same way that we see it. And it's important for us because I think we are a differentiated provider in that space, and it will be -- and as the schemes drive that product or the availability of this in their product, we will see increased foot count through our Clinic Connect solution. I'm now going to hand over to Chris who will take us through the wholesale trading performance.

Thanks, Rui. Good morning, ladies and gentlemen. If this had been a video conference and you're able to see behind my face mask, you'll see a big smile on my face this morning, as I'm going to share some of the details around the fact that we achieved EBITDA breakeven in the financial year 2020 as proposed. Looking at the diagram, we can see that External Wholesale revenue grew by 23.3%. The 2 main contributing factors were Quenets, our acquired wholesaler in the Western Cape, and the local choice franchise stores. Quenets' revenue grew by 27.5% year-on-year. Quenets' acquisition date was the 1st of November 2018. Therefore, only 4 months of revenue reflected in the previous financial year compared to FY 2020. We achieved most of this growth in Quenets through an extended range of products and an extension of the geographical reach. Due to accelerated growth and pressure on space in the Quenets DC, we are planning to consolidate Quenets into our Western Cape DC before the end of the year. This will have the following benefits. We'll potentially see a cost reduction in terms of warehousing costs. Delivery costs should decrease as 75% of Quenets' customer base is in the Western Cape in a closer proximity to our current Western Cape DC. We'll have the benefit of increased space and product offering in our space. And we'll potentially see a consolidation of stock levels as we consolidate the 2 businesses. The number of TLC franchise stores have increased from 91 to 104 in the 2020 financial year. And currently, they are at 109 stores. The TLC customer group revenue grew by 29.8%, reemphasizing the feasibility and success of the business model. We've made the strategic decision lately to invest in a corporate TLC model as many owners are looking to retire or exit. This allows us to purchase smaller stores that would not normally be suitable for a Dis-Chem store format. We have purchased our first TLC corporate store on the 1st of September in 2019. The store is TLC Medipark in Kempton Park. Finamics, our in-house accounting services business, manages the full accounting function for this corporate store in addition to other external customers. The last growth on the graph shows us the independent customer group, and their revenue grew by 4.3%, once again showing that the independent pharmacies continue to consolidate. Moving on to the next slide, our supplier profitability. Our supply profitability model, which we implemented in the first half last year, started gaining real traction in the second half. As mentioned previously, the supplier profitability model has 4 levers. The first one is increased stock turn by either reducing stock levels or by increasing promotional activity. The stock rationalization process has reduced total bin usage in the DC which frees up bins for new or more profitable suppliers. The second lever is increased logistic fees by renegotiating with suppliers. Craig and his category managers have been very successful, and the benefits will probably start increasing in March 2020 as many of these contracts are annual in nature. The third lever, the conversion to a cross stocking or a flow-through model, whereby we don't actually physically warehouse the stock, that also frees up space for more profitable than this. Our fourth and final lever is the removal of a nonprofitable supplier from the distribution environment. This lever is only applied if any of the 3 above levers are not viable. As you can see on the diagram on the right, by actioning one or more of these 4 levers, we've been able to decrease the total number of warehouse supplies by 2%. Once again, this opens up space for more profitable suppliers. The second bar graph shows nonprofitable suppliers have decreased by 10%. The third green one shows profitable suppliers increasing by 15%. And in the DC environment, we have a continued focus on operational efficiencies to decrease costs as well as supplier engagement to improve fees. I'll hand over to Rui.

Thanks, Chris. And just in terms of the outlook, so the outlook is a bit more extensive than it traditionally is. I'm going to take -- myself and Chris will just take you through the impact of COVID and how that has influenced our Retail and Wholesale business across the different levels of lockdown. And then Ivan will conclude in -- once we've spoken a little bit about cost pressures of COVID and the Baby City transaction. So if we look at Slide 38, this shows the impact of COVID-19 at a retail level. So the first part of the graph shows the trajectory of our sales growth across the financial year. So you would have been familiar with the 11% retail growth and the like-for-like growth at 4%. And the transactional margin, as we've said, as a function of the return on invested capital exercise, slightly outgrowing retail growth. We then saw unprecedented demand from the 1st of March to the 26th of March with sales growth at 45.6%. I think important to note, margin growth at 40%, and that's really a function of the mix of categories. So in that time, we saw higher demand in what we deem the more resilient categories in Pharmacy and Healthcare and Nutrition, which do come at slightly lower margins, indicative of the graph. And then I think from a like-for-like sales perspective, it's quite interesting to see. And what we had seen from a trading perspective is obviously more support of convenience focused stores, which is where we have an opportunity to grow space from a customer perspective who wanted a shorter shopping experience as a result of COVID. Once Level 5 and the restrictions around Level 5 were implemented, we saw that reversed. So we saw a trade down at 20.9%. And again, as a result of that same mix now influenced additionally by the inability to sell higher-margin nonessentials, we saw margin down at 22.7%. And then as we moved to Level 4, and we're able to open up all of our lines once again, we've seen some sort of normalization of trade with trade being up 2.8% and margin up at 7%. Margins slightly higher than trade as a result of the reintroduction of higher-margin nonessentials and as a result of less promotional activity during this period. I think important to note that when you look at retail sales across the entire period, if you think about that relationship with cost, retail sales growth across the 11-week period at 6.3%, and Chris will talk to the wholesale piece. But together with the wholesale -- external wholesale growth, group revenue for the same period -- for the same 11-week period up at 9.6%.

Thanks, Rui. The next slide will show the impact of COVID-19 in the wholesale environment. We're reporting on similar periods to Rui's retail report. So if we look at the wholesale graph, it shows turnover growth year-on-year over the different stages of the COVID-19 period. The movement of these graphs display the resilient nature of the industry. But more specifically, the independent market, which is weighted about 80% towards Dispensary and Healthcare departments. The graph shows growth for the 2020 financial year at 13% internal and 23% for external sales, the bar graph on the left. During the month of March, from the 1st to the 26th of March, up until lockdown, we can see that the effect of the crazy or irrational buying patterns of consumers spilled over into our wholesale channels, with internal growth at a staggering 49% and external growth even higher at 65%. During the first 5 weeks of the lockdown period, which is the third bar graph, we experienced continued growth as opposed to the retail channel and the wholesale channel. This was though assisted by a business-to-business initiative that we started. We identified a potential business-to-business market opportunity through our wholesale channel during this Level 5 lockdown period. The benefits of being able to source products, and we have initiated a campaign -- a marketing campaign aimed at businesses and schools restarting their operations. The offering consists of various PPE, disinfectants and monitoring equipment according to the COVID-19 regulations. With our national footprint of stores in DCs, the logistics of this service is a natural extension of our day-to-day deliveries. We have gained a lot of experience during the pandemic and can assist businesses with their risk assessment protocols and preventative measures as these can be complex and demanding. As part of this, we are offering COVID-19 swab testing through our clinics either our drive through sites or at corporate sites for bulk testing. This business-to-business initiative contributed 27% of the total 44% growth during the lockdown period. The value of this business-to-business offering to date is around ZAR 55 million. If we look at the last part of the bar graph on the right, we can see that for the period 1 to 15 May, we are happy to report that we can see Wholesale revenue stabilizing back to pre-COVID levels.

If we continue with the impact of COVID on some of the other income statement lines, we've alluded to the effect that this has had on dividends. I think from our perspective and from the Board's perspective, we've looked at the importance of a strong balance sheet across this period as the pandemic has highlighted. We also want to understand what the new normal looks like. In many instances, the manner in which your supply chain's finances changed with many COD payments as a result of the value of -- or the scarcity of certain COVID lines. We will look at the dividend payments once we cycle the next year interim results, and we'll also take into consideration the rationality behind the dividend payments when we consider the funding sources for Baby City. In terms of cost savings, Ivan alluded to in his introduction, the operational cost increase that has come as a result of COVID as a result of some of the regulated processes that we've had to put in place in stores, also as a result of the lower trading. What it does do for us is it limits the CapEx spend, especially in the IT and Wholesale space. From a new store perspective, we will look at that as and when new normal returns. We've also -- because of the condensed trading hours, we've also reduced variable employment costs. Variable employment costs talk to casual and locum costs, which we inherently have in our organization as a result of the shift patterns because of longer trading periods. And then just to clarify our rental position, and Ivan will talk a little bit more in the outlook. But we paid 83% of our rental invoice, in line with our essential trade. As we explained and as was read in some of the media from our perspective, we pay rental in advance. And I think what we had done and the principle that we had engaged with the landlords was that like the rest of retail, we were looking for some compensation on the nonessential part of our businesses, which is no different what -- from what the PIG or the group representing the landlord is offering to suppliers. We additionally paid all utilities in full. So of the total rental invoice, 88% of the rental invoice in April was paid. And we have paid 100% of the May rental invoice, in line with the principle of our payment being our ability to trade all goods, which across Level 4, we were able to do. The DC rentals were handled in exactly the same way, where we took a split between essential and nonessential services. And we're also in the process of selling the distribution centers from founding shareholders to interested property investors. That process has just commenced, but we will look to ensure that we finalize that as soon as possible. If we move to Slide 41, where we talk about the Baby City transaction, we did release a SENS, and this is just an extension of the SENS. I think in summary, from a group structure perspective, we acquired the brand, the brand sets across 2 statutory entities that represents 33 trading stores. It sells a comprehensive range of Baby branded products and is definitely a destination Baby shopping experience for the first-time mom. So as we explained previously, or as I explained, when I spoke about market share and transactional and sales relationships in the Baby category, there's definitely not a stickiness in terms of a differentiated Baby offering outside of the first-time mom. The group itself generated ZAR 855 million for the 12 months ending February 2020. In terms of rationale, we believe the characteristics of the markets are very similar, the pharmacy and the Baby market. They're highly resilient and defensive. The Baby market has around 900,000 to 1 million new entrants every single year with first-time moms looking to shop. And it's actual estimated market size, if you take unread categories that Nielsen don't read, is around ZAR 24 billion, which talks to the inherent size of some of the hard categories like prems, like toys, like clothing. Natural synergies and almost guaranteed synergies that would come from the transaction would be supply chain synergies by absorbing Baby City into the distribution channel. Chris spoke a lot about the work we've done, which is ROIC focused, but essentially in the distribution space opens up the capacity to service a bigger network. And this would add volumes to the distribution network and would be margin accretive. From a distribution perspective, it's all scalable. So a large part of the cost base is fixed. So the more volumes you can push through the distribution environment, the better. We do believe, as we have done in the pharmacy space, that the inclusion of Dis-Chem branded clinics into the Baby City stores will consolidate the nurse service that exists in the private sector today. It does 2 things. It drives foot traffic into the Baby City stores that will experience that destination shop and also opens up the ability for our Dis-Chem clinics to focus on primary care volumes. Baby vaccinations and baby consultations over the last year in our space have grown in excess of 40%, just showing the need for that market to be serviced and consolidated. As Saul explained, I mean, we've seen unprecedented demand in our loyalty Baby offering, and we think that extending our loyalty and partner offering to the Baby City shopper will drive shopper frequency and definitely drive bigger baskets, as we've experienced in our own stores. We also think that our ability to leverage our private label and exclusive brands into the store will open up gross margin opportunities into the Baby City brand. And when we looked at a traditional white space exercise, which looked at the density of babies per geographic location and the density of babies relative to the number of specialized baby retail stores in the geographies, we think that conservatively there is an opportunity to add another 30 well-traded Baby City sites. Just in terms of the conditions precedent to the transaction, of course, the biggest one being the approval of the Competition Commission, the long stop date in the agreement is the 31st of October to provide for that. Michel, the founder of Baby City, has signed into a 2-year fixed-term employment agreement to help with the transition. The transition would also require the current decentralized head office infrastructure that Baby City carries to be centralized into our environment. And off the back of that, one of the conditions is that we enter into a new head office lease agreement to make sure that from a cost management perspective, we're well in control of that unnecessary in the future cost. And then we've also wanting to retain some key employees identified across the due diligence process. I'll now hand over to Ivan to conclude the outlook.

Okay. Thank you, Rui and Chris, on the COVID update. At this stage, it is very unclear what the future holds, but we are committed as a group to continue delivering the best value for our customers and shareholders. Since year-end, we opened 2 of the 6 planned new stores to date as we're required to put all new store openings on hold when the lockdown was implemented. Depending on the ease and timing of lockdown restrictions, we plan to open 21 new stores for the 2021 financial year. Prospects for 2022 have to be looked at very critically, and it will depend on how the current financial year plays out. Despite the country -- sorry, despite the country entering a lockdown period, we provided our employees with an annual salary increase in March. And as a token of our appreciation to start for the dedicated services as essential workers, we offered permanent employees a ZAR 1,500 shopping voucher. ZAR 30 million was invested in this gesture of staff goodwill. All staff are now covered by medical aid insurance. The rationalization of inventory levels have been completed, but return on invested capital and cost containment will remain key focus areas. Lately, we've had unwanted and unfair press. I feel that this warrants an explanation. First was my negotiations for reduced rent for April due to the fact that after the lockdown on the 25th of March we were doing under half the usual turnover in the first 2 weeks of lockdown. So I paid half the rent plus operating costs and electricity. The property industry group, which represents the major shopping centers, offered a deal to tenants who traded on less than 75% of essential goods. I took the deal and offered to top-up the ratios which is mostly done. The landlords of the malls are in trouble with nonpaying tenants, and the big groups feel that it's my moral right to subsidize them. As Rui said, 88% of rental has been paid for April. Of course, it goes without saying that May onwards will be paid in full. I have had a small campaign launched by the Chairman of the Property Group who has gone on record that Dis-Chem has never paid any rent. It is a lie. But nonetheless, negotiation with independent landlords have been largely successful and is still ongoing. The second issue is about price quoting on masks, which for a short period were unavailable or only available going forward at exorbitant prices. I strongly dispute this allegation of price quoting. We put up prices of the few that we have lived to every price of replacement stock. And as mentioned, this happened before the declared national disaster period. The case has been heard before the competition tribunal and the outcome is pending. The third small campaign, I can call it that, is false allegations that we ignored the protocols of COVID-19 reporting in action. The MCC of activity arrived at 2 stores with Police and a television crew after we closed the store for a day. Tested and sent home all the tested staff until the results were available, sanitized the store and reported the incident to the National Department of Health. A big show was made for the TV cameras and forcing us to unnecessarily close the stores. Other retailers have multiple stores with infected staff, strangers have received unjustified TV coverage. We deny the allegations by the MCC and Police. We have the documentation from the National Department of Health that we followed all the protocols. Unfortunately, the only way to clear our name is to sue for damages. The case is ongoing. I truly believe that we continue to live up to our pharmacists who care and recognize our responsibility to protect our staff and customers from the transmission of the COVID-19 virus. We have gone further than any other retailer in this regard. All our staff have been supplied with cloth masks and have perspex screens installed at customer contact points like the dispensary and cash desks. We have implemented social distancing and sanitizing measures as well as limiting the number of customers to align with the government regulations. The Dis-Chem group donated ZAR 2 million to the Solidarity Fund to support struggling businesses and individuals. With urged our loyalty card members to donate the benefit points to the fund and have pledged to match the nation rand for rand. To date, our loyalty base has donated ZAR 600,000 in points. The Dis-Chem foundation is donating ZAR 1.8 million for Hunger Relief to be distributed in Harding and the Western Cape. This will form part of our random acts of kindness on the 4 premier radio stations. We are also donating -- this should be for Hunger Relief through Africa to Culemborg, whose -- these funds will be used to feed preprimary school children. This will be broadcasted to the -- on the premier stations and will be distributed in 4 different areas. It will be distributed over 3 months. In another partnership with FutureLife will be providing 50,000 meals a month to children as part of an early childhood development program, which also provides all the essential vitamins and minerals that a child needs for proper development. All of this support provided by Dis-Chem foundation is continuing in addition to this. The foundation will spend another ZAR 3 million for COVID-19 Hunger Relief. We are pleased to announce that on the 11th of May 2020, we entered into conditional agreement to acquire the well-known baby care retailer, Baby City, as Rui has explained. Michel Aronoff, who conceptualized and strategized Baby City direction, will continue to serve as Managing Director of Baby City. Baby City is the single biggest baby brand in the country. We will pay a purchase consideration of ZAR 430 million upon closure of the deal. The transaction remains subject to suspensive conditions, including approval from competition authorities, which are subject to performance by the 31st of October 2020. I believe we paid a fair price. Our buying power and logistics will add many synergies to the current operation. We will start on the restructuring of Baby City as soon as the acquisition receives the necessary approvals. The acquisition is a great cultural fit and has been a talk of ours for many years. The brands and businesses were built on similar philosophies, ensuring management team alignment as we take steps to unlock the value that we see in the Baby City brand. The group expects that the consumer will continue to remain constrained. And the rollout of new stores in the next financial year will depend on the extent and the impact of COVID-19 in this current year. It is still unknown what the impact will be. And the rollout will depend heavily on the duration of the lockdown levels and the normalization of retail trade. With the focus on rock and the cash generation of the 2021 financial year will all be taken into account. The group has a strong balance sheet, and we are continuing to adapt quickly to the current environment with a focus on mitigating the near-term impact while positioning ourselves for success in the future. Stay well, stay safe, and thank you for listening to our webcast. We will now open up for Q&A.

We have a couple of questions on the rental position and the price investigation, which I think was covered by Rui and Ivan in the presentation. So I'll move on from that. Can you please give an indication of what you expect OpEx to run at going forward? And if there's any way to reduce this?

It's a difficult question to answer. I think there is a way to reduce it. I think we've spoken previously about the ability to manage variable payroll costs. If you look at our income statement, there's 2 cost components that contribute significantly to the total cost line. Speaking specifically Retail now, I'll address it in Wholesale shortly thereafter. So the payroll line will be influenced. And then essentially, we'll have to wait and see as to what pans out from a rental perspective. But one of the things that we will have to manage in this new normalized environment is the relationship between like-for-like turnover growth and like-for-like operational expense growth. With respect to Wholesale, Chris alluded to it, but I think some of the technological advancements that we've seen in some of the focus on supply profitability inherently does allow us to manage costs better in the wholesale space. And you can see the improvement in the performance of the wholesale business as a result thereof.

Is the lower inventory position sustainable in this environment? Or have you bought additional safety stock in case supply chains are impacted by COVID-19?

So in the current environment, we are carrying safety stock. When we look at the return on invested capital exercise, you potentially -- or you have to look through the COVID period. The truth is the COVID stock comes with a whole -- if you want to call it COVID stock comes with a whole set of its own characteristics. First, it turns incredibly quickly. Secondly, you're funding the entire supply chain, as I mentioned. So you're not necessarily getting the terms. So once we get to a new normalized environment, we expect the benefits of the return on invested capital process to exist as they existed at year-end pre-COVID trade.

Then we have a couple of questions on the Baby City transaction relating to numbers. Do you want to comment on that?

So yes, I mean, at the moment, it's subject to certain conditions, as we shared in the presentation. We appreciate that there's the need to understand that business and understand how we've looked at value from a guaranteed synergy perspective, from a current profitability of that business perspective. What we will do is we'll hold an Investor Day that unpacks our strategy, unpacks the potential increase in value attributable to each of those synergistic points that we've made later on in the year. But as we said, we don't expect the transaction to come through before the end of August, considering the competition commission process.

Can you give an indication of what percentage of retail costs are variable?

Off hand, it would be difficult to say as a percentage of retail costs, but essentially, it's around 25% of the employment cost base in retail.

Would you mind unpacking the supply chain finance arrangement in more detail? Can you give us a sense of the size of the supply chain financing facilities, are the facilities included in your short-term borrowings or account payable balance.

So the supply chain facilities on contractually engage between ourselves and the bank. The arrangement is a contractual relationship between the supplier and the bank. So from our perspective, we engage in extended terms. And the ability for the supplier to get preferential pricing is around the security offered by the purchase order that is Dis-Chem signed. And so there's no contractual commitment between ourselves and the bank. It's a bank supplier relationship. And the benefit of the pricing comes off the back of Dis-Chem supply. So in many instances, the cost of the extended finance that creditors gave us was subsidized by preferential working capital rates that they received on the back of Dis-Chem purchases. So in theory, the extension of the creditor days was financed by the bank.

No more new questions.

We'll close.

Yes, I think those are all the questions that we received guys. Thank you very much, and have a good rest of the day.