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

Good morning, ladies and gentlemen. It is with great pleasure that we welcome you to the presentation of our interim results for the financial year ending in February 2022. Notwithstanding the pressure that the pandemic continues to place on the South African consumer, we have produced a pleasing set of interim results, with strong revenue growth driving market share gains across all categories and strong cash generation. The group was negatively affected by the regrettable civil unrest and looting that took place in July, forcing the temporary closure of 3 Dis-Chem stores and 1 Baby City store. Our committed management and staff worked tirelessly, ensuring the 3 stores return to regular trading within a month, while the final Dis-Chem store reopened on the 7th of October. The Baby City business is now fully integrated into the group, with management continuing to focus on unlocking the planned synergistic benefits. Consistent with our strategy of having at least 1 primary health clinic in every Dis-Chem store, we have commenced the rollout of clinics across our Baby City store network where all Baby City stores will soon be operating with the moms and baby-focused clinic. The group achieved a significant milestone last month with the opening of our 200th Dis-Chem store as committed to upon listing in 2016. We are pleased to report that both the Medicare and Kaelo acquisitions have recently been concluded. We are excited about the new opportunities and new market potential that both acquisitions bring to the group. Before going into the highlights, I would once again like to thank our dedicated staff for their unrelenting commitment to serving our valued customers, particularly during the third wave and the uncertain period during and immediately after the unrest. These pleasing results are attributed to your loyalty and hard work. For the first half of the year, we continued to perform well across all key metrics, once again demonstrating the resilient nature of our business. Group revenue increased by 16.6% to ZAR 14.9 billion. Earnings per share increased by 34.4% to ZAR 0.484. Driven by our continued focus on return on invested capital, our net working capital days improved from 30 days to 26 days. This improvement was further supported by the reduction in COVID-related inventory lines which were brought in at the beginning of the pandemic. A dividend of ZAR 0.195 per share has been declared. Retail revenue grew by 16% to ZAR 13.2 billion driven largely by dispensary market share traction, which unlocked sales growth and market share gains across all categories. Notably, we captured dispensary market share from all competitors, including corporate, independent and courier pharmacies, reaffirming our best-in-class dispensary position. Our like-for-like retail sales growth came in at 6.8%. We opened 5 Dis-Chem pharmacies and 3 Baby City stores in the reporting period. Online sales continue to be strong. However, the rapid growth driven by the periods of hard lockdown has slowed as expected. During this reporting period, online revenue grew by 18.1%. We saw another strong performance from our wholesale division, with revenue increasing by 17.3% to ZAR 10.9 billion. External wholesale revenue grew by 20%, underpinned by increasing support from our TLC franchises and independent pharmacies. As we continue to focus on our warehouse efficiencies, we achieved activity efficiency gains of 16%. The final acquisition of our previously announced ZAR 1 billion investment strategy have been completed. We continue to invest in primary health care to advance our ambitions to be at the forefront of affordable and convenient health care delivery. As a proud supporter of the national vaccination effort, since day 1, Dis-Chem continues to play a meaningful role, and our commitment to partnering with the government remains steadfast. From 98 vaccination sites across the country, consisting of both mass and in-store clinic vaccination sites, Dis-Chem has administered over 860,000 vaccine doses. I will now hand over to Rui who will take us through the financial results.

Thank you, Ivan, and welcome to our interim results presentation. As is customary, I'm going to briefly take you through the statement of comprehensive income and statement of financial positions. And in each of these, we then dive into the detail around specific lines. So on Slide 5, I'm just going to make reference, after Ivan highlighted some of the key performance areas, to specific lines that we don't necessarily talk to in detail. I think, importantly, the net financing cost line has decreased by 1.3%. That is substantially influenced by IFRS 16, specifically with the Baby City stores coming onboard. Excluding IFRS 16 and the impact of these additional stores, net financing costs reduced by over 20% as a function of improved net working capital position; higher cash generation, as we will talk through the presentation on; and the slightly lower cost of debt; and obviously, the Absa term loan reduction. The taxation line, so the effective tax rate is lower than in the prior year. We believe it's now at sustainable levels, and we'll continue at these levels going forward. And then the noncontrolling interest has increased substantially, close to 57%. That's really a function of an excellent performance of our Oncology business. Ultimately, as Ivan mentioned, all of this resulting in the equity holders of the parent being up 34.6% from ZAR 309 million to ZAR 416 million. If we move on to Slide 6, the statement of financial position. Again, we talk to each of these lines in specific details, maybe just a point or 2 to highlight on a specific summary. The intangible asset line has moved substantially since the comparable period last year and only marginally since the financial year-end. A lot of that being driven by the Baby City acquisition, which brought on ZAR 260 million worth of goodwill, an ZAR 124 million worth of brand value, an ZAR 88 million investment in SAP licenses and then the Healthforce acquisition, which brought on ZAR 48 million in the period since financial year-end. Important to note, and again, we'd take you through it in the cash graph later on in the presentation, but a substantial increase in the net cash at bank, a function of strong generation and improved working capital metrics. And then the last point that's worth noting is, essentially, the other liability line reducing back to normalized levels that we had seen in the first half of the comparative period last year. That's really driven by a reduction in the benefit point liability as a result of the increase in the redemption of benefit points associated with more normalized trading patterns, so effectively more feet in our doors, and we continue to see and encourage the redemption of loyalty points to drive consumer value. If we then move on to revenue, one of the first lines we'll talk about. A strong retail performance of 16% growth, up from ZAR 11.3 billion to ZAR 13.2 billion. Retail revenue was really supported by normalized trading patterns. If you look at the discrepancy between mall growth and convenience growth, our mall stores grew well relative to the comparable period at 20.1%, which again talks to normalized trading patterns and these larger malls seeing higher foot count in this period. That also talks to the improved like-for-like retail growth, which is an important metric that we watch, up from 1.5% to 6.8% in this period. Baby City being included for the first time. When compared to the base, it contributed to ZAR 376 million to retail revenue. And the vaccine administration revenue added ZAR 155 million. And the vaccine administration revenue, we'll expand on later. Wholesale sales grew by 17.3%. A lot of that's still internalized -- or the biggest part of it is still internalized to our own basis. Excluding that, independent wholesale growth was at 20% driven by strong performance from the TLC brand. So really just reiterating that the viability of that business model as well as independent pharmacy growth growing at 21.4% if you adjust for the business-to-business revenue that was included in the comparative base. If we move over to total income, and both myself and Craig cover this, in the operating performance part of the presentation. The retail total income increased from 27.3% to 27.7% and 17.9% change. Retail and wholesale transaction margins were continued to be impacted by category mix and low-margin COVID-related sales. Retail transactional gross margin was down 0.4%. And we have started to see the normalization and improvement of this transactional gross margin in the second half of the financial year. Other income, the second line influencing total income, was supported by our investment and continued focus on ROIC and actually drove the total income number, at a group level, up from 27.9% to 28.2%; the wholesale number at 7.5%. As we've always said, we anticipate the total income number over time, as we focus on vendor profitability efficiencies in the wholesale environment, being closer to 8%. That too influenced by very low margin COVID-related line still cycling through wholesale and retail, as I mentioned earlier, as a function of the third wave, which happened during the July period, obviously, influencing the interim set of results. Importantly, the growth of 18.1 being the total income growth in terms of relationship with other expenses resulting in profitable operating leverage in the other income line. If we then look at the expenditure lines, again, depreciation and amortization as a function of IFRS 16, influenced by the addition of Baby City stores, growing 31.2% from ZAR 268 million to ZAR 352 million. Occupancy costs growing at 15.1%, again, a function of the ancillary costs related to rental also linked to space growth, also influenced by Baby City. The employment cost growth at 16.2%, again, lower than both the sales line and total income line. As much as it was influenced by the Baby City inclusion, I think one of the important lines for us, or certainly metrically, one of the important focus areas for us, was the like-for-like employment cost. And that was managed at 4.7%, so below like-for-like sales growth and, again, spoke to the positive leverage that we got on operating margin. And other operating costs increasing by 15%, a big portion of this is a function of normalized advertising as we hit normal trading patents during this first half of the year compared to the much more subdued advertising and promotional period in the base when we were significantly influenced by the restrictions of COVID. And as such, total retail costs are up 17.5%. Removing depreciation, retail cost growing at 15.8%, again, lower than the sales line and lower than the total income line, which is positive for us and, again, demonstrates the ability for the growth that we've seen in the operating margin line. If we move over to wholesale operating expenditure, and Chris covers this in quite a bit of detail, I think some points worth noting. Occupancy costs reduction was influenced by the municipal electricity back billing that we spoke about that influenced the comparative period. So you saw a reduction in occupancy costs. Employment costs at 7.5%, again, continues to show the leverage that we're seeing in the wholesale environment. That business growing north of 17%, so relatively well managed from an employment cost perspective as we continue to focus on efficiencies. And then the other operating costs increasing by 14.8%. The main driver there, and again, Chris will allude to it in the wholesale segment of the presentation, was the increase in courier costs that we saw as a result of the increase in pallet volumes. This was predominantly as a function of new route introductions and the decentralization of our stockholding to cater for growth in the KZN and Cape Town distribution centers, specifically to facilitate independent growth. If we then recap both operating profit and some of the EPS and HEPS figures, obviously, the movements in some of the lines described result in both increased operating metrics in both the retail and wholesale segments and, ultimately, the group. So a positive growth from an operating perspective in retail, a 19.7% change, even taking into account the depreciation influence as a function of IFRS 16. And then wholesale continues on its trajectory, moving from 0.4% H1 last year to 0.5%, resulting in the group operating profit margin moving from 4.7% to 5.1% and then growing by 24.8%. If we then look at earnings per share and headline earnings per share, the change more substantial than the 25%. Again, if you look at the statement of financial position, and the result of that is purely as a function of the net finance cost line reducing. So we have EPS growing at 34.4% and HEPS at 35.3%. A slight change in the diluted WANOS number as a function of the share scheme, which is now a profitable share scheme in place for executive management. And ultimately, we see that result being a positive result of ZAR 0.344 (sic) [ ZAR 0.484 ] in the EPS number and ZAR 0.353 (sic) [ ZAR 0.487 ] in the HEPS number. If we move into working capital, as everyone is aware, this has been a big focus for us over the last 24 months. We continue to show improvement. If you just follow the trajectory of the improvement, and again, we speak about this in the operational performance, we were at 32 days net working capital position at the comparative period last year. We reduced it to about 30 days at financial year-end 2021. We are now 26 days, predominantly driven by a reduction in debtors days. So debtors has been a focus for us, specifically around the collection of trade term income, and that's obviously grown significantly as a function of the ROIC exercise. So the recovery of that income was important. That's reduced debtor days from 25 constant down to 23 days and which is an excellent result considering that independents' growth or certainly the wholesale growth over-indexes retail growth, and that's typically where you see the bigger debtor book. Inventory days are now at 89 days, including Baby City and COVID-related stock lines. You can see that if you take an operational rolling stock day, which, again, Craig will talk to, that's improved to 80.7 days including Baby City and COVID-related stock lines; and excluding Baby City and COVID-related stock lines at 79.3. So again, just demonstrating the normalization that's happening in stock days, and we anticipate that the 80.7 will be slightly down at year-end. And that ultimately culminates in net working capital at 25.7 days, with creditor days being as it was at the FY 2021 period. I think, importantly, we do see a slight upside to creditor days as we roll out supply chain financing to vendors associated with the Delmas facility, which takes -- or does a lot of the distribution into the independent space. If we then move on to cash management, as we said, good performance and strong cash generation across this financial period. Just worth noting, working capital improvements, obviously, a function of the working capital metrics that I spoke about previously. Net finance costs, again, that relationship is important, if you look at that in relation to the finance cost line. Tax at ZAR 156 million. Obviously, the dividend that was declared at the end of the financial year 2021. CapEx, which I'll talk to separately. And then I guess the important thing is the ZAR 224 million loans, treasury and finance lease repayments and contingent consideration. The one point worth noting there is the contingent consideration, which was a function of the purchase of joint ventures at the time of listing is now complete. And so you will not see a liability on the balance sheet going forward. Those stores are entirely owned with no financial obligation left to the group. And the performance has ultimately resulted in an increase in cash and cash equivalents of ZAR 524 million. If we move over to capital management, you can see expansion CapEx has reduced by 54.1%. The majority of that is a function of the ZAR 88 million worth of SAP licenses acquired that were included in the base. The SAP licenses allow us to roll out a new point-of-sale solution. If you remove that, the increase has been a function of new stores. Maintenance CapEx has increased by 33.1%. And then total CapEx has increased by 36.8%, again, a function of the adjusted base as a result of the SAP licenses. The metrics in relation to the turnover have reduced slightly from 1.8% to 1%, once again as a function of the licenses included in the base. If we look at the outlook for the remainder of the financial year, we continue to anticipate between ZAR 8,250 and ZAR 8,750 per additional square meter of floor space added, approximately 7,000 -- or just north of 7,000 square meters of Dis-Chem space to be added in the second half of the financial year, and the number of stores being influenced by the COVID-19 landscape and the inability for some of the landlords to give us space at initially anticipated times. And the last point on capital management is just that we anticipate around ZAR 30 million of distribution movable equipment to land in the second half of the financial year. This potentially could be pushed into the first half of FY '23, obviously, depending on import time lines. If you recall, that number was around ZAR 40 million for the full year, so already delayed as an investment and potentially further delays into FY '23. Myself, Craig and Saul are now going to take you through the retail trading performance. If we move on to Slide 17, our core category market share slides, I think probably one of the most pleasing parts of the presentation. We've taken a significant share across all of our core categories. And there's a noticeable trend, if you follow it from FY '20 to the first half of this financial year, of share gains across all the categories. Starting with dispensary. Dispensary is now at 22.6%. We took share from all competitors, including corporate pharmacy, independent and courier, again, a function of what we think is core to our brand, destination pharmacy. Personal care at 17.1% has almost returned to the 17.3% that we saw at the end of FY '20. Again, there's a lot of competition in the personal care and beauty space as a function of COVID, and the single basket shop that we saw during this period, which led to food retailers taking some of the share in the personal care and beauty space. Health care and nutrition, up to 49.6%. Again, as we said previously, a hugely important category for us. And we continue to see share gains there. We continue to see growth off what was a step change in the prior year number that was driven by the COVID-19 landscape. And then, obviously, baby care. We split baby care up. The table does not take into account Baby City's contribution. The reason we wanted to split it is to show that we've gained share in baby care as a function of the normalized trading patterns, which has driven a lot of the share gains that we've seen. As I said previously, it's also driven strong like-for-like numbers. But taking Baby City into account, our Baby City market share is close on 15.4%. It's currently not read by Nielsen but would also influence the shares of competitors in this space. If we then move on to core category performance in the first half. So just to remind everyone what this graph shows is the contribution to sales and, on the right-hand side, are each of the categories. The change in revenue is effectively the growth that we see in revenue across each of the categories, and the change in transactional gross margin, so transactional gross margin, meaning the stock margin that we see through the tools, just to demonstrate some of the challenges that we experienced and some of the opportunities that we've taken when comparing these categories to the prior comparative period. So dispensary up by 18.2%. Included in that 18.2% is the vaccine sales number, which comes at slightly lower margins than the rest of the dispensary category as a function of the admin fee. But again, we'll talk to the particular metrics of the vaccine rollout later in the presentation. The percentage change in transactional margin at 33.6% driven by better negotiated dispensary fees with medical schemes. We also got access to some performance-based remuneration, which was driven by continued genericization in that category. Personal care and beauty, 8.9% sales growth, 2% gross margin growth. Still continues to be impacted by lower-margin COVID-related lines, a higher price volatility in these lines. But we have seen, and we do anticipate, that there will be an improvement in the second half of the year in this category. We've effectively cycled out of the majority of most of the COVID-related lines. Health care and nutrition, 7.9% change in revenue, again, a surprisingly high number considering the step change that we had seen in the base; and 11.8% change in transactional gross margin as we focus on the ROIC categories. There's also been a slight mix change, which has contributed to that higher gross margin to sales line as a function of some of the higher-margin sport nutrition categories coming onboard. And then baby care, which is really a function of Baby City coming onboard in terms of those higher sales and gross margin contributions. But again, importantly, and this is an area of focus for us, you see a delta between the transactional margin growth and the sales growth. There's definitely a private label opportunity in that category, and we expect this relationship to continue. And then other growing at 13.6% sales growth and 7.7% margin growth, a small contributor to the core category performance. And there were some price pressures in the subcategories that make up the other category performance. I'm now going to hand over to Craig to take us through the continued focus that we have on return on invested capital.

Thanks, Rui, and good morning to all listening in. I'm going to take you through an update of our work improvement strategy. Progress in this area continues to drive a stronger total income. Retail margin grew ahead of revenue in core categories, aside from in personal care where FMCG was impacted by the back end of COVID-19-related products cycling through. Excluding these COVID-19 products, total transactional margin growth was ahead of revenue growth, which illustrates the step change to current gross margin levels. This should be sustainable going forward, and we expect further improvements in the second half of the year. Our private label brands have continued to perform better than the market across our core categories and offer an important point of difference in addition to driving profitability. We are comfortable with the contribution in support of national brands, which is a key part of our growth strategy. An in-depth analysis on private label we have done has shown that there's still a ZAR 1 billion growth opportunity that we believe can be unlocked over a 3-year period. This is weighted primarily towards personal care, FMCG and baby. And whilst there are new categories to enter and space to grow in existing categories through innovation and new product development, the obvious opportunities lie in Baby City and Medicare, which don't have an offering of substance at this stage. We believe that we can increase private label contribution by 3 basis points over this 3-year period. Terms growth supported the higher total income margin growth at 18.1%, which is comfortably ahead of the turnover growth of 16%. This was driven by the group ROIC improvement strategy focus and resulting rebate improvements. Terms growth from the likes of fee-for-service rebates grew at 32%, outstripping purchases growth, which was at 16.2% for the period. Excluding Baby City, the terms growth was at 29.4%, which illustrates that whilst the acquisition supported the increase and added 2.6% growth to the total income line, the primary improvements came from the ROIC work done on the discount base over the previous financial periods. This additional growth came from deeper penetration into the supplier base as well as expansion and improvement of the services we offer that attract fees. From a stock days perspective, total group stock days have decreased, as Rui mentioned, from 91 days at the end of FY '21 to 89 days at end of August. This despite carrying slightly higher levels of safety stock for certain KVIs and subcategories to cater for potential supply chain disruptions as well as Baby City stock included in this number. Operationally, we measure rolling stock days, calculated using stock on added costs at the period end date with cost of sales over the last 91 days, where the accounting method uses the average between opening and closing stock to get to the 89 that I referred to above. Operational rolling stock days cover was at 80.7 and, excluding Baby City, at 80.4. The stock levels were supported by increased coverage of our SAP automated forecast and replenishment system or, as we refer to it, F&R, which now covers 595 suppliers and products representing over 2/3 of front shop turnover, up from 46% coverage at the end of FY '21. The F&R system uses algorithm-based predictive analytics to forecast demand looking forward and, off that process, stores and DC orders systematically for improved accuracy. It also gives us the ability to better control DSC, or days stock cover, and affects stock centrally and strategically within short time frames. To measure success, we check progress on 2 key metrics, being days stock cover and potential lost sales. Lost sales is measured as average potential turnover on stock-outs per site and aggregated up, looked at as a percentage of turnover. On F&R system replenished products, we see material like-for-like improvements with lost opportunity sales levels at half that of the non-F&R replenished products. And the days stock cover typically reduces by around 10% on like-for-like vendors post switch on to F&R. And we still have 1/3 of turnover to cover, which highlights the additional opportunities for further stock optimization. Creditor days increased from 85.5 to 86.3, and we do still see some additional opportunity to improve in the wholesale space, particularly at our Delmas facility where supply chain finance will now be available to vendors there. The usage of the supply chain finance solution across the group continue to be very high over the period, particularly with supply chain-related pressures affecting some vendors. At operational stock days at 80.7, we maintained the negative stock to creditors working capital position that was first achieved at the end of FY '21. This working capital improvement chart also use operational stock days stock, so stock at cost at end August relative to 91-day cost of sales. Group operational stock days rounded at 80, or 81 including Baby City. This is illustrated by the gray total stock day chart line, the most recent data to the far right. This compares to the creditors day line in yellow which, at 86, shows the negative 6 days stock to creditor's position; or 5 including Baby City. The 2 green lines at the bottom illustrate the split between store stock at 46 in dark green and DC stock at 34 days in the lighter green. The split is always impacted by timing of strategic buy-ins and promotion-related purchasing and when this filters from DC into stores and sells through. If we continue to optimize as we have been, there's still room for a couple of days stock reduction in the group. Thanks very much for your attention. I'll now going to hand over to Saul who's going to take you through the loyalty and e-commerce areas.

Thanks, Craig. As with the other metrics, both the loyalty and e-commerce have shown good growth. Our customer profiles have increased by 5.5%, and our loyalty membership is up by 4%. Benefit member contribution is now averaging 72%, up from the previous 70%. Our loyalty partnership contribution, which now includes Standard Bank UCount and Absa Rewards is up from 39% to 57% on average. I'm proud to announce that we have secured 2 new partnerships. We successfully launched Capitec and Sanlam Reality, both of which have got off to a flying start. Loyalty redemption rate has also increased by 2% and is now at 87% as trading patterns continue to normalize. We have shown steady growth on our app downloads, which is up by 61% in the last 6 months, mainly driven by chronic dispensing initiatives, comprehensive above-the-line advertising, digital strategy and member statements. Our e-commerce continues to perform remarkably with online growth up by a further 18% compared to the same time period last year. The revenue trajectory has boomed over the last 2.5 years, as indicated by the graph on the top left driven, as we know, by the pandemic. Our delivery costs as a percentage of revenue have significantly decreased as we are extending our hub base, and we are experiencing a better economy of scale. Fulfillment hubs have further increased from 49 in financial year '21 to 74 currently, improving profitability and efficiency. These 74 decentralized fulfillment hubs have brought our cost base down to only 4.1% of sales. As the additional 25 fulfillment hubs have opened, the click-and-collect orders are ready for collection within 0.5 business day, which is the time from the customer placing the order to being ready for collection. With the delivery orders being ready for the courier pickup within 1 day, our order fulfillment percentage has increased to 99.2%, even exceeding pre-COVID levels. The added efficiencies are driving additional e-commerce profitability. The rollout of PicUp route optimization software implementation has lowered and stabilized our delivery costs as a percentage of e-commerce revenue and reduced the delivery lead times. The split between delivery versus click and collect is 63% and 37%, respectively. Dis-Chem DeliverD is a geo-located, on-demand-based app delivery service that delivers a limited range of over 7,000 products within less than 60 minutes, within a 10-kilometer radius, delivering currently from 50 different store locations and a rollout to 60 stores before the end of this quarter. Dis-Chem DeliverD trial has been running well and the outlook positive, with customer uptake and sentiment encouraging. In line with current market trends, the super app and marketplace will be the future of online shopping as consumers choose apps and payment options suitable for their needs. We are currently active on marketplaces such as OneCart, Zulzi and Quench. I'll now hand back to Rui.

Thank you, Saul. We're going to dive into primary health care. We start on the slide that summarizes our primary health care ambitions. We've illustrated this previously. At that stage, we haven't concluded all of the transactions. We have now. And as I will talk to you shortly, we have concluded all the transactions. And essentially, what this slide demonstrates is essentially that the dispensary in our clinics, which sit at the core of our brand, become an entry point into health care. And some of the assets that we've acquired, Healthforce, Health Window and Kaelo, complemented by the Medicare transaction, allow us to earn some of the margin and diversify our revenue away from traditional retail pharmacy, further into the supply chain. On the right-hand side, we've always spoken about the concept of patient centricity. I think the success of primary health care and, certainly, the success of primary health care products is centered around the opportunity but also making them affordable by lowering the cost of care in terms of entry point, so utilizing nurse-based care as the initial entry point into the health care environment as well as access. So giving patients access through our network and through the network that Kaelo has access to and then again, functionally, from a health outcome perspective, delivering quality and convenience. So if we just move on to summarizing the performance of some of the assets that we've acquired. We've spoken previously a lot about HealthWindow. HealthWindow was the first asset that we acquired, which effectively administers and runs an adherence center. So one of the big drivers of our dispensary growth has been chronic adherence. Chronic adherence remains vital. And as you can see from the gain analysis below, our growth has over-indexed compared to pharmacies. The comparative pharmacies are HealthWindow-controlled pharmacies, so they are receiving similar adherent services. And that growth of 6.9% in the chronic space is indexed well above market. And if you consider that in terms of the market share gains, it's probably the single biggest reason that we've gained shares against both our corporate competitors and independent pharmacies when comparing ourselves to the prior comparative period. If you then look at the stack-up of adherence growth, so the breakdown of that 6.9%. 1% is being driven by adherence growth. That 1% needs to be considered, with adherence being naturally in the base. And we continue to tweak the adherence center and to expand and to increase coverage of adherence between Pack My Meds, which is a reactive SMS services that encourages chronic adherence management, our call center adherence management as well as content campaigns that drives chronic adherence. Again, importantly, we are seeing as a function of the scheme benefit design reducing, as a function of consumers being under pressure, we are seeing the number of new chronic patients entering the market declining. And that reinforces the importance of a tool like HealthWindow and the importance of chronic adherence, which effectively drives foot traffic into the stores and, certainly, from a primary health care perspective, would naturally control costs of a primary health care insurance product. If we move on to primary health care clinics, effectively Healthforce. So we acquired Healthforce on the 1st of March. Healthforce becomes a clinical operational software that gives us the functionality to pass on the consumer from a nurse-led consult into different other areas of medical practice, so typically GPs. What we try to demonstrate in this slide is the continued traction that you see in nurse-led clinic consults. I think importantly, as you look at the graph on your left-hand side, you've got to take into account that during June and July of this year, we experienced the third wave. And typically, when you do that, you do see trading patterns change. But we have continued to see an increase over August, September and October of nurse-led clinic consults. The manner in which we approach nurse-led clinic consult was also slightly impacted by the vaccination drive that we had. We're currently vaccinating from 70 in-store clinics. I'll talk a little bit to the progression and the thinking behind how we approach the vaccination drive. But obviously, we deliver primary health care services, and we had to weigh up the balance between vaccinating in-store and continue to deliver this important primary health care service. The graph on the right demonstrates the VideoMed consults that have been done within our environment. You can see again the VideoMed consults increasing as a function of increased nurse-led consults but also as an absolute number. Typically, what we see is we see VideoMed consults increase in the second half of the year as scheme benefits run out and as consumers look for a lower price point, value-driven option. And this is a testament to what we believe, or certainly provides us with evidence, of a very lucrative opportunity in the primary health care space. It's indicative of people looking for quality private care in instances where they are employed but not on any medical scheme products. Again, as I said, we continue to make ongoing investments in Healthforce and in the clinical infrastructure. These remain core to our primary care vision and really augmenting the group from what is a traditional pharmacy retailer, almost into an HMO, or health management organization. One last point to add is just the rollout of the moms and baby clinics across our Baby City stores. This has started and is gaining good traction and will certainly be completed by the end of the financial year. If we move on to the COVID-19 vaccination updates, this slide just attempts to cover the logic behind our approach and where we stand today in terms of vaccination update. So in summary, total doses administered to date 860,000. That's split between mass sites at 672,000 and in-store clinics at 188,000. And we then break it down up until half year, so since the inception of the vaccine program on the 17th of May and then post the reporting period, so from the 1st of September up until last week Sunday. And just importantly, to explain just the principle around our approach. As I said previously, we have very busy in-store clinics and we needed to find a mechanism to assist and be a service provider to the vaccine program. And so we started our 28 mass vaccination sites. The mass sites have driven significant volume. And as they've gathered momentum, we've seen improvements in throughput. So there are a number of vaccines administered per hour. And ultimately, these have done 383,000 doses up until half year reporting and another 289,000 doses post year-end. You can see the revenue contribution as at half year at ZAR 155 million and subsequently at ZAR 171 million. If we move to the in-store clinics. So as the demand is reduced, it obviously made commercial sense for us to reduce the sunk costs or leverage the sunk cost in our clinics. And we've found 70 in-store clinics. So we've repurposed those volumes into other clinic sites, typically in stores that have more than 1 clinic, and we transitioned from mass sites to in-store clinics. Those in-store clinics have delivered 188,000 total doses, 22,000 doses within the reporting period and 166,000 doses post the reporting period. Important to note that, that 166,000 doses includes 27 Medicare stores that obviously were consolidated into our number from the 1st of October. But importantly, you can see the transition, or certainly the contribution increase, from in-store clinics in the reporting period post half year end, which talks to the leveraging principle that I spoke about. Another important principle is just the uninsured contribution. The uninsured contribution continues to increase as the state required us to assist in vaccinating uninsured patients in the middle of June. It's now moved from 29.5% at the end of the reporting period, contributing 63.6% post the reporting period and on average, 47%. The importance of this number is just in terms of the commercials. As it stands, we have ZAR 132 million owing to the state for vaccine supply. We do believe that this has peaked as a function of the contribution of uninsured patients, and this will continue to reduce over the next period. The settlement of this value to state is not expected before the 28th of Feb as a function of the way that the sales and distribution agreement was signed with the state. And again, we believe we've contributed significantly to the program. It's low margin, as Ivan described, at financial year-end. There is some ancillary benefit in terms of foot traffic from the in-store clinics. But we will continue to play a role as a predominant contributor to the vaccine program, and we'll continue to educate and encourage the population to get the vaccine in order for the economy to return to some sense of normality. If we move to the other assets that we've acquired. And typically, this is just a health asset update. So as we've previously disclosed in our [ sales ] announcement, we've got the approval from the competition authorities for Medicare. Medicare is included in our numbers from the 1st of October and, as Ivan described, contributes to the revenue growth post year-end, only for 1 month of the 2 months that we've reported the number. We had a net working capital provision in the way that the sales purchase agreement was structured. And as such, we required a certain level of working capital protection from Medicare that resulted in a purchase consideration of ZAR 247 million, which we funded from cash resources. The rollout is going well. Synergistic benefits, especially within the dispensary, have been identified. And that value extraction continues. The importance of the dispensary is obviously a function of the dispensary contribution to the Medicare number being 2/3 of their turnover. We then, and Ivan will talk to it, are running 2 parallel work streams, the first being a migration onto the group's common technology platform, so SAP. We expect that to be completed by June 2022. The importance of this is this becomes one of the factors that start to influence the ability to extract synergistic benefits. And then, of course, the rebranding to drive front shop growth will commence in 3 months. And Ivan will talk to the position with respect to how many stores get rebranded over a 2-year period. If we move over to Kaelo. If you recall, Kaelo was up to ZAR 195 million, subject to FY '22 performance hurdles. That FY '22 is at June year-end. Again, we've got competition authority approval, and it was effective on the 1st of November, so 2 days ago. It remains, what we believe, an excellent investment in a class of assets that is best positioned in health care. The initial payments of ZAR 160 million is a function of their performance in the FY '21 financial period. And again, as we described previously, we see excellent operating margin growth and excellent revenue growth in that asset. And Healthforce, we landed on the 1st of March. And I think Healthforce, as I explained previously, is really a software that ensures that we drive our ambitions in the primary health care space, specifically in relation to telemedicine and clinic volumes. And we'll also be launching a new direct-to-patient care offering in early 2022. The importance of direct to patient is just complementary and gives the person or the patient the same ability to access that care, so the same nurse-led ability or GP-led ability but in a direct-to-patient setting. If we just look at Medicare at a glance. Many of these numbers we have described previously. Currently 50 stores are in the portfolio. Again, each of these stores in -- or many of these stores are in geographies that we have not been able to access, in convenience centers. So going to be very interesting to see, once rebranded, what the brand does to front shop turnover growth. FY 2021 revenue, just to give you a size of the asset, at ZAR 1.1 billion. First half revenue, their year-end is aligned with ourselves at ZAR 572 million. And pleasing to see that their first half operating margin at 3.3% was over-indexed against our expectation in terms of when we did the valuation at 2.6%. We expect, and as we've said before, in comparison to Baby City, a short implementation period to achieve targeted profitability for Medicare. That targeted profitability is no different to the group's retail profitability of 6%. A majority of the guaranteed synergies are focused at the dispensary and the wholesale support of the dispensary business. And as a result of that, we've already seen a significant shift in terms of wholesale support from Medicare in October. The dispensary, for example, is at a 96% compliance to the CJ distribution business. And importantly -- we've said this previously, but importantly, when you think about the profitability that the dispensary product drives in the dispensary business because of its volumetric size, so the smaller the product, the higher price points and the logistic fee associated with it, it's really, really profitable business from a wholesaling perspective, and it's relatively easy to absorb that additional turnover as a function of it being dispensary related. If we move on to the other 2 assets, just quickly, just to recap on Kaelo. So the insurance and noninsurance revenue at ZAR 539 million, lives under management of 381,000 and AskNelson registrations at 1.4 million. Just in summary and to recap, Kaelo is a portfolio of health assets: gap and primary health care insurance, occupational health clinics, employee wellness and, obviously, AskNelson psychosocial well-being platform. We, as a function of COVID-19, have seen strong demand for mental health solutions. So currently 1.4 million people have access to the AskNelson program. This has been an increase of 200,000 in the last 5 months. And the AskNelson program becomes the entry point that Kaelo has with corporates. So it becomes a good platform to sell primary health care insurance. And importantly, planning is well underway, and Ivan will touch on it, to offer a health-related insurance products to the retail market. This market, we always identify as an opportunity, 12.4 million employed and uninsured. We have already started to retail Kaelo-branded health insurance into the market. And the first product was sold in 17th of June. And we, as Ivan has explained, will be launching Dis-Chem-branded health care into the markets in the first half of the next calendar year. If we move over to Healthforce, again, we've explained our ambitions on Healthforce. It very much becomes a software that allows us to unlock and shape the way primary health care is consumed as a function of that traffic being run through our clinics. Nurse-led consult on Healthforce since inception at 1.6 million, so relatively maturing in terms of accommodating different types of nurse-led consults. 10% increase in clinic penetration, so 10% more clinics than previously at 479 clinics. And total VideoMeds for the first half of this year of 12,589. 20% growth in total VideoMeds, again, talks to the need for the service. And importantly, again, we expect a higher contribution in the second half of the year as medical scheme benefits run out. And then importantly, the technology road map is in place to advance primary health care ambitions. We do see Healthforce as an enhancement tool to enable our ambitions into primary health care and certainly to deliver the appropriate care and ensure that we route a consumer or a patient through the health care channels to open up insurance margin in the chain. I'm now going to hand over to Chris who's going to take us through our wholesale trading performance.

Thanks, Rui. Good morning, ladies and gentlemen. Rui said at the end that if we improved on our results, I could present our half year figures in any language I preferred. But 11 official language is quite a difficult choice, so please bear with me as I present our wholesale results in 9 of it. Good morning. [Foreign Language] In the interest of time and my limited pronunciation skills, I'll stick to English this round. As you have heard, and you will now see more detail of, the wholesale division once again had a very successful and blessed trading period in continued challenging times. I truly believe that these results are a culmination of concerted efforts which were well executed by a very capable operational and financial team. The continuous improvement theme keeps driving efficiency improvements. We have once again experienced the impact of focusing on the 1% improvement principle. This process clearly resulted in exponential gains from an operational perspective which, in turn, filtered through to our improved financial results. If we turn to the external wholesale revenue slide, you'll see that external growth was at a very pleasing 20.01% (sic) [ 20.0% ] during these continued challenging times. For this period, there were no internalized sales to report on. At year-end, the Medicare contribution will be reported as internalized. In terms of the regional DC consolidation and growth progress, just an update. The consolidation of Quenets into the Western Cape DC is now completed, and we've seen strong growth on the back of an extended product range and delivery footprint. The increased number of routes to service the independent customer base, for example, into the Eastern Cape, has resulted in increased courier costs. We are confident, though, that as these routes mature and the customer base grows, that the return on these investments will increase. TLC customer revenue grew by 31.2%, just reemphasizing the feasibility and success of this business model. The TLC franchise stores increased from 110 to 134 stores. In terms of our corporate TLC model, we now have 3 corporate TLC stores, and all of them are running profitably. Independent pharmacy support grew by a satisfactory 13.6%. This growth is muted as there is ZAR 59 million business-to-business sales included in the comparative base; independent pharmacy growth of 21.4%, if you exclude the ZAR 59 million in the base. We believe that our sustained focus on service levels contribute to the success. There's no current slide reported on the supply profitability, although we just want to mention that there is a continuous focus on the various levers available to drive supplier profitability. If we now move on to the expense efficiency slide. This graph seeks to compare total revenue growth to total expense growth. It can be seen that revenue has grown by an impressive 17.3% compared to the same period last year. Total expenses only grew by 9.4% over the same period despite the growth we have seen in revenue and output. This was achieved by a sustained focus on efficiencies, which I'll touch on later. Depreciation reduced by 5.8%. This was impacted by market-related clauses in some of our rental contracts. Rent and municipal charges reduced by 20.4% due to municipal electricity back billing in the prior period. The payroll expense increased by 7.5%, which is good considering the revenue growth of 17.3%. This was achieved by increased efficiencies and output. Repairs and maintenance only increased by 2.8% driven once again by the renegotiation of maintenance contracts. Courier expense, which has gone up 39.7%, was influenced by 4 main drivers: first, the huge increase in the number of pallets distributed; then new Dis-Chem stores and routes; extended independent pharmacy routes, for example, as mentioned, the Eastern Cape; and then by Baby City orders and deliveries. We currently service more regular orders and deliveries to the Baby City stores. This has led, unfortunately, to suboptimal pallet heights [ enforced ]. We are working on more efficient ordering patterns to improve this. If we turn over to the volume increase units versus pallets slide. The graph on the right shows our pallet growth. The number of pallets we distributed increased by 42%. This is higher than our sales growth and was influenced by the factors mentioned on the previous slide. This inefficient pallet distribution led to the height of pallets declining by 4 centimeters on average, which added 1,056 pallets compared to the comparative period last year. The centralization of stock during the COVID lockdown periods had a lasting impact on inter-DC stock transfer from the Midrand DC. We are busy with an exercise of finding the optimal split of the right SKUs in the regional DCs to reduce the inter-DC transfer cost. The graph on the left shows our unit growth. Units grew at a muted 9.2%, but this is on the back of increased volumes of, for example, face masks in the comparative period last year. Moving on to the next slide, warehouse efficiency gains. The block on the right shows an increase of 16% in warehouse activity efficiency, therefore, increasing our output of units per shift. The graph highlights 2 areas we were able to improve on. We achieved a 5.4% reduction in order queue time. This is the time it takes from receiving an order until we start processing it. Our order to outbound time increased by a minimal 0.3%. This is the actual time it takes to pick, pack and check an order, and this was impacted by us increasing our peak areas in the DC. Outbound to staging time reduced by a further 6.7%. This is the time it takes to palletize stock and prepare to load it. This led to a total time efficiency gain of 11.8%. This time gain contributed to the fact that revenue grew by 17.3% with only 9.4% expense growth. We continue driving visibility across the supply chain through data analytics. The group has increased the number of suppliers being represented via F&R, as mentioned. This serves as a tool to not only optimize but also predict demand curves on the DCs, both from a stores order perspective and a supply into DC replenishment perspective. This balance is critical in the DC resource planning process. The introduction of robotic process automation at the end of last year has shown the benefits of automating mundane tasks to contribute to total efficiency. Some of the gains we've seen in the total efficiency increase can be attributed to the consistency that automation brought to some of our time and resource-dependent processes in our warehouse operations. Turning over to the last slide, The Local Choice slide. As mentioned before, we've adopted the image of a tree as a symbol of what we strive to achieve in our long-term strategy. The more you take care of the basics, being the roots, the better the results. The roots depicts our inputs from a franchiser point of view, and the fruit are the results we achieved from these inputs. As can be seen, the group's retail revenue has increased to ZAR 1.421 billion for the 6 months from March to August. The TLC customer revenue growth is partly driven by front shop support and ranging that we, as a supply chain, offer them. This can be seen in the bigger front shop versus dispensary representation when compared to normal independent pharmacies. The same opportunity presents itself in the Medicare stores, which we have acquired. Exciting fact for us is the fact that the group is now fully represented in all 9 provinces within South Africa. I will now hand back to Ivan for the outlook.

Thank you, Chris. With the timing and degree of a possible fourth COVID-19 wave not clear, we expect any fourth wave to influence trading patterns and continue to put pressure on the economy and consumers. We are well positioned to continue delivering value and exceptional services that our customers and patients have come to expect from us, either in-store or through the various online channels we have to offer. Dis-Chem has made good progress regarding the acquisition of 3 distribution centers. Valuation fairness, opinions and related agreements have been completed and are now being prepared for circulation in the JSE. The transaction will soon be submitted to the competition authorities and is expected to be completed before the end of the financial year. With consumer shopping patterns normalized and market share is mostly in pre-lockdown levels, we are seeing transaction gross margin normalizing largely as a result of fewer COVID lines being sold. We are firmly committed to our integrated primary health care strategy. Planning is underway to launch Dis-Chem brand into health insurance to the retail market. We will open 7 Dis-Chem stores in the second half of the financial year and will maintain our cadence of approximately 20 new store openings in the 2023 financial year. In addition to our organic growth strategy, we are excited about the synergistic characteristics of the recently concluded acquisitions. The integration and rebranding of approximately 40 Medicare stores will accelerate the expansion of our store network, enable us to offer more customers in new geographies the unrivaled shopping experience, range and value that millions of value customers have come to expect. Thank you for listening.