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

Good morning, ladies and gentlemen. It is with great pleasure that we welcome you to Dis-Chem's interim results presentation as we report a strong set of results for the 6 months ended August 2022. With consumer shopping habits and routines just about restored to pre-COVID levels, we have experienced a normalization in our operating environment for the first time in over 2 years. Dis-Chem's entrenched everyday low strategy has never been more important with consumers continuing to experience significant financial hardship. In an environment of affordable constraints, our group is committed to driving down costs and increasing access to quality health care through the integration of capabilities along the health care value chain. Our relentless commitment to delivering high-quality products and service excellence will continue to promote customer support with the resilient markets in which the group operates. Before I take you through the results highlights, I would like to take a moment to clarify our position on the recent headlines regarding employment equity and transformation. Simply put, there are no blanket moratoriums in place. Dis-Chem will continue to strive to comply with the spirit of the constitution and other applicable legislation and accordingly, continue to give preferential employment to suitably qualified previously disadvantaged persons. Transformation is not one dimensional. Skills development is a critical contributor to transformation and growth. I'll now go through the group highlight. For the interim reporting period, we delivered pleasing results across all key metrics. Group revenue increased by 9.3% to ZAR 16.3 billion. Our earnings per share increased 44.7% to ZAR 0.701. Due to our focus on return on invested capital, net working capital days improved and we are now down to 24 days. We have declared an interim dividend of ZAR 0.281 per share, which is an increase of 44.3%. Retail revenue grew by 9.3% to ZAR 14.4 billion with like-for-like pharmacy store growth at 3.6%. If the contribution of COVID-19 vaccine administrations and testing services are excluded from both periods, retail revenue grew by 10%. We have opened 5 new Dis-Chem stores and 3 new Baby City stores in this reporting period. We have also concluded the acquisition of Baby Boom, adding another 15 Baby stores to our network, extending our Baby retail leadership position. At the end of August, we had 251 retail pharmacy stores and 53 retail Baby stores. Online sales grew by 9.5%, and we extended our e-commerce offering with the addition of 5 new fulfillment hubs. Wholesale revenue grew by 10.6% in to ZAR 12.1 billion, as external revenue continues its strong growth trajectory. Excluding wholesale revenue to Medicare stores in the prior period, external revenue grew by 20.4%. This was made up of independent pharmacy growth of 15.8% and TLC growth of 22.5% with an increase in both TLC franchise stores and independent pharmacies and an increase in overall support from the current base. We are proud to have extended our position as South Africa's largest retail pharmacy group by dispensary market share. The rebranding of Medicare stores has been completed, contributing positively to returns sooner than anticipated. Dis-Chem branded health insurance continues to gain traction, demonstrating the very real market need. I will now hand over to Rui, who will take us through the financial results.

Thank you, Ivan, and good morning to all the listeners. As is customary, I will go through a statement of comprehensive income and statement of financial position, and then we'll delve into each of the individualized lines. As Ivan said, just the main highlights from statement of comprehensive income perspective, revenue growth of 9.3% to ZAR 16.3 billion and operating profit growth from ZAR 758 million to just over ZAR 1 billion, growing at 32.5%. I think one of the highlights of the reporting period is the strong total income margin performance, a function that we will explore in a bit more detail later, but really driven by continued scale and the recalibration of the transactional gross margins off the back of what was a very influenced environment from a COVID perspective. Another important principle that I'll talk to that will run through the course of the slides is obviously the contribution of vaccine administration and testing revenue, that affected and contributed significantly to the base in the prior period. So that will be explained in a little bit more detail as well as the property gain as a function of the acquisition of the 2 -- the 3 distribution centers that we made, which landed in April of this year, unlocking ZAR 72 million of a once-off income gain. Those 2 principles, we will talk throughout the presentation. And for the sake of clarity, they will be eliminated from certain lines to give a sense of true trading performance. Two other points that are worth noting in the statement of comprehensive income, is the net finance cost reduction by 8.3% to ZAR 151 million. The reduction in finance costs is a continued improvement is as a result of continued improvement in our net working capital position, a focus of us and a continued focus on us driven by the return on invested capital focus that we engaged on a few years ago. And for the first time, we're seeing an unlock from an interest expense perspective as a function of the age and maturity of our lease portfolio. So previously, the average age of our lease by implication would mean that we'd carry higher interest costs being towards the front end of the lease period, and we're cycling through that environment now with the least cost relative to the comparative period is slightly lower. The non-controlling interest growth is a continued function of gains from our oncology business, as 1 of 2 or 3 franchise businesses where we have controlling equity that have performed well. And then just to highlight that Medicare is included on the first of October in the prior year, and therefore, included for the full reporting period, which will start to unpack as we move to the revenue line and the vaccine contribution. If we move into the statement of financial position, again, we unpack all of these lines separately. Just 2 points worth noting. The shift in the intangible asset line is a function of the Baby Boom acquisition. And then you'll notice a change or a reduction in the lease liability and an increase in bank loans. That's really a function of the property transaction. It was derecognized as a function of the lease at a group level coming to an end. And obviously, we took finance out to acquire the property. So an increase in bank loans, reduction in lease liability, but when you look at liabilities in totality, no real shift in the liability movement. If we move on to revenue. As is normal, we break down revenue into retail, wholesale and intergroup. Intergroup sales represent sales between our retail and wholesale business. Generally, the target is to ensure that they are normalized or linear in proportion to retail growth, and that is what's being reflected. They're growing at ZAR 10.7 billion to ZAR 10.1 billion. They are marginally impacted by increased stock holding that we put into the Medicare rebranded stores. But ultimately, the relationship between internal sales and external sales is at the levels that we would like. Retail revenue growth is influenced by a normalized trading patterns compared to the highly influenced COVID-19 comparative period. What we will explain and you'll see is the impact of vaccines in that number. But most importantly, from a front shop perspective, health care and medical, of which we have a significant share of the market being most compromised because of the size of the step change in the COVID period and the lack of growth off that base. In terms of vaccine administration and testing revenue, and I'll delve into that a little bit further. But just to give you a sense, vaccine administration and testing revenue contribution of ZAR 143 million in the current reporting period compared to ZAR 222 million in the prior reporting period. If that is eliminated to give you a true sense of performance from a revenue point of view, in retail revenue would have grown at 10% as opposed to the 9.3% growth. Wholesale external sales growth, excluding the internalized Medicare sales at 20.4%, that's really driven by the continued success of the TLC franchise model at 22.5%. And Christopher will go into a little bit more detail on the drivers behind it, but that really is a function of continued support from the base in an ever-increasing base. And then just as a function of the focus on service stock availability, we see continued support from the independents and 15.8% growth. The wholesale number at 10.6% is different to the 20.4% as it's reflective of the internalized sales Medicare number. As that would now go into the intergroup, the true performance of external wholesale is at the 20.4%. But again, Christopher will dive into that detail a little bit later on in the presentation. If we move on to the revenue impact of vaccine and testing, what we tried to illustrate was just the monthly impact of the contribution of both vaccine administration and testing revenue and the way that it pans out across both this reporting period, the second half of the year and what it ultimately looks like in the second half of this year versus the base. So the graph indicates the contribution of vaccine and testing revenue by month from the inception date. It really started to contribute in May of 2021. The colors denote the different half reporting periods. So from March '21 to August '21 is effectively the base that we are trying to hurdle, and that talks to the ZAR 222 million that I made reference to in the slide earlier. And the current March to August period, which we're reporting on, you see the ZAR 143 million contribution. The period from September, October, November and towards the end of February '22 is the period that we're trying to hurdle now in terms of the contribution of vaccine testing. And you can see the low level of contribution in September and October as the vaccine program has watered down. So below in terms of the table, what we've tried to illustrate is both group revenue, retail revenue, pharmacy revenue, front shop revenue and external revenue, both including COVID-19, which is reflective of vaccine and testing revenue and excluding COVID-19. The 1st of March to the 16th of May would have been the last time that we effectively spoke to the market about a trading update in terms of revenue contribution, the 1st of March to the 31st of August being the reporting period and the 1st of September to the 31st of October being the last 2 months concluded post the reporting period. And you can see, as a function of the internal COVID-19 number in the group revenue, total retail revenue and pharmacy revenue, the impact of the disproportionate monthly contribution of vaccine and testing revenue to the growth number. If eliminated, it looks a far better representation of true trade. So if we look at group revenue, excluding COVID-19, from the 1st of March to the 16th of May, 14.6%. That was really influenced by strong wholesale revenue growth in the external space from the 1st of March to the 31st of August, which is the reporting period 10%, as I've mentioned previously. And from the 1st of September to the 31st of October, 9.3%. The real difference between the 9.3% and the 10% is the contribution of Medicare as to the base. If you recall, Medicare was included from the 1st of October and therefore, we are also hurdling the Medicare base in the 1st of September to the 31st of October number, which wasn't the case in the half year reporting period. We then further break that down into retail revenue and pharmacy revenue. again, excluding COVID-19, total retail revenue at 13.7% for the 10 weeks ending 16th of May, 10% up until August and 8.9% up until the end of October. Exactly the same principles that being that Medicare's base is slightly influencing the 1st of September to the 31st of October number. And you can see the same metric playing out in the pharmacy number and the front shop number. The front shop number starting to recover from 5.4% to 5.7%, both in the 1st of September to the 31st of October, which is indicative of the improvement in health growth post year-end. So we're starting to see -- we saw a lot of pressure on health care and medical -- on the health care medical category, and we're starting to see growth post year-end, which is signaling a stronger improvement post year-end in the front shop categories. And then just the pharmacy revenue number, obviously continues to be a highlight for us. We will -- I will talk to you about the share that we've taken, but really, really strong results in the pharmacy number in terms of how we delivered pharmacy revenue growth across those 3 reporting periods. And external sales growth, also a good performance in the month of September and October, as we've shifted from 9.7 over the reporting period to now 12.8 in September and October. I think all in all, lots of detail, but the principle is just to ensure that there is consideration to the contribution of vaccine and testing revenue, which is certainly going to impact the second half revenue numbers. as a function of the extent of contribution in the base with September and October, just north and south of ZAR 80 million being the 2 highest contributing months in the base. If we move into the text or certainly a shift in mix as we have done from 48.4% -- were up 48.4% shifting to 0.8% turnover to the wholesale business this year versus the prior year, where we constrained investment due to the COVID landscape. So very similar metrics. And just in terms of the FY '23 outlook, nothing really changed in terms of the rent per additional square meter of space and updated square meterage number in terms of the space being added in both the Dis-Chem brand and the Baby City brand. I'll now take us together with Craig and Saul through the retail trading performance, starting with core category market share and the growth from the prior reporting period. If we look at each of the core categories into the business, dispensary market share move from 23.3% at the end of FY '22 to 24.4%. As Ivan said, we're proudly the largest South African pharmacy chain with a 24.4% share. That 24.4% share is also a rolling 12-month share. So it's effectively discounts to a certain degree, the contribution of the Medicare business, which is our indexed pharmacy. If we just had to look at our share for the month August and as a good proxy for where we anticipate this year will end, we are at 25.59 or 25.6 share percent of the market. Again, indicative of our leadership position in the pharmacy space. We have managed to retain our market shares across Personal Care and Beauty as well as Healthcare and Medical, considering the extent of share, specifically in the Healthcare and Medical market. We're proud of that performance. Obviously, as a function of the step change within health consumption that COVID identified to own and to control and to retain the market share that we have with the smaller network where we have other retailers participating in healthcare, we think is a very solid performance. And as Ivan demonstrate how we've managed to maintain margins in that space. We think it's a good outcome for Healthcare and Medical. Personal Care and Beauty continues to grow, specifically from 1H 2022. And then Baby Care, we continue to take share as a function of what we believe is a well thought through promotional price strategy. So we had 10.8 versus 10.6 compared to FY '22 and 10.3 compared to H1 '22. If the baby market share reflected the contribution of Baby City and Baby Boom, we would -- if we reverse engineer the size of the market and the contribution of those 2 brands, we would have a 16.3% market share. If we move to core category performance, again, just to explain what we're trying to demonstrate here, it's really the relationship between the change in revenue of these core categories and the change in transactional margin, so it doesn't necessarily include the back-end terms. But if you would recall, one of the underpins of performance in the total income line was the change in transaction margin. It also highlights the importance of each of the categories as a function of their contribution to total revenue. This does not exclude vaccine. So this is all in all as a picture. If you look at the Dispensary business, we've seen a change in revenue of 17.7%. Again, importantly, to take that back and isolate the vaccine contribution, which I've done previously in the presentation, and you see the change in gross margin at 16.2%. That delta, that small compression is a function of the vaccine administration program actually delivering a slightly higher margin. If you think about the administration fee that the private sector received relative to the total cost of both the SEP price point on the vaccine as well as the administration fee. That margin was just north of 18.5%. So with slightly reduced vaccine administration volumes, there's a slight impact there, but overall, well held in terms of the relationship between revenue growth and margin growth. Personal Care and Beauty, the main contributor to the margin improvement. And you can see the 46.2% a function of normalizing trading patterns, off the back of what was a very influenced base as a function of the COVID related -- or the COVID related landscape that we experienced in the private -- in the prior year. And ultimately, some COVID related lines in that period moving at losses, which obviously talks to the good performance this year versus last year and the sustainable margin that we're reading in that space, which talks to the point I made earlier around the sustainability of the total income margin for the group. Healthcare and Medical slight depression in the turnover number and marginal compression in the transactional margin, and I talk to my point earlier around the importance of that. As I said, when I spoke about revenue, nice to see the recovery of that in October and September. And it's starting to increase the financial contribution growth that we -- that hampered us to a certain degree in the reporting period. Baby Care revenue growth of 9.8% and margin growth of 6.6%, really a function of mix, higher growth in sales is influenced as a function of the amount of commoditized lines of formula and nappy being sold at lower margins even after recovery of [ Sallies ] and [ tallies ] from our vendor base. And then other had a good margin performance, and that's a function of a strong performance in confectionery and some of the other work that we've been doing associated with the private label focus that Saul previously spoke about and Craig touched on in our full year presentation. I'm now going to hand over to Craig who will take us through a little bit more detail on the return on invested capital strategy, as well as the associated working capital position of the group.

Thank you, Rui, and good day to all listening in. Focus on RIC improvement continued in the first half of FY '23, bearing good fruit in total income, working capital and cash generation. Continued growth of transactional margin ahead of sales illustrated the sustainability of the higher margins produced in FY '22 on the back of the step change mentioned at the time. Margin growth was at 19% compared to revenue growing at 10%, excluding vaccines. The key factors that drove the strong margin result post-COVID margin normalization, successful Medicare conversions as well as the progress on the ZAR 1 billion private label opportunity weighted towards Personal Care, FMCG and Baby. Terms income from suppliers for fee-for-service rebates continue to improve, driving total income margin, strong terms growth of 26.6% was well ahead of the 11.9% purchases growth. This reflects in the improved total income margin for retail that represented earlier of 30.2%, with group up to 31.2%. From a stock optimization perspective, we continue to leverage our fully automated forecasting and replenishment tool, F&R. This uses retail-specific algorithms to optimize inventory levels and reduce supply chain costs. 75% of stock value replenished into our stores is now processed automatically by the F&R tool, improving accuracy and ability to manage stock centrally and reducing lost opportunity sales. In this period, we rolled out to all Baby City sites, Medicare sites and reached 50% coverage of purchases into distribution centers. Total group stock days were down from 89 at year-end to 87 with rolling stock days aligned to that. This relative to creditors days, which increased slightly to 87.3 days. We, therefore, continue in a negative to creditors working capital position with higher creditors days than rolling stock days supportive of strong cash generation. Suppliers usage of our global award-winning supply chain finance program continues to be high. This program has added great value to our suppliers cash flow management and is the largest in Africa based on number of suppliers. Operationally, we managed working capital using rolling stock days cover. This is a more current view being calculated on stock at cost versus the most recent 91-day cost of sales. This rolling day number was at 87 days, with a slight uptick versus the 84 at the end of the previous reporting period. Timing and seasonality do play a role, but this is expected on the back of more normalized post-COVID shopping patterns and buying ahead of the strong recovery in segments such as Beauty and Sports. There was also an element of strategic buying. Rolling stock days remained lower than creditor days, which were at 87.3. The 2 green lines at the bottom of the chart show stock day trajectory and half year increments. Store stock, which is the darker green line move to 48 days from 46 with the buying for higher growth that I mentioned already, and distribution center stock remains relatively stable at 39 days for the lighter green line. Thanks for listening, and I'm 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 program, the e-commerce segments of the business have achieved excellent results with good growth. Our customer profiles are up to just above 13.03 million, which allows enormous opportunities for touch points from the dataset. Loyalty membership have increased by 7%. Benefit member contribution to front shop turnover has increased to 72.7% whilst loyalty partnership contribution to turnover has remained stable at 58.4%. The loyalty redemption rate has increased rapidly again from 101% to 104%, once again, reflecting the value of our benefit program to consumers. We continue to enhance our customer experience with the extension of our benefit program into the Baby City stores, offering customers the full suite of benefits and partnerships of our loyalty program. This includes the contribution to the Dis-Chem Foundation which benefits communities in need. With the relaunch of the Baby program alongside extending the great rewards into the Baby City environment, we also reintroduced our Baby Bag which has been very well received by our customers. Post our WhatsApp for business launch, we have already enhanced the functionality to include a lead generation tool for Dis-Chem Health Insurance within the platform. In addition, we have shown steady growth on our app downloads, which are up by 61% in the last 6 months, continuously driven by chronic dispensing initiatives, comprehensive above-the-line advertising, digital strategy and member statements. We are pleased to announce the launch of the all-new Baby City e-commerce-enabled website www.babycity.co.za. This gives our valued customers the ability to shop Baby Essentials at their convenience, 24/7, 365 days of the year. Our e-commerce component continues to grow, with online growth up by further 9.5% for the financial year. In terms of performance, our hub base grows from 77 to 82 performing hubs. We are approaching maximum economies of scale on our decentralized model as a function of the current volumes and orders that are being processed out of the hubs. Technology remains key to route optimization and driving down costs as a percentage of revenue, although we saw a slight cost increase from 4.41% to 4.61% as a function of onboarding additional delivery methods, which give us access to new markets. The click-and-collect orders are ready for same-day collection. The split between delivery versus click-and-collect is 65% and 35%, respectively. Our order fulfillment percentage has been stable at 99% without having to add additional fulfillment hubs. Despite the post peak-COVID saw a shift in consumer behavior as shoppers went back to the malls more regularly, the online store managed to maintain volume level, revenue and profitability. We continue to read through awards of the consolidation of the online store operations, which continues to give us scale, better bargaining power and efficiencies across the group. Dis-Chem DeliverD, our on-demand-based delivery service that delivers with -- in less than 60 minutes is now over a year old. It operates from 45 locations and offers customers in excess of 10,000 lines. Sales continue to grow and customer sentiment remained strong. We have added an unprecedented element to DeliverD, free delivery, which will come into effect before the end of the calendar year. where we dropped the charge for delivery. This comes, thanks to the partnership between Dis-Chem DeliverD and extra by Dis-Chem, which through the sponsorship is covering all the delivery costs. This is a market first, and we anticipate further positive consumer sentiment. In line with current market trends, we continue to pursue new innovation through various fintech marketplace and super apps. Back to Rui, to talk through primary health care.

Thank you, Saul. This last piece is going to talk to primary health care think previously, we've demonstrated the return and resilience of the invested assets. This is more a principled demonstration of ultimately what we are achieving the primary health care space. And as we've always said, the assets that we've invested in over the years are really there to unlock and deliver the 3 elements. So increased access to care. We think from a network perspective, both our pharmacies and clinics serve are well placed to become the primary entry point into the health care supply chain. We think that with the investment that we've made in clinic sisters, and the expansion of the clinic service offering to include elements like VideoMeds. And we'll talk on it in a little bit more detail, but VideoMeds increasing the scope of service of our clinic sisters to be able to script up to Schedule 4. Those type of examples will ultimately unlock and reduce cost. And at the same time, ensure that we deliver quality, which talks to better health outcomes. And of course, the investment in Kaelo, which has allowed us to deploy a Dis-Chem Health-branded medical insurance policy and GAAP product will benefit from a return perspective of both the principles associated with the triangle as a function of the dependencies between the benefit structure of those products and how people are navigated through the supply chain or the health care supply chain and how they consume their care. One of the examples, which talks to the last bullet on the slide is just the unlimited access to Clinic Connect, which is our virtual doctor for all Dis-Chem Health Plus Plan medical insurance members for 2023. And I think that serves as a proxy for the interdependency of the assets across the supply chain. And obviously, from our perspective, as a retail pharmacy business and the clinic services business. It drives foot traffic, we can invest in cost and the Dis-Chem Health medical insurance product can be price competitive with respect to opening up this benefit. If we move over to the health window effect, which we've previously spoken about in quite a lot of detail, again, if you think about the effect of managing chronic conditions, and if you look at that in -- through the lens of both cost and quality, you can see the importance of the health window asset with respect to investing in integrated health care. What this slide shows you is the volumes of group chronic sales and obviously, the growth is we continuously invest in chronic medication. So from April to August, you can see a sustained step change in the growth from August to Feb and then an additional step change as we continue to invest in both digital services and in call center agents to drive chronic adherence. As you would recall, when I spoke about core market shares earlier, I spoke about us being just north of 24%. That would be in the space of Scheduled 1 to 6. If you look at Schedule 3 to 6, which is obviously where chronic volumes would live along with acute volumes, but predominantly chronic volumes, what you will see is an over-indexed market share with respect to chronic volumes. And in the Schedule 3 to 6 base, we have a north of 26% -- 26.24% of the market share in the space. So we're very confident that the adherence drive that we've done through the Health Window business continues to unlock returns, and it will be an important asset as we think about the reduction of cost and how we deliver quality health outcomes with respect to the insurance products -- the Dis-Chem health insurance products. We move on to the next slide. The principal is exactly the same, just really demonstrating what the health window effect or what chronic adherence management can do on mature dispensary basis. So the Medicare acquisition as denoted by the yellow dotted line was made in October. We've subsequently invested and focused on the Medicare assets through the rebranding process for them to run from a chronic adherence perspective like the Dis-Chem brands. and chronic adherence, certainly in terms of foot traffic has been one of the drivers and successes of the return that we've generated in the Medicare space. And when I talk to it later, it both underpins the front shop return, which is complemented by good ranging and the Dis-Chem brand, but it also has delivered unexpected as we didn't model it, dispensary growth in the Medicare acquisition. And maybe finalizing the health window effect is just the relationship between unmanaged and managed patients. As we've always demonstrated a managed patient visits more frequently. It has -- a managed patient has a larger basket. And again, this just illustrates the interdependencies of an asset that promotes good returns from a cost and quality in the insurance space potentially, but at the same time, drive frequency and foot count into the retail part of our business, as a function of being managed and obviously assuming and taking all of the chronic medications. So unmanaged patients returned at a frequency of 5.41%. And out of 12, if you think about a monthly collection of the chronic medication versus managed patient at 10.13, and we will continue to invest appropriately in chronic adherence as the group grows in scale. One of the other important areas of the integrated health care supply chain that we're focusing on is the clinics. Previously, we've spoken about Healthforce as brand. Healthforce being the functionality or the software that delivers VideoMed consults in our environment. And you can see as a function of some of the principles that I spoke around in terms of cost and quality as well as the benefit design that we spoke about for FY '23 with the Dis-Chem Health Plus plan medical insurance. that the incorporation and the volume growth of our clinics is important. So on the left-hand side, you see the nurse-led clinic consults. The nurse-led clinic consults are denoted by 2 colors. The darker green represents a traditional consult. And the lighter green represents consults that were done for COVID-19, so vaccine administrations and testing partially. And you can see that when ignoring the lighter green color, even though you have the opportunity cost of time that we continue to grow nurse-led consults, and we continue to invest in that space. So recently, we've invested in extending the clinic operating hours. Our goal ultimately is to ensure that the clinics are opened as our pharmacies are opened, when the door is at the pharmacy opens, the dispensary and the clinics are open. And the utilization of our clinics obviously continues to improve, which we try to demonstrate through the 2 colors. And we've had to educate and drive the adoption of virtual doctor consoles, which, of course, drive down cost. So what you can see on the right-hand side is the extent of VideoMed consults. And you can see the traction that we've made as a group in delivering VideoMed consult since the prior year, with August and September delivering almost 6,000 consults. And the reality is if you think about investing in integrated health care, and those 6,000 consults from a price point perspective, they sold for the same outcome at a much lower price. So that just demonstrates our commitment and our ambitions to incorporating some of our in-store assets to generate returns in some of our investor businesses like in Dis-Chem Health. Moving on to Dis-Chem Health Insurance. As you can see from the imagery, both of those products have -- it's been 8 months since the launch of those Dis-Chem branded products. On the right-hand side, we see medical insurance, which is a very, very rich day-to-day medical insurance cover. And on the left-hand side, gap cover, which is very competitively priced in the market. Importantly, I think that with 8 months behind us, we are comfortable that the market exists as we anticipated it did. The acquisition growth trajectory is in line with our modeling. We are seeing better collection and retention metrics when compared to our expectations. We do believe that that's a function of the credibility of the Dis-Chem brand, which a very rich Kaelo product is wrapped in. And again, as I said from the first slide when I was speaking about access care and cost, we will augment these products to include and entrench benefits or appropriate benefits and enhanced benefits across each of the calendar year. So for 2023, the accident benefit is extended to include heart attack and stroke. And from a financial contribution perspective, as we've discussed previously, we commercialize these products through a JV between ourselves and Kaelo, where we have an indirect interest of 50%. And we are on track to achieve monthly breakeven by the end of FY 2023, which was as anticipated. So we do believe that in FY '24, this will be positive from an operating income contribution. And we're quite excited about some of the learnings that we've unlocked and some of the sustainable -- and the sustainability of this type of product and this opportunity in the market. Again, if we shift to rewarding healthy choices, so we've launched extra by Dis-Chem and extra is effectively a reward program that is available to policyholders. And the idea behind extra was simply that when you have a consumer-facing brand like ourselves, we needed to solve, again, thinking about the triangle, we needed to solve for some of the elements that were barriers for the consumption of private medical care. So in a nutshell, that's what extra does. It rewards and encourages healthy choices, which has its own benefits for insurance products, but it also enables the affordability of private health care to advance quality health. So in a nutshell, essentially, if your healthcare spend is at Dis-Chem, and you participate in this discount, and what it does is it be repurposed or that share of wallet can be repurposed to invest in medical insurance. And ultimately, we give you the benefit rich or the daily benefits that the Dis-Chem Health product gives you access to. So together with our stakeholders, some of our vendors -- we've structured this policy that allows you an immediate -- a simple immediate everyday 20% discount on a basket of 2500 healthy and essential products from leading brands. These products were analytically selected as a function of how important they are to the type of consumer that consumes potentially medical insurance and gap product. It's a very, very rich product with many, if not all, of the important national brands associated. And I think from our perspective, we're quite interested to see how a product like extra, which is now -- which is available and how a product like extra starts to change the metrics with regards to collection and retention, which are already running ahead of expectations. I mean just enforces that consumer-facing brand and the benefits of having a consumer-facing brand in terms of how you can augment benefit design and how you can start to potentially maximize returns from all of the assets that potentially play into the supply chain. Then the last slide before I hand over to Chris to give us an update of the wholesale trading performance is just a summary of the Medicare integration, which is now complete. And when we previously spoke to the market, we had 2 stores that we had rebranded, and we saw some interesting efficiencies and metrics off the back of those rebrandings. We've now completed the rebranding and essentially are comfortable to share some of the results. So on the bottom of the slide, it just talks to the rationalization of the portfolio that we acquired. So we acquired 50 stores. We've closed 7, sold 4, leaving us with rebranded opportunities of 39, very much in line with the plan that we communicated at financial year end, before the rebrand. So if you just look at the contribution of revenue, both from a dispensary and front shop level before the rebrand, we had dispensary contributing at 72% and the front-shop contributing at 28%. That was indicative of March this year. So prior to us rebranding those spaces that we were going to retain. After the rebrand, we have revenue at 124% relative to that 100% index. You have dispensary growing at 110%, again, influenced by some of the work that we've done in the chronic adherence space and front shop, which is really a function of the ranging the brand and let's call it the Dis-Chem recipe playing out into those spaces growing at 157 -- or at 157%. So significant growth in the front shop, which was always what we anticipated. And that changes the contribution from 72%, 28% weighted towards the dispensary to 63%, 37%. We further think that this contribution will continue to shift to ideally what would be a 55-45 or 50-50 split ultimately. And that does talk if you think about the TLC contribution, which Chris will share with us in a short while that does talk to the corporate positioning of a brand like ourselves into stores that had very mature dispensary basis. I think importantly, considering the rebranding and integration. I mean we're happy to report that the targeted free cash -- targeted free cash operating margin of 6.7% was achieved for the period. Obviously, that excludes head office -- central head office allocated costs. But this is indicative of sustainable margins coming out of that asset. I'm now going to hand over to Chris, who will take us through the wholesale trading performance.

[Foreign Language] Good morning, ladies and gentlemen. Rui said that because we have such a good set of wholesale results, he thinks that I should present in Portuguese today. I think for clarity, I'll stick to English for the rest of day. 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 the first half of FY 2023. 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 team 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 you turn to Slide 33. Looking at the diagram, we can see that external wholesale revenue grew by 20.4%. Internalized sales of ZAR 131.9 million was taken out of the base to account for the Medicare sales in the prior year. Including the Medicare sales, external revenue growth was at 9.7%. The number of TLC franchise stores have increased from 134 to 153, up till August year-on-year. The TLC customer group revenue grew by 22.5%, which once again proves the feasibility and success of the business model. The independent customer group grew revenue by 15.8%, which can be attributed to our sustained focus on maintaining and improving service levels and our increased customer footprint. Looking at Slide 34. This graph seeks to compare total income growth to total expense growth. It can be seen that total income has grown by 22.3% compared to the same period last year. Total expenses grew by 12.9% over the same period. This was obtained by a sustained focus on efficiencies, which I'll touch on later. Security reduced by 9.2% due to an inflated base, which was caused by the extra security costs incurred during the riots in KZN in 2021. Rent and municipal charges increased by only 1.1%. This is mainly due to a reduction in waste removal costs driven by increased and improved recycling. Payroll expense increased by 9.2%, which is mainly due to the implementation of a full night shift in the Western Cape. Depreciation decreased by 7.9%. This is mainly due to the acquisition of the 3 DCs, which Rui has touched on earlier. Courier expense has gone up at 22.8%. This is an area of continued focus for us as it is a big cost driver in our environment. It is pleasing to see that the increase has been managed below the 40% increase that was experienced in the prior year. It was influenced by the following main drivers: increase in the number of stores serviced, increasing the number of pallets distributed, increased number of third-party routes and obviously, the increase in the fuel price. If you now turn to Slide 35. The graph on the right shows our pallet growth, which is the number of pellets we distributed, which increased by 6.1%. The graph on the left shows our unit growth, which grew by 3.4% versus the comparative period last year. Pallet growth is higher than unit growth, mainly due to a change in product mix driven by Baby City. Slide 36. The block on the right shows an increase of 8.6% in warehouse activity efficiency, therefore, increasing our output of units per shift. The graph highlights 2 areas where we were able to improve on. Although we saw an 8.3% increase in order queue times, which is the time it takes from receiving an order until we start processing it. This increases as a function of consolidating orders for the same stock item before releasing them to be picked, which ultimately helps with efficiencies. Our order to outbound time decreased by 6%. This is the actual time it takes to pick, pack and check an order. Outbound to staging time decreased by 10.9%. This is the time it takes to palletize stock and prepare to load it. This resulted in a total time efficiency gain of 8.6%. This time gain contributed to the fact that total income grew by 22.3% with a 12.9% expense growth. We continue driving visibility across the supply chain through data analytics. The group has increased the number of suppliers being replenished by 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 increased robotic process automation continues to show the benefits of automating mundane tasks to contribute 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. We now turn to Slide 37. As can be seen, the TLC Group's revenue has increased to ZAR 1.665 billion for the first 6 months of the 2023 financial year. This is a 17.2% growth in the group's retail revenue. The TLC customer revenue growth is partly driven by front shop support and ranging that we, as a supply chain offers them. We're excited for the rollout and launch of a fully-integrated e-commerce solution during the course of November. I will now hand back to Rui for the strategy and outlook.

Thank you, Chris. I am briefly going to touch on the strategic growth drivers and the focus areas for our business longer term before Ivan concludes with the outlook. As a function of some of the points that I made with respect to primary health care. And some of the recent investments we made, we thought it was appropriate to expand a little bit on our longer-term positioning of the Dis-Chem brand. So in the center of what is a symbolic puzzle in the sense that these things are still being pieced together. But ultimately, we've certainly made the investments to allow us to ultimately deliver on what is integrated -- certainly the delivery of integrated health care, remains our mandates and kind of our passion of establishing ourselves in South Africa's primary health care authority. And the word authority is a strong word. It talks to the ambitions that we have as a group. We truly believe that we, as a private sector player, can access or provide good health outcomes to more and more South Africans. And so that remains the center of what we do. On each of the sides of the green puzzle piece, which is essentially entrenched in the way that we focus and the way that we build this group going forward. One is the continued investment in technology to support the delivery of customer and patient centricity. Again, we use the words customer and patient purposely. And we are both a traditional retailer with respect to how we engage with customers in the front shop. But at the same time, we're a health care provider with respect to how we engage with cutters through the pharmacy network, through the clinic services and through digital engagement like with Pack My Meds, which is an adherence mechanism, like with VideoMed. So what we've incorporated and what we believe in is the support of technology to deliver care and patient centricity as well as customer centricity and the holistic view of our customers and patients not necessarily treating them as a siloed individual depending on what part of our business they engage with. On the alternate side of the puzzle piece is increasing access to quality private health care that more South African is going to afford. I think we've been quite specific about this opportunity. I mean, we've made an investment in the Kaelo business to unlock the opportunity for us. We've now rebranded the Dis-Chem -- rebranded the medical insurance product with the Dis-Chem brand. We will continue to work with Kaelo to tweak product and benefit design as we've done for FY '23 to a point where we're able to utilize the benefits of routing someone through the health care chain and to invest in price, to reduce that price to make it more affordable to people that are employed but uninsured. We do believe, as we've said in the past that, that is an enormous market. And as we've touched the market, as we started to touch the market through the delivery of Dis-Chem Health, we confirm that. At the bottom of the puzzle piece is the accelerated store footprint growth in underrepresented areas and the extension of our pharmacy leadership position. I think as we've said previously, if you look across the metros, we definitely have a distinguished and a larger delta with respect to our pharmacy leadership position in Gauteng. Even though our network is still smaller than our competitor, it's really a function of the number of stores we have relative to other corporate pharmacies, and we want to establish a solution, and we've started work on establishing a solution to replicate kind of the Gauteng position, which we think is the closest to corporate consolidation nationally, which obviously has -- which means the additional space that we'll add that Ivan will talk to. And then at the top is the expansion of the proven TLC business model to ensure sustainable position of external distribution beyond the independent consolidation. So as we've said and as is well known in the industry, we are seeing and we continue to see a consolidation of the independent market. We've always said that we believe an independent market will exist post-corporate consolidation, like in the global markets. And we want to make a success or help make a success in that business for independent owners under the TLC brand. And we're very comfortable and very happy with the delivery of TLC into the group. And that remains and continues to remain a strategic objective of ours. And then unpinning every workforce that is representative of South Africa. And I think underpinning all of our strategic objective is the principle of equity. And we are ambitious with respect to our health care objectives. And as is the nature of that, we want equity within access to health care, and that same is true around a skilled and transformed workforce. So that will underpin our strategic growth drivers to ensure the longevity of the business. And obviously, the contribution of us as a South African corporate to the transformation of South Africa. I'm going to now hand over to Ivan to take us through the outlook.

Thanks, Rui. Current trading patterns are indicative of consumers searching for value, reinforcing the relevance of the principles that underpin the brand. Marginal gains in total income margin will be unlocked through continued focus on established private label opportunities. In addition to the 5 Dis-Chem pharmacies and 3 Baby City stores opened in the first half, we plan to open a further 9 Dis-Chem Pharmacies and 5 Baby City stores by the end of FY 2023. We continue to fine-tune the ranging in the rebranded Medicare stores with a focus on health and medical categories to further unlock front shop growth. Wholesale growth will continue to be driven by increased support from TLC franchisees as well as independent pharmacies. Work has commenced on replicating our 35% market share in Gauteng, nationwide. We continue to innovate to realize our vision of integrated primary health care aimed at increasing access, reducing cost and delivering better health outcomes for all South Africans. Thank you for listening.