Lewis Group Limited (LEW) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to our interim results presentation for H1 2022. Joining me behind the microphone this afternoon is Jacques Bestbier, our CFO. We are also joined by our investor specialist, Graeme Lillie, from Tier 1. On the agenda for this afternoon, we'll kick off by having a look at our highlights. We'll then move into covering our debtor analysis, followed by our financial results, targets and outlook will follow. And at the end of the presentation, there will be enough time to deal with questions and answers. Ladies and gentlemen, during the interim trading period, the resilience of the business model and management's ability to deal with more than one major crisis at a time was thoroughly tested. I must say that I'm extremely proud of the way in which the Lewis team responded to all of these challenges, and I'm also thankful for the loyal and committed support that we received from our logistic partners and also from local and foreign suppliers. This was a truly tough and testing trading period. But I'm happy to say that with a concerted team effort, a solid set of results can be reported today. During this period, revenue increased by 12.2%. Merchandise sales increased nicely by 20.7%. Our gross profit margin held its own at a solid 40.2%. Operating profit increased by 23.3%. It's important to pause and just to mention that this increase in operating profit was actually achieved on quite a competitive base. You might recall that operating profit during half 1 of last year increased by 13.5%. Cash generated from operations remained strong at ZAR 595 million. Headline earnings per share benefited from an aggressive share repurchase program and increased by 39.7%. And then, ladies and gentlemen, the Board and management is once again displaying high levels of confidence when one consider our prospects for the medium and longer term, and the interim dividend has been increased by 46.6% and the payout of ZAR 0.195 per share, which actually matches the payout that we made as a final dividend last year, ZAR 0.195 as being declared. That's quite shocking, if one looks at this slide. As they say, a picture speaks a thousand words. This is one of our Beares stores that were looted in July. So I think we all agree that this is a very sad period in our country's history. So during this period of looting, 57 of our stores were damaged. Obviously, we had to take stock, we had to decide on the future of the stores. I'm happy to share with you, ladies and gentlemen, that as a proudly South African retailer, we've decided that all of these stores will be reopened. It's the right thing to play our part as a business in terms of rebuilding these areas and these businesses. It's the right decision to go out and create further jobs and to protect the jobs that are at stake in these stores. And we also believe that it is important to continue to make furniture available to people in areas where they work and live. So at the time of results, 51 of these stores have been reopened. By tomorrow evening, the reopened count will increase by 2 to 33 stores and the remainder of the other 4 stores will be opened as quickly as possible. The group enjoyed adequate sensory cover for all of these material damage losses, a total claim of ZAR 79 million has been raised. ZAR 40 million of that is a claim for stock and ZAR 39 million speaks to the value of the asset claim. Happy to share with you that almost ZAR 43 million of our claim have already been received and recognized and the outstanding ZAR 36 million will be finalized during half 2 of '22. We also enjoy business interruption cover. As we stated in the presentation, the extent of the BI losses is still being assessed, and we also thought that it is appropriate to just put this into perspective to mention that the direct impact during the period that these stores were, in fact, closed were ZAR 39 million in terms of lost sales. I also need to mention that the economic recovery in certain of these looted areas have been really slow and that several of our stores are not yet back to optimal performance levels. It's getting operational attention, and we believe that these stores will very soon be back up to fighting strength. We now trade out of 817 stores. We've opened a net 10 new stores during this period. We've added 4 stores in the rest of Africa. 16% of our total store base is now outside of the borders of South Africa. Business outside of South Africa is performing well and contributes 18% of the group sales. Our strategy of converting and opening Lewis outlets in the new smaller format is also still gaining traction with 48% of our stores now operating out of these smaller footprints -- smaller retail stores. 104 stores have been refurbished during this period as we continue to keep our stores up to date and attractive to customers and potential customers. Merchandise sales, strong performance, almost 21% up with credit sales expanding by 24.4% and cash sales increasing on a high base by 17.1%. Right throughout this interim period, our stores were adequately stocked. It's a conscious strategy. We further increased our stockholding levels by 11% since year-end to cater and to build stock for the Black Friday and Christmas trading period. And I think it's important to note and to share with you that during the 6-month period, 95% of all our SKUs, advertised SKUs there is, was in stock right throughout. So 95% in-stock ratio. We can now move on to our credit application decline rate. Decline rate for the period settled at a very high 39.1%. We go back to our experience in 2018. You will note that we've now seen a full 2 percentage point increase since. It's not a surprise. The decline rate basically managed the stress in the economy and the fact that consumers are taking straight. Our finding speaks to the fact that the more labor-intensive sectors of the economy are more severely impacted by COVID. I think it's fair to say that a further increase in credit application decline rates can be expected. We now turn our attention to the sales mix. It's very clear that the execution of the group's diversification strategy continues to bear fruit and the dependency of the group on credit business have reduced significantly over the years. We go back to the bottom of this slide. FY 2017 speaks to the fact that 35% of all sales were cash during this period, 65% of sales being done on credit. Over the last 18 months, very close to a 50%-50% split, and this is in fact in line with management's longer-term target range. Expenses were tightly managed during this period. And the increase of 16.9% is solely as a result of cost savings that were made in the base period, i.e., during the 6-week hard lockdown period. To give this perspective, it's important to go back to half 1 2020 pre-COVID period, one go and look at our cost base at that period, you will note that costs increased by 6.3%, below inflation over the 2-year period. Balance sheet remains robust, continues to offer us the opportunity to grow organically, to also to look at some inorganic opportunities. Share repurchase program, big success. We managed to repurchase 9.1 million shares over the 12-month period. Obviously, this has had a massively positive impact on headline earnings per share. And we'll unpack that a little bit further in the presentation. Also important to note that since listing, now more than 1/3 of our shares that have been repurchased and subsequently canceled. Early aggressive repurchase program, more especially served over the last 2 years, we look at the full period since 2018. We managed to buy back 23.3 million shares. I think more remarkable is the progress that we've made over the last 7 months, in it that we bought back 6 million shares during this period. Ladies and gentlemen, so at the latest AGM that was held in October, we asked shareholders to once again give us a mandate to continue with our buyback program, ask for a mandate of 10% of shares in issue. Those requests was wholeheartedly supported by shareholders with 99.3% of shareholders voting in favor. We immediately got back into the market. So far, we've bought back 1% of shares in issue. That still gives us quite a bit of runway for -- until we get to the next AGM with 9% of shares in issue to remain in play. We plan to execute on this mandate as management and as the Board, we see incredible value that can be unlocked through the strategy. One need to pause to just for a moment look at the net asset value per share. First and foremost, it's important to note that net asset value per share expanded or increased by 12% over the last 12 months, and it now stands at a rand value of ZAR 71.76 per share. So in simple terms, if we consider the proposition, we believe that the company's share is still on offer at a discount that tax is 14%. Since listing in 2004, we've built a proud history of being a continuous dividend payer. Since 2008, in other words, over the last 13 years, we never had a payout ratio of below 50%. As a matter of fact, in years where earnings fell slightly short when compared to the prior year, we took a decision to match the actual dividend payout in rands match the prior year's payout that ease. And in those years, the payout ratio in some instances even exceeded 70%. But more recently, important to focus you on Slide 10, ladies and gentlemen, to just talk a little bit about what we've achieved in terms of delivering shareholder returns. The numbers are there for you to see. Significant dividend payments and significant share buybacks took place during this period, putting the group in a position to today report average return to shareholders measured as a percentage of the market capitalization at that point over a 3-year period averaging 16.8%. We believe that that's quite an encouraging return achieved through actually using this 2-pronged approach of paying dividends and aggressively buying back shares and canceling. And then move on to the data analysis. We've had a solid collection performance during the last 6 months, ladies and gentlemen. Once again, I'd like to focus your attention on the pre-COVID period FY 2019. During that period, we reported a 76.3% collection rate, which as you can see from the slide, was already a significantly improved collection performance when compared to the preceding years. We've now bettered that performance. As we -- as you can see from the slide, actually post a 78.7% collection rate for this period. This very strong improvement supported the performance of customers right across the debtor's book and will very soon turn our attention to what it has done to our actual category of satisfactory paying customers. So collections in rand terms increased from ZAR 1.9 billion to ZAR 2.2 billion, an increase of 16.4% for the period. This has resulted in a reduction in contractual arrears, down from 39.1% a year ago to 37.3%. And it's also benefited the net bad debt written offline significantly to the extent of ZAR 120 million reduction that came through in that line. So all in all, a solid debtor cost performance of the reduction in debtor costs of close to 33%. Debtor cost as a percentage of gross carrying value improved significantly from 7.1% to 4.7%. And when we get to the outlook section of the presentation, we will share our views with regards to our short-term thinking as to where we will finally end or close this financial year. This slide is a highlight because of the fact that our satisfactory paid performance is now the best that it has been over the last 14 years with a satisfactory paying percentage of 75.2%, a significant increase of 29,000 customers in the stock bucket highlights 2 very important things. Some further collection support out of this bucket can be expected, as well as 29,000 additional resale opportunities that will be presenting itself in the future. I also want to highlight the fact that the number of nonperforming customers in the bottom bucket have reduced by 16,500 customers. Ladies and gentlemen, so the improvement in collections driven a significant improvement in the actual composition of the data book. And that, in turn, has resulted in lower levels of provisioning. 42.2%, the current level of provisioning that we've got covering future bad debts and defaults, and that compares to 44.7% a year ago. Also encouraging to note that the actual level of arrears in all of the payment buckets have reduced over this reporting period. You can see that we are really excited and that we want to say a little bit more about the satisfactory performance in this book. I think this graph summarizes the position really well. From 2016 to 2018, the performance of the book basically went sideways. And then prior to COVID, some of our additional collection initiatives started to bear fruit. The book improved to satisfactory paying levels of 69.9%. Then we took it one step further to 74.2%, which was also a good achievement for us. Then the impact of COVID basically took its toll. But I think the most important takeaway from this slide is that the 75.2% is a higher level of satisfactory paid, not only higher than what we reported prior to going into this COVID cycle, but also the highest that it has been in 14 years. We can then carry on and focus on our financial results. We fully appreciate the quality of the set of results. It must be tested against our pre-COVID achievements and the performance that we reported for half 1 of 2020. We already spoke about the fact that revenue expanded by 12% for this period. I think it's more important to make the point that from half 1 2020, revenue increased by 10%, strongly supported by a merchandise sales growth over the 2-year period of almost 15%. This did not -- this growth did not come at the expense of gross profit margin. We were at 40.3% for half 1 2020. We now own 40.2%. Also I think it's important to pause and just to mention that the actual rands of gross profits that we banked during this period increased by ZAR 132 million. Operating profit, solid performance over the 2 years with an increase of almost 40%. Glad to report an expansion in operating profit margin from 14% in half 1 2020 to the current 17.1%. Attributable earnings nicely up, good expansion of 37% over the 2 years, and earnings per share increasing by 44% in the reporting period and the 59% increase over the 2-year period. On the segmental analysis, I can mention that we are satisfied with the operational performance of all our brands during this period. A nice expansion in operating margin coming through from our traditional brands, up from 18.2% to 18.6%. In the case of a slight reduction in operating margin, mainly as a result of the impact of looting, some of you might know that Gauteng is still a very strong province for UFO. And then unfortunately, in KwaZulu-Natal, 1 of our 3 biggest stores were negatively impacted by looting. And as a matter of fact, that's one of the stores that are still not open as we speak today. Solid performance for the group, with operating margin expanding from 16.8% to 17.1%, and the store count there for noting and net 12 stores over the 1-year period to make additional 12 stores at least. We move on to expenses. Once again, necessary to just mention that 16.9% increase is mainly due to a significant saving that we've made during the half lockdown period. We're very happy with our cost management and cost containment measures that were implemented during this period. And we're very comfortable with the fact that expenses, when measured against H1 2020, increased by 6.3%. At the beginning of this year, we communicated a target range in terms of expected cost increases. That target range was set between 8 and 12, and we'll share our expectations as to where we will land for this year when we get to the outlook part of the inflation. On the balance sheet, I want to talk a little bit about inventory. I want to start off by saying that stock levels are exactly where management wanted it to be. We are well positioned at this point in time to compensate for supply chain challenges. I mentioned that we had a 95% in-stock position right throughout half 1. Now very important when one look forward and start talking about Black Friday and Christmas sales to mention that our current in-stock position in terms of what we plan to advertise for Black Friday as it this morning sits at 99%. And we believe that we will be properly prepared to launch our Black Friday campaign to existing customers during special in-house promotions tomorrow evening and that the rest of the market will find what they are looking for when they go into our stores on Friday. Very good position to be in, ladies and gentlemen. It's been a really troublesome period. The guys in stock logistics had to work 12- and 14-hour days to actually make this in-stock position a reality. I think one must just pause to specifically, it's always dangerous to call people by -- to thank people by name. But I think in this instance, I want to say thank you to the head of our stock logistics department, Deon Meiring. And Deon, I also know that you won't feel happy if we don't mention Adiel Allie as well. So to the 2 of you and all of the other star employees in that department, thank you very much for making sure that we are ready to benefit most from the sales that will be up for grabs over the next 5 weeks. And before I get really carried away and thank too many people in person, I must just pause to also say that thank you to the team of Value Logistics. The CEO there, Steven Gottschalk. I must thank you by person. I know even over the last weekend, as the CEO, he was in the front lines to make sure that the stock actually got delivered to our stores in time. It's great privilege and honor to have people like this in your business and suppliers that are prepared to share the ethos of the business to always go that extra mile. So yes, we're well prepared, and thank you very much for everybody that made that a reality. On the balance sheet, I also want to talk a little bit about the fact that we are still in a strong cash position with ZAR 390 million in rand. And this is after we've spent over ZAR 300 million to repurchase shares during this period. And as you can see, ladies and gentlemen, still no borrowings on the balance sheet. Key Ratios. I think this is a story that speaks the improvement that has been made. I think this also highlights the fact that the group's diversification strategy is really starting to bear fruit. And then the impact of the share repurchase program can also be clearly seen if one focuses on the headline earnings per share. So just for those who haven't had time to study the results in detail, headline earnings for this period increased by 24.5%. And the buyback benefited headline earnings per share significantly. The leverage effect is coming through with a nice increase in HEPS of 40% for the period. Over the 2-year period, a very encouraging 54%. ROE, 7.1%. Prior to COVID, this expanded during last year to 7.7% at the half year mark. When we get to the next slide now, we will talk a little bit about what happened at year-end, and then currently at 9.7%. Other returns also moving in the right direction with the return on capital employed, up from 7% to 8.8%, and return on assets are now in double-digit territory, up from 8.9% to 10.5%. On gearing, by now we all know the story. There is no borrowings. The 9.3% that you see is solely as a result of lease liabilities. In the dividend, we know that it's a 47% increase from last year over the 2-year period, once again an encouraging increase of 62.5%. Now let's get back to return on equity. Financial year 2018 saw a 5.1% return that expanded to 6.4% in the following year. Then the impact of COVID is clearly visible in FY 2020. Our return on equity dropped to 3.8%. Process of rebuilding started with a 7.7% in half 1. And then finally, last year's return settled at 9%. We now are 9.7%. And we believe, ladies and gentlemen, that we'll close this financial year with an ROE that is in double-digit territory. Also important to say that this is a long and difficult road that we have been traveling to get returns back up to scratch, and we know that are we are nowhere close to the finishing line as yet. Our medium-term target speaks to the fact that we want to expand our ROEs to levels touching on 15%. I think it's just important to also make the point that we see a medium-term horizon as a period of between 3 and 5 years. We then move into our targets and outlook section of the presentation. Spoke a lot about gross profit margin and the fact that we had to deal with shipping rates that steeply increased on prior years. Nevertheless, a strong gross profit margin performance well within our target range. We also expect to see further expansion in gross profit margin during the second half of this year. Operating margin now touching on the upper end of our target range. We believe that we can bank the gains that we've made in half 1. Operating costs. We already made the point that the cost containment, as always, is a big focus in our business. And we expect to close this year somewhere towards the middle of our target range of 8% to 12%. Credit sales, 50.6%. We're very comfortable with where credit sales are at this point in time. 50.6% is a good place to be. Maybe a slight expansion in the credit sales contribution during half 2, as we do expect the demand for credit to start increasing slightly during quarter 4 as the availability of cash in the economy might become a little bit less than what it is today. People might turn back in our traditional stores and may give us a little bit more credit to finance their purchase. Satisfactory paid at 75.2%, better than the upper end of our target range. Once again, we want to build on this. We believe that the gains that we have made will be back and that we will continue to steadily move towards achieving the upper end of our medium-term target, ladies and gentlemen. So you can see, when you look at our targets, that the actual improvement that took place in the book is actually better than what management expected it to be. Debtor costs as a percentage of the gross book, 4.7 at the half year mark. We set a target at the beginning of this year of 13 to 16. I already made mention of the fact that we are performing better. So we can now turn our attention to the medium-term target. It speaks to the bottom end of 12% to debtors. If all things remain equal, ladies and gentlemen, we believe that we are well positioned to actually do better than the 12% that we've presented as a medium-term target. And we've spoken about gearing. You can then turn our attention to Slide 25, the outlook. We believe that trading conditions will become tougher during the second half of this year. We all know that there are several risks to the economic growth outlook of South Africa. Some of those risks are obviously very high levels of unemployment. And I think with that, the very weak levels of job creation that exists in the economy. We all know that interest rates have just recently started to increase. We believe that there's more interest rate hikes on the horizon. Food and fuel prices are coming under inflationary pressure. And then, yes, uncertainty around COVID-19 and exactly when the fourth wave will, in South Africa, what the severity of that wave will be. Then ongoing load shedding. I think we've all been impacted by load shedding on an on and off basis. We all know exactly what it is about, and it has disrupted business to quite a large extent. And to add insult to injury, the consumer also needs to deal with price inflation in the area of electricity that's already in double-digit territory. Ladies and gentlemen, this is a mouthful. It's a lot of challenges that is actually on the horizon. And although we, as a management team and as a group, cannot change any of these things, we can give you the assurance that we are well positioned to face these challenges and to deal with these challenges as they arrive. If you look at the experience of our management team, we've traded successfully through several down cycles. And I think the way in which the management team has actually dealt with the latest set of crisis in more than one of those is actually a testament to the fact that we will be successful in terms of steering the ship through troubled waters. The business model has continued to demonstrate resilience and also agility. A lot of tweaks have been made through the business model. And in most cases, those tweaks have actually been very successful. The improvement in collection rate speaks to one of those. The increase in the number of customers in the satisfactory paying bucket also positions us well to basically tackle all of these future challenges. In the short term, the fact that we've got adequate stock to take the full customer demand during Black Friday and the festive season will most definitely serve us well. And we believe that this, together with the fact that we've extended our reach through adding different marketing channels to the mix, will help us to continue to gain market share. One of our big competitive advantages remains same-day delivery, even more through during this time of the year. People don't want to wait for merchandise. They go into a store today, they want to receive it same day. We are very successful in terms of executing on our promise and the strategy with 90% of our deliveries actually going into customers' homes on the same day. If we look at the percentage of deliveries that are completed within 24 hours, that 90% increases nicely to a 95% interact. Something that we shout about from the rooftops, and it's something that will benefit us over the next trading period. Spoken about the balance sheet and our cash flows, ladies and gentlemen, well positioned to continue to grow the group organically, and we're also well positioned to look at inorganic opportunities. The share repurchase program will continue. We spoke about the fact that net asset value per share is at ZAR 71.76. And there's still a massive discount on offer, and management want to use this opportunity. to create further value for shareholders. The group remains on track to open 15 to 20 stores, not only during this year. If we look at the future, still ample opportunity to expand the base brand. Good opportunities to grow the UFO brand. And with that, ladies and gentlemen, we would just like to end off by saying that we are really well prepared to benefit from sales that will be on offer over the next 5-week period. With that, I would once again like to thank you for your attendance, and we will now be happy to deal with your questions. Thank you very much.

Johan, the first question is from Jacques Conradie from Peregrine Capital. And he asks, can you clarify how much of the insurance plan has been booked to the income statement thus far? Is it only the ZAR 42.5 million actually received? Or have you already accounted for everything you expect to receive in the income statement?

I'll start off by giving a bit of the answer in a nutshell of the in-house chart to unpack it further. And the full impact of the insurance claim on the set of results is ZAR 15 million, Jacques, and maybe you would like to unpack that a little bit further.

Yes. Thank you, Jacques. The answer is that we've only recognized the ZAR 42.5 million that we have received. Our criteria is to only recognize it when we receive it or when we've signed an agreement of loss. So the balance of the claim of ZAR 36-odd million that Johan mentioned will be finalized in half 2, will be finalized and recognized in the income statement only in half 2.

Then a question from Chris Gilmour from Salmour Research. He says logically, the so-called homebody economy should be running out of steam as consumers start spending on eating out and holidays, et cetera. This doesn't appear to be the case with Lewis, where your top line growth is still good. How do you reconcile this?

Yes. Chris, thank you very much for the question. It's obviously a very good question. First, one needs to differentiate between the target market that we service through those and test on the one hand. Then you've got Beares, which is in quite a sweet spot servicing customers in LSM 8 and 9. And then obviously, the UFO, which was probably benefited most from the so-called home economy, is basically the brand it sells to customers in LSM 10 plus. Chris, I must say that we do not believe that the benefit that we arrived or that we got as a group was a tremendous benefit for the bulk of our business being the traditional brands. We believe that UFO benefited most. And we do believe that we've got more than enough additional marketing strategies of which our online strategy is one to compensate for the potential loss of sales as people now start returning to a life that's closer to normal. And I think maybe now is also not a bad place to just briefly unpack the inroads that we have made through actually launching so-called e-commerce-based product into the market. So 14 months ago, we took a strategic decision to take all of our plans on to the social media platforms to utilize these to build brand awareness and also to utilize these platforms to basically measure what temperature is in terms of demand for our goods from customers that frequently utilize these platforms. We've been really successful. And as a matter of fact, we'll most probably generate 5% of the group sales through this avenue for this financial year, and that will more than likely more than compensate for the potential drop off in demand as people now in turn to offices to go and work.

Another question from Salmour Research. This time from Rod Salmon. He says, considering the stress in the economy, as shown by the rise in credit declines, do you expect that debtor costs will increase? And if so, by how much? And if not, why?

Rod, we are really encouraged by the collection trends that we've seen in, not only in the last 6 months, if we look at the improved collection trends that we've basically seen over the last 12 months. I mentioned the fact that we have tweaked our collection strategies and that these new strategies are actually adding a lot of value. We believe that we are going into this down cycle with a debtors book that is quite nicely improved on what we had in the past. And we believe that the level of collection support that we will be enjoying from that satisfactory bucket will, in fact, put us in a position where data costs remain at worse, stable at the sort of levels that we are seeing at this point in time. I think I must also mention that the actual debt-to-income ratio of customers that have bought from us during this period is in fact down by 1.8 percentage points when compared to the same period last year. So the customers that we have actually booked during this period are, in fact, customers who are carrying a little bit less debt, Rod. I think with that, I also want to talk a little bit more about 4 months of new business. And when we talk new business, we talk about business that we wrote after we came out of this hard lockdown period, i.e., business booked from June last year. Happy to share with you that, that portion or part of our portfolio is actually outperforming the rest of our book, and that level of outperformance is actually quite significant. And I think these new strategies, together with the strategy of granting credit responsibly, is going to serve the group really well as we move into the future.

Thanks, Johan. Then another question from Rod Salmon. Could you give details of the effect of each 0.25% interest rate rise on debtor costs and profit?

If we look at that effect in simple terms, for every 0.25% interest rate increase that we see, obviously, if the cash credit contribution and ratio remains stable at around about 50-50, we'll basically see an additional ZAR 5 million per year that will basically come through the interest line.

Rod, I can maybe just add, you're also asking about the impact of that in debtors cost. Obviously, we can't speculate on debt, but it also goes back to your previous question. And what I just want to add is the forward-looking nature of EBITDA's line, as you know, incorporates or we believe that we've incorporated enough there for the future shocks and further stress that the economy might bring to us in the next 12 to 18 months.

Then another question from Rod. What is the longer-term target for the number of cash stores? And what effect will this have on the gross margin? Or can some of this be offset by product ranging changes?

Like what we mentioned, there's still quite a bit of potential for us to grow the UFO brand. So to put a number to that, we believe that we can grow the brand within the borders of South Africa and in the BLNE countries, which we will go to once we've saturated South Africa to around about 70 stores. And I think if I take the 70 stores, we'll get a very good idea if we actually increase the potential sales in his model. But maybe just also to finish that point, if we look at the current contribution coming out of cash sales, which is around about 50%, we don't expect that to materially change. Of course, we do also expect higher levels of credit sales to come back into our traditional stores and more especially so under the Lewis and the Best Home and Electric brands. We believe that as soon as government now finally stopped the resistance, that the level of cash has been quite high in the economy, started reducing that in itself or fuel the increase in the credit take-up rates at additional portion of the business.

Then we have a question from Jan Meintjes from Denker Capital. And Jan asks, the collections remained at similar levels in H2. Can we expect a similar credit cost in H2?

I think the short answer to that question, Jan, is yes. Does that -- I mean, Jan is now asking us, can we just take that 4.7% and multiply it by 2? Jan, if all things remain equal, there is a possibility that the final result can in fact be as strong as that. You would have noted that we are still quite cautious in our approach. And we therefore said that we believe that we'll come in below our medium-term target. And the floor of that target is set at 12. But you're absolutely right in saying that -- or thinking that, that is a worst-case scenario and the result can be, all things remain equal, even better than that.

But then a question from Alexander Duys of Umthombo Wealth. Does your leverage target of less than 25% in the medium term include operating leases?

Yes. As things stand at this point in time, that 20% to 25% actually includes operating leases, yes.

Another question from Alexander. Will you consider to gear the balance sheet for acquisitions or additional dividends or share buybacks that can't be funded by free cash flow?

Yes, it's a yes and no answer. For the right acquisition, we will most definitely consider gearing the balance sheet and gearing beyond the 25% that we've just spoken about. Will we go out and increase gearing for share buybacks and for dividends? At this point in time, the answer to that question is no. Not to say that the Board will not consider this at the appropriate time. It's not up for consideration at this point. We mentioned the fact that we are still -- we've got a strong balance sheet. On that balance sheet, we've got gas resources touching on ZAR 400 million.

Then another question from Jan Meintjes. The second half of last year was a very good result. Do you think you can grow the top line over debt payers in H2 if current conditions prevail?

Jan, it will all depend on our successes over the next 5 weeks. We will have to come through with a decent growth on last year's very high Black Friday numbers and on Christmas sales. We remain positive. And on that basis, we've gone out and we've increased our stock holding by 11%, 11% on our closing position of 6 months ago. And we've also invested in some significant marketing campaigns to make that a reality. But the answer is if the next 5 weeks is big, Jan, then we will be successful in terms of showing a growth in sales for half 2.

Thanks, Johan. No further questions on the webcast.

Yes. So with that, just once again, ladies and gentlemen, to thank you for your attendance. All the best. Keep safe. Thank you.