Lewis Group Limited (LEW) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and thank you very much for joining us at our interim results presentation this afternoon. We will be covering our results for the period ended 30 September 2022. Joining me this afternoon is our CFO, Jacques Bestbier, and we are also joined by our Investor Relations specialist, Graeme Lillie. On the agenda for this afternoon, we will start off by looking at the highlights of this reporting period. We will then spend a considerable amount of time taking you through our data analysis. Financial results will follow, and we will then deal with our targets or achievements for the first 6 months of the year, and we'll then give you some insights into our outlook for the remainder of this financial year. In an extremely challenging trading environment, our cash retail brand, UFO, underperformed, whilst our traditional trading brands delivered a balanced and solid set of results, mostly supported by strong credit sales growth and also supported by strong cash collections during the period. The revenue increased by 4%, supported by a merchandise sales growth of 4.3%, gross profit margin settled at 39.3%. We're very pleased with the further improvement in our debtor cost line with an improvement of 2.2% during this period. Operating margin settled at 13.6%. Headline earnings up 4.4%. And then headline earnings per share increased by an encouraging 19.2%, benefiting from our aggressive share repurchase program. The Board once again showed confidence in the group's medium- to longer-term prospects by matching last year's interim dividend payment at ZAR 1.95 per share. I think all of you are fully aware of the fact that we traded through significantly weakened -- that we traded in a significantly weaker trading environment. We all know about all of the reasons that we've listed, it's part and parcel of our daily lives. I would ever want to highlight the fact that we've seen continued exchange rate pressure washing through our business. And this has had quite a material impact on the set of results, and more especially so in the case of our cash retailing on the UFO brand. So just to give that a little bit of color that during this period, the group imported 27% of the merchandise that we sold. And in the case of UFO, the import percentage finally settled at 66%. When we get to the segmental analysis part of this presentation, I'll unpack UFO's performance and the exact impact that these very high exchange rates and unfavorable logistic costs actually had on the set of results. So the weakened retail conditions washed its way through the economy. Our business, it led to a decline in cash purchases. But because of the fact that we prepared well for an increased demand in credit, we actually managed to balance our books in traditional retail by extending credit sales by a very significant 16% during the period. We continue to follow a strategy of carrying higher stock levels. This has once again aided or assisted the business during the period of transient strikes, and we managed to keep our stores fully stocked throughout this trying period. We are now trading at 829 outlets, net 10 new stores were opened during the reporting period. Two of these stores were opened outside of the borders of South Africa, increasing our installed base beyond [indiscernible] to 131 stores. Happy to share with you that our African operation performed well and thank the sales growth of 6% for the first 6 months with [indiscernible] contribution that we are now getting out of Africa 19% of sales are done outside of the borders of South Africa. So we've also made further inroads in terms of migrating more of our Lewis brands and outlets onto the smaller store formats. And at year end, we reported that 48% of our stores were, in fact, trading at a smaller configurations. And that has now subsequently increased to 49%. Store refurbishment program is also well underway, 2/3 of the planned refurbishments for the year already completed as at the end of September. In terms of merchandise sales, we had a very strong first trading quarter. Sales came off the boil quite significantly during quarter 2. This resulted in the group's merchandise sales increasing by 4.3% for the 6 months. Traditional brands performed well with an increase of 6.5%. But unfortunately, as I mentioned, sales in UFO declined by 9.5%. It is important to note that group cash sales declined by 8.1%, Put that into perspective, cash sales in all of our traditional brands during this period declined and the actual decline in percentage for the period for traditional settled at 7.6%. So right across all segments of the market, quite a significant decline in cash and circulation. Group credit sales, good story for our traditional brands, a very good increase of 16.4%. One must always be careful if we only talk about percentages. I always tell my staff that when you go into the bank to go and deposit money, you don't write the percentage on the deposit slip. It's all about the rands. So we can just focus on the credit sales increased in rand terms for this period. We actually invoiced about ZAR 165 million more credit business. And in the cash sale line, we've seen a decline of ZAR 18 million in cash sales. So the last cash sales during this period was basically compensated for or made good by the actual extension of credit. And when we get to the segmental analysis, I also want to unpack the actual profitability that is attached to a credit sale when one actually compares that to a cash sale that is similar in size. The credit application decline rates and improving trend if we look at last year, down from 39.1% to 35.8%. And I think it's a very good question to ask how is this possible in a climate that is as difficult as the one that we are currently trading in. Ladies and gentlemen, 12 months ago, we took a conscious decision to change certain of our marketing strategies to actually put us in a position to attract lower risk credit customers into our stores. Happy to share with you that, that strategy was, in fact, really successful. And if we go back and if you look at the decline rates that we reported for half 2 of last year, you will see that we actually had a decline rate that went as low as 33.6%. So a slight uptick from that level from last year's half 2's level, but still a very encouraging trend for us to see. I think it's also important to pause to just talk about the payment behavior because we've got this new strategy in play for just on 12 months now. Very happy to share with you we ring-fenced the portion of business that we wrote after we adopted this lower risk marketing strategy. The actual performance of all of those accounts is actually better than what management expected. And it's also better than the performance of the rest of the book. It's one of the factors that also underpin our very nice increasing collection rates that we'll touch on a little bit later. Other revenue increased by 3.6%. At the end of last year, we reported other revenue increase of 2.8%. And at that point, we also indicated to the market that we expect to see an increase in the contribution coming out of the other revenue lines. We gave that color and we should finish or settle this financial year with an increase in other revenue of closer to 5.6%. And I think it's clear from this set of results that we are well on our way to actually achieve the revenue contribution increase of 5.6%. Credit sales mix or sales mix, more specifically, Johan talked about the increase in credit sales. Credit sales increased from contributing 50.6% half year 1 of last year to 56.5%, significant increase and it clearly reflects the position that consumers have got an increased appetite for credit. It's also important to note that we've basically returned to pre-COVID levels with greater sales contribution before we went into the COVID period, but very similar to what we are seeing today. And we must also mention that we expect to see a further increase in credit sales contribution as we move through the current economic cycle. Expenses were well managed during this period with good cost management disciplines right across all of our trading brands. The operating costs during this period increased by 5.4%, which is obviously way below inflation that range between 7.5% and 8%. The balance sheet remains strong. We'll talk a little bit more about the borrowings that we've taken on during the support period when we get to the balance sheet slide. The aggressive share repurchase program progressed well with 7.2 million shares repurchased for the 12-month period. More recently, during this reporting period, a total of 3.8 million shares were, in fact, repurchased at a cost of ZAR 192 million. Also important to mention that 41% of shares in issue were, in fact, repurchased since we've listed the business in 2004 and 75% of those repurchases actually occurred under the current repurchase program that we keep talking in 2018. We believe that the aggressive buyback strategy will continue to be accretive to our shareholders. And for that reason, we received a very new mandate from our shareholders to get back into the market and to go and repurchase 10% of the shares we've issued. So not only do we utilize share buybacks to enhance shareholder returns, we also actively pay dividends to our shareholder base. We continue to execute on our dividend policy, which speaks to the 55% payout of the attributable line. And if we look at the average return to shareholders over the last 3 years -- last 3 completed years, you will note that the average return actually settled at the very encouraging 18.2%. We'll talk a bit about current trends. For the first 6 months of this year, we've returned 11.9% to shareholders, once again, through buybacks and dividend payments, and that is aligned with the position of last year half 1. Spoke about the fact that management and the Board's confidence, the business, medium and future term prospects are also reflected in the fact that we found it good to actually match last year's dividends, although earnings were 12% short on last year, and the dividend payment will be in line with what we paid [indiscernible] share. Ladies and gentlemen, one of the highlights in the set of results is the performance of the debtors book. As we all know, for a business that is involved in credit extension, the foundation of that business can only ever be described as the actual underlying quality of the debtors book. And we believe that we've done really well to get the book into a very good nick, standing up the book at this point in time. It is really, really a source of encouragement. This is mainly as a result of the improved collection strategy. The strategy continues to be improved as we motivate more and more of our customers to actually migrate on to debit order platform. As things stand today, 42% of all South African customers are, in fact, paying their accounts through this avenue. And as stated in the past, this has now also freed up a lot of additional capacity in our stores to actually deal with the nonperforming portion of the book better. And when we get to the slide that deals with payment buckets, you will see that this strategy is really working well and that we've done quite a bit not only to improve the strategy payment bucket but also to reduce [indiscernible] retailing of the book. I can also mention that the collection rate of 81.7% is in fact the interim results, the all-time high for the group. And what's even more encouraging is that the strengthening in the collection trend continued through this reported period with quarter 2's collection still coming through stronger than quarter 1's achievement. So although we struggled on the sales front in terms of keeping momentum, the opposite was true on the collection front, and we are still gathering collection momentum. Once again, important to look at the rands collected or banked ZAR 2.172 billion last year, increased nicely to ZAR 2.332 billion this year. That's a 7.4% increase in rands banked. And one must view this against the backdrop of the debtors book that increased by 2% during the period. So we have a very, very good real and solid increase coming through in the collection line. This also resulted in an improved position in terms of our arrears with a reduction of ZAR 220 million in terms of our contractual arrears, therefore, resulting in a nice size improvement of 37.3% arrears last year to 32.9% this year. I've spoken about the fact that debtor costs further improved by 2.2%. If we look at the net bad debt written offline, this increase of ZAR 34 million there is fully as a result of the tailwind of the book that's still in the process of being improved. On a look-through basis, debtor cost as a percentage of debtors, 4.5% against the last year's 4.7%. And this is obviously a checkpoint that this is at interim stage. So if we look at the 4.7% last year, that number finally settled at 12.3% at year-end, and we'll share our expectation for this year when we get to our target slide a little bit later on. Really encouraging performance overall and expansion on a growth customer numbers of 7,000 customers for the year, but more importantly, 26,000 more customers are now being classified as satisfactory paying customers, giving us the opportunity to resell and to reserve the 464,000 customers. This is a great, great advantage to have during a period where people want -- need to turn back to the in-store credit offering. And we can give you the assurance that we've got very strong marketing initiatives in place to make sure that we hang on to those customers and that we also sell into the open to buy the -- for the credit number that they have got it available. Also important to note that the nonperforming bucket, I mean, that's the so-called tail end that I've referred to with a bit debt payment bucket, we've seen a reduction of 17,000 customers in that bottom bucket. I mean, if we look at the rands, now less than ZAR 1 billion worth of balances that are actually classified as being invested on performing accounts. So total provision reduced from 42.2% to 38.7%. And the lower provision is driven, ladies and gentlemen, by one thing and one thing only, and that is the improvement in the quality of the debtors book. It's clearly visible in [indiscernible] composition with 78.8% of old customers now being classified as satisfactory paying. If we look at the impairment provision percentage coverage per payment bucket, I would like to highlight that we've got a higher coverage in a satisfactory paying bucket, now at 20.7%, up from 19.7% last year and a very similar level of coverage in the nonperforming bucket at around about 88%. Slightly reduction in the slow paying bucket coverage from 69.5% to 68.7%. And this is as a result of the better quality or composition of customers that you will find inside the slow-paying bucket. All in all, solid performance, and this reflects a solid foundation from which we can continue to predict well. And like I've mentioned, also plenty of reserve and the resell opportunities. I mentioned the fact that this is the base result that we've reported interim stages. This clearly shows you the trend, a very solid improvement that has actually taken place over the last 5 years. We can then move on to our financial results. So on the income statement, we've spoken about a revenue increase of 4%, driven by solid performance by our additional brands. Merchandise sales up 4.3%. So gross profit margin down from last year's 40.2% to 39.3%. I would like to highlight that our gross profit margin for our traditional trading brands were exactly in line with last year's achievement, another drop in GP for the traditional brands. This drop was solely as a result of pricing that came under pressure in UFO business. And we believe that there is some upside in half 2, but a little bit more about that later on. The operating profit, once again, under pressure as a result of underperforming UFO brand. Last year, UFO posted the operating profit before impairments of ZAR 21 million. This year, we closed the year with a small -- we closed the reporting period, I should say, with a small loss of ZAR 4 million. And we'll talk about the rules that are put and the turnaround strategy that we have already provided in UFO to get us back to a position we end up start making a contribution. Obviously, this washed through every single line of the income statement. Operating margin also down from 17.1% to 13.6% and attributable earnings down by 12.5%. Like we mentioned earlier, we are in a position to match last year's dividend and more than comfortable to slightly increase the payout ratio to make that possible. The share repurchase program was once again utilized as a low-risk tool to create value. And the impact of the strategy is very visible in our headline earnings per share line with an encouraging increase of 19.2%. We're now going to deal with segmental analysis. I'd like to start off by focusing your attention on merchandise sales. So the 6.5% that is spoken on that for traditional is there on the slide. Revenue for the traditional brands increased by 5.2%. So we can already see that, that gap between merchandise sales growth, expansion in revenue starting to narrow as we explained 6 months ago. It was probably that gap will now continue to narrow as we move through the final stages of this year. I would see with those result, merchandise sales down 9.5% that we've spoken about that then obviously resulting in operating profit line that now reflects a loss of ZAR 4 million, which compares to a profit of ZAR 20 million last year. Obviously, all of our other matrixes, operating margin negatively impact by this move, finally resulting in -- after impairment and capital margin of 13.6% against last year's 17.1%. Ladies and gentlemen, this is a good place to pause and to talk a little bit about what we've seen in traditional and why we believe that this is a really solid set of results. And also to talk a little bit about the future expansion that there is increasing -- future expansion in the operating profit margin line that will be driven by the high levels of credit sales that we have actually referenced during this period. So to put this more into perspective, I must just start off by once again saying credit sales increased by ZAR 165 million during this period, and we've seen a reduction in cash sales of ZAR 80 million. I want to unpack the difference being the actual level of profitability when we compare the credit sale to a cash sale. On a look-through basis, [indiscernible], the credit sale is between 3x and 4x more profitable than a cash sale of similar size. So let's unpack that a little bit. Currently, an average deal in our business is ZAR 10,500 [indiscernible] that is the average size of the deal. So on the cash sale side of things, it's quite an easy calculation. Typically, you will bank the GP, which is still running at around 40%. And you'll also bank delivery charge if the customer makes use of parcel delivery service. But for ease of example, let's work on the 40% and let's say that on a look-through basis, there will be ZAR 4,000 profit available. And obviously, as soon as you invoice this transaction, as soon as you conclude the transaction, the full benefit of the profit attached to this cash sale will be banked and will obviously flow through fully loaded income statement. Now on the same day, you also invoice credit transaction, similar size, once again, ZAR 10,500 comes into play, but now IFRS 9 also comes into play, and it would immediately raise a debtor provision according to those wonderful accounting standard that has been with us for quite some time. And no surprises that, that obviously plays a massive role in how the income sales will now flow through. So remember, you've got a transaction year that's 3x to 4x more profitable than the cash transaction. But how long does it actually take until you get to the same level of profitability [indiscernible]. Ladies and gentlemen, it takes 8 months before you actually realize the same level of profit. So after invoicing that credit sale and having it nurturing it on your books, 8 months later, you will actually see a benefit that is something that you want to enjoy on the day we invoiced your ZAR 10,500 cash sale. But obviously, from that point on, that the news now becomes quite a bit later. So during the first 12 months and I must reiterate that it's obviously not down to reporting periods of financial years. This will be after having this transaction on your books for 12 months. 36% of the profit attached to this credit transaction will actually be realized. In the following 12 months, 33% of the total will be realized, followed by 23% in the 12 months following that. And then finally, over the last 8 months, because a typical transaction remains on our books for up to 24 months, during the last 8 months, the final 8% will be realized. So if you ask us why are we not seeing the actual benefits of this very nice increase in credit sales in our numbers during this reporting period, I think it will now make a lot more sense. So we need more runway. But we've definitely thank a set of results that is far more profitable on the traditional side of the business and then the set of results that we presented during half 1 of 2022. So it's a big investment in the debtors book that has been made. And all of these other revenue streams will support us to get us back to operating margin that we are comfortable with. Obviously, for what all its way through all metrics, it also give us their position where we actually achieved our medium-term return on equity targets. I'll touch on that because such an important point again when we get to the next slide. Ladies and gentlemen, so that's a very, very comprehensive explanation. I hope that it makes sense. So on a look-through basis, credit sales 3x to 4x more profitable, significant inroads with a 16% increase during this period. We do expect that this rate of increase in credit sales will continue during the second half of the year. And like we said, it all bodes really well for future revenue schemes. Store count 829, 12 new stores opened during the 12-month period, I alluded to the fact that 10 of these stores were opened during this reporting period. You also see that UFO expanded installed base by 2 stores. And you might ask, what is the plan? You've got a business -- a segment of your business here that is not profitable at the moment? Are you going to expand? Ladies and gentlemen, at this point in time, we've now reached a point where we've entered the phase of, let's call it, consolidation. We are now in the process of stabilizing UFO. And once we've got this business back to a position of profitability, so that is when expansion of this brand will in fact continue. If we talk about the future of this brand, we still see a very bright future for this brand to acquire this business for strategic reasons. And up to this point, this business has served us well. Still the same business as the 1 that we had 12 and 24 months ago. It's just that a lot of headwinds actually hit this business simultaneously. And I would like to expand that a little bit when we get to the next slide. So one of the reasons why we underperformed in terms of achieving sales goals during this period was that a new range launch was significantly delayed. I already mentioned that 66% of what we sell through UFO are, in fact, imported merchandise. The delay was basically for 2 reasons. First and foremost, the KZN/Gauteng rail between Durban ports and [indiscernible] Johannesburg, of course, out was operation. If you add all of the reasons and all of the weeks together, you'll see that roughly 4 out of the 6 months, we did not have the benefit of actually transporting our goods by rail. And insult to injury, Transnet went on strike. And during this period for the Lewis Group, we had no fewer than 220, 40-foot containers that was basically piled up and stacking in the Durban port, which is really an unacceptable situation. But we dealt with that as good as we could. And happy to share with you that these lines are in our stores at this point in time, and a lot of these new lines are gaining sales momentum and traction. The biggest problem for UFO was a significant increase in logistics costs. Now to unpack that we need to understand the business, I need to explain the actual sales composition in the business. 70% of what we sell out of our UFO outlets are in fact big, bulky items. Its merchandise that falls in the lounge and dining room categories. Because of the fact that these items are big and bulky, the actual container loading the quantities that you can get into these 40-foot containers are on the low side, in certain instances as low as 20 round suites in a container. And to unpack that a little bit further, we had a close look at what has actually happened to not only shipping but also logistic costs. If we go back to the pre-COVID period, 8% to 15% of the total cost price of the product was actually made up by the logistic cost component, 8% to 15%. Now today, 25% to 45% of merchandise costs are being made up by that logistics component. Very, very, very significant increase. So yes, last year, we were faced with shipping costs. Those costs were not as high as what we experienced during half 1 of this year. But then we also had the situation that I described above. And instead of utilizing the rail, which was not available for utilization at that point in time, we had to move these containers by road from Durban in to Johannesburg. And this came at a significant cost that range between ZAR 8,000 and ZAR 10,000 per container. Obviously, it was not possible to pass all of this cost burden onto consumers. We have to absorb some of this and it resulted in obviously based on the GP line. But we also had to pass a significant portion of this one, and this was made by a certain level of price assessment by consumers and has negatively impacted the actual sales during this period. I can just add that all of this price increases and so forth was basically reduced into a target market that was already under pressure. Also income just got [ unsimilar that was before in quarter one ] it was a year ago. We also know that this customer is a very interested and sensible customer. But like I said, UFO is not done yet. There is some plans we put to turn this business around. You will agree that the operating loss of ZAR 4 million is not credit of the growth. So we've taken very decisive action -- take a decision to strengthen the senior management team in this business. So we've actually have the services of a gentleman that is very experienced in the sector of the market. He joined the Lewis team 3 years ago. During his tenure with Lewis, so far responsible for managing the Beares brand with great success. And we also know that we've enjoyed great market share gains in that segment of the market. All in all, he's got 40 years of furniture experience. Prior to joining the Lewis, he was intimately involved in running, I'm not going to mention names, but one of the brands that compete with UFO. And I believe with his experience and the energy that he will be introducing in this business, it will actually go a long way to engage people [indiscernible]. When I look at the quality of middle management that we've got in UFO, I can describe the team as being experienced and also highly motivated to turn this situation. We've also changed our road logistics supplier. I've mentioned Value Logistics in the past. They've been an integral part of the traditional success over very many years. They are now also the preferred logistic supplier for UFO. We believe that these lots of efficiencies will be unlocked not only cost savings, but also improved customer experience because of the [Technical Difficulty] our business. There's also renewed and increased focus on social media marketing. This is one of our brands that should be doing quite a bit better in terms of online sales. We already enjoyed a significant online and social media following for UFO. If that color part have the consumer with 1,000 Facebook followers and over 100,000 people that actually followed our UFO brand Instagram. We are going to utilize this as a source of potential business, which also led us to dual position we saw start of current year. Stock holding. It's an opportunity for us to reduce stock holdings by narrowing the range over the next 12 months, obviously resulting in cash that will be freed up, and it will also result in lower levels of stock provisions, which will also obviously add to our operating performance as a whole. One very good news for the entire business, but obviously very relevant for UFO, shipping rates are trending downwards. We are already in the process of negotiating shipping rates for the new financial year. And as being said today, we believe that these potential savings are between 20% and 25%, but it can be banked on maybe in terms of shipping expenses from quarter 1 in 2024. Expenses well managed, good operational discipline across all brands. We had to spend more on marketing to make sure that we keep coming through the door and also to ensure that we give the online interest in the group at high levels. And then the transport and travel line is also one that one must talk about. So we all know that we've seen record high fuel prices during this reporting period. But I must commend my team, it was a relative to actual kilometers that were traveled and most of this is being spent in terms of running that deliberately, ladies and gentlemen. If I look at the actual kilometers traveled, before the 6-month period, the operational team have done tremendously well to actually keep the controls intact. So on a look-through basis, an increase of 5.4% for all business shares. Balance sheet. Increase in stock holding, inventory levels up from ZAR 1.057 billion to ZAR 1.245 billion during this period. Two reasons. First and foremost, the unexpected sudden slowdown in sales in quarter 2 had an impact on stockholding. And then secondly, we also took the opportunity to actually grow and do a little bit of buying ahead of expected price increases that will definitely come through during quarter 4. I can give you the assurance that the quality of merchandise of stock that we hold is good. This is the new salable stock. We look at the levels of observations in our business. I can describe that has been under control -- has been [ staged ]. And I also want to talk about borrowings. So last year at this time we had 0 borrowings. This year, ZAR 432 million. Good investments has been made. That resulted in the increase in borrowings, basically tripled. An investment in the stock of ZAR 243 million during this period, stock purchases there is. And then, really encouraging investment, and really glad that we are in a position to once again start investing in the growth of the debtors book, ZAR 200 million during this period was invested in debtors book, resulting in borrowings of EUR 432 million. Spoken about the encouraging increase in headline earnings per share. We also spent about our total dividend of ZAR 1.95. We now need to talk about our returns. And obviously, for us, one of the big measurements and management and our shareholders are totally focused on our return on equity. So during this period, unfortunately, decline from 9.7% ROE a year ago to 8.8% during this year. You need to go over the page. If you go and look at the trends -- so up to the end of financial year 2022, we performed well, shared with the market that we are well on our way to achieve our medium-term objective just to mention again that the medium-term objective is to get to an ROE of [ 8.8% ]. So at the end of FY '22, we said, we're well on our way. Management recommend to the medium-term target. And today's message is no different. Management remains committed to actually achieve that goal. And we actually believe that we have made very good inroads because of the reasons that I've mentioned earlier. We've invested for the future. The additional operated sales growth is not benefiting us. Other revenue streams are now way close to mature. The good news, ladies and gentlemen, is that, it's coming. And you get a renewed commitment today in our ROE target -- medium-term target of 15% remains solidly flat. All right. Then nothing more to say on the headline earnings per share. Just maybe to highlight that significantly up from last year's position of ZAR 3.30 to ZAR 3.93 at this point. Yes. Ladies and gentlemen, this morning, when I woke up, I felt very excited. I mean, you might say that there's an -- after all of these years are you still excited to actually go and present the results. But the real reason for that excitement is actually not there. I'm pretty really excited because the start of the Black Friday drive for the Lewis Group is, in fact, today. We normally start our Black Friday drive by having a preview day for all existing customers that are in good credit standing, like I mentioned. As things stand today, we've got close to 500,000 of those customers. But as tomorrow is official Black Friday, I also thought that it is appropriate -- I suppose I won't read through to myself, as a [ true blue retailer ] to not have a Black Friday slide included in our presentation for this afternoon. And this is the Black Friday slide. Year-to-date, on ARPU, we've got the Lewis share price discounted by 40%. That's a really lucrative discount. On a serious note, net asset value per share end of this reported period ZAR 78. Trading at that point is ZAR 46 the day trading between ZAR 48 and ZAR 49. As a management team and as a Board, we see tremendous value in our share price depending sort of levels. And for that reason, we will continue with our share buyback program. We believe that this is the best tool available to unlock permanent value for our loyal shareholder in most, ladies and gentlemen. So there you go, that's the Black Friday offering. I'm sure that it's still available on the open market. But be aware, you don't pick up the bargains, we will. Targets and outlook. Spoken about gross profit margin. So in traditional, we build our own, spoke about the troubles in UFO, how do we see the second half of this year. In the fortunate position where we've completed most of our purchases for the remainder of this year, I can also share with you that we're very far advanced in terms of constructing our marketing campaigns, not only for the festive trading period, but also for quarter 4. And on that basis, we want to share with you that we expect a strengthening trend in the gross profit margin line for half 2. And we believe that we'll close the financial year at the bottom end of our gross profit target range. Again, operating margin, spoken about the support it will be coming through, other revenue lines as we move forward. Fortunately, a lot of that support for only following in the next financial year. Having said that, we do believe that we would actually get to the bottom end of our target range for this financial year. Operating costs. We will have to continue to spend more in the area of marketing to actually convey the very good product offerings that we will be able to make during this period. We do expect some further pressure to come through in the fuel inflation line. But on a look-through basis, we believe that we will still come in within the parameters of the target range that we've set. But most probably closer to the upper end of profit target range. Credit sales of 56.5% of total, in line with pre-COVID levels, and we have already alluded to the fact that we expect to see a bigger contribution coming out of -- or through the credit extension lines and we almost probably settle this year well above the upper end of the target range and also well above the 56.5% that we have reported. Satisfactory paying customers, good results. We don't expect to move backwards on a look-through basis. The upper end of the target range is very much still in plan. Debtor cost as a percentage, now at 4.5%, last year at 4.7%. I mentioned that we closed the year at 12.3% last year. And we expect to do better in Half 2 better than what we did last year. And for that reason, we believe that we will actually do better than [ what we did ] of those target range, which will settle at 12%. Gearing increased to 24.9%, but like I already mentioned, the gearing increase for the right reasons. We've got good stock that we purchased. It will save us some inflation as we trade through the remainder of this year. And very happy that we've got the opportunity to invest in the latest book. Where we will settle this half? Most probably somewhere between the year-end target that we've set and our medium-term target. Ladies and gentlemen, going on to the outlook. I think we're fully aware of the increasing pressure that's [ sparking ] in the economy. Now we don't believe that we are through the worst as yet. I think we all know that there's further interest rate increases coming. So there that's a negative for 1 portion of the market. We must never lose sight of the fact that also gives us the opportunity to actually increase the interest rates that we charge on new contracts. So on the one side, more consumer pressure but the other side also an opportunity for us. And we see this as a great opportunity because of the reservable base that has grown in industry with overall last 5 years. I think I don't need to tell you anything about rising food prices. We all saw the latest CPI inflation numbers. We saw that there's oil pressure coming through on the actual price of food. We don't believe that this is the end of it. We just look at input costs and the agricultural side of things. We don't believe that all of those pressures have fully washed its way through the economy and that there's further pressure coming on those lines. And obviously, that will motivate more customers to actually turn and make use of their store credit offering. Record high unemployment levels and we look at retrenchment claims in our customer base, we are still seeing an increase during the last 6 months period. We expect that to start levering up as we start comparing against a higher base during the second half of this year. So that's a significant thing. But once again, one must also see the opportunity to all of this. We know that as South Africans, we've got the ability to make plans. We know that the self-employed or formally employed sector of the economy is growing. And if you know how to grant pay the responsibility to that sector of the economy -- and that also unlocks opportunity. To keep that some color, and we've spoken a lot about orderly regulations, we have actually changed and that started to open the door for credit impairments to start selling into that sector of the economy. Maybe just -- let's just spend a minute on that. At that point in time, 4% of our active customer base were, in fact, self-employed customers. That was down from previously reported 8% of total customers prior to change. We've subsequently utilized this as a very good source of our business. And as we stand today, 13% of our customers are, in fact, self-employed customers and the payment performance of that portion of the book ratio can only be described as satisfactory. We don't shy away from this sector of the economy that we understand and that we can successfully sell into. Eskom load shedding, we all know this story. I'm not going to quote the number of hours that we've actually lost due to trading. We all know that it has been significant. I think by now, we've all developed our own methods of actually making sure that we not only turn quiet days into busy ones, the demand that we also build -- the opportunity to actually switch the light on -- in our stores, and we believe that we've got the ability to deal with the workers challenge as well as we move forward. The ongoing supply chain challenges. I spoke about the fact that we'll see a little bit of softening shipping charges as we move forward. And once again, although a stuff at this point in time, there might be some improvements coming through in that line. Ladies and gentlemen, we've got a very experienced management team that has traded through tough cycles before. It is the cycle may be a little bit tougher than what we've seen in 2018 time. My view is, yes, it's tougher. But I believe for us as a business, we're better positioned to actually deal with the slowdown in the economy. And the major reason for all of this is that is the quality of the business book as we go into these tougher times, our collection rates are still improving, and we've got more customers that can actually invoice to take up our credit offering. I'm not going to talk anymore about the strong credit sales growth. I think we're in fact that -- [ in the greatness ] of detail, just to say that, we expect this strong credit sales growth trends to continue, not only for the second half of this year, but also quite a bit beyond that. Spoken about UFO and the turnaround strategy. It's a focus area of this business. I believe that we've made appropriate changes, and I remain hopeful that we can actually give you some better news in 6 months' time and that we can at least then report that, that we've turned the corner and the sales are at least in a position of growth here. We know about our footprints. Footprint is still growing. There is still further room for expansion. But when we talk about strategic positioning to gain market share, we are really referring to our ability to extend credit into the market and more importantly our relatively successfully [indiscernible] from these customers. Black Friday. It's not only a discounted share price that is on offer, ladies and gentlemen. After a lot of hard work and dedication, the team made sure that through dealing with the [indiscernible] and everything that goes with that, that we are in a position today to say that our Black Friday specials are available across all brands, all of the other stores. And during the Black Friday, at least the trading period, you will see significant value that it will be offered to consumers. And like I said, through all available marketing avenues that will be started and communicated to the market on a regular basis. Same-day delivery. We are still in a position where we can say that this remains a competitive advantage. 95% of all deals that gets concluded in a specific day is delivered to our customers before the sunsets, even in the traditional side of the business, higher percentages are achieved in case of UFO. If you got a customer based in Gauteng, we commit to a 48-hour delivery. If you're situated anywhere else in South Africa, you'll get your merchandise from us within a period of 5 days, which is quite extraordinary in that sector of the market. We will continue with our share repurchase program. And then finally, the group remains on track to open the net 16 stores and the revamp 150 stores during this financial year. I think this is important because it shows intent, it shows that the management team believes in the future of all of our brands and that we will, for those reasons, continue to invest for a better tomorrow and also for a tomorrow that finally speaks of an ROA of 15-- of an ROE, I should say, of 15%. Ladies and gentlemen, thank you for taking the time to join us today. Thank you for listening to quite convincing results presentation. We will now be happy to deal with your questions. Thank you.

Johan, we have a few questions from Chris Reddy from All Weather Capital. His first question is, what does trading be like post the end of September?

So I think that we mentioned the trade slowed down quite significantly after quarter 1. Our worst trading month during this reporting period was in effect the month of September where we did not show a sales growth. Unfortunately, the negative trend also carried through into the trading month of October. There is similar sort of scenario where cash sales were, in fact, under pressure. Happy to report that we did actually bank the credit sales growth during October. But on a combined basis, we were still in the red. Early trends in -- during the trading month of November. And I say early trends, although the calendar are telling us that you've just got 6 months -- 6 trading days left in this month. It is early days because 50% of this month's turnover must be -- must actually be the turn over the next 6 days. But be as it may, early trends in November is positive. We are, in fact, very, very satisfied with our sales performance leading up to today, which is basically the launch of our Black Friday. So very tough October, but an encouraging first half of November for our brands.

The next question from Chris is, how do you see the debtors book performing in the light of a tougher macroeconomic conditions? And are current provisions sufficient?

Chris, yes, collection trends actually strengthened during the second quarter of this reporting period. The total collection rate of 81% for the reporting period is, in fact, the highest that we've ever reported at the half year checkpoint. Just once again to talk about the improvement in respective paying customers, very encouraging. And like I said, one must not lose sight of the fact that it's not only a top bucket improvement scenario, but we've also seen a 17,000 customer reduction at the tailwind or in that so-called nonperforming bucket. If I look at collection trends for the month of October, strong collection trends continuing right through that month. And if I compare November so far with October, that strengthening trend, Chris, has, in fact, continued. And there's none of the KPIs, operational KPIs that I monitor on a daily basis that actually tells me that there's any reason the recent forecast certainly in terms of the [indiscernible]. I think I must also add, Graeme, before we move on to the next question that one must not lose sight of the fact that we've seen a significant reduction in arrears over the last 3 years. And that trend also does not show or slow, I should say, over the last 12 months with a further reduction of ZAR 220 million in contractual arrears. And remember, at the Lewis Group, we don't do refreshing. So if we put contractual arrears, that's the actual arrears that has actually fallen into arrears calculated on the -- according to the terms of the regional contract that we do.

All right. Then Chris had a question on load shedding, but I think you've adequately covered that after he had asked the question on the arrear price. Then there's a question from Rudi van Niekerk of Desert Lion Capital. He asks, what is the effect of higher interest rates on your debtors book profitability? To what extent does net interest margin increase? And to what extent is it offset by higher credit loss ratios?

So before I hand the second part of the question to Jack, I think we can also mention where we are at now and with the actual average interest rate in our book is. Maybe we should just talk about South Africa for a moment, of course, that is still more than 80% of our business. It's also where we've seen the most significant increases in interest rates during this period. So if we look at the South African book now, and the average interest rate in the book at the end of this reporting period, it finally settled at 21.59%. We currently charged 23.25% on all new contracts that we enter into. Most probably from tomorrow, we will be allowed to, who knows, charge at least 24% [indiscernible] against settlement. Jack?

Thank you, Johan. Yes, so the -- I mean, as you know, our business is got to be an odd year cycle. So it takes quite a long while for interest rate increase flow through the [indiscernible] for us to get a full benefit of that. And maybe just illustrate that by a number. I mean at least 75% increase in the interest rate, only has about 0.03% average interest rate in the book. And to add on to what Johan said, the average interest rate in the book now is still quite a bit lower than it was largely at the same time. But we have reached a turning point. And it is, at the moment, the average rate is higher than it was at the year-end in March 2022. So we are starting to see that benefit there. And that support will just continue to grow in the new financial year. Maybe on the impact of the debtors book, as part of this [indiscernible] modeling, there's correlation steps that's done between our book and especially our nonperforming customers and certain macroeconomic metrics. And I can comfortably state that the rising interest rate is not one that are very strong for a customer. That Increase in interest rates in our customers in the traditional [indiscernible], he hasn't got a bike, he hasn't a car finance. And the small amount that added to his monthly installment actually has got a significant impact on it moving forward.

Obviously, as soon as there is a shift in the actual payment behavior, that will be picked up and obviously then be incorporated -- as soon as that correlation becomes stronger it will immediately be reflected in your provision in line, Chris, so there won't be a significant lag because of the rules that has been set under accounting standard IFRS 9. I think the other point that's just worth making here is, maybe just talk a little bit about the actual composition of other revenue. Also to unpack the positive impact of the interest rate increase. So if you look at other revenue, Chris, and to the rest of the audience, 45% of the other revenue income is, in fact, what we classify as being finance charges. In these 2 components, 2 finance charges, of which 80% basically comes back to interest rates as being stand at this point in time and the other 20% is basically the accounting for upfront initiation fees. Then we should unpack the rest, 28% of other revenue is basically net insurance premiums earned. And the remainder, the other 27% will then be other services that we -- that we're render. So if you do that calculation, you can see that the actual impact of the rising interest rates going forward as these income streams mature is going to be a material one. But to put a different thing, I mean, we touched on this earlier in the presentation. If you just basically work on the assumption that the actual maturity of other income streams will basically follow the 36% of total profitability of 12 months -- 33% for the 12 months that actually follows this, 23% in the next 12 and 8% for the last 8 months, that's still there. You should come up with an answer that closely relates [indiscernible]. Obviously, one then works on the assumption that the Lewis Group will be in a position to actually successfully maintain the current credit standing [indiscernible] debtors book.

I think if I can just add to Johan. I mean supporting other revenue streams going forward is also the credit sales that we banked in the last financial year where we showed a 17% increase [ in the result ].

Yes. And I think all of that is already starting to manifest and that basically speaks to the increase in other revenue from 2.8% last year to 3.6%. And we alluded to the fact that we expect that to increase to at least 5.6% by year end.

Thanks Johan and Jack. Then we've got 2 questions from Charles Boles from Titanium Capital. Charles says, I understand the impact of logistics costs on UFO. Why did this not impact traditional retail in the same way?

Charles, good question. Thank you for asking. So well, traditional retail, the situation is very different. Only 22% of merchandise gets imported by Lewis. And far, far, far lower percentage of furniture line. So in the case of Lewis, we will import lines that got container loadings that far exceed the 20 and 25 lounge suites that one can get into the container. Like I said, [ in some ], the difference between being 22% of the business as opposed to 66%.

And the next question from Charles is, whether Lewis is increasing gearing to try and improve ROE? The unseated balance sheet has been a defining strength of Lewis.

Charles, the short answer to that question is, no. We've increased gearing [indiscernible] to go and buy a little bit more merchandise for reasons that I have explained. Obviously, we really encouraged to invest in debtors book [indiscernible] 41%. We know it's good -- it's a good investment, and it's most certainly not with any other extension that, that we could -- maybe require. Jack, anything that you'd like to add?

Yes. I think just with the gearing in context, I mean, we're sitting on our balance sheet with net borrowings [indiscernible], which considered to the equity base of around 4.6 -- only 4% to 5% gearing. The balance of the gearing come from lease liabilities. So we -- the current borrowing levels, we're quite comfortable with that.

Then we've got 2 questions from Alexander Duys at Umthombo Wealth. He asks with debt at peak levels, can we expect a slowdown in share buybacks in H2?

I don't think that the debt is really at peak levels as we speak. We've always said that our gearing target is what that -- first and foremost, other target is [ CD ]. But we always mention that this is something that we review with the Board on a continuous basis. I think Jack now make the point very well. But on a look-through basis, the actual level of gearing, the borrowing levels of this business is still really, really low. I think the fact that we went out to ask shareholders for a mandate to buy back [ 13% ] of shares issued clearly underlines that we [indiscernible] fully committed to the buyback process.

Thanks, Johan. And then the next question from Alexander is, whether you witnessed a pickup in sales post a store refurbishment?

Yes. The short answer to that is yes. The feel good factors will start, obviously plays the biggest role in all of this. And we generally see a pickup in sales, yes.

Another question from Matthew Zunckel at Umthombo Wealth. Can you please give us guidance on the working capital cycle? And when you expect the group's substantial working capital investment to revert to a level more in line with history and the benefit to be realized from a cash flow perspective?

Yes. I just want to repeat again that we are -- in our business 3 to 3.5-year cycle. So on a look-through basis, whatever you invest now, you get return over a 3-year period. But like we said earlier, we are already expecting the benefits of gearing [indiscernible] and give good support to profits from the next financial year as part of this.

Thanks, Jack. And then a question from Chris Reddy. How much of the new 10% buyback have you already purchased?

Chris, unfortunately, really we can't even report the percentage today. The volumes are over the -- since the AGM, volumes in the market has been really, really low, but we can give you the assurance that we are in the market as we speak. Like we said, if nobody else is interested in buying those Black Friday Specials, we will.

Thanks, Johan. There are no further questions on the webcast.

Ladies and gentlemen, so thank you very much for your attendance today. And as always, if there's any follow-up questions, Graeme will be very, very happy to put you in touch with us. Have a good afternoon.

Thank you.