Pick n Pay Stores Limited (PIK) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the first half results presentation of our FY '22 financial year. We are again running this presentation online. Like many other companies, Pick n Pay switched to online early in the pandemic. We have received many positive comments that you prefer an online event for its convenience and its saving in travel and other time. It has been an extraordinary 6 months since we delivered our last results. In April, we were reflecting on how we had adapted to the unprecedented challenges presented by COVID-19. Since then, we've experienced another COVID wave and the resultant disruption to our business. No one anticipated the terrible lawlessness of July and the devastating impact on infrastructure, on businesses, on communities and particularly on the most vulnerable in our country. During the July crisis, 212 of our Pick n Pay and Boxer stores were damaged by looting and by destruction. An additional 551 stores were closed to protect our customers and our staff. Most have now reopened, although not all, unfortunately, at full service levels. But the numbers tell only part of the story. What we all experienced in July was the worst of South Africa, but it's also brought out the best in South Africa. I was immensely proud of our colleagues across Pick n Pay and Boxer. You kept our customers and you kept each other safe. After order had been restored, you worked night and day to get our business back up and running and to get people in the affected areas fed. There was no better example than in KwaZulu-Natal where Pick n Pay retail's 2 distribution centers were looted and vandalized so badly that they were inoperable. This at a time when we feared that the unrest would result in devastating food shortages in the region and across the whole country. Our Pick n Pay and Boxer teams worked together like never before to get food and groceries to stores and to our customers. For the first time ever, the Boxer distribution center in KZN supplied Pick n Pay retail stores. Our nationwide network was used to truck products into the region from as far away as Cape Town. We diverted over 1,200 trucks to KZN in the days after the crisis, carrying over 1.2 million cases of essential food and groceries. Our Pick n Pay logistics team rolled up their sleeves and achieved the impossible, rebuilding, restocking and reopening the 2 damaged distribution centers within a fortnight. My profound thanks go to all my colleagues who led us through this crisis. To our valued franchise partners, you and your stores are at the heart of many of the communities which bore the brunt of the violence. You put your customers and the community first, working heroically to save your stores and afterwards, to rebuild and restock. You occupy a position of pride within the Pick n Pay family. My thanks also go to The Consumer Goods Council of South Africa, which played a crucial role in coordinating the industry response and keeping communication lines open with the government. The past 6 months have underlined how much business and government depend on each other. During and after the lawlessness, we're dependent on government to restore and maintain order. Government depended on us to rebuild, to restock and to reopen for customers as quickly as possible and to commit to investment in the damaged areas. The Pick n Pay Group remains committed to our CapEx program for the year and also for the future. This year, we will invest about ZAR 2.5 billion in our system. Government depends on us to pay social grants in our stores. We pay out approximately ZAR 1 billion each month in SASSA payments. I was really proud that Pick n Pay and Boxer were the fastest companies to be able to pay out the 350 social grant reintroduced after the civil unrest. Government and business depend on each other. We must work together with honesty, transparency and in good faith. We have shown that we can do it. For example, our combined effort to increase local production of food, textiles and clothing is starting to bear fruit. Our work on local procurement of clothing has created jobs and livelihoods. This cooperation has made our supply chains more durable at a time of global disruption. We must avoid those cases where ideology, poor liaison, a lack of transparency or intransigence damage our economy and the word trust. The government's reliance on restricting alcohol sales as part of its COVID-19 response has been immensely damaging. There is a wealth of evidence to show that it has little or no positive impact as a public health measure. But it has immensely negative impacts on jobs, on the economy, on confidence in our country and, of course, in the performance of businesses like ours. Our concern is that the state of disaster is being used by elements of government to address liquor policy issues without resorting to constitutional processes. We will continue to support the government in its fight against COVID-19 and ensuring that as many people as possible are vaccinated. But we implore government to heed the evidence and resist the temptation to reach again for restrictions on alcohol sales. There's a concern that liquor restrictions are being put in place for the local elections. We need to focus on getting the country vaccinated rather than putting further restrictions on citizens' rights. Let me also make a plea for greater transparency from government. Policies and proposals issued by ministers should reflect what government has said it intends to do without last-minute changes or surprises. I hope the Company Amendment Bill will be a good example of consistency and transparency. Government, like business, must also learn lessons from the July crisis. For example, we saw in July how the N3 highway is one of the country's most vital arteries. Let us ensure that the Mooi River Plaza is not rebuilt in the same place so that it cannot again be used to block this artery and cripple the country. Finally, I want to pay tribute to the Pick n Pay values. They are never more important than they have been in these challenging times. Our Feed the Nation program is doing brilliant work. It has raised over ZAR 150 million to help distribute over 33 million meals to the most vulnerable through the pandemic. It has done even more vital work in the aftermath of the civil unrest in July. It has distributed over 650,000 meals in areas where the violence and looting left many families without food or essential supplies. This is Pieter's first set of financial results. He could not have picked a more difficult time to start. But he has relished the challenge, and I'm very much enjoying working with him. The transition to Pieter Boone from, as CEO, from Richard Brasher has been seamless. I commend Pieter and his team on these results and on the progress you have made. If you look through the severe disruptions over the past 6 months, you'll see some of our growth engines, such as Boxer, clothing and omnichannel, are performing well as well as further progress in the overall Pick n Pay turnaround. I share Pieter's view, which he'll talk about in his presentation a little later, that there's much more to be achieved and more hard work to be done. Thank you for your support. Thank you for listening to me. And I would now like to hand over to our CFO, Lerena Olivier, who will present the results.

Thank you, Gareth. Good morning, everybody. Thank you for the opportunity to present our half year results to you today. As Gareth has indicated, it has been an extraordinary result period. As has become our custom, I will be taking you through the pertinent points of the results, and there's additional information at the appendix to assist with your analysis. This result represents a resilient performance over a very challenging first half. Group turnover of ZAR 46 billion, up 4.1%, reflects the impact of an estimated ZAR 1.7 billion of lost sales related to trade disruptions during this quarter. Those disruptions were both the civil unrest in July of this year as well as the reinstatement of liquor restrictions in the second quarter. These items has got a significant impact on the overall group P&L. As an example, both gross profit and other income includes items like stock write-offs and additional distribution costs and the related insurance recoveries. And I hope to give clarity on the impact of these and other items throughout this result presentation. Throughout this, we have maintained our strong expense containment. Through Project Future, we've ensured that we've got careful control of our operating costs and strong working capital management. As a result, we have delivered solid earnings growth under very difficult circumstances, a comparable PBT of ZAR 481.2 million and a comparable HEPS of ZAR 0.7085, up 90.9% on last year. As a result of the civil unrest, we closed 212 stores, 10% of our estate. 45 of these are still closed. 2 distribution centers were significantly impacted. We've closed 551 stores on a precautionary basis in order to protect our staff and our customers. This represents 30% of our estate. The majority of the group's losses are covered by our insurance policy. Effective collaboration with insurance and claims specialists has expedited the claims process. I would like to acknowledge our insurance partners, loss adjustors and brokers for the professional speed in which they assisted us through this process. That, along with the recoupment of 65% of losses to date, the group has accrued for the recovery of the majority of its losses. There is still unrecorded recoveries mainly relating to business interruption at an estimated ZAR 65 million. These are expected to be realized in the second half of the year. However, although there will be a recovery, we believe it might be mitigated and offset by the increased cost of working in our line items such as security and insurance. On the left-hand side of the slide, we have indicated all the items that are impacted as a result of the civil unrest. I hope that will assist you with your overall analysis and understanding of the shape of our result. Both our current and prior year is severely disrupted. The H1 base of last year, we only had 3 weeks of trade in an undisrupted environment. And in H1 this year, as I've indicated, has got both the civil unrest and the liquor restrictions all concentrated in our second quarter. We had a strong first quarter with group turnover up 9%, reflecting the sharp recovery in categories impacted by COVID-19 trade restrictions in the prior period. The severely disrupted second quarter delivered turnover down 0.7%. The resumption of liquor restrictions in June this year resulted in estimated lost sales of ZAR 800 million. This is a conservative estimate as it does not include the impact on the associated basket as well as the decrease in customer counts on the days, specifically the weekends, where we could not sell any inventory. The civil unrest in July, we lost an estimated ZAR 930 million worth of turnover, both as a result of the stores we had to close due to damage and those we had to close on a preventative measure. Looking through the disruption, we have presented a 2-year CAGR turnover growth normalizing for the impact of the civil unrest and liquor in the base. Looking through the disruptive period, the group has delivered a 2-year CAGR of 5.8%, supported by food and grocery growth over the same period of 5.2%. This reflects our pleasing performance over a 2-year period, underpinned by both Boxer and Pick n Pay Value stores and market-leading growth from our clothing division at 11.7% for this 2-year CAGR period. Our like-for-like estate delivered sales growth of 3.6%. Our store opening program remains strong, notwithstanding the disruptions. We invested in 64 new stores across formats, franchise and owned stores. We're constantly focusing on ensuring that our overall estate is profitable. And as a result, we have closed 16 underperforming stores, and we flexed our estate across owned and franchise and converted a further 4 stores from franchise to company-owned stores. We have made strong progress against our investment plan. As mentioned on the previous slide, our strong store pipeline was maintained. Civil unrest did have a certain impact, specifically in the second quarter of the half and specifically in Boxer. As a result, we have accelerated our H2 store rollout program to mitigate any impacts as a result of civil unrest. And we're still guiding the same program we did at the end of our full financial year result. We've also guided that we will be focusing on increasing our investment in digital evolution. During this half, we further invested in asap!, our on-demand solution. We've increased the analytical capability of our Smart Shopper. We have started a cloud migration progress, one of the first movers in South Africa in this area. And we've also rolled out our Workday digital HR platform. It's a mobile-enabled solution and was very well received by our staff. Our ZAR 2.5 billion capital guidance for the full year is maintained. There will be some additional costs relating to looted stores. However, this is fully provided for by insurance proceeds. Our elevated annual investment will continue for the foreseeable future to support our strategic investments. Pieter will detail that in his presentation. We are also planning our new DC capacity for Boxer and a replacement DC for our Longmeadow DC in Gauteng called Eastport. Both of these will be funded through stand-alone, long-term funding and is excluded from the annual CapEx guidance. Investment in our customer offer remains a key strategic priority across both Pick n Pay and Boxer. Lower prices and greater value is increasingly important for our customers. As a result, we have continued to contain our internal selling price inflation well below that of CPI food. This has been done through sustained price investment, supported by our Project Future initiatives through better buying, continued supply chain efficiency, cost discipline and lower waste. Looking through the disruption to the progress in our underlying gross profit, it is evident that we are making progress in improving the group's overall price perception for our customers. We've presented a read-through view of our gross profit margin looking back to the GP margin 2 years ago in FY '20. The GP margin for this period has been severely impacted by the civil unrest, and this has removed 180 basis points from our gross profit margin. The reason being stock write-offs of ZAR 633 million written off in gross profit, additional distribution and security costs also relating to the civil unrest. Both of these items largely covered by insurance under -- and the insurance recovery has been recorded under other income. And also that there is a fixed cost of supply element in our gross profit. And as a result of the lost turnover, it creates upward pressure on the gross profit margin. Underlying, our gross profit margin reflects the progress we've made through our supply chain optimization and better buying, supported by Project Future. This has delivered 60 basis points of improvement and has given us the opportunity to invest in our customer offer, a full 40 basis points over the 2-year CAGR period. Our other income includes ZAR 753 million of insurance recoveries raised in the respect of the civil unrest losses, the ZAR 633 million stock I've just mentioned on the previous slide, the additional operating costs as well as a portion of business interruption. Excluding these items, other income is up 6.3%. Our franchise fee income, up 1.8%, also reflects the impact of civil unrest with 58 stores damaged in the process. Franchisees also feel the punch of the liquor restrictions. And we've also got conversions, 38 to date in the last 18 months from Pick n Pay to Boxer company-owned stores. Commission and other income also includes our value-added services, up 16.8% for the half, with travel and event ticketing, banking and insurance services up as customers return to pre-COVID behavior in these areas. We remain resolute on costs. Our gross -- our trading expenses margin of 19.3% reported last year reflected once-off costs of ZAR 100 million relating to our voluntary severance and ZAR 50 million relating to our COVID-19 appreciation bonuses. That added 30 basis points to the trading expense margin of last year. On a see-through basis, the normalized margin is 19%. Through our staff productivity and operational efficiencies during this half, we have improved our trading expense margin by 40 basis points. Civil unrest and the related lost turnover has resulted in upward pressure as the turnover has lost, but the fixed cost component remains, and that has added 70 basis points to our trading expenses. Trading expenses, all up, is up 4.1%, 1.9% on a like-for-like basis, reflecting the additional costs such as heightened security measures, reinstatement of insurance covers and repairs and maintenance. In the appendix, there is a detailed analysis per trading expense line item. The Rest of Africa segmental revenue delivered ZAR 2 billion, up 12.9% in local currency. The difficult trading conditions persist across the South African regions where we serve. This is as a result of local currency weakness, high levels of inflation as well as the severe impact on the tourism and hospitality industries in these countries that we trade due to the COVID-19 pandemic affecting tourism. However, the division still remains profitable. Segmental profit before hyperinflation of ZAR 92 million is up 95.3% from last year. This was supported by a strong local performance in Zimbabwe with the resumption of dividend payments repatriated to South Africa. A disappointing result in Zambia, notwithstanding good cost control and working capital management, is something we hope to improve on in the second half of the year. The group continues to generate strong free cash flow. Our cash flow from operations of ZAR 1.4 billion was delivered, notwithstanding the trade disruptions this half. Cash inflow from working capital of ZAR 900 million demonstrates the solid progress against the working capital plan, notwithstanding the impact of the civil unrest, stock losses of ZAR 633 million that was lost and franchise support of ZAR 100 million to those franchisees who are also impacted by the civil unrest. This support is largely secured through insurance receivables. Our net funding position was therefore ZAR 315 million higher than last year, with insurance receipts of ZAR 500 million in September post year-end restoring the net funding position to be back in line where it was in August '20. The group's cash flow generation was supported by a strong working capital plan. Improvements in like-for-like inventory, receivable and payable days added to the group's working capital performance. Inventory is up 2.9% of last year, notwithstanding opening 74 new company-owned stores, the replenishment of looted stores and investment in essential food and grocery lines. The overall improvement in working capital has delivered a ZAR 30 million interest improvement for this half, ZAR 18 million of that supported by repo rate base cuts, but a full ZAR 12 million due to the continued discipline and improvement. Our strong balance sheet stood us in good stead during this period. The group extended its borrowing facilities this year. As civil unrest hit, we were all unsure as to the length and the extent and the impact on the country and the group's liquidity as well as the timing of related insurance recoveries. We acted swiftly, terming out some of our shorter funding into 3, 6 and 12 months to ensure that we've got a strong liquidity position. Surplus funds was invested in high-yield money market funds. And the positive net funding position has resulted due to the fact that we have ensured that we've got exceptional cost and working capital discipline. Insurance receipts in September returned our net funding position to ZAR 1 billion, in line with that of last year. Comparable headline earnings per share is up 90.9%. It excludes the impact of hyperinflation accounting in Zimbabwe and all items of a capital nature. This metric reflects the full impact of the trade disruptions in this half, with only a ZAR 65 million unaccounted insurance receivable expected to be recovered in the second half of the year. Comparable headline earnings per share is also the group's primary measure in determining its dividend payout. The Board has therefore declared an interim dividend of 38 -- ZAR 0.358 per share, up 91%, in line with the increase in the comparable headline earnings per share. This declaration reflects the Board's confidence in the recoverability of the majority of the losses suffered as a result of civil unrest and the strength and visibility of the group's balance sheet. In summary, a highly disrupted trading environment in this half, we have still delivered a solid underlying sales performance over a 2-year CAGR period. Greater operational efficiency is driving strategic investment into lower prices. Project Future is on track to delivering the ZAR 1 billion as planned, with more to come, which Pieter will detail in his presentation. We continue our good work with tight working capital management, and this provides greater liquidity and reduces our finance cost. Our strong balance sheet with lower gearing provides exciting opportunity for future growth. This result has been an extraordinary effort of the team to rebuild and restore after the devastating unrest. We are now looking forward. We know what to do, and we are energized to do it. I will now hand over to Pieter so he can take you through the strategic and operational review for the period.

Thank you to Gareth for the introduction. And thank you, Lerena, for taking us through the interim results. At our last result announcement, I had just joined the business. My initial observations at the time were the Pick n Pay was a well-run, people-centric, values-driven company and a loved brand in South Africa. The last 6 months have confirmed my initial thoughts, Pick n Pay is a fantastic company. Despite the challenges we have faced as a business and as a nation, the first half has been energizing. The group has shown tremendous resilience. We have operated through unprecedented civil unrest and an ongoing pandemic. We have made big strides in the market with our Boxer business, and we have accelerated our omnichannel and clothing growth engines. There has been trade momentum in Pick n Pay, but we know that we have a lot more work to do. It is worth highlighting the challenges we faced in the first half and their impact. We have reported turnover growth of 4.1%, but I want to emphasize that this does not tell the full story. We had strong revenue growth of 9% in the first quarter, but the second quarter was difficult. The liquor restrictions and the horrific looting and unrest led to a disappointing 0.7% sales decline in the second quarter. This is largely attributable to the unavoidable sales losses. I think this demonstrates that there is an underlying strength in the group's performance. We added 64 new stores to the group over the first half. We continue to see customers preferring larger shopping baskets and fewer visits to stores. But this trend is not as stark as what it was last year. In fact, in the first half, we saw significant year-on-year transaction growth. Looking through the impact of the unrest, store closures and the COVID-19 third wave, we believe that customers are beginning to feel comfortable shopping more often. I think we can attribute this to the amazing work of our teams to do every day to maintain hygiene and safety in our stores and the way the nation as a whole is adapting to COVID. Vaccination is a key tool in this adaptation, and we strongly support the national vaccination drive. To help customers through a very difficult period, we focused on delivering lower prices and deeper promotions. Our internal selling price inflation was 3.6% year-on-year against a CPI food inflation of 6.5%. Our price investment strategy is bearing fruit. Independent customer surveys have shown an improvement in our price perception against key competitors. In the past, we haven't always been consistent in our price investments, but getting our pricing right is critical for our customers, so is it's critical for us. Our incredible Smart Shopper program is at the heart of our promotional price investments. Smart Shopper customers get both the very best deals in the market and points which they can accumulate and use to make purchases from us or from our partners. 10 years on, our Smart Shopper program is a resounding success. Nearly 80% of our customers use their card when they're shopping at Pick n Pay. That's more than 9 million unique customers. Smart Shopper was recognized as the most used retail loyalty program in South Africa and also, I'm told, recognized as South Africa's coolest loyalty program by consumers under the age of 30. The food and grocery market is set to grow by almost ZAR 200 billion over the next 5 years. The growth will be particularly driven by the less affluent part of the market. The group has about 16% market share in the formal grocery market, but only 11% in the less affluent part. This is a big opportunity for us. The good news is that through Boxer and Pick n Pay Value, we are gaining market share in this segment of the market. We also have work to do in the middle and the more affluent parts of the market, and I will say more about our Select store plan in a moment. Project Future is our program to increase efficiency and modernize our operation. It was launched with a target to save ZAR 1 billion over 2 years. I'm pleased to confirm that we are on track to deliver this target. Savings from Project Future are funding our current investments into lower prices and better value for customers. Having an efficient, flexible and centralized supply chain is one of the key enablers of any successful modern retail business. In the first half, we achieved year-on-year improvements in strike rates and product availability. In 2023, we will be opening a new DC in Gauteng to replace our current facility at Longmeadow as our central hub in the province. The new DC will be 45% larger than our current one and will add 50% throughput capacity. It will enable us to increase the picking productivity and reduce our cost per case. Boxer is a real gem in the group. Marek and his team have done a brilliant job growing the best discount business in South Africa. Its progress in the first half was especially notable given that Boxer was disproportionally affected by the unrest. Boxer continues to delight customers with unique deals and campaigns and continues to gain market share in key categories like commodities. I have learned that in South Africa, there are categories where the category name and the brand name are synonymous. And yet, in this highly brand-conscious market, nearly 1/3 of Boxer sales comes from owned and confined label. It's the price, it's the quality, it's the consistency, and that's what our customers want. Boxer has centralized 64% of its supply chain and will soon add the second distribution center to its network. This will add 25,000 square meters of capacity starting in the next financial year. Strong organic growth has been at the foundation of Boxer's success. In the last result, we indicated our willingness to look at the Cambridge and Rhino assets. We did appraise the possibility, but are confident that we can grow Boxer better, faster and cheaper without this deal. Pick n Pay Clothing stores are another gem in the group. We are strongly positioned in the market with our unique proposition, superb quality at great prices. Our range now spans the whole family, and the team continue to experiment and innovate. Hazel and her team have delivered a truly excellent result over the first half. In an increasingly competitive market, our clothing sales, including clothing sold in our supermarkets, grew more than 26% year-on-year. We have gained clearly 1% in clothing market share since financial year 2019, including in the critical, highly competitive womenswear category. Nearly 40% of our clothing is now locally produced, and we have been working with local designers and custom limited edition ranges. The picture on this slide are examples of some of these collaborations. Pick n Pay Clothing online store was launched last year. Today, online sales already account for 1% of our all clothing sales. We are so excited by the e-commerce possibilities in clothing that we have partnered with Zando to increase our availability online. Omnichannel retail is critical to our future. This year, we relaunched our Bottles on-demand app, asap!, with dedicated in-store pickers and a relentless focus on picking accuracy and order execution times. asap! gives customers more of what they want out of on-demand grocery: fast delivery times and accurate picking. On-demand sales grew over 100% year-on-year in the first half. Just as impressively, asap! has grown more than 200% since it launched. And asap! was available from 130 stores at the launch, and we have a major store rollout underway to enable asap! delivery from 50% of our supermarkets by the end of the financial year. Pick n Pay online scheduled delivery sales continue to be higher than before the pandemic. We have always approached business in the Rest of Africa as cautiously, prioritizing steady growth over quick wins. The Rest of Africa segment continues to be profitable for the group, and we have seen steady revenue growth in local currency terms. Hyperinflation remains an issue in key markets, but we are encouraged by our robust performance in Zimbabwe. Zambia had a difficult period, but there are green shoots emerging. Gareth and Lerena have already highlighted the devastating impact of the civil unrest in July. This image is the outside of our Springfield store, the day after the worst of the looting. This store, like many others, was completely gutted. Across the Boxer and Pick n Pay estate, we had over 200 stores similarly impacted. Some of our franchise partners were amongst the worst affected by the looting. We closed 551 stores as a precautionary measure, and these precautionary closures resulted in unrecoverable revenue losses. The safety of our customers and staff is always paramount, so closing these stores was absolutely the right thing to do. I visited KZN and Gauteng immediately after the worst of the looting. The devastation I saw, often in communities already reeling from the challenges of the pandemic, was disheartening. As shopkeepers, we instinctively knew that the minority of people breaking the law were massively outnumbered by the majority of decent people who needed to buy groceries to feed their families. So even as the lawlessness was unfolding, we prepared a plan to reopen our stores. It is in the tough times when we really show our values. The response of colleagues to this crisis was nothing less than extraordinary. As soon as the store could be deemed safe for our staff to return, colleagues were fully engaged, working tirelessly to clean up, restock and reopen our stores. It was truly inspiring to watch what the business could achieve when driving toward a singular purpose. This picture is the same Springfield store just a few weeks later, cleaned, restocked and open to serve customers. The group has some superb strengths. I've already said that it is a loved brand with a rich heritage. In Boxer, we have the best discount in Africa. There are strong opportunities to drive future growth through clothing and omnichannel. And understated strength is the innovation, entrepreneurial spirit and commitment of our franchise partners. In Smart Shopper, we have the most loved and used loyalty program in South Africa, and we have a diverse and talented workforce. We have strong values that are embedded in the business. These strengths are really the foundation of our future growth. But with those strengths, we know that there are areas where we need to improve. We know that our customers want even lower prices and better value, and we know that we can do better to provide more pricing consistency. I think in the past, we have been guilty of adding complexity. We need to simplify our operations to serve customers more better. We need to differentiate our offer in a way that is intuitive to customers, having a local focus so it is relevant to customers and gives them something to get excited about. A good part of our future growth will come from the acceleration of Boxer, clothing and omnichannel. We need to harness the benefits of digitization in order to increase efficiencies. And there is a significant scope to reduce cost in the business to fund the investments we will need to make. I've said that the last 6 months have been energizing. In retail, finding new and better ways to meet your customers' needs is a reason to get up every morning. I'm excited by the opportunities in this business and in this country. Some 6 months ago, I laid out my cornerstones for future growth. And now having been in the business for a half, I take the opportunity to update them slightly. My 5 cornerstones are: winning with people, making Pick n Pay the first customer's choice, growing the best discounter in Africa with Boxer, accelerating future growth engines and developing a local focus. I will unpack each of them a little more. I've been hearing this phrase left and right, and I've been told it's an African proverb. If you want to go fast, go alone. But if you want to go far, go together. Well, we plan to go far. Pick n Pay and Boxer are great organizations with great people at their heart. Retail is a people business, and winning with people is the only way to succeed. That's why winning with people is the first of my cornerstones. I believe in empowering the organization by putting the responsibility and decision-making at the right level. I think sometimes in a centralized organization, you end up with an ivory tower whereby everybody waits for permission or instructions. Our franchise partners are some of the best entrepreneurs, and their knowledge is one of our most valuable assets in the group. Introducing more of this in the rest of the business would challenge us and help us to grow. I want to create a performance-driven culture at Pick n Pay. We have already started on this path, and we are aligning incentives more closely with the right metrics. We are transitioning to a hybrid working in the support offices. We have embarked on a vaccination drive across Pick n Pay and Boxer, and we are actively encouraging our staff to get vaccinated. Let's face it, COVID-19 will be with us for a while, and vaccination is the most effective way to stay safe and enable people to interact in person safely. To ensure that we are the customer's first choice, we need to increasingly be customer-centric. We need to simplify the Pick n Pay business so that our offer is better defined. This will allow us to deliver more consistently and ensure that expectations are met. We need to increase our investments in pricing and promotions to ensure that customers get the products they want at a great price. We must focus more intendedly on our owned and confined label. In order to fund this, Pick n Pay still needs to get leaner and more efficient. That's why I'm announcing today a new ambition on the Project Future to deliver ZAR 3 billion in additional savings over the next 3 years. Project Future is more than just saving money. It's about our determination to modernize and become adaptable so that we can serve customers in an even better way. Our Select plan started by taking the time to really research and understand what customers in the more affluent segment are telling us. We revamped a small number of stores initially to trial some of the innovations. We introduced new ranges with a focus on high-quality fresh produce, added convenience, plant-based solution, healthy eating solutions and unique grocery lines. We introduced a new look and feel with changes in the flow of the store and innovative displays. This has been launched in 24 stores of our Select part of our business to date. All 24 Select stores have stronger sales and profitability, and we will add an additional 16 stores by the end of this year. The second phase of Project Future will see us modernizing work, increasing efficiency and saving to reinvest in the customer. Our target to save a further ZAR 3 billion over 3 years is highly ambitious, but I believe we have the right initiatives to make it a reality. The initiatives include building our office of the future, which will streamline our way of working to unlock efficiency gains; increasing our productivity across operations and getting more flexibility in our store estate; optimizing our supply chain to make it more efficient; and a better cost management across the business. Boxer is a fantastic business, as I have described. The goal of every great retail business is to serve more customers. And we have an ambition plan to add 200 new Boxer stores over 3 years. There is also the opportunity for Boxer to open more liquor sites adjacent to the stores. To service these stores, we will require additional capacity, and we have plans for this with the new distribution center. I've already spoken about our plans to accelerate asap! by adding 76 more sites by the end of the year. This will make asap! available to 50% of our Pick n Pay supermarket estate. I also believe the scheduled delivery will be crucial and a growing part of our omnichannel future. It fulfills, though, a slightly different customer need from asap! And therefore, we plan to invest more in our online scheduled delivery offer. We plan to grow our clothing network and continuously innovate our range. We will develop a proposition for the less affluent market that continues to uphold our overall clothing plan, superior quality at great prices. This will be a big priority over the next 6 months and beyond. We will simplify decision-making across Pick n Pay so that we can tailor our offer better to the needs of local customers. We need to build a greater innovation mindset in our stores, improve the local focus of our promotion and strengthen our regional buying where it is important to our customers. I would like to say a huge thank you to all of our teams, our franchise partners and our suppliers. Many have had to show tremendous amount of strength over the last 6 months, and many more have had to go and above beyond the call of duty just to ensure that we remain open. When extraordinary effort is required, extraordinary people stand out. And in Pick n Pay and Boxer, we have extraordinary people. Over 20 franchise stores were completely devastated. Many like [ Bonnie ], who owns Pick n Pay Protea Boulevard, saw a lifetime's worth of work destroyed. I visited Bonnie and many others in the wake of the unrest. And what I saw from our franchise partners was incredible, a steely determination to recover, restock and reopen, and ethic to work tirelessly night and day to make that happen despite their own personal disappointment and financial impact. I saw the same in our corporate store managers and distribution center staff. Our KZN distribution center was severely damaged. There was not a single project left on the shelf. But through the teamwork and steady work from Werner and his team, the KZN distribution center was restored to full functionality within weeks. We plan to go far. Pick n Pay is on a journey. We aren't at the beginning of the journey, for sure. We have over 50 years of great heritage, so we are definitely experienced. We also certainly not at the end of the journey because we know the potential of this company and we see the potential of this country and, indeed, the continent. But we are at a critical juncture. One must use every bit of our experience to unlock the fantastic opportunities we see in the future, and we are determined to do so. I would like to thank you for listening and taking the time to be with us. And with that, I would like to hand over and open up the floor for the webcast now to take questions and answers. Thank you.

Thank you, Pieter.

We have got quite a number of questions that has come in. Nandi Qubeka from Nedbank. Please, can you specify in which areas the new Project Future aims to remove cost and inefficiencies?

Yes, you referred to the Project Future of ZAR 3 billion. First of all, we -- I inherited a great team that has been able to demonstrate successfully the Project Future 1 and the savings attached to that of ZAR 1 billion over the last 2 years in an environment which was highly disruptive. So I think that gives me a lot of, yes, commitment and convincement that we will be able to do that in the future. What are now the key areas in relation to that ZAR 3 billion? First of all, in the way we have organized our buying structure, buying better, buying more organized, buying more competitive and exploring as well the opportunities we have on a local basis. The second one is, of course, in the way we structure our business from a support perspective, our support offices. It's what we call the office of the future. And I think in that respect, the last 18 months, we have gone through a great learning curve. You talk about the way of working in a hybrid environment is something that we will bring forward as well. The third topic that should contribute to Project Future 2 is furthermore an improvement and greater productivity across all levels of the operations by increasing our store estate on one side, but as well further working on when it comes to further flexibility within our workforce. The fourth one, of course, is better value through an improved cost management is what we call goods not for resale and a more flexible store estate and further enhancements when we talk about our systems and further digitalization. The question subsequently, of course, is what are you going to do with those savings? We will continue to reinvest those savings in our pricing by continuing to further improve the pricing, the price perception and the competitiveness in order to serve customers in the best way we can.

Thank you, Pieter. The next one is from Paul Steegers. Paul, I think your -- you've got a number of questions here. The first one, I think, Pieter has just asked -- answered. You're also inquiring around the Project Future initiative. The second one from Paul Steegers, he's asking us to give more disclosure regarding our clothing and our Boxer business. Paul, I think you would agree that we have endeavored to give additional disclosures to assist with your analysis, and we will continue to do so. A third question from Paul. Pieter, can you give some color on trading in H2 to date in terms of revenue growth? And what is the outlook for internal food inflation for the full year?

Yes. Well, you know, Paul, that officially, we don't give forward-looking statements. But let me give you a little bit color about what happened since August. Definitely, we have seen that the lifting of the trade restrictions had a positive impact on our business. Clearly, we have seen that back when it comes to an increase of traffic to our stores and a positive impact on the associated baskets. So the lifting of trade restrictions definitely had a positive impact. Nevertheless, we remain cautious because the aftermath of the July riot resulted in a softer retail market in August, not only with us, but across the board. So that's something to be aware of. Subsequently, we're also still living in an environment with a lot of volatility and uncertainty as a consequence of COVID. There is an objective that at least 70% of the population has at least 1 vaccination at end of this year. I have high doubts that we will realize that if I look at the current progress. So the fourth wave is around the corner. And there are 2 other elements in that. We have still 45 stores within our network that are closed. And subsequently as well as not all stores that were damaged are operating yet at full capacity. We're working very hard in order to get that done as soon as possible. On the second question in relation to inflation, we have managed to keep our internal inflation below CPI for the first half year, 3.6% versus 6.5%. And we will continue to make every attempt to shield our customers from the worst effects of inflation driving -- driven by macroeconomic environment.

Another one from Paul. You highlight CapEx will remain elevated for the next 3 years. Besides the ZAR 2.5 billion CapEx this financial year, what is our forecast for FY '23 and FY '24? Paul, I think at this stage, we can guide that it will be similar levels to what you are currently seeing in this current financial year. And as I think I've mentioned, it does exclude any long-term investment in distribution capacity, which will be over and above. Then a final one from Paul. Pieter, do you have any operating margin targets given the ZAR 3 billion of new cost savings over the next 3 financial years?

Project Future for all of us as a team within Pick n Pay as well as in Boxer is about building a modernized business. That's our first priority. And it is -- the savings that we take out of Project Future, we continue to continue to invest in building a better customer value proposition. And this will lead to an increased profitability in the long term. And yes, our objective and our goal is to return to historical profits, which we once enjoyed of around and about 3%.

The next question, also a few questions from Yaser from Ninety One. Pieter, what is the overall strategy with respect to buying out franchisees? Why are we seeing that some franchisees might be selling their businesses?

First of all, franchisees are a very important part of our family. I think that's what I stated earlier. They are the source, what I call, of entrepreneurial spirit and driving innovation. But okay, talking about buying out franchisees is not something that you do every day. We continuously review our store estate and our store -- and our strategy is to remain flexible across all sales formats that we have within the business. So it's not a strategy as such, but that happens once in a while.

The second question from Yaser, also around the ZAR 3 billion targeted savings. I think, Pieter, you've addressed most of these queries. Yaser, you're also asking when the previous ZAR 1 billion of cost savings were announced, where did that actually play out? So we are very confident that it will play out over -- towards the end of this financial year. And we guided that ZAR 600 million was already delivered last year. It is done across both the gross profit and the trading expenses line as the efficiencies in supply chain and our support office costs gets realized. However, we are reinvesting in the margin. So you won't see all of that just fall through to the bottom line. Then a third question from Yaser. Pieter, how many Select stores are there? And what percentage of these will be refurbed and upgraded over time? And are they margin enhancing for us?

Yes, thanks. Thank you, Lerena. And thanks, Yaser. First of all, we have around and about 100 stores in our network, very important stores when it comes to serving the more affluent part of the market. By the end of this calendar year, we will have refurbished around and about 40% of them. And yes, they are more profitable. The initiative that we have started and that I've just shared with you a couple of months ago start bearing fruits. So initial results are very, very encouraging from a customer experience perspective, but also we talk about -- when you look at the sales, but also from a basket mix perspective. So I think very encouraging, and that's something we continue to drive innovation in order to serve customers in a more and an efficient way is key in every part of the segments of the market in which we serve.

A fourth question from Yaser. How much rand value of the additional security and other riot-related cost will become permanent? Yaser, at this stage, it really is difficult to determine. We're still in an environment that is evolving. I have guided that there was around about ZAR 65 million that we haven't accrued for in terms of business interruption in this result and that we expect that, that will be offset in the second half by increased costs. But we will keep you updated as the environment stabilizes. And then the last one from Yaser. How much of Pick n Pay's clothing product is sourced locally? I think Pieter did address that in his presentation. We were, prior to the unrest, around about 11%, and that's increased to 38% for this half and has really stood us in good stead to ensure stability in supply in an environment that is disrupted in many ways. The next question from Sa'ad from Nedbank. Is it fair to assume that a 20% GP margin for H1 on a normalized basis? And is it similar normalized expansion for the full year? Sa'ad, given the half that we've just been through, it really also is a challenge to be crystal clear as to what that GP margin would look like for the second half and for the full year. That said, given no further disruptions, that would be a safe place to start. What I can also guide is that we will continue to look for efficiencies and then reinvest in price. And ultimately, we will be focusing on managing the overall P&L, as Pieter has indicated, because we do believe that we need to return to historical profit margins. Second one from Sa'ad. Pieter, you mentioned that Boxer and Pick n Pay is gaining market share in the lower end. Who are you gaining that market share from?

Yes. Sa'ad, it's a good question. First of all, it's an extremely competitive market. It's the fastest-growing market in that segment in the formal market with a lot of players operating, including some of our nearest competitors. We are winning customers because of a few reasons. First of all, excellent assortment, excellent execution, excellence in price as well as offering alternative solutions when it comes, for instance, in the Boxer arena when you talk about confined label, and I've highlighted that in my presentation. And it is an exciting segment of the market that we will continue to grow as we have indicated, and we have sufficient opportunities to further penetrate that part of the market when it comes to the new number of stores that we plan to open in the coming years.

We've got a question from [ Bile Dudla ]. I also think we've answered this one, the plans on realizing the ZAR 3 billion of savings. Then a question from Funeka from JPMorgan. How much of the GP margin improvement is attributable to the mix change, liquor and clothing outperforming and the increased private label participation? Funeka, the gross profit margin evolution in this half, as I've illustrated in my presentation, has been severely impacted by the trade unrest. And therefore, we attempted to give a normalized view across a 2-year view. Through that process, effectively, we know that we've got efficiencies in the business that is adding on 0.6% and that we've reinvested in price. As for the contribution due to the disruptions in the base, we guided at the end of the half last year that we lost close to 0.8% of the margin due to the higher-margin categories being restricted from trade. Most of that has returned, but not all. We still have some hot food, delis, et cetera, that is not operating as it used to as customer behavior changes. And as for the private label participation, it is margin enhancing for the group as a whole. And specifically in our Boxer business, this is an important lever for them. However, that does not move the dial on an overall level in terms of the gross profit margin percentage. Then I've got a number of questions on online. It is Nandi Qubeka from Nedbank. Funeka has also got questions around our asap! progress. [ Nomtombo ] wants to have clarity as to what is our progress on asap! and the forward-looking data. Pieter, can you maybe give us some guidance?

Yes. I think, first of all, omnichannel is clearly a new growth driver in our business. And I think with the relaunch from Bottles into asap!, I think we have clearly demonstrated our appetite in relation to the market. More than half of the customers since that relaunch are new customers. I think that's an important one. And what we also do see is that people like the app and the way we execute and the way we serve our customers when it comes to our on-demand offering. We see that they're returning for subsequent orders, and it's because we are working hard in the background to make sure that our orders are strong and well executed and delivered on time. The good thing is that we also do see that we're going to increase the number of customers that we will serve with this part of the value proposition as asap! by making it available by the end of the year to at least 50% of our store network that we have in the country, including our franchisee community. And I think that is a very good of encouragement. I think there's another thing that I would like to highlight. It brings more disruptiveness in the business. And I think that is important as well when it comes to working in a new way, thinking in a different way and working when it comes to continuously working out new innovative solutions to serve customers going forward. So for me, the topic of omnichannel is a key strategic pillar for Pick n Pay going forward.

David Smith from Investec is also asking some -- for some insight into the trading period after period. And Pieter, I think you've already addressed that question. So maybe we've got time for one more. There is more than one that echoes Kgosi from Citi's question. Can you please comment on the impact of global supply chain challenges on the group as well as potential supply chain-led inflation?

Yes. Well, the good thing is when you talk about supply chain, the majority of our business is food and grocery business. The good thing on there is that 95%, we do source locally. So the vulnerability we have when it comes to imports, we are less dependent on. Nevertheless, there is a highly likely [ outturn ]. We have -- we do see that as a consequence of disruption imports, increase of oil prices, that there might be some impacts in categories, be it like general merchandise. Now Derick and his team is on top of that by doing some forward buying and making sure that we do have stock availability during the festive season. And I think you just alluded to that, what Hazel was doing is we had, in 2019, with our clothing business, only 10% that we produced locally. It is now close to 40%. So the vulnerability that we have is becoming less in that part of the business. But I think we have, overall, and that should be -- should give some confidence we have good and strong mitigation plans in place.

So thank you, everybody. I think I'll close off there. If there's any of your questions that we didn't get to or that you need more clarity, by all means, please reach out, and we will assist. Thank you very, very much for your time today.

Thank you for your attendance, and looking forward seeing you soon in person. Thank you.