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

Okay. Good morning, everybody. Welcome to the Pick n Pay interim results presentation. Firstly, I need to apologize for my voice. Nothing I can do about it. I lost it this morning. And hopefully, it will last. I should maybe borrow Lerena's water here, I saw her filling it up with vodka a little bit earlier. Thank you very much for coming. A little bit short notice. We decided to go to have a physical meeting, and welcome to our people who are watching us online this morning. I think this is the first time we've had a formal public face-to-face meeting, I think in 4 years. Last time was in -- David tells me in October 2019. So it's great to be back here to have you all here. And I'd like to welcome a lot of the Pick n Pay executives. We've got a few of our directors here. Welcome our new CEO, Sean Summers; and particularly like to welcome our Honorary, Life President [ my mother, ] Wendy Ackerman. Thank you very much for being here with us this morning. And the directors don't normally come, but it is wonderful to see them coming to this presentation this morning. Thank you. This is the first time I've addressed you since the founder of Pick n Pay, my father Raymond Ackerman passed away last month. And I really would like to thank everybody for the really kind condolences, messages of support and just outreach that we've had from so many people, so many organizations. It's been absolutely heart warming and most appreciated by the family. The sympathy and the support has really overwhelmed all of us, and thank you very much. It really goes to underscore what a caring and special person our father was. He had a great passion for Pick n Pay and all its people, and we will work really hard to continue and to rebuild our father's great legacy. The 6 months from March to August were among the most difficult South African consumers have had to endure in recent years. Load shedding reached its worst level since we first experienced it in 2008. This has had a disproportionately negative impact on the retail industry. Food inflation topped 14% in March, its highest level in 14 years, and the price of fuel has risen this year alone by over 20%. Interest rates have also reached the highest point since 2009, thanks to 10 successive increases since the end of 2021. All of this has proved to be a potent cocktail that has once again put consumers under extreme financial pressure. When I spoke to you a year ago, I referred to several worsening problems in the macroeconomic and socioeconomic fears. Today, we are disappointed that we have seen little or no progress in them. In short, South Africa is negotiating one of its most turbulent periods since 1994. And there is significant uncertainty about the country's future trajectory. The performance of Pick n Pay to some extent, reflects the difficulties in the economy and the society. Even though we are proud of our efforts to support consumers with lower prices and to keep internal price inflation well below CPI food, there is no avoiding the conclusion that the group's results is extremely disappointing. There are, however, some encouraging signs and the Pick n Pay story is really one of 2 main operating brands, Boxer and Brand Pick n Pay. Boxer delivered double-digit South African sales growth and is the main growth driver for the group at the moment. There are now 454 Boxer stores countrywide, each of them delivering on the promise of the lowest possible prices, and they are supporting millions of lower-income customers through this challenging period. The group will continue to support the continued growth and expansion of the Boxer brand and I really need to congratulate the Boxer team on their performance in this very difficult and extremely competitive market. Under the Pick n Pay brand, the same can be said on the Pick n Pay Clothing division, where sales stands -- where sales of stand-alone stores also grew in double digits leading the market. This is proof that this strategy is working. We've seen superb online sales growth, driven by strong growth in our on-demand platforms, asap! and Pick n Pay groceries on taking off Mr D app. Income from value-added services also grew encouragingly as the group focused on maximizing opportunities in banking services, financial services and mobile. We are encouraged that our businesses in Zambia and Zimbabwe also have performed really well. Notwithstanding, we see incredible political issues in Zimbabwe. Our franchisees continue to be a core part of our business and it's important to acknowledge their continued contribution to the group. More than 40% of our 1,599 Pick n Pay stores in South Africa are earned and run by franchisees and they have epitomize the entrepreneurial spirit my father displayed when he began Pick n Pay in 1967. The performance of our Pick n Pay business, however, has not met expectations. The Board reflected on the latest performance of the Pick n Pay grocery business and resolved that decisive action was required if we wanted to turn this business around from its current trajectory. The Board has appointed Sean Summers as CEO with effect from the first of October to lead the company, and he's doing this with immediate effect. Later in this presentation, you will hear from Sean, who will have more to say about his first impressions. And just as an aside, we've had a number of discussions and Sean has met a number of people around the company over the last week or so since he's been here. And it is really exciting to see the enthusiasm and excitement that he is engendering into the Pick n Pay people. The Pick n Pay Board's mandate is to focus on our core retail business as a priority. During our earlier years, consumers felt a close connection with Pick n Pay. They felt the group was on their side, and that sentiment led our group the clear grocery market leader in South Africa. Sean's task will be to reestablish that connection, to rekindle customers love for the Pick n Pay brand and to make it a meaningful part of their lives once more. Concurrently, the other levers of the company need to continue to be developed. The key element of the shopping experience will be improving levels of customer service in our supermarkets by energizing staff and focusing their efforts. We recognize that we need to improve our relationships with our suppliers, understanding their businesses and supporting them in a mutually beneficial way. We need to optimize the performance of the 130 stores that we have upgraded in the last 18 months, ensuring they achieve an appropriate return on investment. These are the nonnegotiable basics of retailing. They've served Pick n Pay well for nearly 60 years, and they will continue to do so in the future. In Sean, we have a globally experienced world-class retailer who understands these basics and how to implement them better than us. And we have every confidence in his ability to build back the heart of what Pick n Pay does best. I'd like to thank Pieter Boone and his team for the dedication they've shown in the year to date. The high cost of load shedding in particular, has taken the glass of their achievements. But they can be proud of the way they have delivered in most of our defined strategic pillars. I would particularly like to thank our staff and stores throughout South Africa and the 6 other African countries where we operate for their hard work and ongoing commitments. I'd now like to thank Lerena Olivier to present our interim results. Lerena, thank you for your excellent leadership, particularly over this very difficult period. It's appreciated. Thank you.

Thank you, Gareth. Good morning, everybody. It is good to see -- thank you -- physical faces. It's been a very challenging half. As Gareth has mentioned, our customers have been battling with high inflation, interest rates and load shedding has become a way of life. All our customers are under pressure, but none more so than our heartland customers. In these very challenging times, we've set focus to try and deliver as much as possible value for our customers and our internal selling price below that of CPI food is destiny to that. However, as Gareth has indicated, this has come with the cost. Load shedding has increased our expense lines. But with margins under pressure, specifically in Pick n Pay, Pick n Pay had very limited ability to respond in an increasingly promotional market. As a result, the group delivered a disappointing turnover performance of 5.4%, 2.3% on a like-for-like basis. Our gross profit margin declined by 90 basis points, and I'll give more detail on that decline in the later slides. And our expenses increased by 13.7%. Although our trading expenses were well controlled at 5.7% on a like-for-like basis, the group delivered a trading profit of only ZAR 31.8 million. For context of the result, it's important to note that the trading profit did include ZAR 565 million of abnormal and one-off costs, ZAR 190 million of that is net incremental energy costs due to relatively high levels of load shedding this half than in the base last year. We had ZAR 259 million of once-off people restructuring costs relating to our VSP and junior store management program. And we had ZAR 160 million of duplicated supply chain costs as we transit from our Longmeadow to our Eastport distribution centers. However, excluding these costs, the trading profit was ZAR 596.8 million, still down on that of last year. Our South Africa operations, which is 96% of our business, grew turnover by 5.1% like-for-like 1.8%. As Gareth has indicated, this was driven by a very, very strong performance of our Boxer business, up 16.1%. Despite the pressures in the market, we continue to invest in our growth engines and they delivered pleasing results. The Boxer turnover growth has resulted in them being up 50 basis points of group participation to 33%. This was supported by space growth of 10.2%. Our clothing division grew 13.8%, 4.4% on a like-for-like basis, with [ clothing ] space increasing 13.5%. Online sales delivered growth of 76.3%. If we look at what on-demand did on our asap! and Mr D platform, that turn over doubled, something that we are very proud of. The group's liquor business, sales were up 9.3%, with space growth of 5.7%. We opened 26 liquor stores during the period, bringing the estate now to 669 stores. Pick n Pay South Africa across both Pick n Pay and QualiSave banners grew turnover 0.3% like-for-like 0.8% for the half. Relatively lower levels of load shedding in the second quarter did allow Pick n Pay to reintensify its promotional campaign and the sales momentum improves from a contraction of 0.4% in the first quarter to growth of 1.1% in the second quarter. We continue to prioritize the like-for-like sales across the Pick n Pay banner, and we closed nonprofitable stores with a negative retraction of 4 in owned stores and 7 in our franchise business. Boxer South Africa, as we indicated, had high sales growth, and it exceeded its sales growth momentum across both quarters. This was driven by a strong store opening program and like-for-like turnover growth of 4.2%. As mentioned in my opening remarks, we continued to try and ensure that we give the best value for our customers. We are operating in a depressed economy with persisting high inflation and consumers are under severe financial pressure. During this half, we contained our internal selling price inflation to 8.3% compared to CPI food of 11.4%. South Africa's leading soft-discounter, continue to deliver strong organic growth. Customers increased 14.6% for the half. The business opened 27 new stores compared to the 26 of last year. These were predominantly liquor stores. However, during the second half, the supermarket ramp-ups will increase. The team is guiding 50 -- 55 stores for the second half. This is below the original guidance at the beginning of the year of 75. The business has got full capital allocation. And the lag between the guidance and what will be achieved this year is purely as a result of timing. We've got a strong store opening pipeline, and we're on track to deliver the 200 stores by FY '26 and doubling sales for this business unit. It's through Boxer's sales momentum, an extremely efficient operating model that they were able to weather the storm of this half. And we foresee that Boxer will grow full year earnings in FY '24. Our Clothing stand-alone stores, they grew their sales by 13.8%, 16.5% on a 2-year CAGR basis, well ahead of the market. The division gained market share across multiple segments, but the highest market share were gained in men's and kids wear. Hazel and her team is on track in growing this business. They've reopened a flagship store in Sandton recently and they will be producing 3 collaborations with leading South African designers in their future wear program this year. They've opened 20 new company-owned stores and are on track to deliver the 60 we've guided at the beginning of this financial year. As I've mentioned, online has delivered strong turnover growth backed by doubling on demand on asap! and Mr D. Our online execution continues to be ramped up. We now have 25,000 articles on asap! delivered from 500 stores. our reduction in order preparation time is 56%, and there's a 20% improvement in the delivery time. All of this is underpinned by a world-class AI search engine. To be honest, that can even correct my typos. We've launched the asap! app. It's got a great new fresh look and feel and is really a better shopping trip for the customers. I can see some nods in the audience. asap! combined with our offering on Mr D, through that, we have got 2 channels that we are very well positioned to grow in this dynamic market. Our gross profit margin at 18.5%, contracted by the 90 basis points from the 19.4% last year. The first item to note is a reallocation of 30 basis points between our gross profit and our other income. The reason for this is that we are in a journey with our franchisees to modernize our franchise model. The objective is to create a win-win scenario where both parties benefit. Ultimately, we want to offer the franchisees an improved cost and therefore, support their profitability while we benefit from increased volume and franchise fees. We started trialing that model during the second quarter of this half and early results are positive. The model is broadly cost neutral for us for this half with future benefits for both parties into coming financial years. As a result of that 30% reallocation, you will see that our underlying gross margin on the chart is 19.1%. That gross profit margin was negatively impacted by the duplication costs of ZAR 116 million for the transfer from Longmeadow to Eastport and a once-off 0.2% reduction is reflected in this half. Our underlying gross profit margin, however, contracted by 40 basis points. The reason for this is increased promotional participation as well as a reduction of supplier incentives received. Lower supply incentives were partly due to the cutback of our CVP revamp program during this half as part of our prudent capital approach and the related supplier support reflected in the base was not repeated this half. Our other trading income, excluding the cost neutral impact of the franchise model and the insurance recoveries in the prior year base grew 7.3%. Our franchise fee underlying income grew 3.8% and our value-added services included in our commissions and other income line was up 13.5%, supported by our banking and financial services. Value-added services remains a key growth driver for the group, and we believe that there is a lot of value that we can still unlock in this line in the future. Our trading expenses increased 13.7%, excluding the abnormal costs, 9.1% with like-for-like up 5.7%. The increase in the trading expenses overall is broadly as a result of 3 items. The abnormal costs, as I previously articulated of ZAR 565 million. the growth in our new store rollout program both in Boxer and in Clothing and exponential increases in load shedding, security and insurance costs in South Africa. The underlying cost control illustrated by the 5.7% remains strong. And this reflects ZAR 124 million of energy savings as our energy saving initiatives starting to bear fruit as well as Project Future savings of ZAR 334 million. Driven by procurement of good stuff for resale and ties to scheduling and multi scaling. Our project future initiatives are on track. The increase in our employee costs, our largest expense line reflects that. Excluding once-off costs, employee cost was up 5.9%, but on a like-for-like basis, only 2.8%. As Gareth has also articulated, the impact of load shedding continues to have a profound impact on the group and the country. All our stores across both the Pick n Pay and Boxer estate have generated and are fully operational during load shedding. However, we have incurred a full ZAR 396 million of diesel to run these generators during this half. And as I've mentioned, ZAR 190 million of estimated net incremental costs has been added. We've made good progress on our energy savings, and we are on track to deliver the ZAR 200 million we've guided that we believe we can optimize this half. However, the impact of load shedding remains. Not only on the cost line, but also on customer disruption on our supply chain and procurement. The team remains focused on this challenge. The group's Rest of Africa segment contributed ZAR 2.7 billion of turnover on a constant currency basis, up 12.2%. The profit contribution of 84.2% is down 36.2% year-on-year. This was largely driven by a decline in our Zimbabwe profitability down 55.8%, as the impact of hyperinflation and currency evaluation in the country impacted the profit contribution in Rand. This was offset to a certain extent by the profitability in the other countries we trade in. Trading in the Rest of Africa remains a challenge. The group's net gearing at the end of August was ZAR 3.8 billion. This is an increase of only just over ZAR 100 million from the 3.7 million at the end of February. The limited increase in gearing, in spite of the trading loss recorded, reflects maintains focus on working capital management and prudent capital allocation. We have also raised ZAR 5.5 billion of long-term debt of which we've drawn down ZAR 4.5 billion and half of the group's funding facilities is now long term in nature. The group's net debt to EBITDA, excluding one-off costs is at 1.6x, in line with what we've guided for this half. There was more detail on the gearing position in the appendix to the slide presentation that we've uploaded on to the website. The cash flow profile for the last 6 months illustrate our underlying focus on ensuring that the free cash flow was optimized in a very challenging trading period. Our focus will remain on strong liquidity in the second half of this year. The group released ZAR 2.1 billion of working capital liquidity during this half due to focused programs to ensure that we optimize this in very important funding line for the group. This was supported by an inventory decline of 6%. The unwinding of ZAR 400 million worth of stock, which we had duplicated at the end of February due to the Eastport, Longmeadow transition has to be fully unwound. And I would like to actually take this opportunity to congratulate [ Masel Bison ] and his team for a very smooth transition to one of the largest distribution centers in Africa. But importantly, the entire team focused on ensuring that we clear exit stock. We sell through investment buys, and we improve overall stock efficiency. And as a result of that, we released ZAR 1.3 billion worth of working per capital through this process. We've invested ZAR 1.9 billion in capital projects during this half. As guided at the end of our FY '23 full year results, we were going to follow a prudent capital allocation given current uncertainties in the trading environment. Our focus, however, remains on our growth engines, Boxer, omnichannel and clothing, and these business units have received full capital allocations. We have, however, reduced the plan rate of CVP conversions with an impact on supply incentives, as I've detailed previously. We've successfully sold our Longmeadow distribution center that resulted in a ZAR 500 million worth of cash inflow. So our net capital outlay for the half is ZAR 1.4 billion compared to the ZAR 1.5 billion last year. Guidance for the full year remain at approximately ZAR 4 billion worth of gross CapEx, ZAR 3 billion net of proceeds of asset sales. This includes the investment in TOMIS, a state-of-the-art abattoir, meat packaging and processing business, which will allow the group to reset and really improve its fresh meat offering to our customers and to our franchisees. The group recorded a pro forma loss of ZAR 837.2 million, a disappointing negative 1.5% of turnover. This compares to the pro forma profit of ZAR 580 million last year at 1.1% of turnover. This chart illustrates the progression from last year to this year. Before taking into account any abnormal cost item, the loss was ZAR 272 million or a contraction of 0.5% of turnover as illustrated in the middle of the chart. So what was the reason for the decline in profitability? Firstly, the 40 basis points of pressure in our gross profit margin, as I have detailed. Secondly, 60 basis points from negative operating leverage. Although our trading expenses were very tightly controlled, ultimately, they outgrew our sales performance. And lastly, an increase in our financing costs, reflecting our increased gearing and increase in interest rates. All these elements resulted in an underlying pro forma loss of ZAR 272 million. In summary, this was a difficult trading period for the group. We had some encouraging successes that will definitely stand us in good state for the future. Our Boxer business continues to grow profitably. Our Clothing business continues to gain market share and our online on-demand sales across both channels of asap! and Mr. D sets us up for future growth. Our efficiency journey is on track. Project Future is delivering savings as planned, and we are focused on ensuring balance sheet stability through strong working capital and prudent capital allocation. However, there is no hiding from the disappointing performance of Pick n Pay. Looking forward, tough trading conditions are likely to persist. We are in a low-growth economy, our customers will remain under pressure. We expect continuing load shedding and there's an uncertain inflation outlook. There will be some reprieve from pressures for our H2 results relative to H1. The first is earning seasonality. Secondly, the non-duplication of the Eastport to Longmeadow transition costs and similar levels of load shedding expected year-on-year compared to last year as well as some project future benefits expected in the second half. All of that considered, however, given the tough outlook, we still expect that the H2 earnings are likely to be high -- to be behind that of H2 last year. Our key focus is now on revitalizing the Pick n Pay business under Sean's leadership. And with that, I want to hand over to Sean.

Thanks, Lerena. Morning, everyone. Thank you for being here and Wendy, welcome and colleague nonexecutive directors, the market everybody. Why are you looking so sad? It's not the end of the world. We can't even see it from here. It's just for me, a huge privilege and I like to be back in the place that I love. The place from my heart was -- I left you physically, but I think a little piece to me always remain here in this very, very special place with these very special people. And it's equally distressing for me as it is for all of us in this room, the family, Wendy, the shareholders, everybody, to see our beloved Pick n Pay in this situation. And you know what I always said in my previous time when I was with this company, that our relationship with the market, specifically with the investor market and analysts would always be one of truth because the problem in my entire life, and I started in this company in 1974, is it wherever you go and then people say, "No, what do you do for a living?" So you know we're on a gross salesman -- black bean salesman, I work at Pick n Pay and they tell you "but I was in the store, and this is wrong, and this cashier was talking to the shelf back, it was the talk backer." And so that was the story of my life. So this is no return to the set me once again, because I'm back being a green grocer. And the truth of our business is simply the truth. People know what we do for a living because what we do is on display. So for all of you very, very important bright people in this room that work in the investment market, your analysts and the like and work in all of these financial markets and that I've seen around the golf clubs while I've been taking a little bit of time off, I actually don't really know what to do for a living other than you do with the money that we give you to invest. You know what we do for a living. And the fact truth is that Pick n Pay has fallen out of love with its customers, with its people, with the suppliers. And this is what lies ahead of us. And this is why it's so exciting. Because from here, we go up. It's as simple as that. We will put back into our business, the energy, the passion, the love for this great, great industry that we are privileged to work in. Because it has the extraordinary thing for me, and I've shared this story quite a few times since I've been back with my colleagues. They all said, Sean, of your age now, what do you know? What do you understand? This is like one of my great Rob Rose call me, a pensioner, okay? What would you know as a pensioner? And I shared the story with them that the more things change in life, the more they stay the same. So when I was born and raised here, I was born in Capton in 1953, and I was raised in [ Palmerini]. And I remember when I must have been sort of 7, 8 years old, how my mother used to provision the home. And she pick up that old telephone, we used to dial like this for a lot of you, younger people in the room, we'd have to go to museum to see the phone that I grew up with. But my mother would dial the phone and order the groceries and a few hours after the fellow would arrive in a bicycle and bring the groceries to the house because there were no supermarkets in those days. And that's how we provision the home. There was a coupon in the milk bottle at the gate, and that's how the milk arrived. So if you really ask yourself today, I mean, what has changed? So the Internet has replaced that phone and asap! scooter replaces the Bicycle. We're not eating 6 times a day because of the Internet. We're eating the same fresh foods we used to eat, we eat the same food that we used to eat. So in essence, none of these things really change. And to a degree, the thing that really pleases me so much, is that we, to a degree, almost talk to those people in back and froth at that office that's on the other side over there, how to do this? Because if you think back to the original [ Gusalela ] campaign that we did in Pick n Pay in the late 90s where we refurbished every single store and put all the fresh on the floor and open up the dairies and the bakeries and the Tea shop and at a real love and passion for the people in the business. They just took our playbook and threw it back at us. So the question in this room from all of you and the very reasonable question is, well, what are you going to do? You're back and now what are you going to do with the business? Well, the simple truth is we are just going to execute properly. We're going to execute consistently. We're going to get the passion and the love back into the business again. We only get the passion and love for our customers back in the business. We're going to get the hearts and minds of the people back. Because that's so important because without that, you cannot run these retail businesses. And I mean, my time now that I've been away, I've been doing some advisory work for the world to sign off all over the world. And we had a place in Houston for 4 years. We lived in Houston for about 5, 6 months of the year. And in the apartment building that we were in, there was Whole Foods in the bottom as they call it in America, the Whole Check because it's fairly expensive to go and shop in Whole Foods. But I mean, I watch Whole Foods grow from really nothing out of Austin into this most fantastic business in America. And then it was bought by Amazon. You know Mr. Ben -- Bezos' mission to conquer the world. They bought Whole Foods. And it's just incredible to see how Whole Foods is just going like this because the passion has gone out of the business. And retail is it like passionate at the end of the day. You need to understand product, you need to understand placement. You need to understand the theater because we're in the attraction game in this business. And in today's world, the one thing that has changed is that consumers today have what I call a promiscuous lifestyle and that they have both a virtual and a physical relationship with the businesses that they engage with. So they'll do some online and they'll do some physically. But here is a simple truth. If you do not reward people today for their time, if somebody gets up in the morning and grants you their time to come to your store, your business and you don't reward them for that time. Guess what? They ain't coming back. They ain't coming back. You're going to have to do a hell of a lot to get them to come back. So we have to be truthful with ourselves. I mean you know it, you all shop in Pick n Pays, then you'll get it. Okay. You know, you can go into the stores and you can see it. So for us, this is the journey that we embarked upon. So to the very good looking, elegant, pretty well turned out people who we have today. We really appreciate you being here today. And one of the things that I said when we were talking about today's presentation is that for those of you who know me, those of you who don't know me, I'm more of a touchy feely kind of person. Not -- I mean this team's problem we have in this world today. Sharing with my colleagues here that in our business, we've got 90,000 associates roughly across the company, about 1,000 an [ Kanaloa ] support, 500 in Kensington and Johannesburg, and then Boxer, in case you didn't know, 500. So sort of 97%, 98% of our staff are at stores. They go to work, to work. What makes us so special here? Could you imagine that Russy, last Thursday, said to his team, "sorry, guys, I'm working from the hotel, I'll be in teams. It'll be a little arcade in the sand, you'll see me there, okay." So we're going to get a culture back in this business today that we are a team. We work together. We play together. We have fun together. We suffer together. And you know what, it's in the toughest of times, that the true metal that the true growth comes out from people. So Lerena, to you, Penny, all of your accounts team, all of you love me people who just ground away all of the long hard hours to put this together because when things are tough and the numbers are bad, it's even tougher to get up and show some strength in character and backbone and what have you. And when I have a look at the people in these buildings and we're off to go and get around the rest of the country in the next couple of days, when I have a look at the -- just the beautiful smiles, when you have a look at just at the beautiful willingness in people to actually get up, go forward and get it done. So yes, we are a little bit in the back foot at the moment. Make no mistake. We've been there before. We'll be here in the mid-90s. Everybody follows the cycles in the market because these things are cyclical, nothing ever goes up in perpetuity. So things do move in cycles. We've been here before. And with some of my colleagues from those days who's still around when I came in the room and in this room here, we had to do them marking groups of 200. And I asked them the first question was put your hands up, who was here when I was here last year, and there maybe be sort of a [ snacking ] of hands. And then you asked him the question who hasn't Googled me, maybe you get sort of 2 or 3 hands that would go up. But our people are extraordinary in this country. Extraordinary. It's one of the things that struck me, one of the great things for me being involved in the trenches in the standoff world, is it working in all of these different geographies from New Zealand to Australia to through Europe, France, Eastern Europe, England, America, nothing like South Africans. Nothing. You just get -- it's just like instantaneous what you can get out of people in this country. Who are the most beautiful people in the world, the most beautiful people in the world. And its through people that we will win at the end of the day. And one of the things that really -- Wendy, I mean, I said this on many occasions, one of the most beautiful things with me, were the sad thing with Raymond's passing, one of the most beautiful things was it in this world today, this divisive, horribly, polarizing world that we live, where you always get [ cratons ] on one side that are just saying poison out there into the world and all of this stuff. It was virtually none of it with Raymond. It was virtually none of it. There was this universal love, passion and respect for the man that did so much in this country for everybody. I mean I remember my formative young days in the late '70s, the early '80s in the really dark days in this country, when Raymond and Wendy were just breaking all of the laws. There was no such thing as toilets and canteens for color. I mean when you those with first housing schemes that you did in [ Soweto ] in those days in the late '70s, early '80s, housing loans for staff, all of these things. The legacy that Raymond created in this country beyond extraordinary, beyond extraordinary. And then the day that the news came out and I was returning nearly 400 whatsapp calls on that day. Every single one of them, positive. Every single one of them, we want our Pick n Pay back, and that's what we're going to do. We're going to give you our Pick n Pay back and we can only do it through people. We can only do it through our stores. We can only provide our people that passionize our stores, the optionality of coming in physically shopping with us virtually through asap! and all of those things. There's all of this reality out there in the marketplace that our friends from 6060, you've got this massive leap on us. We started it. We were the first ones in this space. So there's nothing really that special at the end of the day. It's all about execution and people. So that's what I want to share with you. Your big question, obviously, will be, how long is this going to take? That we say behind every successful person is a confused partner because they actually know who we are. So I'm -- why I'm sitting at home. I think -- I would like to think that she does think highly of me in that I'm a very special person, but I'm pretty realistic to think that just because I'm back here and I can generate some enthusiasm in the people and what have you, that Mr. or Mrs., whoever it is, samsonin has not just automatically going to go shop more in the store. It's not happening. It's not happening. We got to get to grips at the basics. And this will take a bit of time. So this is a journey we're on here. And from an investor and analyst perspective, obviously, you ask yourself the question, well, how long is it going to be? This may be a multi -- in fact, I can tell you, it will be a multiyear journey. This is going to be a 12 to 18, 24-month process because to turn this thing around fundamentally and sustainably, it takes that long. This is a big ship. This is a big ship, but we will do it. On the other side of the coin hands company, there are so many fantastic things. I mean I look at Boxer and I see what's happened in Boxer. It is absolutely just beautiful. Marek and their team. And you think it 20 years ago, when we were running around pursuing Pat Cos and Hubrand, who was then MD and Pat was a major shareholder in Boxer trading. And we bought the business from them. We managed to convince them to sell the business to Pick n Pay. It's turned into the most extraordinary business, most extraordinary business. You look in about growth in Boxer, just phenomenal. You have to look at the growth in textile, its beautiful. The job that hazel's doing in textiles, just extraordinary. As Lerena said and Gareth in the value-added services and that side of the business just fantastic. So we've got so many great things happening in the company. But we've got this heartland. This thing that's so special with Pick n Pay, Pick n Pay, Pick n Pay, we're sailing at the moment. Sailing. You know, one of the journalists when they were doing interviews with me asking the same question, they said, Sean, I mean after 15 years, what can you know? South Africa has changed. The state been going for 15 years. And I ask them, do you have kids? So they say, I've got 2. And ask them well, where are they? So there's another one kid, Chairman, my son is married, he lives in Canada. And I said, if you find your son in Canada within the first 3 seconds of the phone call, you know whether your son is in a good space, bad space, happy, sad. It's just the way it is. And I said, I've been around long enough to know, and I worked in Pick n Pay long enough, and I was privileged to work in Raymond's footsteps and be part of the growth and the creation of this company. To be able to claim a little bit of internal rights, just a small understanding for what this member is Pick n Pay. And I said, I think I know what [ Alsaciand ]. It's not that complex. And as I've just been getting my knees under the desk here and looking under the hood, and seeing what's going on. I have to be honest and share this with you. There are a lot of the things that I've observed from a distance from external, pretty much proved to be true. So it's back to basics. We're going to use the strong core elements that we have in this company that is so great and we're going to get Pick n Pay back, rocking and running again. We're going to get our stores back and we're going to win your love and your passion in the brand because we deserve to get that done. So I don't know if any questions that anybody has got. Anything they would like to ask?

I'll just start up the question. So for the Ekuseni strategy, what is your view on it? Are the targets still the same? And do you still expect to achieve it by the end of FY '26? And then the second one, with the dividend being cut down in the half year, what is the expectations for the full year?

Okay. So I think on the Ekuseni strategy, when this change of leadership happened with Peter. And I mean, Peter was really -- I mean he's a super nice guy. So don't get me wrong when I make these observations. This is not just speaking of what has gone before. So before Peter and before that, okay. And I actually found Peter on the day that this whole thing happened and [indiscernible]. And when you have a look at Ekuseni, one of the challenges that you had is when you launch a multifaceted business process that has 4 or 5 columns in it that you're dealing with, I mean, it was. I mean, we had the whole sort of the Boxer column, the clothing column, we have the value-added services column and asap!, and we've got QualiSave. The problem is said that one or two of the columns don't achieve the goals that you set out to achieve, it kind of affects everything else. So in the beginning, for those who've been around a long time. And I mean, when Peter came up with this thing, the whole Ekuseni name came as a sort of a follow-on from the original [ Busilela ] campaign that we did when I took at Pick n Pay in '96. And we had 2 elements of that [ Busilela ] campaign because at the end, '95, '96 -- for those of you who really weren't around them, I mean, this country was broken. We've been through all of these years of societal change and everything and then the Halcyon period with Mandela and then the first Monster strikes that hit this company hard. So we had to set them out winning the heart signs of our people first because that's where you have to start with the people inside the business. So [ Busan ] in the beginning was very focused, hearts and minds of the people. And then [ Gisela ] 2 dealt with fixing up the physical attributes of the company. So we've refurbished the stores, clean them up and all of that stuff, with fresh foods and the fall [indiscernible] everything. To the extent that 2007 Pick n Pay became the global retailer of the year. We beat Abercrombie n Fitch in the second place. Focused. The problem with Ekuseni as a concept as a banner, okay? Is it this [ makes it]. So what we're going to do now, okay, we're going to take and celebrate the good stuff that Ekuseni delivered to us, while we have a look at what has gone on with the QualiSave investments that we made in the stores. So we now have 160 odd stores approximately that have been changed over to QualiSave. And to be honest, I mean, I think that the execution of that strategy, okay, needs to be revisited, and we need to have a look, okay? What has actually gone on that we're not getting the return? How are we set about getting? Haven't got it. And then also what has happened to the core old ramp of the blue Pick n Pay stores, the traditional Pick n Pay stores there. And I think one of the things that's happened in this process is that too much attention is being taken away from the core business. So that's what we're going to be focusing on. So yes, Ekuseni numbers and targets and stuff are going to be revisited because we have to do it. We can't just be like general [ case ]. He died for the principles with still full of errors. So sometimes, you just got to ask yourself, I don't need to hang around on this here over, I need to review, I'm actually on the right book. And as circumstances change, you need to change your realities. So we'll have a look at it. But it's not to say that the investment has gone in there. It's just say no way, not at all. We've got 160 stores that are bright, fresh, cleaned up, new lighting, new everything. So how we fine-tune and deal with the merchandise offering et cetera in those stores. We will deal with that. We will deal with that. But as part of the Ekuseni strategy and this whole value proposition and everything that was put together, a large part of that was taking people out the business. In business, you always take things for intended consequences. So you look at something and if someone is going to do this because there's an intended outcome for me. So credit people with laptops and spreadsheets to sit there and say, well, you can do this, you can take that out. It's going to give you that on the bottom line. But they don't take account of are the unintended consequences of these sittings. And when you go through these were transparent processes, and they've been through 3 of these. I mean, Nick had the first one then Richard had another one and now Peter has had another one. What you do is you rip out the social fabric of the company. And there's an unintended consequence of what that does, because we're in the people business. We are in the people business. Anybody can buy product. We all buying the same suppliers. We all go to the same pharma and buy the same stuff. We can buy the same fixes and picking from suppliers as well, to get out our stores. We're about the people. And those projects have a profound effect on the morale of people, on the happiness of people. And you can feel that when you go into stores, and that's why customers become a little bit hesitant to come back. So Ekuseni as a name for us. We're just going to quietly side it out and keep the guts of what's there as we review a few bits and pieces of the business. So the targets will be revisited. The outcomes of that will be revisited. I mean Lerena has given, I think, fairly clear guidance that the full year earnings may not be a thing of beauty. Get over it, get over it, okay? It's a journey. It's a journey. That's what we're saying to you. So it's buckle up, hold tight. We're going to move forward. And you can see there's no dividend declared currently. So I don't think that the chances of there being a fundamental change to that will be particularly great because company needs to constrain itself. We need to contain ourselves. And we need to invest appropriately, and we need to invest in stores that we got a far greater instant payback than has been the case to that. I don't know if that answers your question.

Good morning, everyone. Lerena, I just wanted some clarity on the employee cost growth. You mentioned that like-for-like growth was up 3%. Could you just elaborate on how you managed to achieve that? And what is the outlook for the rest of the year?

So the employee cost, as I said, is something that we are really proud of. It's the Project Future initiative starting to deliver. So that has been a key focus area for us, as you know. Our overall target of to take ZAR 3 billion out of the business, and we've initiated a number of initiatives over the over the past 18 months to start delivering that benefit. The guidance of the second half and where I've indicated that we think there's about another ZAR 300 million of benefits that will come from these initiatives and most of them will come through in the second half.

So yes, my collateral colleague with a spreadsheet over here. It takes the cost side of the business. And it's very, very important because we do have some issues on the whole issue around the average cost of what we pay in Pick n Pay through things like along service and all of that. So we have a much higher embedded average cost of people in our business than you are in our position. And that's a reality for us. So in a very, very competitive space, and this is something we have to balance out at the end of the day. So it's always a case to try to find a balance in this thing. But that's why those numbers look better. But as I say, there are some underpinning consequences of those processes and that's what we'll deal with, with the hearts and minds of the people.

Question is from Paul Steegers from Nedbank and Funeka Maseko from JPMorgan. They're talking about the closure of underperforming stores and how the decision made between closing an underperforming store or upgrading it and perhaps some guidance on that.

Okay. The issue of closing of underperforming stores. The first question you have to ask is so very simply is why is the store underperforming? Are we doing a lousy job? Has something open up down the road and we not republished the store and stuff. Is it a store in the wrong place? I mean things move. So for example, I mean there's Humana. [ Aleko ] reached out to me last night. And I mean [ Alek ] was just telling me about the Humana store. So the epicenter of Humana has moved. It's gone through that new checker center that's at the back of the Marine hotel there. And Pick n Pay didn't avail us of the opportunity to move in that thing. And we've kind of ended up on this end of time in Humana with the whole demographic of the shopping and everything has changed. So we'll have to revisit that soon. This is retail branch. I understand one thing about retail, okay? I mean when I was in the states with the [ Mattress Firm ] business here, we had 3,500 stores in America, length to breadth, north to south, east to west. And I always used to tell them there, one key, one door, one store. And that's what makes up the business. So you can look at these big numbers, billions and billions of sales every year and what have you, but that's what it comes down to. And our business comes down to one key, one door, one store. We have to look at every single store and work out its relevance in that place. Is it fit for purpose? What does the future look like? What is happening to the demographic there? What is going on in that time? And that's what will drive the decision as to whether we open or close profitable stores. Another one?

Another also from Paul Steegers and Fineko are asking about for the new franchise model and what impact that will have on our gross margin? If you can give some guidance on that.

As I've indicated, it is a new model that we are trialing at the moment, and we're doing it in collaboration with our franchisees. Ultimately, the objective is to make sure that both parties benefit from this model. So it is too early to give additional guidance for specifically the gross profit margin level. But what is important to note is that it will be broadly cost neutral for us during this year.

So I would like to know that online sales is a growth driver, but is it also a growth driver at the bottom line level instead of top line level? Is it a positive margin contributor? Or is it a negative margin contributor? And with the fuel cost rising. What is the strategy around that?

So our online model at the moment, if you look at it, is driven now 100% out of store, which makes the far more economic model. I mean, for those of you who look at Ocado in the U.K. that runs around being home deliveries or groceries in the U.K., the only value of Ocado is actually the software. Because the actual physical model of running around, delivering groceries because we are the most beautiful model before this. I mean you bring the labor to the store, you do the shopping and pack it into checkout -- fantastic model. What happens now is that, that [ monomer ] challenge. So what we do is we pick out a store -- so if you look at the net-net margin that's left behind it, we saw upper rational level. It's getting pretty much close to sort of a breakeven. We obviously have to have a bit of central cost and stuff to drive it, okay? But it is an expensive business to run. So it's kind of getting sort of close to breakeven, but it's a part of the consumer life that you have to deal with today, as I saying this promiscuous world we live in with the consumer. It's a key, key part. And I mean, we were just looking anecdotally at the numbers because there's good basis of research and what have you from the banks and payment portals and all of these things today. I would think that quite a bit of growth. In fact, I think a huge chunk of the growth is coming from our friends down the road is actually coming out of the online business and more so than the store-based business that's there. Came another one from Joe.

Many more.

We are coming there.

A question from Christel at Battle Capital and also from Ya'eesh Patel at SBG. With respect to suppliers for trade payables, acknowledging that $600 million is attributable to timing, can we expand on our current relationship with suppliers? Have we been able to negotiate or secure more favorable terms? And then how frequent are negotiations with suppliers and what impact has that had to gross profit margins over the first half?

I think that for me, one of the critical areas where we need to really have a proper winnable gazing for lack of a better term. Is this a whole area of merchandise and buying. Because it's true for retailers, if you don't buy right, you can't sell right. I think that some of the evolutions that have taken place in that space, we need to revisit. We need to rebuild our relationships with suppliers, I think, at the moment, an extraordinary -- and I've had reach-outs from the biggest suppliers that supply Pick n Pay. If I go through the list, I had reached out some of the biggest suppliers from Pick n Pay, all saying we need to come and sit down and you need to come and check. We need to get focused back on trading again, buying and selling as opposed to trying to drive all sorts of other things like rebates and everything else, so what have you, those are secondary for me. The major thing is to get back to trading and building relationships with suppliers again. And I think that there we're behind the past and I mean the whole supplier community talk about it and they know it. We know it.

Another question from Paul Steegers at Nedbank. Outlook for price inflation for the second half.

I mean driving here this morning, Lerena, you can answer this as well, driving here this morning. I mean they're talking now about Reserve Bank. They want to put up the interest rates may be again. That obviously won't go well for us. We're seeing that on the more basic categories, I mean, I've only just hit the ground here now. So maybe I'm not even really enough to favor us to answer this question properly. But we can see that the level of inflation in the more basic commodities and what have you is more muted. That's actually come down than in the other categories of grocery at the moment. But I think, unfortunately, the inflationary pressure is going to continue.

I think we showed that there's been some progression between the 2 quarters, some contraction on it. But as we stand, it's definitely so uncertain in our base is that it will be a little higher than lower.

A question of clarification from David Fraser of Peregrine. Our comment that Boxer is expected to grow profits. Are we referring to operating profit or profit before tax level after interest charges?

I think David is trying to allude to the fact that he would like segmental profit reporting. David, that is on an underlying pro forma profit basis.

Sir. Perfect. So it's Michael from [indiscernible]. Just on the [ CBP ] stores, I know in the end of the last financial year, you spoke about that 10% uplift in the sales in those stores. How do you find the customer interaction in those stores? And how has the profitability been coming through? I know that you mentioned that it hasn't come through fully now in this last period.

No. I mean listen, it hasn't come through to the degree that we would have wanted. I mean last year, CDP, I think, had quite a kicker. I mean, now I'm just talking any [indiscernible] from what I can pick up having just arrived. But I think in last year, CDP was also driven by the enthusiasm and a lot of stuff from suppliers as well in terms of supplier support and rebates and allowances and store openings and stuff that we put in there. So kind of had this bit of a housing launch period into it. We've got to have a look now at the second wave of that when you now start to compare year-on-year and ask yourself just how successful have they been? And part of the -- part the problem is that when we have a look inside there, it is not growing at the rate that we need to grow. Yes, it's growing more than the traditional old blue store, absolutely, but both of those growth levels are unsatisfactory. They are unsatisfactory both of them, and that's what we're going to deal with.

Question from Dino Constantinou from Investec. Could we provide some color on the material increase in accounts payable relative to inventory?

I mean it's a product of the net working capital. So I indicated an increase of about ZAR 1 billion in our inventory relating to new stores and just normal inflation in the base, and that is directly contracted into our trade payables and ultimately, the net improvement comes through in the stock that was not funded by creditors because of the fact that there was duplication in Eastport and we had some strategic buy-ins.

And another question from him. What are the other anticipated disposals to get to the guided ZAR 1 billion given Longmeadow disposal proceeds of ZAR 0.5 billion?

As a group, we're constantly reviewing our property portfolio and as properties mature, we do put them up for sales. So we are looking at selling 2 of our retail properties towards the end of the second half.

So not many, many more. Sorry in that aspect. From Citi. Can we provide any kind of sales trend post year-end? And what sort of -- you answered a question on inflation, but what diesel costs that we incurred post year-end?

On the diesel cost at similar levels as load shedding continues. There's been some reprieve, but then in various areas, there's changes again. So we effectively -- at this stage, given any other additional indicators assumed that the current trend will continue, which is more or less in line with what we've got in our base of last year. And the second one was -- the first one, Tam was?

Sales growth.

We are seeing similar levels. So we saw Boxer momentum continues into the second half. But Pick n Pay is where the focus needs to be.

Yes, I've got a question. I've got my question of my Chairman. Gareth, have we made any progress yet on this with the government on the diesel? Money that they're making out of selling diesel to us to fire our generators and attach that chart.

Absolutely no movement from government.