The SPAR Group Ltd (SPP) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to SPAR's Results Presentation for the 6 Months ended 31 March 2023. My name is Mike Bosman, the Executive Chairman of SPAR and together with Mark Godfrey, the CFO of SPAR, we will be presenting the results today. For our presentation, I'll begin with an overview and then deal with our operational and strategic update. Mark will then present the financial results for the period. After that, I'll give you a view on our outlook and then we'll take any questions that you may have. The SPAR Group is one of the largest businesses within the SPAR International organization and we at SPAR South Africa celebrated our 60th birthday this year. After SPAR Austria, South Africa is the second largest SPAR organization globally. We operate in 9 countries, South Africa and Namibia, Botswana, Mozambique, Ireland, England, Switzerland, Poland, and Sri Lanka. As you know, we're the second largest retailer in South Africa in terms of revenue. And from an annual point of view, the group delivered over ZAR 135 billion in turnover last year with ZAR 3.4 billion in operating profit. We have about 4,500 stores and over 10,300 employees in our 9 countries. I was invited to join SPAR in mid-December 2022 as the new Independent Non-Executive Chairman. And at that time, there were serious allegations being made against SPAR in the press. I joined SPAR as a complete outsider to the group and I've spent the first months coming to grips with understanding the business and the key issues. The Board then requested me to step in as the Executive Chairman at the beginning of February, following the retirement of Brett Botten, the former Group CEO. It's been an intensely busy but exceptionally productive last few months. So I'd like to kick off by sharing some of my key observations coming into this business. In the first instance, we at SPAR recognized that our success as a company is driven by the success of our independent retailers. Without them, we really don't have a business. They underpin everything that we do and they are the ones that are facing the consumers every day. They create the jobs and serve millions of people through the SPAR store network and help them build and improve homes through our Build it business. Our SPAR people operate in so many places enriching their communities, and I've had the great pleasure of meeting many of our retailers during my short time at SPAR and they have my greatest respect. One might think that SPAR is mostly in the business of delivering groceries and building supply materials and that is true. But perhaps more importantly, we need to recognize that we are in the relationships business. My view is that, SPAR is a really great business and still has huge potential. The organization employees, very good people, they're are very competent and highly experienced. There has been a lot of change in the organization in the past few months. We recognize this must be very unsettling for our staff members and perhaps some retailers too. Change is never easy in any business and I'd like to extend my sincere thanks to all of our staff members and retailers for the ongoing efforts for the business throughout this process. SPAR prides itself on the values of passion, entrepreneurship, and family values. However, there can never be a trade-off between governance and entrepreneurship, they are not opposing concepts nor enemies. The 2 can and must go hand-in-hand. Entrepreneurship should not compromise the highest standards of corporate governance and the Board takes this very seriously and takes a lot of comfort from the insurance services provided by the external auditors, PwC, and additional comfort will be sought from the newly appointed internal audit firm, EY. The SPAR voluntary trading model is a great model for grocery retail entrepreneurs because of its flexibility and the freedom it offers to retailers. While the model clearly works, there are many elements of it that we are revisiting and planning to improve on. We are challenging the thinking around how things are done, and challenging the existing ways of doing things. And since our success is built on our retailer success, we also need to cleverly think about how we recruit our retailers and increase our support to them. So this year of 2023 is the year for an urgent review of everything that we do in the SPAR business and we're making significant progress. As previously mentioned, the group was facing serious allegations at the end of last year. And in terms of priorities, this was important to us that we dealt with these as a matter of greater urgency. This included the composition of the Board, which had come under severe criticism in the press during the period. I mentioned that I was appointed as Independent Non-Executive Chairman in December 2022. I'm currently acting as the Executive Chairman until a new CEO takes up his or her office. 3 directors have resigned or retired. We've appointed 2 new Independent Non-Executive Directors, Dr. Shirley Zinn and Pedro da Silva. And today, we've announced that Shirley Zinn has been appointed Deputy Chairperson of the Board and we congratulate Shirley and we wish her everything of the best in her new role. Last month SPAR appointed Shana Ashokumar as the new Company Secretary, dedicated to supporting the Board and Committees and further elevating governance standards within the group. The former Company Secretary, Kevin O'Brien, has been appointed as SPAR's dedicated Group ESG Executive and will focus on environmental, social and governance matters, driving SPAR's commitment to the future of our brand and the planet. Then in respect of the fictitious loan claims, the Board took these allegations very seriously. We received different independent professional opinions, but at the end of the process, the Board agreed with our auditors, PwC, that it was a reportable irregularity. This event happened in 2018, some 5 years ago, and the total amount was ZAR 11 million. The reportable irregularity was reported to IRBA, and while the value of the loan might be regarded as immaterial, the traction -- the transaction itself was unacceptable. Unethical behavior of any kind will not be tolerated at SPAR. Irrespective discrimination towards retailers, it's very important to mention that all racial allegations and all the allegations of SPAR acting in a racially discriminatory matter towards retailers were investigated by the independent third party, and it was found that there was no basis for any of these allegations. In respect of the 2 retailer groups with which we've had disputes, I'm happy to report that all 10 black retailers who declared disputes with SPAR have had their matters amicably settled, and we were especially happy to have 6 of them back in this fold as SPAR retailers. In respect to the Giannacopoulos matter, significant progress has been made through formal mediation processes, and alongside that, I believe our direct engagements through the family are assisting us to rebuild the broken relationship and hopefully resolving their and our issue soon. I believe that we're on top of the key issues that need addressing. The appointment of a new CEO is critical. We've worked urgently but not in a rushed fashion towards making an appointment. It's essential that we find the right person for the business. We have been through an extensive process of identifying possible candidates locally and internationally, and we're currently working with a very short list of candidates. We will continue to provide regular updates and hope to make an announcement soon. Most importantly for us as a Board, we derive a great deal of comfort from the fact that all 3 of our geographies have very competent CEOs in country. The Polish business continues to make losses. Although these losses are lower than last year, it is not making progress to breakeven quickly enough. We've been very busy reviewing our operations in Poland and several of us on the Board had visited the country a few times. It's particularly helpful to have Pedro da Silva on the Board, with him, having led a large retailer in Poland for 15 years. Late last week, the Board received an extensive research document that we commissioned on the market and the Board is considering this research and the options. The Board plans to make an announcement on Poland before the end of the financial year. And having said that, we recognize the urgency of this matter. Poland has enormous potential with good economic growth rates and according to some research, there are reportedly 80,000 to 88,000 independent retailers in the country and the opportunities they could be enormous. The country has good growth rates and while highly competitive is ideally suited to the SPAR model. In South Africa, our top line growth is good, but it should have been better. We are maintaining consistent gross profit margins, which we're pleased about, but our costs are just too high. Management is focused on driving the cost down urgently and we need to get back to a positive operating leverage. I'll address our efforts to drive market share later in this presentation and Mark will deal with South Africa's operating margin in more detail. The SAP go-live in KZN has been extremely challenging for us and has significantly impacted the result for the first half and that is still hurting us and our retailers. We estimate that we've lost about ZAR 786 million worth of sales in H1 and we're addressing the issues as a matter of urgency and completely reviewing the remainder of our SAP rollout plans for our South African DCs and elsewhere. As far as the balance sheet is concerned, in difficult economic circumstances like this, we believe that cash protection is a key priority and management is very aware of this. As a Board in the current situation that we find ourselves in country and in business and with the idea of food security in mind, the business and the Board had resolved to not declare an interim dividend. Going forward, the Board will adopt a far more stringent approach to allocating capital and dealing with investment opportunities. We've reviewed the capital structure of the business and we are aware that there's some speculation in the marketplace about a possible rights issue. However, any form of equity raise is not something the Board is considering and we most certainly are not being pressurized into it. From a debt point of view, Mark will provide a detailed overview on the debt situation shortly, but it's really important to mention that with the exception of Poland, all of SPAR's foreign debt is currently being serviced and repaid from our operations offshore at low interest rates. Working capital is another important focus area. Obviously, the SAP issues in KZN are putting temporary pressure on our cash flow. In respect of inventory levels, we've adopted a strategy to buy ahead of inflationary price increases and increase stock ahead of the SAP launch and we're also holding safety stock, thereby, protecting our customers, our retailers, and ourselves and, of course, our customers from the poor state of our national infrastructure including our ports, roads, railways and the supply of electricity. We take our responsibility to supply our customers in all of our geographies, particularly with food and other supplies very seriously. It's an imperative that we carry extra stock to protect food supplies I've mentioned. Having said that, every day of extra stock that we hold reduces our bank balance by ZAR 120 million in cash. Nevertheless, we will continue to be extremely disciplined in managing our inventory level. The business is also reviewing the management of receivables and support offer to its retailers. Going forward, we want to assist our retailers in any way, but we need to do this in the most efficient ways possible. Before moving on to a brief operational update, SPAR's ESG commitments can be summarized in our purpose statements as follows: our environmental purpose is to inspire and influence stakeholders to make authentic and notable environmental contributions; and our socioeconomic purpose is to grow people and communities so that no one is left behind. This slide depicts some of the areas which our teams are focusing on. An enormous amount of work has been put into this and they have many initiatives in place to support our vision of My SPAR, Our Tomorrow, our commitment to the future of the brand and our planet. The one area on the socioeconomic front that I'd like to highlight for the period specifically is the SPAR development program for the suppliers. This program was launched towards the end of the last financial year. And from a procurement point of view, we've developed this as a supplier-first solution as in we're putting suppliers first and supporting small supplier entrepreneurs with their businesses. Once compliant from a food safety point of view, they can simply supply whomsoever they wish to supply and not just SPAR. This program has been specifically put together to ensure that micro and small supply applicants have all the tools, knowledge, and access to industry specialists to help them grow their businesses and achieve their full potential in the most effective and affordable way. And during the period, over 300 suppliers in both the manufacturing and agricultural sectors around the country have registered for the program. And I'd like to extend a big shout out to Tessa Morris and the rest of our ESG Food Safety team of this great initiative, helping to create many jobs and supporting local communities and local growth in a very tough economy. The response has been incredible and we're very proud of what we've achieved here. Turning to the operational and strategic updates. This busy slide shows an overview of our markets and some insights on the business environments in which we operate, and I'm not planning to go through each of it. Across all markets, energy prices and food inflation have pushed costs higher and the ongoing geopolitical tensions have resulted in continued uncertainty for commodity prices and global economic activity. In South Africa, like everyone else, we've been grappling with unprecedented levels of electricity load-shedding during the period. Fortunately, 97% of our retailers have generators to run their stores during load-shedding hours, and we estimate this to cost our retailers more than ZAR 700 million in diesel to run these generators for their stores during the first half of the financial year. It's important to mention that the generators, obviously, need to operate and be on standby 24 hours a day just to protect the fresh chilled and frozen portions of the business. The SPAR retailers have access to funding for generators, batteries, and other equipment through the SPAR Guild development fund and other SPAR-arranged funding and we use solar and generators at our own distribution centers. Looking at SPAR Southern Africa, the tables on the right provide a comparison between what we reported at the wholesale level versus what our retailers are reporting. Wholesale growth in the current period has made a recovery against the prior period with strong retail growth and retail like-for-like sales. Retail growth ahead of wholesale growth speaks to the issues that we've been having with SAP and potential buying outside of the system by retailers in the interim. It also highlights the COVID-19 dynamics at play in the liquor base, growing at 40% plus in the prior year. The 2022 figures are inflated due to the restrictions being lifted in September 2021. Looking at SPAR's core grocery business, gross margin during the period was well managed as I've mentioned. It's a solid gross margin performance considering an intensely competitive market and inflationary pressures in producer input costs, as well as logistics. SPAR launched SAP in KZN during the months of February and March 2023 as I've mentioned, and this has been a difficult time for us and the retailers in KZN, and we're doing our very best to provide support to the impacted retailers at this time. And this is important also to say that we've assisted many retailers by distributing to them from our other distribution centers. Across all brands including -- excluding Build it, SPAR opened 57 stores during the period. A total of 105 SPAR and TOPS stores were upgraded and considering the economic environment currently, it's a very encouraging situation to see retailers firmly committed to the SPAR brand and investing in new stores and upgrades. Operationally, Max Oliver, our Southern African CEO, and his Executive Team have made a huge amount of progress in respect of the 6 key focus areas as set out on this slide. A new national marketing executive for SPAR, Tony Mun-Gavin, was appointed in January this year. And under his leadership, SPAR's marketing plan has undergone a complete overhaul. This includes a new marketing structure, the appointment of a strategic PR agency partner, and a new sponsorship strategy, focused on building the strategy on 3 pillars: nutrition; education; and women's employment -- empowerment. Customer and format segmentation is how we are shifting to a more customer-centric approach to our business and provide our retailers with improved business intelligence and insights for making smarter and more informed decisions. And during the period, our new customer-focused format architecture was approved, based on a defined customer segmentation plan, which we will share in more detail with you later in the year. One of the key focus areas for us has been the revival of SPAR's bakery and fresh line range of products with SPAR Encore, which commenced last year. These categories have been well-received by our retailers and consumers. SPAR's bakery category grew by 10.7% during the period and home meal replacement offerings have been rebranded and was well received. SPAR2U, SPAR's on-demand shopping platform was scaled to 234 sites at the end of the first half, up from 5 pilot stores a year ago, and the plan is to have 500 sites by the end of the financial year. This is rapid progress considering the independent nature of our SPAR operating model. And so, very well done to Blake Raubenheimer's omnichannel team. They also finalized a complete overhaul of the SPAR Rewards program, which was re-launched post-period end and which registered more than 1 million consumers in 6 days. The number of customers on our new Rewards program is now over 3 million. During the period, the Competition Commission approved the acquisition of the remaining stake in SPAR Encore with effect from the 1st of April 2023. And as a reminder, SPAR Encore is the provider of end-to-end supply chain solutions in private label products and it manages the procurement, packaging and distribution of house-branded products from independent manufacturers to our distribution centers. This exciting deal streamlines the structure of our private label business and the teams have now been fully integrated into one SPAR Encore office. Retail excellence focus is about driving improved customer services and consistency across all SPAR stores. The CX customer experience program was re-launched in September last year to incentivize retailers to improve customer experience within stores. The retail operations team launched a review of store operation execution and management processes to align them nationally. The amount of innovation and progress we made in the South -- by the South African team is very encouraging and we continue to also enjoy tremendous success in our businesses in Namibia, Botswana, and Mozambique. Under the South African banner, we also have our Build it business. Build it is the #1 building materials retailer in South Africa, and we have 403 stores and these includes 4 new stores and 22 store upgrades in the period. The performance of this business is underpinned by the strength of its supply chain, a highly experienced group of retailers, and focus on retail execution, which is what continues to differentiate the Build it brand from the competition. Customer relationships are key in supplying quality building products at the best possible prices, and what -- is what keeps customers coming back to Build it. Very pleased to have appointed a new Managing Director for this business, Hawie du Preez, currently the National Retail Operations Executive and we congratulate him on this well-deserved appointment, and we wish the outgoing Managing Director, Rob Lister, all the best for the future and thank him for his incredible dedication to Build it for the past 23 years. Finally, just to touch off on our efforts in the pharmaceutical space, our S Buys and pharmacy at SPAR businesses. The months of February and March were record months for both Scriptwise and Pharmacy at SPAR. Our pharmacy business is growing its retailer loyalty and added 5 new pharmacy stores during the period with 150 stores nationally. We're continuing to see good opportunity for independents in this area. And with regards to S Buys, as a reminder, S Buys' structure has 3 components: it's a wholesaler, catering to our pharmacy stores, and is a career pharmacy for highly specialized medicines, and it's also a training academy focused on the upliftment and upskilling of individuals in the pharmaceutical service area of South Africa. Turning to our European regions. Ireland and England. The BWG Group led excellently by Leo Crawford, has continued to deliver very strong results despite significant macroeconomic challenges. We have a very strong presence in the Irish convenience food retail space, with EUROSPAR, SPAR, Mace, XL and the Londis brands. And all of these brands delivered positive growth during the period. A recovery in the hospitality and license trade sectors from March last year continue to boost performance during the period and the group remains very well placed to optimize the opportunities in the sector. The Irish team confirmed the strategy for the EUROSPAR format during the period, now competing in the supermarket sector. And Appleby Westward in South West England, where we have 346 stores delivered a solid performance boosted by new store acquisitions, which helped offset the decline in volumes due to consumer inflationary pressures forcing consumers to trade down and reduce discretionary spend. In Switzerland, the Swiss market has continued to experience volume declines, as consumers look to better value across the border. Shoppers tend to travel from Switzerland across the board into Germany and Austria, where they can buy goods for up to 60% lower prices. However, within Switzerland, the convenience sector still provides many opportunities. Our TopCC Cash & Carry business has been impacted by a contraction in the gastronomy sector, coupled with consumers eating out less. And towards the end of the period, we launched 2 Go24 concept stores as shown on this slide. These stores are completely unmanned and are open to consumers 24 hours a day, 7 days a week, 365 days of the year. The software has performed exceptionally well. And management are confident that in time we can utilize this platform to extend shopping hours in selected AVIA forecourts and neighborhood SPAR stores. It's early days. However, this does provide a great opportunity within this market, especially in respect of access to Sunday trading hours, where many stores are closed in Switzerland. We're also trialing our SPAR2U on-demand shopping app, thereby, expanding our consumer reach through an improved omnichannel offering in this country. Moving on to Poland. As I've mentioned earlier, we're working very hard on our options for the Polish market and we'll announce our plans shortly as I mentioned. And in terms of the progress made during the period, gross margins increased due to the improvement in supply terms, but also due to improved gross margin at retail. Retailer loyalty for the country reached 60% for March 2023 having been at 48% at the end of 2022. In terms of the store network expansion, 17 new stores were opened during the period and 10 non-viable stores were closed. The restructuring of our DCs in Poland is complete and the extended range offering for retailers in the south was launched in January 2023. In Sri Lanka, we have a joint venture arrangement with a highly experienced local company, Ceylon Biscuits Limited, a leading local biscuit and food manufacturer, and exporter in Sri Lanka. Established in the 1960s, Ceylon Biscuits has strong roots in local communities and is committed to enhancing food retailing and entrepreneurial opportunities in the market making it an absolutely ideal partner for SPAR. While this market presents a potentially greater opportunity for SPAR in recent years, the political and economic crisis have been a massive setback here. Having said that, there is signs that this is now turning around completely. The business for the first time delivered a small operating profit in 2022. With a population of more than 22 million people, mostly young, and a predominantly informal retail environment for food, this market offers huge potential and is perfectly suited to the SPAR model, and so, we will be investigating opportunities there. I'll now hand over to Mark to take us through the numbers.

Thank you, Mike. Good morning, ladies and gentlemen. As much as we operate in multiple currencies, I've just had it also pointed out to me, we need to start considering multiple time zones. Our Irish team is still having breakfast. So to Leo and the team, enjoy the coffee, and we'll take cognizance of our 9:30 start when we consider future presentations. As Mike said, I will attempt to present the numbers now to really fill in the color of what you've already received. If we look at our salient features for the period, turnover just under ZAR 73 billion, ZAR 72.9 billion, growing at 7.9% and we don't pack that by geography. The margins have maintained what appears to be an uptick of roughly 20 basis points. But in fact, if you strip out the decimals, it's largely in line with the previous year and unfortunately, I'm going to once again frustrate some of you and say it, it's a lot to do with mix. We are not profiteering. We've seen strong growth in some of our higher earning regions and as Mike has already alluded to some of our corporate retail businesses are performing well. However, there is a significant gap on the slide if you move from a solid operating growth performance or gross profit performance to an operating profit that declined by 17.5%. And fundamentally, our operating costs were the issue, those grew by 14.7% across all geographies during the period and have to be a significant focus for us. We were well aware of the fact that rising inflation in Europe and in South Africa was going to impact cost, but to the extent that we were able to hold that is, obviously, the issue. Operating margins have declined from 2.7% to 2.1% and that is the focus for the business going forward to drive those up, particularly in our Swiss and South African geographies. Profit after tax continued to decline as finance costs and interest, obviously, affected all of our geographies and from thereon earnings per share -- headline earnings and diluted headline earnings roughly tracking at that trend to finish minus 30% down. As has been described already, the Board's decision, to at this stage declare no dividend. I'm sure will come as a disappointment to a lot of shareholders, but I think it is also only appropriate to recognize in these uncertain times that we maximize cash holdings and particularly deal with the balance sheet stresses which have caused the concerns around group debt. Net asset value increased by 27.5% and ironically underpinning that is the exchange rate because of the significant investment that the group has in European assets and the hedge consequence of that is driving that performance. If we can turn to the similar slide but just presenting it to you from a regional perspective to give you a sense of how the various geographies have performed. I'm not going to go through each of the countries. The information is there, other than to say that our European business, or our international business now constitute some 35.4% of total revenue. Unfortunately, the profit contribution from those regions is not as strong that just under 25%, significantly impacted by the Polish business that remained loss-making, but we need to recognize that that loss has actually improved by some 37% in this period. So looking at it across all geographies will give you a sense of the gross margins and as I've mentioned earlier, largely the impact of mix, the Irish business having a strong exposure to corporate retail and the Swiss business similarly affected. Operating expenses again are set out for you to get a sense of how the cost structures of our various businesses are set out. And then at an operating profit margin, again, giving you a sense, the South African business fundamentally for us is the issue. That business has historically traded at margins of circa 3%. It is substantially down on where we targeted to be. And in the short term, the challenge will be to drive that 2.2% back towards 2.7% and 2.8%. And then finally get it back to levels that we would expect to see it. The Irish business in recent years enjoyed significant benefits coming through the COVID period and saw that margin up at nearly 3%. But I believe Leo and the team would acknowledge that at 2.6% they would be comfortable and that is in line with the previously guided margins that we believe the Irish business would return. And the Swiss business, to a lot of you, I'm sure would look like an extremely disappointing performance. Again, having returned margins of well over 2.5% during the COVID period, but the business at 1.5% margin is again very much in line with our previous guidance based on the mix and the segmental structure of that business. We do believe there's opportunities for the Swiss business to improve getting closer towards the 2%, but not too far off the consistency that is shown in the years pre-COVID. Net finance costs, again just to highlight those per geography and as guided, obviously, with rising interest costs across all regions, those have been significant. But again, just to point out that the fact that debt is structured and I will cover debt in some detail on slides to follow. The fact that our debt is largely based in Europe, where it's linked to Euribor and [indiscernible] rates of anything up to 0, obviously, those have moved in recent years. But the margins that we enjoy in Europe are significantly lower than those in South Africa. And hence, the decision to leave the debt and to structure the debt in Europe because of the financing benefit that it's presented to the group. Just to make the point and to echo the comment that has made, yes, the SAP implementation in the KZN DC adversely affected turnover, a decline or a notional loss of turnover of roughly ZAR 780 million, estimated, but that did have a significant operating profit effect, and again, part of the contribution to the overall South African performance would have been that we are very confident that that will very rapidly normalize as the KZN business internalizes its conversion to SAP and we start seeing that system settle back to the performance that we enjoyed pre the implementation. And then along the bottom, the last line of profit after tax, just again to give you a sense of the profitability and just again to highlight that in the H1 period of 2022, the Polish business reported a loss of some ZAR 184 million and hence, a fairly significant and noteworthy improvement despite very challenging conditions in that region as well. If you could turn the slide and just to unpack some of the turnover and again a lot of information, a lot of geographies, and a lot of very dynamic changes that continue to take place. The South African business' core groceries improved by 7.9%. A solid number and a number that we take a lot of encouragement from because it was an area of the South African business that had underperformed in significant years. For H1 '22 that exact row was a mere 5.3% and yes, there are inflationary benefits that have impacted that number, but we still believe that we are making positive inroads in recovering some of the lost positioning that SPAR's wholesale business was enjoying. Mike has alluded to this significant liquor impact of a year ago where we saw a surge of liquor sales just following the pandemic, the threat that lockdowns might again be reimplemented, or possibly some people coming out of lockdown heading to their local TOPS store. In H1 of '22 that number was 42.6%. So the 1.9% albeit looking at face value very disappointing, needs to be seen against the context of an extremely inflated base. In fact, if you look at the number of 2023 versus 2021 and again, I'm not trying to do a pre-COVID exercise, liquor over the last 2 years has grown by some 39%. So there is still a very strong underlying growth in our liquor performance. And then, as has already been touched on, our Build it performance declining by 3.8%. I think needs to be seen in the context of an entire sector that is in slowdown at the moment. And without trying to suggest otherwise, I think our Build it team will still make the point that that number, albeit negative is probably a lot stronger than some of our opposition are reporting. So the South African business growing by 5.4% because of the -- the implied negatives on 2 of the significant categories. S Buys, an incredible performance, plus 20%, some very strong growth coming out of the Scriptwise, but also the Pharmacy at SPAR business, and to the whole team, congratulations. And then Encore, which as most of you will appreciate is our private label sourcing business, and that number is very misleading because effectively that represents just the external business that Encore do because effectively some 95% to 98% of their business is supplying the SPAR grocery business. So effectively a vertically engineered business and that number should not be seen as the performance of Encore and the team. The Irish business, an exceptional performance in euro terms, plus 8.8% and the business is clearly enjoying very strong momentum at the moment. Across all of the retail channels, all of the retail symbols, there has been strong performance growth. The recovery of the hospitality sector contributes a significant part of that business and that is also aided. But also the impact recently of some small acquisitions, both corporate retail and in the Irish business, BWG Foods, some of the small Cash & Carry businesses, all accumulating into a very strong performance coming through in that number. The Swiss business, in ZAR terms, growing by 6.9%, again, perhaps some disappointment might be seen in the minus 4.3%. But I think we need to see it in the context of the entire Swiss market, which is in decline at the moment. Inflation in Switzerland has reached record levels of 3% and in local markets a number, which is really completely unheard of. So clearly, there has been some concern around inflationary pressures. And again, we're starting to see this phenomenon of cross-border shopping or exodus in to go and buy your groceries in neighboring countries becoming an issue. We believe that we would retain or hold onto a lot more of the business post the pandemic. And I think against the rising inflation in the country, that has continued to be a challenge, but a solid number for the business in ZAR terms. In Poland, as has been alluded to growth of 4.9% needs to be seen against the backdrop of a year ago, losing some 58 contracted retailers we elected not to stay with us. So we have made strong inroads into loyalty growth. I believe our new business is perhaps not as strong as what we would have expected to have seen at this stage, but the Polish business showing encouraging signs of improvement. If you'd turn the slide just to guide around some of the indicative inflation and really not to focus too much on inflation, I think what we just like to give you a sense of on this slide is how all of our geographies have seen substantial inflation coming through in food, alcohol and tobacco. In South Africa, the official numbers are in the region of 14% and you can see this, the extent of that increase of the same period a year ago, more than doubling. And just on the right-hand side, to give you a sense of our own wholesale inflation, substantially down at the grocery line against the official line. And again I think talking to the extent of the support from a pricing perspective that we continue to give both our retail customers and in turn that the population that they serve as their greater customer base. Pricing is, obviously, extremely sensitive in the market at the moment and SPAR need to ensure that they remain price competitive. In Ireland, an incredible increase and, in fact, very much indicative of what's going on in Europe. Almost 10 percentage points in food and non-alcoholic beverages. In Switzerland, again of a 0 base and that's not a typo. And the Swiss business seeing increases of more than 6% and even in Poland that number in strong double digits. All of this has impacted volumes across all of our regions but despite that, we're still converting some strong revenue performance. If we could turn the slide just to move into the gross margin category. And again, just to make the point that a lot of the increases and, in fact, some of the movement that we've seen has really got to do with mix. There's very little profiteering, and I use the word cautiously in any of our geographies at a very sensitive time. The 10 basis points in South Africa is largely the change in the core business as liquor and building materials traded lower margins. So, obviously, that impact ironically results in an increase in the percentage. In Ireland, a very strong 80 basis point increase. And again, seeing the increase in consumer spend around product mix, convenience products, confectionery sales, all coming through strongly in their performance. Switzerland, the 110 basis points decline, again, having to do with mix. We sold into private hands during the period some 25 of the corporate retail stores, obviously, losing that additional margin. But at the same time, also stripping out the costs relating to those stores. And then, as a result of the decline in volumes in Switzerland, a big ticket item would have been the supply rebates that would have been earned on the total volume business done. Ireland have seen an encouraging increase of nearly 200 basis points. But again, speaking to improve supplier terms, some very good work being done by the marketing teams in Poland in supply negotiations, but also in the performance of retail. And Mike has already alluded to the fact that retail margins in Poland are up nearly a 150 basis points in the period. So an increase of some 20 basis points, but very strong contributions from the high-margin categories of the business. If we could turn to operating expenses, and I guess, we could spend a lot of time discussing Op cost because effectively the big ticket item, but I'm going to try and summarize them firstly by geography and then just some of the major categories. The South African business showing some 16.8% increase in operating expenditure in the period. Just some of the major line items affecting that, our employment costs up roughly 9% and that, obviously, included, not just the volumes, but also new heads that have been introduced into the business to support the innovations. And again, not just speaking to the SAP implementation, but innovations across the entire marketing spear that we are moving into. Our IT costs covering some of those, increasing by some 51%. And a lot of the work being done in that space. The development of SPAR2U, networking costs, our software licenses in advance of supporting SAP, and the move of our entire operating platform into the cloud. For those of you that like me get a little nervous when you get told your entire storage repository is in the cloud, well, I'm assured that it's very secure, but obviously, it comes at a cost because of the enjoyed benefit of the security around protecting our data. And then the SAP go-live also a part of that. Fuel and distribution costs, up 27%. I think, we're all very familiar with what's happening in the prices of both diesel and petrol over the period and significant impacts there. The opportunities or the challenges for us are to ensure that we are maximizing our distribution networks from an efficiency point of view because there is very little we can do around the base cost of fuel, we just need to be working as smartly as I know that our logistics teams are doing in all the geographies. And marketing costs up 19%, a lot of work being done, not just around the new Rewards programs and driving a lot of innovation at retail, but obviously, spending time to remain competitive in the market as well. S Buys up 22%, again, very much related to volume, but also to drive the efficiencies that are existing in those businesses, impacted likewise by inflationary pressures. If I move to the European businesses in Ireland, up 22%, very much in line with what was budgeted, but underpinned by significantly rising fuel and energy costs in Europe. And again, the challenges of labor, which we've spoken to, not just because of increased labor cost, but also understanding that volumes in that business have increased and, obviously, the variable element of labor costs would follow suit. In Switzerland, a rather smaller increase in ZAR terms but in Swiss currency an actual decline or a decrease of some 3.5%. And as I've alluded to on the previous slide, the disposal of those 25 corporate stores, obviously, would have had the related cost strip out of the business as well. And ongoingly the Swiss team are looking at every opportunity to drive further cost out of the business going forward as the top line is now stabilizing back at the kind of levels pre-COVID that we believed we could grow from. And then in Poland, a decline both in ZAR and in zloty terms, despite the pressures like European neighbors in fuel, energy, but the benefit that they enjoyed was somewhat or rather the costs that they experienced somewhat offset by some foreign exchange gains that was made as a result of currency movements between the zloty and the euro. So the total group increase of some 14.7% and as Mike, has already alluded to in his opening remark, is something we simply cannot continue to absorb when the top line is so much lower than that. We simply have to push on all of the cost lines to ensure that we are leveraging the operating margin. If we could turn to the finance costs, and again, not to spend a line item focus on this, but just to give you a sense of at a income level, there has been a slight increase in our income earnings. We, obviously, don't have a lot of cash or cash instruments. So really not much significant impact on income categories other than, obviously, the components of IFRS. Bear in mind that we have sub-lease arrangements, hence the income from IFRS leasing and that is somewhat offset by the related cost. But I think you can see, if you look under the finance cost component of the analysis, the significant increase in both loans and strangely enough, the bank overdraft is an area that I would like to touch on when we talk about the group debt. So across all of the geographies, the sharp increase in financing cost over the period impacting cost and, obviously, flowing through to impact net profit as well. But just as a sense and for those of you that perhaps don't have much exposure to the European markets, the Euribor alone over the period of October to March of this reporting period moved from 0.7% to some 2.9%. So that's your base cost, a significant increase. Fortunately, we've negotiated very, very competitive margins. But the Euribor underpin is, obviously, impacting that significantly. And in years previously that number had a floor of almost 0. So, again, getting a sense of that increase. And we've broken it down below just by segment so that you can again get a sense of the costs per our various geographies. If we move on and really the next couple of graphics is just to visually demonstrate what is happening in currency. I know a lot of you are tracking currency performances with SPAR. But as you can see, just on a spot rate impact, the graph on the right-hand side is quite literally the last 6 months. And simply the movement between where the spot was -- well, the closing rate was at March 2022 versus where we find ourselves now, a 19% weakening of the rand. And obviously, that impacts both the valuation of the foreign balance sheets, but also exposes us to the risk that the debt in those foreign currencies does look extensive when consolidated at a group level. Unfortunately, by comparison, the average rate, which is used to translate your income statement only grew by some 6% over the period. So unfortunately, again, showing further disconnect. And if you turn the slide, we do a similar exercise for you on Poland. The Polish closing rate, the zloty versus the rand March '22 versus March '23, some 19%. And again, significantly impacting the consolidation of the Polish business. The slides that follow, if you would turn, is really just, again, a visual representation of what we've just touched on in the actual numbers. So not to spend too much detail on it. The turnover disclosures have been provided previously. The South African turnover growth of 5.6%, Ireland in ZAR terms, a solid 15%, Swiss just under 7%, and Poland at 9%. And then on the right-hand side, the contributions to operating profit versus their base of a year ago. And in fact, I think it would only be appropriate to call out the Irish team that managed to actually increase profits, despite the challenges that they faced. So to Leo and the team, a solid set of numbers. And, again, illustrated on the slide that follows, if you would just turn the slides. We do a similar exercise just to highlight the local currency to try and remove the foreign currency vagaries and to just to illustrate how the various performances of the geographies look in their own reporting currencies. If you would turn the slide, I think let's get to -- I'm sure an aspect of the business and it hasn't intentionally been left for lost and that's really the balance sheet. What we presented, again, on a fairly extensive slide is just the regional balance sheet highlighting some of the key components or key elements of the various geographies. So just starting in the South African column, just under ZAR 3 billion worth of solid assets in property, plant and equipment. Obviously, having to recognize the finance IFRS component of leases, so the non-current component of that ZAR 4 billion and you would look down below to a -- in the red box, a roughly matched ZAR 4.8 billion, which again demonstrates the head lease, sublease arrangement that South Africa has historically entered into on a lot of property leases. In the South African business, current assets and current liability is roughly ZAR 17.5 billion to ZAR 17.7 billion. And the South African business, having almost no term debt at all, there is a small mortgage on an adjacent property of some ZAR 120 million. If you move to the right, obviously, and particularly just stay in the red box at the bottom, you start getting a sense of the long-term borrowings in ZAR terms in Ireland just over ZAR 3 billion. In Switzerland, a similar number, ZAR 3 billion, and more recently the Polish business contributing roughly ZAR 1.3 billion. To give you the long-term component of our borrowings of ZAR 7.5 billion. I'm going to unpack this on the slide to follow, but just to get a sense of where those borrowings were situated. But moving back to Ireland, a significant part of the Irish business is, obviously, their goodwill and intangibles. The business has grown over many years via acquisitions. And those goodwill -- that goodwill number represents a very strong historical base of growth that the team have enjoyed and are very competent at doing. And that is valued and assessed for impairment every year and the headroom in that number is excessive. So, again, a very strong indication of the performance of that business. In Switzerland, right-of-use assets, all of the property, particularly the TopCC Cash & Carry's under lease, and similar valuation on current assets and current liabilities. In Poland, a lot smaller valuations because of the recent entry into that market. But again, just to note, the non-current liabilities at circa ZAR 2 billion, of which the lease liabilities on properties are some ZAR 750 million, and then the group numbers, obviously, costing to the right. But moving off that base, if we could turn the slide and let's get into what is a concern or has, at least in certain notes been a concern to the market. And we're just trying to address group debt and just to try and give a sense of the debt that is used both in the disclosure, but also in the measurement of the relationships with our banks. So if we look at the top part of the growth what we've exhibited here for you is the bank overdrafts, which are a significant part of the total debt measure, particularly in discussions with bankers and in banking facilities. And as you can see, over the course of the last 3 reporting periods that number has definitely moved from a year ago, ZAR 3.5 billion, and we probably got the sequence somewhat out of line, the full year FY '22 slight declined to ZAR 3 billion and then a fairly significant increase to ZAR 4.9 billion as at the end of the reporting period March '23. You will see that the total borrowings of the business have remained relatively flat commencing in 2022 at ZAR 6.7 billion, moving to where we are now reporting ZAR 8.5 billion. The difference between that number and that we've just touched on, on the previous slide is the current element, so that is total borrowings ZAR 7.5 billion but just over ZAR 1 billion. And we will, again, discuss that further, and then there was a very small recognized financial liability bank balances, roughly maintained across all of the geographies at ZAR 0.75 billion. But the point I really want to then make is, if you consider the total group debt at the end of March 2023 of ZAR 12.7 billion, which appears to have increased rather dramatically from the ZAR 9.8 billion reported 6 months ago, a significant part, nearly ZAR 2 billion worth of that is in short-term bank facility movements. And the concern that has been raised around debt is well noted. We are well aware and focused on our debt quite substantially. But the point I would just really like to make now is the controllable element of that in the bank overdraft element is something that is critical for us to focus on right now. I'll talk to that again on further slides to follow, but just setting up below that, again, we do a similar exercise to setting up the debt exposure in local currency. And as you can see, if you look at Ireland, that number has moved from roughly EUR 183 million to EUR 199 million. There have been pay downs against that and included in that number is part of the Irish revolving credit, which is really just a short-term funding facility. So that's not just all-term debt. Switzerland, again, showing a slight increase, but also underpinned by pay downs, and the Polish number in euros showing some small decline. But really what we want to demonstrate in this exercise, and I suppose it would be best if we simply move to the slide to follow is that, yes, the concern that has also been raised in the market around the potential impact of a bank covenant breach. I think the overarching observation and the statement that needs to be made is the confirmation that at the 31st of March, the group at a parental level breached its covenants with the banks. And I would just like to unpack some -- to some extent the relationships that we do have with our banks. In each of the European geographies we maintain local banking relationships and in some cases syndicated relationships and in most of those instances, we would have local covenants measured against local performance. And that is the primary area of concern for those local bankers. The parental guarantee which overlays that almost at an umbrella level considers the entire group and, obviously, when you have certain regions like Poland and more recently, like the performance in South Africa, rolling up into the group level that can create, at a group level, some distress, where regional bankers do not recognize that they -- albeit that they recognize the issue or they recognize with some concern, the fact that at a parental level, there is some distress. Their primary focus is on the local relationship. And, obviously, in Ireland and in Switzerland, those have been well received by the bankers and we were able to very, very easily and very quickly negotiate and present to the banks the situation and receive their full support and their waivers. As you can appreciate, in the Polish business, because of its performance, the situation does change. Yes, the bankers are cautious. Yes, they were concerned. But again, very supportive and were prepared to provide us with waivers on that breach that did take place at a parental level. The calculation that we've done is really for a lot of you to understand that our banking covenants are actually reported in a pre-IFRS format. So fundamentally, we actually have to go and restate the disclosure. And part and parcel of that is just adjusting the operating profit back to a pre-IFRS effect. We've tried to just give some guidance on the components. But if we just start firstly at the net debt level, I think it is also important to highlight and I'm fully respectful of the fact that in dealing with any covenant measure, particularly if your debt is in foreign currencies, the defense of FX movements is a weak one, but I think it is just important to realize that in the total debt movement of some ZAR 12.7 billion, up from ZAR 9.8 billion, nearly ZAR 800 million of that was just the weakening effect of the currency. So the underlying debt effectively and that's a total debt including overdrafts, the overdrafts being the bigger element. The pure total borrowings or rather term debt in this period showed very little movement. And then the table below that just setting out what we would have calculated in getting to our reported pre-IFRS EBITDA. And yes, we did breach the covenant of 2.75x. And yes, in discussions with all of the banks involved, they were supportive of issuing the necessary waivers. And just to also make the note that on all of the other covenant measures that the group has in place including interest covers, we are well compliant, and that is not a concern at all. And then just the last comment and, again, probably to some of you, it will come at -- it would be evident that we are perhaps overemphasizing the point, but just really to continue to make the point that our borrowings of some ZAR 8.5 billion, yes, they have increased. We've set out on this slide just the extent of the deterioration of the weakening of the currency. But in local currency terms, and it just is needed to be made. In Ireland, they have some EUR 190 million of debt. Their structured repayment on that is some EUR 5.8 million per annum. The intention has always been that the Irish debt is part of the capital structure of that business. And at the end of the term, which is December of 2026, that will be rolled over into a new facility and renegotiated. So the intention in the Europe and -- sorry, just to make a similar point in Switzerland, exactly the same, CHF 166 million of debt with an annualized repayment of some CHF 8 million. The intention not being to pay down the debt over a fixed period, but to reach a bullet payment at maturity and, again, to roll over under a refinance. And I think again just to make the point of why the European bankers understand and appreciate that, that is the structuring of the debt, the repayment of both interest and capital continues to be honored by the local businesses, and the local bankers do not have very real concerns around the quality of their debt or the management's ability to service it. The next component, and again, just to touch on it at the bottom and this is the focus of the business and particularly the finance team in the business in the immediate short term because the biggest element which has caused distress on the covenant is the lack of net liquid funds. In fact, the increase in the overdrafts. And in the South African context, that is probably the biggest contributor of that movement from roughly ZAR 1.4 billion overdraft at September of -- sorry, ZAR 1.7 billion at September of '22 deteriorating to some ZAR 3.5 billion. And I think we just need to understand the impact that the SAP implementation at KZN disrupted the business some ZAR 900 million worth of working capital was influenced by the loss of turnover, the increase of stock holding as we went into that, that implementation and, obviously, having to support the KZN retailers during this period. In addition to that, Mike also alluded to the fact that the group built up safety stocks in advance of the Easter trading period by some ZAR 300 million. And we continued in this investment overdraft to also support the Polish business. There have been some funds, which we've had to continue or we had to provide to Poland to assist with their working capital. But fundamentally, this is the area of focus. We do not believe at this stage it is either necessary or appropriate to renegotiate any of the European banking relationships, particularly in Ireland and Switzerland. We obviously are in more regular talks with our Polish bankers because of the nature of operations. But we believe that these businesses are well capable of servicing at extremely completely competitive interest rates the debt in those countries. I would also just like to make a point that if you just look at the Irish debt of some EUR 199 million, some EUR 104 million of that actually relates to the buyout of the minorities which took place in 2020 and 2021. So the core Irish business has less than EUR 100 million of borrowings relating to operations. We structured the buyout of the minorities in country, which obviously gave us the benefit of the costing, but it also avoided having to bring that debt back to South Africa and deal with it on the South African business. And both in Switzerland and Ireland, we have managed the buyouts of those minorities in that way. Included in the Swiss number of CHF 166 million is some CHF 56 million relating to the buyout of the Swiss minorities also taking place in roughly 2021. So at this point, I'd just like to really wrap up the conversation on debts and debt covenants. The slide that follows just for reference. There was concern around some of the exact ratios in place and just to highlight at a group level and as I've described it as almost the umbrella covenant, those are the measures that we have in place. We have ironically both a pre- and a post-IFRS number so it's a real belts and braces approach on leverage. And then on the right hand side, you can see what the in country actual covenants are. And as I've stated at the outset, in both countries very well operationally performing against the covenants. In Switzerland we have engaged with the banks on the ratio that they've achieved because of their low profit in this period, but again they were comfortable and that number should reverse. So I hope at this stage I've been able to give you some sense of where the business stands on the issue of debt. Yes, we are aware that at circa ZAR 8 billion worth of term debt, it is a significant number. But against the backdrop of operating profits on an annualized basis of some ZAR 3.5 million to ZAR 3.8 million at roughly 2x, we are not concerned about it, but we do acknowledge that it needs to be managed. And if the opportunities in the future exist to start reducing debt, that would obviously be a priority and something that we would want to deal with. In the more immediate short term, our focus is on short-term debt or more locally referred to as overdraft debt. That is what the business needs to manage in short term, cash flows and short-term working requirements or working or funding requirements. But just wrapping up on cash flow, we've set out for you on the slide that follows just the cash flow performance of the business over the last period. And again just very, very obviously illustrating that the working capital changes and net working capital outflow of some ZAR 1.9 billion. We touch on the right hand side just giving some color without going into all of that detail again. We spoke to the KZN impact; we spoke to as a consequence increasing trade receivables, but increasing trade receivables in the greater business as we are supporting retailers in these difficult and challenging times; and then a decrease in trade payables because of the disruption in that business as a result of turnover losses. Taxation and dividends highlighted further down. And then capital expenditure and included in that number circa ZAR 292 million of the ZAR 1.1 billion relates to SAP projects. Small business acquisitions of just under ZAR 200 million. And then just from a disclosure point of view, the principal element of the IFRS 16 leases, both receipts and payments. And fundamentally, finishing at a net cash movement of some ZAR 1.9 billion. And it is not -- perhaps the point being those of you that might have noted that that ZAR 1.9 billion is almost exactly the working capital change in the period. And again highlighting why the focus on the business has to be its working capital in the short term because the cash that is being generated is more than adequate to cover any other opportunities, be they acquisition or capital expenditure. But at the same time, I can reassure you that the business has taken a hard view and will be taking a very close look at any capital expenditure in the short term. And to the extent that that can either be delayed or deferred, that has also been agreed and instructed. The slide that follows and again just to illustrate in a more graphic form what you've just seen and I'm not going to spend that much more time unpacking it. But I think what is clearly obvious is that the inflows of operating profit were not sufficient to cover particularly the working capital requirements and therefore remain the focus of the business at this time. Just to touch on capital expenditure. We provided you some details firstly at a high level between expansionary CapEx and then just more regular maintenance CapEx and then also included in the slide is just the acquisition of businesses and subsidiaries. On the right hand side just giving you a breakdown of what those were. Some retail stores in both South Africa and in the United Kingdom. We bought in Ireland a wholesale business, McCarrick Brothers, which is a very, very good deal for us; a deal that the Irish team are very positive about and then Tunderosa in fact relates to properties and 4 retail stores in Dublin. And then the rather unusual named business, SMC Food Concepts in fact is a meat company that has been acquired by Encore as part of our very committed view on improving our private label product and some reverse or vertical engineering, which in fact is taking place in that space. So we're quite excited about that opportunity. Just to turn the slide again just to make the point and just to give you further color of the capital expenditure by geography to get a sense of in fact what we are spending. And just to make the point that within the South African business, some of that expansionary CapEx of ZAR 289 million includes from a cash flow point of view some ZAR 150 million worth of SAP spend. That has brought the total SAP spend since the project initiated to some ZAR 800 million. Before I wrap up, I just want to also on the issue of CapEx just provide the guidance. Our budget CapEx for financial year '23 was circa ZAR 2.5 billion. At half year roughly ZAR 1.1 billion has in fact been spent and/or incurred. I can assure you that the spend over the second half of the year is not going to be ZAR 1.4 billion and we believe that we will be probably not anything more than circa ZAR 1.8 billion to ZAR 1.9 billion for the full year as we look to pull back very carefully. We do not want to impact some of the more strategic projects that we have initiated, but we do obviously need to ensure that we are very prudent at this time on any capital spends and allocations. So if I just turn to the last slide in wrapping up. It's been a long presentation, but there are a lot of detail particularly around the balance sheet and debt. Turnover growing by 7.9%. A very disappointing operating profit performance at a group level contracting by some 17.5% and very disappointing and the management take it extremely seriously that profit after tax in fact has contracted by as much as 30%. I can assure you of something and that is that our management teams are working extremely focused on ensuring that is reversed not just in the immediate short term, but to set up the business for more longer-term sustainable performance at that level. And before I hand back to our Executive Chairman, can I just make 1 last thank you to our finance teams around the group. In Ireland to Aiden to Cole to Jen to Joe; in Switzerland, [ Direto ]; in Poland, to Jakob, to Patrick and all of your colleagues; and in our South African team across our 6 geographies, our 6 regions. And then most significantly to me in the preparation of this to our head office team. It's a very, very small team that hold all of this together, in the last 6 weeks have been put under extreme stress. So to Max, to Abby, to Kiara and all of the team; my thanks and appreciation for all of the effort that's gone in to ensure that we've been able to present today a comprehensive disclosure on the performance of this business. At that note, I'd like to thank you all and I'm going to return to our Executive Chair. Thank you. Mike?

Thanks, Mark. And also just on behalf of the Board, a big thank you to you firstly for the huge amount of work that you've put in with your teams over the past period. I'd just like to move on to our outlook very briefly now. And to say that in the Southern African environment, we've seen a significant uptick in sales post the period-end, which is very encouraging for us, and the team will push ahead with the accelerated growth plan as I've discussed earlier. Operational and capital expenditure disciplines and improved working capital management are critical focus areas for management as Mark's mentioned and I also have. And resolving the outstanding SAP issues is a priority for the business and for our retailers and I believe we're getting there. In Europe, the summer months are traditionally very positive months for retail trading in the hospitality sector. And in Ireland and Southwest England, the teams will build on the momentum seen in the first half reaffirming their position as leader in the convenience sector. And execution of the new EUROSPAR strategy will continue in the months ahead. In Switzerland, we remain focused on new business development predominantly in the petro-convenience area and strict cost disciplines to improve profitability in this region will be key to success in the second half. In Poland, management will focus on a couple of key areas, mainly gross margin improvement and retailer loyalty growth and the Board, as I said, will make a decision in respect to the options it's currently considering. And in terms of the outlook there; while there are numerous challenges, we're incredibly positive about the SPAR business. So in closing, I just want to say that we hosted the SPAR International Congress in South Africa a few weeks ago, at which the concept of collective resilience and moving forward together were the themes around which many discussions were based. And in the exceptionally difficult circumstances and situations that most South Africans and most South African businesses find themselves in at the moment, perhaps it's worthwhile reminding ourselves that we as a country have always demonstrated collective resilience. We've also always managed to tackle what appears to be insurmountable problems in our country and we've always been able to solve them at many times in our history. However saying that, I believe that we're at crossroads now and in South Africa it's critically important for business and government to work alongside each other now more than ever putting aside any mutual distrust. It's time for all of us to move forward together. We're not a nation of losers. And as often said if you've got the right people and the right tools, you can build or fix anything. And I'm very positive about South Africa and I'm very positive about The SPAR Group and I think there's work to be done and it will lead to much greater success. And I think I'll stop there and Mark and I will now take any questions that you may have.

First question. What are the options you are considering in Poland? Can you close or sell the business and sort of likely exit being in terms of cost?

Okay. I'll take that question. There are 3 options, but only 2 I think are being considered. The 3 options are that you could sell the business, you could continue as you are or you could expand rapidly and really build a big business. I think the idea of staying as we are and sort of eking towards a break-even situation is not something that we find very appealing. So I think the remaining options are one, to exit Poland by selling the business; and 2, the other option would be to expand rapidly. Obviously if we're going to expand rapidly, that might require acquisitions, which in turn may require increased debt and that would -- I don't think that's something that we would find entirely palatable without showing that elsewhere in the debt structures we were able to reduce debt or alternatively that we might find partners in the local communities and in the local countries to support our endeavors. So those are the options for Poland. And I think there was a second part to that question, Kerry.

No, that's it. Next question. What are the cost cutting initiatives in Switzerland? What is the [Audio Gap] for operating margins going forward?

So as commented when we did speak about Switzerland, the Swiss operating margin at the moment of circa [ 1% ] was very much in line with what we've guided previously, but not a number that we are comfortable with or satisfied with. So under Rob Philipson's guidance and leadership, the Swiss have looked at their entire income statement, their entire cost structure. Some of that cost was the disposal of those corporate retail stores. But yes, you do lose the retail margin. More significantly and in the short term what the Swiss team have done has taken views on certain redundancy positions. We are not wholesale retrenching, but they have reduced a small number of heads, which will have a short-term impact at least in the FY '24 financial year that will come through. And in fact I've got to also make the point that the entire Swiss leadership team have taken salary cuts at this stage in an effort to ensure the sustainability of that business. Other than just people cost, the business will also relook its entire operating cost structure including running cost and reduce where they can.

Okay. In terms of the covenant waiver, how long is it waived for?

So that has differed from banker to banker. Our projections at this stage suggest that at September of this year, which is the official reporting date to certain of the banks, we don't report to all of the banks every 6 months, but the projections and forecasts that we have from the business suggest that we will still be constrained in September this year unless there has been a dramatic turnaround in working capital. We have presented that to the Irish banks and to certain of the European bankers. They have already been very supportive of that and in fact we've received their support to beyond September of '23. But as a formality, we will approach all of the banks again in September and again request their support. So at this point in time I think the short answer would be it has been wavered for the breach at March '23. We have received very positive support that should we need to apply for September '23, there is a very strong compelling underpinned base case and they are happy with that. But we would go through the motions again in September.

Mark, before Kerry asks the next question, perhaps you can just comment on an element of the previous question, which is what would the accounting effect be on exiting Poland or selling it?

Well, at this point in time we have approximately EUR 110 million of debt in Poland. Obviously that debt is fundamentally secured and supported by the South African parent. And if there was an extreme decision taken to exit the country, you would obviously have certain break costs or certain exit costs, but you would at least be faced with as a minimum the settlement of any debt in that country which right now would be circa EUR 110 million or roughly ZAR 2 billion.

Right. So that would be offset by any possible sales proceeds. That would be the cash impact. And I think from an accounting point of view, there would be probably very little impact because of the consolidations that have been taking place.

Correct.

All right. Just to clear that up. We did miss that part.

Coming back to the covenants. Are you able to comment on any conditions that have been placed on the group; for example no dividends, having to reduce CapEx?

So the waivers that we've received from all of the bankers across all of the geographies have included no conditions at all. The only additional penalty margin was added by 1 of the banks of roughly 1.2% and that will remain in place until the covenants are reinstated.

Next question. Should Poland not be sold and you breach covenants at year-end, what is the risk of a rights issue?

At this stage the possibility of a rights issue is remote. It's not something that the Board is considering. We have many other options before we could get to a situation like that, including for example a close look at how we fund our retailers because SPAR fundamentally has done a huge amount of work in this area, but SPAR isn't a bank. And the other area that we could look at is of course in the value of our properties. We hold a huge number of properties and of course there will be options for sale and leasebacks in this environment. But at this stage we're not feeling any pressure to move in any of those directions just yet.

Next question. How much loyalty and service levels have fallen in South Africa due to the SAP issues and how will this be fixed?

So if we consider service levels as the percentage of the delivery that we're able to make to retailers from our distribution center, then the number post the go-live in February was exceptionally low some 20%. But that as recently as last week has reached a number of just over 70% and continues to increase quite substantially week-on-week as the system is bedded down and a lot of the issues in the system are smoothed out. The plan is to get that to 85% by the end of this month and at 85%, the KZN distribution center will start taking back the delivery service to certain of the peripheral KZN stores that at the moment are being serviced by the Eastern Cape and by South Rand and North Rand, which will then allow the business to normalize its distribution to those retailers in KwaZulu-Natal. So the percentage at the moment is roughly 70%, but on track for 85% by the end of the month. And as far as stock levels are concerned, yes, we obviously built up safety stock in the DC. I think part of the frustration of the system at the moment has not been clearly able to buy efficiently because of the amount of noise that is taking place in the system. So we might have a lot of the wrong or overstock in certain areas and insufficient stock or out of stock in others and that's part of getting the delivery level up to 85% as we identify and bring in the stock that we are out of at the moment.

Kerry, before we go to the next question, I just want to make a comment on the debt covenant breaches. I think it's important for people to understand that almost all of the extent of the debt covenant breach is caused by foreign exchange currency movement. Mark, maybe you just want to comment on that. I think it's important for people to understand that this has played a huge part in the numbers, the mathematics that we do in the business and doesn't represent any significant change in the business. And maybe I can just hand it back over to you. And the other important thing, which we really want everybody to understand clearly, is that we hold mostly overseas debt. This debt is cheap and this debt is serviced and repaid according to the plans in Switzerland and Ireland. And to the extent that one can earn 20% returns on investments or on projects in Ireland for example and you're paying 4% interest, I think it goes without saying that they're paying down debt or alternatively bringing the debt onshore makes no sense whatsoever.

So Mike, just in response to that, yes, I'm always cautious in discussions with bankers and bank covenants particularly at a parental level to blame everything on FX. But the reality is that the deterioration or rather the weakening of the currency over the last 12 months has had a significant impact. Would we have been able to avoid a breach? No, we wouldn't have. We would have been a lot closer to 2.75x. And hence, the focus in the presentation on identifying that working capital also contributed to the breach. But would we have been at circa 3% or approximately 3% had it not been for the currency movement? Most definitely.

Okay. Next question. How much support did you extend to your retailers in South Africa in the first half due to lower trading in terms of loans, working capital? Will this continue? Have any retailers gone bust?

I think it's going to be difficult to put an absolute number on it because the type of support that we would be providing to retailers would be in a wide range of categories. It's not just a one solution fits all. In some instances the work that's been done in our marketing teams; providing increased marketing support, promotional advertising, subsidy on product, driving special promotions for stores to try and assist their retail turnover. In other instances, we provided some form of subsidization on fees, be it leases or rentals. And the most critical one obviously to us right now is the short-term support on trade debt and extending credit to those retailers. So it's not an absolute number. It's a wide range of support, all of which impacted our results.

Please could you provide an updated timeline for SAP implementation on a regional basis and the subsequent outflow of CapEx timing?

Yes. I think we're planning to finish a proper independent post-implementation review of what's been happening in KZN in the next couple of months and from there is going to be a full-blown evaluation of all the learnings before we start moving to roll out SAP in the Western Cape and Eastern Cape. We want to learn from all of the mistakes that have been made.

Please can you clarify the time frame for a decision on Poland? Is it the end of the calendar or the financial year?

Financial year. We are under pressure. We put ourselves under pressure to make this call. And as I mentioned earlier, we commissioned some very, very detailed research into the market and its players and as I reported, we received that last week and we studied it at yesterday's Board meeting. In fact we had a board meeting on Friday to talk specifically about Poland. We had the weekend to go through it and then we discussed it again yesterday. So it's receiving urgent attention at the Board.

Next question. Has the Board considered exiting Switzerland? The business seems ex growth and generates poor revenue and profits relative to its asset base. If not selling it, what is the rationale for keeping it?

Look, I think at this stage it's important for us to study what's happening in every geography and I think it's a question of priorities. At this stage we're very focused on Poland and what's happening there. I mean the Swiss market has difficulties, as I mentioned, with the recent cross-border trading. There's no doubt that convenience shopping in Switzerland is very much on the up. The other thing that's interesting in Switzerland, there's some very strict rules coming down the road in a couple of years' time with regard to forecourts and so it's quite possible that forecourts could be used extensively for retail outlets. So that's a bit of thinking that we are doing and working with AVIA at this stage on.

Next question. The dividend cut for the interim period, how long should one expect the cut to be implemented for?

I think that's obviously something we've discussed and we're not in a position to say we're going to cut it for this year or for 2 years or 3 years. We obviously thought about that. I think it would be irresponsible for us to make a call like that. I think the most important thing is for us now to do what we've got to do for the next few months and then we'll reevaluate it towards the end of the financial year, which of course is September, right.

In terms of the SAP implementation issues, is there any recourse for damages?

At this stage, no. As I've mentioned, we've been quite fortunate that we were able to help many retailers out of our Eastern Cape, South Rand and North Rand DCs. But having said that, we're very well aware of the fact that some retailers have been hit.

Giannacopoulos lawsuit being resolved?

Yes. It is being resolved along 2 channels. We're resolving it along a formal channel where we've agreed to arbitration and we're also following an informal route where several of our executives in KZN and I are involved directly with the family and we've met and we've had many discussions. And as I think I mentioned, we've distilled all of the issues that concern the family to about 10 and in principle we've resolved about 6 or 7 of them and there are 3 big ones that we still need to tackle. But I'm confident that if we stay committed to the process, we can get through this. Failing which, it will go to arbitration.

Is it reasonable to assume that the differential between wholesale sales growth and retail sales growth in South Africa is indicative of franchisees buying away from SPAR?

Yes.

Okay. On loadshedding, having incurred ZAR 700 million in costs during the interim period, what is the estimated cost for the second half of the year for your retailers?

Well, I think that the problem we've got is that load-shedding isn't consistent on any day or during any 1 week in any part of the country. So it's difficult for us to make projections. But I suppose on a linear basis if loadshedding was to continue on the levels that we've seen for the last 6 months, the number would have to be ZAR 1.4 billion and if in fact we went to loadshedding Stage 8, it will be significantly higher.

Is HMR, home-meal replacement, benefiting from enhanced takeaway demand from consumers due to loadshedding and not cooking at home so much?

Probably.

As PPE expanded this year, what type of PPE CapEx did you expand into? Secondly, what do you plan to do with the Swiss and Polish businesses, which we've covered? Do you plan to keep -- okay, we've covered that.

Also the question was regarding -- just about the PPE, if you could just repeat that portion?

What type of CapEx did you expand into? PPE CapEx, apologies.

So the total spend in the period was just over ZAR 700 million. ZAR 272 million of that was intangible assets relating to SAP and then the remaining ZAR 473 million was basically trucking trailers and growth expansion requirements.

In terms of your Go24 stores in Switzerland, are these similar to Amazon Fresh and Tesco GECO stores or is this something different?

The software and the management of the store is different. Basically one just access -- I think there are elements which are the same, but fundamentally what you do is you access the store using your phone and you move around the store and then you exit.

Back to South Africa, what is the prospect for cost growth in the next 6 to 12 months?

Prospects for cost growth, I think this is dependent on diesel prices, a lot of this will depend on electricity availability and a lot of this will depend on other cost pressures that are pushed in our direction. As I've mentioned before, we are used to managing risk and return in business. And in the last few years I think this whole element of uncertainty has been introduced into business, which makes it very difficult for us to predict some of the exogenous factors and how they'll impact on the business.

What drove the decline in other income in South Africa during the 6 months?

What drove the decline in other income? Mark?

Very, very simple. In fact other income in the SA business was fundamentally the fact that in the previous reporting period, we had some ZAR 33 million worth of loss of profits, insurance claim being the overhang of the disruption that took place in KZN in 2021 and obviously that is no longer repeated. So it's really the insurance proceeds that were paid out in the prior period.

Just in respect of SAP again, P&L impacted by ZAR 786 million with South Africa with gross margin of circa [ 10% ]. How does that impact results and operating profit impact of ZAR 143 million?

Correct. The calculation of numbers is not far different. I think what we've also done in getting to the ZAR 143 million is we've actually yielded gross margin of circa 9.3% and then on top of that there was obviously additional OpEx incurred. So ZAR 786 million times 9.3% plus additional OpEx of roughly ZAR 70 million is your ZAR 143 million guidance.

Can you please explain how people living in Switzerland can buy groceries at 50% to 60% cheaper across the border?

Yes. It's a crazy situation. There are different cost structures in Switzerland and also very different tax structures and VAT and sales tax. And so what we're finding is that people when they want to do shopping for a week or 2 or for a month, they'll get in their cars and drive over the border and shop in Germany or Austria where the prices are significantly lower. Of course this does not affect convenience shopping, hence our focus on that sector. And it's a fact I mean as we've seen almost anywhere in Switzerland is within 1.5 hours of a border; whether it's Italy, France, Germany or Austria; and people do this. It's just the way that the Swiss economy is structured.

Next question. What GP margin assumptions are applied to Switzerland's EBIT margin guidance of 1.5% to 2%?

It's not so much a guidance. It's what the Swiss were currently achieving. So basically using a number of 17.5, we believe that number could be as strong as 18 and at that 18 level, we should be between 1.5% and 2%.

Mark, can you talk to OpEx cost growth expectations across the geographies for the second half?

I think to be honest with you, Mike has already dealt with South Africa. Nothing to repeat the whole shopping list of concerns that might impact the South African business other than to say that in the SA business, the South African CEO and the management team have been given a clear number that we expect them to save and the fundamental objective in the entire exercise is not to target a percent, but to target positive leverage.

Yes, I think that's completely right. I mean we simply can't have a situation where your sales are growing at x percent and your costs are growing at 2x%. So there's going to be a very steep cost reduction exercise carried out.

When can we expect an update on a new CEO?

I hope that in the next month or so. We will continue with updates every 2 weeks if we need to, but we really need to fill those positions urgently now. But as I said, we're not prepared to be rushed into it. So we don't have the good fortune I think of having to make a change again in the foreseeable future.

Does the group use live hedges?

For what? I mean you obviously can hedge operating costs and you can hedge balance sheets. We do not hedge the balance sheet, but we do definitely hedge some of the operational expenditure.

Are you reviewing the current funding structure where the group uses less overdraft facilities going forward?

Yes. So I think as Mark touched on, we're definitely doing that. I mean what we have done because we've been in a position to do it is in recent times, we've been able to make acquisitions out of short-term funding and then there's a chance now obviously to convert that to term debt, which would be more appropriate to the length of the project that we've invested in. And I think the number there, Mark, is probably ZAR 2 billion odd.

Okay. What was the plan to look at ForEx gain in Poland?

Circa ZAR 10 million.

Interest rates in Switzerland have ticked up significantly off a low base. Given the low profit margins and innovative levels of debt in the Swiss business, will the Swiss segment be cash flow positive with higher finance costs going forward?

Obviously the challenge is higher finance charges going forward for how long. I mean obviously the Swiss business at the moment has got significant debt. A lot of that is mortgage debt and, as I've alluded to, some CHF 56 million is the minority buyout debt. So the challenge for the Swiss business is to get the operating margin back to a level of plus 1.5% and then we're going to have to manage the debt -- sorry, manage the finance cost. At the moment, the finance cost in Switzerland is circa 50% of the operating margin of 1.5%. So yes, cash flow-wise, they can service their debt.

I've mentioned this, Kerry. We are looking at this because we're not a bank and we're not a property owning company. We are a retailer.

What CapEx are you not spending that you had originally planned for?

At this stage, I think the most obvious one is the fact that in the current period there was a certain cadence on the rollout of the SAP project, that has been pushed out. So it's not so much the CapEx has been cut, it's been delayed. So as already guided, the budget for this year was circa ZAR 2.5 billion, of which a substantial portion of that was actually SAP-related CapEx of some ZAR 900 million. In the current year if the spend is going to be ZAR 500 million, then we will defer ZAR 400 million.

Can you speak about the health of your franchisees? How many stores are making losses or experiencing difficulty?

I can't give the correct or accurate answer on that, but I can tell you that I've engaged with many franchisees across the different stores. I've met many Build It franchisees, I've met many SPAR franchisees and by the way they're not franchisees, they're independent wholesaler and retailers and it's completely different. So these independent retailers, many of them are incredibly smart and very entrepreneurial. They're running these businesses for themselves and their families and I think many of them are doing well. But there's no doubt that particularly the independent retailers that are owning fewer stores or perhaps 1 store and aren't hardened retailers that they will be taking some pain, particularly with the cost of running generators and on the other side of the equation, the restrained consumer spending environment.

Can you comment on what would happen if the financiers don't waive the covenants?

They have waived the covenants. And I think as Mark's mentioned, unconditionally with the only adjustment being 1.2% interest rate hike with 1 bank.

If the rand stays as weak as it is now for the next 6 months, what are the effects on profitability?

Again it really depends which way it moves. I think in the South African business, which is our mother ship, I think that would be unaffected by that.

Okay. And then what is the status of your online delivery service including how many SPARs have the online offering?

So I think I mentioned we had 5 pilot stores last year. We've got 234 now. Planning to have 400 by our financial year-end and we're also looking at leapfrog techniques to accelerate this.

Okay. That's it for today.

Well, I think that then brings us to the end of our presentation. Mark, I don't know if there's anything else that you want to add. But if not...

I was just going to take the opportunity, Executive Chair, to say that in the very short space of time that you've been part of this organization, your knowledge of SPAR is not just impressive, but it's actually becoming quite extensive. So it's been a pleasure. But no, I think it's been a good morning. I hope that those of you that have joined us at least have taken comfort in a lot of the uncertainty that has existed in the market over the last couple of weeks. There's been a lot of questions asked, a lot of concerns raised and we hope that what we've been able to share with you today addresses a lot of those concerns and gives you the assurance that this is a solid business. It is going through some challenges at the moment, but it will be back.

And I think it's been a very interesting couple of weeks for us because since putting out our trading update and our profit warning, obviously we've been unable to speak about anything. So we felt a bit like we've been in the boxing ring with our hands tied behind the back. But I'm glad we've had a chance to talk this morning. I just want to say thank you very much for making the time for us and please contact us if you have any other questions. I know some of us will be having discussions anyway. And most importantly, I just want to say thanks on behalf of all of us for your interest in The SPAR Group. Enjoy the rest of your day.