Truworths International Limited (TRU) Earnings Call Transcript & Summary

Good afternoon, everybody. I'm welcoming all the people in the room here with us and also the webcast participants. I apologize for my throat. As you can hear, I've got a bit of a laryngitis attack, happened last night. So I'll do my best. And if necessary, other people will support me. The format of the presentation is the same as always. So I'm not going to go through that with you. Looking at a high-level summary of our performance, I'm going to go through the numbers, you already know. Gross margin, slightly up. The trading expenses have been very well maintained. We once, again, generated lots of cash. And essentially, we don't have any debt anymore. Not strictly true though, because if we paid creditors there'd be a bit of debt, the month-end and all that. But essentially, we -- the group has hardly got any debt. Diluted HEPS and HEPS went up. The Truworths African business grew by 2.7% with a small growth in like-for-like sales completely driven really by account sales growth with cash sales decreasing by 1%. Office U.K. shrank in U.K. terms, in pound terms, by 2.6% with a like-for-like decrease. At least, partially, that's as a result of closing stores, which, as shareholders know, we are doing as a strategy. But as I say, it's partially. It's not only because of that. Secondly, we haven't given you Truworths's e-commerce online contribution because it's still relatively small. It grew over 100%. It's about 1% now -- or just over 1%. But Office is now 34% online, which you've known about it for a while, but it's getting higher and higher. So Office is a really online -- it's becoming increasingly an online business. We just thought that we would share with you very quickly, and you'd be able to read this in your own time and questions can follow, and anyway we interact with shareholders regularly outside these presentations. But we shared with you the model that has appealed to us and which we use to drive our forward thinking. And they relate to -- I'm sure all of you would be very familiar with this, but let me just say them anyway, highly increased flexible fashion -- I mean [ forced ] fashion and quick response is the name of the game and that means vertically integrated manufacturing. It's becoming increasingly necessary to be local and to be able to respond quickly to customers' needs and when -- and to trends of merchandise and when you import merchandise. Shortening that supply chain has also become increasingly essential in our industry. Of course, everything I'm saying is universal because nothing here is exclusive to South Africa. This is world universal trends. Customers have to perceive value. It doesn't matter if it's not cheap, but they have to perceive value, otherwise they are incredibly discerning. And it applies to us particularly, because our DNA is very specific about the fact that we want and will not give in on the idea of being aspirational. So the idea of having quality merchandise, of hot fashion on our own brands primarily, is essential. That is what we regard as our DNA. Remembering, most of the clothing brands in our stores, almost all of them, are our own in-house brands, that our market research indicates time and time again, our customers see as international brands. But it's got to be worth it. And we always say internally, our customers are geniuses when they buy together, I mean, big groups of hundreds of thousands of people. So when you add them together, they know better than any of us what is right and what is wrong. And therefore, the real true value, we have to listen to our customers and not dictate to them. So if they think it's too expensive, and therefore they don't buy it, we have to deal with it. So that's a big challenge for retailers, especially if you are aspirational premium. Constant -- customers have an expectation of constant improvement with the way you serve them at each and every touch point. And with e-commerce growing, and now we've introduced lay-bys, which is another type of touch point because it involves putting aside and then coming to collect or taking them -- getting their money back. In each case, there's more transactions required and the level of service and understanding of staff has to be at a premium. It's not acceptable any longer to customers, irrespective of who they are and where they are, to have inferior service. Data analytics is -- has always been, in our business, absolutely critical and we like to pride ourselves as being world leaders in data analytics, both in terms of merchandise and understanding the logistics of merchandise related to stores and how you get into stores and which stores and in which sizes and then also relating to accounts or credit, however you want to call it, and the management of that. Because I know that many analysts are bothered about the extent of our credit book. But you have to understand if we have superb analytics, it actually results in us really having a loyalty base of customers who we know better than most retail businesses in the world because they're such a high proportion of our sales. So we know so much about our customers, and we can communicate and interact with them in a unique way. And bearing in mind, most of our transactions are related to a champion-and-challenger strategy. So over the years, we established best-in-breed methods of communicating with our customers. And as they change their needs, we are in, all likelihood, able to pick it up quicker than most. And of course, that's becoming universal. There are so many artificial intelligence opportunities in our business, of crossing customer data to merchandise data to store data, and finding solutions to the opportunities there. Truworths has always believed in best-of-breed technology. We're not a enterprise-type of business. We have bought and continue to buy, and sometimes internally develop, technology that is the best-of-breed for the issue that it's trying to deal with. So we'll look at a particular space, whether it's -- whatever it is, whether it's DC, administration, accounting or merchandise credit, and we will, in each and every case, choose the best technology we possibly can and make our systems integrated internally. I've already said about the customer experience, both digital -- there's sort of almost an overlap of that, digital and physically in stores. One is digital, and physically in stores the other. They are so important. And of course, they now are combining because you so often get customers who are transacting, especially in Office, digitally while they're physically in-store. That's becoming the new norm. People think, well, why I should queue. I like this shirt, I'll order it and have it delivered to my home today. And sustainability has always been there, but it's quite remarkable how speedily it's suddenly become an issue. I mean when I was in the U.K. a few days ago and paper bags are the order of the day. Plastic bags you just don't see anymore. It's becoming a major, major issue and especially so with young people. And although South Africa has been a little behind there, I think that's going to change dramatically over the next 12 months to 3 and 4 and 5 years. So that's the sort of model. And in each and every case, we have teams of people continuously working on all these as a series of projects. At any one point in time in our business, we will have over 50 or 60 major projects came on with lots of people involved, all driving these elements of retailing. And it will never stop and it will never end. In the next few slides, I've given more detail about those -- that matrix, and I'll just highlight 1 or 2 things. I've said already about fast fashion and absolute need for flexibility and speed. The issue is you've got to have fabric available and you have to have production space available. That's the real thing. Fabric, of course, and trends. And the ability to do that, whether it's -- you're buying in Mauritius, Madagascar or China or India or wherever it is, the ability to react to trends in fashion as well as styles that are selling is completely dependent on production capability and fabric. So that is becoming very important. And the reason why we were -- we, over the last 3 years, have implemented a PLM, product lifestyle sort of management system, it's taken 3 years, but it's up and running, fully functional in quite a unique way in our business and has been for almost a year now, is because of what I've just said. In order to do what I've just said properly, you have to have a completely transparent PLM system that looks at your merchandise from the time it was thought about till the time it arrives in stores and thereafter, or the other systems, they tell you what to do with it. And that, of course, includes local manufacture. This thing about value and being an aspirational brand and differentiating ourselves because of our DNA and the value equation through having higher quality. And we believe and we know from our research that our customers believe that our quality is pretty much uniquely high in the marketplace and then, of course, getting the right fashion. The way we've decided to do it is instead of dropping our margin, which we think is a bad idea, and we will certainly not do that, it is to make sure that our inflationary product increases over the years at the same or better quality, is below the inflation rate in the country. And we've managed to do that since summer 2017. You can see that we have been really good at that. And that's been driven not by dropping standards or quality, it's by being much more focused on the idea and the importance of value equation for customers. And again, it's one of those things that will never end. It will keep on being an issue forever. And I think we're getting better and better at it, and I think the evidence is there. The omnichannel experience is, I don't have to say it, you all know, South Africa is perhaps behind the curve. But then we have the fortune, in a way, of having Office where it's 34% of our revenue. And so our omnichannel capability, which, by the way, in Truworths is not dissimilar from Office. Office is ahead of us because they've been here for longer, but we have an enormous amount of mutual learnings. The experience is unbelievable, and you can just see it's one of those things that customers are getting used to and they're going to take more time in South Africa perhaps than elsewhere, but they're going to get there. Bearing in mind that South Africa has hundreds, if not thousands, of shopping malls that are easily accessible to most people irrespective of the income group. Compared to, say, the U.K., where it's very difficult to get to easy shopping habits, especially because of transport costs and convenience and time. So it's the store experience -- excuse me, the store experience combined with the digital experience and the integration of those 2 things, I believe, in South Africa will become eventually world leaders. You won't really know when a customer buys digitally or they're physically standing in-store or whether they're buying it online, you won't know. And we will be the leaders in that. And that's quite an exciting thing. It's just kind of interest, I mean, this is not in my presentation, but I'll add it into you because you'll find it interesting. We launched, and I think in this case, it's unique because we launched lay-bys at roughly the same time as e-commerce, I think 2 years ago. Now when you think about that, many of our competitors had lay-bys for years and years, so they were ahead of us. And e-commerce, we were kind of in the middle in timing. So it's quite unique to do them roughly at the same time. What's interesting about that, we went for best-of-breed, latest technology in both. We chose to go lay-bys because we'd always avoided it because we felt that we offer credit and you shouldn't offer lay-by. But we saw this as an opportunity, especially for people who cannot afford credit. And what's interesting, and you'll find this very interesting, e-commerce now is about, in size, it's growing fantastically, I think, 130% the last time, but it's still [ a bit white ]%. And it's a -- I think it's up 15% or 16% because if it was a store, it would be one of our top 20 stores. But we launched lay-by at the same time and lay-by will be, by far, a bigger store. It's interesting. It gives you an indication of customers in South Africa, their affordability and many of them [ owe their debt at ] one creditor, can't afford credit. Remember, our lay-by is 3 months; you have to make the choice. About 80% of people do come and get the merchandise and it's a cash transaction. We are very strong in both Truworths and Office on social media. I mean Truworths, itself, has 1.9 million followers. Identity has 800,000. Office in the U.K. has 360,000. And when -- that's Facebook. In Instagram, Truworths has now 180,000, I think it's almost doubled over the last 2 years. Identity is growing nicely and Office has got much more than both because Instagram is a wonderful tool for fashion. Di Dynamic data analytics. I don't think I have to say much about that because everyone knows how critically important technology systems as well as the ability of very clever, analytical people who are retailers and not just mathematicians to be able to take advantage of the latest technology and the latest thinking across the whole spectrum of retailing. And I really mean it when I say from merchandise to stores to customers. The invisible nature of that and the importance of that can never be overestimated. Remembering, Truworths has 7 million customers we can track and Identity has another 3.5 million, so it's over 10 million South African customers who are loyal to you or credit customers. And there are 6 million people in the U.K. who transact periodically with Office. So it's all about AI and understanding and reacting and communicating with and offering the right thing to the right customers at the right time. And then best-of-breed technology, I'm not going to say more about that. I feel that we've got a very, very well-established track record of being able to prove that we've always been this way, and it continues to be the case except, I think, it's even accelerating. And the elements of retail success relating to understanding our customer needs, their brand expectation and the whole shopping experience whether you're shopping, lay-by, credit, loyalty, online, in-store, it's got to be a seamless, pleasurable experience. And we completely acknowledge and admit we are not there yet. We -- in fact, we research it over time whilst customers check us out and we come short plenty. But the issue is not that. The issue -- because you probably always will, because of customers' increasing expectations. The issue is not about whether you come short, it's whether you do anything about it. And we've got a highly reactive process to try and deal with deficits in that experience. And then, of course, we're always busy with store formats. Sustainability, I'm really not going to list all the things we do that you have to do nowadays. They're all on the slide. But in fact, if you go and have a look at our sustainability and environmental report, you will see that we do an enormous amount of work there. But again, we are far, far, I can't tell you how far, from being good at it. We feel there's a long journey to go and we're very committed to that journey. So getting to the country and talk about -- both countries, the U.K. and South Africa. Once again, I'm not going to lecture people who know this as well as I do. Just a quick summary. We know gross GDP is under pressure in South Africa. We're not sure about the U.K. what's going to happen. Of course, this is a bounce-back optimism that seems to be evolving in the U.K. We hope that gets even more positive. Unemployment rate, we know, is a problem. We know we've got lots of challenges in South Africa. And as we didn't need this, we've now got the load shedding issue. And just out of interest, we monitor load shedding, we have the ability to do that. The way we do it is we perpetually monitor when our terminals are not operating. We have forever. So there's kind of an ongoing kind of 0.5% or something of terminals that don't operate. You don't know why, they're just not. So when it spikes, you can see that's load shedding and the impact. And that's easy to quantify because you just look at our percentage compared to the stores that we're operating. And it's quite amazing because it can be, in some months we can lose a couple of percent, 3%, 4% in revenue. So the implications of load shedding are significant. But nevertheless, we understand that Eskom is a historical problem and we respect the idea of planned load shedding so maintenance can happen, and over time, we will, please God, get through this crisis and it might take 2 or 3 years, but it is a challenge. In the U.K., there are similar things, but we don't know where it's going. And hopefully, once they've concluded the negotiations with the EU, life can get on to sort of normality. And then we're hoping that the environmental side of the U.K. improves. Looking at our own financial update, we have now, as everyone has to, adopted IFRS 16, which, as you know, affects your leases. It has a significant impact on our balance sheet and our comparative historical data. Interestingly enough, more of an impact on Office U.K. than on Truworths by quite a significant degree, and that's because of impairment issues, impairment -- both the impairment we did on the intangible assets, but also impairment on the leases because Office, certainly, we all know, it's one of Office's biggest challenges. So this makes the impairment of leases in Office is very highlighted through this IFRS 16. I'm not going to answer many questions because -- about that, I'll refer them to my colleagues because I'm the opposite of an expert at it. You know the numbers. Sales of merchandise grew in the group by about 1%. Diluted HEPS were up by about 1%, dividend per share. And there was a significant amount of cash generated. Remember, that's after buying back shares of ZAR 480 million. And also, it's also after the reality that our book has increased, I think it's by another ZAR 400 million. So this is a highly cash-generative business, but admittedly, too, both this year and last year, we hadn't paid the creditors because of the way the month fell at the end of December. So there is a large amount that comes off that in the beginning of January. When it comes to look at the history, you can see that our diluted dividends per share and HEPS -- well, our dividends per share and our diluted HEPS slightly improved this year. Return on equity, return on capital improved as did return on assets and asset turnover. But admittedly, the impairment I've just mentioned now of both leases as well as the impairment of the intangibles in Office is the primary reason for that, although I do say that we managed to make a significant inroad into the stock management and excess stock that Office has been saddled with for years and years and years. So our balance sheet is very strong. And we've highlighted there the new IFRS 16 impact, the right-of-use asset, the ZAR 2.9 billion; and then the noncurrent lease liability as well as the current. Current is defined as less than 12 months. Noncurrent leases, they are longer. You can see, of course, that liabilities exceed the assets. That's because of the manner in which IFRS works, which is one is flat line, the other is a sort of discounted process. But nevertheless, the balance sheet is now a more accurate reflection and is fully IFRS compliant. We -- as we've said, we had cash in Truworths, ZAR 753 million; group, ZAR 734 million because there is a little bit of lift [ tick ] in Office. I have summarized that before. But the same happened last year in the sense that last year we also hadn't paid the creditors because of the timing of the month. So it's sort of comparable. The difference is what I said already about debtors’ book and about share buybacks. I mentioned that we bought back just over 9 million shares. That's a depiction of the group's cash flow process. And you see net cash generated ZAR 1.9 billion and at the end, ZAR 1.2 billion. And you can see the impact of IFRS there, which is just second from the right, the orange bar, which is related to leases. And the other one is when you look at the finance charges, that's also an IFRS thing. So it's sort of got to be split in terms of operational cash flow and net cash flow. So while we all get our minds around it and get used to IFRS, it'll be a new language for everyone. But I suppose, in time, we'll all get used to it and understand it properly. So in summary, let's talk now about Truworths Africa separately from Office. Retail sales increased by 2.7%. Lay-by sales contribute now 2% of our revenue, and as you know, that's cash. Gross margin went up to 56.4%. Trading expenses are under good control. What is exciting is our active account growth is 3%. There has been a significant increase in our doubtful debt provision. Not our bad debt, which is historical, but our technology that forecasts the likelihood of risk into the future, which is what are called Markov -- we and many other retailers use it -- is now predicting a lifestyle decline in the quality of accounts, and therefore, you have to provide for it, which is why our provisions went up. Of course, that can change because it's a system-driven thing. It can change for the worse or better. But still, it's a consistent measure that we use each and every year and each and every half year period. In fact, we do it every month. And there was strong cash generation, and I've already spoken about share buybacks. And these are our gross profit trends, which you can see over many years is consistently above 55% and actually is now above 56%. I remember saying this year when we presented the June figures, that if our markdowns are a little bit better and we manage our stock better, we actually can improve our margin and worry -- or less worried about it. I cannot guarantee we'll always have about 55% because it does go up and down, depending on how good our planning is and the reaction of our customers to our merchandise. But still, we feel we're pretty good at that and our record shows that. And then profit before tax, which has now become the more accurate measure rather than EBITDA and those kinds of things because of IFRS. You can see how that changed because you have to restate your historical. And it's -- if you look at it based on last year, it's slightly decreased, but that's IFRS-compliant in both years. Our like-for-like store sales growth was 1%. And as you can see, over the years it's been really difficult because in 2015, if you look at the middle column, it grew by 10%, then it shrunk for 2 years. In 2018, it was square. And now it's a slight positive, which is a good thing, of course. We're all hoping that we've reached the bottom of the trough, but who knows. We've managed to keep inflation low again. And you see what I showed you earlier on, we had a higher inflation rate in '16 and in '17, decline '18, decline '19, it's 1%. And for those who ask and want to know, obviously in the future, there will be inflation. We're still going to try and keep it lower than the marketplace. But of course, there'll be because you've seen what's happened to the rand. And although we do cover forward and we buy merchandise into the future, the weakness of the rand is going to impact our inflation rate. Across-the-board, business was tough, but the highlights, if you look at our categories of merchandise, really was the kids emporium and some of our more specialty areas. And the interesting about that is because that's where we can differentiate ourselves the most because of the brands. And by the way, it's not cheap. If you look at it, those are proportionately relative to the marketplace and probably the more expensive areas, and we're talking about the glamor product and we're talking about -- well, the glamor -- the design emporium increased by 5%. But the kids emporium grew by 11%. That, as you know, is largely Earthchild and LTD Kids. So that was a highlight. The rest of the business battled a bit. But you would, I suppose, expect that in these times. And under the circumstances, we were relatively comfortable with our numbers because we managed to keep expenses and margin intact. There's only been a 1% change in space. But that doesn't really tell you the true story because we do close quite a few, you'll see -- I don't know if we show it in this, but we closed quite a few small stores. And we consolidate them into the larger physical footprint. Either we divide the space or we include them in the emporium, that helps with costs. Not necessarily much space, but with costs. In fact, there, I think I've shown it, 21 new stores and 31 closed stores. Of course, closed is a funny word because we didn't really close 10 Earthchild and Earthaddict stores. So it hasn't dropped from 39 to 29. What will have happened is they might be in the Truworths emporium 150 or more Earthchild and Earthaddict stores -- products and sort of divisions in the Truworths emporium. And we would have moved the stand-alone stores with high rentals, the merchandising, to the emporium store. And we found that, that works fine. Customers are in the store anyway and then they go into the section or the division because there are boundaries, there are wall boundaries, sometimes separate entrances to the kids stores. And they're all doing nicely. I mean they really have been a great success. Office London has now got 16 stores. Then if you look at sales per square meter density, you saw the peak of December 2015. It looked like it was driven to some degree by the credit -- the pre-Credit Act, the affordability legislation. And so you almost should ignore the '15. But still, in the next year, '16, it was still higher and dropped a lot. And then last year, it was still down a little bit. This year, it's improved. So there's a slight turn. Although there is inflation in the product of about 1% or something. Rest of Africa, also struggling. Botswana is actually doing quite nicely. But as you can see, our sales are relatively small there, about ZAR 250 million. So it's not a big proportion of our business. We close unprofitable stores. We don't operate them. And business is difficult in many of these African countries. But still, we manage it as best we can. Trading expenses have been well controlled and an analysis goes through there into the detail. I'm not going to highlight much other than, as you can see, employment costs, if you look at it, comparable, it was only 1% up. Depreciation actually decreased. Remember, it's not different because the right-of-use asset, which is that IFRS 16, is now included there. Occupancy cost has changed because now it's not rental anymore. So it's all a bit unusual. But still, these are like-for-like figures. And the big issue is the 18% increase in trade receivable costs, which is primarily, if not exclusively, because of the provision increase. If you -- from other operating costs, which did go up by 14%. But if you exclude foreign exchange over the 2 years, then actually other operating costs have increased by 4%. CapEx is kind of in line there. Don't read much into the fact that we're lower than last year. Some of that relates to timing. In the full year, we roughly will spend our budget. Now this is the Truworths cash flow. And as you all know this very well, Truworths generates -- really it's a really, really cash-generative business, continues to be, despite buying back the ZAR 480 million shares and despite the working capital increase. Looking at Office, which is, of course, a big challenge for us, retail sales actually decreased. Online sales are now 34%. Store sales were down. Online was a bit up. Margin has decreased, partly to get rid of the excess stock. We have managed to decrease trading space and we're definitely going to be doing more of that. As bad leases come up, we are getting out of them. We were successful in reducing finished goods inventory by 11% and stock turn has increased, we're going to be doing more and more of that. And you can imagine, that's just not an accounting thing. It's a customer thing. If you come into the stores and there's fresh stock all the time and it's replenished and you haven't got those old carryover slow-moving stock, it just makes everything work better. We have appointed Kerry van der Merwe who worked in Truworths for a long, long time, I think, 14 years as Head of Finance. And then she went to Office, I think, 3.5 years ago as CFO and then COO. She's been in charge for about 3 years now of the finance in Office and store operations, 900 store -- oh yes, she was store operations but also IT and human resources. And she's now the interim CEO and we'll see how that goes. So far, I can tell you, it's going really well. We're very pleased with it. The turnaround strategy, which we announced in the last presentation, is progressing according to our plan. But it's a long journey. It's 2 years, we think, that journey. So these are our numbers. The EBITDA dropped, but the real issue is the profit before tax. It's dropped from 12.9% to 10.7%. Remembering, the second half of the Office is not anywhere near as profitable in the first half of the year because the first half is about, I think, over 60% of its sales. Geographically, it's a U.K.-based business and some stores in Germany. Those are our numbers. We are trying to decrease costs significantly in Office. You can imagine -- it's obvious why. And there's an analysis there. The only one I really want to highlight to you is -- sorry, let me just go back. The only one I really want to highlight to you is employment costs. We've got the issue of closing stores, which helps over time. And then the IFRS has affected Office significantly. The 11% increase in other operating costs was almost exclusively to drive e-commerce revenue because e-commerce is a really good business in Office, and we are running with that as fast as we can. We did have about GBP 1 million infrastructure expenditure in IT, and I think that will continue because Office technology or systems are nowhere near at the Truworths level and we have to get them up to scratch over time. But still, Office was cash generative. You can see why, it was almost all because of the working capital decrease. That cannot be repeated to the same extent. But hopefully, we'll be able to get sales to pick up over time and make more profit. When it comes to account management, this is quite a positive thing as we see it. Everything is looking much better. The only negative issue is that what I said before, about the provision for bad debt. As I say, we've got tools to manage that. So we react to that and we are able to control it, but the provision has gone up, which will mean there should be an increase in bad debt. Everything else is looking actually very good. If you look at the Consumer Credit Index and the environment, it's interesting because when you're above 50 as many of the analysts know, when you're above 50, it means the health of the industry and credit is getting better. And actually, in quarter 3 2019 and in quarter 4 2019, it shows that there is an improving health in the credit industry, which I know sounds strange, but that's just the reality of it. It probably relates to credit providers having great technology and being very astute at managing the risk. Nevertheless, it is getting better. If you look at us, it's interesting because our new account applications, obviously, that's not new accounts. It's applications. People want to have accounts. It's an indication, though, of interest and desire to shop. It's the highest it's ever been partly driven by our initiatives, but we've always had them. But there's obviously a massive desire for customers to open accounts at Truworths. And by far the highest level, which is quite astounding. However, we are very strict and you can see the affordability legislation as well as our own internal risk assessment methodologies, have, over the years, made the number of applications that are approved for credit decline so that they're now 26%. So it means 3 in 4 customers who apply are rejected. 1 in 4 are accepted. Now you see why lay-bys became so important. They want to shop, but they can't get the credit. And then another interesting statistic, and this changed in 2015 when the legislation was implemented for affordability, you had to bring documentation, and it actually has never got properly fixed, interestingly enough, even though the legislation isn't there anymore. Even though 26% of the applicants are approved who applied, only 19% actually come [ and are open ] and shop. So 1 in 5 of applicants come and actually activate their cards. And you can imagine, we work on that all the time, but that's the reality. But still, despite all that, and it's obviously because of the applications, our new accounts that were actually opened is the highest ever. And that's a fantastic thing. And what's also very exciting is about half of them are young people. They're under 30. So young people are wanting to shop in Truworths: 18 to 24, 25%; and 25 to 29, 22%. And that's been like that for a long time. It's far fewer older people who are opening accounts. And then this shows you how the age of the book works its way over time. There's 1 to 12 months, customers who've been on your book for 1 to 12 months. You know that they're new accounts. You can see in December 2016, which was the impact of the legislation at the time, made our new accounts drop by 17%. Of course, the next year, then some people are now 13 to 24 months, that dropped by 19%. And the third year, 25 to 36 months, so it's 3 years later, it's still 20%. And then it gets into the big pool of 37 months-and-more customers, which is, by far, a bigger pool for obvious reasons because most of our customers stay for much longer than 3 years. And then that gets into the average of the total, which because of the economy, this is quite tough, it's at 2%. But what's nice about this is, over the last 2 years, in December '18, we grew, you can see, by 17% the new account sales and December '19 by 9%. The '17, has already 1 year later, flowed through to the 13 to 24 months and it's going to flow through to the book. So the new account growth has been a good thing, but it flows through over time. And our book relative to the industry is actually quite healthy. I'm not saying it's relative to the past, but relative to the industry because we all subscribe to a particular service and we get the data. And you can see that relative to the industry, our good to bad balance ratio is actually better than the industry's and improving compared to the industry declining. And then the ones who are about to be written off, the 4-plus, again, you want that to be low as possible. And again, you can see the industry is not looking so good there. We are looking quite good. But again, relative to the industry, not relative to the history. Overall, again, I'm not going to go through all this, everything is looking good and a lot of accounts opened and the bad debt is okay. And shoppable accounts, meaning they're not in arrears, is as good as it's been for a long time. The problem though is what I've said before. The provision, which predicts the health of the book into the future, has gone worse. 75% of our customers pay interest, for those who want to know. That's hardly changed. So when we look at the outlook. South Africa's retail environment, we believe, and I don't think it's any surprise, will remain constrained. We obviously then sit on our hands, which is why we showed you that circle matrix right upfront. Our reaction is to leverage our technological enhancements to integrate physical and online retail offerings, both on the fast fashion and quick response capability. It's a big issue in our lives. And for sure, to continue to grow our account base, but manage the risk of that in the way we have in the past. For the first seven weeks, our sales did increase by 12%. But we have made it clear that, that's because the sales moved from the last week of December to the first week of January. The truth, though is, if you think about it, it made our June -- July to December sales lower because we didn't have a competitive figure in. So -- but anyway, the -- I wouldn't use that as a guideline for future sales, definitely not. Space increased by 1%, I've said it before, and I think it's going to be static for the year. Office. There are still headwinds, yes. There is better politics, it looks like and it might be better, but we all know there's a lot of headwinds. The business is under pressure. We are fully in control in the sense that we are managing it the way we really want to now. I'm not saying it's easy. We've managed to reduce merchandise, excess inventory. We are very well advanced working on costs. But the big thing is to generate revenue. And there, we've restructured the business and the buying teams. In certain -- we've separated, to be honest with you, if I make it simple -- we've separated brand and -- the brand-buying area from the design in-house area. They used to be sort of combined. Now there is a separate buying team and planning team on the one versus the other. Remember Truworths is expert at the in-house design, which is an important part of Office, too, because it's been shrinking over the years and it's got much higher margin if it's [ poured ] properly. And it's one of the reasons we bought the business. So we've changed our way of working there and now our Merchandise Director, Sarah Proudfoot, is very involved in that aspect particularly. The coronavirus slide, we only put this slide in because we're not stating anything you don't know. It is an issue. And of course, it's a main issue because China supplies fabric as well as finished goods. I suppose, in our case, because of the move of the Chinese New Year, a lot of merchandise was shipped in December and January, so that helps a lot. But we are a little bit exposed in late May and June, and probably more in July and August. But again, we don't sit on our hands. There are things we can do and we're very busy doing them to try and mitigate and just to make sure if we don't get the right merchandise in quantities, we won't. We're going to do something, we've got a plan to deal with it. That's the end of my presentation. So now what I'm going to do, it's 20 minutes to go before 2:00, I'm going to take questions from the floor and I'll probably allocate them to my colleagues. And then I will also take questions which you can hand to me on the IR page from webcast.

So who wants to go first?

It's Stephen from JPMorgan. You mentioned at the beginning of the presentation about your -- you mentioned briefly vertical integration on the supply side. And then a slide or 2 later, you mentioned growth of the manufacturing division. Could you let us know roughly how much manufacturing you do have? How much of it you do yourselves? What your -- and what you -- provide a bit of color on the general topic, what are your plans in this area?

Thanks, Stephen. That's a very good question. I'll answer that because it's -- essentially what we're doing there is -- well, firstly, let me say that, I don't know, Sarah, you can tell me what percentage of it is local.

In ladies, we're about 50%.

And mens, about 40%. So -- okay, so about 45% or just under 50% is local already, has been for years. Of that, a lot of it is driven by ourselves in 2 different ways. One, by our own in-house, what we call Truworths manufacturing, which is really a design center that buys fabric, trims and hands outs the merchandise to CMTs. As well as other design centers that do the same thing, but they're exclusive to us. So I would say we have control over a significant amount of that. Truworths manufacturing has now become the largest of those, out of interest. We are very small, however, in the ladies side and very large in the kids and mens. The flavor of it is that we are planning to and are actively involved in becoming more directly, I won't say by ownership, but certainly by planning and organizing right from the base, which is the manufacturing side through to the retail demand side. So there's an increasing emphasis on the supply chain, from source all the way through to retail, but driven by the retail demand. And we're making inroads there. I'm not going to disclose exactly what we're doing, but there's a lot of work going on there.

In summary, it sounds to me like you're saying you're going to bring, that a certain percentage of your local -- of your local product is designed in-house versus -- and then controlled in terms of the manufacturer versus product designed and manufactured by third parties, and you're going to try and increase that percentage. Is that a rough summary of that?

Yes. It is a reasonable summary, but let me just clarify. The word design is -- can be a bit confusing. We actually design, I would say, 95% of our products, including imports. We don't really depend on other people like you would with the brands in shoes who design for you and you select from a range. We do very little of that. In fact, even when you occasionally do that in 1 or 2 of the lingerie brands, I'm excluding the Nike and adidas shoes, that's a separate issue. But on all the clothing areas, we design it ourselves. Design houses, in the way I'm defining it, they play a role. They offer design alternatives and they work in conjunction with our buyers and designers. And they, together, try and create ranges, but we make the final decision in all cases. And often, we drive the design. What they do a lot of is getting it together, design, putting the patterns together, providing the samples, buying the fabric, buying the trims, making sure it's manufactured, supplying us. So the design/creative side, we control. The other side, from that point on is a supply chain. And as I said, we are -- we always have been integrated. I don't want to make out that, that's a new thing, but we certainly are putting much more emphasis on it the last 2 years and it will be even more so in the next 2 or 3 years. Okay, Kathy or whoever's giving the microphone there? Well, why is it only one of you? There are supposed to be two microphones. Okay. So would you give the microphone?

Sorry, just coming back to your expectations of space growth and the shift that you've taken towards, I think you said, 1% space growth in the next year and the year after, you actually don't expect to see further space growth. When you look out over a 5-year period, do you think that we actually turn to -- return to a place where we find space growth actually going backwards?

Yes. I do think -- the only thing I have to make -- the point I have to make to you is -- David, I don't know, do you want to, or Sarah, do you want to answer it? Why don't you give David the microphone.

So if I can differentiate between Truworths and Office. So Office, I think there will be a reduction in space growth going forward. Coming back to Truworths. I think yes, it's 0.5% this year. We're saying flat next year. I think it's very much dependent on economic growth and GDP growth. And if that growth starts coming back and then property developers start developing more sites, then space growth could grow. I think if the economy stays where it is, space growth could stay at those low rates going forward. Saying that, when we do assess our leases when they come up for renewal every year, we do, do very comprehensive feasibility studies. And there, we assess whether to grow a store, shrink a store, keep the store the same, negotiate on rental. So we do manage it very efficiently, hence seeing our trading densities growing now and we'd like to see those trading densities grow slightly more in the years ahead even if the GDP does remain low.

And just to add to that point. There's 2 conflicting things going on. One is, for sure, we'll have to keep on being, in South Africa especially, more productive and using space per area. I mean that's goes with that saying irrespective of what happens in the economy. So there will always be a tendency to tighten up. On the other hand, what you do have, which is why I agree completely with David, is that the economy does determine if landlords open your malls. And Truworths has a policy, if there's a big new mall, we always go there. The way -- we don't sort of say, oh, they shouldn't have another mall there. We can't control that, so we go and we get a good position. And we pay the rent we think is the most appropriate. But we won't take long leases. So it gives us flexibility. If you think about it because we've got 5-year leases, our average lease period is 2.5 years. So there will be a mixture of those 2 things. I will let you ask another question, but I just want to answer one of those here. Yes, this is a very important question about the coronavirus. And I just think it's such a worry to so many people, I must answer it while I'll try and get my colleagues to help me. It says, what proportion of Chinese factories that supply to us operating -- what proportion of Chinese factories that supply to us -- so I don't understand the question. Is it possible to place orders at the moment? Are there any changes in lead times? How do you view the risk that you may run short of stock and lose sales? And general comments about the virus and Truworths. Sarah, do you want to answer that?

I think when it comes to coronavirus at the moment, obviously, there is a lot of unknown elements in terms of what percentage of our factories....

You've got the microphone switched off, I think. You have to just talk it out.

Yes. We don't know the exact percentage of our factories. They are in the process of reopening. That's what we know at the moment. In terms of placing new orders, many of their offices are already back [ a bit ] even if the manufacturing facilities are still lagging behind as the workers return. So this is, I think where, in terms of risk mitigation, the fact that we have quite diversified opportunities in terms of supply, we're obviously looking at ways where we can rebalance. The exact extent to which it will impact the stock over the period that Michael mentioned, in other words, the latter part of winter and the very early part of summer, we can't say exactly. We're monitoring it daily. But we're not significantly exposed to the China factories only because of the very large local supply base, and obviously other countries of origin that we use all the time.

Sorry, Sarah, can -- is it right to assume, though, that the disruption in whichever way it plays out, should result in inflation -- or more inflation coming into the system than what you would have expected?