Dedicated to Value Massmart Reviewed Results for the 26 weeks to 25 December 2011 Presentation to Investors, Analysts and Media February 2012 Saving people money so they can live better 1
2 December 2011 Financial Performance
Brief Overview of 1H FY12 Income Statement: Great performance in three Divisions Strong sales growth High space growth, and two new African stores Despite expense pressure due to investing in stores & capacity, comparable expenses +9.4% Foreign exchange volatility: a R162m swing from Dec 10 Integration costs Underlying Group profit before tax growth 4.8% - 6.5% Balance Sheet: Good retail disciplines: inventory days lower & steady supplier funding levels Significant capital expenditure 3
Sales (Rm s) 2011 2010 Total % Chg Comp % Chg Inflation % Massdiscounters 7 819 6 994 11.8 4.6 (5.0) Makro 7 800 6 593 18.3 11.6 2.3 Massbuild 4 240 3 782 12.1 8.7 0.5 Masscash 11 633 10 006 16.3 10.9 5.2 Total 31 492 27 375 15.0 9.2 1.1 Strong real comparable sales growth in all Divisions Game Africa local sales growth 12.4% and Rand growth 18.1% (comparable) Walmart promotions R308m incremental sales 4
Store Portfolio Massdiscounters Makro Massbuild Masscash Total June 11 113 14 81 105 313 Acquired - - - - - Closed (1) (1) - (2) (4) Openings 10 3 3 5 21 Dec 11 122 16 84 108 330 Massdiscounters: seven Game, including Enugu, Nigeria, and three Dion Wired. Closed Mauritius Makro: opened Montague Gardens, Nelspruit & Polokwane. Closed Milnerton Massbuild: Opened a Builders Warehouse in Botswana and two Builders Express Masscash stores: four Cambridge opened, one Saverite opened and two Cambridge closed. 5
Sales Inflation YTD sales inflation to December 2011: General Merchandise -6.1% Home Improvement +0.6% Food & Liquor +2.3% Total +1.1% General Merchandise still experiencing imported deflation Rising Food prices 6
Inflation Basket: CPI vs. Massmart Why is Massmart sales inflation lower than CPI? Higher weighting of Food & Liquor; and Significantly higher weighting of Gen Merch (CPI: Household Goods). 7
Massmart Sales Inflation vs. CPI Due to higher proportion of (deflationary) Gen Merch, Massmart s sales inflation is lower than CPI Higher inflation associated with extreme Rand weakness 8
Gross Profit 2011 2010 Gross Profit R5 575m R4 944m As % of Sales 17.7% 18.1% Steady gross margins in Makro & Masscash Lower gross margins in: Massbuild due to some stock clearance activity Massdiscounters due to higher proportion of Hi-tech & Appliance sales and slight shift into promotional sales 9
Operating Costs 2011 2010 Operating Costs R4 304m R3 763m As % of Sales 13.67% 13.74% Total costs increased by 14.4%, below sales growth Comparable expenses up 9.4% (including depreciation) Difficult environment: sales inflation of 1.1% still below SA inflation of 6.1% Larger items: New stores & refurbs. Depreciation of R276m +24% Investing in Cambridge capacity Makro new store pre-opening costs +R22m 10
Employment Costs (50% of total costs) 2011 2010 Employment Costs R2 137m R1 837m As % of Sales 6.79% 6.71% Total increase 16.4% Comparable increase 9.5% And trading space up 5.7% (from December 10) 13% increase in staff (FTEs). Staff increases in RDCs and head offices 11
Occupancy Costs (23% of total costs) 2011 2010 Occupancy Costs R 989m R 827m As % of Sales 3.1% 3.0% Total increase of 19.6%. Comparable increase of 9.5% 5.7% net new trading space (compared to Dec 10) Leases comprise 68% of Occupancy costs Massdiscounters lease-smoothing adverse impact R13m Rates, services & electricity inflation remains high 12
Depreciation (6% of total costs) 2011 2010 Depreciation R276m R222m As % of Sales 0.88% 0.81% Increase by 24.4%. Greater than sales growth from accelerating capital expenditure And as new stores sales lag the incremental depreciation charge Expect to continue ahead of sales growth due to new stores, refurbishments and RDCs Also affected by shift from acquisitions to organic space growth 13
Integration costs 2011 2010 Integration R42m - Includes all ex-pat costs, and direct charges, travel & accommodation for initial integration work-streams Likely full-year charge of R170m (FY12) Most costs are one-off / set-up costs, so we anticipate 2013 fullyear charge of approx R75m, and possibly R50m thereafter Will not separately disclose this figure after June 12 as it then becomes normal Group operating cost 14
Forex Gains & Losses Rm s 2011 2010 Massdiscounters 25.4 (57.8) Other 57 (21.7) Total 82.4 (79.5) Translation gains caused by Rand weakness in 1H FY12: Massdiscounters: net realised & unrealised gains from African operations balance sheet translation Other: predominantly unrealised gain from translation of other offshore monetary balances 15
Divisional Trading Profit before Interest Rm s December 2011 2010 % Massdiscounters 498.3 473.6 5.2 Masswarehouse 446.2 397.1 12.4 Massbuild 215.8 189.5 13.9 Masscash 175.4 224.5 (21.9) Trading Profit before Interest 1 335.7 1 284.7 4.0 Trading profit excludes foreign exchange losses & Transaction costs 16
Net Interest Paid Rm s December 2011 2010 % Massdiscounters 29.7 13.0 128.5 Masswarehouse 28.5 25.3 12.6 Massbuild 21 20.3 3.4 Masscash 9.8 12.3 (20.3) Corporate (137.1) (111.6) (22.8) Total interest (48.1) (40.7) (18.2) LY over-stocking fully unwound in Massdiscounters Corporate pays Divisions interest & funds Group capital expenditure 17
Divisional Trading Profit after Interest Rm s December 2011 2010 % Massdiscounters 528.0 486.6 8.5 Masswarehouse 474.7 422.4 12.4 Massbuild 236.8 209.8 12.9 Masscash 185.2 236.8 (21.8) Trading Profit before tax 1 424.7 1 335.6 5.1 18
Tax Charge 2011 2010 Total tax R411m R363m Tax rate 31.2% 31.7% Effective tax rate will drop slightly as profit grows, from lower proportion of non-deductible expenditure Tax rate includes STC on dividends 1.9% (2010: 2.6%) No STC charge in FY13 19
Stock & Creditors Dec 2011 Dec 2010 Rms Days Rms Days Net Stock (1) 8 385 59.0 7 336 59.7 Trade Creditors (1) 12 281 75.9 10 261 73.2 Stock days improved in Massdiscounters, Makro & Builders Warehouse Creditors terms unchanged, but positive timing difference of approx R600m due mostly to new Makro stores 1. Days calculated using historic cost of sales. 20
Debtors Dec 2011 Dec 2010 Rms Days Rms Days Gross Trade Debtors 1 668 8.5 1 333 7.8 Closely monitor commercial credit Bad debt experience steady RCS still doing well in Massdiscounters Slow pick-up of RCS in Builders Warehouse, and soft-launch shortly for RCS in Makro 21
Net Capital Expenditure Rm s Dec 2011 Dec 2010 Replacement Capex 324 216 Investment Capex 428 350 Total Capex 752 566 Businesses acquired - 87 Total Capital Expenditure 752 653 Includes: New Makro stores R210m (and some capex spent in FY11) Cambridge new stores & refurbs R123m Foodco new & refurbs R249m 22
Main Areas of Capital Expenditure Massdiscounters: RDC Foodco Africa Makro: Stores RDC Massbuild: Stores RDC Cambridge: Stores RDC Current Status RDC prog. done by FY12 15 Foodco stores One new in FY12 Three new in FY12 Extending RDC now New stores in SA & Africa Construction underway Five new stores in FY12 Ambient DC Future Expenditure on IT & Fresh? Foodco 15-20 stores / yr 1-2 new stores / yr Two in FY13. Two (?) in FY14-15 - New stores in SA & Africa RDC operational FY13 10-20 new stores / yr Fresh DC? 23
Accelerating Capex Group capex is increasingly organic in nature, and is now 2.4% of sales compared to 1.5% some years ago 24
And Accelerating Depreciation 1H of FY11 & FY12 The increasing proportion of organic expenditure and RDCs is driving depreciation higher as % of sales Since 2006, 66% of space growth has been organic 25
Group Gearing Average Group net gearing of R1 344m (FY10: R1 163m), and debt /equity ratio 32% (2010: 31%) Making progress with selected property acquisitions (large stores) in Makro and Builders Warehouse for new sites and existing leased properties Capital expenditure for whole of FY2012 remains R1.6bn, and excludes acquisitions 26
Cashflow Statement Rm s 2011 2010 Operating cashflows 1 644 1 316 Working capital released 1 939 864 Cash from Operations 3 583 2 180 Interest & Tax paid (411) (358) Replacement capex (324) (216) Free cashflow 2 848 1 606 Dividends paid (291) (287) Net investment capex & acquisitions (380) (374) Cash inflow before Financing 2 177 945 27
Returns ROCE = EBITA / Average Capital Employed. EBITA in FY11 excludes Transaction Costs ROE = Headline Earnings / Average Shareholders Equity. Headline Earnings in FY11 excludes Transaction Costs 28
Dividend 2011 2010 Total dividend per share (cents) 252 252 Despite lower headline earnings since 2008, have held the dividend per share constant Current dividend policy x1.7 cover on headline earnings After the changes to taxes on dividends in April 12 however, will likely adjust future dividend levels in response to the taxeffect on shareholders 29
Change in Financial Year-end To align with Walmart, will change to December financial yearend with effect from December 2012 Consequences: Will report a six-month period to December 12 Annual report for six-months to December 12 And June 2013 will be our first Interim results release 30
Highlights of the Operational Performance 31
Group Operating Performance Highlights Dec 11 Total Sales growth +15.0% 6% Gross additional space Comparable Sales growth +9.2% Very high volume growth Comparable store expense growth Increase in Trading Profit excl Forex and Integration costs +9.4% +4.8% High rates, electricity, depreciation Lower than sales growth due to high organic expansion and investment in Food retail skills and assets Increase in Inventories +14.3% Below sales growth Increase in Cash Generated by Ops Good progress with Retail Food +60.4% R7bn Controls / Stock in good shape Saverite, Cambridge, Foodco, Makro FTE jobs created 3 879 Since Dec 2010 32
Contribution and Performance by Category Total Contribution by Category Home Improvement 16.7% Food and Liquor 52.2% Comp Sales 10.0% Inflation 2.3% Comp Sales 8.7% Inflation 0.6% General Merchandise 31.1% Comp Sales 7.2% Deflation 6.1% 33
34 Divisional Performance
Massdiscounters Dec 11 % change Sales R 7 819m 11.8% PBT excl Forex R528m 8.5% PBT margin 6.8% Comparable sales 4.6%, deflation 5.0% Game SA: difficult sales (SA comps 1.8%) Game Africa had a great performance (Total sales 24.5%) Dion Wired had another strong performance with sales up 41% Effectively now on the RDC system nationally, including Durban although we will move the warehouse 15 Game Foodco stores (8 in the Cape, 5 in greater Gauteng and 2 in Africa) Next focus of Foodco conversions will be Gauteng. Trading space increased 5.9% 35
Masswarehouse Dec 11 % change Sales R 7 800m 18.3% PBT R475m 12.4% PBT margin 6.1% Exceptional performance whilst opening three stores and closing one Before pre-opening costs, profits increased ahead of sales Full fresh offering now in five stores Fruitspot acquired from 2 Jan 2012 Trading space increased by 15.9% 36
Massbuild Dec 11 % change Sales R4 240m 12.1% PBT R237m 12.9% PBT margin 5.6% Solid performance in a weak market Trade Depot and Kangela stable but at a low margin with low growth. Warehouse and Express performing strongly First international store in Gaborone, Botswana, doing well Supply Chain strategy and plan approved, first DC in Midrand under construction Branded credit card started slowly, but building Trading space increased 2.2% 37
Masscash Dec 11 % change Sales R11 633m 16.3% PBT R185m -21.8% PBT margin 1.6% Strong sales growth with comparable sales 10.9% High cost growth with investment in Saverite and Cambridge brands, capacity and pre-opening costs Gauteng RDC opened and running well A few own goals Fruit and Veg, DC move, shrinkage lessons learnt Rhino acquired and approved, expected to be implemented 1 March 2012. Need to sell 2+2 stores. Trading space increased 3.2% 38
39 Environment
Environment Competitive Retail Retail market: Consumer health appears to be improving with real wage growth and improving employment Indebtedness of the middle market still a threat Product inflation still low, although CPI at 6.1% Shift back to credit card spend from cash, particularly store cards Lots of regulatory demands putting pressure on smaller retailers and suppliers Very competitive with increasing levels of aggressive promotions Massmart performance was affected by: Food inflation improving the Food business, particularly in commodities GM and HI volumes strong compensating for deflation overall but not amongst middle-income consumers who are using the savings to buy food and clothing where inflation is higher Strong volume growth driving costs Multimedia being stimulated by lower price points (growing at 30%) There are some signs of new activity amongst building contractors 40
Environment Challenges Increased regulatory demand (CPA, Labour Amendment Bill, BEE Amendment Bill, National/Provincial Liquor Licence Legislation, etc.) Freeze on Liquor Licences in Gauteng hampering job creation Rising service costs (rates, electricity, water, etc.) 41
Strategic Priorities 42
Priority 1 Improve Operations Trading Disciplines Supply Chain Private Brand Financial Services Food Retail (Saverite, Cambridge, Foodco and Makro) Organic Growth 43
Priority 1 Invest in Operational Improvements Trading Disciplines Supply Chain Private Brand Financial Services Food Retail (Saverite, Cambridge, Foodco and Makro) Organic Growth Trading space planned growth (including store acquisitions): 2012 8.0% (6%) 2013 8.0% 2014 5.0% New stores 2012 (including store acquisitions) 30 stores: (20) o 11 Game (7), 3 (3) Dion Wired o 1 Makro (2) o 0 Wholesale Cash and Carry o 10 Retail Cash and Carry (5) o 3 Builders Warehouse (1), 2 Builders Express (2), 0 Builders Trade Depot (0) African Growth - City Strategy 44
Priority 2 Complete the Transaction South Africa Awaiting South African Competition Appeal Court judgement Reach out to interveners to rebuild relationships Namibia Awaiting decision of Minister of Trade & Industry in Namibia Reach out to his Department Consider our legal options post his ruling 45
Priority 2... and Implement the Conditions No Deal-related Retrenchments Relatively simple to implement Where we close a site (non-deal related) we will offer employment at other sites No Union De-recognition Relatively simple to implement We have never tested a recognition level Therefore no change Offer of re-employment to 503 Retrenched employees Process underway Some success Appointed an external agency to assist R100m Supplier Development Fund We are ready to start the first expenditure Governance in place Projects in Manufacturing, Agriculture, Fisheries and Services We are also assisting a number of local companies to connect with the greater Walmart to export their products Reaching out to Government, Unions and Industry 46
Priority 3 Integrate into Walmart So far on track with toolkits being implemented Costs to date R40m. R170m for the full year We are sending 370 employees to the Walmart Shareholders Conference later this year to showcase Africa Integration likely completed by end of Dec 2012 Ongoing integration costs estimated at R50m We are now focussed on extracting measurable value Value will appear in the Divisions and not the Centre Each toolkit will be evaluated on its own merits Some value will be given back to customer and some retained Will be difficult to pin-point exactly in the Income Statement or Balance Sheet We will do our best to communicate it as we identify it After FY2012 will become part of the business and we won t specifically measure it further 47
Priority 4 Good Corporate Citizen Department of Trade and Industry SABS ISO9000 quality standard Department of Finance Procurement strategies, structures, systems and controls Department of Agriculture assisting small emerging farmers and fishermen and women Department of Safety and Security supporting orphans of police-men and -women Department of Basic Education school feeding schemes and equipment Department of Defence Christmas hampers to families of deployed soldiers Post-Walmart transaction BEE score 72% - Level 4 48
49 Risks & Prospects
Massmart s 2012 Prospects 34 Weeks to 19 February 2012 comparable stores sales growth 9.2% and total sales 15.1% Integration costs higher in the second half (R170m full year) Investment in growth, capacity and integration will continue Integration value will start flowing Cost pressures will remain Operating margins under pressure 50
Risks Local and Provincial Government service costs and taxes Legislative environment GM inflation remaining very negative Middle-income debt levels and confidence Competitor response to our market share gains in all categories 51
52 Conclusion
Conclusion Strong sales growth Strong headline performance supported by weakening Rand Operating profit growth inhibited by investment in growth Transaction completed, awaiting appeal rulings Integration on track Leader in Corporate Citizenship Group positioned well in medium-term for growth post the current investment cycle 53
54 Thank You & Questions?
55 Additional Financial Data
Headline Tax Rate Reconciliation % Dec 2011 Dec 2010 Standard tax rate 28.0 28.0 Disallowed expenses 7.0 3.1 Exempt income (0.1) (0.1) Foreign income (0.1) (0.2) Prior year (4.3) (1.0) STC 1.9 2.6 Other (1.2) (0.7) Group tax rate 31.2 31.7 56
Analysis of Tax Charge Rm s Dec 2011 Dec 2010 SA tax 312.3 307.9 STC 33.1 28.6 Deferred tax 3.8 2.8 Foreign tax 46.1 29.2 Foreign deferred tax 15.6 (6.0) Income Statement Charge 410.9 362.5 57
Capital Expenditure Rm s Dec 2011 Dec 2010 Land & buildings 63.1 54.4 Leasehold improvements 103.6 67.1 PPE 458.4 346.0 Computers 92.9 74.4 Motor vehicles 34.2 24.1 Total 752.2 566.0 These figures exclude acquisitions 58
Headline Earnings Reconciliation Rm Dec 2011 Dec 2010 Attributable earnings 893.0 738.5 Impairment of assets 0.3 - Profit / Loss on fixed asset disposals 2.4 0.8 Release of negative goodwill - (0.2) Loss on sale of assets classified as held for sale - 0.7 Tax effects on adjustments (0.5) (0.3) Headline earnings 895.2 739.5 59
Number of Shares (000 s) At June 2011 213 883 Shares issued 1 970 At December 2011 215 853 Weighted-average for period 215 209 Fully-diluted weighted average 219 778 60
Trading Space June 2011 trading space 1 257 985m² Net new space 63 248m² Opened 75 680m² Closed or sold 12 432m² 5.0% net space growth (unweighted) December 2011 trading space 1 321 233m² 61
Targets Int-bearing Debt : Equity < 30% Return on Capital Employed (ROCE) > 45% Return on Equity > 35% ROCE = EBITA / Average capital employed, excluding goodwill and deferred tax assets ROE = Headline Earnings / Average shareholders equity, excluding goodwill and deferred tax assets ROCE is not same as the Walmart-defined ROIC (return on invested capital) 62
Dedicated to Value Dedicated to Shareholder Value www.massmart.co.za 63