Lewis Group Limited · JSE:LEW
Lewis — 11th Annual Merrill Lynch Conference 2010
27 slides from Lewis's conference presentation, March 2010
Slide 1: Lewis Group Limited – 11th Annual Merrill Lynch Conference
LEWIS GROUP LIMITED 11TH ANNUAL MERRILL LYNCH CONFERENCE MARCH 2010
Slide 2: Agenda
AGENDA 1. The Investment Case 2. Debtor Analysis 3. Summary Financial Results 4. Outlook 2
Slide 3: The Investment Case
1. The Investment Case • Solid business model established over past 75 years. • Consistent performance. • Historically high operating margin business with low cost structures. - New format store - Introduction of furniture into Best Home & Electric • Strongly cash generative. 3
Slide 4: The Investment Case (Cont'd)
The Investment Case (Cont’d) • Dividend per share maintained. • Cash returned to shareholders –Two Thirds of 2004 listing market cap. (66%) • Merchandise management and innovation – a prime focus. • Stock turn – 5.4 times. 4
Slide 5: The Investment Case (Cont'd)
The Investment Case (Cont’d) • Integrated credit and marketing strategies focus on good paying customers • Develop long term customer relationships at store level. • High level of repeat business. (55% of total sales). • Target Market LSM 4-7. A growing market in South Africa. • Centralised credit g
Slide 6: The Investment Case (Cont'd)
The Investment Case (Cont’d) • Customer debt to income ratio (38%) well below national average (76%). • Proven store based collections process. • Experienced management team. • CHALLENGES TO THE INVESTMENT CASE • Extremely challenging past year. • Unemployment and short time worked remains a risk. 6
Slide 7: Operating Profit - History
Operating Profit - History Over the past 16 years – Compound annual growth of 10.6% 1,000 R860 R883 R832 800 R729 R Millions R594 600 R506 R417 R442 R429 R388 R361 400 R327 R351 R274 R298 R200 R166 200 - 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Year Operat
Slide 8: Core Strengths
Core Strengths • Re-serve model → ± 55% of sales from repeat business • In store promotions → Building customer loyalty • Convenience → Extensive store network • Selection → Merchandise offers to meet local needs • Small store based → 90% of deliveries executed Warehouses within 24 hours • Immediate
Slide 9: Re-serve Scheme
Re-serve Scheme • Identifies suitability of customer for further credit extension. • Fully integrated with debtors system and store operations. • Driven by historic payment behaviour & current indebtedness. • Customer base is segmented and targeted monthly. • Targeted direct mailing with promotional
Slide 10: Debtor Analysis
2. DEBTORANALYSIS Group Ltd
Slide 11: Debtors Provisions
Debtors Provisions • The Lewis group model is credit based with 69% of sales on credit. • Over 700 000 individual debtors with a debtors book of R3.7 billion. • Debtor provisions well above debtor costs. • Since 2003 debtor provision calculated in terms of International Accounting standard IAS 39. 1
Slide 12: Debtors Provisions (Cont'd)
Debtors Provisions (Cont’d) • IAS 39 requires receivables to be carried at the net present value of the expected cash flow from the debtor, discounted at the interest rate applicable to the contract. • Provision calculated monthly for each individual customer utilising the payment behaviour (good or
Slide 13: Debtor Costs
Debtor Costs H1/2010 H1/2009 Rm Rm Total Debtor costs 189 143 Bad debts written off 53 51 Provision for doubtful debts 136 92 Debtor costs as a % of net debtors 5.0% 4.5% 13
Slide 14: Doubtful Debt Provision
Doubtful Debt Provision H1/2010 H1/2009 Rm Rm Net Debtors before DD prov. 3 738 3 154 Doubtful debt provision 668 488 Doubtful debt provision % 17.9% 15.5% Credit application decline rate 27.4% 24.5% IAS 39 – Net present value of expected cash flow discounted at interest rate applicable to contract
Slide 15: Debtor Payment Analysis
Debtor Payment Analysis NUMBER OF CUSTOMERS DOUBTFUL DEBT PROVISION MARCH H1/2010 H1/2009 H1/2010 H1/2009 '09 Satisfactory paid Customers fully up to date including No 491 614 515 471 those who have paid 70% or more of amounts due over the contract period 0% 0% 0% % 69.6% 72.5% Slow payers Customers
Slide 16: Summary Financial Results
3. SUMMARY FINANCIAL RESULTS 16
Slide 17: Overview of Results
Overview of Results R1 946m 21.8% R424m 290.5c 144c + 7.9% 21.8% + 4.3% - 3.9% Maintained Revenue Operating Operating Headline Dividend Margin Profit Earnings per per Share Share 17
Slide 18: Income Statement
Income Statement H1/2010 H1/2009 % Rm Rm Revenue 1 946 1 803 7.9% Merchandise sales 951 890 6.8% Gross profit margin % 33.5% 33.1% Operating profit 424 407 4.3% Operating margin % 21.8% 22.6% Attributable earnings 261 270 (3.3%) EPS (cents) 297 305 (2.6%) Headline EPS (cents) 291 302 (3.9%) 18
Slide 19: Segmental Analysis
Segmental Analysis Best Home Lifestyle H1/2010 Group Lewis Electric Living Revenue (Rm) 1 946 1 644 239 63 Revenue growth (%) 7.9% 7.9% 10.2% 0.8% Operating profit (Rm) 424 377 46 1 Operating margin H1:10 21.8% 23.0% 19.3% 1.1% H1:09 22.6% 23.9% 20.7% (3.7%) Number of stores 539 431 89 19 IFRS8: OPE
Slide 20: Business Split
Business Split Risk Financial Retail Services Services Group Rm Rm Rm Rm H1/2010 Revenue 1 083 292 571 1 946 Operating profit 134 76 214 424 Operating margin H1:10 12.4% 26.0% 37.5% 21.8% H1:09 12.1% 36.3% 36.0% 22.6% • Supplied for continuity purposes only. Our business is not managed in accordance
Slide 21: Analysis of Costs (Excluding Debtor costs)
Analysis of Costs (Excluding Debtor costs) H1/2010 H1/2009 Change Rm Rm % Employment costs 296 270 9.5% Admin and IT 92 87 6.6% Marketing 71 67 6.0% Occupancy costs 78 72 9.0% Transport/Travel 64 71 (9.6%) Depreciation 27 28 (4.9%) Other operating costs 72 63 14.0% Total 700 658 6.4% % of revenue 36
Slide 22: Balance Sheet Overview
Balance Sheet Overview H1/2010 H1/2009 Rm Rm Property, plant and equipment 232 207 Investments 803 707 Tax - 11 Inventory 306 269 Net Debtors after Doubtful Debts 3 147 2 705 Cash 67 99 Total Assets 4 555 3 998 Shareholders’ equity and reserves 3 049 2 751 Retirement benefits 55 60 Tax and Deferred
Slide 23: Capital Ratios
Capital Ratios H1/2010 H1/2009 Gearing ratio (%) 27.4% 24.2% Share repurchases (Rm) - 51 Interim dividend declared (cents) 144 144 ROE – after tax (%) 17.6% 19.8% ROCE – after tax (%) 16.4% 17.2% ROA – before tax (%) 21.0% 22.6% 23
Slide 24: Outlook
4. OUTLOOK 24
Slide 25: Outlook for 2010/11
Outlook for 2010/11 TRADING UPDATE – DECEMBER 2009 6 months Quarter ended 9 Months Sept. 2009 Dec. 2009 Dec. 2009 Revenue increase 7.9% 7.9% 7.9% Merchandise Sales 6.8% 7.3% 7.0% increase Sept. Dec. Dec. 2009 2009 2008 Doubtful Debt provision 17.9% 17.4% 15.4% 25
Slide 26: Outlook for 2010/11
Outlook for 2010/11 • The proven business model - our competitive advantage. • More aggressive store expansion: - FY2011 : 40 stores - New Format store • Management of Debtor book remains a top priority 26
Slide 27: Outlook for 2010/11 (Cont'd)
Outlook for 2010/11 (Cont’d) • Capital management: - No further buy back planned - Maintain gearing at current levels • Merchandise innovation – increased furniture sales. 27
Lewis Group — 11th Annual Merrill Lynch Conference 2010 on 6ix