Truworths International Limited · JSE:TRU
Truworths International — FY2016 Earnings Presentation
79 slides from Truworths International's earnings presentation, 2016
Slide 1: Truworths International
TRUWORTHS INTERNATIONAL
Slide 2: Agenda
Agenda oo PS REVIEW OF THE PERIOD FINANCIAL REVIEW |. GROUP Il. TRUWORTHS Il. OFFICE RETAIL GROUP CREDIT MANAGEMENT STRATEGIC FOCUS AREAS OUTLOOK QUESTIONS
Slide 3: Biggest challenges facing our Group
Biggest challenges facing our Group: 1. Affordability legislation - specifically documentation requirements 2. Integration of Office into the Group retail philosophies, practices and systems 3. SA, UK and European economies which are going through difficult times
Slide 4: Review of the Period
REVIEW OF THE PERIOD
Slide 5: Review of the period
Review of the period * Tough economic and trading environments in SA, UK and Europe. ¢ Acquired Office —7 months trading included in the Group results. * Truworths merchandise ranges have been well received by customers since July 2015 resulting in higher sales growth and a stable gross margin. * —
Slide 6: Impact of current economic climate on the Group
Impact of current economic climate on the Group . Consumer spending under severe pressure from rising living costs and inflationary pressures: food; utilities; fuel. Consumer credit environment deteriorated in H2 in line with slowing economic conditions and increasing interest rates. Consumer confid
Slide 7: Brexit impact on retailers in UK
Brexit impact on retailers in UK Source: SBG securities report: Brexit: the impact on SA retailers’ UK investments Consumer confidence index down from -1 to -9 and slower top-line growth expected. BDO monthly high street tracker — June 2016 sales down 8.1% compared to prior year. Fashion retail show
Slide 8: Office since December 2015
Office since December 2015 e Adapting to Truworths best-in-class practices. e Focus on reducing stock levels, improving stock flow and stock turn, changing processes and systems. * Strong growth in the e-commerce business. * Strong cash generation despite a challenging trading environment: — _unseas
Slide 9: Impact of affordability regulations
Impact of affordability regulations ° — Estimated impact on 2016 retail sales of approximately R 200 million to R 250 million. ° — Estimated impact on 2016 profit after tax of approximately R 70 million. ¢ — Estimated impact on 2016 HEPS of approximately 17 cents. ° 2017 retail sales could be furthe
Slide 10: Impact of affordability regulations on Truworths retail sales growth
Impact of affordability regulations on Truworths retail sales growth 2015 Retail sales growth excluding a ee Office, Earthchild and Naartjie Full year H1 H2 Full year % % % % Cash sales 6.0 Credit sales 77 Total sales 7.2
Slide 11: Strategies to mitigate impact of affordability regulations
Strategies to mitigate impact of affordability regulations e New account credit strategies and credit offerings being developed to improve profitability, using more accurate predictive models and scorecards to enhance the decisions. e Material improvements being made to in-store and head office proc
Slide 12: Truworths merchandise offering
Truworths merchandise offering Improved fashion increased retail sales by 11.3% (excluding all acquisitions) and achieved gross profit margin of 55.3% (2015: 55.2%). Buying processes updated to align with increasing complexity and to meet the challenges of changing global fashion. Newly developed sp
Slide 13: Financial Review: Group
FINANCIAL REVIEW ee |. GROUP
Slide 14: Pro-forma ratio basis note
* Ratios are based on the results of the Group including 12 months of Office profits, on a pro-forma basis, excluding any exceptional non-recurring items 14
Slide 15: Group - Financial performance
Group - Financial performance Sale of merchandise Gross margin Operating margin Adjusted diluted HEPS Dividend per share NAV per share Jun 2016 (cents) (cents) | asa | (cents) | 2031.8 | Change on prior period Incl. Office 48% Excl. Office Jun 2016 12 889 55.3 30.7 Change on prior period Excl. Offic
Slide 16: Group - DPS and Diluted HEPS
Group - DPS and Diluted HEPS pie tS /DPS Compound growth rates: Compound growth rates: Diluted HEPS: DPs: 700 5 Jun: 5-year 8%, 3-year 6% Jun: 5-year 12%, 3 year 8% 688.2* 600 + 500 + 400 + 300 + 200 + 100 + 326 362 385 405 452 Jun 2012 Jun 2013 Jun 2014 Jun 2015 Jun 2016 DPS (cents) = Diluted HEPS
Slide 17: Group - Statements of financial position
Group - Statements of financial position Fane | Change on prior Jun 2016 Jun 2015 period Rm Rm % Property plant and equipment 11622 | 1053 54 Goodwill F805 | 346 422 Intangible assets | 3631 | 217 1573 Other non-current assets Fa | 260 37 Cash and cash equivalents P92 | 1462 9 Trade and other receiv
Slide 18: Group - Trading space
Group - Trading space Trading m2 ‘000 Truworths Office Jun 2016 Jun 2015 Total Growth on prior period Growth excl. acquired businesses 18
Slide 19: Group - Capital management
Group - Capital management * Gearing ° Dividends — Gearing to fund operational requirements — Scrip dividend with cash dividend alternative after acquisition of Office. Net debt to equity: — Total dividend per share increased 12% to » Group: 33%, R 2.8 billion net debt. 452 cents (2015: 405 cents).
Slide 20: Group - Return on equity and return on capital
Group - Return on equity (ROE) and return on capital (ROC) (Includes annualised Office, excluding once-off exceptional items) % Average: Average: 70 ROE: ROC: Jun: 5-year 37.6%, 3-year 36.3% Jun: 5-year 53.8%, 3-year 52.0% 60 8 55 55 52 50 - 40 - 30 - 20 - 10 - Jun 2012 Jun 2013 Jun 2014 Jun 2015 Ju
Slide 21: Pro forma ROE and ROA
Ratios declined due to Office having lower returns than Truworths – pro forma ROE and ROA shows performance if Office was not acquired 21
Slide 22: Financial Review: Truworths
FINANCIAL REVIEW ae ||. TRUWORTHS
Slide 23: Truworths - Review of financial performance
Truworths - Review of financial performance * Strong growth in cash sales. ¢ Credit sales significantly impacted by new affordability regulations in H2. ¢ Slight increase in gross profit margin. * Strong cash generation. ¢ Continued investment for growth in stores, systems and the debtors book. 23
Slide 24: Truworths - Key financial highlights
Truworths - Key financial highlights Sale of merchandise Retail sales (excl. Earthchild and Naartjie) Retail sales (incl. Earthchild and Naartjie) Gross margin Trading profit Trading margin Operating profit Operating margin Jun 2016 ( (Rm) (Rm) (Rm) (Rm) Change on prior period 14% 11% 14% 12% 15% Ju
Slide 25: Truworths - Retail sales growth analysis
Truworths - Retail sales growth analysis Unit growth: Retail sales LFL store Product Unit growth: | Non-comp Reval Sales oar ugar nnn eo stores stores Jun 2015 11 644 6 7 Jun 2014 10 762 7 1 9 (8) 6 Jun 2013 10 074 13 8 2 6 5 Jun 2012 8 921 10 6 8 (2) 4
Slide 26: Truworths - Credit performance
Truworths - Credit performance Jun 2016 Retail sales growth Cash sales growth Credit sales growth Credit sales growth to customers with more than 24 month old accounts Credit sales growth to customers with less than 24 month old accounts Gross trade receivables growth flee |= Lele : New account grow
Slide 27: Truworths - Divisional retail sales
Truworths - Divisional retail sales Change on Jun 15 prior period Rm Rm % Truworths ladieswear | 4794 | 4387 9 Truworths menswear | 2713 | 2 386 14 Truworths designer emporium* a) 1 464 15 Truworths kids emporium** | 86 | 457 79 Other*** | 1075 | 999 8 Truworths emporium | 11.078 | 9 693 14 Identity
Slide 28: Truworths - Number of stores
Truworths - Number of stores Truworths Identity Uzzi Jun Departments 2016 within stores Total ssf 888| pag || | 538) 183] 238 | Earthchild and Earthaddict En en Truworths Man Naartjie YDE Daniel Hechter LTD Ginger Mary Total Jun 2015 334 230 52 Departments within stores Total 334 230 226 4 353 28 21
Slide 29: Truworths - Rest of Africa corporate stores
Truworths - Rest of Africa corporate stores Namibia Botswana Swaziland Zambia Ghana Lesotho Mauritius Kenya Nigeria* Total Retail sales Jun 2016 Rm oc ond ond : Retail sales Change Number of Number of Jun 2015 on prior period stores stores Rm % Jun 2016 Jun 2015 219 7 17 16 75 33 8 8 vA 23 5 5 24 38
Slide 30: Truworths - Sales densities trend
Truworths - Sales densities trend R per m2 Compound growth rates: Sales density: 40000 5 Jun: 5-year 3%, 3-year 2% 37 350 35 656 34.849 34 586 8) —i- 35.000 - 32979 29 965 29307 ae 30000 - 288020 —_— —— 25000 - 20000 - 15000 - 10 000 Jun 2007 Jun 2008 Jun 2009 Jun 2010 Jun 2011 Jun 2012 Jun 2013 Jun
Slide 31: Truworths - Gross profit trend
Truworths - Gross profit trend or Compound growth rates: Average: Grose urate Gross profit: Gross margin: 80 - Jun 5-year 10%, 3-year 9% Jun 10-year 55.7%, 5-year 55.9% _ 7.0 + a 8 9 55.2 553 | 6.0 - | 5.0 - 4.0 - 30 | | 20 - F 1.0 5 [ 71 Jun 2012 Jun 2013 Jun 2014 Jun 2015 Jun 2016 ‘m= Gross profit
Slide 32: Truworths - Analysis of trading expenses
Truworths - Analysis of trading expenses Change on prior Jun 2016 Jun 2015 period Rm Rm % Depreciation and amortisation 259 221 17 Employment costs 1425 1 186 20 Occupancy costs 1102 15 Trade receivable costs 960 14 Other operating costs 647 7 Trading expenses 4735 4116 15 32
Slide 33: Truworths - Analysis of trading expenses
Truworths - Analysis of trading expenses ¢ Depreciation and amortisation (17% growth): — Capital expenditure of R 558 million mainly due to store expansion, acquisition of an annex to the head office building, as well as the additional assets purchased as part of the acquisition of Earthchild and Na
Slide 34: Truworths - Analysis of trading expenses
Truworths - Analysis of trading expenses * Trade receivable costs (14% growth): — Doubtful debt allowance reduced to 12.3% of gross trade receivables (Jun 2015: 12.5%). — Net bad debt as a percentage of gross trade receivables decreased to 12.4% (Jun 2015: 12.5%). — Interest income earned (including
Slide 35: Truworths - Operating profit performance
Truworths - Operating profit performance Operating Compound growth rates: Average: Average: wea (Ron) Operating profit: EBITDA margin: Operating margin: Jun: 5-year 7%, 3-year 5% Jun: 5-year 34.5%, 3-year 32.9% Jun: 5-year 32.9%, 3-year 31.2% 45 4 38 36 4 7 40 | _— 33 4.0 —— = 32 + 35 35 | 36 35 —i—
Slide 36: Truworths - Capital expenditure
Truworths - Capital expenditure Committed Jun 2017 Rm Store renovations and development 301 Land, buildings and refurbishments Computer infrastructure and software Motor vehicles Distribution facilities #497 Trademarks Total 516 * Includes the purchase of an annex to the head office building. ** The
Slide 37: Truworths - Cash flows
Truworths - Cash flows | : : (1.000) (2.000) (3 000) (4.000) EBITDA 15 140 (1070) 104) (1.441) 2389 (454) Le 45 | (377) (3514) 2598 Working Interest Dividends Finance costs Tax paid Capex Freecash Dividends Capex Net Increase in Other Net cash capital received received maintenance flow expand acquis
Slide 38: Financial Review: Office Retail Group
FINANCIAL REVIEW SS. Ill. OFFICE RETAIL GROUP
Slide 39: Office - Review of financial performance
Office - Review of financial performance * — Sale of merchandise increased 1.4% to £ 282 million (2015: £ 278 million). ° — Like-for-like retail sales level with the prior year, with strong e-commerce performance of +21% offsetting decrease in store sales of -6%. e Unseasonal weather hampered sales
Slide 40: Office - Review of financial performance
Office - Review of financial performance (Excluding exceptional items) Sale of merchandise Gross margin EBITDA Operating profit Operating margin (%) Jun 2016 Jun 2016 31 weeks 52 weeks £170.0 £ 282.3 45.0 45.6 £17.3 £29.9 £13.4 £ 24.2 79 8.5
Slide 41: Office - Geographic sales and number of stores
Office - Geographic sales and number of stores Sale of merchandise 31 weeks Jun 2016 Number of stores Jun 2016 United Kingdom 147* Germany 7 Republic of Ireland 5 Total 159 *Including 44 concession stores
Slide 42: Office - Integration opportunities
Office - Integration opportunities ° — Retail principles — Office will apply Truworths retail expertise and thinking, where appropriate. » Improve stock turn and stock management » Standards and performance criteria » Continually look for shared learnings » “Talk the same language” * Process — Where
Slide 43: Office - Cash flows
Office - Cash flows for 7 months £7000 120 000 100 000 80 000 89 282 (83 200) 60 000 40 000 43 (1.524) 1115) 20 000 (1115) (1.045) (805) = EBITDA Working Interest Financecosts ‘Tax paid Capex Free cash flow Capex Loans Loans repaid Netcash capital received maintenance expand advanced increase moveme
Slide 44: Credit Management
CREDIT MANAGEMENT
Slide 45: Credit risk environment
Credit risk environment ¢ South African credit market has changed since the new affordability regulations. * TransUnion consumer credit health index fell below 50 points in 2016 Q1, indicating deterioration in consumer credit health. * National credit market new credit granted declined in 2016 Q1. *
Slide 46: Industry: TransUnion SA Consumer Credit Index
Industry: TransUnion SA Consumer Credit Index . The TransUnion SA Consumer Credit Index (CCI) declined sharply to 46.1 in the 1st quarter 2016 from 52.1 in the previous quarter “ =a . The CCI fell to its lowest level in three years, reflecting the = 1 adverse impact of rising interest rates and high
Slide 47: Industry total credit granted - Rand value
Industry total credit granted - Rand value Rbn Sharp decline quarter-on-quarter in credit granted across all credit 60 - types showing general consumer under pressure. Credit Facilities declined in the previous quarter because of affordability regulations. 50 + 40 4 ms 30 4 20 + —~ AaA™ -_—__ 10 | |
Slide 48: Industry store cards total credit granted
Industry (store cards) total credit granted - Rand value Rbn 6.00 Value of store cards granted sharply down 5.00 4.00 3.00 -26.9% 2.00 year-on-year 1.00 0.00 200704 200803 200902 201001 201004 201103 201202 201301 201304 201403 201502 201601 Store cards R' amount granted Source: National Credit Regu
Slide 49: Principa Credit Compass - Total Good/Bad 2+ ratio
Principa Credit Compass - Total Good/Bad 2+ ratio Year-on-year growth ‘h : : 0 Truworths portfolio relatively more stable 15 - Retail industry deteriorating 10 - 5 5 -10 - “15 -20 - May 12 Nov 12 May 13 Nov 13 May 14 Nov 14 May 15 Nov 15 May 16 ——Y-on-Y % Change Industry Excl. Truworths ——Y-on-Y % C
Slide 50: National Credit Act - Affordability regulations
National Credit Act - Affordability regulations Key points of the new affordability regulations: * All customers must complete an affordability assessment, which must: — Include a minimum living expenses calculated based on the customer's gross income; the calculation of this minimum living expenses
Slide 51: Project plan for implementation
Project plan for implementation Check Bureau within 7 days of granting of credit: « Re-score new accounts and credit limit increase accounts if score is older than 7 days Validate customers’ income with supporting documentation Integrate these 3 new processes into all credit systems 51 PO FWN> FwWNr
Slide 52: Estimated sales impact of affordability regulations
Estimated sales impact of affordability regulations ° Impact of affordability regulations on sales estimated using historical and predictive statistical analysis. ° — Estimated impact on 2016 retail sales of R 200 million to R 250 million. ° 2017 retail sales likely to be further impacted without su
Slide 53: Impact observed after implementation
Impact observed after implementation * Often Approved customers do not bring documentation — Formally employed customers find it inconvenient to have to provide documentation — Informally employed customers often do not have access to the required documentation * Conversion from an Approved applicat
Slide 54: Initiatives in progress to improve performance
Initiatives in progress to improve performance (Application levels are relatively at normal levels) ° Stores — Allstores have been trained and re-trained on the process to gather proof of income documentation from customers. — Stores are empowered with the latest technology to assist customers. * Ca
Slide 55: Initiatives in progress to improve performance
Initiatives in progress to improve performance Credit strategy changes Truworths applies international best practice credit strategy management principles This means that there are always several credit strategies operating on the portfolio at any one-time This has, and will continue to, enable Truw
Slide 56: Conversion from Application to Open is improving
Conversion from Application to Open is improving Random months prior to NCA Subsequent to NCA A A Possible permanent account loss Steady improvement due to internal initiatives especially the last few months Application month : ry 56
Slide 57: Legal action
Legal action * — Truworths, The Foschini Group (TFG) and Mr Price (MRP) have taken legal action against the NCR and DTI. e The grounds for the action are: — The historic processes followed by the credit retailers are effective, in line with the NCA’s purpose and combat over-indebtedness. — The requi
Slide 58: Credit risk management
Credit risk management * Challenger strategies developed and implemented for new account applications that leverage more predictive scorecards. ¢ Enhancements to proactively manage customer's credit limit through the life of their account. * Commissioning of new technology in the contact centre that
Slide 59: New account applications
New account applications Number of applicants “000 2500 5 1993 2000 - 1803 1664 1527 1500 = 1374 1225 tooo, S54 500 - Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 59
Slide 60: Active accounts vs. acceptance rate
Active accounts vs. acceptance rate Acceptance No. of active rate accounts % ‘000 50 5 r 3000 an 2554 2586 2672 2658 = —i— a 45 4 —— + 2500 40 + + 2000 35 4 + 1500 30 + + 1000 25 4 + 500 26 20 4 Jun 2008 Jun 2009 Jun 2010 Jun 2011 Jun 2012 Jun 2013 Jun 2014 Jun 2015 Jun 2016 —m=<Acceptance rate —i=N
Slide 61: Share of balance (clothing retailers)
Share of balance (clothing retailers) % 35 4 Truworths 30 + Z a ee i 25 4 —. Retailer 1 20 | ——= Retailer 2 15 4 Retailer 3 10 + 5 4 Retailer 4 Retailer 5 Identity 0 1 Retailer é Mar2013 Jun2013_ Sep2013 Dec2013 Mar2014 Jun2014 Sep2014 Dec2014 Mar2015 Jum2015 Sep2015 Dec2015 Mar2016 Source: Total Bu
Slide 62: Key trade receivable statistics
Key trade receivable statistics June 2015 Number of active accounts (000's) | 2658 | 2672 Growth in active accounts (%) | | 3 Gross trade receivables (before doubtful debt allowance) (Rm) 5 229 Growth in gross trade receivables (before doubtful debt allowance) (%) | aa | 11 Credit sales as a % of re
Slide 63: Key trade receivable statistics
Key trade receivable statistics sis 2uirs | June 2015 Active account holders able to purchase at period-end 83 Overdue values as a % of gross trade receivables 14 Net bad debt as a % of credit sales 8.0 Net bad debt as a % of gross trade receivables 12.5 Doubtful debt allowance as a % of gross trade
Slide 64: Cost of credit vs. credit income
Cost of credit vs. credit income Rm 1400 5 1273 1277 1200 + 1110 1082 1086 1000 + 800 | 674 4g 581 600 j 511 528 522 437 503 400 200 + 04 : : : : Jun 2008 Jun 2009 Jun 2010 Jun 2011 Jun 2012 Jun 2013 Jun 2014 Jun 2015 Jun 2016 =Total income from credit ™ Total cost of credit 49 |
Slide 65: Percentage of the book generating interest
Percentage of the book generating interest % 90 5 194 812 82.2 82.0 80 5 76.0 70 | 60 + 50 + 40 4 30 5 20 , T T T Jun 2012 Jun 2013 Jun 2014 Jun 2015 Jun 2016
Slide 66: Strategic Focus Areas
STRATEGIC FOCUS AREAS
Slide 67: Strategic focus areas
Strategic focus areas Integration of Office into the Group Truworths Exco changes Affordability regulations Kidswear expansion E-commerce Loyalty programme Supply chain Strategic acquisitions Office Optimise UK store portfolio Expand international presence E-commerce Product offering Product mix Sto
Slide 68: Group - Integration of Office
Group Integration of Office into the Group ¢ — Integration of Truworths and Office progressing well. e Focus on extracting value, minimising areas of risk and alignment where appropriate. ° Focus to date has been on merchandising division, key being optimising stock management, buying and planning p
Slide 69: Truworths - Exco changes
Truworths - Exco changes ° The newly formed Truworths Exco is involved in all key decisions. * Douglas Dare has id been appointed to Mite ETSI MEI Peta ie Truworths International board. ’ Sean Furlong Sarah Proudfoot
Slide 70: Truworths - Kidswear expansion
Truworths - Kidswear expansion ¢ — Integration of Earthchild and Naartjie completed late 2015. * — Kids emporiums (including LTD Kids, Earthchild and Naartjie) unique in SA retail. All three are aspirational upmarket brands, yet with different profiles. ¢ First kids emporium opened in October 2015;
Slide 71: Truworths - E-commerce
Truworths - E-commerce * Launch e-commerce platform in FY 2017 to facilitate omni-channel retailing. ¢ Relaunch website with enhanced functionality, order fulfillment, communication and payment capabilities. * Increase online fashion product offering. ° Develop digital channels to increase customer
Slide 72: Truworths - Loyalty programme
Truworths - Loyalty programme ° Truworths has built a relationship with the majority of our customers through our credit offering. ° This enables a deep understanding of our customer behaviour and preferences. ° Analytics is used to drive a suite of profitable customer centric campaigns and offers t
Slide 73: Truworths - Supply chain
Truworths - Supply chain ¢ Achieved 4% efficiency improvement in the distribution centres. e Naartjie, Earthchild and Earthaddict now fully integrated into Truworths’ distribution network and processes. ° Project is underway to significantly enlarge the current distribution facilities to accommodate
Slide 74: Office
Office Optimise UK store portfolio * Grow standalone store footprint in UK; Office not present in some of the top UK retail destinations. ¢ Open 25 stores over next three years. * Relocate older stores and close less profitable stores. * Redesign new concept Office Expand international presence ¢ Op
Slide 75: Outlook
OUTLOOK
Slide 76: Outlook for the FY 2017
Outlook for the FY 2017 . Non-comparable Group retail sales for the first six weeks of FY 2017 up 40% over prior period. — Truworths business unit showed marginally positive sales growth for the six weeks. This was a consequence of: » the new affordability regulations, » the delayed allocation of ne
Slide 77: Outlook H2 - Early 2017 calendar year
Outlook H2 - Early 2017 calendar year ¢ SA trading environment is likely to continue to be tough but H2 of FY 2017 could benefit from lower product inflation if the currency remains at current levels. ¢ Continued impact of the affordability regulations, although we hope to have made even more progre
Slide 78: Questions
QUESTIONS
Slide 79: Disclaimer
Disclaimer This announcement contains certain forward-looking statements with respect to the financial condition and results of operations of Truworths International Limited and its group companies, which by their nature involve risk and uncertainty because they relate to events and depend on circum
Truworths International — FY2016 Earnings Presentation on 6ix