Pick N Pay Stores (JSE:PIK) Q2 2027 Earnings Call

0:01 Thank you and good morning and welcome to everybody those present here in the room today and those of you joining us online good morning on this beautiful Monday morning and the opportunity to share with you our results and the progress to date again I can say that when you have a look at where we find ourselves currently at the moment and we all understand that the marketplace that we're in currently in South Africa is a severely constrained marketplace so we have a consumer that is under extraordinary pressure extraordinary pressure and the outcome of all of the uncertainties in the Middle East we all talk about a black swan event none of us anticipated an orange swan event that has had a profound effect on the world and the outcomes and it really has played out in the most unfortunate way for those people in our communities who can afford it least.

1:04 But having said that, it's played out right across the marketplace. So it's against that background that we have to have a look at where we are in terms of our journey that we're on. Not quite sure what that feedback is in terms of the journey that we're on and the progress that we are making. I'm very pleased with the fact that we've continued to narrow the gap in the losses and Tina will get into the numbers in a lot more detail later but you know I think as a perspective maybe one of the things that I should perhaps have called out a little earlier in my time back here is that it stands to good logic if you think of it that life is sequential at the end of the day and for most of the people in this room here today and those watching the podcast the focus is very much on the outcomes and the return to profitability and that is uppermost in all of our minds obviously but the truth is we have to solve for our customers first we have to solve for the company and the people first and as once that gets its momentum and starts to rebuild that momentum again then the outcomes flow then the profits will flow and I'm quite I'm never comfortable but I am confident that where we find ourselves now is predictable as to where we are currently and when we have a look at the journey going forward now and all of the plans that we put in place I have absolutely all of the confidence in the world that we are going to get to where we need to get to in Pick and Pay and that is to ensure that

2:38 Pick and Pay does become a beautiful, sustainable, profitable enterprise that can play its role in society and the broader society in South Africa and look after its customers and look after its people. Our customers are choosing us more and more at the moment. I'll get into a bit of the detail later. But if you just have a look at where Pick and Pay is positioned today compared to where it was two years ago, we are showing up. If this is not the case, we would not be showing the positive growth that we are showing currently at the moment. And if the market would be a little bit more kind to us and we could get some stability in the Middle East, it would obviously help us even more. Our fantastic boxer business continues to perform just amazingly. It's 600th store opened. and Marek and his team continue to perform, and again, in a market that's had its share of realities it's had to deal with, along with some deflationary pressures in a lot of the major categories in which it trades, but a strong, strong performance in Boxer.

3:48 And then if we just have a look at where we are in pick and pay, we have a strong balance sheet at the moment, we've got an excess of 10 billion of cash in our balance sheet, and it's cash that we look after very, very carefully. We know that we still have some cash to burn in terms of the turnaround and getting to where we need to get to, but that's all part of our plan going forward from here. So without any further ado, I will hand over to my new Chief Financial Officer, Tina. Tina Rutledge. Tina, welcome. So this is Tina's First Radio, as they say in the classics in Texas. So I'm going to sit in the front here and mark it. Over to you.

4:35 Thank you, Sean. And it's quite interesting that when I joined Pick and Pay, well, I've been here for 82 days now. Sean, I said, I came from a ballet, but now I'm in a cowboy in Western. So I must make sure I'm ready for this ride. But good morning to everybody that's joined us here in person today, as well as those on the website. As I said, it's been 82 days in this role. But what has struck me the most about in these 82 days is the commitment and dedication of Team Pick and Pay. It's a real determination to turn this business around. You know, the energy and focus that people arrive with at work every day is something that really stood out to me. But we are all under no illusion that there's still a lot of work that still needs to be done. But we're encouraged by the progress that we are making each and every day. But with that, let me get on to the financial performance for the half.

5:30 So at a group level, we've increased turnover by 2.4% to 60.5 billion rand, with like-for-like growth of 1.8%. Boxer delivered sales growth of 6.3%, while pick-and-pay sales growth was broadly flat. We continued to make good progress on our gross margin, which increased by 70 basis points to 18.8%, with both Pick and Pay and Boxer contributing to this improvement. The stronger gross margin flowed through to profitability. Group trading profits increased around 180 million to 500 million with 105 million rand of that coming from Pick and Pay and the remaining 75 million rand from Boxer. Importantly for us, this improvement was at an operating level.

6:15 a loss before tax and capital items reduced by 56.2% to $139 million, while net finance costs remained fairly constant year on year. This flowed through to the bottom line, with the headline loss reducing by 31.9% to $299 million. This is after taking into account the non-controlling interest in boxes. It's worth noting that the box and non-controlling interest increased during the year, following a 12.5% sell down of our investment in Voxer. And finally, we've ended the period in a strong cash position with 10 billion rand on our balance sheet. This is up from 6.9 billion rand in March 2026. If I then move on to our turnover, the retail, as Sean said, the retail environment remains challenging.

7:08 Consumers remain under pressure. and that pressure was compounded by the fuel increase in May. At the same time, food inflation is at a 16-year low. That's clearly good for consumers, but it does create more challenging top-line environment for us as retailers. Consumers remain highly focused on value and are increasingly prepared to shop around for the best prices. Against this backdrop, both Pick and Pay and Boxer delivered credible turnover growth during the period. If I just turn specifically to Pick and Pay, Pick and Pay turnover was broadly flat at $36.4 billion with like-for-like sales growth of 2%. In South Africa, sales were down 0.5% while like-for-like sales grew by 1.4%.

7:55 The difference between these two metrics largely reflects our store estate. That store estate reset is now complete, although the closures over the past 12 months continue to create an effect in our reported sales growth. If we look forward to our company-owned supermarkets, like-for-like sales grew by 2.4%. It was very much a tale of two quarters for us, with a clear slowdown once the fuel price increased in May. But we are happy that we delivered positive like-for-like volume growth of 0.9%. This is a very important indicator to us, because it reflects the exceptional work our operational teams do to improve our customer offer. And we're doing this while we're remaining competitive on prices.

8:40 Our internal selling price inflation was 1.5%, which is below current CPI food inflation of 2%, and this deflects our continued focus on value for our customers. Our franchise business also showed an improving trend. Sales grew by 1%, compared to a 0.2% decline in the second half of FY26. We continue to work closely with our franchise partners, to make sure that we strengthen our customer proposition to improve both sales and profitability. Omnichannel remains our strongest growth engine, with sales up 35.4%, and we continue to invest in differentiating our digital proposition. During the period, many of you will know, we launched Penny, our AI-powered conversational shopping assistant, which has already supported higher average order values.

9:33 We also launched clothing on ASAP, as well as launched a new clothing website. For us, this is important because it brings both grocery and clothing together in the same digital ecosystem. If we just turn briefly to clothing, standalone stores delivered growth of 3.9%, with like-for-like sales declining by 0.7%. While like-for-like sales remain negative, the trend has improved on what we saw in the second half of H2 in FY26. Our focus in clothing is firmly to return this business to positive like-for-like sales growth. So while restoring stronger sales growth remains a key priority, we are encouraged by the underlying performance we're seeing in all areas of the business. This momentum has continued after period end, with the South African supermarket like-for-like growth sales for the first four weeks of H2 running slightly ahead of the levels achieved in H1.

10:35 If I now move to trading profit, at a group level, we increased our trading profit by 58.1% to R490 million, an improvement of around R180 million on last year. Both businesses contributed, as I've said before, with Pick and Pay contributing R105 million and Boxer contributing R75 million. The Pick and Pay trading loss reduced by 16.9%, with trading margin improving from negative 1.7% to negative 1.4%. Boxer, meanwhile, continued to deliver strong profitability. Trading profit increased by 8.1% to around 1 billion rand, with the trading margin improving by 10 basis points to 4.2%.

11:22 This is achieved in spite of a constrained consumer environment. If I just look at Boxer, I'm not going to really touch on the Boxer highlights. This was covered by Marik and the team last week in the presentation. What I do want to call out is that it continues to deliver profitable growth while investing behind its longer-term expansion plan. Focusing now more on the pick-and-pay segment, the key feature of this result is the continued improvement in the earnings trajectory. The pick-and-pay segment reported a trading loss after leases of R1.1 billion, and an improvement of R100 million when compared to the prior year. Yes, there's clearly still work to do, but at the same time, the strength of our balance sheet has improved. We ended the period with a healthy cash balance of R7.7 billion.

12:18 This gives us the confidence and flexibility to continue investing in the turnaround initiatives and to make the right decisions for the long-term health of this business.

12:27 We are no longer financially constrained,

12:30 Now what we need to do is focus on the operational elements of our business. If we then look at the trading results, reflecting on the pick and pay segment trading results, as I previously discussed, the turnover is broadly flat year on year at 36.4 million rand. Despite this flat turnover, gross profit grew by 3.9% to 6.4 billion rand. this reflecting the 70 basis point improvement in the gross margin to 17.5%. At the same time, we managed to keep a tight rein on costs. Trading expenses increased by just 1.7% with like-for-like expense growth of 2%. This is broadly in line with our like-for-like sales growth. For me, this is one of the most important measures in this presentation today, that during the period, our gross profit grew ahead of expenses.

13:25 The operating leverage is starting to come through in the result and this is evidenced by the trading loss reducing by 16.9% to 500 million and the trading margin improving from negative 1.7 to 1.4%. If I just unpack the gross profit analysis for pick and pay, as I said before, the gross profit margin improved by 70 basis points to 17.5%. with gross profit increasing by 3.9% despite flat turnover. This improvement was both in South Africa and in the rest of Africa. South Africa contributed 40 basis points to the margin improvement and this was supported by better category management and margin improvement. We are seeing encouraging progress in our fresh and general merchandise divisions with improvements in both participation and margin.

14:21 Important for us is that we achieved this margin improvement while remaining competitive. Our selling price inflation remained at just 1.5%. We continue to invest in value while improving our range and our quality of our customer offer. The remaining 30 basis points came from the rest of Africa, primarily from Zambia, but also from the corporatization of our Botswana operations. Diesel, however, remains a significant cost headwind for the business. For the segment, spend increased 14.9% to R426 million for the period. In South Africa alone, our diesel costs were up 22.5%, but this was partly offset by lower diesel costs in Zambia due to the end of load shedding in that country.

15:09 If I now move on to trading expenses, as I said, cost discipline remains a critical part of the pick-and-pay turnaround strategy, and we've seen good progress. Trading expenses increased by just 1.7% to 8.1 billion rand, with like-for-like expense growth of 2%. This is a significant improvement on the prior year, where like-for-like growth of 6.7% was reported. So what's driving this better cost performance? If we start with employee costs, our largest expense category at 3.4 billion rand, cost increased by just 2.7%, despite above-inflation wage increases at a store level. These savings, the savings from our support of a restructure are coming through and help absorb a significant portion of these wage increases.

15:59 We also see benefits in the work we've done in our store estate. Occupancy costs declined 0.4%. That was supported by rental renegotiations and lower insurance costs. As lease has come up for renewal, we continue to right-size our state for a better match to our business needs. Occupancy costs also benefited from a 99 million grand profit on lease termination compared to 126 million in the prior year. Merchandise and administration costs were down 5% reflecting our continued cost discipline and included a more strategic approach to advertising and promotional spend. These savings were partly offset for operations costs which increased by 5% and these are driven mainly by higher diesel costs electricity costs, utility costs, as well as costs associated with the growth in our omnichannel business.

16:58 Moving on to finance costs, our finance costs were broadly flat at $400 million, increasing just 0.3% year on year. Our stronger cash position is now benefiting our funding interest, although this was offset by a 3.1% increase in our I4S 16 interest. Our balance sheet at the end of the period is strong. We ended with 10 billion rand of cash, of which 7.7 billion rand comes from Pick and Pay and 2.3 billion rand from Boxer. This cash position includes 4.7 billion rand of gross proceeds from the sale of our 12.5% shareholding in Boxer. But the improvement in cash is not just from the Boxer transaction. Excluding these proceeds, the pick-and-pay net cash position improved by around R600 million during the half, including the R232 million dividend from Boxer.

17:53 But excluding the benefit of the Boxer sell-down, we still saw a meaningful improvement in the underlying cash position of the business. Turning to working capital, inventory reduction was a key focus area for us at the start of the year, and we're seeing good progress. Our inventory reduced by 3.2% year-on-year to 6.7 billion rand. This was achieved by continuing to invest in range. We also managed to protect both availability and our customer offer. Receivables were also well controlled, reducing by 9.3% to 3.4 billion rand, largely reflecting the corporatization of 10 franchise stores during the period.

18:38 The reduction in inventory has released cash and it's contributed to the strength of our liquidity position for the half. Overall, the group generated 2.7 billion rand of working capital in flow for the period, compared to 1.7 billion last year. Pick and Pay contributed 1.4 billion rand of that, with a further 1.3 billion rand of that coming from Boxer. But as you were expecting retail, the e-seasonality in our first half working capital cycle and we expect a portion of this benefit to underwine in the second half. So the full 2.7 billion rand should not be extrapolated for the year. I now move on to capital expenditure. We continue to be disciplined and targeted in how we allocate capital across the group.

19:27 Group net capital investment for the first half was 700 million rand compared to 900 million rand in the prior period. This consists of gross capital investment of 900 million is approximately 200 million from the proceeds of asset disposal. Within the pick and pay segment, gross capital investment increased by 20% year on year to 583 million rand as we increased our investment in our supermarket estate. Net capital investment was up just 5% thanks to the increased proceeds from the property disposal. Our investments remain selective with strategic store revamps prioritised alongside critical repairs and maintenance. We have also invested in selected franchise to corporate store conversions, where it's strategically and financially appropriate for us.

20:18 Looking ahead, capital investment will step up in the second half, consistent with a planned capital investment program. For pick and pay specifically, our FY27 growth capex guidance remains unchanged at 1.7 billion rand. Bringing the cash story together, We started the year with 2.4 billion rand of net cash. Cash flow from operations after lease payments was an outflow of 800 million rand, and this reflects the fact that we're a loss-making business. The outflow, however, was more than offset by the progress we've made on working capital. Working capital released 1.4 billion rand of cash, with a further 200 million rand benefit from net funding interest.

21:05 At the same time, we continue to invest in the business with net capital investment around R400 million during the period. Putting this all together, Pick and Pay generated R400 million of positive operational free cash flow, taking the net operational cash position to R2.8 billion, and that is before the Boxer transactions. As I've said before, we received R232 million from Boxer, in the form of a dividend, as well as we sold down on 12.5% of our shareholding, which yielded 4.7 billion rand. As a result, the pick and pay ended the period with 7.7 billion rand of net cash, giving us a strong financial position from which to continue executing the turnaround.

21:56 Finally, turning to earnings per share, the group lost for the period reduced by 88.2% to 38 million rand, Following the increase in the Boxer Minority shareholding from 34.4% to 46.9% during May, the non-controlling interest increased by 34.1% to R232 million. The loss attributable to the Pick and Pay Store shareholders reduced by 45.6% to R270 million. After headline adjustments of R29 million, the headline loss reduced by 31.9% to 299 million. The weighted average number of ordinary shares remained unchanged at 734 million rand. Our headline loss per share improved by 31.9% to 40.71 cents, while our basic loss per share improved by 45.6% to 36.77 cents. So in conclusion, as a team, we're encouraged by the progress we're seeing across the business.

23:01 The turnaround is gaining momentum, profitability is improving, underpinned by a strong balance sheet and cash position. There is still work to do, but the plans are in place, the priorities are clear, and our focus is firmly on executing and returning pick and pay to profitability. Thank you.

23:25 Thank you very much, Tina. Straight out the blocks, 10 out of 10. So, presentation and passion. The room will stand in judgement of the numbers. But you can see that there is certainly a lot that's been happening under the hood in the organisation. And this is not just about any one lever that sticks out. There are so many, many things that we're busy tackling at the moment. So if I can just get into some of the detail of where we find ourselves at the moment. I spoke earlier about our like for like sales growth and on the right hand side we won't get specific about naming retailer A, B and C but the most important thing for us is that our customers are coming home to pick and pay there's absolutely no doubt about it and you know people ask why so given the constrained market that is out there a lot of the work that is being done you know if we look at For starters, obviously a major thing is the Springbok sponsorship and the event and the effect that that's had.

24:30 The overall halo effect on the company has been extraordinary. It's been absolutely fantastic. But if you look below that, all of the work that's been done, like in women's rugby, in school rugby, we had the Gold Cup this weekend. Just extraordinary activation and Pick and Pay really getting back to what it stands for in community. We just have a look at our marketing, the consistency of the pick and pay marketing and execution today. The blue stripes that are out there, it's just so easily recognizable and identifiable and all of these things are about building blocks and about getting us back to being where we need to be. We spoke a bit earlier about food inflation and some of the challenges that we've had to deal with in this year past and we mustn't for any second underestimate the effect of what this has on on our business.

25:20 So for Boxer, for example, on the major categories that are there, and all of the serial categories and stuff, we've in fact had deflation. So despite that, we've managed to achieve what we've achieved. And the fantastic thing about the deflation that is there is that it certainly does help consumers, specifically at the bottom end of the marketplace, who really are constrained. So with meal and meal and rice and all of those things are less 30%, less 40% than they were last year. Pocketed potatoes, less than half in a year. It's fantastic for the consumer. It's great because it helps them in these times, but it certainly brings added pressure to retailers as an operator. One of the major things that we've spoken about and one of our major focuses in the company for Pick and Pay going forward is fresh.

26:11 And you know, everybody says, well, Sean, how are you really going to call out Pick and Pay as being the fresh food people and working towards getting back to what we were always known to be, the fresh food people? I can just tell you that the progress that we've made in these areas has been nothing short of phenomenal. So if we look at the traditional area of the business, the sort of the eds and the non-eds, your household and packaged grocery goods, there are so many new competitors playing in that space today. You've got a lot of your direct online competitors, the Amazons and the take-a-lots of this world that are competing actively in this marketplace. And fresh food for us is really the major focus for us. And between Peter and the team, we've got Dallas here today as well. If I have a look at the retail operational side of Pick and Pay and how their capability is growing day on day on day, it really is rewarding and heartening to see.

27:04 And we're busy with a lot of new innovations in this space. You know, if you just reflect for a second and you think about the South African consumer and the market that we operate in here, We have of the best retail in the world in South Africa. So in turning Pick and Pay around and getting it back to where it needs to be. I can tell you now there is no grocery consumer in any country in the world that gets what they get out of us the supermarket operators. And here I have to call out our opposition as well with 60-60. So between 60-60 and ASAP what we provide to our consumers in this country is absolutely world leading. It's world leading and world class. So we run proper supermarket operations in this country.

27:51 We can have a look at our penny has been absolutely phenomenal for us and the initial uptake of that and that certainly was groundbreaking. Clothing also and our clothing business continues to now grow in the ASAP environment and

28:08 continues to add to that.

28:09 One of the great innovations that we're having within Pick and Pay now is that we are in the process now of launching Smart Shopper Pro which means it's a subscription and this has been rolled out at the moment so for a fixed fee per month unlimited deliveries and that will also go ASAP into that space. When you have a look at the numbers and the beneficiation and you look at things like stock productivity and all of the numbers that are starting to come down, the curtailment and the control of expenditure and you know, here I must call out the operational people in the room. and across the length and breadth you know both at a store operational level and here in the support office level the things that we've been talking about about right-sizing about doing all of this if we hadn't have been doing that they wouldn't be showing in the numbers that we put up on the screen now and we really have made some incredible progress in this regard and our huge facility that we have in Eastport is all done and dealt with it's moved off to DP World and we've got some really great innovations that are coming out for us in the space we're busy sorting out our distribution along the coast specifically in the Eastern Cape area where we're busy with DP World at the moment and looking at how we're going to evolve that to make that more effective for us and then also creating some additional capacity in the KZN region But under Johan's guidance,

29:39 we really have made some fantastic progress. And look how beautiful that truck looks. Extraordinary. I suppose one of the major issues that it really is great to share with you today is the fact that we settled last week the ongoing labour negotiation that we were having. and you know to just put this into context some two and a half years ago we already worked out that just purely from a package and benefits perspective at a store operational level that we were in a situation at Pick and Pay that we could no longer compete in a really cutthroat tight margin volume business such as we operate in in this world and for about two years we had tried to move the dial in this regard and respect to the negotiating body they had done a good job of not moving at all and we were left with no option other than to actually trigger the section 189 process. Now you know just very quickly for those people who don't understand we are actually obliged to in law if we contemplate due to business necessities any retrenchments that may result you are actually obliged by law to enter into a S189 process and it doesn't automatically mean retrenchment because what the S189 process does is it calls upon you to look at alternatives

31:15 to retrenchment so it was a serious situation for us when we had to announce some five and a half months ago now that we were going to be launching an S189 process and take 22,000 people in pick and pay that we love and that they love pick and pick and put them under this sword of Damocles that something has to happen and we know that we had various interventions that happened in the interim and there were certain court actions that were taken against us we were taken to both the Labour Court and to the CCMA and fortunately we won both of those resoundingly resoundingly and it was one of the issues that really brought some common sense into the room that we could realize stuff is real stuff is real we need to sit down and we need to talk about this calmly we need to talk about it quietly and we need to get your resolution on it and I want to call out specifically our National Negotiating Committee who are our body of shop stewards across the country who've been involved in this five-month process and then also Dallas who heads up our retail operation along with Paul and Mike and Jeff it's been extraordinary how they've got together many many long hours many many late nights but finally found resolution because that's the most important thing at the end of the day so I'm very pleased to be able to say that last week we could officially announce that the S189 had now been withdrawn and we've taken that off the table and now we were moved to giving substance

32:47 to what we've agreed is going to be the changing terms and conditions going forward. And for clarity, we're not going to be disclosing the detail of that in public. I know that we live in a world today where everybody loves to know everything, but there's certain things in life that you need to know, and there's certain things in life that you won't know. So this is confidential between us and our labour force in the company, and we will move into it. We live in a competitive world. if we have a look at clothing we know that clothing in general across the length and breadth of the country and make no bones about it has been under pressure and we haven't had a stellar two year trading period in clothing but we can already see that the work that Hazel and her team has started to put into place now is starting to get us back the right way around again and there's been a lot of there's been a lot of pressures in that marketplace you know if we take the advent of of the likes of the Sheens and the Timus that have been flooding into the marketplace as well that's also had an effect on everybody and you can see it's across the clothing and apparel universe so we would be foolish to believe that we somehow operate somewhere else we don't our partnerships in the company are very very important for us and in this regard We obviously know we have our FMB e-books, we have our beautiful apps, our bank is sitting in the right hand side of the room over here.

34:11 We have work that we're busy doing with BP Express at the moment and we're busy making some evolutions there and making sure that we get to service that piece of our business better. And then we have the wonderful collector box that have kicked off again. So I don't know if you've all seen that cute little advert this year. trying to use the connection to get his cards and being told you have to go and shop and pick and pay. See if you want to fill up your collector box. But it's just extraordinary how fantastic this program is. I mean, people just slide in there for these things. It's amazing.

34:45 Absolutely amazing.

34:47 Boxer, as we said, and I'm not going to go into too much detail here, because Boxer was spoken for last week by Marek and the team. But other than just to say that on the Boxer succession, we've made the announcement that Marek will step down in March. He will still be in Boxer until November next year. So with Justin, who we've appointed as Marek's CEO designate, Justin's been in the business for 15 years. He's well experienced across the length and breadth of the business. So that's all put in place. And Boxer has a very, very strong leadership team across the business that has been growing up over all of those years. So if we have a look at where we are, and this is a slide that we put up some two years ago in May when we said this is the journey that we're on in Pick and Pay.

35:36 And if we have a look, pretty much the e-capitalization, leadership in people, resetting the store estate and strengthening the partnerships continues. The big thing that's still under work is accelerating like-for-like sales, and that's something that we do daily in everything we do, whether it's ranges, fresh, whatever it is we do there. and then on the future fit structure. And future fit structure, a lot of that was about making sure that we get the right terms and conditions in place at store level and we will now get that action in place. So that is certainly work on the go at the moment. And that brings me to the last piece of my presentation and that is my succession in the company. And we announced a few weeks ago that Spencer would be joining us effective from the 1st of February next year as part of succession.

36:31 And I know that there's a lot of conjecture about, you know, internal, external, all of these things. We need to understand that in an organization like this, we have incredible operational teams. But we are still in the situation in this company that we need to continue to strengthen our ranks of management in the organization. as Peck & Pay over the years found itself just having to operate on less and less and less people and you know we have the most extraordinary operational situation under Dallas's leadership now where we have our core retail business that is growing in Peck & Pay and that is still the big nut that we need to crack and we cannot afford to take focus off that we cannot afford to be driven in what we achieve in that regard and you know I made the commentary not somewhat likely but somewhat seriously about the roles of leadership and being CEO in an organisation like this today is not clearly understood by people out there there are so many dynamics that one has to deal with that are outside of actual day-to-day trading. You know, there's sometimes when you go home and you're like, hell, you know, I would just like to get to stores and just be passionate about what we do and that's look after people and sell more product.

37:48 And there's some days if you go home at the end of the day and you're kind of like, man, it's just too much stuff that one has to deal with. But that's the world that we live in at the end of the day. So we're very, very blessed to have somebody with Spencer's experience coming to join us after a fantastic career at... W something they're very sensitive about us using their name but we're very very fortunate that Spencer at the end of his time there went to go and work in New Zealand and went to go and work for Woolworths New Zealand which is obviously nothing to do with Woolworths South Africa and in Woolworths New Zealand that business was in fact half corporate half franchise also by 22,000 executives or employees in the business and a very very tough time in New Zealand so Spencer had to face into government because the supermarkets, like in Australia, were blamed after COVID for a whole lot of woes and ills. So an extraordinary amount of experience out there dealing in the corporate world and having to deal with the bits and pieces that one needs to deal with. So I think that for us, the continued strengthening of Pick and Pay's leadership and the continued strengthening of the quality and the depth that we have in the organisation, for me, is of vital importance. Vital importance.

39:04 because this company is only about its people at the end of the day. This is not about one person. It's about a team and it's about the people across the length and breadth of the company. And it's extraordinary. When you go to store openings now, you just have a look at the spirit that's there. You have a look at the people that are there. It's palpable. It's palpable. So I consider myself very fortunate and very blessed to be here at this stage and at this juncture now. And as I said, Spencer will join 2nd of February. Everybody's asking, who's the long handover and all of this stuff. No. It's properly, properly planned. So over a period of 4-6 months, Spencer will deal with the handover and Spencer moving in.

39:49 And then I'll also be in a situation that I can spend a little bit more time with Justin and the Boxer team. And as you know, Boxer is very, very close to my heart. And it's a crucial, crucial part of this business. But there is no confusion in our lives. of the fact that Boxer has an independent board and that Boxer does what is right for Boxer. Other than one thing, Merrick and them do not like to pay for the stores that we pass on to them. I wish we could decree that this would be the amount that we pay, that they pay for them, but that doesn't happen. They negotiate and they drive a hard bargain. So Boxer run their business and they run it well and we will continue to run our business and run it well. And the crucial thing for us is to ensure that the operational people in this company can focus on what they do.

40:37 And that's look after the business. So on that note, I would leave you with a few key, key thoughts and the real takeaways from where we're at. And if I had to leave you with three real key pull-outs of this thing. One, customers are returning to pick and pay. We can see it in our life-for-life sales. and this is not delusional in any way, shape or form. We can see it in our life-for-life sales. The second thing is that we have dealt with our labour situation and I think that this is a massive feather in the cap of everybody in this company and specifically our people in the company. We had a program of fairly regular updates where we did a little video.

41:26 I did a video that went out to the company every couple of weeks just appraising them of where we're at Why are we doing these things? How are we going about it? Keep the heat out the room. And that's where we've got to on the labour front. So I think against all odds, and I don't think many people thought that we would actually get to this stage. That we could have achieved what we had achieved. So that should be the second big call out. We now need to get that actioned. and we need to get that implemented. And then the third one is just the acknowledgement to the marketplace because a lot of questions have been around my succession, everybody's, you know, why are you there? This is like, at your age you should be gone already. So we know that this is all in place and all in control. And more importantly, that across the company we have a growing capability, an operational capability in our businesses.

42:16 So I want to thank you all for your attention today. I want to thank you for all of the energy and the input. And seriously, Tina, I want to thank you for your first presentation of the numbers. Very, very well done. And I think you can see when the numbers are there and they're laid out in that fashion is that you can see that there are many, many, many, many arrows that have been fired off in this company in the last two years and they're starting to find their targets. So long may that continue. Thank you very much indeed. Q&A.

42:55 Great. Thanks, Sean and Tina. We have a decent list of questions online. And let's kick off with some of these online questions before we tackle some of the questions from in the room. So the first question is from Michal de Nobrega from Avio Capital Markets. on the Section 189 agreement, but it is also asked by many other people, including Excelsior Capital, Standard Bank Securities and Citi. So it's really these questions in aggregate are asking three things. On the Section 189 agreement, number one, what level of savings do you expect? Number two, over what time frame will they come through?

43:43 And number three, are you able to provide any additional details on the agreement reached?

43:53 Yes, no, no. In terms of the time frame, bearing in mind that we're already sitting here, we're almost in Christmas trade already, so this year is all but done. I would the bulk of what we have put in place will bring fruits in the next financial year so FY28 will come to bed and with regards to the absolute detail for competitive reasons we're not going to be divulging the absolute detail of what is inside there because it includes our wage settlement and everything for next year so it's all wrapped up in one So I'm sure you can appreciate that for competitive reasons, it just doesn't work in our favour to have that out there at all. So Tina, I don't know if there's anything you want to add to that?

44:47 No, Sean. I'm from CCSD. Nothing has been factored in for FY27. So we've taken no benefit into FY27. Everything we have taken will now be in FY28.

45:00 Thank you. Okay, and then the second question from Michal. I'll give this one to you, Tina. on the gross margin within pick and pay with the DP world and the rest of Africa benefits now coming through, what level of gross margin do you see as sustainable from here?

45:17 So to answer that, we continue to work on the gross margin and Fresh GMDA as I've said are an important part in our uplift of our gross margin. I think it's also important that we do have deflationary categories within the business as well. you know, our competitors, Voxel, everybody has indicated, you know, that staples and commodities are currently in deflation. So at this stage, we won't be giving any guidance on the gross margin. Just to say that there's lots of work happening in the gross margin space with Dallas and its team.

45:50 Thank you. The next question is from Nick Wilson of News24. Pick and Pay closed some franchise stores during the period and also... opened or converted a number of stores to company-owned stores. Does this reflect an evolution in pick-and-pay strategy towards more of a corporate store format? I know you have said the store reset is now done, but I was wondering if we could see more franchise store conversions to corporate stores.

46:22 I think certainly franchise remains a very, very important piece of our business and our go-to market in pick-and-pay. There's no doubt about it that the franchise business in and of itself is under pressure. We can see that from what is happening in the largest franchise operator in the country. So margins aren't tougher, margins aren't tighter. and I think it follows that you will see in the major metropolitan areas where the stores do become available. We have franchisees where because of family, you know, they may have had the store for 15 or 20 years or 25 years. They're at a stage that their family don't want to go into the business. Retail is a hard business. Some of these kids like to take the easier option in life.

47:07 They don't want to go and grind it out every day. So with those opportunities present themselves, we will continue to buy those stores. at terms and conditions that make sense to us. For sure. But it does not mean the franchise is finished. I mean, I just, I come back to Hope Town, Dallas, whenever we go to Hope Town, I mean, look at what Stolle and his family do in that area. I mean, they are the town. I mean, they're mowing the verges, they're looking after the town, they're in the community, they're in the schools, they're in everything. you can never really do that as a corporate operator you can never get that level of engagement so we will continue to celebrate franchise where it does prevent incredible strengths for us but then you know in a store like Belita and Mattel where we have Mike Laffer at the end of a long beautiful time over there we bought the store back from Mike Lafferty at the end and that will become a corporate store and we will make a margin on both ends both as a franchisor and a franchisee obviously the maths stack up for us

48:04 The next one is from Veriton Fund Management. Could you comment under what circumstances would you consider further sell down of Boxa and is management considering any other asset sales as a means of achieving the break-even target or unlocking shoulder value? Thank you.

48:23 No, we don't contemplate any further sell down of Boxa at all. We believe that the money that we have in place now on our balance sheet should be able to see us through getting back into profit again in the company. You know, if I could just give you a sniff, I mean, for every 1% of sales that we lose, in terms of our sales growth, costs us about $140 million of income. $140, $150 odd million of income. We may have probably lost at least 3% in our top line sales growth number since the war broke out in the Middle East. At least 3%. So you can do roughly the math and look at it. And as I said before, you know, momentum in life is everything in business. And you know, for us, if we look at where our business as Pick and Pay is, and this is still a very big business at the end of the day.

49:14 So we're like a tanker in the ocean. We know we're a tanker. We're not a cruise ship or a yacht or something else. We know we are a tanker. And Pick and Pay currently is taking a bit of water over the bound. That's the losses that we make every year. and we were on a trajectory to getting our bow a little bit higher and a little bit higher and taking on less and less water because at the same time we've got a deal with fixing up everything that's inside the tanker and everything that makes a part of the tanker. There's no doubt about it that the exigencies of the outcomes that would happen in the Middle East has led to choppier seas and taking more water over the bow. But despite that we've managed to continue to show growth ahead of the marketplace and we will continue driving that and making sure that our stores continue to grow. So the short answer is no.

50:04 And this has not just been a romantic or just been living in hope because hope is never a strategy at the end of the day. But we firmly believe that all things being equal we will get there and it will not be necessary for any further sell down or asset disposal. Boss, is that...

50:22 Perfect.

50:24 There you have it.

50:26 If you were thinking of selling it, yeah, I didn't tell

50:31 you. The next one is from Standard Bank Securities and I'll address this one to Tina. Tina, it looks like the operating free cash flow of the call, pick and pay business was a positive $0.4 billion for the first half. If we take into account the seasonal nature of the working capital, a possible credit cut-off, and the H2 weighted capex program, how should we think about operating free cash flow for the pick and pay business for full year FY27?

51:01 So thanks for the question. Because we are last making business and our break-even guidance hasn't changed from FY29, we will continue to burn cash in H2. Most of our capex is also weighted to H2, so there will be cash spent. but I think what's important in the cash spent is that we do turn over every rand and so we're making sure that the capital that we do spend, that we get in the appropriate return on investment for the capital that we spend. So at this stage, you know, I would say the guidance is by and large in line with what we've previously given the market but yeah, I don't expect it to be operational cash inflow in H2.

51:45 Thank you. Right, from City Group, on gross profit margin, how much of the expansion came from the Botswana corporatisation?

51:59 So approximately 0.1% of the margin uplift came from Botswana.

52:04 Thank you. We have a question from Warwick Bum of Morgan Stanley. Can you expand on your cost levers for H2 FY27? Is it possible for you to reduce costs on a life-for-life basis in the second half of the year?

52:20 So from a cost point of view, as I said previously, every cost line item and every RAN gets turned over. So we just continue to monitor expenses on a line-by-line basis right now. So at this stage it's very difficult to give guidance and we will end for H2.

52:39 Thank you. Okay, I'm going to move on to a question from Paul Stiggers at Nedbank. Have you managed to achieve the cost savings in your store labour model that you intended when you started the programme?

52:56 it's still somewhat premature because we've just come to conclusion on that negotiation now and those will come to bear in the next financial year largely but having said that the operational team I mean Dennis has been a lot of energy that has already been targeted at trying to get the stores as efficient as possible one of the major issues that we have now because when we started the S189 process we had two real big goals in that thing the first one is in a nutshell we needed to get flexibility into the company again that we could get our people working by and large when we needed them to work and not have sort of full set Monday, Tuesday, Wednesday, Thursday and then have to resort to other forms of labour on weekend and temporary labour on weekend so the first big one was flexibility which we got and then the second big one is obviously not having to have any retrenchments.

53:55 That was another goal that we had. So we achieved in both of those fronts. So on that score, to answer that question, most of that saving will come in the next year. Thank you.

54:08 We have another question from Jaco Schultz. Congratulations on the improvements you've made. Is it necessary for you to hold on to your boxer shares? and is there any consideration to unbundle the box of shares? No. Are there any questions in the room before I carry on with the online questions? Yes.

54:49 I thank Sean for the opportunity, Nico MacDonald from Denker Capital. I'd just like to know if you can give some guidance on any potential store closures or space addition, because you obviously can take a view on inflation, you can take a view on life-like sales, but there's been a lot of change the last couple of years in terms of your store estate. If you may just give some guidance. Yeah, sure.

55:16 I think, you know, if one has a look at one store estate and I don't think it's any different for most retailers that are out there today that run big store estates. There are a lot of stores that are still too big and not fit for purpose. You know, I mean, I'll give you a classic just down the road from here. It's Kenilworth Centre. I mean, we were in Kenilworth Centre. What have we done? It's about 6,000 GLA in total. I mean, for us in Kenilworth Centre, we could literally halve that store. We could take 2,500, 2,800. And I can tell you now, we'd run a better business, far less wasted. And we most probably do even more turnover, ironically. So, you know, that's where we're in discussion with those landlords who are ready to say to them, how do we cut this floor up? And JB's setting our heads up, our property division. JB and his team have in fact made some, they've actually made some wonderful inroads. Tina put them through the sword the other day and made them do a little bit of analysis and stuff from what they've done in the last year.

56:13 JB, even you got a pleasant surprise. You were like, wow, we're back to here. achieved a lot. So, in having a look at our stores, as we go through now and we get into lease renewal, that's where we're really, really focused in terms of repurposing our stores. So, I think if you're going to see resizing, reconfiguration, I mean, I'll give you a classic, Brackenfell Half Market. You know, that store in its current construct, just size-wise, can never, ever do enough sales again to warrant having a building that big. I think our GLA is about $14,000. It's worth $14,000, daddy? $14,000 GLA. I mean, it's like, it's nuts. It's nuts. So, you know, those stores, we have to get to a stage where the land will be completely reconfigured, the centre, like we're doing in Ferry Glen hypermarket now.

57:00 So, we've done a deal in Ferry Glen, we sold the business off, it's going to be redeveloped, and we'll end up with what we call the new age hyper now, about 6,500 square metres, and the balance of the other 8,000, 9,000 square meters will be redeveloped in the center. So that beneficiation will be an ongoing place of getting Picken Bay back into a sweeter and sweeter and sweeter place. But there's no retailer in the world that's not currently confronting this situation. As more business gets done out of store and so this is a real issue for everybody and for the landlords. But the landlords are coming around to it now and they're sitting down and saying we need to talk. We need to look at this That's a very good question.

57:48 Anything else from in the room? Stephen, I'm sure you've got a few more for us.

57:54 Try a few more from online, from a couple of questions around sort of the future of retail and specifically our franchise model. One from Excelsior Capital, but also a similar question from Protech Capital Management. with increased competition from the likes of Amazon, etc., as you have mentioned. What do you think the future of retail is, and more specifically, the franchise model?

58:23 When I say how long is a piece of string, I mean retail is evolving. It doesn't matter what branch of merchandise you're in today. Retail continues to evolve. We know that going forward from here, that consumers of the future and specifically the younger new age consumers are very easy at just being on the screen and wanting their stuff delivered immediately to the door so they will continue to evolve a combination of the brick and the click that's going to happen but the hallmark of what we set ourselves as our goal is great stores with great people and great inspiration Because it happens in the world today that if you don't reward people for their time coming to visit your business, they won't come back.

59:11 So they need to leave the store having filled in rich parts, having felt, wow, you know, the people were really cool, the experience was fantastic, I saw some new stuff, I saw some innovation, I saw some evolution, and a lot of the energy and effort that's going in specifically in the area of fresh in our business at the moment is exactly around that. You know, what are you doing in produce? What are you doing in butcheries? What are you doing in bakeries? and it's about training people up again. It's about getting some skills back in the store. You know, everybody de-skilled. It's amazing how in the supermarket industry you see these cycles of skilling and then de-skilling and skilling and then de-skilling and then you look at the chains that are really doing well and those that are sustainable are the ones that actually do the difficult stuff. So it's kind of like, it's kind of finding a balance between the brick and the clicker. But online is a reality. The new competitors that are in there in the marketplace are an absolute reality. And you've got people like Amazon who play a very, very, very long game in whatever market it is that they're going to.

1:00:12 We just have to compete with it. We have to deal with it and we have to find ways to deal with it.

1:00:18 Okay. Thank you. A couple of questions from Bank of America as well as Investec. Looking at the H2 CapEx guidance or the full year CapEx guidance implies a significant step up in the pick and pay segment within the second half. Can you elaborate on how the spend is likely to be allocated? Thank you.

1:00:41 So the primary drivers for our spend is revamping strategic stores and we've got a few currently in the pipeline. We will also look at, as I've said in my presentation, certain franchise acquisitions that make sense for the business. We will continue to look at and certainly at critical repairs and maintenance as well. So those are the three reasons, the three areas in which we will spend capex. You know, if you look back at prior years as well, our capex is weighted to H2, and so we do see us spending the, in terms of the capex guidance, of 1.7 billion there.

1:01:19 And then we've got some big stores as well, Tina, that have been done early next year. We've got Waterfront Store, Canal Walk, So we've got some other... So we've got some other significant stores that will kick in early next year. And similarly for Boxer, their CapEx is waiting for the second half.

1:01:37 Thank you. Perhaps we'll make this the last questions from NetBank Securities. Are you able to give any inflation guidance for the pick and pay segment for the second half of the year?

1:01:52 You know, it's interesting. One has been waiting with... with bated breath to see when the push for inflation would start to manifest and would start to show and suppliers coming looking for price increases. We're starting to see some moves in that regard but I don't think it's going to be anything marked in the rest of this year. I think it will be earlier in the new year. It will be earlier in the new year. It's obviously very, very good from a consumer perspective because it keeps prices down for hard-pressed consumers. But I think it will only start to see an uptick in inflation next year.

1:02:30 Thank you. All right. I think let's leave it at that in terms of the question.

1:02:35 Thank you very much again for your attention both here and online. Thank you, Tina.

1:02:40 Thank you very much. Thank you.

1:02:41 And to all my Pick and Pay colleagues. Thank you.