·Setback to recovery in Australia
·Good performance and expansion in Southeast Asia
·Supermarket price war affects Hong Kong
·US$178 million special dividend paid
Results:
Sales excluding associates - US$m5,918
Net profit excluding non-recurring items - US$m64
Cash flows from operating activities - US$m238
Recurring EBITDA to sales - 3.5%
Debt / equity ratio - 24%
Earnings per share excluding non-recurring items -US¢3.58
Earnings per share - US¢2.08
Dividends per share - US¢6.00
"The performance of the Group in 2000 will be significantly influenced by the competitive conditions in Hong Kong where the profit in the first half of 2000 will be lower than last year. Speeding the recovery at Franklins in Australia, however, remains our top priority."
Simon Keswick, Chairman
"We remain confident that the Group has the right vision and the plan, the people and the capital to achieve its objectives."
Ronald J Floto, Group Chief Executive
28th February 2000
The final dividend of US¢4.35 per share will be payable on 7th June 2000, subject to approval at the Annual General Meeting to be held on 31st May 2000, to shareholders on the register of members at the close of business on 24th March 2000. The ex-dividend date will be on 22nd March 2000, and the share registers will be closed from 27th to 31st March 2000, inclusive.
DAIRY FARM INTERNATIONAL HOLDINGS LIMITED
PRELIMINARY ANNOUNCEMENT OF RESULTS
FOR THE YEAR ENDED 31ST DECEMBER 1999
OVERVIEW
While the economic environment in Asia Pacific has shown some recovery during 1999, the improvements have not been consistent across the Region. The effects of declining consumer spending and price deflation in Hong Kong were exacerbated by a supermarket price war. This and a setback in the recovery of Franklins in Australia have significantly affected Dairy Farm's results. Notwithstanding this difficult environment, through its acquisitions in South Asia, the Group has taken further steps towards realising its vision of becoming the leading food and drugstore retailer in the Asia-Pacific Region. The Group has also returned value to its shareholders through a special dividend of US$178 million.
PERFORMANCE
Dairy Farm International Holdings Limited today announced that sales from its subsidiaries of US$5,918 million were 3% ahead of last year with growth in Australia, Southeast Asia and New Zealand offset by a decline in supermarket sales in Hong Kong.
Operating profit before non-recurring items of US$55 million was 64% less than last year due mainly to the performance of Wellcome in Hong Kong and Franklins in Australia. Franklins had disappointing sales and higher operating costs resulting in a significantly reduced contribution in the second half. The Group's retail businesses in New Zealand and Southeast Asia and its convenience and drugstore businesses in Hong Kong performed well. Losses in the first year of operation at Géant, the Group's hypermarket joint venture in Taiwan, and reduced profits at Hong Kong Maxim's were partly offset by a substantially improved performance by Hero in Indonesia. The Group's recurring EBITDA of US$205 million was 26% below last year.
Consolidated net profit was US$37 million compared with US$157 million in 1998. Excluding non-recurring items, earnings per share of US¢3.58 were 55% below last year.
Following the payment of the special dividend in November, the Group's balance sheet moved into a net debt position and at the year end the gearing ratio was 24%. This has enhanced the efficiency of the balance sheet.
In view of the Group's strong cash flow, the Directors consider it appropriate to maintain the dividend at the same level as 1998. A final dividend of US¢4.35 per share is therefore recommended, payable in cash which, together with the interim dividend of US¢1.65 per share, will make a total annual dividend of US¢6.00 per share.
BUSINESS DEVELOPMENTS
Turning to the operations, the Chairman, Simon Keswick, said that the Group significantly expanded its presence in Southeast Asia in 1999 with the acquisition of 90% of Giant in Malaysia which operates two hypermarkets and five supermarkets, together with the purchase of eight Tops supermarkets in Singapore and a 49% shareholding in the 29-store Foodworld supermarket chain in India. In addition to the investment in Hero in 1998, Dairy Farm is now the largest food retailer in Southeast Asia. Further investment opportunities in this fast growing Region are being actively considered.
The implementation of shared services has been completed successfully in Hong Kong and contributed positively to the results for the year. The disappointing performance of the Géant hypermarket joint venture reflects the oversupply of hypermarkets in Taiwan. The Group is now reviewing the strategy for this business with its partner, Casino of France.
The Group opened 194 new stores in the year, principally in Hong Kong, Australia and Singapore, bringing its year-end total to 1,583. Including associates, it has an interest in 2,063 outlets in nine territories. Capital investment, including acquisitions, amounted to US$407 million. This investment programme will continue in 2000 when the Group plans to invest a further US$300 million.
OUTLOOK
In conclusion, Simon Keswick said, "The performance of the Group in 2000 will be significantly influenced by the competitive conditions in Hong Kong where the profit in the first half of 2000 will be lower than last year. Speeding the recovery at Franklins in Australia, however, remains our top priority. We expect that improvements in the performance of Franklins will occur gradually over the next two years.
"In the meantime, the Group's focus will remain on increasing fresh food sales, developing new formats and improving efficiency and retail execution. The Group's balance sheet remains strong and management will continue to seek new investment opportunities in the Region."
GROUP CHIEF EXECUTIVE'S REVIEW
OPERATING PERFORMANCE
Though anticipating a difficult 1999, our results for the year have been worse than expected. The 57% reduction in recurring profit before interest to US$79 million was driven by extremely difficult market and competitive conditions in Hong Kong and a setback in the recovery of Franklins in Australia.
Declining consumer spending in Hong Kong was worsened by a severe supermarket price war beginning in August. The price war has significantly reduced the profitability of our Hong Kong supermarket business and the impact continues today. Although our 7-Eleven convenience stores and Mannings drugstores performed well, the decline in Wellcome's profit led to a US$60 million reduction in our total retail operating profit in Hong Kong. The setback in the recovery of Franklins resulted from disappointing sales growth in the very competitive Australian market and increased expenses related to our fresh store roll-out program. Our top priorities to resume the recovery are to build sales and to reduce expenses in-store and at the division level.
Elsewhere, our businesses in Southeast Asia had an excellent year with strong growth in sales and profits in Singapore and much improved results at Hero, our 32% owned associate in Indonesia. Woolworths in New Zealand, while having a difficult first half, recovered strongly in the second half and is well positioned for further improvement. Hong Kong Maxim's group, our 50% owned associate, performed well and maintained its market share despite deflationary food-away-from-home sales. Sales and operating performance of the Géant hypermarket joint venture in Taiwan were substantially below expectations, reflecting overstored conditions in the Taiwan hypermarket segment. As a result, we have reduced the carrying value of this investment by US$5.6 million and we are now addressing the future of Géant with our partners, Casino.
The Group's recurring EBITDA , our primary performance measure, of US$205 million declined to 3.5% of sales, down from 4.9% in 1998.
STRATEGIC DIRECTION
The strategic direction of the Group remains unchanged. Food, convenience and drugstore retailing make up 98% of the Group's activities and are focused wholly within the Asia-Pacific Region. Investments are concentrated on improving our existing businesses. We invested US$233 million in new, expanded and remodeled stores in 1999 and plan to spend over US$200 million in 2000. Our investment policy is to give priority to:
· improving our formats;
· increasing the proportion of fresh food sales;
· improving customer service; and
· enhancing the efficiency of the business.
We will continue to expand our existing businesses by acquisition and will also pursue investment opportunities in new markets in Asia Pacific.
ACHIEVEMENT OF OBJECTIVES
Notwithstanding the performances at Franklins and Wellcome, we have achieved our objectives in other areas:
· The Group significantly increased profits in Singapore, Indonesia and Malaysia. Our New Zealand business was more profitable in the second half than it was in the corresponding period last year, following a first half in which we adjusted our promotional position in the Auckland area.
· The convenience and drugstore businesses in Hong Kong, Southeast Asia and Southern China have expanded, developed new formats and improved financial performance.
· Major new business developments in Asia Pacific included the acquisition of the Giant hypermarket and supermarket operations in Malaysia, the eight-store Tops supermarket chain in Singapore and a 49% shareholding in Foodworld supermarkets in India.
· Our own label supermarket brands of No Frills and First Choice are now sold in supermarkets throughout the Group. Sales of these higher margin products made up 8% of total retail sales.
· The shared services program in Hong Kong was implemented in the first half and made a significant positive contribution.
We will continue to pursue these objectives in 2000.
SYSTEMS, TECHNOLOGY AND E-COMMERCE
Our continued investment in systems reflects the need for modern technology to remain competitive. The Year 2000 transition was completed smoothly. The total cost of this program was US$38 million compared with our estimate of US$40 million.
We have been operating E-Commerce businesses in Hong Kong, Singapore and New Zealand since 1998 and, while modest today, we anticipate significant growth. Dairy Farm is committed to developing this emerging channel to add incremental sales through the delivery of convenience and value-added services to customers. In Hong Kong, we are developing plans to expand into higher-end food and wines under the Oliver's banner and a "health & beauty club" under the Mannings banner. 7-Eleven has launched a pick-up service for products ordered through the Hongkong.com website, and is exploring an in-store kiosk for online services. The Group also plans to explore business-to-business E-Commerce opportunities through our wholesaling and distribution business, Sims Trading.
THE FUTURE
Our vision, strategy and objectives are unchanged. The focus of attention in 2000 will be on building the underlying sales and improving the profitability of each business. To achieve these objectives, each business will:
· Meet customers' changing demand for products: Better fresh foods in supermarkets; more attention to wellness, health and beauty in drugstores; more services in convenience stores.
· Operate stores designed to serve our shoppers needs: Continue to refine store formats in terms of more tailored space, more pleasant décor, more finely tuned range and more specially trained staff.
· Reduce the costs of serving our shoppers: We will improve the efficiency of our stores, reduce the cost of delivering product to store and increase the efficiency of support functions. Opportunities for improvement in 2000 include our recently expanded network in Malaysia and the rationalisation of support offices in Australia.
In line with this policy, we reduced the cost of our support functions at Group level by US$5 million in 1999 and plan a further reduction in 2000.
All investments made by the Group are assessed on the basis of the incremental value they deliver to shareholders. Each is required to add economic value in excess of the Group's cost of capital. These principles guide our investment policy and have led to the reshaping of our balance sheet over the last two years. In addition to normal dividends, we have returned some US$396 million to shareholders, and the Group now has net debt of US$209 million compared with a cash surplus of US$74 million in 1997. Our shareholders will benefit from the greater efficiency of our balance sheet while the Company continues to maintain the financial strength to develop its business and weather difficult economic and trading conditions.
The two key issues for Dairy Farm in 2000 are to reverse the sales and expense trends at Franklins and to restore the profitability of Wellcome. The turnaround of Franklins will, however, take time and we do not expect significant improvement in cash operating profit until 2001. It is not practical to anticipate the end of the price war in Hong Kong, but it is likely to continue at some level for much of this year. This will inevitably reduce the profit from Hong Kong in the first half of 2000. We plan to alter our strategy regarding the Géant hypermarket business in Taiwan during the first half of the year. Elsewhere, we expect continued improvement in New Zealand and Southeast Asia.
We remain confident that the Group has the right vision and the plan, the people and the capital to achieve its objectives.
People make the difference in retailing. Ours have managed well in a particularly difficult year. Their hard work and dedication is greatly appreciated. I thank them and ask for their continued support in the coming year.