“The board is confident that the group’s strategy is appropriate for the ongoing creation of shareholder value.”

chairman's statement

Delivering on strategy

The group’s intense focus on the delivery of its strategy over the past year has reaped handsome rewards for all stakeholders.

On the trading front, the strong growth in turnover has ensured that all the businesses increased market share, while the 35.8% increase in operating profit reflects the improved turnover, margin and operating efficiencies.

Headline earnings increased by 41.9% to R356.9 million with diluted headline earnings per share growing 45.1% to 103.0 cents per share.

The improving performance has attracted increasing interest from the investment community which saw the share price move 47% for the year compared to the 35% growth in the General Retailers Index and a 31% rise in the All Share Index.

Shareholder wealth has been enhanced by R1.6 billion, including the growth in the market capitalisation and distributions to shareholders which were 45.2% higher than 2006.

Strategic priorities

The board is confident that the group’s strategy is appropriate for the ongoing creation of shareholder value and believes that the strategy is working effectively, based on the performance in the past two years. Management has identified five strategic priorities and business plans are focused on the delivery of these priorities:

Continue transition of Clicks to a health and beauty specialist
The benefits of a focused strategy are becoming evident in the Clicks performance and these two specialist merchandise categories now account for 70% of sales. The new store Blueprint programme is re-energising the look and layout of Clicks to better reflect the brand’s positioning as a health and beauty specialist.
Build UPD and Clicks pre-eminence in healthcare and pharmacy management
UPD and Clicks collectively account for 91% of the group’s turnover and 88% of operating profit from continuing operations. Both businesses are market leaders, with UPD being the country’s foremost pharmaceutical wholesaler and Clicks the largest retail pharmacy chain. UPD is the preferred supplier to two of the country’s major private hospital groups.

We believe the business is well-positioned to benefit from the inevitable consolidation in the wholesale pharmaceutical market.

Clicks pioneered the drugstore model in South Africa when it entered retail pharmacy less than four years ago. The success of this model is reflected in the turnover of stores with dispensaries which are growing at more than double the rate of stores without a pharmacy offering. Already 98% of dispensary customers also make purchases in the front shop. Corporate pharmacy in South Africa has some way to go to reach the levels of market penetration of the United States and the United Kingdom. This highlights the organic growth opportunity as Clicks has scope to open at least a further 200 dispensaries in its existing stores.
Continue Musica’s transition to entertainment and widen access to the brand
Musica has successfully transitioned to an entertainment brand and 41% of turnover is now generated by non-music categories of DVD, gaming and lifestyle. This broader offering and the increasing affordability of DVD and gaming has created the scope to expand the trading footprint from around 150 stores to 200 in the medium-term.
Build organisational capability to deliver sustained performance
In order to deliver the strategy, management ensures that the business has the necessary people, systems and processes. As is evident from the Operational Reviews and the Sustainability Report, there is a strong focus on training and developing our people, investment in systems and discipline around processes.
Efficient capital and cash management
The heightened focus on working capital management has enabled the group to invest in the long-term growth of its businesses, undertake further balance sheet restructuring, increase cash holdings and end the period with no gearing. Through the share repurchase programme which commenced in May 2006 the group has acquired R879 million in shares, which has further enhanced the group’s earnings per share.

Legislative environment

After embracing the Department of Health’s announcement of a new dispensing fee structure in late 2006 we were disappointed when these regulations were challenged in court by independent pharmacists and the planned implementation date postponed.

A year later there is still no clarity on dispensing fees for retail pharmacy and this has only added costs for consumers, while negatively impacting the pharmacy profession.

Despite the legislative uncertainty Clicks continues to build a sustainable pharmacy business at its current low pricing levels.

The regulatory landscape for pharmaceutical wholesalers is also in a state of flux. We anticipate draft regulations on international benchmark pricing being released in the coming months. The capping of logistics fees in the single exit pricing environment is expected to be introduced once benchmark pricing has been promulgated.

We have also urged the health authorities to address the registration criteria for wholesalers operating in the pharmaceutical market. The proliferation of quasi-wholesalers continues unabated and there are now over 100 registered wholesalers. We firmly believe that more exacting standards need to be adopted in this registration process.

New Clicks continues to support the government’s endeavours to make medicine more affordable and accessible to consumers and improve the quality of healthcare delivery. We remain committed to open and constructive engagement with the healthcare regulator.

Board of directors

Our longest serving director, Eliot Osrin, retired from the board at this year’s annual general meeting. While we paid tribute to Eliot in last year’s report, we thank him once again for his contribution as a director over more than a decade and wish him good health in his well-deserved retirement.

Independent non-executive director Lucia Swartz will not be making herself available for re-election at the forthcoming annual general meeting owing to increased work pressure. Lucia has served on the board for a combined seven years and we extend our appreciation for her contribution.

Enhanced reporting

Management is committed to expanding both financial and non-financial reporting beyond the prescribed statutory requirements to enable shareholders to gain better insight into the business and make more informed decisions on share ownership. We have introduced Remuneration, Risk and Sustainability reports into the annual report for the first time this year while financial disclosure has been improved in several areas.

Thanks

On behalf of the directors I would like to thank our key stakeholders for their support over the past year. This includes our shareholders and the broader investment community, our customers who have supported us in increasing numbers, suppliers, business partners, industry regulators and the media.

Thank you to my fellow directors and the management team of New Clicks, so ably led by David Kneale and his executive team of Keith Warburton, Michael Harvey and Bertina Engelbrecht.

In closing, congratulations to the more than 9 000 New Clicks employees in the stores across the country, the distribution facilities and at head office on a most creditable performance.

David Nurek
Independent non-executive chairman