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chief executive’s report


2006 has indeed been a year of challenge and change, but one in which real progress has been made towards achieving our medium-term goals as we build a more sustainable performance base. It is a pleasure for me to report to shareholders for the first time on performance and developments within the group.


David Kneale
Chief executive officer
“The results for the year are most encouraging, considering that the business is still in turnaround mode.”

Group executive

Following my appointment as chief executive officer in January this year, the group executive team was restructured to comprise Keith Warburton (chief financial officer), Michael Harvey (managing director of Clicks) and myself. Bertina Engelbrecht was appointed to the newly-created position of group human resources director in July and also joined the executive team. Her appointment strengthens our human resources capability and elevates the status of this discipline in our business. We now have a blend of complementary skills and experience, while a strong team dynamic is evolving as we focus on delivering the strategy and goals we have set for the business.

Strategy

A priority for the new executive team was to review the strategy. We concluded that in broad terms the strategy was appropriate. In summary, our strategy is to be a specialist retail group, focused on health, beauty, entertainment and homeware, operating through multiple formats and organised to be cost-effective and efficient.

Globally, in both developing and developed economies, there are thriving specialist retailers operating in similar markets to New Clicks, providing evidence that the business model is robust. The issue facing New Clicks was therefore not so much one of changing the strategy, but rather the execution of the strategy and delivery against targets.

Short-term priorities

In order to address the barriers to success we identified four short-term priorities:

  • set clear targets;
  • outline clear accountabilities;
  • make the business simpler; and
  • get the basics right.

Progress has been reassuring. Targets are now clearer since the introduction of return on assets managed (“ROAM”) as the key measurement indicator for the trading businesses. ROAM, while still being refined, ensures we have financial metrics for all the key drivers of the business. Accountabilities are also clearer as we have adopted scorecards to measure delivery against internal targets.

We have simplified the group structure by adopting a less complex business unit structure. By allocating central costs we are getting a more accurate measure of each business’s profitability, which is further driving accountability.

Getting the basics right has meant focusing on reducing inventory levels (where inventory turns improved from 6.1 times in 2005 to 6.9 times), improving product availability to customers (in-store availability for Clicks has increased from around 80% to over 90%) and achieving compliance with the new systems processes. The implementation of the new systems has proved challenging and business processes have had to be adapted to the requirements of this sophisticated and demanding system. While compliance has taken longer than anticipated the systems are already having a positive impact on our business, with better quality information facilitating improvements in inventory and working capital management.

Medium-term goals

We have identified three goals to enable the business to deliver the strategy:

  • delighting our customers, as specialist retailers should do, by providing better products, better service and better availability;
  • ensuring that the group has motivated and competent people who are appropriately trained, motivated and rewarded; and
  • improving return on equity (“ROE”) for shareholders which we plan to do through increased profitability and more efficient utilisation of assets and capital.

While these targets have two to three-year time horizons, the group has made encouraging progress.

Trading performance

The results for the year are most encouraging, considering that the business is still in turnaround mode.

Group turnover increased 14.8% to reach R10 billion for the first time. This was a pleasing performance, particularly against the backdrop of price deflation in Clicks and Discom.

Operating profit before capital items grew by 19.6%.

The performance of the retail trading brands and distribution business are covered in more detail in the Chief Financial Officer’s Report and the Operational Review.

Legislation

New Clicks has always supported the government’s move to make medicine more affordable and accessible to consumers, and improve the efficiency and quality of healthcare delivery. We therefore welcomed the new pharmacy dispensing fee regulations announced by the Department of Health (“DoH”) in late October.

The collaborative process followed by the DoH has resulted in a workable and transparent pricing model that provides a fair return to pharmacists and certainly benefits consumers.

It is now critical that we have stability in the pharmacy sector which has been operating in an environment of uncertainty for far too long. This has negatively affected the profession which is a key component of healthcare delivery in this country.

A potential piece of legislation under consideration in the year ahead relates to the regulation of logistics fees within the single exit pricing framework. These regulations could impact on UPD and there are two key issues we are addressing in our submissions to the DoH:

  • firstly, the regulations should distinguish between fine and bulk distribution as we believe this split is the most effective way to make medicines accessible throughout South Africa; and
  • secondly, New Clicks is also urging the authorities to provide a strict definition of the services required for a company to be registered as a wholesaler. There has been a proliferation of quasi-wholesalers in this country in recent times who do not offer a full-line service and this only inflates the cost of medicines to consumers.

We continue to engage openly and constructively with the DoH on this legislation.

Prospects

The trading environment for 2007 is likely to be affected by recent and forecast increases in interest rates, although it is still too early to determine the exact impact on consumer spending patterns and confidence levels. Modest price inflation is expected in the year ahead in Clicks and Discom.

The group has developed clear plans for each business to improve its offer to customers. We have 34 new stores planned for the year ahead. Operationally the group will have the benefit of its new systems for a full year in 2007 and will focus on improving distribution efficiency and expense control.

Against this background, the directors and management are confident of delivering real earnings growth in 2007.

Thanks

My personal thanks go to the board of directors for the confidence they have shown in appointing me as chief executive officer. At the same time I should like to thank our chairman, David Nurek, my fellow directors and the executive team for their wholehearted support and guidance. Thanks also to my predecessor, Trevor Honneysett, for facilitating such a smooth transition.

Since January this year I have had the opportunity of visiting close on 200 stores around the country. My key observations are that our people are totally focused on delivery to customers and have a strong desire to be part of a winning team. To all our people, thank you for being so welcoming. Your commitment and drive to make the business succeed has been most heartening and augurs well for the future of New Clicks.



David Kneale
Chief executive officer