Pick n Pay Stores Limited (PIK) Earnings Call Transcript

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 we 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 will 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 at least -- 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 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 like a 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 in 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 once that gets its mentum and starts to rebuild that momentum again, then the outcomes flow, then the profits will flow. And 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 n Pay. And that is to ensure that Pick n 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 aren't choosing to more and more at the moment and I'll get into a bit of the detail later. But if you just have a look at where Pick n Pay is positioned today compared to where it was two years ago, we are showing up. And 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 a fantastic Boxer business continues to perform just amazingly. It's 600 store opened and Marek and his team continue to perform. And again, in a market that's had its share of realities has had to deal with, along of deflationary pressures in a lot of the major categories in which we trade, but a strong, strong performance in Boxer. And then if we just have a look at where we are in Pick n Pay. We have a strong balance sheet at the moment. We've got in excess of ZAR 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 Rookledge. Time, welcome. So this is Tina's first rodeo, as I say, in the Classics in Texas. So I'm going to sit in the front end market. Over to you.

Thank you, Sean. And it's quite interesting that when I joined Pick n Pay well, I've been here for 82 days now, Sean, I said, I came from a ballet, but now I'm in a cow boy in Western. So I must make sure we're 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 stuck me the most about in these 82 days is the commitment and dedication of team Pick n Pay. There's a real determination to turn this business around. The energy and focus that people arrive with that 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. 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. So at a group level, we've increased turnover by 2.4% to ZAR 60.5 billion, with like-for-like growth of 1.8%. Boxer delivered sales growth of 6.3%, while Pick n Pay sales growth was broadly flat. We continue to make good progress on our gross margin, which increased by 70 basis points to 18.8% with both Pick n Pay and Boxer contributing to this improvement. The stronger gross margin flowed through to profitability. Group trading profit increased around ZAR 180 million to ZAR 500 million with ZAR 105 million of that coming from Pick n Pay and the remaining ZAR 75 million from Boxer. Importantly for us, this improvement was in an operating level. Our loss before tax and capital items reduced by 56.2% to ZAR 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 ZAR 299 million. This is after taking into account the noncontrolling interest in Boxer. It's worth noting that the Boxer noncontrolling interest increased during the year following our 12.5% sell down of our investment in Boxer. And finally, we've ended the period in a strong cash position with ZAR 10 billion on our balance sheet. This is up from ZAR 6.9 billion in March 2026. If I then move on to our turnover. The detail, as Sean said, the detailed environment remains challenging. 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 n Pay and Boxer delivered credible turnover growth during the period. If I just turn specifically to Pick n Pay, Pick n Pay turnable was broadly flat at ZAR 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%. The difference between these two metrics is 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 price. Our internal selling translation was 1.5%, which is below current CPI food inflation of 2% and and this reflects 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 FY '26. We continue to work closely with our franchise partners to make sure that we strengthened 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 ore values. We also launched clothing on asap! as well as started our -- 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, stand-alone stores delivered growth of 3.9%, with like-for-like sales declining by 0.7%. While like-for-like sales remained negative, extent has improved on what we saw in the second half of H2 in FY '26. Our focus in Clothing is firmly to return this business to positive like-for-like sales growth. So on -- while storing 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 Africa consumer market like-for-like growth sales for the first 4 weeks of H2, running slightly ahead of the levels achieved in H1. If I now move to trading profit. At a group level, we increased our trading profit by 58.1% to ZAR 490 million, an improvement of around ZAR 180 million on last year. Both businesses contributed, as I've said before, with Pick n Pay contributing ZAR 105 million and Boxer contributing ZAR 75 million. The Pick n 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 ZAR 1 billion, with a trading margin improving by 10 basis points to 4.2%. 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 Marek and the team last week in the presentation. What I do want to call out is that we have continued to deliver profitable growth while investing behind its longer-term expansion plans. Focusing now more on the Pick n Pay segment. The key feature of this result is the continued improvement in the earnings trajectory. The Pick n Pay segment reported a loss -- trading loss after leases of ZAR 1.1 billion, an improvement of ZAR 100 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 ZAR 7.7 billion. 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. We are no longer financial [indiscernible] now what we need to do is focus on the operational elements of our business. If we then look at the trading result, I'm reflecting on the Pick n Pay segment trading results. As I previously discussed, the turnover is broadly flat year-on-year at ZAR 36.4 million. Despite this flat turnover, gross profit grew by 3.9% to ZAR 6.4 billion. This reflecting the 70 basis point improvement in the gross margin to 17.5%. At the same time, we managed to keep a bit [indiscernible] 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. The operating leverage is starting to come through in the results. And this is evidenced by the trading loss reducing by 16.9% to ZAR 500 million, and the trading margin improving from negative 1.7% to 1.4%. If I then just unpack the gross profit analysis for Pick n 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 Akaan ] and 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. 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 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 this segment, increased 14.9% to ZAR 426 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. So I now move on to trading expenses. As I said, cost discipline remains a critical part of the Pick n Pay turnaround strategy, and we're seeing good progress. Trading expenses increased by just 1.7% to ZAR 8.1 billion, 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 ZAR 3.4 billion, cost increased by just 2.7% in despite above-inflation wage increases at a store level. These savings -- the savings from our support office restructure are coming through and helped absorb a significant portion of these wage increases. We also think benefits in the work we've done in our [ story stat. ] Occupancy costs declined 0.4%. That was supported by rental renegotiations and lower insurance costs, as leases come up for renewal, we continue to rightsize our state for a better match to our business needs. Occupancy costs also benefited from ZAR 99 million profit on lease termination compared to ZAR 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 by 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. Moving on to finance costs. Our finance costs were broadly flat at ZAR 400 million, increasing to 0.3% year-on-year. Our strong cash position is now benefiting our funding interest, although this was offset by a 3.1% increase in our IFRS 16 interest. On our balance sheet at the end of the period is strong, we ended with ZAR 10 billion of cash, of which ZAR 7.7 billion comes from Pick n Pay and ZAR 2.3 billion from Boxer. This cash position includes ZAR 4.7 billion 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 n Pay cash position improved by around ZAR 600 million in the half, including the ZAR 232 million dividend from Boxer. 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 ZAR 6.7 billion. 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 ZAR 3.4 billion, largely reflecting the corporatization of 10 franchise stores during the period. The reduction in inventory has released cash and has contributed to the strength of our liquidity depletion for the half. Overall, the group narrated ZAR 2.7 billion of working capital inflow for the period compared to ZAR 1.7 billion last year. Pick n Pay contributed ZAR 1.4 billion of that with a further ZAR 1.3 billion of that coming from Boxer. But as you expect in retail, the seasonality, our first half working capital cycle, and we expect a portion of this benefit to underline in the second half. So the full ZAR 2.7 billion should not be extrapolated for the year. I'll now move on to capital expenditure. We continue to be disciplined and targeted in how we allocate capital across the group. Group net capital investment for the first half was ZAR 700 million compared to ZAR 900 million in the prior period. This consists of gross capital investment of ZAR 900 million. This approximately ZAR 200 million from the proceeds of asset disposals. Within the Pick n Pay segment, gross capital investment increased by 20% year-on-year to ZAR 583 million as we increased our investment in our supermarket estate. Net capital investment was up just 5%, thanks to the increased proceeds from property disposals. Our investments remain selective with strategic store prioritized alongside critical repairs and maintenance. We have also invested in Select franchise to corporate store conversion, where it strategically and financially appropriate for us. Looking ahead, capital investment will step up in the second half, consistent with the planned capital investment program. For Pick n Pay specifically, our FY '27 gross CapEx guidance is unchanged at ZAR 1.7 billion. Bringing the cash story together, we started the year with ZAR 2.4 billion of net cash. Cash flow from operations after lease payments was an outflow of ZAR 800 million, 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 ZAR 1.4 billion of cash, with a further ZAR 200 million benefit from net funding interest. At the same time, we continue to invest in the business with net capital investment around ZAR 400 million during the period. Putting this all together, Pick n Pay generated ZAR 400 of positive operational free cash flow, taking the net operational cash position to ZAR 2.8 billion, and that is before the Boxer transactions. As I've said before, we received [ ZAR 222 million ] from Boxer in the form of a dividend as well as we sold down on 12.5% of our shareholding, which held at ZAR 4.7 billion. As a result, the Pick n Pay ended the period with ZAR 7.7 billion of net cash, giving us a strong financial position from which to continue executing the turnaround. Finally, turning to earnings per share. The group loss for the period reduced by 88.2% to ZAR 38 million. Following the increase in the Boxer minority shareholding from 34.4% to 46.9% during May, the noncontrolling interest increased by 34.1% to ZAR 232 million. The loss attributable to the Pick n Pay store shareholders reduced by 45.6% to ZAR 270 million. After headline adjustments of ZAR 29 million, the headline loss reduced by 31.9% to ZAR 299 million. The weighted average number of ordinary shares remained unchanged at ZAR 734 million. Our headline loss per share improved by 31.9% to [ ZAR 0.4071 ] while our basic loss per share improved by 45.6% to ZAR 0.3677. So in concluding, as a team, we're encouraged by progress we're seeing across the business. Turnaround is gaining momentum. Profitability is improving underpinned by a song 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 n Pay to profitability. Thank you.

Thank you very much, Tina. Straight out the block 10 out of 10. So presentation and passion. The room will stand in judgment of the numbers, but you can see that there is certainly a lot that's happening in the organization. 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 n Pay. There's absolutely no doubt about it. And people ask why. So given the constrained market that is out there, a lot of the work is being done. If we look at full starters, obviously, a major thing is the spring sponsorship in the event and the effect that, that's had 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 schools rugby, we had the gold caps weekend. Just extraordinary activation and Pick n Pay really getting back to what it stands for in community. We just have in our marketing, the consistency of the Pick n 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 to 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 must not for any second underestimate the effect of what this has on our business. So for Boxer, for example, on the major categories that are there in 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, really are constrained. So in [indiscernible] and all of those things are less 30% less 40% than they were last year. Pocket in potato is 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 focus is in the company for Pick n Pay going forward is fresh. And everybody says, "Well, Sean, how are you really going to call out Pick n Pay has been 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 you look at the traditional area of the business, the sort of the [indiscernible], 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, Amazons and the take 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 have got Dallas here today as well, if I have a look at the retail operational side of Pick n Pay and how that capability is growing day on day on day, it really is rewarding and heightening to see, and busy with a lot of new innovations in this space. 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 the best retail in the world in South Africa. So in turning Pick n 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 to 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. We can have a look at 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 continues to add to that. One of the great innovations that we're having within Pick n 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 grow 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 must call out the operational people in the room, across the length and breadth both at a store operational level and here in the support office, all the things that we've been talking about, about rightsizing, 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. 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 coming out for us in the space. We're busy sorting out our distribution along the coast, specifically in the Eastern Cap area where we're busy with DP World at the moment and looking at how we're going to evolve that and make that more effective for us. And then also creating some additional capacity in the KZN region. But under Johan's guidance here, we really have made some fantastic progress. And look how beautiful that truck looks, it's extraordinary. I suppose one of the major issues that really is great to share with you today is the fact we settled last week the ongoing labor negotiation that we were having. And to just put this into context some 2.5 years ago, we already worked out. That just purely from packaging benefits perspective at a store operational level that we were in a situation in Pick n Pay that we could no longer compete in a really cut through tight margin volume business such as we operate in in this world. And for about 2 years, we had tried to move the down in this regard. In respect to the negotiating body, they've 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. 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 S 189 process, and it doesn't automatically mean retrenchment because the 189 process does is it calls upon you to look at alternates to retrenchment. So it was a serious situation for us when we had to announce some 5.5 months ago now that we were going to be launching in S 189 process and take 22,000 people in Pick n Pay that we love and that they love Pick n Pay and put them under this sort of damages 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 Labor 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 to a resolution on it. And I want to call out specifically our national negotiating committee who are our body shop stewards across the country. who've been involved in this 5-month process. And then also Dallas, who heads up our retail operation, along with Paul and Mike and Jet -- it's been extraordinary. Now they've got together many, many long hours, many, many late nights, but finally found resolution because it'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 S 189 and now being withdrawn, and we've taken that off the table. And now we will move to giving substance to what we've agreed is going to be the change in terms and conditions going forward. And for clarity, we're not going to be disclosing the details of that in public. I know that we live in a world today where everybody loves to know everything but there are certain things in life that you need to know, and there are certain things in life that you won't know. So this is confidential between us and our labor 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 to the country, make no bones [indiscernible] has been under pressure. And we haven't had a stellar 2-year trading period in Clothing but we can already see that the work at Hazen and the team has started to put into place now is starting to get us back around again. And there's been a lot of -- there've been a lot of pressures in that marketplace. If we take the advent of the likes of the shines and the teams that in flooding into the market place 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 FNB eBucks. We have a beautiful apps. Our bank is sitting on the right-hand side of the room over here. We have work, be busy doing at BP Express at the moment, and we're busy making some evolution there and making sure that we get to service that piece of our business better and then we have the wonderful collective box that had kicked off again. So I don't know if you will see in [indiscernible], it will advertiser, trying to use the connection to get his cards and being told you have to go and shop in Pick n Pay, if you want to fill up your collective box, but it's just extraordinary, how fantastic this program is. I mean, people just flooding there for these things. It's amazing. Absolutely amazing. 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 they're on a box of succession, we've made the announcement that [indiscernible] step down in March. He was still been Boxer and [indiscernible] until November next year. So with Justin, who we've appointed as Marek CEO designate. Justin has 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 grown up over 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 n Pay. And if we have a look pretty much the recapitalization, leadership in people, resetting the store estate and strengthening our partnerships continues. The big things that 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 and 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. And I know that there's a lot of conjecture about 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 Pick n Pay over the years, found itself just having to rain less and less and less people. And we had the most extraordinary irrational situation under Dallas' leadership now, where we have our core Retail business that is growing in Pick n Pay and that is still the big nut that we need to track. And we cannot afford to take focus of that. We cannot afford to be driven in what we achieved in that regard. And I made the commentary not somewhat likely, but somewhat seriously about the roles of leadership and being CEO in an organization like this today is not clearly understood my people out, there the so many dynamics that one has to deal with that are outside of actual day-to-day trading. There's sometimes when you go home and you like [indiscernible] just like to get to stores and just be passed about what we do and that's look after people and sell more product. And there's some days that you go home at the end of the day and you kind of like then 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 who 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 were to go and work in New Zealand and we 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, we're blamed after COVID for a whole lot of [indiscernible]. So an extraordinary amount of experience of dealing in the corporate world and having to deal with the bits and pieces that we need to deal with. So I think for us, the continued strengthening of Pick n Pay's leadership and the continued strengthening of the quality and the depth that we have in the organization for me is of portal importance. Because this company is only about is 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. And when you go to store openings now, and 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 junction now. And as I said, Spencer will join 2nd of February, everybody is asking who, who's so long, and all of this stuff it's properly, properly planned. So over a period of 4, 6 months, Spencer will deal with the handover expense moving in. And then it'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 the Boxer does what is right for Boxer other than one thing, [indiscernible] do not like to pay for the stores that we pass on to him, I wish we could decree that this [indiscernible] amount that we pay -- they pay for them, but that doesn't happen. They negotiate and they have 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 and let's look after the business. So on that note, I would leave you with a few key thoughts and the real takeaways from where we're at. And if I have to leave you with three real key putouts of this thing. One, Customers are returning to Pick n Pay. We can see it in our like-for-like sales. And this is not delusional in any way, shape or form. We can see it in our like-for-like sales. The second thing is that we have dealt with our labor situation. And I think that this is a massive feather in the cap of everybody in this company. And specifically, I'm pulling the company, we had a a program of fairly regular updates where we did a little video, 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 things, how are we going about it just keep the heat out of the room. And that's where we've got to on the labor front. So I think, again, all out, and I don't think many people thought that we would actually get to the stage that we could have achieved what we had achieved. So that would be the second big call out. We now need to get that action, and we need to get that implemented. And then the third one is just the acknowledgment to the marketplace because a lot of questions have been around my succession. Everybody is so why are you there? This is like your auto 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 and operational capability in our business. 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 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. 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 the questions from in the room. So the first question is from Michael de Nobrega, from Avior Capital Markets on the Section 189 agreement, but it is also asked by many other people, including Excelsia Capital, Standard Bank securities and cities. So it's really these questions in aggregate or 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? And number three, you're able to provide any additional details on the agreement reached?

Yes, no, no, no. So in terms of the time frame, bearing in mind that we're already sitting there, we're almost in Christmas trade already. So this year is all but done. And our -- the bulk of what we have put in place will bring fruits in the next financial year. So FY '28, we'll come to bear. And with regards to the absolute detail for competitive reasons, we're not going to be diverting 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 the competitive reasons. It just doesn't work in our favor to have that out there at all. So Tina, I don't know if there's anything you want to add to that?

No, Sean. Completely agree. Nothing has been factored in for FY '27. So we've taken no benefit into FY '27. Everything we have taken will now be in FY '28.

Okay. And then the second question from Michael, I'll give this 1 to you, Tina. On the gross margin within Pick n 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?

So to answer that, we continue to work on the gross margin fresh GMD, as I've said, our important part in our uplift of our gross margin. I think it's also important that we do have dilational categories within the business as well. competitors, Boxer, everybody have indicated 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 a lot of work happening in the gross margin space with the Dallas and ESP.

The next question is from Nick Wilson of News 24. Pick n 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 n Pay's 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.

I think certainly Franchise remains a very, very important piece of our business and then our go-to-market in Pick n Pay. There's no doubt about it that the Franchise business in and of itself is under pressure. We can see that from happening, what is happening in the largest franchise operator in the country. So margins aren't tougher, margins are 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, they may have had the store for 15 or 20 years or 25 years. They're at a stage of 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. They don't want to go and ground it out every day. So with those opportunities present themselves, we will continue to buy those at terms and conditions that make sense to us, for sure. But it does not mean that Franchise is finished. I mean I just -- I come back to Hopetown, Dallas, whenever we go to Hopetown. And we look at what Stolly and your family do in that area, I mean, they are the town I mean, moving the mergers are 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 a store like [indiscernible], we have [indiscernible] at the end of a long beautiful time over there. We bought this back from Micaela the end, and that will become a corporate store. And we make a margin on both ends, both as a franchisor and a franchisee. Obviously, the math stack up for us.

The next one is from Veresen fund management. Could you comment under what circumstances would you consider a further sell-down of Boxer? And is management considering any other asset sales as a means of achieving the breakeven target or unlocking shareholder value?

No. We don't contemplate any further sold down on Boxer at all. We believe that the money that we have in place now in our balance sheet should be able to see us through getting back into profit gain in the company. If I could just give you a sniff. I mean, for every 1% of sales that we lose in terms of our sales growth, cost us about ZAR 140 million of income, ZAR 140 million, ZAR 150-odd million of income. We may 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, momentum in life is everything in business. And for us, if we look at where our business is Pick n Pay is, and this is still a very big business at the end of the day. 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 n Pay currently is taking a bit of water over the bond, that's the losses that we make every year. And we were on the trajectory to getting our bar a little bit higher and a little bit higher and taking on less and less water because at the same time, we've got to 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 season taking more water over the bar. But despite that, we've managed to continue to show growth ahead of the marketplace, and we'll continue to driving that and making sure that our stores continue to grow. So the short answer is no. And this has not just been a dramatic, just being living in hope because hope is never a strategy at the end of the day. But we firmly believe that all things being -- we will get there, and it will not be necessary for any further sell down or asset disposal. Boss, is that?

Perfect.

You have it.

You had, if you were thinking of selling it, you hadn't told me.

Okay. 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 core Pick n Pay business was a positive ZAR 0.4 billion for the first half. If we take into account the seasonal nature of the working capital, possible credit cutoff and the H2 weighted CapEx program, how should we think about operating free cash flow for the Pick n Pay business for full year FY '27?

So thanks for the question. Because we are a loss-making business and our breakeven guidance has changed from FY '29. We will continue to burn cash in H2, most of our CapEx is also added to H2. So there will be cash spend. But I think what's important is in the cash spend is that we do turn over EBITDA 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, I would say the guidance is by and large in line in what we've previously given the market. But yes, I don't expect it to be operational cash inflow in H2.

Right, from from Citigroup on gross profit margin, how much of the expansion came from the Botswana corporatization?