| To: Business Editor | 26th February 2001 For immediate release |
The following announcement was today issued to the London Stock Exchange.
DAIRY FARM INTERNATIONAL HOLDINGS LIMITED
2000 PRELIMINARY ANNOUNCEMENT OF RESULTS
Results
"Though the short-term economic outlook for Asia is mixed, we remain confident of the Region's potential for significant growth in the food, convenience and health and beauty retail sectors."
Simon Keswick, Chairman
"After our disappointing results in 2000 our objectives for 2001 are clear. The performance issues in Franklins and Wellcome must be successfully addressed and I am confident we will make good progress on these."
Ronald J Floto, Group Chief Executive
26th February 2001
DAIRY FARM INTERNATIONAL HOLDINGS LIMITED
PRELIMINARY ANNOUNCEMENT OF RESULTS
FOR THE YEAR ENDED 31ST DECEMBER 2000
OVERVIEW OF THE YEAR
In 2000 Dairy Farm encountered the most challenging operating conditions in Hong Kong and Australia the Group has had to face for many years. In Hong Kong the food retail industry has been engaged in a deep and prolonged price war, which has proved extremely costly to all market participants. In Australia the highly competitive environment continued to intensify, with Franklins struggling to maintain market share and margin.
RESULTS
Dairy Farm International Holdings Limited today announced that conditions were at their most difficult in the first half, when Dairy Farm reported a loss after tax before non-recurring items of US$51 million. Improvements in Wellcome Hong Kong and normal seasonal trends led to a much reduced loss of US$14 million before non-recurring items in the second half, representing a loss for the whole year of US$65 million. In view of the performance issues in Franklins an impairment charge of US$129 million has been made, which reduces the carrying value of Franklins' assets.
Recurring EBITDA, the Group's primary performance measure, fell from US$205 million to US$116 million, although second half EBITDA performance was much stronger than the first. Operating cash flow generated in the second half was US$209 million, after an outflow of US$17 million in the first half.
The Group's prudent approach to financing has ensured that its funding and liquidity position remains secure. The ratio of net debt to shareholders' funds peaked at 49% at 30th June 2000 and had reduced to 42% by the year end. The Group remains highly liquid with some US$400 million in short-term bank deposits.
In view of the uncertainties in Franklins and the unsettled situation in Wellcome Hong Kong, the Directors believe that it is in shareholders' interests to continue to conserve the Group's capital and therefore have recommended no dividend for 2000.
OPERATIONS
Turning to the operations, the Chairman, Simon Keswick, said that Wellcome Hong Kong's operations have been heavily impacted by the price war although there was a gradual and steady improvement in margins over the course of the year. The Hong Kong market will remain challenging in view of the significant expansion in food retail space over the last two years and low consumer confidence, which will continue to put pressure on margins.
In Australia, it has become clear that the cash investment required to continue the Franklins repositioning strategy will be significant. As a consequence, the Group is undertaking a strategic review which will be concluded by early second quarter. The Group will continue to provide Franklins and its team with the support they require.
Dairy Farm's other businesses all performed well in 2000, with particularly strong performances in South-east Asia and New Zealand. South-east Asia represents a key short to medium term growth region and will, along with 7-Eleven convenience stores in Southern China, be a high priority for investment.
OUTLOOK
In conclusion, Simon Keswick said, "Though the short-term economic outlook for Asia is mixed, we remain confident of the Region's potential for significant growth in the food, convenience and health and beauty retail sectors."
GROUP CHIEF EXECUTIVE'S REVIEW
The year was a disappointment due to the underperformance of our supermarkets in Hong Kong and Australia. Though these problems areas dominated our results, we made substantial progress in the balance of the business. I would like to highlight several favourable developments and also to address Franklins, Wellcome Hong Kong and the overall outlook.
Franklins
Franklins launched its turnaround freshening strategy in 1996 and in the last two years has invested more than US$90 million to advance it. The business lost US$71 million in 2000 after a loss of US$27 million in 1999. We have reached the conclusion that the time and cash required to realize satisfactory returns from Franklins in its current form are unacceptable given the Group's alternative opportunities for investment. As a consequence we have engaged JP Morgan to assist in a strategic review of our options. This is a complex and time consuming process in which all avenues are being considered. Our ultimate decision has wide industry, employment and regulatory implications that must be adequately addressed. Our review is not complete and we do not anticipate its completion until early in the second quarter.
In light of Franklins' performance and the difficult competitive conditions prevailing in Australia, our Directors have approved an impairment charge of US$129 million, which reduces the carrying value of Franklins' assets.
This is an awkward situation for Franklins' management in whom we maintain complete confidence. Dairy Farm will fully support the management and employees of Franklins as they continue their efforts to improve the business by building sales and reducing expenses. Our decision regarding a new strategy for Franklins will be guided by the economic interests of our shareholders and also by maximizing opportunity for Franklins' people.
Wellcome Hong Kong
The combined economic and competitive conditions faced by Wellcome Hong Kong could not have been more difficult in 2000. Our principal competitor has increased its network by some 700,000 sq. ft (over 50%) since the end of 1997. A global competitor opened 399,000 sq. ft of hypermarkets, and a much publicized "dot com" grocer entered the market selling everyday commodities at rock bottom prices. Conditions were worsened by continuation of food-at-home deflation that began in late 1997 and by consumer caution that has prevailed since the downturn of the residential property market in late 1997.
Market instability reached its climax in a price war beginning in August 1999 and continuing at some level throughout 2000. This, combined with the other conditions, eliminated the profitability of Wellcome and has prompted a restructuring of the market. The global competitor and the "dot com" start-up closed down and asset productivity has dropped substantially below industry and historical market norms. We expect continued restructuring for some time.
The Wellcome team did an admirable job of expense control and shrink reduction during the year. This, along with gradual improvement of margins and continued good performance in Mannings and 7-Eleven, produced better results in the second half of the year:
The market, though less difficult than last year, will be a challenge in 2001. Margins and prices are well below 1997. Consumer sentiment is still cautious and our expenses have been driven up by aggressive investment in new stores. This has been required to protect our market position and to increase sales by attracting the wet market shoppers with exciting new fresh food departments. Further, the rapid expansion by our principal competitor has resulted in two consecutive years of market share losses. Despite this, Wellcome has a strong number two position in Hong Kong, one of Asia's wealthiest markets. It also has an excellent network of up-to-date stores and modern infrastructure. Our plan is to invest at least US$55 million in Wellcome in 2001, principally in larger destination stores. We are confident that Wellcome will ultimately return to profitability; however, the first half of this year, while a substantial improvement on last, will be loss making.
The Outlook
After our disappointing results in 2000 our objectives for 2001 are clear. The performance issues in Franklins and Wellcome must be successfully addressed and I am confident we will make good progress on these.
We have solid assets:
The management team of the Group looks forward to the next twenty-four months as a period of growth and creation of shareholder value.
Results and effort do not always go hand in hand in retailing. 2000 was one of these times. Dairy Farm people have shown great dedication, energy and determination in 2000 and we thank them.
Ronald J. Floto
Group Chief Executive
26th February 2001
REGIONAL OPERATING REVIEW
NORTH ASIA
Hong Kong - The competitive and economic environment in Hong Kong, as discussed in the Group Chief Executive's Review, was extremely challenging during 2000.
Against this difficult background Wellcome continued to upgrade its offer, investing some US$54 million in 13 new supermarkets and 16 major refurbishments. Wellcome now has 237 stores, the majority of which are new or refurbished and we will continue to invest in new sites as opportunities become available. During the year considerable achievements were made in cost control, with substantial overhead reductions and shrinkage levels more than halved. Wellcome's marketing profile has been raised with a very successful advertising campaign fronted by the popular Hong Kong actress, Do Do Cheng and the higher marketing profile will continue. The proportion of fresh sales, which over time will drive sales and raise margins, continues to grow and now represents around 13% of sales.
We opened our 400th 7-Eleven store in October 2000, ending the year with 414 outlets. Hong Kong has the capacity for at least 500 7-Eleven stores and whilst this will probably represent a maturity point, the Hong Kong operations will continue to act as the development springboard for the next phase of growth in Southern China, focused on Guangzhou and Shenzhen. Sales at 7-Eleven convenience stores increased in line with store openings and EBITDA margins remained strong. Focus in 2000 has been on improving formats to provide a more vibrant offer, with particular appeal to younger consumers. Our newer outlets offer a wider selection of goods and response to the upgrade has been very encouraging. 7-Eleven continues to innovate with a range of services designed to boost customer traffic. These include smart card value replenishment and bill payment facilities. 7-Eleven is also trialling kiosk-based services (offering ATM and multi-media functionality) and has recently broadened its e-fulfilment offer.
Mannings' excellent performance continued into 2000 with double-digit sales growth and strong EBITDA margins. The chain has now been substantially repositioned as a health and beauty offering, with improved margins and turnover, and there are now 161 Mannings stores in Hong Kong. Mannings is experimenting with new formats aimed specifically at the health-conscious consumer. Mannings continues to win recognition from its peer group, taking awards from the Hong Kong Retail Management Association in 2000 both as Service Category Leader and the Service Retailer of the Year in the supermarket and chain store category. Whilst Mannings still has plenty of opportunity for growth we expect the market in the health and beauty sector to become more competitive over the course of 2001.
The shared services programme that supports the retail banners in Hong Kong continues to add value, providing a low overhead cost structure. Our transaction-processing shared-service entity, the 50% owned OneResource Group, is also seeking to leverage non-trade procurement opportunities through sharing Dairy Farm's non-trade procurement terms with smaller purchasers.
Sims, the Group's wholly-owned wholesaler, produced strong results in 2000 following the addition of significant agencies and growth in the China business. Whilst Sims has a strong future, it does not fall within the Group's core retail competence and a sale to CITIC Pacific was concluded in February 2001 for US$58 million, producing a gain estimated at US$20 million. This crystallizes the value that Sims has built up over the 36 years that it has been part of the Group.
Ice manufacturing had a successful year, with increased sales and profits. However this industry, which serves primarily the fishing and construction industries, is in long-term decline. Certain of our sites have long-term redevelopment potential and restructuring opportunities will be pursued if these alternatives add value.
Hong Kong's Maxim's group, our 50% owned associate in the restaurant and catering sector, continues to make a valuable contribution to the Group's results. Today's changing Hong Kong customer is less interested in traditional large sized banqueting-style restaurants and Maxim's is responding by rightsizing and refurbishing its Chinese restaurants. Its "m.a.x. concepts" division is introducing new formats including modern European and Asian-fusion restaurants. One of these, Thai Basil, was named by Conde Naste as one of the World's 60 best new restaurants. Fast food remains an extremely competitive environment in which Maxim's has proved very adaptable. During the year Maxim's opened 9 Starbucks outlets which have started promisingly, with plans to rollout a further 10 in 2001. In 2000 revenues increased by 8%, and profit before tax was up by 8% excluding a one-off credit in 1999. Maxim's strong cash position enabled it to pay a substantially increased dividend. Results for 2001 will be impacted by a substantial increase in costs, especially following the introduction of the Mandatory Provident Fund in Hong Kong.
Mainland China - Considerable progress has been made in the restructuring of our 7-Eleven convenience store interests in Guangdong and Shenzhen, in response to revised foreign-owned joint venture regulations. We are putting in place new joint venture arrangements and a formal reorganisation plan is currently awaiting approval from the supervisory authorities in Beijing. Dairy Farm will retain a 65% equity stake and, once the reorganisation has been approved, we will be expanding the chain, which is currently profitable at store level. In the medium term we see the opportunity to operate at least 500 stores in Southern China.
During the year Wellcome's 8 stores in Shenzhen were closed, since it was clear that the investment cost to build a supermarket business of sufficient scale would not enable us to meet our targeted returns.
Taiwan - As a result of continued improvements in performance over the last two years, with emphasis on larger stores and increased fresh food participation, sales increased by 9% and Wellcome moved into net profit in the second half of the year. A successful bolt-on acquisition of the 12-store May Soon chain, with its complementary store profile oriented to a mini-fresh format in central Taiwan, adds further scale and the chain now has 104 outlets. Wellcome has also concluded a supply agreement with FE G
ant, which makes a significant contribution towards utilisation of its distribution capacity.
SOUTH ASIA
Malaysia - Sales in the Group's Malaysian businesses increased significantly as a result of the inclusion of Giant for the first time, with a strong EBITDA contribution of over 7%.
Giant, the Group's 90% owned hypermarket and supermarket operation, had a very successful year and with sales close to US$250 million is well on its way to becoming the market leader in Malaysia. Giant is expecting to open a further 4 hypermarkets and 2 supermarkets in Malaysia over the course of 2001. Whilst the competitive environment is becoming tougher we see ample opportunity for growth in the food retail sector in Malaysia. The Group is currently seeking investment from potential Bumiputra partners, as part of its longer term strategy for development in Malaysia.
The Group's Guardian health and beauty channel also had a very successful year with 9 new stores giving the chain a total of 64 outlets. It is planning to open a further 18 new outlets in 2001 and is also currently looking for bolt-on acquisition opportunities.
During the year there were a number of reorganisations of the Group's interests in Malaysia. Over the course of the first half, the former Wellsave supermarket banner was rationalised with 4 stores absorbed into the Giant chain (2 of which have been re-launched using the Cold Storage brand, with a strong emphasis on fresh and specialty foods) and the 3 remaining stores closed. At the year end Giant also acquired a 70% stake in Guardian, which was formerly 50% owned by Dairy Farm and 50% by a third party, for some US$13 million.
Singapore - Sales across the Group's businesses in Singapore in 2000 approached US$500 million, increasing by a record 31%, and Dairy Farm's market share is growing rapidly.
The Group's supermarket formats had a strong year, with a better than expected contribution from the stores acquired from Tops at the end of 1999. Using expertise from Malaysia and leveraging on Giant's supply chain, the Group opened its first Giant hypermarket in Singapore. The results for the first period of trading exceeded all expectations, reaching profitability in its fourth month, and a second hypermarket site is currently being identified. The Group continues to experiment with the "value store" format in the highly competitive government housing estates. Dairy Farm is now established as a strong number two in the Singapore supermarket sector.
The Guardian health and beauty format had another successful year. 13 stores were opened and the acquisition and reformatting of the 22-store Apex chain was completed successfully in the fourth quarter. These stores are expected to make a significant contribution in 2001. The Group now has 87 health and beauty outlets, with a dominant market position.
7-Eleven opened 20 stores and posted strong growth. The chain now has 124 outlets and is pursuing an aggressive expansion program, with 40 new stores expected to open in 2001.
Photofinish had a strong year and expanded its operations with 15 new stores, bringing total outlets to 44. To further extend its coverage, it is working with Cold Storage and 7-Eleven to introduce its "Budget Print" drop-and-collect programme at their stores.
Indonesia - Hero, in which the Group has a 32% interest, had a satisfactory year. Sales increased by 13% year on year with the majority of the increase arising in the second half as a result of the implementation of more aggressive retail pricing and promotional structures. Hero regained its market share position and began a programme of refurbishment and expansion of numbers of outlets. While the political and wider economic environment remains unstable, the retail market continued a steady growth trend. The Indonesian market offers growth opportunities through existing formats and the potential for rollout of the Giant hypermarket format.
India - Foodworld, the Group's 49% owned supermarket joint venture with RPG has flourished, opening its 50th store and moving into profitability in December, which is extremely satisfactory for a greenfield operation in a developing market. It is now clearly established as the largest organised food retailer in India. The chain will move in and out of profit equilibrium as the network is widened over the next three years, depending on the speed of roll-out of new stores.
Health & Glow, the Group's 50% owned health and beauty joint venture has been less successful with minor losses in 2000. The format is currently under review.
The Group's partner in India, RPG, is currently developing a cash and carry format, which is now expected to commence trading in May 2001. Dairy Farm's interest is by way of an option to acquire 49% of the business, which will become exercisable should the wholesale sector be deregulated.
AUSTRALASIA
Australia - Franklins' performance over 2000 continued to disappoint. The Group has been pursuing a strategy for Franklins to increase sales, improve in-store execution, supply chain and operating efficiencies. In recent years, competition in the grocery market has intensified, with a significant increase in the number and size of stores. Taking this together with a change in consumer preferences, it has become clear that the capital required to reposition Franklins to respond to these changes is significant, and the return on the investment may not adequately reward our shareholders. As a consequence, an impairment charge of US$129 million has been made in 2000 and a strategic review is being undertaken. This is expected to be concluded early in the second quarter of 2001.
To prepare for the introduction of the Goods and Services Tax in July, the team at Franklins put in considerable effort in the first half to ensure compliance with the new regulations. Significant progress has been made in the second half in tackling a number of Franklins' supply chain-related issues, with the roll-out of radio frequency scanners throughout the chain, the implementation of a demand forecasting module for major purchases and the introduction of a flow-through warehousing facility to support a range increase of over 3,000 products without adding fixed cost.
New Zealand - Woolworths had a record year with strong profit growth in a flat sales environment. The increased recurring EBITDA margin was achieved through margin improvements attributable to fresh produce and corporate brands, the extension of liquor sales following relaxation of trading regulations and ongoing cost control. In 2000, Woolworths opened 5 new stores, giving 83 outlets in total, with an additional 5 conversions from Big Fresh and Price Chopper to the upmarket Woolworths format. Woolworths' strong performance is expected to continue in 2001.
1. ACCOUNTING POLICIES AND BASIS OF PREPARATION
The financial information contained in this announcement has been based on the audited results for the year ended 31st December 2000 which have been prepared under the historical cost convention, as modified by the revaluation of certain non-current assets, and comply with International Accounting Standards.
In view of the international nature of the Group's operations, the amounts shown in the financial statements are presented in United States Dollars.
The Group's reportable segments are set out in notes 2 and 3.
2. SALES
The Group operates in three regions: North Asia, South Asia and Australasia. North Asia comprises Hong Kong, Mainland China and Taiwan. South Asia comprises Singapore, Malaysia, Indonesia and India.
3. SEGMENT OPERATING (LOSS) / PROFIT AND SHARE OF RESULTS OF ASSOCIATES AND JOINT VENTURES
Associates' results include goodwill amortisation of US$1.3 million (1999: US$1.5 million).
Net loss of non-recurring items amounted to US$129.4 million (1999: US$39.6 million).
4. IMPAIRMENT OF ASSETS
Given the poor trading conditions, the Directors have reviewed the carrying value of the Group's assets in Australia as at 31st December 2000. This review took into account the retail market conditions in Australia and the cash generating capacity of Franklins, having regard to its loss-making stores and related infrastructure assets. The Directors have concluded that it is appropriate to recognise an impairment charge of US$129.4 million against certain assets associated with Australia. As a result, impairment charges were recorded against goodwill in Australia of US$14.5 million (note 8), and against tangible assets in Australia and Hong Kong of US$114.9 million (note 8).
5. TAX
Tax on profits has been calculated at rates of taxation prevailing in the territories in which the Group operates and has no tax in the United Kingdom (1999: Nil).
6. (LOSS) / EARNINGS PER SHARE
Basic and diluted (loss) / earnings per share are calculated on the net loss of US$194.5 million (1999: net profit of US$37.3 million) and on the weighted average number of 1,655.7 million ordinary shares issued during the year (1999: 1,795.7 million). The weighted average number excludes the Company's shares held by the Trustee under the Senior Executive Share Incentive Schemes.
The weighted average number of shares which are deemed to be issued for no consideration under the Senior Executive Share Incentive Schemes based on the average share price during the year are not material.
(Loss) / earnings per share excluding non-recurring items are calculated on the net (loss) / profit after adjusting for non-recurring items as follows:
7. DIVIDENDS
No final dividend is proposed by the Board in respect of 2000 (1999: US
4.35 per share amounted to a total of US$72.0 million).
8. CAPITAL EXPENDITURE AND COMMITMENTS
9. SHARE CAPITAL AND SHARE PREMIUM
10. NOTES TO CONSOLIDATED CASH FLOW STATEMENT
The sales and operating loss of these stores since the date of acquisition amounted to US$13.1 million and US$1.7 million (1999: US$22.4 million and operating profit of US$0.6 million) respectively.
11. POST BALANCE SHEET EVENT
On 5th February 2001, the Group entered into an agreement to sell its wholly-owned subsidiary, Sims Trading Company Limited, to a third party for a cash consideration of US$58 million, subject to certain adjustments. The sale will be completed by the end of February, and the Group will recognise an estimated gain of US$20 million.
12. ANNUAL REPORT
The Annual Report will be posted to shareholders on or about 11th April 2001. Copies may be obtained from Jardine Matheson International Services Limited, P.O. Box HM 1068, Hamilton HM EX, Bermuda; Capita IRG plc, Bourne House, 34 Beckenham Road, Beckenham, Kent BR3 4TU, England; and M & C Services Private Limited, 138 Robinson Road #17-00, Hong Leong Centre, Singapore 068906.
For further information, please contact:
Dairy Farm Management Services Limited
| Ronald J Floto Ian Durant | (852) 2299 1881 (852) 2299 1896 email: idurant@dairy-farm.com.hk |
Golin/Harris Forrest
| Bob Fienberg Sue Gourlay | (852) 2501 7908 (852) 2501 7936 email: bob.fienberg@golinharris.com.hk |
Full text of the Preliminary Announcement of Results and the Preliminary Financial Statements for the year ended 31st December 2000 can be accessed through the Internet at "www.dairyfarmgroup.com".
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