Interim 2013/2014 Foschini Group Ltd Earnings Presentation

TFG.J - Foschini Group Ltd
Interim 2013/2014 Foschini Group Ltd Earnings Presentation
Nov 07, 2013 / 03:00PM GMT 

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Corporate Participants
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   *  Doug Murray
      Foschini Group Ltd - CEO
   *  Ronnie Stein
      Foschini Group Ltd - CFO
   *  Peter Meiring
      Foschini Group Ltd - Group Director, TFG Financial Services

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Presentation
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Unidentified Company Representative   [1]
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 Good afternoon ladies and gentlemen. On behalf of the Investment Analysts Society a warm welcome this afternoon to the interim results of TFG that were released about 2:00 o'clock this afternoon, and since you've had a bit of time to go through them.

 TFG was listed on the JSE in 1941, so have got quite a long pedigree, and when I left office, market capital was about ZAR24.4 billion, not such a good day for retailers. We certainly look forward to Management's insights into the retail markets and all the dynamics going on there, especially as we head rapidly towards the Christmas season.

 And I just like to thank TFG for their support of the Investment Analysts Society for hosting this presentation and for the refreshments before and after the presentation.

 I'll now hand over to Doug Murray, CEO of TFG.

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 Doug Murray,  Foschini Group Ltd - CEO   [2]
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 Okay, thanks, Mark. Well, welcome to our mid-year results which we released at 2:00 o'clock today. It's a pretty normal format. I'll run through on the economy and the retail environment, overview of the results. Ronnie will give more detail on the financial figures, Peter on the credit side, which I'm sure you'll be very interested to hear about. And then I'll wrap up with our outlook for the second half.

 Probably nothing that's a surprise to anybody here. The news on the global economy is obviously still mixed. There are signs of healing, as it is said, in the eurozone, there's talk of a Chinese slowdown, and there's talk of tapering of quantitative easing. I don't think that's going to be great for the rand if and when that happens.

 So the outlook for the South African economy has definitely deteriorated. We have domestic labor issues, we've got all the global concerns that impact South Africa and as a result you can see our projected GDP has been revised downwards quite sharply now down to 1.9% for this year and 2.8% for next year.

 Interest rates continue to remain fairly stable. We think that they're going to remain on hold for the next 6 to 12 months. Inflation is at 6%, but it's running at the upper end of the 3% to 6% target range.

 The effect of the slowdown in unsecured credit lending, we started almost a year ago and that continues and of course the local currency has remained under pressure and very volatile.

 Here's just some graphs just to really support what I've just said. You can see where GDP is going. You can see the inflation where it's sitting at the upper end here, this is the range, it's sitting at the upper end, and the interest rates, other than the 0.5% drop last year, fairly stable.

 Obviously what is worrying is this consumer confidence figure that came out is the lowest it's been certainly in this period, even below 2008, and of course there is the exchange rate which is showing a lot of volatility and heading in the wrong direction at the moment.

 In terms of the period for TFG, consumers remain under pressure. That slowdown in unsecured lending has created a very weak consumer credit environment. As a result, credit sales are under pressure, and Peter will talk about that side. Obviously in this environment credit retailers curtail credit sales. What is very encouraging is that we still have very strong cash sale growth. I'll give some more information on that just now.

 All our gross margins by merchandise category have remained intact. Our like-for-like expenses have been very well controlled. They're I think just over 5%. We have opened 81 new stores in this period.

 Both the TFG and RCS debtor's books have been well-managed in this climate, bad debt is increasing, but it is within our expectations, and we have put quite a lot of extra credit risk measures in place. And again Peter will talk about that. And RCS has performed well over this period.

 The key figures are on this slide. The retail turnover is up 9% to ZAR6.7 billion. Our HEPS growth is 3.1%. The diluted HEPS are up 3.8%. The interim dividend is 3% up. The operating margin is marginally down at 22.5% from 23.1%. The ROE has remained flat at 26.3%. And we have still got some growth in our active account base, and again Peter will give more insight on that.

 This is just a split now between cash and credit growth over the last three periods. So we go back to the same period last year. You can see we had growth -- cash growth, very strong, 19%.

 There is probably two reasons for that; one, unsecured lending was still growing at a fast rate; and secondly, we had released -- or launched rather our cash rewards program. So that did drive good cash sales, in fact it probably took some sales away from our credit turnover because we hadn't at that stage launched the rewards program to our credit customers. So a number of those customers actually switched into cash, but that's where we were.

 Then of course a year ago we had the breaks on unsecured lending. You can see that the consumer got a shock, the cash sale growth slowed down quite significantly.

 I think our credit sales held up a bit because we then launched our rewards program to the credit customer. And this is the period we are now in and 12.7% cash sale growth on the back on 19% last year we think is very strong.

 Again couple of reasons for that. Clearly, us having a, quite a diversified range of brands now that go not just in mass middle market but into the upper middle and upper end of the market is clearly helping because that consumer is without doubt in a better place.

 And secondly, good cash sales is always a sign that your product has been accepted by the market. So that's encouraging. And of course at 6.6%, we've put in measures on credit. That curtails your credit growth. That is summing that in our own way we slowed down that credit growth, and again Peter will talk more about that.

 If you look at this by merchandise category, you can see there is the total sales growth, 9%, with same-store sales up 4%, very strong homeware, furniture sales, 14% up and with our comp sale growth there at just under 13%.

 In the same period last year that was also at double digits because metrics remains steady and strong. Cellphones a lot better, coming off quite a soft base. So I think that has got a lot to do with that cellphone figure and clearly that does affect the overall mix in our margin.

 Jewellery, difficult category, luxury category in a tight credit environment, and clothing at 8.3% is probably sitting somewhere in the middle. And again our clothing has -- quite a large percentage of that business is done through our own credit. Homewares and furniture, only about 30% of that is our own credit.

 Cash sales now just over 40% of the business. And again here is a comparison of cash versus credit turnover in each of these categories. Very happy to see clothing at 12.8%. The cellphones appears high, but that's because we have got restrictive credit practices in place there, higher deposits are required for cellphones, and there has been a switch into cash sales there.

 And the rest I think are probably self-explanatory. The other one that would probably stand out is the homewares and furniture appear to be bucking the trend, 18% up on credit sales, very much -- it's a very low base of credit sales that we have in homewares, they have been on a drive to drive the credit sales up.

 And also there is a drive on the high-value purchases into credit and Peter has put up an area in his division to actually specifically handle that. So that's why that appears somewhat out of kilter to the rest. But there is the total again 12.7% and 6.6%.

 If you look at the various divisions, again there is the @home figure very strong. Jewellery I've spoken about. Sports also very strong, 15.8% growth. We're very pleased with that on the back of very strong growth last year.

 Exact is a business which -- it has -- our largest percentage of credit sales are done in Exact. Therefore the -- and that consumer is the consumer that is under the most stress. So that is making it hard for -- harder for them.

 Markham at 9.3%; the base that they had was I think between 17% and 18% last year, also have quite a high contribution of credit sales in there. You'll notice Fashion Express, for the first time we've pulled out.

 It used to be within the Foschini division. So -- and they had -- did have a slightly softer base last year, but 12% up. And Foschini at 4.5% is very much a division that's going through a transition at the moment. We expect to see that -- the benefits of what we're doing there coming through in the next 6 to 12 months.

 In terms of Africa, I think first points I want to make is that all our stores in Africa are corporate-owned. That's not necessarily the case with a number of other retailers. And I think the trend is to, where possible, move towards owning your own stores.

 We now have 116 stores outside of South Africa. For the period, the growth for those stores was 25%; 25% growth with comp store growth of 15%. We've opened 12 stores outside of South Africa in the last six months, and we're looking at further expansion into Ghana, Angola, and Mozambique. And at this stage it's quite a stretched target, but we believe that we can have 300 or more stores by 2018.

 And I'll just hand over now to Ronnie, and he'll take you through some of the financial figures in more detail.

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 Ronnie Stein,  Foschini Group Ltd - CFO   [3]
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 Thank you. All right, our results were on since, as you all know, 2:00 o'clock, so I presume most of you have looked at them, maybe done some sort of analysis. In fact, I see already there's been one or two notes out on our results already. Sort of first to the mark at Merrill Lynch; I don't know what the rush is, but anyway they did get something out.

 So these results, this is a summary of the income statement, and I'll just unpack in the next few slides some of the more important areas just to help you when you go through the numbers.

 Obviously turnover up 9%. Now, in that 9% the same-store sales was 4%. And in the retail business where you've grown your same stores 4%, it's very difficult to sometimes leverage anything to the bottom line. In fact with that you would expect maybe the bottom line to have reduced somewhat. But I'll show you later on the other income streams in our business that have assisted the operating profit to grow by 6%.

 Then of course your diluted HEPS coming in the 3.8%. Well, I thought this is interesting because it's -- as Doug said, it's not the best result in the world with 3.1%, but if you see what has happened to our business in the few years before then we grew our earnings, they're at 6.9%, remember this is all at the half-year, from 2009 to 2010 we grew 16.9%, then 25.6%, then 17.1%, and now obviously 3.1%.

 And you can see dividends have moved up pretty similar levels. What I want to just put on the side is the dividend cover. You can see the dividend cover was historically 2%, we moved it to 1% -- down to 1.8%, and then to 1.7%.

 And I think that's quite an aggressive dividend cover for retail business -- credit business, where in fact you're building up all the time your debtor's book. And you'll see -- you've probably seen from the numbers every year more and more investment has to be made into the debtor's book.

 But if we look at the three components of our business of revenue, we don't only have turnover, we always have interests, which I'll come to because there's -- I've got a slide on that and we've got other revenue as well, and you can see those items have grown quite a little bit more than the retail, and obviously that's one of the factors that the bottom line has been leveraged up.

 If I look at the other revenue, 25.3%, I think that's pretty good performance. But when we met last time I said we should expect good performance from that particular line. It's made up of our club income which grew 10%.

 Customer charges is 37%. Now, that's pretty high, but in terms of current legislation you'll have to charge customers for phone calls you make to them, letters you make to them. So obviously the more your collection activity, the more your recoveries, and also because this clearly is consolidated with RCS, RCS business has been moving more from its loans into its credit card business.

 So in that particular number, there's also quite a bit of merchant commission. Insurance also grew quite nicely, 22.6%, and our cellular one2one product grew at 17.7%.

 But now gross profit; now this is very fundamental clearly for a retail business because this is where the money is made or lost. And you can see how much the gross profit is in this period, it's ZAR2.7 billion.

 In the current environment we've in fact held our gross profit. If you look at the product categories, they are identical. The reason that it looks like it's gone down by 0.1% is purely a mix. You saw that cellphones and certain of the other products, cosmetics have grown faster than clothing.

 So that's something we've been watching very, very carefully. If we had lost any big points on this number, the result could have been very, very different.

 Now look at the interest income now. We've been growing 12.8%, we think is quite a good number. The first point I want to make is that interest for us is at the lowest level it's been for many, many years.

 And you all know that as the repo rate goes up we're entitled to leverage our interest charge up by a factor of 2.2 times. So when interest rates do change at some stage, this number should grow quite quickly.

 But if I look at these numbers, it looks at first glance that our books extended, because the book has grown -- our retail book has grown under 6%. Wonder why the interest has grown by 13%, but you may recall the stretching of our book did not happen this six months, it happened in the previous six months.

 From November -- in fact, the second week of November last year, that's when in fact the book stretched out a little bit.

 And I'll show you another slide when you see the increase in our -- in the book in this period. Also one other point I want to make that 87.4% of the balances are now attracting interest, up a little bit from 86%. And we have said to you all the time that we think that's going to plateau round about 88%. So I think we're pretty much where we expected to be.

 Trading expenses, also very critical for us in a period when the credit cycle is not good. So we've grown our expenses by 11.3%, but in that bear in mind there's the cost of the new stores. We've got about 6% new store growth. So our like-for-like costs grew by 5.2%, and I think that's the guidance that we did give you right from the first presentation this particular year.

 Depreciation is depreciation. When you invest in stores, you build up your capital base, you have to write it off, nothing you can do about that.

 Employees cost, I think we've done extremely well on that particular line because with 6% new stores and given increases of 5.5% which we did this year, and with promotional increases probably it comes to round about 6.5%, you'd expect that number to be round about 12%.

 And the reason we've been able to keep it at 6% is that we've made quite a lot of staff efficiencies at store level which has driven that. Now you will find that number is going to carry through for the whole year, but it's not something you can repeat next year. But I think we've done pretty well in keeping the salary cost down.

 Occupancy cost, pretty much where you'd expect them to be. At 6% new floor space, your escalations are still running round about 8%. So that's exactly -- and it's very difficult to cut that down. What we have been doing now with our new leases, we are starting to get the escalations below 8%, some of them at 7%, some a fraction lower, but that takes quite a number of years before that affects the majority of the leases.

 Other net costs up 15.5%, also looks a little bit high. There are quite a few non-comp items in that particular figure. The biggest one is the discounts on our rewards program. If I take out the non-comp discount figure, this growth comes out at 11%, and the total growth at 10.5%. So I think on this on this particular line I think we've done a reasonable job in the current climate on costs.

 Bad debts you can see went up by 37%, but Peter is going to deal a lot about that in his part of the presentation.

 The reason I just put up finance costs is just to demonstrate the finance costs for retail was ZAR66 million, not a huge number when you think that our profit is close to ZAR1.4 billion. But also to demonstrate that the majority of the finance charges we have still come from RCS, ZAR126 million.

 And also if you look at the ZAR66 million for finance costs, quite a lot of that comes from our share buy-backs. If we wouldn't have done share buy-backs, our interest cost would be quite a lot lower.

 Segmental analysis, this is a interesting slide obviously because now it's segments retail versus RCS, and you can see this is at the total profit before tax line. Our retail businesses made profit at the speed of 2.3% while RCS did quite a lot better at 11.6%.

 But if I take RCS, if I take it at the [attributal] earnings line, in other words after tax and after minorities, the contribution to our profit is 9.6%, slightly higher than 8.8% at the previous period, but that's obviously because the profitability grew a little bit more.

 Right, let me move on to some of the balance sheet items. We've only got two assets worth talking about in the balance sheet. Number one is stock and the other clearly is our receivables.

 Now, if you have a look at our stock at the half year it's grown by 22.6%, on the face of it it looks like it's too high because turnover has not grown by that number and we'd love to have turnover in the second half of 22%, but I can tell you now we're not going to do that, sure, we won't.

 But you might recall at this time last year we had quite significant logistical problems with our stock and -- just running up to Christmas and our stock at that stage was about ZAR200 million too low. We've also got new stores in here, so we've got 7% -- close to 7% new stores, we need to stock up for those new stores.

 And we think -- we look at our stock as pretty clean at the moment and we think that's at appropriate levels for our future trade. And if I just move this one month down, in other words from September to October, that numbers really drop down to 16%. But we've certainly got no issues with the stock.

 I always look at the creditors at the same time because we would like our creditors to pay for our stock because that's interest-free money and you can see they have grown by 17% and not quite there, but pretty similar.

 And just one point I want to make also you see our creditors terms of 30 days. We pay every single creditor 30 days. If we had need for more money, all we need to do is extend our creditors by one month and that will give us nearly ZAR500 million extra cash flow on a permanent basis.

 Not that we want to do that because the whole question is we're not sure that some of our suppliers would cope, they're used to getting money on 30 days and we move to 60 days, but certainly it's something for the future if we ever needed to do that.

 Looking at receivables, obviously this is the big asset in our balance sheet. We've got almost ZAR10 billion of which ZAR4.4 billion is RCS and ZAR5.5 billion is on receivables book.

 This is the point I wanted to make earlier; you can see our trade receivables from the beginning of the year to now have grown by 5.7%. Credit sales grew by 6.6%. So you can see the book is not extending at all -- certainly has not extended at all in the six month period, and that would be a pretty good sign. If it were the other way around, it would be a little bit worrying. That means that the whole market outside is continuing to worsen quite significantly.

 What's interesting with RCS, you can see that the loans book has dropped 5.5%. That's by design by the way. And the receivables on cards has gone up 10.2%. And we think that's the way that business is going to be moving. This is really -- I suppose that you can describe as African Bank-able territory and you'll see from figures which Peter tables, you can see how strong the effect this business is compared to some of the businesses in the marketplace.

 Okay, here's the slide -- the reason I'm putting the slide because if you look at the published accounts, it's actually quite difficult to work out exactly where the borrowing comes from because some of its current liability, some is ordinary liability, some relates to RCS.

 So this is in fact taking all the borrowings together. We move out the RCS factors from our slide, which leaves us with -- reposted. Bear in mind with RCS we don't stand behind that debt at all. So no one can ever come to us and say pay up what RCS owes, that particular number there.

 But of course that's why we describe this as retail debt. You can see it has moved up quite a bit and you'll see -- so the recourse gearing is now up to 27% from 18.5%. Obviously the buyback, share buyback recently has quite a bit to do with that and I'll show you that in the next few slides.

 Cash generation for our business on this slide is quite good, but of course as I said at our presentation to our staff, we spend a lot of money. Unfortunately, we've got to pay tax and we paid ZAR432 million.

 Dividends were ZAR566 million. That's because of the dividend covers. We think that's fairly generous for -- as I mentioned, for a credit retailer. You can see what has happened to our debtors. We put ZAR575 million into debtors in the six-month period of which ZAR320 was for our retail book.

 So that's our investment in -- and RCS obviously invested ZAR255 million. Inventory up a little bit high than we would have expected, but I've explained the reason for that.

 Capital expenditure ZAR271 million; now that really is all new stores and IT related to new stores and obviously to keep our systems up-to-date, but you'll see that in the next slide. And of course it has nearly ZAR500 million in the current period for the buyback of shares.

 We obviously looked at the market -- I think we had indicated to the market some time ago we were looking at buybacks. We did ZAR250 million worth of buybacks in the close period which was announced since, and we just think with the share price where it is and the way we see the future, we think that's the right way to go certainly at the moment.

 All right, the last slide I'm going to deal with is CapEx. There is the ZAR271 million and you can see that the majority comes from new stores and ZAR87 million for IT, I would say probably 50%, 60%, 70% of that actually relates to stores as well. So when you build the stores, lot of IT that goes into the store.

 So that's really what accounts for that. We thought we'd update the guidance on the CapEx for this year because the guidance -- last time we met I think we said the CapEx would be about ZAR570 million, moved up to ZAR600 million purely because we have more stores that we are going to open in the second half than we had projected.

 All right guys, at this stage, I'm going to hand you over to Peter for the Financial Services presentation.

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 Peter Meiring,  Foschini Group Ltd - Group Director, TFG Financial Services   [4]
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 Thanks Ronnie. Right, I think as Ronnie and Doug have alluded to there was a lot of lending activity that took place last year. I remember standing here and saying to you that we were seeing some positive results in our collections, and I felt that collections might even improve during the course of the year.

 Well, as soon it was that statement out of my mouth than we hit November and as I said to the staff when we were talking to them, a lot of the lenders were lending like there was no tomorrow. Well, that tomorrow hit in the second week of November. Very quickly the liquidity in the market dried up, they started retracting from lending as aggressively as they had been, and we saw that comes through markedly in the payment patterns from our customers out there.

 And I thought to illustrate this, we'd just show you two of the slides that we have received from TransUnion. And this one here indicates the tension or the stress that's in the market. You can see clearly the drop since 2011.

 But if you put this slide against it, the interesting factor is, yes, that whilst that was deteriorating, the household cash flows were improving at the same time, and clearly if the cash flow is improving while the payment patterns are deteriorating, you've got an artificial situation being created.

 And that's exactly what we had. This was underpinned by strong lending on the part of all the unsecured lenders at that point in time and here you can see is where have find ourselves at the moment in a very markedly weak household cash flow situation.

 What is interesting as well is that this whole change is very different from what we saw in 2008 and in previous cycles many of them which were led by retailers or possibly lenders taking on a lot more risk into their portfolios. This wasn't risk-led.

 As you can see, it's being characterized by people's inability to pay as opposed to their unwillingness to pay. So it doesn't matter how good your scorecards are at the end of the day when you're leading people through the front door, if they cannot make payment for this or for the goods that they're purchasing, you're going to find that they're going to hit a brick wall at some point in time.

 And certainly with our more mature portfolio, that's what we're finding. Customers have been with us 5, 10, 15 years, we're finding that suddenly they've got lots of lines of credit that they have incurred over the last year to 18 months and these are typically loan credit that they've got and they're battling to make the payment.

 So it is a problem for those customers and obviously we're looking at ways and means of keeping them with us and also preventing them from going into debt review. The debt review matters have increased over the last period of time, and as a result of this climate, all lenders have started to curtail the exposure and to a certain extent, we are no exception to that.

 So we find ourselves in the situation that we've got higher delinquency levels. Due to the short payments, our arrears increased to 22.2% from last year 21.5%. That's actually a better situation than we had in March, but of course there is a cyclical nature or cyclical habit in terms of the paying that occurs and so we are at 22.2%.

 That does mean that we've got fewer customers in the buying position and that puts your credit sales under pressure as a result of that. We introduced fortuitously in November 2012 new scorecards. These scorecards take into account a lot of what's happening in the broader market.

 So we are looking at how exposed are our customers to lending activity in the personal loan space and these are amalgamated into the scores that we get.

 As a result of that and also because of the deterioration of credit scores on average at the bureau, we've seen our acceptance rates fall by 5%, so that's 5% differential, but a 10% drop in total. And we've had to also look at a lot of our external customer information and right-size credit limits to those customers where we find that they're heavily exposed to external lending activity.

 We've also improved our ability to react to customers with credit exposure. So what we're doing is we used to get quarterly reports from the bureau as to what our customers were doing. We sent all our customer -- total customer base to the bureau, they score it, comes back to us and we can see the change in pattern and we can react to that.

 We're now getting that on a monthly basis with lots more comprehensive data on where they're exposed, particular segments of the market, particular lenders out there that we are exposed to and we can take appropriate action.

 We also in-sourced our lifestyle collections because we found that with the glut of books being farmed out to external agencies there we weren't getting the same level of focus on our work, and we then brought those collection activities in-house.

 We had the capacity then as well because we took more space across the road from ourselves there at the (inaudible) center and we have capacity now to house those collectives and that's working very effectively for us.

 So there is a concerted focus on getting correct customer contact information, talking to the right customer. We've launched our mobile payment platform, so right now today you can go on to your TFG application on your mobile device that works on BlackBerry, Android, iOS systems.

 You can look at your statement, you can look at your last payment, you can transact by making payments on your cell phone through a gateway that we have provided there. And we're looking at other ways of making it easier for our customers to make the necessary payments including debit orders.

 We had strong performance in publishing and insurance and obviously good growth as Doug has alluded to in our rewards program. In fact our rewards program reached over 4 million customers. By the end of this year all our customers will -- our credit customers will be on our rewards base.

 So we have over 3 million active accounts or accounts in total; 2.6 million of those accounts are active at any point and they'll all be on our rewards system. We've also increased the number of cash customers to 1.8 million. We're hoping to hit the 2 million mark in the near future.

 And the beauty about that is that we are now talking to an audience that we weren't talking to previously. These are customers that were shopping with us, but we didn't know what they were buying and we didn't know what their preferences were. We now have a database of all that information which we can use to do a number of things, including making special offers to them, where our store is located, what our store propositions are and so forth.

 So it's a unique program. We haven't made a lot of noise about it. We intend making a lot more noise going forward. And the reason why the program is unique is because it gives customers instant rewards in the store. So as soon as they get the toll slip and on their cell phone, whatever they've bought, we look at the next best offer in the kind of range that they've been buying and we make them an offer, discounted offer in the kinds of things that they've been buying.

 And of course they can -- many of them go immediately and purchase those items and we've seen a lift as result of that. In fact we found that on rewarded redemptions, typically those customers spent 20% more than non-reward customers.

 So there's quite a bit of work to be done. We've got a great vehicle out there. I think there's some things that we've learned lessons from. What we have realized is we can get our customers to shop more frequently if we narrow the time in which they can redeem those offers. We're going to do that a little bit better.

 Also when we started up, we thought it was great because we've got a number of brands in our group and we could get them to shop from Markham all the way through to Exact. It's not quite like that.

 They showed a degree of resistance to moving outside of the brand that they typically are accustomed to and so we brought the offers a lot closer to where they are. So it's typically in the merchandise that they would have bought and we are giving them a reason to buy that a lot sooner than they would have.

 So the results are not great from Financial Services. It's probably the first time that I've stood here to say that we've actually had a year-on-year decline. We are looking towards the end of the year; we hope to be in positive territory when we get towards the end of the year.

 But really there are several factors that go to make up the situation. The interest income last year in right about July we had a 1.1% drop in the NCA rate that we could charge. So that had an impact because it was income for the first half of the year.

 So it's at 13%, the growth in interest income. Other income here which is largely the income associated with our publishing and insurance, you can see has moved up nicely. Now, that's not necessarily because we've hiked up the rates, it's because they've also expanded the number of customers that they are making this offer to.

 The insurance income has grown by 18.8% and you will realize that our insurance is not compulsory insurance. We have no compulsory insurance products in our business and I think there is a fear about that because it's been examined now fairly thoroughly by the regulators out there to see what the impact of that is.

 None of ours is compulsory. It's all sold at store level or through our telemarketing operation and it's a range of insurance offerings which cover both the product that we sell in our stores as well as fairly unique offerings niche to our customers. And the claims rates also because this is one of the other concerns, they in general are above the 4% level which is one of the talking points at the moment in terms of where insurance claims are going to be.

 It looks like we've had a great cost reduction there, but the figure that Ronnie mentioned earlier on in terms of the way that we recoup our costs for collection activities is reflected in that number, and so as a result our credit costs are showing a 17.1% reduction.

 So a lot of work to be done in the space, but we think that we put all the building blocks into place that will give us the kind of traction we need and we certainly think that in the second half of the year when we're up against what happened in November last year, we are going to see the level of deterioration that we witnessed up until now probably come down.

 And the book has been growing, the number of active accounts have grown by 4.3%. So despite the fact that it's a tough environment out there, despite the fact that we got high decline rates coming through, we've managed to grow our book by 4.3% and it is an area that we focused on because we think there are pockets of customers out there that we can still bring into the top-end brands, that we haven't got the penetration that we deserve and we're going after those customers.

 These are the stats that you guys often like to look at and this is the net bad debt write-off as a percentage of the debtor's book which you can see has moved up into 11.4%. We did indicate I think as a form of guidance that we thought this would be into the 12% mark by this stage and that we would progressively move within that 12% mark.

 So we're delighted that the result is not as bad as we had anticipated, but it's still not a result that we're particularly proud of and we certainly would like to see that improve. We are still saying as we said now that it won't be in the 12% to 13% range going forward, but certainly we think that 12% and round about that number is a possibility as we go to the end of the year.

 The big problem for us is the number able to purchase. It's just not this number in isolation because this number shows that it has gone down from 81.5% to 80.1% of our base, improved from 79.7%. So it's not just the numerical, but it's also the number of accounts that have got enough open to buy.

 Understand that when we see stress and delinquency, we also bring down our overall credit exposure to those customers that we think are going to themselves into trouble and that curtails their ability to spend. That's the point that I was making, a lot of this is self-inflicted in terms of the credit sales because you can see this stress in the market there.

 We react to it and therefore you don't get the kinds of yield out of your credit-base as you would want to get out of them as a result of being a little bit more cautious. And the arrears decreased to 22.2%, when I said decreased to 22%, that was from the March result, but obviously it increased from the September result last year. And the doubtful debt provision remains healthy and reflects the impairment in the book.

 So going forward in this area, we expect the consumer credit environment to remain probably muted for the next period of time. We don't know how long this will last.

 Our expectation looking at previous cycles and seeing what is being done, it's probably in the 12-month, just about the 12-month to 18-month, may be at the worst case 18-month situation. We certainly will be monitoring this.

 We're hoping that some of the alleviation will come through job growth and possibly the increase in customer's income levels or their salaries.

 We will source new customers from groups less impacted by the extension. We want to increase the pool of cash customers through our rewards base so we've got more customers that we can deal with in our Group.

 And then the other point we will be looking at the regulatory environment. So we've been asked what's the impact of some of the changes that are going to take place.

 The answer is we don't really know because the regulators, although they're promulgating these various new changes, overall changes to the Credit Act haven't given us a lot of definition about what they're anticipating to do.

 So for instance, in the credit amnesty, they have said there is going to be a credit amnesty, they are going to expunge details as we understand at the moment for all customers who subsequent to going in arrears have paid up those amounts, and have had judgments taken against them. So whether it's adverse information on the bureau or judgments taken against them, and they've paid it up, they want to annul those records, take them off the bureau.

 What they have indicated to us in previous discussions is that they will retain the payment profile information, which tells us when you paid, how much you paid, and if you've missed your payments at any point in time.

 If that is the case we can draw certain conclusions from that. But be that as it may, we're engaging with them at the moment. We've sent commentary. We've highlighted to them what we think are some of the risks. And we certainly would hope that they will respond to what we're asking there as we really don't believe this is necessary in the current climate to put that kind of level of amnesty into place.

 We think the -- those same people that I've -- are going to be given the amnesty, a large portion of them will be back in default in no time. Previous experience in 2007 has indicated that.

 On the affordability side, they want to introduce affordability measures. We think it's appropriate to be introducing affordability measures. However, the way they want to go about it is a little bit draconian, because they want to imply that there are certain expenses that we must take into consideration for groups of customers based on what their income level is. So they infer expenses.

 We know that a lot of our customers are young people who live with their parents, don't have big expenses, and they will be prejudiced under those circumstances. We also believe the bottom end of the market is going to be prejudiced, and will not have the desirable impact.

 They've asked for pay slips and banking statements to be produced at store. Clearly that's one of the things that will be difficult for us to comply with because it's a huge amount of paperwork and there are other disclosure considerations in terms of (inaudible) and so forth.

 So the account process is expected to remain at current levels and you should continue to see further innovation in both the publishing and insurance portfolios going forward.

 Moving on to the RCS Group now, RCS Group have had a solid set of results as Doug and Ronnie have alluded to. Despite higher bad debt levels they have made -- maintained solid profit growth at 11.6%.

 The nature of this business has changed over the last period of time. They used to be very strong, and primarily a loan originator in the unsecured lending space. That was 26% of their business last year, 23% of their business this year. By the end of this year it will be below 20%.

 So they've become more like a bank card operation. They run a considerable bank card operation. It's changed a lot of the dynamics within their business, and their fee income structure has changed as a result of that.

 We think it's a healthy path that they're following. We are certainly supporting them in those initiatives given the sort of tension that we see in the market at the moment.

 So they have a healthy balance sheet, adequate provision cover. They're getting continued support in the capital and banking markets. They've consolidated all their systems on to one IT platform, and they've put a lot of effort into their collections and transactional fraud capability over the last period of time.

 They've also expanded -- I missed this point here, expanded their merchant network with new national retailers. Pick 'n Pay and Shoprite are accepting their card as well. So they're getting a lot more of the FMCG market, and as a result of that they're getting more customers shopping more frequently on their card.

 So here's an analysis of their figures. Again, they were impacted by the lower interest yield as a result of the change in the repo rate in July last year. Non-interest income has gone up quite nicely. And here again you're seeing the impact of their card operation because if you've got these cards out there, every time a customer used them, you'd get a merchant fee as a result of the transaction that takes place and that's bolstered their income here. So at the income -- the total income level, they're at 15.2% growth, very healthy.

 They did feel the pain in bad debt. Their bad debts have grown by 35.6%, and they've got two things that are affecting them here. As you are finding the bad debt coming through, at the same time you're handing over your book to your recovery agencies.

 If your bad debt is falling, those books are getting smaller and smaller. So you are not getting -- you don't have a huge base to yield sufficient -- or sufficient returns from the recovery agencies. So whilst they've got their bad debt growing, the books that they've passed over have been diminished -- diminishing as their bad debt has been coming down over the last period of time.

 Their provision costs remain over 100%. Their cost-to-income ratio improved to 40.5%, and they have a great diversification of funding from both banks, and from the CP and bond market.

 So I just want to focus in on one or two points here. You can see that their nonperforming loans as a percentage of total debt has gone to 7.9%, from 6.4%, following the sort of growth that they've had in their books.

 And then you can see that they've got adequate cover over those nonperforming loans. Nonperforming loans are all loans 90-days plus. You can see that their provisions cover those 90-day plus loans by 110.8%.

 I've been asked why that's dropped from 123% to 110.8%, and the fact of the matter is RCS used the Markov model to calculate their provisions. It's consistent, they've always done it. Markov relies on 12-months worth of history, and it looks at the default rate over those last 12-months, and then looks at the current performance, and the current performance buckets and it infers those default rates into the current performance.

 What happens though is that there's certain portfolios that are new in that process where you don't have enough history in order to -- for Markov to model because they're brand new portfolios. And as a result you have to infer the default rates to those newer portfolios, and typically you are conservative.

 Now in March and in September last year -- sorry, in September last year and March of this year, they had a number of those portfolios in the co-branded space, where arguably they were overestimating the kinds of bad debt they were going to get out of those portfolios.

 Once Markov got hold of the actual data that they were experiencing out there, extrapolated going forward, it indicated to them that they were overprovided and as a result it's brought down the provision levels there.

 So there's nothing sinister in the fact that that's gone down. We know the bad debt is tough at the moment. It's really as a result of a consistent approach that we've adopted and the fact that the history now is starting to drive the model.

 You can see the percentage of applicants granted credit on the card portfolio is now at 48%, down from the 48.6% they saw last year.

 They continue to make investments in their collection resources and in their strategies that they're using to collect. We've seen very good results from them in terms of their historic aging, and we think that it will continue to keep that business on a sound basis moving forward, on a sound platform going forward and that they will be able to maintain their bad debt rates at reasonable rates given the current climate.

 Return on equity at 18.9%, and debt-to-equity ratio still very, very strong at 65.1%. Because they have such a diversified portfolio now between loans and cards, and they've got a lot of card activity going on, those are short-duration loans, and because of the short-duration loans they have a lot of positive asset liability mismatch. In other words, they are borrowing long and lending short. And in fact that gap has widened over the last period of time as they've got more into card lending.

 So the outlook for RCS is again a muted economic growth that's going to impact them, but they see positive trends in the book and profit growth, albeit at a lower level than previous years. We see no reason why the same sort of results we portrayed for you here at the half-year shouldn't flow through to the end of the year out of RCS.

 They have adequate funding in place to deliver their business plan. For the next 18-months they are well-funded. They will continue to tap the capital markets and the banks for fundraising efforts, and they will maintain their healthy balance sheet position.

 They're looking at further expansion of their private label and the co-branded cards, and also looking for new distribution channels and expansion of their merchant network. There's still some fairly major merchants out there that are not accepting the RCS card. They think that they're not far away from actually breaking into that territory and that of course will enhance the appeal of the RCS card going forward.

 And then finally, in August, we put out a SENS announcement to inform the market that we had had an unsolicited expression of interest in acquiring the RCS business. We had hoped by this stage to be able to tell you that we had a firm offer on the table, but the party we're dealing with has asked for an extension of a month, which we've granted them for the reasons -- for reasons that they've indicated to us.

 So hopefully by the end of November we should be in a position to tell you one way or the other whether we have a firm offer for RCS, and we will obviously keep you informed when that event occurs.

 And over to Doug.

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 Doug Murray,  Foschini Group Ltd - CEO   [5]
------------------------------
 All right, thank you, Peter. All right, this is the last slide that's on outlook and guidance for the second half. I mean, clearly we're still in this difficult credit environment and we think it's unlikely to improve over the second half due to the higher levels of customer indebtedness that Peter has been referring to.

 He also made reference to the net bad debt to book. We're projecting approximately 12%. It's more or less where we've been sitting all year.

 We plan to open 92 new stores in the second half. That will give us -- if we do all 92, it will actually be just over 6% -- between 6% and 7% space. Second half inflation is looking as though it's going to come in at between 7% and 8%.

 We expect to maintain the margins on each of the merchandise categories. There's a very, very strong focus on costs that will continue. The like-for-likes for the year we believe and for the second half will be still at around 5%.

 As Peter said, we expect still a good performance out of RCS for the second half. He's made reference to the August SENS announcement. As soon as we're in a position to make any further statement on that, we will, and we anticipate that that will be at the end of November.

 And there is a strong focus on our key strategic initiatives, supply chain, CRM, omni-channel, and Africa. We'll talk more about that at the year-end results.

 Retail sales for the first five-weeks of the second half, which is October, continue at very similar levels to the first half. We do expect an improved performance in the second half.

 You may recall that this time last year, November was particularly soft, not just for us, but for the whole of retail. December wasn't great. And against that softer base, we expect to do better. But I think, as always, the second half is going to be very dependant on what happens over the next eight weeks. And that will obviously determine the performance of the Group for the second half.

 That's the presentation, and we're very happy to take any questions that you may have, or may not have. And of course we're always available afterwards if anybody wants to talk to us directly. Yes.



==============================
Questions and Answers
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Unidentified Audience Member   [1]
------------------------------
 Hi, it's [Steven] from JPMorgan. Could you just unpack the increase in net other income line charges to customers, a little bit more the line. I think it increased by 36%.

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 Peter Meiring,  Foschini Group Ltd - Group Director, TFG Financial Services   [2]
------------------------------
 Yes.

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Unidentified Audience Member   [3]
------------------------------
 It's a very big number. And I think you said you're charging customers for debt collection. I mean, is that it, you're making debt collection -- you're doing debt collection at the customer's cost instead of your own cost, I mean roughly if someone is in arrears?

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 Peter Meiring,  Foschini Group Ltd - Group Director, TFG Financial Services   [4]
------------------------------
 Yes, so the under the Debt Collectors Act there are certain charges that you can levy against the customer if you are performing calls and you're sending them notifications. What we've done over the last period of time is we've looked at the customers -- obviously that's grown over the last period of time, the number of customers. Also our call volumes have gone up as a consequence of the current situation, and it's reflected in those numbers.

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Unidentified Audience Member   [5]
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 So that's pretty much all there is in that big increase, it's that?

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 Peter Meiring,  Foschini Group Ltd - Group Director, TFG Financial Services   [6]
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 Yes. It's that.

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Unidentified Audience Member   [7]
------------------------------
 I mean, is that a sensible thing to do given that these people are in arrears already? So that might, just by charging them some revenue that might make your revenue look -- line look nice now, but they're not going to pay you anyway later on because they're already behind, so it's kind of a zero-sum game for you on a 12 month to 24 month view, or not? Am I -- just help me -- I'm just --

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 Peter Meiring,  Foschini Group Ltd - Group Director, TFG Financial Services   [8]
------------------------------
 Yes, that's a good question. A lot of those charges are levied against customers who might be one month to two months in arrear, and those customers come back into a current position fairly quickly. And you're getting [q-rates] there of 60% to 70% in those customers that come back and they pay you. So you do get that coming back, but there's an element that bleeds through into your charge ultimately like anything else.

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Unidentified Audience Member   [9]
------------------------------
 Thank you.

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 Doug Murray,  Foschini Group Ltd - CEO   [10]
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 I don't think that we are unusual. In fact I think it's quite common practice in the industry.

 No other questions. All right. For those that would like to quiz us at the front, you're more than welcome to. (Conference Instructions) Thank you for being here.




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