| To: Business Editor | 10th March 1999 For immediate release |
The following announcement was today issued to the London Stock Exchange.
DAIRY FARM INTERNATIONAL HOLDINGS LIMITED
1998 PRELIMINARY ANNOUNCEMENT OF RESULTS
Results
"The difficult economic conditions in Asia are expected to continue through 1999. However, the quality of our major businesses is improving and, with our strong balance sheet, the Group will continue to invest in its existing operations and to pursue new investment opportunities in the Asia-Pacific Region."
Simon Keswick, Chairman
"Following completion of our repositioning, Dairy Farm has been transformed from a retail holding company to a decentralized retail operating company. The business simplification, clarity of focus and sharing of upgraded Group resources have been important elements in our ability to achieve earnings improvements during the difficult economic circumstances of 1998."
Ronald J Floto, Group Chief Executive
The final dividend of US¢4.35 per share will be payable on 9th June 1999, subject to approval at the Annual General Meeting to be held on 2nd June 1999, to shareholders on the register of members at the close of business on 1st April 1999. The ex-dividend date will be on 26th March 1999, and the share registers will be closed from 5th to 9th April 1999, inclusive.
DAIRY FARM INTERNATIONAL HOLDINGS LIMITED
PRELIMINARY ANNOUNCEMENT OF RESULTS
FOR THE YEAR ENDED 31ST DECEMBER 1998
OVERVIEW
Asia's economic difficulties have increased during 1998 and the recessionary environment in most markets has impacted both asset values and consumer spending. Against this difficult background, Dairy Farm has made steady progress towards its vision of being the leading food and drugstore retailer in the Asia-Pacific Region in terms of sales and long-term shareholder value creation. The Group's principal retail operations performed well. The reported results were further enhanced by exceptional items.
PERFORMANCE
Dairy Farm International Holdings Limited today announced that the Group's sales from continuing activities in 1998 were US$5,734 million, a 10% decrease from last year. Sales in underlying currencies increased by 2%, but this was more than offset by exchange rate movements, in particular the weaker Australian and New Zealand Dollars.
The consolidated net profit of US$155 million was 38% ahead of last year. Some US$10 million of this was attributable to discontinued activities and exceptional items. These exceptional items included the profit on disposal of our European operations, which was partly offset by a write-down in the value of the Group's investment in Indonesia, Year 2000 remediation costs and property devaluations.
Net profit from continuing activities of US$145 million was 11% ahead of last year. The good underlying performance of the key retail businesses in Australia, Hong Kong and New Zealand and higher interest income were largely offset by adverse exchange rate movements, higher corporate overheads and a reduced contribution from Maxim's.
Earnings per share were US¢8.46, an increase of 35%. Excluding discontinued activities and exceptional items, earnings per share of US¢7.89 were 9% above last year.
The Directors recommend a final dividend of US¢4.35 per share, payable in cash, which, together with the interim dividend of US¢1.65 per share, will make a total annual dividend of US¢6.00 per share, unchanged from last year.
CORPORATE DEVELOPMENTS
Turning to the operations, the Chairman, Simon Keswick, said that the disposal of the Group's operations in Spain and the United Kingdom early in the year were in line with the Group's strategic focus on Asia Pacific, as was the acquisition in February of a 32% effective shareholding in PT Hero Supermarket, the leading supermarket chain in Indonesia. Other initiatives included the opening of a fresh food centre in Hong Kong and its first Géant hypermarket in Taiwan in joint venture with Casino S.A. At the same time the Group completed the closure of the non-performing Mannings drugstore chain in Taiwan and the Wellsave supermarket chain in Japan.
During the year the Group continued to invest in its core businesses, opening 100 new stores, principally in Hong Kong and Australia, giving a year-end total of 1,374. Investment in infrastructure, systems, new stores, store conversions and refurbishments amounted to US$190 million in 1998 and the Group expects to invest US$300 million in 1999.
The Group redeemed its outstanding convertible preference shares at a total cost of US$208 million in July. This redemption, together with the US$120 million property devaluation arising from the Directors' annual review of current property values, substantially accounts for the reduction in Shareholders' funds to US$1,017 million. The Group's balance sheet, nevertheless, remains strong, with net cash of US$208 million.
OUTLOOK
In conclusion, Simon Keswick said, "The difficult economic conditions in Asia are expected to continue through 1999. However, the quality of our major businesses is improving and, with our strong balance sheet, the Group will continue to invest in its existing operations and to pursue new investment opportunities in the Asia-Pacific Region."
GROUP CHIEF EXECUTIVE'S REVIEW
STRATEGIC DIRECTION
1998 was a year of substantial progress toward the turnaround of Dairy Farm. In 1997 we identified three steps to be taken to reposition the Group:
Completion of these repositioning steps has transformed Dairy Farm from a retail holding company to a decentralized retail operating company. The business simplification, clarity of focus and sharing of upgraded Group resources have been important elements in our ability to achieve earnings improvements during the difficult economic circumstances of 1998. Most importantly, we have a strong foundation on which to build in the future.
ACHIEVEMENT OF OBJECTIVES
We have substantially achieved our 1998 objectives.
The turnaround at Franklins continued, with operating profit tripling in local currency terms to A$63 million. The programme of conversion to formats selling fresh foods has been augmented by the implementation of category management, improvement of the supply chain and reorganisation of the management structure.
Improvement in our other businesses was achieved, with increased profitability at Wellcome supermarkets, 7-Eleven convenience stores and Mannings drugstores in Hong Kong and also at Woolworths in New Zealand.
Major new business development initiatives in Asia Pacific were the acquisition in February of a 32% effective shareholding in PT Hero Supermarket in Indonesia and the opening of the US$50 million Fresh Food Processing Centre in Hong Kong.
The development of drugstores and convenience stores has moved ahead with the opening of 20 new format stores at Mannings. This format concentrates on wellness, health and beauty and adds to the flexibility of our network. We opened 44 7-Eleven stores during the year and now operate 487 convenience stores in Hong Kong, Mainland China and Singapore.
These objectives will remain in place for the coming year, and we will continue to focus on returns on capital and the creation of shareholder value. This policy is well reflected in our approach to both potential acquisitions and to our existing businesses. During the year, we identified, researched and rejected numerous potential acquisitions. In each case, our assessment was that these opportunities would not add shareholder value.
OPERATING PERFORMANCE
Given the economic conditions in Asia, the performance has been satisfactory. In local currency terms, operating profit improved by 9% in the retail businesses in Hong Kong and by 7% at Woolworths in New Zealand, in addition to the improvement noted in Franklins. Total Group operating profit from continuing activities was, however, only marginally ahead of last year with improvements offset by a number of factors. Volatile exchange rates, in particular the weakening of the Australian, New Zealand and Singapore Dollars, reduced the operating profit by 7%. Corporate overhead increased with investment in the core competencies essential for the future of the Group. The resources needed are in place, and these expenses will not increase further in 1999. Finally, Maxim's has weathered a difficult year for the catering industry in 1998 and sales and profits have been affected. Maxim's management are addressing both sales initiatives and expense control in splendid fashion. We anticipate a gradual improvement in 1999.
SYSTEMS, TECHNOLOGY AND ELECTRONIC COMMERCE
Our investment in systems continues, reflecting the need for modern technology to remain competitive. The upgrading of systems, particularly In Store Systems, is an ongoing process. We will invest US$40 million in 1999. We anticipate major opportunities arising in E-Commerce and are developing programmes to participate in this rapidly evolving market.
YEAR 2000
We have a dedicated programme office and procedures in place to address our exposure to the Year 2000 systems issue. Work is continuing to ensure that we are millennium ready in all business critical activities. This includes an assessment of internal and external risks, and the development of Business Contingency Plans to mitigate these risks. Audit Committees in our principal businesses monitor the programme regularly, and our Board reviews the progress, costs and risks. Costs are expensed as incurred and were US$13 million in 1998. Total costs associated with this programme are projected to be some US$40 million.
THE FUTURE
Our vision, strategy and objectives are unchanged. However, our plans for the next three years will take on new direction now that much of our repositioning is completed. Each of our businesses has plans to:
We believe our most important responsibility, beyond setting a sound strategy, is to ensure capital is invested to create shareholder value. Our investment policy is to give priority to:
1. expanding our existing successful formats;
2. upgrading our poor performers when the business case to support them is clear;
3. expanding existing businesses by acquisition; and
4. entering new markets in Asia Pacific by acquiring successful retail businesses.
We anticipate little relief on the economic front in 1999 and expect trading conditions in Hong Kong to become more difficult. Competitive conditions throughout Asia Pacific, and especially New Zealand, are intense. Between the turnaround of Wellcome Taiwan and the new hypermarkets, our operating losses may be as much as US$10 million in that challenging market. The conclusion that there is more downside than upside in 1999 is inescapable.
Nonetheless, we believe our Group is on a sound strategic course and has the plan, the people and the capital to succeed in the future.
Retailing is a people business. Ours did a particularly fine job in 1998 in difficult circumstances. I am grateful for their hard work and dedication, thank them and ask for their support in 1999.
Ronald J Floto
Group Chief Executive
10th March 1999
NORTH ASIA
Hong Kong - The retail businesses in Hong Kong all performed well in a difficult environment. The effects of the regional economic turmoil have, however, increasingly impacted the Hong Kong SAR as the year has progressed and this, together with increased competition, will make it difficult to maintain both sales and profits in 1999.
Wellcome supermarkets maintained its market share, although sales growth in the first half was partly offset by declines towards the end of the year. 7-Eleven convenience stores had a slower start to the year but were able to increase sales in the second half, while the Mannings drugstore chain performed strongly throughout the year. The Oliver's delicatessen chain was integrated into the Wellcome supermarket business in September, and the Oliver's sandwich bar chain, which was not a core business for Dairy Farm, was sold in January 1999.
In November, we opened the 161,000 sq. ft Fresh Food Processing Centre at Tseung Kwan O, giving Wellcome and 7-Eleven the opportunity to enhance their fresh and prepared food offer significantly. These categories meet the changing demands of our customers and will provide much of the sales growth in 1999 and beyond. Mannings has successfully developed its new "health & beauty" format stores, which now represent 37 out of 115 outlets.
We have initiated the shared services concept in Hong Kong and will complete the implementation of this in 1999. This changes the structure of the business by combining all of the back office functions of administration, logistics, information technology, procurement and finance into one unit which will then service the three retail banners. This will bring economies of scale, reductions in cost and improved margins through the leveraging of the combined purchasing power of all of the businesses in Hong Kong.
The Group added 32 stores in Hong Kong in 1998, bringing the total at year end to 686 outlets, comprising 221 Wellcome supermarkets, 350 7-Eleven stores and 115 Mannings drugstores.
Sales and profits at our wholesaling business, Sims Trading, declined as the economy slowed and because of difficulties in the Mainland China market. Ice manufacturing, which serves the fishing and construction industries, also declined. Though not a core business, this remains a valuable contributor to profit.
Maxim's, our 50%-owned associate, was affected by the economic downturn in Hong Kong with both sales and profits declining as consumers cut back their spending and tourism remained depressed. The management has taken stringent measures to reduce operating expenses and to focus on growing sales. Recovery is expected to be gradual. At the year end, Maxim's operated 280 restaurants, fast food outlets and cake shops, principally in Hong Kong. In Mainland China, the company has an interest in 14 catering outlets and continues to participate in joint venture aircraft flight kitchen businesses in seven main cities.
Mainland China - The limited spending power and high operating costs in Mainland China continue to cause our retail businesses there to operate at a loss. However, the performance of our convenience stores is improving. We will invest in businesses which we believe will provide adequate returns. Our business is primarily concentrated in 7-Eleven convenience stores in Guangzhou and Shenzhen, which now account for 48 out of the total of 56 outlets. Our investment plans have been scaled back pending resolution of regulatory issues concerning foreign investment in the retail industry. The three supermarkets in Chengdu, Sichuan were not achieving target and we disposed of our interest in this joint venture at the end of the year.
Taiwan - Sales and profits at Wellcome supermarkets declined as the company lost sales to increasing competition from both hypermarkets and convenience stores. In response, the company will continue to establish its position as a neighbourhood supermarket chain and has refined its basic format with the introduction of additional fresh products. The new format will be extended selectively across the chain, which now has 93 stores in operation, over the next three years.
DFI Géant, our 50%-owned joint venture with Casino S.A., opened its first Géant hypermarket in Taichung in December. A second hypermarket is scheduled to open in Kaohsiung in March. This start-up business will incur losses in the early years but is a logical extension of Dairy Farm's supermarket business.
SOUTH ASIA
Singapore - Sales in Singapore, where we operate 21 Cold Storage supermarkets, 89 7-Eleven convenience stores and 52 Guardian pharmacies, increased by 7% while operating profit was 4% above last year. Future sales growth will come from the Group's continued focus on fresh food, where Cold Storage now dominates the market, and its shared services initiative which will drive efficiencies.
Malaysia - We will, subject to regulatory approval, increase our investment in Malaysia by increasing our shareholding in the eight store Wellsave supermarket chain to 75% and in the 59 store Guardian pharmacy chain to 65%. The implementation of a new merchandising system in Guardian has improved margins and reduced inventory in this business, which has the leading market share and the top reputation for health, wellness and beauty.
Indonesia - Despite the difficult conditions in Indonesia, the Hero supermarket business, in which we acquired a 32% effective shareholding in February 1998, has performed well and has increased its already dominant market share. Eight stores were destroyed during the May riots. 20 other stores that were damaged were back in operation within three weeks and all stores have since improved their sales and operating profit. Hero has also taken over the management of its central distribution facility with resulting improvement of service levels and reduced costs. In late 1998, Hero acquired the Guardian pharmacy and the Mitra supermarket chains. With 128 stores now in operation, the company is well placed to take advantage of any recovery in this market.
India - Under a technical assistance agreement with Dairy Farm, the RPG group is now operating 25 Foodworld supermarkets in Southern India. Our pharmacy joint venture, also with RPG, is now operating seven stores under the Health & Glow banner.
AUSTRALASIA
Australia - Franklins continued its recovery with operating profit increasing to A$63 million, compared with A$21 million last year. We expect to make further steady improvement in the coming years. The programme of converting the No Frills stores to the Franklins Fresh format continued. Within the fresh initiative, we have now added a limited fresh offer into a select number of No Frills stores, where a full conversion is not possible. We completed 32 of these conversions during the second half of the year. In addition to conversions, we opened eight new Fresh stores and acquired seven independent supermarkets. At the year end, 150 of our 270 stores were fresh stores, comprising 68% of the total sales area. We continue to seek opportunities to extend the network and increase our market share.
Benefits have also been derived from the initiatives taken in category and supply chain management and in improvements in labour productivity. The management structure at Franklins now places greater responsibility and authority at the national headquarters in Sydney, where we have developed our functional management resources. This combination of skills and structure enables us to improve our standard of retail execution and therefore to serve our customers better.
New Zealand - Woolworths achieved a 2% increase in sales and a 7% growth in operating profit. This was a satisfactory performance in the low-growth New Zealand market. Woolworths has the highest proportion of fresh produce sales of any of Dairy Farm's companies and accordingly is a source of expertise for the growing Fresh business across the Group. During the year, we opened two new Big Fresh stores and now have 44 Woolworths supermarkets, 14 Big Fresh stores and 19 Price Chopper stores. The slower growth in store numbers for the last two years has led to a slight decline in market share, and the company is now refurbishing its flagship Woolworths supermarkets and will selectively add to its portfolio as opportunities arise. We plan to invest US$20 million in refurbishing and expanding our Woolworths network in 1999.
1 BASIS OF PREPARATION
The financial information contained in this announcement has been based on the audited results for the year ended 31st December 1998 which have been prepared under the historical cost convention, as modified by the revaluation of certain non-current assets, and in conformity with International Accounting Standards on the basis of the accounting policies set out in the Financial Statements. In accordance with the revised International Accounting Standard 12 - Income Taxes, deferred taxation is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values. This is a change in accounting policy as in previous years deferred taxation was provided to the extent that a liability or an asset was expected to be payable or receivable in the foreseeable future. The comparative figures for 1997 have been restated to reflect the change in policy. The effect of this change has been to decrease the profit after taxation and minority interests for the year ended 31st December 1997 by US$3.3 million and the Shareholders' funds at that date by US$13.7 million.
2 SEGMENTAL INFORMATION
* Associates' results include goodwill amortisation of US$4.7 million (1997: US$1.4 million).
The comparative figures have been restated to include the 1997 operating results of activities disclosed as discontinued in the current year.
3 DISCONTINUED ACTIVITIES AND EXCEPTIONAL ITEMS
The comparative figures have been restated to include the 1997 operating results of activities disclosed as discontinued in the current year.
4 TAXATION
Tax on profits has been calculated at rates of taxation prevailing in the territories in which the Group operates. Taxation includes United Kingdom tax of US$2.7 million (1997: US$14.6 million).
5 EARNINGS PER SHARE
Basic earnings per share are calculated on the profit of US$155.0 million (1997: US$112.4 million) and on the weighted average number of 1,833.0 million ordinary shares (1997: 1,794.6 million).
Diluted earnings per share are calculated on the profit of US$155.0 million and on the weighted average number of shares after adjusting for shares deemed to be issued for no consideration under the Senior Executive Share Incentive Schemes of 1,833.9 million.
The convertible cumulative preference shares were anti-dilutive, and therefore ignored in the calculation of the diluted earnings per share.
Earnings per share excluding discontinued activities and exceptional items are calculated on the adjusted profit of US$144.6 million (1997: US$130.2 million) and on the weighted average number of 1,833.0 million ordinary shares (1997: 1,794.6 million).
Diluted earnings per share excluding discontinued activities and exceptional items are calculated on the adjusted profit of US$144.6 million and on the adjusted weighted average number of shares of 1,833.9 million.
6 NOTES TO CONSOLIDATED CASH FLOW STATEMENT
a. Purchase of associates and other investments
This includes US$39.1 million for purchase of a 32% effective interest in PT Hero Supermarket in Indonesia, and US$16.4 million capital injection to Géant Hypermarket joint venture in Taiwan.
b. Sale of subsidiary
In February 1998, the Group completed the sale of its wholly-owned subsidiary, Simago in Spain, to a third party.
c. Sale of associate
In March 1998, the Group sold its 11% interest in the United Kingdom supermarket chain, Somerfield, following its merger with Kwik Save.
7 ANNUAL REPORT
The Annual Report will be posted to shareholders on or about 4th May 1999. Copies may be obtained from Butterfield Corporate Services Limited, P.O. Box HM 1540, Hamilton HM FX, Bermuda; IRG plc, Bourne House, 34 Beckenham Road, Beckenham, Kent BR3 4TU, England and M&C Sevices Private Limited, 16 Raffles Quay #23-01, Hong Leong Building, Singapore 048581.
The final dividend of US¢4.35 per share will be payable on 9th June 1999, subject to approval at the Annual General Meeting to be held on 2nd June 1999, to shareholders on the register of members at the close of business on 1st April 1999. The ex-dividend date will be on 26th March 1999, and the share registers will be closed from 5th to 9th April 1999, inclusive. Shareholders will receive their dividends in United States Dollars, unless they are registered on the Jersey branch register where they will have the option to elect for Sterling. These shareholders may make new currency elections by notifying the United Kingdom transfer agent in writing by 21st May 1999. The Sterling equivalent of dividends declared in United States Dollars will be calculated by reference to a rate prevailing ten business days prior to the payment date. Shareholders holding their shares through The Central Depository (Pte) Limited ("CDP") in Singapore will receive United States Dollars unless they elect, through CDP, to receive Singapore Dollars.
For further information, please contact:
| Dairy Farm Management Services Limited Ronald J Floto/Ian Durant | (852) 2837 6401 (office) |
| Forrest International Limited Sue Gourlay/Terri-Helen Gaynor | (852) 2522 6475 (office) |
Full text of the Preliminary Announcement of Results and the Preliminary Financial Statements for the year ended 31st December 1998 can be accessed through the Internet at "http://www.irasia.com/listco/sg/dfi". This announcement is also available through "First Call".
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