2021 Half Yearly Results

 

DAIRY FARM INTERNATIONAL HOLDINGS LIMITED

HALF-YEARLY RESULTS FOR THE SIX MONTHS ENDED 30TH JUNE 2021

 

OVERVIEW

Ongoing restrictions related to the COVID-19 pandemic imposed by Governments across our markets have significantly affected trading in all markets, impacting the Group's overall performance in the period.  The Group continued to implement its multi-year transformation programme in the first half, however, with a number of key initiatives demonstrating further progress.  The sales surges experienced by key businesses in the first half of last year, caused by the panic buying behaviour at the start of the pandemic, have ceased as consumers have adjusted to a different way of life.  This return to more normal buying patterns as well as the annualisation of Government support from the prior year have been key drivers of the change in underlying profitability for the Group's subsidiaries.  Similar behavioural volatility on the Chinese mainland was also responsible in part for Yonghui's weaker performance in the first quarter of this year than the same period last year, when there were very high sales, and this, together with reduced margins due to increasing online competition, significantly impacted the Group's share of profits from this key associate in the first half of 2021.

 

RESULTS

Combined sales for the Group, including 100% of associates and joint ventures, reduced by 4% to US$14 billion.

 

Last year's overall sales benefitted from the Group's ownership of Wellcome Taiwan and Rose Pharmacy in the Philippines, both of which have now been divested.  The loss of the contributions from these businesses, combined with reduced Grocery Retail sales compared with the prior year, have been the primary contributors to the 13% reduction in sales in the first half from the Group's subsidiaries.  Underlying profit for the Group's subsidiaries in the period was US$76 million, a reduction of US$25 million on the same period last year, primarily due to more normal levels of customer shopping behaviour, the absence of panic buying compared to the prior year as well as the annualisation of Government support received in the prior year.  Convenience Stores, which experienced adverse trading conditions in 2020, saw a significant improvement in profitability in the first half of 2021.  This was not, however, sufficient to offset lower profitability reported by the Group's other subsidiaries.

 

There was an improvement in performance from Maxim's, which recorded a lower loss than the same period last year despite reduced level of Government support compared to the prior year.  The Group's associates and joint ventures made a loss overall, due to the Group's share of losses from Yonghui.  Consequently, the total underlying profit for the Group was US$32 million, a 69% reduction from the US$105 million recorded in the same period last year.

 

Operating cash flow, after lease payments, for the period was a net inflow of US$97 million, compared with US$76 million in the first half of 2020.  As at 30th June 2021, the Group's net debt was US$935 million, compared with US$817 million at 31st December 2020.  An interim dividend of US¢3.00 per share has been declared, 40% lower than the 2020 interim dividend.

 

OPERATING PERFORMANCE

Grocery Retail profitability in the first half was primarily impacted by lower sales driven by the normalisation of customer buying behaviours.  There were, however, significant underlying improvements to business fundamentals as a result of the implementation of the Group's multi-year transformation plan.  The introduction of cost improvement programmes, stronger retail execution, enhanced Own Brand penetration, and a groupwide approach to customer loyalty in Hong Kong have led to significant improvements in profits for the Grocery Retail business compared to 2019 levels.

 

The Group's Convenience Stores business reported strong growth in profitability compared with the same period last year, when movement restrictions and physical distancing requirements, together with temporary store closures on the Chinese mainland, impacted performance.  Like-for-like sales growth was encouraging, particularly on the Chinese mainland despite new COVID-19 cases arising in Guangdong province in May.

 

The Health and Beauty Division continued to be significantly impacted by the ongoing pandemic and the prolonged closure of the border between Hong Kong and the Chinese mainland.  The performance of Mannings in North Asia continued to be significantly affected by the lack of custom from tourists in Hong Kong.  In Southeast Asia, heavy restrictions on movement resulted in a significant reduction in footfall in malls, which continued to materially impact sales and profitability.  Nevertheless, like-for-like sales performance improved in the second quarter relative to the first quarter.  Faced with such challenging external conditions and the desire by consumers to reduce spending, the Group continued to reinvest in prices to enhance the customer value proposition.  The short-term impact on profit margins as a result of these price investments has been largely offset by volume growth, and operating cash flow has improved significantly.  The Group firmly believes this will enhance brand value and scale over the medium term.

 

The pandemic also negatively impacted customer traffic for IKEA due to the requirement to close stores periodically or restrict customer numbers to comply with Government policy, particularly in both Indonesia and Taiwan.  However, the strong performance of e-commerce, combined with a stronger store opening programme, supported revenue to be broadly in line with the equivalent period last year.  During the first six months of 2021, a third IKEA store was opened in Bandung Indonesia, marking another milestone for the growth of IKEA in the country.  IKEA remains on track to open its fourth Indonesian store in the second half of the year.  In May, IKEA opened a larger replacement store in Neihu, Taipei City, which is almost double the size of the store that it replaced.

 

Higher pre-opening expenses from strong investment in new spaces, together with the disruptions caused by COVID-19 as well as supply chain constraints which impacted availability, were the primary drivers of the reduction in IKEA profitability compared to the same period last year.

 

The performance of Maxim's, the Group's 50%-owned associate, improved in the first half relative to the same period last year.  Maxim's reported a smaller loss for the period, with encouraging Hong Kong and Chinese mainland like-for-like sales performance, partially offset by challenging trading conditions in Thailand and Singapore resulting from the surge of
COVID-19 cases there in the second quarter.

 

Dairy Farm's share of Yonghui's underlying losses for the six months ended 31st March 2021 was US$31 million.  Yonghui's operating performance over the period was impacted by normalisation of sales performance in the first quarter compared with a high base from the prior year, as well as reduced gross margins resulting from rising online competition.  Robinsons Retail's performance over the same period was affected by ongoing Government-imposed restrictions on movement, which particularly impacted discretionary retail banners.  Revenue growth for Robinsons Retail's supermarket business in the first quarter was also impacted by a high base in 2020.

 

BUSINESS DEVELOPMENTS

Despite the challenges posed by COVID-19, the Group made good progress in executing its key transformation initiatives.  The Group continues to effectively execute its four key improvement programmes.  These programmes have generated significant cost savings for the Group, which have supported the Group's ability to reinvest into its key businesses.  The Group's Own Brand initiatives continue to gather momentum, with over 1,200 SKUs now launched.  Following the successful launch of the Meadows Own Brand range, our Chinese Own Brand range Yu Pin King was also successfully relaunched in the first half.  Own Brand penetration has grown approximately 40% since launch.  In addition, yuu Rewards in Hong Kong continues to grow and has now attracted over 3.5 million members, with approximately 80 billion points issued.  

 

The Group continues to innovate and upgrade its store formats, taking advantage of changes in supply and demand dynamics for real estate.  With the relaunch of the Giant brand in Malaysia, over 100 Giant stores have now been recalibrated across Southeast Asia, with encouraging performance so far.  Upscale supermarket refreshes have been piloted and are now being rolled out across a number of key markets, with approximately 40 stores expected to be refreshed in 2021.  7-Eleven reached its 1,000th store milestone in Hong Kong and opened over 90 stores in Guangdong in the first half, bringing total number of 7-Eleven stores in Guangdong to over 1,450.

 

In May, the Group's 89.3%-owned subsidiary in Indonesia, PT Hero, announced that, following a strategic review, it will be pivoting its trading operations by increasing investment in its strong brands of IKEA, Guardian and Hero Supermarkets and away from the Giant banner.  This change in strategy is a decisive and necessary response to changing market dynamics, particularly given the Indonesian consumer's move away from the hypermarket format in recent years, reflecting a similar trend evidenced in other international markets.  As part of this pivot, the company intends to convert a number of stores into both the IKEA and Hero supermarket brands.  The company is also in active negotiations with a number of third parties with respect to the divestment of some existing Giant stores. 

 

PEOPLE

 

Given the ongoing challenges associated with the pandemic across the geographies where the Group operates, we would like to express our deep gratitude for the continuing dedication and resolve of our team members in putting our customers first during these difficult times. 

 

OUTLOOK

 

There remains significant uncertainty as to the future impact of the COVID-19 pandemic on Dairy Farm's businesses and trading conditions in the second half are likely to remain challenging.  Nevertheless, Dairy Farm remains committed to its multi-year transformation and we are confident in the Group's ability to continue to adapt and achieve long-term sustainable growth.

 

 

Ben Keswick

Chairman

 

s
Dairy Farm International Holdings Limited Consolidated Profit and Loss Account
	(unaudited) Six months ended 30th June																								Year ended 31st December
						2021												2020												2020
		Underlying business performance US$m				Non-trading items US$m				Total US$m				Underlying business performance US$m				Non-trading items US$m				Total US$m				Underlying business performance US$m				Non-trading items US$m				Total US$m
Sales (note 2)		4,536.8				-				4,536.8				5,239.9				-				5,239.9				10,268.5				-				10,268.5
Cost of sales		(3,123.9)				-				(3,123.9)				(3,640.9)				-				(3,640.9)				(7,077.7)				-				(7,077.7)
Gross margin		1,412.9				-				1,412.9				1,599.0				-				1,599.0				3,190.8	3			-				3,190.8
Other operating income		105.2				1.3				106.5				136.6				-				136.6				355.4				75.2				430.6
Selling and distribution costs		(1,114.8)				-				(1,114.8)				(1,269.6)				-				(1,269.6)				(2,575.8)				-				(2,575.8)
Administration and other operating expenses		(248.7)				(35.9)				(284.6)				(255.0)				(1.2)				(256.2)				(558.8)				(98.7)				(657.5)
Operating profit (note 3)		154.6				(34.6)				120.0				211.0				(1.2)				209.8				411.6				(23.5)				388.1
Financing charges		(60.5)				-				(60.5)				(76.2)				-				(76.2)				(145.1)				-				(145.1)
Financing income		0.5				-				0.5				1.8				-				1.8				2.4				-				2.4
Net financing charges (note 4)		(60.0)				-				(60.0)				(74.4)				-				(74.4)				(142.7)				-				(142.7)
Share of results of associates and joint ventures (note 5)		(43.6)				15.5				(28.1)				4.4				11.3				15.7				76.0				8.9				84.9
Profit before tax		51.0				(19.1)				31.9				141.0				10.1				151.1				344.9				(14.6)				330.3
Tax (note 6)		(19.0)				0.2				(18.8)				(37.5)				0.1				(37.4)				(74.2)				0.4				(73.8)
Profit after tax		32.0				(18.9)				13.1				103.5				10.2				113.7				270.7				(14.2)				256.5
Attributable to:
Shareholders of the Company		32.1				(15.4)				16.7				105.1				10.2				115.3				275.7				(4.7)				271.0
Non-controlling interests		(0.1)				(3.5)				(3.6)				(1.6)				-				(1.6)				(5.0)				(9.5)				(14.5)
		32.0				(18.9)				13.1				103.5				10.2				113.7				270.7				(14.2)				256.5
		US¢								US¢				US¢								US¢				US¢								US¢
Earnings per share (note 7)
- basic		2.38								1.24				7.77								8.53				20.38								20.03
- diluted		2.37								1.24				7.77								8.52				20.37								20.03