Click below to view full PDF article https://senspdf.jse.co.za/documents/2019/jse/isse/msm/Massmart.pdf Interim Results and trading statement Massmart Holdings Limited (Incorporated in the Republic of South Africa) Company registration No. 1940/014066/06 JSE Code: MSM ISIN: ZAE 000152617 ("Massmart", "Company" or the "Group") MSM: MASSMART HOLDINGS LIMITED - Interim Results and trading statement Date: 2019/08/29 Massmart, with total sales of R43.8 billion, for the six months to June 2019, comprises four Divisions operating 441 stores, in 13 sub-Saharan countries. Through our widely-recognised, differentiated retail and wholesale formats, we have leading shares in the General Merchandise, Liquor, Home Improvement and Wholesale Food markets. Our key foundations of high volume, low cost and operational excellence enable our price leadership. Performance summary Rm 26 weeks 26 weeks 26 weeks 52 weeks IFRS 16 Period % Adjusted* June 2019 June 2019 June 2018 December adjustment* change % change (Reviewed) (Adjusted)* (Reviewed) 2018 (Audited) Sales 43,832.4 - 43,832.4 41,558.4 5.5 5.5 90,941.6 EBITDA (before non-trading 1,867.3 (1,210.8) 656.5 1,211.1 54.2 (45.8) 3,047.8 items) Trading (loss)/profit before 318.9 (320.3) (1.4) 664.4 (52.0) (100.2) 2,068.9 interest and taxation (Loss)/profit for the period (832.4) 246.6 (585.8) 190.0 (538.1) (408.3) 868.7 Basic EPS (cents) (382.8) 112.9 (269.9) 90.0 (521.1) (396.9) 410.6 Headline (loss)/earnings (796.6) 246.6 (550.0) 204.1 (490.4) (369.5) 901.2 Headline EPS (cents) (364.7) 112.9 (251.8) 94.7 (485.1) (365.9) 416.5 Dividend (cents) - - - 68.0 (100.0) (100.0) 208.0 *To provide a more meaningful comparison of the current period’s performance, the performance summary has been prepared on a like-on-like basis which excludes the impact of IFRS 16 ‘Leases’ in the current and prior financial periods. Group performance, including IFRS 16 in 2019 Massmart’s total sales for the 26-week period of R43.8 billion represents total growth of 5.5% and comparable growth of 3.6%. Margin pressure resulted in gross margin decreasing by 36 basis points, while expenses increased by 7.6% driven by the impact of new stores and other cost pressures. This resulted in trading profit of R318.9 million, a decrease of 52% from the previous year period. African currency weakness resulted in foreign exchange losses of R157.1 million (2018: gain of R23.4 million), and increased average borrowings, drove net interest expenses to R909.6 million. As a result of the above, Massmart incurred a net loss of R832.4 million, a decrease of 538.1% from the prior year profit of R190.0 million. Headline losses amounted to R796.6 million, a decrease from prior period headline earnings of R204.1 million. Group performance, excluding IFRS 16 in both years The adoption of the IFRS 16 leasing standard from 1 January 2019 complicates performance comparisons between the results of the current and prior periods. To provide a more meaningful assessment of the current period’s performance, and unless otherwise stated, the commentary below has been provided on a like-on-like basis, i.e. excluding the impact of IFRS 16 in both the current and prior periods. Group overview Massmart’s total sales for the 26-week period of R43.8 billion represents total growth of 5.5% and comparable sales growth of 3.6%, with year-to-date product inflation of 2.7%. Total sales from our South African stores for the period grew by 4.9% and comparable sales by 3.2%. Total sales from our ex-SA stores for the period grew by 6.4% and comparable store sales by 2.4% (both in constant currencies). Total ex-SA Rand sales increased by 11.8%. The Group’s sales increased by 6.4% in Food (with inflation of 2.9%), 13.6% in Liquor (inflation of 5.3%), 5.0% in Home Improvement (inflation of 2.9%) and by 0.6% in Durable Goods (with marginal deflation). In the second quarter to June 2019 there was a marked decline in sales growths in our non-Food categories whilst sales growth improved slightly in our Food and Liquor categories. Rand sales growth from our ex-SA stores also slowed in this quarter. Gross margins declined from 19.6% to 19.2%, which was caused by the increased sales participation from the lower margin Food and Liquor categories. Cash-strapped consumers continue to spend proportionately more on our sales promotion activities which causes further gross margin pressure. Total expenses increased by 11.8%, while comparable expenses increased by 9.2%. Employment costs, the Group’s biggest cost category, increased by 8.6% against the prior 26-week period (with a comparable increase of 7.2%) with an 8% increase in full-time equivalents over the same period to just over 46,500 contributed to this increase. This conversion is in line with legislative requirements. An additional net 16 stores opened since June 2018, increased municipal tariffs and electricity costs together with the severe load shedding experienced in February and March have resulted in an increase of 8.7% of occupancy costs, and a comparable increase of 6.5%. Depreciation and amortisation increased by 20.3%. In addition to the impact of new store openings, the implementation of the Hybris web and fulfilment platform in Makro has been completed and its related depreciation has commenced. Other operating expenses increased by 19.3%. Contributing to this increase are the change management and training costs associated with the Makro Hybris web and fulfilment platform, increased security costs, increased credit card costs, slightly higher bad debts as well as pre-opening store expenses of R53.5 million (2018: R18.6 million). Due to the combined impact of the above factors, trading profit before interest and taxation declined by 100.2% to a loss of R1.4 million. Operating profit before foreign exchange movements and interest declined by 108.7% to a loss of R47.9 million. Included in operating profit before interest are net realised and unrealised foreign exchange losses of R81.9 million (2018: gain of R23.4 million), the majority of which arose as a result of the recent currency weakness mainly in Zambia and Nigeria. Cash interest paid to the bank was R313.5 million causing net finance costs to grow by 17.8% to R353.1 million (2018: R299.7 million), largely due to increased levels of borrowing. The Group's effective tax rate is -21.3% (2018: 29.9%) which resulted in a tax charge of R102.9 million despite recording a loss before tax of R482.9 million. This charge is mainly as a result of impairing certain deferred tax assets previously recognised, in addition to a decision to limit the recognition of further deferred tax assets on year-to-date losses specifically relating to certain African jurisdictions. Consequently, the Group incurred a net loss for the period of R585.8 million, down from a profit for the same period last year of R190.0 million. Headline losses amounted to R550.0 million, down from Headline earnings in the previous year period of R204.1 million. The interim condensed consolidated results from which the information above have been extracted, have been reviewed by the Group’s Independent External Auditors, Ernst & Young Inc. and their unmodified review report is available for inspection at the Company’s registered office. Outlook and trading statement for the year ended December 2019 For the 33 weeks to 18 August 2019, total sales amounted to R55.8 billion, representing an increase of 5.0% over the prior period. Comparable stores’ sales increased by 3.2%. Product inflation is estimated at 2.6%. It is difficult to envisage the South African consumer economy improving in the near-term and negative risks seem heightened in the international geopolitical and economic situation. Massmart’s profitability has always been heavily skewed towards the second half of the financial year and particularly the fourth quarter, which includes Black Friday and the Festive season, which makes near-term financial guidance difficult. Assuming no further deterioration in the South African consumer economy for the remainder of 2019, Massmart expects that basic earnings per share for the year to December 2019 may be at least 50% below last year’s basic earnings per share of 410.6 cents per share on a comparable basis (excluding the impact of IFRS 16) and may be at least 100% below last year’s basic earnings per share of 410.6 cents per share (including the impact of IFRS 16). On the same basis, Massmart expects that headline earnings per share for the year to December 2019 may be at least 50% below last year’s headline earnings per share of 416.5 cents per share on a comparable basis (excluding the impact of IFRS 16) and may be at least 100% below last year's headline earnings per share of 416.5 cents per share on a reported basis (including the impact of IFRS 16). A further announcement will be released once there is a reasonable degree of certainty on results in due course. The financial information on which this trading statement is based has not been reviewed and reported on by the Company’s external auditors. About this announcement This short-form announcement is the responsibility of the Company’s Board of Directors and is a summary of the information in the full results announcement. The full announcement has been released on the JSE Stock Exchange News Service at (https://senspdf.jse.co.za/documents/2019/jse/isse/MSM/Massmart.pdf) and is also available on the Company’s website: https://www.massmart.co.za/interimresults2019. Copies of the full announcement are available for inspection and may be requested at the Company’s registered office, at no charge, during office hours. Any investment decisions by investors and/or shareholders, in relation to the Company’s shares, should be based on a consideration of the full announcement. By order of the board Guy Hayward Mohammed Abdool-Samad Chief Executive Officer Chief Financial Officer 28 August 2019 Sponsor: JP Morgan Equities South Africa (Pty) Ltd Date: 29/08/2019 07:05:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on, information disseminated through SENS.