Company snapshot

Highlights

TURNOVER

UP

FROM 13.3%
TO R19.6 BILLION

HEADLINE EARNINGS

UP

19.7%
TO R677 MILLION

RETURN ON EQUITY

AT

50%

DIVIDENDS

AT

31.5cps

Chairman’s report

Dis-Chem completed its first full year on the JSE with the business model working as designed.
Our only notable setback was a delay in obtaining trading licences for certain newly constructed wholesale operations.

Larry Nestadt
Independent non-executive Chairman

Operating environment

South Africa’s economy made a promising start to 2017, but investor and business confidencewas dashed by an unexpected political decision in March 2017. Within weeks the Fitch and S&P ratings agencies downgraded South Africa’s debt to sub-investment grade. Economic activity contracted in the first quarter, but slowly regained momentum and in the fourth quarter grew by 3.1% quarter-on-quarter (seasonally adjusted and annualised) to record a sluggish 1.3% for the year. Further downgrades in November 2017 signalled that substantial economic reforms were required to prevent the country sliding into across-the board junk status. Following the major political shift in December 2017, South Africa entered 2018 in a more confident mood, but consumers remain under severe pressure from rising costs from utilities, the recent VAT increase and continuing political volatility.

Although GDP contracted by 2.2% in Q1 2018, most commentators remained confident that our fundamentals remain sound. Early in the year, ratings agency Moody’s affirmed South Africa’s investment-grade credit rating and revised its credit outlook from negative to stable.

Standard & Poors (S&P) consequently reaffirmed South Africa’s rand debt at “BB+” and kept the country’s foreign-currency debt unchanged at “BB”. These ratings agencies have evidently
adopted a “wait and see” stance while the new Presidency installs new leadership teams in government departments and public institutions.

Consumer disposable income will remain constrained until the economy revives, though South Africa’s aging medical aid population will inevitably drive up the need for pharmaceuticals. Nevertheless, our strong fundamentals and Dis-Chem’s positioning in the resilient healthcare industry bodes well for ongoing expansion in a muted yet stable economy.

Compliance

Many of Dis-Chem’s product categories are regulated. Staying abreast of these regulations are written into the KPIs of each category executive.

We are working steadily to remain fully compliant by removing all remedies and products that our testing reveals fall short of current or incoming standards. A quality assurance team screens all new suppliers, their facilities and products before considering these for our catalogue.

New regulations for medical devices and personal care are also in the pipeline.

Constant regulatory amendments have made compliance an operational priority. The Board is establishing a compliance framework that will comprise an overarching set of rules and compliance characteristics that can be applied throughout the business. Management will also utilise this framework for audit and risk purposes.

Dis-Chem presently holds over 40% of the Complementary and Alternative Medicines (CAMs) market, which is being impacted by the roll-out of CAMs legislation that sets new regulations and registration criteria for the category. Government’s intention is to eliminate questionable remedies from the market, which we welcome wholeheartedly. On the other hand, this regulatory process could impede the development of new formulations and cutting edge products.

Stakeholder relationships
Following an employee strike in January 2018, Dis-Chem agreed to recognise the involved trade union when it achieves sufficient representation in terms of current labour legislation. Although the union had not reached the required membership threshold, we have considered the issues raised by our employees and taken corrective action where necessary. As our employee communications seeked improvement, our CEO, Ivan Saltzman, and other senior executives now personally attend in-house work forum meetings, along with representatives from our unionised and non-unionised employees. These discussions have proven invaluable for understanding challenges our employees face and are fundamental to building trust and a more proactive relationship with the workforce.

Sustainable operations
From their early years in business, the Saltzmans have believed that doing good for the community is good business. The Dis-Chem Foundation was launched as their social responsibility enabler and our customer loyalty programme is now 15 years old. Being a good corporate citizen and giving back to the community is built into Dis-Chem’s corporate DNA. This empathetic culture informs our approach to employee
training and development, with a particular focus on preparing young adults for productive and fulfilling lives. We have enthusiastically engaged government’s tax-based initiative to provide job and learning opportunities for South Africa’s underprivileged youth. Where we can, we bring these young people into Dis-Chem or healthcare, as the industry is perennially short of skilled people.

The Group is preparing a comprehensive environmental and waste reduction programme, which we will report on in greater detail in the next reporting cycle. An early part of this process is to assess our emissions, materials used and environmental impacts, so that appropriate measures can be built into the programme.

In the meantime, the wholesale business has equipped our stores with specialised balers that prepare discarded packaging for recycling. Leadership and corporate governance Dis-Chem’s listing in November 2016 brought with it a fundamental restructuring of the Board. We inducted nonexecutive directors with the appropriate skills for overseeing a healthcare business and repositioned several previous directors into operational executive roles. I am satisfied that Dis-Chem has an optimum mix of Board members for this time, though we continually look for opportunities to broaden its diversity and introduce individuals who will add value.

The Board approves strategy and sets KPIs across categories, stores and regions. The Group’s strategy remains focused on consolidating retail and wholesale healthcare facilities through Dis-Chem’s differentiated business model. In our view the business and the brand will continue gaining traction through Dis-Chem’s market-leading offering to consumers, independent pharmacies and distributors.

This year, the Board paid close attention to the challenges facing our wholesale business following the major investment into additional wholesale storage and distribution capacity. Obtaining the necessary distribution licences became a drawn-out process that was not sufficiently factored into our planning. These delays
hindered new distribution and caused Dis-Chem to pay for salaries and storage capacity that generated no returns. As a consequence, our wholesale business reported a R169 million operating loss, which dampened the Group’s year-end results.

Dividend

The Board declared a gross final cash dividend of 12.74 cents per share for the financial year ended 28 February 2018. This figure was based on 40% of adjusted headline earnings.

Prospects

We expect consumer spend to remain muted until the future direction of South Africa’s economy becomes clearer. Nevertheless, Dis-Chem operates within a particularly resilient market that is well protected from foreign entrants.

Thank you
The Board and I appreciate the consistent support and encouragement of our shareholders, who understand that DisChem is on a journey to create value for all, year after year.

Dis-Chem’s journey is assured by the expert stewardship of CEO, Ivan Saltzman, the executive team and management, who have worked ceaselessly to maintain sustainable growth as a newly listed company under exceptionally tough circumstances. Dis-Chem is home to exceptional people, who contribute at every level to fulfil the high expectations of our customers. That is how the Dis-Chem promise to all stakeholders is delivered.

Last and by no means least, my sincere thanks to a relatively new Board for quickly merging into an effective team. I am confident that Dis-Chem has the right combination of oversight and leadership to continue unlocking value for all who depend on us.

Shareholder information

Nature of business

Dis-Chem is a market leading corporate pharmacy group in South Africa. The group operates through two divisions namely, Retail and Wholesale, and employs more than 13500 full-time and part-time employees. In November 2016, the Group listed 27.5% of its issued share capital on the Johannesburg Stock Exchange (JSE). This was the second largest initial public offering (IPO) on the exchange.

Dis-Chem Pharmacies Limited
Registration number: 2005/0097/66/06
JSE share code: DCP
ISIN code: ZAE000227831
CSUIP:
ADR ticker symbol:
Income tax number:

Registered Auditors
Ernst & Young Inc.
102 Rivonia Road
Sandton
Johannesburg
2196

JSE Sponsor
The Standard Bank of South Africa Limited
3rd Floor, East Wing
30 Baker Street
Rosebank
2196

Transfer Secretaries
Computershare Investor Services Proprietary Limited
Rosebank Towers
15 Biermann Avenue
Rosebank
2196