Agenda High-level financial overview



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Agenda

  • High-level financial overview

  • Purchase Milton & Associates

  • Healthcare update - South Africa



Financial Results for year ending 31 August 2002



Income Statement

  • Turnover R5.5bn +25.7%

  • Operating Profit R318m +21.3%

  • Operating Margin 5.8%

  • Excluding Discom

  • Operating Profit +31.9%

  • Operating Margin 7.04%



Goodwill

  • Balance Sheet Income Statement

  • Rm Rm

  • Link 16.120 0.895

  • House 78.304 9.042

  • Price Attack 88.078 1.419

  • Total 182.502 11.346



Accounts Receivable

  • Increases due to:

    • acquisitions
    • franchisees
    • 2002 2001
    • Rm Rm
  • SA 120.353 82.630

  • Aus 76.271 24.640

  • Total 196.624 107.270



Accounts Payable

  • Increases due to extending terms



Cash Flow

  • Big Improvement

    • Improving Working Capital
  • Cash Flow from Operating

  • 2002 2001

  • Rm Rm

  • 296.927 145.337



Future Focus

  • Continue to focus on:

    • Asset turnover (stock turn goal 7x over 3 years)
    • Cash generation
    • Improving margins (goal still 8%) - (UPD will
    • lower margin but has high asset turnover)
  • Resulting in improving:

    • Returns and EVA (ROE goal still 30%)


Strengthened Financial structure as we go forward

  • Appointment of CFO in each geography

  • Focus on efficiency improvements

  • Trans-national project:

    • cost centres to profit centres - franchising
    • process innovation to reduce overall costs
    • strict financial regime


Loan to Pharmacy (PM&A)

  • 2002 2001

  • Rm Rm

  • Loan 276.900 239.028

  • Interest charge 45.5 10.1

  • Cost recovery 11.4 4.0

  • Interest turn

  • Fees income Link

  • Loan impairment & recoverability



PM&A

  • They are budgeting high profit growth as they consolidate

  • Some of the largest stores were acquired

  • Acquisitions stopped - consolidation phase - convert to largest and most profitable chain of Pharmacies in SA

  • Operating profit could exceed 10% if we could integrate (7% otherwise)

  • Cash generating



Healthcare SA







Different store ownership models

  • There will always be franchise (LINK)

    • income from fees, rebates, wholesale profits
  • but if law allows there will also be:

  • pharmacies in Clicks & Discom

  • 100% ownership (PM&A)

  • JV (80%:20% for any of the brands)











Intercare

  • A close relationship with the doctors who prescribe

  • Objective is to improve pharmacy turnover

  • Pilot project



Link Investment Trust

  • Budgeting for break-even

  • Funding new initiatives

  • Link - The best known pharmacy brand

  • Income from

    • franchise fees - potential for new members,
    • rebates
    • own brands


UPD transaction reminder

  • R 2 billion turnover, NPAT R43m

  • Transaction to be funded through issue of

  • 39 024k New Clicks shares at R7.20

  • P/E for valuation was 6.5x

  • Earnings enhancing

  • Awaiting approval from Competition Commission



Healthcare Legal Issues









Introduction - a perspective

  • Introduction - a perspective

  • The year in review

  • Our pharmacy model

  • The year ahead

  • Summary



August 2001







Results – Aug 2002

  • Sales up 13.9%

  • Operating Profit up 22.9%



Results – Aug 2002

  • Franchise Income up 99.2%

  • Operating Profit up 117.5%

  • Store Growth 10



House Key Issues

  • Response to competitive environment through differentiation - Private label - Direct imports

  • Government home loan scheme ends

  • Competent team now in place

  • NZ on hold due to supply chain complications



Results – Aug 2002

  • Sales Up 13.2%

  • Operating Profit Up 10.34%

  • Store Growth 9



Priceline Key Issues

  • Why did we only open 9 stores

  • Intense competition – our response

    • Lifestyle category repositioning
    • Differentiation through imports
    • Loyalty - a positive outcome
  • Leverage to be gained with Price Attack

  • Margin focus

  • Loyalty - a positive outcome

  • Stock levels - growth due to strategic opportunity

  • Operating Profit - 7.61% to sales



A Snapshot

  • 94 stores

  • Average turnover per store - $950 000

  • Franchise fees - 5% on sales

  • Advertising fee - 3% of sales

  • Local area marketing - 1% of sales

  • Master franchise arrangement - WA, SA - 1% franchise fee, 3% marketing fee





Opportunities

  • Synergy with Sunday Group - access to 1800 formulations

  • Private label

  • Easily transported

  • Monopolistic environment

  • High margin



Make-up of the industry

  • Make-up of the industry

  • Regulatory environment

  • Our offer

  • How income is generated

  • Store growth





Number of pharmacies in Australia: Approximately 4,900

  • Number of pharmacies in Australia: Approximately 4,900

  • Bannered pharmacies:

  • Approximately 1,900 (39%)



Retail Pharmacy Sales Mix





Wholesaler & Pharmacist Relationship

  • Wholesalers guarantee loans for pharmacists to acquire pharmacies.

  • The pricing mechanism for pharmacists is artificially inflated, 1:1 ratio of turnover to goodwill

  • Pharmacists align to a banner through loose agreement

  • Distribution on a twice-a-day basis

  • Banner groups offer marketing programmes and some operational support

  • Private label products are key to the relationship



Regulatory environment

  • Agreement between Government & Pharmacy Guild

  • No corporation can have pecuniary interest

  • Geographic restriction

  • Usage clause restriction - landlord

  • Limit to numbers in shopping centres

  • Regulations applied by Pharmacy Board - layout of stores

  • Approval numbers

  • Pharmacy Act - differs in each state



Pharmacy Paradox



Our Offer

  • Category management - increased margin

  • Rebalance front and back of shop - increase sales

  • Common IT platform

  • Marketing programme - including ClubCard

  • Retail services (merchandising and space management)

  • The Pharmacy Academy

  • Operational focus - shopfloor productivity

  • Brand equity



Benefits for Fees

  • Annual franchise fee - a flat amount

  • Distribution fee linked to purchases on front of shop

  • IT annual maintenance fee

  • Marketing fee linked to marketing programme costs

  • Supplier rebates

  • Significantly - no capital employed



Store Growth

  • Three Opportunities

      • Existing Pharmacies convert to Priceline model
      • Convert Priceline stores to Pharmacies through a franchise arrangement
      • Secure new locations and through a relationship with pharmacists acquire approval numbers
  • Objective

      • 14 - 20 Stores secured by August 2003
      • 1000 by ??


The Year Ahead



The Year Ahead – Store Growth





Summary

  • Price Attack, full year of profit

  • Controlled growth of costs

  • Loyalty to deliver

  • Leverage gains in merchandise

  • Roll-out of pharmacy



































Stock Management

  • Next year goal R250m improvement

  • Centralising imports, single item picking, algorithms

  • Stock turn 5x, 6x, 7x, over next years to generate cash (JIT)

















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