Chairman’s Statement

“New Clicks’ move into pharmacy will see the group transform from a general retailer into a healthcare and pharmacy specialist.”

The past year will be remembered in the corporate annals of New Clicks for the far-reaching legislative changes which were announced, allowing for corporate ownership of pharmacies in South Africa for the first time.

The implications of this deregulation for the group – and indeed the healthcare industry – cannot be underestimated and will bring South Africa in line with the retail pharmacy model applied so successfully in several developed economies.

These long-awaited changes come 35 years after the group was formed.  It is a tribute to the leadership of the group down the years that they have been able to build a successful, sustainable business without the core component that Clicks was originally designed to sell.

We also welcomed the approval granted by the Competition Tribunal for New Clicks to formally acquire the Purchase Milton & Associates (PM&A) chain of pharmacies, which will serve as our springboard into the retail pharmacy arena.

The jubilation at finally being able to embark on our healthcare strategy was tempered by a disappointing financial performance, most notably from Clicks, Discom and the Australian operations.

We lost focus and allowed ourselves to be distracted from our core business.  This has come at a time when the market has become increasingly competitive, evidenced by several new entrants into the homeware sector.

Financial performance
Reviewing the financial results for the year, the 34% growth in the group’s turnover to R7.4 billion was bolstered by the acquisition of New United Pharmaceutical Distributors (UPD) during the period.  Comparable turnover growth was a relatively modest 8.0% in South Africa and 4.5% in Australia.  This was negatively impacted by declining sales in the lifestyle merchandise category in South Africa and the effect of the strengthening Rand on the results of New Clicks Australia.

Headline earnings per share grew by 26% to 65.6 cents per share, while diluted headline earnings per share showed a 30% rise to 64.5 cents per share.  The increase is largely due to an impairment of R32.5 millionof the loan to PM&A which was reflected in the 2002 figures.  No further impairment was considered necessary in 2003.  Diluted headline earnings per share adjusted for the PM&A provision increased by 13.4%.

The return on shareholders’ interest showed a marginal improvement to 15.6% and remains below the target of some 4% to 5% above the group’s cost of capital.

Strategy
The changes in the pharmacy regulatory environment have brought about a realisation that years of strategising are now over.  The group will need to move rapidly to the implementation phase if it is to capitalise on the window of opportunity it has created in the healthcare market.

The board is committed to enhancing value for shareholders and will hold management accountable for financial and project delivery as it moves to adopt a stronger performance and results orientation in the business.  Our stakeholders need to be reassured of our ability to implement our strategies, particularly around the integration of pharmacy into Clicks and unlocking value from the centralised distribution system.

Part of this intense focus on performance has been to move group leader, Trevor Honneysett, back into the business as head of New Clicks in South Africa.  The early signs of a renewed focus on the business are starting to emerge and the board is encouraged by the recent progress.

Earlier this year, management was also tasked by the board with separating the South African and Australian divisions and allowing them to operate on an autonomous basis.  Leadership and operational structures spanning the two regions have been dismantled and the respective teams have been given responsibility for their own strategic planning and implementation.  Once again, this step was designed to bring about renewed focus on performance and delivery in the respective regions, freed from the distraction of endeavouring to pursue a transnational business.

At the same time, the board undertook a review of the group’s Australian strategy.  The retail environment in that country is particularly competitive and New Clicks Australia is facing several strategic challenges.  As the healthcare strategy moves to implementation phase in South Africa the board took the view that we cannot allow ourselves to lose focus and commit resources to addressing the issues in the Australian environment at the expense of our growth strategy locally.

The group advised shareholders in late October that it had entered into negotiations for the disposal of the Australian operations.  These discussions are continuing and we will keep shareholders informed of developments.

New Clicks’ move into pharmacy signals a major strategic shift in our business and a move in a new direction which will see the group transform from a general retailer into a healthcare and pharmacy specialist.  It is not just about adding another pillar to our health, beauty and lifestyle offering.

While the implementation of the strategy is covered in more detail in the group leader’s report, one of our challenges is to integrate the pharmacy chain and operate it as a business.  Our strength lies in traditional retailing and we now have to develop the expertise to manage a national retail pharmacy network.

Corporate governance
We are continually striving to improve corporate governance standards and during the year a board governance committee was constituted to ensure compliance with the recommendations of the King Report, as well as monitor governance practices throughout the group.

While the group is substantially compliant with King ll, there are still areas requiring attention.  These include addressing the composition of the board to appoint additional independent non-executive directors, the review of the board charter and the establishment of a nominations committee.

Our commitment to governance is outlined in the expanded Corporate Governance Report which appears on page 39.

Corporate citizenship
The corporate sector has responded positively and proactively to the recommendations of the King Report for enhanced disclosure on non-financial issues.  While financial reporting is retrospective, non-financial reporting covers the future and provides shareholders with an assessment of the long-term sustainability of the business.  New Clicks is committed to integrated sustainability reporting and as a move in this direction we have prepared our first Corporate Citizenship Report, and plan to enhance this annually.

Board of directors
Peter Green resigned as an executive director in June this year after more than 25 years service with the group.  He was appointed to the board in 1996.  I would like to acknowledge the contribution he made to the group, not only in the management of the finance division over several years, but also in the development of the group’s healthcare strategy.

As referred to earlier in this report, we are planning to make further board changes as we increase our component of non-executive directors and restructure the board in line with changes to the operations.

Outlook
Management has given the board a commitment to renew its focus on performance delivery, and achieve a number of strategic objectives which have been set for the group.

Based on the forecast performance for the group, the directors are confident that shareholders can expect continued real growth in earnings in the year ahead.

Thanks
In closing, let me thank you – our shareholders – for your ongoing support of the group, as well as our other external stakeholders, including our customers, suppliers, advisers and business associates, for the invaluable contribution you continue to make to the group.  Thanks are also due to my fellow directors, the management team and the people of New Clicks.

DAVID NUREK
Non-executive chairman