Sustainability Report 73Context 74Sustainability Review and Responsiveness 76Scorecards 78Performance Against Objectives 82Stakeholder Engagement 84Broad-based Black Economic Empowerment 86Human Capital 88Suppliers and Customers 92Corporate Social Investment 94Environment 96Global Reporting Initiative (GRI III) 98
Corporate Governance 99King II Index 110
Group Consolidated Annual Financial Statements 113Approval of the Annual Financial Statements 115Directors’ Report 116Group Consolidated Income Statement 119Group Consolidated Balance Sheet 120Group Consolidated Cash Flow Statement 121Group Consolidated Statement of Changes in Equity 122Group Consolidated Notes to the Annual Financial Statements 123
Massmart Holdings Limited Annual Financial Statements 177Massmart Holdings Limited Income Statement 179Massmart Holdings Limited Balance Sheet 180Massmart Holdings Limited Cash Flow Statement 181Massmart Holdings Limited Statement of Changes in Equity 182Massmart Holdings Limited Notes to the Annual Financial Statements 183
Shareholder Information 189Notice of Annual General Meeting 191Form of Proxy 195Notes to the Proxy 196
Administration and Financial Calendar IBC
Massmart’s vision describes the response we strive for from stakeholders.
Customers will regard Massmart’s wholesale and retail formats as their first choice when buying those categories of merchandise offered by the formats.
Suppliers will regard Massmart as a valued partner in accessing and understanding their end-consumers.
Career retailers will regard Massmart as the preferred employer in the distribution industry.
Investors will regard Massmart as a portfolio rendering superior growth and total returns at relatively lower risk than alternative wholesale and
retail investments.The community will regard Massmart as a sensitive, caring, trustworthy, South African corporation.
Massmart is a South African-based international regional management group, invested in a portfolio of differentiated, complementary, focused wholesale and retail formats, each reliant on high volumes and operational excellence as the foundation of price leadership¸ in the distribution of mainly branded consumer goods for cash.
The Group actively seeks the continual improvement of performance in the portfolio and its parts, through strategic and structural clarity, high market shares, excellent management, principle-driven ethical leadership, cost-effective technology and the sharing or agglomeration of capabilities, knowledge, resources, influence and information.
To this end, thought leadership, individual and collective performance, and collaboration throughout the Group are appropriately rewarded, with executive management incentivised predominantly on Group performance.
Massmart’s missiondescribes the assetsand competencies necessary for strategic success.
CHANNEL SERVICES
Massmart at a Glance
Our Business Model
3Our MissionOur Business Model
Massmart at a Glance
Massmart operates primarily in terms of a decentralised business model that is circumscribed by absolute strategic clarity, unambiguous budgetary targets, a shared commitment to intelligent collaboration and an ability to take decisions centrally when appropriate.
This model is operationalised through four structural entities: Massmart Holdings, Shared Services, Channel and the Operating divisions. Each entity has a different but equally important role to play in the Group and is represented by one or more Massmart Executive Committee members who each report to the Group CEO.
DivisionsOperating divisions are the traders within the Group and operate within the boundaries of an approved strategy and budget. Each division has a dedicated management team focusing on its particular format(s), merchandise proposition, customer base, profitability and returns. The divisions are empowered to take trading decisions within a defined governance structure and Group strategic framework.
The divisions comprise Massdiscounters, Masscash, Masswarehouse and Massbuild.
HoldingsMassmart Holdings is the shareholder of the Operating divisions and is the consolidator of the Group financial, treasury, tax and company secretarial functions. It performs a Group management and advisory role that includes defining the strategic principles that guide the Group’s activities, approving budgets, managing corporate stakeholder relationships and supporting the implementation of Group strategy.
Holdings comprises CEO, CFO, Treasury, Tax, Company Secretarial, Business Intelligence, Corporate Affairs and Human Capital.
ChannelThe Channel is the leader and facilitator of collaboration in areas of significant overlap within the divisions. It encourages divisional collaboration by coordinating divisional participation in Group forums covering specific areas of competence.
Channel comprises the Trading and Functional forums being: Merchandise, Operations, Human Resources and Information Technology forums.
ServicesShared Services is the aggregator of non-differentiating activities and provides services to more than one division and Holdings. These services must respond to divisional needs, leverage cost synergies across the Group and be of higher value (quality and cost) than can be sourced externally or provided for by the division.
Services comprises functions such as International Commerce, Rebates, Private Label, Internal Audit, Payroll and Training.
Massmart Group
MASSWAREHOUSE
HOLDINGS
CEO
CFO
Treasury
Tax
Company Secretarial
Business Intelligence
Corporate Affairs
Human Capital
Shareholder strategises
and manages performance
Facilitates trading and functional
collaboration
Leverages group
synergies
General Merchandise
Food & Liquor
Home Improvement
Cellular
Operations
Human Resources
Information Technology
International Commerce
Rebates
Private Label
Internal Audit
Payroll
Training
DIVISIONS
STA
KEH
OLD
ERS
MASSDISCOUNTERS
MASSBUILD
MASSCASH
MASSMART GROUP
4 MASSMART ANNUAL REPORT 2007
Massmart at a Glance
Our Highlights
Financial
Group summary*2007
Rm2006
RmChange
%
Sales 34 807,6 29 963,6 16,2
Earnings before interest, taxation, depreciation, amortisation and asset impairment (EBITDA) 1 940,5 1 536,4 26,3
Trading profit 1 699,6 1 333,5 27,5
Headline earnings 1 092,2 836,6 30,6
Headline earnings before the BEE transaction** 1 146,5 836,6 37,0
Cash generated from operations 1 898,1 1 804,0 5,2
Shareholders’ equity 2 239,0 1 901,8 17,7
Total assets 10 849,6 9 618,4 12,8
Ordinary share performanceCents/
shareCents/
share %
Headline earnings 540,4 419,3 28,9
Headline earnings before the BEE transaction** 571,9 419,3 36,4
Diluted headline earnings 530,9 408,3 30,0
Dividends 320,0 210,0 52,4
Net asset value 1 113,5 946,0 17,7
Financial statistics % %
Trading margin 4,9 4,5
Return on capital employed 66,1 57,1
Return on shareholders’ equity 52,8 48,9
Debt: equity 18,0 27,3
* See explanatory notes forming part of the seven-year review on pages 38 to 49.** See note 12 in the annual financial statements on page 138 for further details.
The above excludes amounts relating to the discontinued operation. Details can be found in note 3 in the annual financial statements on page 131.
1. Record sales achieved of R34,8 billion, of which 98,7% were cash sales and 6,0% from foreign stores. Comparable store sales growth of 12,5%
Operating See page 38 to 45
2. Profit before tax grew 25,7% to R1,6 billion
3. Pre- and post-interest operating profit margins increased to 4,8% and 4,7% respectively
4. Headline earnings grew by 30,6%, exceeding R1 billion for the first time
5. Return on equity increased from 46,4% to 51,8%
6. The store network was increased to 238 and 994 277 m2, a net space increase of 3,7% over the prior year
5Massmart at a Glance
Divisional See page 56 to 71
Massdiscounters1. Sales of R9,4 billion, 15,1%
real sales growth
2. Ten stores opened in South Africa and three in Africa
3. Total trading space increased by 7,6% to 346 387 m2
Masswarehouse1. Sales of R8,6 billion reflect
8,1% real growth
2. Two stores almost achieving sales of R1 billion each
3. EBITA margin improves through operating leverage
Massbuild1. Sales of R4,9 billion reflect
20,6% real growth
2. Total trading space increased by 2,1% to 294 039 m2
3. Finalised Massbuild management team and structures
Masscash1. Sales of R11,8 billion reflect
real growth of 5,7%
2. Total trading space increased by 1,9% to 246 276 m2
3. Integration of CBW, Jumbo and Shield finalised
Sustainability See page 73 to 98
1. Retained environmental advisor to provide guidance about Group’s environmental practices
2. Conducted local and global retail best practices review to inform environmental priorities
3. Conducted first ever Group customer survey that focused exclusively on environmental consumerism
4. Paid first Thuthukani Empowerment Trust dividend to 14 627 participating staff members
5. Launched programme to procure and distribute wines supplied by eight BEE winemakers
6. Provided support to 1 600 rural women entrepreneurs through Massmart WDB Rural Women’s Enterprise Development Fund
7. Launched Massmart graduate development programme with an initial intake of 22 black graduates
8. Launched Merchandise, Business Analyst and Senior Management development programmes in response to the scarce skills challenge with an initial intake of 83 participants
0,00
10,00
20,00
30,00
40,00
50,00
60,00
70,00
80,00
90,00
100,00
Massmart share price
Retail index
Jul 2
000
Sep
2000
Dec
200
0
Mar
200
1
Jun
2001
Sep
2001
Dec
200
1
Mar
200
2
Jun
2002
Sep
2002
Dec
200
2
Mar
200
3
Jun
2003
Sep
2003
Dec
200
3
Mar
200
4
Jun
2004
Sep
2004
Dec
200
4
Mar
200
5
Jun
2005
Sep
2005
Dec
200
5
Mar
200
6
Jun
2006
Sep
2006
Dec
200
6
Mar
200
7
Jun
2007
Massmart share price versus JSE General Retailers’ index (rebased to R12,95, the share price on date of listing)
Our Highlights
6 MASSMART ANNUAL REPORT 2007
Massmart at a Glance
Looking Forward
Divisions Chains 2007Stores and outlets
2007Trading space
2007Sales and contribution
2007Trading profit before tax
Massmart Group R34 807,6 m 100%
R1 895,4 m 5,4%
238stores
994 277 m2
MassdiscountersGeneral merchandise discounter
R9 424,5 m 27%
R686,3 m7,3%
Game 82stores
317 075 m2
Dion 8stores
29 312 m2
MasswarehouseWarehouse club discounter
R8 640,1 m25%
R525,4 m6,1%
Makro 12warehouse clubs
107 575 m2
MassbuildHome improvement retailer and building materials supplier
R4 948,3 m14%
R379,8 m7,7%
Builders Warehouse 21stores
161 799 m2
Builders Express 15stores
27 213 m2
Builders Trade Depot 28stores
105 027 m2
MasscashFood wholesaler and buying association
R11 794,7 m34%
R303,9 m2,6%
CBW 65stores
219 311 m2
Jumbo 7stores
26 965 m2
Shield 658member outlets
Divisions Chains 2007Stores and outlets
2007Trading space
2007Sales and contribution
2007Trading profit before tax
Massmart Group R34 807,6 m 100%
R1 895,4 m 5,4%
238stores
994 277 m2
MassdiscountersGeneral merchandise discounter
R9 424,5 m 27%
R686,3 m7,3%
Game 82stores
317 075 m2
Dion 8stores
29 312 m2
MasswarehouseWarehouse club discounter
R8 640,1 m25%
R525,4 m6,1%
Makro 12warehouse clubs
107 575 m2
MassbuildHome improvement retailer and building materials supplier
197 500 m2 * Pro forma using 2007 sales mix and target margins
– New Game outlets in RSA and Africa– Develop Dion Wired– Realise Supply Chain efficiencies
8,0% 7,4%Target International benchmark
Wallmart ex. food
21stores
57 000 m2
– New stores in RSA– Leverage customer relationship
management capability
6,0% 5,0%Target International benchmark
Metro AG C&C
3warehouse clubs
36 000 m2
– Complete Builders Trade Depot re-branding– Extract benefit from IT and structural investments– Optimise joint buying and merchandising benefits
9,0% 10,0%Target International benchmark
Home Depot/B&Q
8stores
73 500 m2
8stores
16 000 m2
6stores
9 000 m2
– Complete divisional integration– Refine and grow new hybrid format– Manage for cash and returns
3,0% 3,0%Target International benchmark
Makro South America
4stores
6 000 m2
– –
8 MASSMART ANNUAL REPORT 2007
Massmart at a Glance
Customers
Geography
Merchandise
Formats
Massmart at a Glance
Massmart at a Glance
BSc (Eng) (Hons)
Chief Executive Officer, member of the Risk Committee and Sustainability Committee.
BCom, CTA, CA(SA)
Chief Financial Officer and member of the Risk Committee.
MASSMART ANNUAL REPORT 2007
BCom, MBA (Wits), PPL (Harvard)Chairman of the Board, member of the Audit, Nomination and Remuneration Committee.
BCom, BAcc, MBA, FCMADeputy Chairman of the Board and Lead Independent Director, Chair man of the Nomination and Remuneration Committee, member of the Audit Committee.
Member of the Risk and Sustain ability Committees.
Chairman of the Sustainability Committee.
BA (Hons), MPhil (Oxford)
Massmart at a Glance
Massmart at a Glance
MSc (KZN), MSc (LSE), PhD (University College)
Member of the Sustainability Com mittee.
MA (Oxon), MBA (UCT)Chairman of the Audit and
Risk Com mittees, member of the Nomination and Remuneration Committee.
BCom (Hons), CA(SA), HDip Tax LawMember of the Audit and Risk Committees.
BA (Social Science)Member of the Sustainability Com mittee.
BSc, MBA (UCT), MBA (Columbia)Member of the Sustainability Com mittee.
MASSMART ANNUAL REPORT 2007
BCompt (Hons), CTA, CA(SA)
Managing Director Massdiscounters
BCom, BAcc, CA(SA)
Divisional Chief Executive Mass warehouse
Divisional Chief Executive Massbuild
BCom, CA(SA)
Divisional Chief Executive Masscash
Massmart at a Glance
Massmart at a Glance
BSc
Group Commercial Executive
BA (Hons), HDipEd, MA (University of London)
Group Human Capital Executive
BA, MPhil
Group Corporate Affairs Executive
BCom (Hons), CA(SA)
Managing Director Builders Ware house and Deputy Divisional Chief Executive Massbuild
Chris Seabrooke (outgoing Chairman),Mark Lamberti (outgoing Chief Executive Officer and incoming Chairman),Grant Pattison (incoming Chief Executive Officer) andGuy Hayward (Chief Financial Officer)against the background of the Makro distribution centre in Chloorkop, Johannesburg.
16 MASSMART ANNUAL REPORT 2007
17Reports to Shareholders
Massmart’s performance in the 2007 financial year once again reflected the soundness of its strategies, the excellence of its management, the positioning of its portfolio of wholesale and retail formats and the effectiveness of its channel and shared services forums. This was assisted by favourable economic conditions in South Africa and satisfactory economic conditions in the other African countries in which it has operations (excluding Zimbabwe where economic indicators continue to deteriorate).
Headline earnings per share (HEPS), before charges for the Group’s recent BEE transaction, increased 36,4% and HEPS after the charges for the BEE transaction grew 28,9% to 540,4 cents per share. HEPS has increased by over 30% per annum since listing in 2000. The Group’s high cash conversion ratio has enabled it to establish a dividend policy at a lower level of 1,7 times cover. Dividends and distributions per share have increased by 43,9% p.a. compounded over the period since listing.
While share prices will vary with market conditions, over a period the average growth in share price should reflect the growth in intrinsic value per share. The growth in Massmart’s share price from 930 cents at the 2001 financial year-end to 8 800 cents at the 2007 financial year-end represents an implied compounded annual growth in intrinsic value of 45,4%. This is indeed a tribute to the achievements of management and in particular to the leadership of outgoing CEO, Mr Mark Lamberti.
The CEO’s successionAs advised last year, Mr Grant Pattison was appointed CEO Designate to succeed Mr Mark Lamberti as CEO at 30 June 2007. This was the culmination of an effective and transparent succession planning process that had been under way since 2004.
I am pleased to advise that the succession has been smooth. I believe that Grant has taken over the leadership role very effectively and is well positioned to continue the sound and progressive management of the Group.
Governance and directorate As of 1 July 2007, the Board of Massmart comprises two executive directors, one non-executive director and 11 independent non-executive directors, five of whom are black and three of whom are female.
As mentioned previously, my Board colleagues and I are unanimously of the view that the interests of Massmart’s stakeholders will be best served by the retention of the skills and experience of Mark Lamberti as Chairman of the Board.
The chairmanship will continue to be completely non-executive and subject to all existing policies relating to remuneration and tenure. In keeping with sound governance practice, the chairs of the four Board committees will continue to be held by independent directors and recognising that Mark Lamberti is not considered independent I will function as the Group’s lead independent director and as Non-executive Deputy Chairman.
During the year Dr Lulu Gwagwa and Mr Kuseni Dlamini joined the Board as independent non-executive directors. We are delighted to have them with us and to enjoy the benefit of their contribution.
In December 2006, Mr Fanus Nothnagel resigned as an executive director of the Group. We thank him for his contribution to the Group during the four years he was with us.
I am pleased to report that the Board and all of its committees functioned well during the year. The non-executive directors have an appropriate mix of retail, financial, governance and human capital skills.
Strategy and performance
Letter from the Outgoing Non-executive Chairman
Sound Strategies and Excellent Management
Massmart’s performance in the 2007 financial year once again reflected the soundness of its strategies, the excellence of its management, the positioning of its portfolio of wholesale and retail formats and the effectiveness of its channel and shared services forums.
Chris Seabrooke
Letter from the Outgoing Non-executive Chairman
18 MASSMART ANNUAL REPORT 2007
The Board regards its key functions as:
I refer stakeholders to the detailed Corporate Governance Review contained in this report.
Sustainable developmentThe Group continues to focus on sustainable development and a detailed report is included in these financial statements.
Massmart proactively addresses the inequalities of the past and unequivocally embraces the vision of a united South African society in the future. BEE targets continue to be the sole qualitative element of executive incentive schemes in order to provide further impetus to the Group’s programmes.
ShareholdersI am pleased to welcome all new shareholders who have invested in the Group during the year. The Group now has 8 191 registered shareholders representing a 23,6% increase over the prior year. These include 5 763 individuals.
The Group has no controlling shareholder or shareholder of reference and its shares are widely held in South Africa and abroad. At the reporting date the foreign shareholding in Massmart amounted to 74% by number of shares. The majority of these shareholders are domiciled in the USA, with the balance predominantly in the United Kingdom and Europe.
The number of Massmart’s shares which traded in the past 12 months was 117,3% of issued share capital making Massmart one of the more liquid shares on the JSE.
TributeMr Mark Lamberti retired on 30 June 2007 after 19 years at the helm of the Massmart Group which he was instrumental in founding. The financial performance of the Group over this period (and especially since listing), the strategic balance and growth of the Group’s portfolio of assets and its highly capable management team are all a tribute to Mark’s leadership and vision.
I take this opportunity of expressing sincere and grateful thanks to Mark on behalf of the Board, management and stakeholders of Massmart for all that he has achieved in the dedication of his career to the establishment and growth of this exceptional Group.
I wish Mark and his wonderful wife, Annette, and their family, success, happiness and health in the next chapter of their lives which I am sure will feature many personal and business achievements in South Africa and abroad. I am delighted that we will all continue our association through the board of Massmart.
AppreciationI record my personal appreciation to my colleagues on the Board, to the outgoing CEO and the incoming CEO and the management team for their unfailing support, and also to the Group’s professional advisors and bankers for their services to the Group.
It has been a pleasure and an honour to lead the Board of this exceptional Group over the past four years and I look forward to my new role of Deputy Chairman and lead independent director with commitment and enthusiasm.
Chris Seabrooke
10 October 2007
Letter from the Outgoing Non-executive Chairman
Sound Strategies and Excellent Management
19
It is a rare privilege to be able to conclude one’s nineteen-year tenure as a chief executive by reporting such exceptional results to stakeholders.
Off the base of an excellent 2006 and in the midst of a retail economy that was proving to be an embarrassment to the bears, Massmart commenced the 2007 financial year with clear strategic focus, but group-wide anticipation of change, mainly around the Chief Executive transition and the rationalisation of assets, management and systems in Massbuild and Masscash. As the year unfolded, the general state of the consumer economy provided a solid platform both for the implementation of these initiatives and for the exploitation of the Group’s low cash price competitive positioning.
Despite gradually increasing inflation and a rise in interest rates from 10,5% to 12,5% over the year, household consumption expenditure growth accelerated (particularly in services, food and semi-durables), abetted by the increase in formal employment and real wages. With consumer confidence sustaining the high levels reached in early 2005, and retail industry volume growth averaging 9,1% over the period, retail and wholesale confidence was extremely buoyant, the latter reaching an all-time high in the second quarter of 2007.
Against this backdrop, most retailers reported high rates of comparable store sales growth, although anecdotal evidence suggests that higher interest rates and the introduction of the National Credit Act depressed the sales growth of certain credit retailers in the second quarter of 2007. Aggressive space expansion occurred across all sectors of South African retail as new stores, formats and categories were added. The quality of these investments will be tested in less favourable economic times.
In contrast, low cash prices and rising product inflation, particularly in food, enabled Massmart to sustain high rates of sales growth, while the Group maintained its conservative approach to store development ending 2007 with 238 stores occupying almost one million square metres in 14 southern African countries, trading through four clearly targeted major divisions, each a market leader in its chosen segment.
Massmart’s sales increased 16,2% to almost R35 billion, with pre-tax profits of R1,6 billion and earnings of R1,1 billion, exceeding R1 billion for the first time. All sales growth in the current year was organic, increasing the Group’s lifetime annual organic growth to 34%. The strength of the trading performance was best reflected in the 36,4% growth of headline earnings per share to 571,9 cents per share, before charges for Thuthukani, our black economic empowerment transaction. Headline earn ings per share after charges for Thuthukani grew 28,9% to 540,4 cents, producing a 32% compounded growth of headline earnings per share since listing in July 2000. Return on equity increased from 46,4% to 51,8%.
The year’s performance has perpetuated Massmart’s high rate of com pounded sales and profit growth. Annual sales growth has compounded at 23% since founding in 1992, 22% over 10 years and 19% since listing in 2000. Earnings before interest, tax and asset impairments has compounded annually at 41% since founding, 47% over 10 years and 36% since listing.
Letter from the Outgoing Non-executive ChairmanOutgoing Chief Executive Officer’s Report
Outgoing Chief Executive Officer’s Report
A Year of Exceptional Results
This year’s performance has perpetuated Massmart’s high rate of compounded sales and profit growth. Massmart’s record of
value creation stands as a testament to the efforts of many people, past and present, from the highest to the lowest echelons of the organisation.
Mark Lamberti
Reports to Shareholders
20 MASSMART ANNUAL REPORT 2007
Massmart’s strategic approach and principles, carefully described in this report last year, were manifest throughout the past financial year in wide ranging implementation initiatives. For the most part these centred on cautious organic growth, further rationalisation of the asset base and the simplification of organisational and management structures in each division, with a view to enhancing efficiency while eliminating complexity and cost.
Massdiscounters’ role as southern Africa’s leading general merchandise discounter (trading under the Game and Dion brands) was enhanced with: the opening of 13 new stores (including two trial Dion Wired stores and three new stores in Africa); the conversion of three large-format Dion stores to Game; the discontinuation of clothing; the establishment of a trial regional distribution centre; and several major systems enhancements.
Masswarehouse (trading as Makro) entrenched its leadership in ware house club discounting by: refining the interior design to emphasise new specialist departments; commencing the construction of a new store planned to open in Pretoria East in October; formulating extensive value-adding, information-rich point-of-sale material to enhance customer decision-making; and enhancing supply chain improvements to better cope with the peaks of the festive period.
Massbuild, now South Africa’s leading home improvement retailer, demonstrated the efficacy and extent of its strategic conception with: the refurbishment of five Builders Warehouse stores; the re-branding of De La Rey, Servistar and half of Federated Timbers as Builders Warehouse, Builders Express and Builders Trade Depot respectively; the integration of the Servistar and De La Rey finance, merchandise and marketing functions with those of Builders Warehouse; the closure of the Servistar and De La Rey head offices; and the installation of SAP systems in Servistar and De La Rey.
Masscash, southern Africa’s leading food wholesaling business (trading under the CBW, Jumbo and Shield formats), enhanced its footprint and efficiency with: the acquisition of two stores; the acquisition of three new “hybrid” retail/wholesale outlets; and the integration of Jumbo and Shield under one divisional management team.
The successful implementation of the strategies and plans described above, concludes a period of internal focus and consolidation, once more positioning Massmart to seek and exploit external opportunities for growth and profitability.
A year of enhancing sustainabilityIn past reports I have articulated at length our philosophy towards enhancing the long-term sustainability of the Company and its stakeholders. In brief, we remain contemptuous of gains today which prejudice or mortgage tomorrow.
Extensive detail on Massmart’s progress with matters affecting sustainability is featured elsewhere in this report but the following developments were particularly noteworthy.
Leadership
The succession process that the Board embarked on some years ago was completed on time and according to plan. The organisation and its major stakeholders have adapted easily to the changes and the transfer of power was seamless, efficient and effective. With the benefit of hindsight, there is nothing that we could have done differently or better.
On 1 July 2007 Grant Pattison was appointed Chief Executive of Massmart.
Grant is well equipped to lead your company. His intellectual agility is obvious, inter alia, in his impeccable academic record, he has thoroughly interpreted and imbibed his extensive functional and line experience, his judgement is evident in the consistently positive impact of his strategic, structural and operating decisions on the Company, and his leadership has earned him the unqualified followership of his colleagues. He enjoys the confidence of the Board and the Company and we look forward to Massmart’s continued progress under his stewardship.
On the same date I became Non-executive Chairman of the Board and Chris Seabrooke, Massmart’s lead independent director, was appointed Deputy Chairman. Concurrently, Grant reconstituted the Executive Committee, which now comprises 10 members.
The growth and rationalisation of the Group saw numerous changes to head office and divisional organisation and management structures, to further facilitate succession and align the best available talent with the leadership challenges of Massmart and its large focused divisions.
Transformation
Massmart is committed to playing a constructive part in the transformation of South African society, specifically in regard to every aspect of Broad-based Black Economic Empowerment and the recent scorecard as formulated by the Department of Trade and Industry.
Insofar as ownership is concerned, the implementation of Thuthukani, Massmart’s Black Economic Empowerment transaction, has resulted in 7,1% of the Company being owned by 11 858 previously disadvantaged employees, who enjoy full voting rights and received their first dividend of 49,25 cents per share (averaging R593 per participant) in February.
Notwithstanding the skills shortage, our progress with employment equity has been slower than we would have liked, particularly at the most senior executive levels. At the time of writing nine (five of whom are women) of the 50 executive directors of the Company and its major subsidiaries are from previously disadvantaged groups.
Investor relations
Our dedication to facilitating accurate stakeholder understanding of the Company through extensive qualitative and quantitative disclosure, resulted in Massmart’s 2006 Annual Report being ranked third of the largest 100 companies, based on market capitalisation, on the JSE, by Ernst & Young.
Outgoing Chief Executive Officer’s Report
A Year of Exceptional Results
A year of excellent strategic implementation
21
Environment
Consistent with the growing societal awareness of mankind’s deleterious impact on the environment, we have initiated a practical and realistic programme of addressing those aspects of our business that could affect our environment. Energy consumption, packaging, food sourcing and water consumption are among these.
In conclusionThis is the nineteenth annual report I have written since being appointed as the Managing Director of Makro on 1 August 1988. I am pleased that the performance captured in this final report has no precedent.
Looking back, the reports have evolved in concert with the size and sophistication of the Group, the quality and competence of my colleagues, and my own evolution as a manager and leader. No matter how difficult or challenging the times they reported on, each of the reports reflected progress, optimism and a conviction that Makro, becoming Massmart, would be an extraordinary company. Today it is, and the record of value creation through a high rate of compounded sales and profit growth stands as a testament to the efforts of many people, past and present, from the highest to the lowest echelons of the organisation. Their good decisions dwarfed the bad ones.
For my own part, I am filled with gratitude for the leadership opportunity and the privilege of having been closely associated with the men and women of Massmart, particularly those who served as Board and Executive Committee members over the years. I learnt from all of them and am thankful that my association with them will continue, albeit more distantly.
It was with a deep sense of accomplishment that I vacated my office for Grant on 30 June 2007.
Mark J Lamberti
10 October 2007
Reports to Shareholders Outgoing Chief Executive Officer’s Report
22
CEO succession
MASSMART ANNUAL REPORT 2007
On 1 July 2007 I assumed executive responsibility for Massmart Holdings Limited.
This was the culmination of a three-year process during which leadership momentum was maintained and uncertainty among stakeholders minimised. From a personal perspective, my assumption of increasing responsibility over the past year ensured my preparedness for the role and my thanks are due to Mark Lamberti, Chris Seabrooke and the Board, the Executive Committee members, and other senior leaders of the business for their support and confidence.
Together we have handled the subtle complexities and obvious challenge that a change of leadership demands.
A healthy groupThe annual strategic review and budget processes reveal a group that is in good health, although fully committed to continuous improvement. I feel confident that:
Strategy is rigid enough to ensure market differentiation, manage ment focus and shareholder understanding, but flexible enough to allow an entrepreneurial response to change and opportunities;
Structure is formal enough to ensure oversight and control, but informal enough to allow rapid communication, candid rapport and critique;
Leadership cadre has the competence, confidence and intellect to interpret their individual and collective experiences, and integrate the learning into their philosophies, principles and judgment;
Portfolio of four focused divisions is appropriate, each a low-price leader in its chosen sector, differentiated by market positioning, merchandise mix, business model and cash characteristics, but bound by a common dedication to high volume, low gross margin, low-cost distribution, and the pursuit of additional value through collaboration;
Reputation is one of transparent excellence; and
Group is poised for sustained superior performance.
The leadership challenge is therefore to avoid overconfidence, complacency and undue internal focus, and to remain vigilant to competitive threats and opportunities. Change is a constant and where there is no change – we must create it.
Refining the strategy and portfolioOur strategic model is focused on answering the following questions:
“Who are we?” with our definition of purpose or Mission.
“What do we want to achieve?” with our definition of victory or Vision.
“Where are we now?” with a review of the current reality summarised in this annual report.
“How do we plan to get there?” with our three-year strategic plan, communicated as Vision 2010.
The Group is poised for sustained superior growth. The annual strategic
review and budget processes reveal a group that is in good health.
Incoming Chief Executive Officer’s Report
Poised for Sustained Superior Growth
Grant Pattison
23
This year’s annual review concluded that while our strategic plans need updating and revision, our strategies at Group and Divisional levels are sound: we are a sub-Saharan African business; our business model relies on low expenses and cash-generative sales to underpin price leadership; we operate large stores; we are focused on general merchandise, food and liquor; we structure ourselves so that each operating division is both differentiated and comple mentary with its own management team focused on fulfilling customer needs; supported by value-adding service divisions that lead, direct control, service and facilitate only when necessary; and we are highly incentivised on growth.
In recent years, we have focused on simplifying the Group, con solidating acquisitions and smaller operating entities and brands under four divisions and management teams. By July 2007 this process was almost complete, allowing us to focus externally on the com petitive environment and search for new sources of growth.
Vision 2010We believe insight is not a crystal-ball exercise, trying to predict the Group’s response to a single ver sion of an envisaged future. Rather it is an informed discussion, ex ploring possible and likely scenarios, and positioning the competencies and assets of the Group to best respond to an unpredictable future.
We also believe that strategic thinking and planning must con sider trade-offs. Taking one action often means sacrificing another, making prioritisation and effective resource allocation imperative.
Perhaps most importantly we be lieve strategy is about com mu nication: to our internal stakeholders so that operating
decisions can be made in context; to external stake holders, including share holders, to enable them to articulate their interests; and perhaps even to our competitors so that they are clear about where we intend to apply our capabilities and competencies.
Accordingly, Vision 2010 represents the Group’s strategic agenda for the next three years.
Leadership excellence and trans for mation: In today’s world – as the battle for talent intensifies and cur rent and potential leaders become more demanding about what sort of life they want to lead and what sort of people they want to become – to develop and attract excellent leaders, we need to get better.
In our human resource practices, recruitment, remuneration, job de sign, performance management, education, training and career manage ment will be re-examined from the bottom up – ensuring modern and world-class practice and systems.
In human capital development, we have established a virtual university, which collaborates with leading institutions around the world in designing executive and retail leadership programmes. We will build on this foundation to develop and retain the best executives and leaders.
In our transformation practices, we will continue to strive to become a truly South African business in all respects – one that respects the individual; values collaboration, diversity and performance; and ensures equal opportunity for those who want to deliver.
Comparable growth: Generating real comparable store growth requires both competitive trading and the management of our store portfolio so that stores are opened
and closed as customers move, with the net increase in space adding value. We will continue to manage, develop and improve this measure closely, using the tools at our disposal.
Organic growth: Understanding that property is a long-term invest ment, we will continue to monitor expert opinion on ten-year market and demographic trends at local level to make responsible property decisions and avoid being led solely by opportunistic property developers.
Greenfield and acquisitive growth: In addition to growing the core business, we will look for opportunities to leverage our mass-merchandising skills in new markets and formats and will, within the disciplines of our strategy, either develop or acquire new businesses.
Supply chain: To achieve long-term volume growth in comparable stores, and meet the physical challenge of managing high in-stock levels, of numerous stock keeping units, in very high-volume stores, we will invest in people, processes and systems from point of sale backwards into our supply chain.
Private label: The best retailers in the world leverage their abilities to create and build their own brands alongside leading national brands in a way that builds the category and profitability. This will require us to invest in new skills, partnerships and systems.
Financial services: While we have no intention of competing in this market, we believe there is an opportunity to create third-party relationships that leverage our customer base, improve the level of competition in this market and reduce the switching cost of credit.
Sustainability: We will continue to focus on developing practical plans in the areas of black economic
empowerment, environment and corporate social investment. We have developed internal measurement systems and introduced an incentive to improve our empowerment scores; we are developing plans to improve our environmental per formance in energy and water consumption, packaging, ethical sourcing and waste disposal; we are focusing available corporate social investment funds on a group school feeding scheme, while maintaining our support of other programmes in the education arena.
Looking forwardFor the 14 weeks to 30 September 2007, total Group sales grew 12,5% with comparable store sales growth of 10,7%. While the fundamental economic environment is healthy, inflationary pressures remain. Combined, high real wage increases, rising food inflation, high oil prices and widespread capacity constraints run the risk of introducing secondary inflation. This could herald a sustained period of CPIX outside of the Reserve Bank’s target range with resultant higher interest rates.
Notwithstanding the possibility of tighter monetary policy, the outlook for growth looks good. Over and above the opportunities the economy provides, we are doing things that will improve Massmart’s competitiveness that should produce relatively superior growth of shareholder value.
Grant Pattison
10 October 2007
Reports to Shareholders Incoming Chief Executive Officer’s Report
Massmart Young Achiever of the YearMichela Adams
Massmart Spirit of Entrepreneurship AwardRichard Fuller
FROM LEFT
Massmart Retailer of the YearWillie de Villiers
Massmart Amagugu AwardJohn Hawksley
Massmart Socially Responsible Division of the YearMasscash – represented byJane Bruyns and Garth MaClou
Masscash, the winning division in 2007, was recognised for exceptional progress in the areas of Broad-based Black Economic Empowerment and Corporate Social Investment. This included achieving the highest BBBEE score in the Group of 43,6% and also investing the highest percentage of profit after tax in the Group on focused Corporate Social Investment projects.
Chief Executive Officer’s AwardPhineas Manamela
The Chief Executive Officer’s Citation was awarded to Phineas Manamela, a store manager, for his remarkable presence of mind and professional management of the events immediately following an accident in the Builders Warehouse Edenvale store. Phineas’s response ensured that the injured parties received immediate access to the best available private medical care, thereby reducing their trauma whilst also protecting the reputation of Builders Warehouse.
24MASSMART ANNUAL REPORT 2007
Incoming Chief Executive Officer’s Report
Massmart Annual Citation Awards
25Incoming Chief Executive Officer’s Report
Reports to Shareholders
FROM LEFT
Performance Excellence AwardsAndré du PreezMasswarehouse,
Johan van Wyk Massdiscounters, Janet Pieterse Massbuild, Brian Pillay Masscash,
Brenda Shelly Massmart Holdings Limited
FROM LEFT
Massmart Division of the YearMasswarehouse – represented byPieter Schoeman, Thuli Mpshe, Gert Lourens, Kevin Vyvyan-Day, Derick Kalan, Doug Jones, Garry Hendry, Chris Nezar and Bruce Cayzer
Masswarehouse, the winning division in 2007, achieved a 76% increase in annual Economic Value Added for the financial year ending June 2007.
MASSMART ANNUAL REPORT 200726
goes to the individual who is seen to exert significant influence over retail practice in the Group or industry, and who committed retailers in the Group would wish to emulate. Among the very demanding criteria for this award are:
Conduct;
competitive environment served by the division;
retail decisions in the best commercial interests of the Group;
and advice; and
providing retail thought leadership.
THE MASSMART RETAILER OF THE YEAR AWARD
Massmart annually awards citations for excellence in eight award categories:
is made to an “up and coming” individual under 30 years of age who has demonstrated exceptional retail expertise that is disproportionate to his/her level of experience. Award criteria include:
Conduct;
with the Group;
returns in area of direct responsibility, typically achieving
interests of the Group.
THE MASSMART YOUNG ACHIEVER AWARD
goes to the individual who demonstrates extraordinary commercial and business acumen, in achieving results beyond what would be reasonably expected with the resources that are available to him/her. Award criteria include:
Conduct;
vision for the future that is creative, clear, insightful and inspiring;
opportunities that our competitors miss);
balancing risk and returns in commercial decision-making; and
THE MASSMART SPIRIT OF ENTREPRENEURSHIP AWARD
are made to individuals who consistently achieve exceptional levels of performance in all areas of job performance. Each division and Massmart Holdings is entitled to make one award in this category which focuses primarily upon individual impact.
MASSMART PERFORMANCE EXCELLENCE AWARDS
is awarded, at the discretion of the Massmart CEO, to an individual who has demonstrated exceptional performance in any of the areas that comprise retail endeavour.
THE MASSMART CHIEF EXECUTIVE OFFICER’S CITATION
goes to the individual who best represents Massmart’s core values of dignity and respect, integrity, accountability, stewardship, trust and diversity. Award criteria include:
Conduct;
stakeholders with dignity and respect regardless of the situation in which they are encountered;
consistently honest and fair and never manipulative of the rights of others; and
and the organisation are honest, fair and reliable in its dealings with all stakeholders and associates.
THE MASSMART AMAGUGU AWARD
goes annually to the division that achieves most in the areas of Broad-based Black Economic Empowerment, Corporate Social Investment, Environmental Stewardship, Employee Relations and Ethical Conduct.
THE MASSMART SOCIALLY RESPONSIBLE DIVISION OF THE YEAR AWARD
goes annually to the division that achieves the greatest improvement in Economic Value Added performance in a given financial year as calculated by Massmart Finance. This is calculated as the percentage improvement, rather than as an absolute figure, using the division’s audited financial results for the year.
THE MASSMART DIVISION OF THE YEAR AWARD
Incoming Chief Executive Officer’s Report
Massmart Annual Citation Criteria
26 MASSMART ANNUAL REPORT 2007
Chief Financial Officer’s Report
A Group in Good Health
We continually strive to improve the quality of Massmart’s external financial reporting, as well as trying to better the technical disclosure in our annual report – but trying always to keep the details and explanations clear and simple even as the accounting standards become increasingly complex and technical. Earlier this year we were thrilled when the Massmart 2006 annual report came third overall and was awarded an Excellent rating in the Ernst & Young South African annual report survey.
Financial targetsThe Group has clearly stated medium-term financial targets or measures that we believe represent optimal performance levels within the income statement or balance sheet, or the combination of both. Certain of these targets are “stretch targets” that will only be achieved in two to three years and with exceptional performance.
These target ratios are shown below:
MEDIUM-TERM TARGET RATIOS DEFINITION
ROS > 5,5% Return on sales (ROS) is the ratio of operating profit before tax (excluding asset impairments) to sales
ROE > 35% Return on equity (ROE) is the ratio of headline earnings to average ordinary shareholders’ equity (not adjusting for any intangibles previously written off)
Gearing < 30% Gearing is the ratio of average long-term interest-bearing debt to average ordinary shareholders’ equity
Dividend cover of x1,7 Dividend cover represents the ratio of headline earnings to dividends declared and paid to ordinary shareholders
Return on sales (ROS)
This ratio combines all the key elements of the income statement, being sales, gross margin, supplier income, expenses (including depreciation and amortisation), and net finance charges. Every important financial aspect of the retail or wholesale business model is captured in this ratio. The largest asset investment at the level of the division is in working capital (being inventory and trade receivables), with the concomitant liability (in trade payables), and the relative success of management’s impact on net working capital will therefore be reflected in changed net finance charges. The ROS target by division can be found in the “Looking Forward” section on page 6 and the Divisional Reviews on pages 56 to 71. In the “Looking Forward” section we refer to trading ROS. The difference between trading profit before tax and EBITA is the corporate net interest of R185,9 million (2006: R111,4 million) and the IFRS 2 charge of R54,3 million (2006: zero) relating to the BEE transaction.
Progress to date – Massmart’s current ROS is 4,9% (prior year 4,5%). Massmart has grown its ROS every year since 2000 and we believe that the ROS target of 5,5% remains achievable in the medium term.
Return on sales
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
Target Actual
2007 2006 2005 20041 20032
We continually strive to improve the quality of Massmart’s external financial reporting, as well as trying to better the technical disclosure in our annual report… …and so earlier this
year we were thrilled when the Massmart 2006 annual report came third overall in the Ernst & Young South African annual report survey.
Return on equityMassmart is committed to delivering superior returns to shareholders. The Group’s medium-term targets are to exceed a 35% return on average ordinary shareholders’ equity.
Progress to date – Massmart’s return on average shareholders’ equity was 52,8% (2006: 48,9%).
Return on equity
0,0%
10,0%
20,0%
30,0%
40,0%
50,0%
60,0%
Target Actual
2007 2006 2005 20041 20032
The Divisions are responsible for delivering operational returns, being the returns to net working capital and non-current assets excluding goodwill and trademarks. Massmart, through the Board and Executive Committee, is responsible for delivering investment returns that will also include the book value of intangibles (raised on acquisitions or otherwise), as well as setting the Group’s gearing levels that will influence returns to shareholders and the overall risk profile.
As part of this, the Divisions are recapitalised annually by Massmart with non-interest-bearing shareholders’ funds that are equivalent to the book value of long-term assets in each Division. Each business therefore must fund its net working capital position through cash or interest-bearing debt, depending upon the characteristics of that business model. This process enables divisional returns to be evaluated and compared on a consistent basis across the Group, and from one year to the next. This policy has not yet been rigidly applied in CBW due to minority shareholders in that business.
Adjusting for goodwill and trademarks previously written off, i.e. reversing the accounting write-offs allowed previously, the Group’s return on average shareholders’ equity exceeds 25%. Depending upon the purchase price, retail and wholesale acquisitions tend to generate significant accounting goodwill due to the relatively low net asset values of those business models.
Gearing
Given the Group’s high cash generation and its preference for leasing rather than owning stores, it is difficult to permanently and meaningfully gear (i.e. trade in a net interest-bearing debt position) the Group over the long term. It may be possible to gear the Group through a strategy of owning rather than leasing all stores, but this would potentially reduce asset and equity returns. Massmart prefers some level of gearing, up to a maximum of 30%, in order to leverage the return on shareholders’ equity but without introducing excessive financial risk to the Group. However, depending upon the cash characteristics of a target company, this gearing ratio may be increased but probably to no higher than 50%. In addition, our store lease obligations represent a form of permanent gearing.
As the period-end balance sheet tends to be unrepresentative of the Group’s average net cash or debt position during the year (showing higher cash balances as monthly creditors are paid after month-end), the Group’s gearing levels can be calculated using the net interest paid (or received) for the period as a proxy. Our preference, however, is to use the Group’s disclosed medium-term (classified as long term in the annual financial statements) and long-term interest-bearing debt as these amounts represent the Group’s formal debt commitments over the longer term.
Progress to date – the Group averaged gearing of 18,0% (2006: 27,3%) for the financial year.
Gearing
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%
35,0%
Target Actual
2007 2006 2005 20041 20032
Dividend cover
Massmart’s current dividend policy is to pay total annual cash distributions representing a x1,7 dividend cover ratio, unless circumstances dictate otherwise. During the year, this was reduced from x2,0. This ratio is not a target – because it is already being achieved – but is disclosed to give clarity on future dividend levels. The Board believes that this lower dividend cover ratio is appropriate given the Group’s current and forecast cash generation, planned capital expenditure and gearing levels.
The Board has no desire to build up a cash reserve and so will, where practical, reduce dividend covers and/or may execute a share buyback – depending upon the actual share price and our view of its valuation – in order to return surplus cash to shareholders.
HISTORICAL DIVIDEND COVER RATIOS:
2007 2006 2005 20041 20032
Dividend cover x1,7 x2,0 x2,0 x2,0 x2,5
AcquisitionsThere were no major acquisitions concluded during the financial year. The remaining 49% minority shareholding in De La Rey (re-branded to Builders Warehouse) was, however, acquired with effect from 1 July 2006 and a portion of the 2005 Servistar (re-branded to Builders Express) purchase consideration was deferred to August 2007 and so has recently been settled in cash.
28 MASSMART ANNUAL REPORT 2007
Chief Financial Officer’s Report
A Group in Good Health
There were no significant changes in accounting polices during the year.
The results for Makro Zimbabwe were, however, deconsolidated as Massmart can no longer be said to be controlling the day-to-day management of that business following legislative changes in that country. Control is defined as “the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities”. The financial effect was minimal. For more details on Makro Zimbabwe, see note 8 in the annual financial statements on page 135.
Black Economic Empowerment staff equity issueMassmart’s Black Economic Empowerment (BEE) staff equity issue that was formally approved by Massmart shareholders in July 2006 became effective from October 2006 and so was included for the first time in these financial results.
Full details on this BEE staff equity issue were published in the June 2006 circular issued to shareholders, but for completeness the main financial points are repeated below:
pre-dilution, or 9,1% post-dilution was issued.
and Scarce Skills, and separate trusts were formed for both.
price of R49,98, the actual legal instruments are two classes of preference shares. The reason preference shares were used was to give the participants voting rights and, in one case, a right to dividends as explained below.
the General Staff Trust, called the Thuthukani Trust, for the benefit of all 14 500 permanent employees in the Group at that time. These shares have voting rights equal to those of ordinary shares and have a right to dividends on the following basis: 25% of the ordinary dividend in year 1 (being 2007), 50% of the ordinary dividend in year 2 (2008), 75% of the ordinary dividend in year 3 (2009), and
preference shares are converted into Massmart ordinary shares, for the direct use or benefit of each beneficiary, in three equal annual tranches commencing on 1 October 2010.
Scarce Skills Trust for the benefit of current and future black managers in the Group. These shares also have equal voting rights but do not attract dividends. These shares convert into Massmart ordinary shares, for the direct use or benefit of each beneficiary, in four equal annual tranches commencing from the end of the second year of the issue date.
The IFRS 2 Share-based Payment charge arising from this BEE staff issue is R372,8 million. In terms of IFRS 2, this amount will be amortised over the life of the scheme, being six years, commencing from 1 October 2006. The current year’s charge was R54,3 million (for a nine-month period) and the figure for 2008 is anticipated to be R76,2 million. South African tax legislation currently does not allow any tax deduction associated with this non-cash charge.
Using the estimated total IFRS 2 charge of R372,8 million suggests that the total likely dilution to ordinary shareholders of this transaction is 3,3%. This amount does not take into account forfeitures by employees which will reduce the dilution effect. At year-end, the BEE transaction was not yet dilutive, primarily due to the adjusted strike price, including the IFRS 2 charge, being higher than the average share price over the year.
Accounting convention requires Massmart to deduct the appropriately weighted portion of the Thuthukani dividend from headline earnings when calculating headline earnings per share (HEPS). Given that headline earnings has already been reduced by the associated IFRS 2 charge, this amounts to a degree of double-counting for the “cost” of the dividend that is unavoidable under current accounting conventions. Given the stepped increases in the Thuthukani dividend outlined above, growth in HEPS will therefore lag growth in headline earnings. For more details on the calculation of headline earnings and HEPS, see note 12 in the annual financial statements on page 138.
A new circular has been issued clarifying the calculation of headline earnings and HEPS (Circular 8/2007 Headline Earnings). Details on the effect of this circular are contained in note 2 in the annual financial statements on page 128.
Income statementThis review covers the consolidated income statement shown on page 119, and the related notes on the ensuing pages.
Detailed commentary on divisional-specific issues is provided in the Divisional Reviews on page 56 to 71.
Sales
Our General Merchandise prices for the financial year, using the Group’s sales mix, averaged inflation of 0,5%. Food inflation increased particularly in commodities where price inflation was as high as 20% in certain categories. Combined product inflation for the Group’s Food and Liquor was 8,1%, while Home Improvement reported inflation of 6,5%. The Group’s average product inflation rate for the 2007 financial year was 4,9%.
Although there is some pressure on product prices from South African core inflation rising, this is expected to abate slightly from the first quarter of calendar 2008 due to the base effect. We are expecting average Group inflation to be 6% for the 2008 financial year.
Total sales of R34 807,6 million increased by 16,2% over 2006, both years representing 52 weeks’ trading. The Group’s existing businesses and stores reported 12,5% sales growth, and non-comparable stores added 3,7%.
During the financial year, the Group opened 15 new stores, closed eight stores, deconsolidated two and acquired five stores, thereby increasing its trading area by an unweighted 3,7% to 994 277 m² (unweighted meaning that the new space has not been proportionately adjusted if only open for part of the financial year).
29Chief Financial Officer’s ReportReports to Shareholders
Accounting policies
The new stores were:
three in Western Cape, and one in Northern Cape, Eastern Cape, Blantyre (Malawi), Dar es Salaam (Tanzania), and Accra (Ghana);
opened, one in Pretoria and one in northern Johannesburg;
region, in the central part of South Africa, and two stores in the Johannesburg region; and
Cape Town and Builders Express opened a store in Jeffreys Bay, Eastern Cape.
The stores closed were Game Bruma (Gauteng) and Game La Lucia (KwaZulu-Natal); Dion Edenvale (Gauteng); CBW in Gauteng and Eastern Cape; and Federated Timbers in Northern Cape and two in Western Cape. Over the next few years there will be some store closures as we refresh the store portfolio, closing underperforming or poorly sited stores when the leases have expired.
Gross profit
Gross profit of R6 371,9 million reflects an 18,3% gross margin that is greater than the prior year’s 17,7%. The reasons for this improvement were twofold: the first, and most significant, being the portfolio effect from the greater contribution by the fastest growing and higher margin Massbuild businesses, and the second being slightly higher gross margins in CBW due to Food inflation in that business.
The Group’s gross margin will always be dependent upon the sales mix across the Divisions and the required trading aggression occasioned by competitor activity, but is expected to improve marginally due to the increased contribution from the faster growing Massbuild division. Gross profit includes rebates and other forms of income earned from suppliers as well as ongoing revenue from sales of cellular products and airtime.
Other income
Other income of R157,1 million (2006: R117,0 million) comprises royalties and franchise fees from in-store third parties, property rentals, investment income (excluding interest), finance charges from Massdiscounters’ consumer credit book, and sundry management and administration fees. These are shown in more detail in note 5 in the annual financial statements on page 133.
Expenses
Total expenses of R4 855,7 million (2006: R4 102,5 million) represent 14,0% of sales, slightly higher than the prior year’s 13,7% of sales. We expected this ratio to increase slightly due to the increased proportion of the higher-cost Massbuild businesses, but the Group was also impacted by several larger items described in more detail below. With 15 new stores opened during the financial year, some of these stores would not yet be trading at optimal levels and so will temporarily distort expense and sales ratios. As trading levels accelerate, these stores will become more efficient and the ratios will improve towards Group norms. Costs and cost-productivity remain areas of continual focus across the Group.
Due to ongoing store refurbishments and new stores, the depreciation and amortisation charge of R240,9 million (2006: R202,9 million) increased ahead of sales growth, and will continue to increase as it reflects the higher capital costs of this expansion. Game and Builders Warehouse have been refurbishing their stores, resulting in higher depreciation charges. Due to these refurbishments, the annualisation of depreciation arising from the capital expenditure on new stores in 2007, and that arising from the new store expenditure scheduled for 2008, the Group’s depreciation charge for 2008 will grow by more than the rate of sales growth.
Employment costs of R2 449,8 million (2006: R2 079,0 million) are 17,8% higher than the prior year. Included in these figures are the IFRS 2 Share-based Payment charges of R73,3 million (2006: R17,2 million) which are significantly higher due to the Thuthukani BEE Staff Scheme. Including this IFRS 2 charge, at 7,0% of sales, employment costs are higher than last year’s equivalent figure of 6,9% and remain the Group’s single largest operating cost. The existing businesses employed 9% more employees mostly for new stores and had annual salary and wage increases of 7% to 8%. Makro used a higher number of employees due to the increase in inventory volumes through its stores.
Due to the significant degree of incentivised remuneration for the Group’s staff, management and executives, total employment costs will generally increase at a rate greater than inflation when exceptional performance is achieved, as was the case in 2007. For the forthcoming financial year the Group’s salary increases are between 5% – 7% while the wage increases, that have all been finalised, are between 7% – 8%.
Occupancy costs, the Group’s second-biggest operating cost, increased 14,2% to R846,0 million (prior year R740,5 million). As a percentage of sales, however, this figure at 2,43% is lower than the prior year equivalent of 2,47%. Total trading space increased by 3,7%. The increase in trading space does not include the increased space from new distribution centres. Adjusting for the lease-smoothing in both years shows that annual cash occupancy costs increased by 17,6%. There are several reasons for this increase. In some cases, the rentals on new stores in Massdiscounters and Massbuild are higher than those for the older stores – this situation is exacerbated by lease-smoothing. Another factor is the annualisation of rental charges from stores opened in the prior year.
The “lease-smoothing” accounting policy applicable to operating leases has the effect of keeping comparable-store lease charges broadly equal from one year to the next, and so any increase between years would therefore be from new stores. Another effect of this lease-smoothing accounting policy is that annual lease escalations will no longer increase the Group’s lease charge.
Other significant items
Included in operating profit is a net unrealised loss on foreign exchange transactions and translations of R41,4 million (prior year net unrealised gain of R33,3 million). Of this, R18,1 million relates to realised and unrealised exchange differences from Massdiscounters’ African stores (prior year: gain of R17,6 million) and the balance of the net translation loss arose primarily from IAS 39 Financial Instruments: Recognition and Measurement adjustments relating to forward-exchange contracts held at Massmart.
In addition, the decision to close the original Dion format resulted in a total asset impairment pre-tax charge of R14,1 million.
30 MASSMART ANNUAL REPORT 2007
Chief Financial Officer’s Report
A Group in Good Health
Finally, included in “Other Operating Costs” in the prior year is a net monetary gain of R22,2 million arising from the hyperinflation accounting of the Makro Zimbabwe operation. This was deconsolidated in 2007 and so there is no equivalent figure.
Operating profit
Group operating profit of R1 673,3 million (2006: R1 328,1 million) is 26,0% ahead of prior year and has improved from 4,4% to 4,8% of sales. This improvement arose from different actions across the four Divisions but can broadly be summarised as: sales growth exceeding cost growth; good cost control in Massdiscounters, Makro and CBW; slightly increased gross margins in CBW; and a greater contribution from the higher-margin Massbuild. Given the cost increases highlighted above and the expected lower level of sales volumes, cost control and efficiency remain key imperatives for the Group.
Net finance charges
Net interest paid of R44,4 million (2006: R32,2 million) increased due only to the inclusion of a once-off R18,1 million interest charge. This payment related to a settlement reached recently between a major financial institution and the South African Revenue Service (SARS). In 2001, the Group entered into a five-year structured finance arrangement, effectively a medium-term loan, with that financial institution. Interest payable on the loan was partly linked to changes in the tax profile of the financial institution. Massmart bore the risk of any adverse tax consequences relating to the structured finance arrangement. In 2006, this arrangement was challenged by SARS which disallowed certain deductions claimed by the financial institution and resulted in the R18,1 million interest charge which is in full and final settlement of any tax consequences flowing from the arrangement. In terms of the financial institution’s settlement with SARS, the terms of which are confidential, this payment is not tax-deductible.
Taking into account anticipated capital expenditure and excluding any unforeseen developments or new initiatives, the Group will remain net geared for two years. Using long-term interest-bearing debt, the Group was 18,0% geared (2006: 27,3%).
Taxation
The total tax charge of R554,8 million represents a tax rate of 34,1% compared to the prior year charge of R444,6 million at 34,3%. Two factors caused the current year rate to be higher than the standard corporate rate, the first was the higher charge from the Secondary Tax on Companies (STC), arising from the higher dividends paid, which increased from 3,2% to 3,6% within the effective tax rate. The second was the effect of two significant non-deductible expenses, being the IFRS 2 charge of R73,3 million and the R18,1 million interest charge discussed above.
Excluding the impact of STC and IFRS 2, Massmart expects its future effective tax rate to be at or near the South African corporate rate of 29%, although higher tax rates in certain foreign jurisdictions may marginally increase this.
Massmart is not concerned about any specific element of historical tax risk in the Group, but there is the uncertainty that material adjust ments arising from potentially unfavourable tax assessments from the past tax returns, some of which have not yet been assessed by SARS, could impact future after-tax earnings. In addition, SARS can re-open any tax assessment within three years of issuing such assessment.
Headline earnings
Headline earnings of R1 092,2 million are 30,6% greater than the prior year. Adjusting for the first-time inclusion of the IFRS 2 charge arising from the Thuthukani BEE scheme increases revised headline earnings to R1 146,5 million with a growth of 37,0%.
Slightly more shares in issue and the effect of the Thuthukani dividend of 4,4 cents per share, explained above and in note 12 in the annual financial statements on page 138, marginally reduced the HEPS increase to 28,9%. After adjusting for the potential future conversion of 3,58 million share options, the diluted headline EPS of 530,9 cents is lower than actual HEPS of 540,4 cents. It should be noted that
shares issued under the Thuthukani BEE scheme are not yet included in the diluted headline earnings calculation. As noted earlier, however, the total dilution to ordinary shareholders expected from this BEE transaction is 3,3%.
June 2008 financial year
It should be noted that this coming financial year will be a 53-week trading period, with the additional week occurring in the second half of the financial year. The extra week’s gross margin disproportionately exceeds the incremental increase in operating expenses for that week and so Group profits will be higher. The estimated effect of the 53rd week on sales, sales growth and profit will be properly disclosed at that time.
Balance sheetThis review covers the consolidated balance sheet shown on page 120 and the related notes on the ensuing pages.
Non-current assets
Property, plant and equipment of R1 123,8 million (2006: R944,3 million) and goodwill of R1 346,8 million (2006: R1 196,4 million) together represent the greatest proportion of the Group’s non-current assets.
Over the past few years Massmart has been refurbishing and building new stores and during this year expenditure of R391,3 million (2006: R314,3 million) was spent on property, plant and equipment. Of this, R123,8 million (2006: R173,1 million) was replacement capital expenditure, while the balance of R267,5 million (2006: R141,2 million) was invested in new capital assets, including new stores.
A detailed reconciliation of the movements in property, plant and equipment is shown in note 13 on pages 139 and 140.
Goodwill increased by R150,4 million, primarily reflecting the goodwill arising from the July 2006 acquisition of the De La Rey 49% minority as well as minor goodwill from the acquisition of CBW store managers’ minority interests. Under IFRS, all goodwill must be tested annually against the value of the business units with which it is associated and, if overstated, that goodwill must be impaired (see note 14 on page 141 for more details). Jumbo Cash & Carry (Pty) Limited recognised a goodwill impairment of R12,2 million arising from a minor acquisition in 2001. Details on goodwill can be found in note 14 in the annual financial statements on page 141.The figure of R130,2 million (2006: R102,3 million) in “Other
31Chief Financial Officer’s ReportReports to Shareholders
intangibles” (note 15 on page 142) represents computer software that IFRS requires to be disclosed in this category. The “depreciation” charge arising from this asset category is classified as amortisation.
Capital expenditure for 2008 is budgeted at R595 million, which is higher than previous annual expenditure levels due mainly to the inclusion of the new Makro store in the budget figure. As can be seen in the graph below, despite the significant growth of the Group and the acceleration in new stores and refurbishments, capital expenditure has generally represented 1,0% – 1,6% of Group sales.
Cap
ital
exp
endi
ture
(R
m’s
)
Cap
ital
exp
endi
ture
as
a %
of
sale
s
Capital expenditure
0
100
200
300
400
500
600
Capex as % of sales Total capex
0,0
0,5
1,0
1,5
2,0
2,5
3,0
2007 2006 2005 20041 20032
Investments and other financial assets
Investments of R241,2 million (2006: R190,9 million) comprise mainly a R168,2 million investment in a treasury and international costing module, revalued to reflect foreign-denominated assets within that module (note 16 on page 143).
Other financial assets include loans of R173,4 million (2006: R190,7 million) that comprise primarily amounts attracting zero percent interest totalling R127,1 million (2006: R144,5 million) owed by participants in the Massmart employee share purchase trust. This loan amount reduces as employees sell their shares and repay the related loans and increases where executives elect to own Massmart shares rather than options issued by the trust. The finance lease deposit of R39,3 million is related to the financing of the Makro Strubens Valley store (note 17 on page 145).
Deferred tax
The deferred tax asset of R432,8 million (2006: R409,5 million) arises primarily from numerous temporary differences, including tax deductions on trademarks, the operating lease liability, and unutilised assessed losses. This asset should reduce over time as the associated tax benefits are utilised. More detail is provided in note 18 on page 146.
Current assets
Net inventories of R4 027,3 million (2006: R3 221,0 million) represent approximately 52 days’ sales (using the historic basis), higher than the prior year figure of 48 days. Inventory levels were deliberately increased in Massdiscounters as we felt that previous in-stock service levels were too low, potentially resulting in lower sales growth, and also in Masscash in response to the supply chain constraints currently being
experienced by major South African food suppliers. The food inventory situation is expected to normalise during 2008, but the higher inventory levels in Massdiscounters will be maintained.
In general, Massdiscounters, being a retail discounter with 90 stores, has the highest inventory levels and its sales days in inventory are almost double that of Massmart’s wholesale businesses (Masswarehouse and Masscash). Builders Warehouse also has higher inventory days given the broader and deeper merchandise range in those stores.
The net inventory of General Merchandise at R2 816,6 million represents 69,9% of total net inventory. This is to be expected given the higher inventory days in that category. See note 19 on page 147.
Total trade receivables and prepayments, net of provisions, is R1 876,5 million and has increased by 6,0% over the 2006 figure of R1 770,0 million. See note 20 on page 148. Although trade credit is offered to customers in all Massbuild businesses and in Masscash, it is well controlled and kept within the Group’s parameters, and does not affect the Group’s working capital.
Of Massmart’s total sales, approximately 1,3% represents consumer credit sales. Included in trade receivables and prepayments are net trade accounts receivables of R980,8 million (2006: R860,8 million) which have increased by 13,9%. This is lower than the sales growth and signals continued effective management of trade credit in the Group. There are also total consumer accounts receivables of R283,4 million (2006: R264,5 million). This consumer credit, being hire-purchase and revolving credit, is found only in Massdiscounters. For more detail, refer also to the commentary on credit risk in the Financial risks section below.
Due to payments to creditors being made shortly after each month-end, cash balances in the Group at year-end are not representative of the average level of cash or overdraft during the remaining period. The amount by which the net month-end cash balance is overstated in comparison to the average for the month cannot be accurately calculated but is approximately R1 billion.
Non-current liabilities
This total category comprises medium-term bank loans, capitalised finance leases, income received in advance from extended warranties, the operating lease liability arising from the lease-smoothing adjustment, deferred tax and long-term provisions. Non-current interest-bearing liabilities are R402,7 million (2006: R519,7 million). This balance reduced as the final amortising payments on two R150 million five-year loans were paid during the financial year. During the 2006 financial year, another two R250 million five-year loans were raised to finance the Massbuild acquisitions. Interest on both loans was fixed at 8,8% and 8,7% respectively.
Capitalised finance lease balances are R89,2 million (2006: R90,0 million).
32 MASSMART ANNUAL REPORT 2007
Chief Financial Officer’s Report
A Group in Good Health
33Chief Financial Officer’s ReportReports to Shareholders
Non-current non-interest-bearing liabilities are R556,9 million (2006: R474,7 million) and are partly higher due to deferred extended warranty income of R93,2 million (2006: zero).
The main balance is the operating lease liability of R461,8 million (2006: R472,5 million) which will be released over the remaining period of the Group’s operating leases.
Included in non-current liabilities is the long-term provision of R45,0 million (2006: R39,0 million) arising from the actuarial valuation of the Group’s potential liability arising from post-retirement medical aid contributions owed to current and future retirees. This liability is unfunded. With effect from 1999, post-retirement medical aid benefits were no longer offered to new employees joining the Group.
Details of all non-current liabilities, excluding deferred tax, are included in notes 24 and 25 on pages 153 and 156.
The deferred tax liability of R115,5 million (2006: R97,2 million) arises primarily from prepayments and property, plant and equipment. More detail is provided in note 18 on page 146.
Current liabilities
Trade payables of R5 285,8 million (2006: R4 604,7 million) represent approximately 67,8 days of cost of sales (using the historic basis), which is similar to the prior year figure of 68,2 days. As noted earlier, due to payments to creditors being made shortly after each month-end, the Group trade payables balance at year-end is not representative of the average during the remaining period. The amount by which the year-end trade payables is overstated in comparison to the average cannot be accurately calculated but is approximately R1 billion.
The current taxation liability of R534,4 million (2006: R410,9 million) reflects the Group’s liability for provisional corporate tax payments that are generally payable within days of the financial year-end.
Cash flow statementThe consolidated cash flow statement is shown on page 121.
Operating cash before working capital movements of R1 926,4 million (2006: R1 543,6 million) is 24,8% higher than prior year and closely approximates this year’s operating profit before depreciation, amortisation and impairment of R1 940,5 million, demonstrating the cash underpin of Massmart’s earnings.
Cash taxation paid of R531,6 million (2006: R487,4 million) was lower than the growth in taxable income due to the timing of year-end cash tax payments.
Due to the increase in the dividend payout ratio in February 2007, the relative increase in the total dividend paid in cash has been distorted and this year’s amounts paid of R565,1 million are 40,3% above the prior year figure.
Total capital expenditure (replacement and expansion) was R470,8 million. Capital expenditure for 2008 is budgeted at R595 million, which is higher than previous annual expenditure levels due mainly to the inclusion of the new Makro store in the 2008 figure.
Cas
h ge
nera
ted
(Rm
’s)
% o
f sa
les
Cash generated by operations
0 200
400
600
800
1 000 1 200
1 400
1 600
1 800
2 000
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
7,0%
% of sales Cash generated
2007 2006 2005 20041 20032
Financial risksLiquidity risk
Liquidity risk is considered low due to the Group’s conservative funding structure and its high cash generation. Massmart’s liquidity requirements are continually assessed through the Group’s cash management and treasury function. The Group has total banking facilities, incorporating overnight, short- and medium-term borrowings, letters of credit, forward exchange contracts and electronic fund transfers, of R3 492,2 million (2006: R3 492,2 million). As at June 2007, total interest-bearing debt amounted to R567,9 million (2006: R756,7 million). For more detail refer also to note 38 on page 171.
As the Group begins to build inventory levels for the festive season, net interest-bearing debt will increase up to a maximum of approximately R1,0 billion in November, but will reduce rapidly as peak year-end trading accelerates.
Interest risk
Interest rate exposure is actively monitored due to the Group’s significant intra-month cash movements and the seasonal changes in its net funding profile during the financial year. As noted above, interest rates on the remaining two new medium-term bank loans are fixed at 8,8% and 8,7% respectively.
Credit risk
Credit is available to wholesale customers at Masswarehouse, Massbuild and Masscash, and is adequately controlled by using appropriately trained personnel, applying credit granting criteria, continual monitoring and the use of software tools. A portion of the trade debtors book in Shield is insured with an international insurance company and a further portion is secured through general notarial bonds, pledges and other forms of security.
Massmart is only exposed to consumer debt through its hire-purchase and revolving-credit debtors books in Massdiscounters. The net book of R283,2 million (2006: R264,5 million) is conservatively managed, adequately provided for and represents approximately seven months’ credit sales. For more detail, refer also to note 38 on page 171.
Currency risk
Where possible and practical, currency risk in the Group is actively managed. All foreign-denominated trading liabilities are covered by matching forward exchange contracts. Foreign-denominated assets are not covered by forward-exchange contracts, as these are permanent assets held for the long term.
Technical reviewThe Board reports that the appropriate accounting policies, supported by sound and prudent management judgement and estimates, have been consistently applied, except for deconsolidating the results of Makro Zimbabwe (noted earlier).
The Group’s accounting policies are governed by IFRS and the AC 500 series as issued by the Accounting Practices Board. Guidance has been obtained from IFRICs and circulars effective on 10 October 2007. Due to the nature and volatility of Exposure Drafts (EDs), no review has been provided.
A detailed technical review can be found in note 2 in the annual financial statements on page 128.
The Group maintains the view that the standards set the minimum requirement for financial reporting. The financial statements in this annual report have been prepared with the aim of exposing the reader to a very detailed view of the numbers, using a simplified approach, in the hope of facilitating a deeper and informed understanding of the business.
Going-concern assertionThe Board has formally considered the going-concern assertion for Massmart and its subsidiaries and believes that it is appropriate for the forthcoming financial year. See page 118 for more detail.
AppreciationI would like to acknowledge and pay tribute to the high-quality performance and significant effort invested by my Financial colleagues and their teams at all the Massmart Divisions, and to the many members of the Deloitte audit teams, throughout the year, but especially over the two financial reporting periods.
Guy Hayward
10 October 2007
Notes:
1. 2004 – pre-IFRS and Furnex classified as a discontinued operation.
2. 2003 – pre-IFRS, lease-smoothing and Furnex classified as a discontinued operation.
34 MASSMART ANNUAL REPORT 2007
Chief Financial Officer’s Report
A Group in Good Health
35
Seven-year Review
Seven-year Review
Sev
en-y
ear
Rev
iew
36 MASSMART ANNUAL REPORT 2007
1990Massmart founded. Makro was the founding entity of Massmart with 6 stores
1992Acquired Shield in March
1993Acquired 20 Dion stores in May
1998Acquired 14 CCW stores in June
1998Acquired 26 Game stores in July
2000Massmart listed on the JSE Limited in July
2001Acquired 6 Jumbo stores in April
2001Acquired 22 Browns and Weirs stores in July
Seven-year Review
Historical Timeline
37Seven-year Review
2002Acquired Fumex in January
2003Acquired 8 Builders Warehouse stores in February
2004Shareholders purchase SHV's 31% shareholding in January
2005Acquired 3 De La Rey stores, 14 Servistar stores and 34 Federated Timbers stores in June
2006BEE transaction announced in May
2006Disposal of Fumex in March
2002In June Wooltru unbundled its 41% shareholding in Massmart
Historical Timeline
38 MASSMART ANNUAL REPORT 2007
as at 30 June 2007
Seven-year Review in Rands
Income Statement
Income statement (Rm)Continuing operations:SalesCost of salesGross profitOther incomeDepreciation and amortisation costsImpairment of assets
This includes the IFRS 2 Share-based Payment expense. Employment costsOccupancy costs
This includes the foreign exchange gains and losses. Other operating costsOperating profit
The net amount of interest received and interest paid. Net finance costsExceptional itemsProfit before taxTaxationProfit for the year from continuing operationsDiscontinued operation: Profit/(loss) for the year Loss on disposalProfit for the year
Attributable to:Equity holders of the parentMinority interest
Earnings before interest, taxation, depreciation, amortisation and asset impairments.
EBITDA
Earnings before interest, taxation and asset impairments. We prefer using EBITA rather than operating profit as the latter includes the charge for asset impairments which can distort traditional ratios and returns.
EBITA
Headline earnings
Annual growth (%)Sales
Earnings before interest, taxation and asset impairments. We prefer using EBITA rather than operating profit as the latter includes the charge for asset impairments which can distort traditional trading ratios and returns.
EBITA
Profit before finance costs and taxProfit before tax
Inventory has been included in the subtotal of “Current assets”. InventoryTotal assets
Equity and liabilitiesTotal equityNon-current liabilitiesCurrent liabilities
Trade and other payables has been included in the subtotal of “Current liabilities”.
Trade and other payables
Total equity and liabilities
Cash flow (Rm)Operating cash before working capital movementsWorking capital movementsCash generated from operationsNet interest (paid)/receivedInvestment incomeTaxation paidDividends receivedDividends paid
Net cash flow from operating activitiesInvestment to maintain operationsInvestment to expand operationsOther
Net cash flow from investing activitiesNet cash flow from financing activitiesNet (decrease)/increase in cash and cash equivalentsForeign exchange losses taken to FCTRCash and cash equivalents for the period
The opening cash flow in 2005 does not agree to the closing cash flow in 2004 due to the results being restated for IFRS from 2005. The difference is due to the opening cash flow of Makro Zimbabwe being consolidated as a result of IFRS.
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
Ratios/indicatorsOperating statisticsDepreciation and amortisation costs as a % of salesImpairment costs as a % of salesEmployment costs as a % of salesOccupancy costs as a % of salesTotal expenses as a % of sales
Number of stores by chainGameDionMassdiscounters
Number of stores includes the two Makro Zimbabwe stores from 2005, the date from which the results have been consolidated due to IFRS, and excludes them from 2007, the date from which the results have been deconsolidated.
Makro
MasswarehouseThe three De La Rey stores, re-branded to Builders Warehouse in 2005, existed for one month.
Builders Warehouse
Number of stores for 2005 existed for one month. Builders Trade DepotNumber of stores for 2005 existed for one month. Builders Express
MassbuildCBWJumbo
Outlets managed by a third party, and not owned by the Group. ShieldMasscash
Total number of stores includes the two Makro Zimbabwe stores from 2005, the date from which the results have been consolidated due to IFRS, and excludes them from 2007, the date from which the results have been consolidated.
Total number of stores
FTEs includes all permanent employees and the permanent equivalent of temporary employees and contracted workers. Number of FTEs includes the Makro Zimbabwe employees from 2005, the date from which the results have been consolidated due to IFRS, and excludes them from 2007, the date from which the results have been deconsolidated.
FTE (full-time equivalents)
Trading space excludes parking, yard and warehouse space. Trading space includes the trading space from the two Makro Zimbabwe stores from 2005, the date from which the results have been consolidated due to IFRS, and excludes them from 2007, the date from which the results have been deconsolidated.
Trading space (m2)
Sales/Number of stores. For June 2005, sales per store excludes Federated Timbers, De La Rey and Servistar for the one month of trading. Sales for Shield, Furnex and Cell Shack are always excluded as they do not have stores.
Sales per store (R000)
Sales/FTEs. For June 2005, sales per FTE excludes Federated Timbers, De La Rey and Servistar for the one month of trading.
Sales per FTE (R000)
Sales/Trading m2. For June 2005, sales per trading m2 excludes Federated Timbers, De La Rey and Servistar for the one month of trading. Sales for Shield, Furnex and Cell Shack are always excluded as they do not have a trading area.
Productivity ratiosSales/Net assets. The Group defines net assets as capital reserves and interest-bearing LT liabilities
Net asset turn
Gross profit/Sales Gross margin (%)Operating profit/Sales Operating margin (%)EBITA/Sales EBITA margin (%)EBITDA/Sales EBITDA margin (%)Taxation/Profit before tax (Refer to note 10 on page 136 of the financial statements for the effective tax rate workings.)
Effective tax rate (%)
Profitability and gearing ratiosHeadline earnings/Average of opening and closing capital and reserves balances
Return on average shareholders’ equity (%)
EBITA/Average of opening and closing capital employed balances. The Group defines capital employed as capital and reserves and interest- bearing LT liabilities
Return on capital employed (%)
Debt comprises non-current interest-bearing liabilities (and amounts due to vendor in 2001)/Capital and reserves
Long-term debt: equity (%)
Operating cash flow per share/Headline earnings per share Cash earnings cover
Solvency and liquidity ratiosCash and cash equivalents, net of borrowings/Total equity at the end of the year Net cash to total equity (%)Current assets/Current liabilities Current ratioCurrent assets excluding inventory/Current liabilities Quick ratioInventory/Total cost of sales Inventory daysTotal cost of sales/Inventory Inventory turnTrade payables/Total cost of sales Payable daysSales/Total assets Asset turnCurrent and non-current liabilities/Total equity Total liabilities to total shareholders’ equity
Per share performance (cents)Headline earnings/Weighted average number of shares in issue Headline earningsHeadline earnings/Diluted weighted average number of shares in issue Diluted headline earningsEarnings attributable to the equity holders of the parent/Weighted average number of shares in ussue
Attributable earnings
Distribution to shareholders Dividends/distributionCash generated from operations before working capital movements/ Weighted average number of shares in issue
Cash generated from operations before working capital movements
Net cash flow from operations, after working capital movements, excluding exceptional items and after adding back the dividend paid/Weighted average number of shares in issue
Operating cash flow
Capital and reserves/Total number of shares in issue Net asset valueHeadline earnings per share/Interim and final dividend per share Dividend cover
Stock exchange informationShares in issue (millions)Shares traded (millions)Percentage of shares traded (%)Earnings yield (%)Dividends yield (%)
As at 30 June Market capitalisation (Rm)As per the JSE Share price South African (cents):
High Low Closing
Notes:
1. These amounts have been restated due to SAICA’s reinterpretation of IAS 17, Leases.
2. These amounts have been restated due to SAICA’s reinterpretation of IAS 17, Leases. These amounts exclude amounts relating to the discontinued operation (Furnex). Details can be found in note 3 in the annual financial statements on page 131.
3. The above results have been restated for Circular 9, Transactions Giving Rise to Adjustments to Revenue/Purchases.
Income statement ($m)Continuing operations:SalesCost of salesGross profitOther income and expensesOperating profitFinance costsExceptional itemsProfit before taxTaxationProfit for the year from continuing operationsDiscontinued operation: Profit/(loss) for the year Loss on disposalProfit for the year
Attributable to:Equity holders of the parentMinority interest
Headline earnings
Balance sheet ($m)In 1999 the convertible debentures of R410 million have been included in shareholders’ equity. These debentures were converted to ordinary shares on 1 January 2000.
Total equity
Net cash/(borrowings)Total assetsInventoriesTrade and other payables
Cash flow ($m)Cash generated from operationsNet cash flow from operating activitiesNet cash flow from investing activities
Headline earnings/Average of opening and closing capital and reserves balances Return on average shareholders’ equity (%)EBITA/Average of opening and closing capital employed balances. The Group defines capital employed as capital resrves and interest-beaing LT liabilities
Return on capital employed (%)
Debt comprises non-current interest-bearing liabilities (and amounts due to vendor in 2001)/Capital and reserves
Long-term debt: equity (%)
Liquidity ratiosCurrent assets/Current liabilities Current ratioInventory/Total cost of sales Inventory days
Per share performance (cents)Headline earnings/Weighted average number of shares in issue Headline earningsHeadline earnings/Diluted weighted average number of shares in issue Diluted headline earnings
Attributable earningsDistribution to shareholders Dividends/distributionCash generated from operations before working movements/Weighted average number of shares in issue
Cash generated from operations before working capital movements
Net cash flow from operations, after working capital movements, excluding exceptional items and after adding back the dividend paid/Weighted average number of shares in issue
Operating cash flow
Capital and reserves/Total number of shares in issue Net asset valueHeadline earnings per share/Interim and final dividend per share Dividend cover
Exchange rates (Rand/US$)At year-endAverage for the year
Notes:
1. These amounts have been restated due to SAICA’s reinterpretation of IAS 17, Leases.
2. These amounts have been restated due to SAICA’s reinterpretation of IAS 17, Leases. These amounts exclude amounts relating to the discontinued operation (Furnex). Details can be found in note 3 in the annual financial statements on page 131.
3. The above results have been restated for Circular 9, Transactions Giving Rise to Adjustments to Revenue/Purchases.
Cape Town - The fear of interest rate hikes seems to have done little to dampen consumer confidence yet if the 5.5% like- for-like sales growth at Massmart
for the year to June is anything to go by. On Tuesday, Massmart was the first of the retailers to release a trading update for the reporting period to the end of June.
Massmart said total sales growth was up 15.2% over last year. Sales before acquisitions grew 8.8% and sales from comparable stores grew 5.5%. Overall sales
growth was boosted by the acquisition of Federated Timbers, De La Rey, Servistar and Cell Shack during the year.
Fin24 11 July 2006
Sales growth unabated at MSM
Johannesburg - South African retailer Massmart lifted headline
earnings per share by 31% in its first half, beating its own forecasts and
sending its shares up more than 9% on Thursday. Massmart’s headline
EPS rose to 335.6c for the six months to the end of December but it
said profit growth may be slower in the second half. At 15:38 GMT,
shares in the retailer were up 8.94% at R86.50, with the JSE mid-cap
index up 1.17%. Last month, Massmart forecast a 20% to 30% jump in
headline EPS for the first half of its fiscal year. Headline EPS, the main
profit gauge in South Africa, strips out the impact of capital, non-trading
and certain one-off items. Sales from continuing operations rose 16%
to R18.01bn driven by a buoyant economy.
Reuters
22 February 2007
Massmart shares surge 9%
BACK in June, when Massmart was reviewed in this column, its share price was R52. On the basis of some key investment
fundamentals, it was concluded that the share price was at a discount. There was something of a jolt, therefore, when the share
price plunged to R45. It didn’t take too long, however, before the market took into account the company’s growth potential and
the share price is now about R84.
Business Day 28 February 2007
The Forecast Factory: Massmart has goodlong-term potential
While some industries are starting to feel the pain brought by the National Credit Act, and borrowing consumers are under pressure after four successive interest rate hikes, retailer Massmart believes its performance should improve in these inflationary times. Its strategy of
selling high volumes of low-margin consumer goods at the lowest possible price, for cash, has put the company in a strong position.
Financial Mail 31 August 2007Beyond interest rate hikes
Business Day 10 April 2007
Massmart sees profitable future in green retail RETAIL giant Massmart says it wants to do its bit for the environment — a move analysts say could make strategic sense. Massmart, which operates more than 200 stores across the country, convened an internal brains trust last week to spread a better understanding of
environmental change and to identify ways in which to do business in a more environmentally friendly way. Climate change and environmental degradation, which are being debated with increasing urgency, are expected to drastically affect the way we live in the next five decades.
Business Report 7 September 2007
Massmart ropes in top-end customerswith Dion Wired Cape Town - Massmart would
press ahead with its new-concept
Dion Wired pilot to lure top-end
shoppers away from specialist
audio and kitchen appliance
stores, the high-volume retailer
said this week. Massmart chief
executive Grant Pattison said the
pilot project, which launched late
last year with two stores in
Gauteng, aimed to put competing
top-end brands such as Gaggenau
and Miele side by side with prices
displayed.
Seven-year Review
Massmart in the Headlines
50MASSMART ANNUAL REPORT 2007
CLOCKWISE: Employees representing Massbuild, Massdiscounters, Masswarehouse and Masscash.
51Operational Review
Ope
ratio
nal R
evie
w
Operational Review
52 MASSMART ANNUAL REPORT 2007
South African CPIX averaged 5,4% for the 2007 financial year while national Food inflation was higher at 8,2%.
53Operational Review
At the beginning of the June 2007 financial year the South African economic environment was positive but latterly, as interest rates were tightened, it became benign at best and began to adversely affect consumer confidence and spending.
During the financial year to June 2007, the Rand/US Dollar exchange rate averaged R7,22, with a high of R7,92 and a low of R6,74. This was weaker than the R6,42 average for the June 2006 financial year but the feed-through effect into South African inflation was muted.
Consumer inflation, measured by CPIX (being inflation excluding interest), averaged 5,4% for the financial year, with a low of 4,9% in February and a high of 6,4% in June. Within this measure, average national Food inflation was higher at 8,2%. The higher Food inflation was primarily caused by supply-side constraints, particularly in commodities. Other significant contributors to CPIX were Services and Fuel & Energy costs which averaged 5,0% and 9,2% respectively.
Given the South African Reserve Bank’s inflation-targeting mechanism, this higher inflation resulted in five interest rate increases totalling 2,5%. The first of these was in August 2006 and the last in August 2007. Interest rates increased 2.0% during Massmart’s 2007 financial year.
The higher interest rates did not, initially, affect South African consumer spending as measured by Personal Consumption Expenditure (PCE). Growth in PCE was reported at 7,6% quarter-on-quarter annualised in the third quarter of the 2006 calendar year but had declined to 5,5% by the second quarter of the 2007 calendar year.
With this economic backdrop, South African consumer confidence as measured by the Stellenbosch Bureau of Economic Research peaked in the first quarter of 2007 but had eased in the second quarter.
The broad effects of the above on the Group were twofold: the higher Food inflation increased nominal sales in the Group’s wholesale food businesses while the tightening interest rate environment slowed the sales of General Merchandise in Game.
Our thanks to Mr. Michael Biggs, Deutsche Bank’s South African economist, for his assistance with this note.
Broadly speaking, the higher Food inflation assisted Masscash while the tightening interest rate environment depressed sales growth in Massdiscounters.
South African consumer confidence as measured by the Stellenbosch BER peaked in the first quarter of 2007 but eased in the second quarter.
The Economy – A Backward Glance
Operational Review
The Economy – A Backward Glance
54 MASSMART ANNUAL REPORT 2007
Operational Review
Store Location Map
Divisional/chain store distribution
Divisions Stores by ChainInside
South AfricaOutside
South Africa Total
Massdiscounters Game 70 12 82
Dion (including 2 Dion Wired stores) 8 — 8
Masswarehouse Makro 12 — 12
Massbuild Builders Warehouse 21 — 21
Builders Trade Depot 28 — 28
Builders Express 15 — 15
Masscash CBW 55 10 65
Jumbo 7 — 7
Total 216 22 238
WESTERN CAPE
NORTHERNCAPE
Upington
Maseru
EASTERN CAPEUmtata
King William’s Town
Mkuze
Ermelo
Rustenburg
NORTH WEST
FREE STATE
Welkom
Makhado
EmpangeniMtubatuba
Qwa Qwa
Vryheid
ButterworthQueenstown
Port Shepstone
Hermanus
PaarlUitenhage
Cape Town
Port Elizabeth
East London
Richards Bay
BloemfonteinBotshabelo
SOUTH AFRICA
ILANDSWAZII
LESOTHO
Witbank
3
2
1
9
1
1
1
1
1
2
1
Shelley BeachMargate
Hazyview
Ladysmith
Nongoma
Stellenbosch
Vredenburg
Gingindlovu
2
1
Ficksburg
1
1
1
1
1
1
11
1 1
1
1
1
1
1
1
1
2
1
1
1
1
2
21
1
1
2
2
1 1
5
1
1
1
2
1
1
1
Polokwane (Pietersburg)
1
2
1
1
1
1
2
10
21
1Worcester
Dundee
Klerksdorp
Tzaneen
Mafikeng
Kimberley
Durban
Nelspruit
Krugersdorp
1
1
Eshowe
Newcastle
Secunda
2
2
Springbok
Midrand1
1
Knysna
Ulundi1
Manguzi1
Park Rynie
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Somerset West
1
11
5
21
3
1
3
1 1
1
Kokstad
1
Jeffreys Bay1
KWAZULU-NATAL
1
1
1
3
1
1
1
1
1
1
1
1
1
11
2
Vryburg
1
Ladybrand
2
46
146141
Johannesburg
1225
Pretori a5Olifantsfontei n
Vanderbijlpar k Vereeniging
GAUTENGGUTENG
George
Pietermaritzburg
LIMPOPO
MPUMALANNGANGNG
Thaba Nchu
55Operational Review Store Location Map
International stores
Chain Country
Number of stores City
GameBotswana 2 Francistown and GaboroneGhana 1 AccraMalawi 1 BlantyreMauritius 1 Quatre BornesMozambique 1 MaputoNamibia 2 Oshakati and WindhoekNigeria 1 LagosTanzania 1 Dar es SalaamUganda 1 KampalaZambia 1 Lusaka
* Two Makro Zimbabwe stores were not included in the table of stores on page 54 as their results have not been consolidated. See note 8 on page 135 of the financial statements for details.
1
2
2
72 2
1
1 1
1
1
11
1
56 MASSMART ANNUAL REPORT 2007
Highlights include…
Sales of R9,4 billion, reflect 15,1% real growth
Profit before tax of R672,2 million and a 7,1% return on sales
Ten stores opened in South Africa and three in Africa
Total trading space increased by 7,6% to 346 387 m2
ABOVE: Jan Potgieter, Managing Director of Massdiscounters, in the new Dion Wired store in Fourways, Johannesburg.
Massdiscounters comprises 90 retail discount stores offering a wide range of general merchandise and non-perishable groceries to customers seeking value. 82 Game stores trade in South Africa, Namibia, Botswana, Zambia, Uganda, Mozambique, Nigeria, Mauritius, Malawi, Tanzania and Ghana. Six Dion stores and two Dion Wired stores trade in Gauteng, South Africa.
Grant Pattison (36) BSc (Eng) Chairman
Guy Hayward (42) BCom, CTA, CA(SA) Non-executive Director
Jan Potgieter (38) BCompt (Hons), CTA, CA(SA) Managing Director Joined Massdiscounters 2005
Mark Turner (37) BCompt (Hons), CA(SA) Marketing Director Joined Massdiscounters 2006
Rob Barrell (50) Store Operations Director Joined Game 1981
John Hart (40) BCom, MBA Systems and Supply Chain Director Joined Massdiscounters 2005
Tyrone Vieira (35) Merchandise Director Joined Dion 1991
Pearl Maphoshe (39) BA, MA Human Resources Director Joined Massdiscounters 2006
Dion 10 2 -3 -1 8 Dion Wired – Centurion (Gauteng, Johannesburg) Eastgate mall (Gauteng, Johannesburg) Edenvale (Gauteng, Johannesburg) Dion Wired – Fourways (Gauteng, Johannesburg) Northgate mall (Gauteng, Johannesburg)
Southgate mall (Gauteng, Johannesburg)
58 MASSMART ANNUAL REPORT 2007
Operational Review
Massdiscounters Divisional Review
OverviewThe Game brand is a trusted icon of general merchandise and non-perishable groceries for a broad sector of the population in their respective trading territories. Comparable store sales grew 6,8%, with product inflation averaging 1,3% over the year.
We have decided to discontinue the original Dion format and will have closed or converted all Dion stores to Game by June 2008. This decision gave rise to an after-tax impairment charge of R11,9 million.
During the year, Game continued its aggressive new store rollout programme, opening 13 new stores (three of those in African territories). Game trades from large stores (up to 6 000 m2) and the newer smaller-format stores (3 200 m2), whose location is determined by site availability and researched local market needs. In addition, three underperforming stores were closed, three converted from Dion to Game and seven refurbished. The performance of these conversions to Game has exceeded our expectations by attracting significantly more customers. Commendably, in the past two years, Game has opened 22 stores – including four in Africa, without disrupting focus on normal trading.
Trading in Africa requires informed understanding of the social, economic and political environment in each territory and between territories. Backed by prudent country and site selection and thorough due diligence processes, Game has successfully completed the first phase of its African expansion with very positive consumer response to its comprehensive offering. We are currently in the process of researching a second-phase African store rollout.
Early in the year, the division discontinued its clothing range to optimise trading space for furniture, outdoor and camping goods.
The combination of a significantly larger comparable store base and aggressive merchandising and marketing initiatives during the year underpinned the sales growth of 16,4%. Due to working capital discipline, effective operating control and good expense management, the division exceeded its targeted return on sales of 7,0% approaching its international benchmark of 7,4%. The operating profit before tax growth of 16,6% was despite a foreign currency translation loss of R18,1 million (prior year R17,6 million gain) and store pre-opening costs of R39,5 million (prior year R24,2 million).
Capital expenditure doubled during the year to R210,9 million, a level set to continue as Game’s store development programme and continuous improvement initiatives gain momentum.
A new import warehouse in Pinetown, near Durban, was successfully opened. The pilot phase of a new supply chain model for Massdiscounters is under way with a regional distribution centre being constructed in Cape Town. This distribution centre will service the 14 stores in the Western Cape region. An advanced supplier information system is providing better interaction with Game’s top suppliers and will be rolled out to the full supplier base.
During the year a new electronic funds transfer system to integrate the in-store switching of credit and debit card was rolled out, which will improve convenience for customers while lowering operating costs.
FROM LEFT: In-store pictures of Game and Dion Wired in Fourways, Johannesburg.
A radio frequency scanning automated stock receipt system has been rolled out to all South African stores. The National Credit Act was implemented smoothly in June 2007 and our credit customers experienced minimal disruption despite the new legislated requirements.
The launch of the first two Dion Wired consumer electronics stores during the 2007 financial year proved popular with Gauteng’s shoppers. Dion Wired’s sophisticated store layouts and cutting-edge hi-tech and audio-visual product ranges from global brand leaders are supported by delivery, installation, after-sales service and support. Two more stores are planned for the current financial year, potentially expanding to a national footprint in time.
Through innovative store design, aggressive marketing, effective merchandising and rigorous working capital and cost control, Massdiscounters is well positioned to continue entrenching its position as southern Africa’s leading general merchandise discounter.
TRADING PROFIT BEFORE TAX RETURN ON SALES
Actual 2007
7,3%Previous target
7,0%
Revised medium-term target
8,0%
International benchmark 2007
7,4%The difference between operating and trading profit before tax is the impairment charge.
In the last two years Game has opened 22 new stores, including four in Africa.
Massdiscounters 2007 2006 2005Sales Rm 9 424,5 8 095,7 7 396,6 EBITA Rm 634,2 546,4 466,4 EBITA as % sales % 6,7 6,7 6,3 Operating profit before interest Rm 620,1 546,4 466,4 Operating profit before interest as % sales % 6,6 6,7 6,3 Net finance costs Rm 52,1 30,0 (1,0)Operating profit after interest Rm 672,2 576,4 465,4 Operating profit after interest as % sales % 7,1 7,1 6,3
Inventories Rm 1 597,8 1 272,5 1 046,6 Inventory days days 84 78 70
Net capital expenditure* Rm 210,5 120,3 177,1
Cash flow from operating activities Rm 43,2 458,6 304,3
Number of stores 90 80 72 Trading area m2 346 387 322 066 297 407 Average trading area per store m2 3 849 4 026 4 131 Number of employees 10 681 9 925 9 545
Sales per store R000 104 038 101 196 102 731 Sales per m2 R000 27 25 25 Sales per employee R000 877 816 775
*Net capital expenditure is defined as capital expenditure less disposal proceeds.The ratios have been calculated using year-end balance sheet figures.
Sales
EBITA
37,2%
27,1%
We were proud of the business innovation displayed in establishing Dion Wired and the IT systems upgrades and improvements.
60 MASSMART ANNUAL REPORT 2007
Operational Review
Masswarehouse Divisional Review
Highlights include…
Sales of R8,6 billion reflect 8,1% real growth
Profit before tax of R525,4 million exceeds 4,0%, the medium-term benchmark
Excellent margin management through optimising merchandise mix, cost control and working capital focus
Total South African trading space maintained at 107 575 m²
ABOVE: Kevin Vyvyan-Day, Divisional Chief Executive of Masswarehouse, in the Makro Woodmead store, Johannesburg.
Makro is a unique business model, that straddles most South African consumer segments and provides a complementarity of margin and cash flow resulting from its mix of essential and non-essential categories. This model has proven to be resilient through economic cycles. The stores trade a comprehensive range of food, general merchandise and liquor.
The division recorded excellent results for the year, with higher sales, and improved merchandise mix and well-controlled expenses. Divisional sales grew 14,4% with estimated average product inflation of 4,7%, with no new stores opened.
The financial results for the two Zimbabwean stores were deconsolidated from this division during the year due to government legislation preventing management no longer having effective day-to-day control of that business.
During the year, one store was refurbished at a cost of R21 million. A new store in Pretoria East will open in the fourth quarter of 2008 and plans are well advanced for the opening of two more stores in the short-term. Given the size of Makro stores, finding suitable sites remains a challenge in expanding this division.
Capital expenditure increased to R49,9 million due to the store refurbishment and ongoing enhancements to the information technology systems. Planning and testing for a business-wide SAP system and database upgrade in July 2008 is progressing well.
Changes being implemented in certain of Makro’s food sections – from enhancing the aesthetic appeal to a greater variety in pack sizes – are providing the expected return on investment and similar changes will be instituted in other perishable departments. Equally, the success of the pilot phase of a dedicated sporting goods section with expanded ranges has seen the concept rolled out in six stores, and customers are responding positively. Grocer’s liquor licences have been awarded to two stores, enhancing convenience for customers who may now shop for selected liquor ranges in the main store.
The strength of Makro’s relationships with key suppliers enabled the chain to take a proactive approach to the occasional raw material and product shortages experienced during the year.
FROM LEFT: In-store pictures of Makro Woodmead, Johannesburg.
Given the plethora of anticipated new legislation – for Makro, this relates primarily to amendments to the Liquor Act – exacerbated by uncertainty of timing, the division has prepared for full compliance and continues to work with industry bodies and the authorities to achieve the stated aims of the legislation.
Building on a base of 1,5 million active cardholders, Makro continues to refine its innovative merchandising skills and considerable customer relationship management capability to pursue higher quality sales, while always effectively managing inventory and expenses. Although sales in 2008 will show good growth because of the new store, operating profit will grow at a lower rate than that of 2007 and 2006.
TRADING PROFIT BEFORE TAX RETURN ON SALES
Actual 2007
6,1%Previous target
4,0%
Revised medium-term target
6,0%
International benchmark 2007
5,0%The difference between operating and trading profit before tax is the impairment charge.
The strength of Makro’s relationships with key suppliers enabled us to take a proactive approach to the occasional product shortages.
A new Makro store will open in October 2007, with advanced plans for another two stores.
Masswarehouse 2007 2006 2005Sales Rm 8 640,1 7 661,1 7 178,8 EBITA Rm 466,7 288,3 173,6 EBITA as % sales % 5,4 3,8 2,4 Operating profit before interest Rm 466,7 288,3 173,6 Operating profit before interest as % sales % 5,4 3,8 2,4 Net finance costs Rm 58,7 29,6 19,0 Operating profit after interest Rm 525,4 317,9 192,6 Operating profit after interest as % sales % 6,1 4,1 2,7
Inventories Rm 807,2 682,3 620,0 Inventory days days 40 38 36
Net capital expenditure* Rm 49,8 34,3 132,7
Cash flow from operating activities Rm 375,8 289,1 245,6
Number of stores 12 14 14 Trading area m2 107 575 120 435 120 440 Average trading area per store m2 8 965 8 674 8 603 Number of employees 2 570 2 794 2 641
Sales per store R000 720 010 547 221 512 771 Sales per m2 R000 80 63 60 Sales per employee R000 3 362 2 742 2 718
*Net capital expenditure is defined as capital expenditure less disposal proceeds.The ratios have been calculated using year-end balance sheet figures. Masswarehouse includes Makro Zimbabwe for 2005 and 2006, but not 2007. Details can be found in note 8 in the annual financial statements on page 135.
Profit before tax of R379,8 million and a 7,7% return on sales
SAP IT systems implemented in two brands, two regional head offices relocated and divisional re-branding almost complete
Total trading space increased by 2,1% to 294 039 m2
ABOVE: Joe Owens, Divisional Chief Executive of Massbuild, in the Builders Warehouse store in Zambezi Drive, Pretoria.
65Operational Review
At a glance…
8 Builders Warehouse stores acquired 28 February 2003, 3 De La Rey stores acquired 1 June 2005, rebranded to Builders Warehouse
Now 21 stores
Operating in RSA
Home improvement supplies/ tools/ building materials
LSM 5 – 10
14 Servistar stores acquired 1 June 2005, rebranded to Builders Express
Now 15 stores
Operating in RSA
Home improvement supplies/ tools/ building materials
LSM 5 – 10
34 Federated Timbers stores acquired 1 June 2005, rebranded to Builders Trade Depot
Now 28 stores
Operating in RSA
Building materials/ tools
LSM 5 – 10
Massbuild has 64 outlets, trading in DIY, Home Improvement and Builders’ Hardware, under the Builders Warehouse, Builders Express and Builders Trade Depot brands in South Africa.
Grant Pattison (36) BSc (Eng) Chairman
Guy Hayward (42) BCom, CTA, CA(SA) Non-executive Director
Gareth (“Joe”) Owens (58) Divisional Chief Executive Joined Makro 1971 and Massbuild 2005
Aubrey Cimring (36) BCom (Hons), CA(SA) Deputy Divisional Chief Executive Managing Director Builders Warehouse Joined Massmart 2003 and Massbuild 2006
Graham Booysen (43) MBA (Henley) Managing Director Builders Trade Depot Joined Makro 1994 and Builders Trade Depot 2006
Llewellyn Steeneveldt (38) BSc Metallurgical (Eng), GDE (Ind.Eng.), MBA Managing Director Builders Express Joined Massmart 2002 and Massbuild 2005
Robbie Best (43) BCom, CA(SA) Director Builders Warehouse Joined De La Rey 2003
Alison Lambert (49) BA, HDE Systems and Supply Chain Director Joined Makro 1989 and Massbuild 2005
Alex Rymaszewski (55) Store Development Director Joined Builders Warehouse 2003
Massbuild Divisional Review
Chain Number of stores at the start of the year
Stores opened
Stores closed
Number of stores at the end of the year
Builders Warehouse 20 1 – 21 Century City (Western Cape, Cape Town)
Builders Express 14 1 – 15 Jeffreys Bay (Eastern Cape)
Trading under the three focused and complementary chains – Builders Warehouse, Builders Express and Builders Trade Depot – the division focuses on home improvement and decorative hardware products, tools, sanitaryware, builders’ hardware, tiles and garden services.
2) in major cities and urban areas, aimed at homeowners and those involved in home improvement, small and medium building contractors and the DIY hobbyist. The Western Cape-based De La Rey stores, an identical format, have been re-branded Builders Warehouse and its management incorporated into this chain, which now has 21 stores.
smaller stores (approximately 2 000 m2) which are being expanded from its traditional base in KwaZulu-Natal and Eastern Cape. Builders Express is focused on homeowners and home improvers, and includes gardening and outdoor ranges.
merchant format trading through 28 outlets, operating from functional low-cost depots, located in selected urban areas and towns, targeted primarily at contractors and tradesmen.
Massbuild caters for the entire South African residential and commercial construction sector. Reinforced by a focused marketing drive and strong supplier relationships, Massbuild’s approach of maximising choice and convenience for customers under one roof is delivering significant benefits.
In a year characterised by the consolidation and re-branding of the three 2005 acquisitions, Massbuild grew sales by a very commendable 27,1% with average product inflation of 6,5%.
Aggressive trading created a platform for the division to register significant progress in implementing its strategic initiatives: divisional and regional leadership was strengthened; merchandise skills were augmented; the marketing platform was defined; and IT systems, including point-of-sales, upgraded.
Capitalising on the economies of scale presented by Massbuild, and supported by trained personnel equipped to advise and educate customers, the newly established divisional merchandising department expanded product ranges and made good progress with developing private label and exclusive brands. Environmentally friendly ranges have begun to find favour with ecologically sensitive shoppers, although South African consumers are generally not yet as attuned to conservation issues as, for example, their European counterparts.
FROM LEFT: In-store pictures of Builders Warehouse in Zambezi Drive, Pretoria, and Builders Express in Robindale, Johannesburg.
67Operational Review
Capital expenditure for the period was R109,1 million. Apart from once-off re-branding and consolidation costs, eight Builders Warehouse and three Builders Trade Depot stores were refurbished. A Builders Express and a Builders Warehouse store were each opened in Jeffreys Bay, Eastern Cape and Cape Town respectively, and three smaller Builders Trade Depot stores were closed during the year.
Massbuild is well on track to enhance the performance of unique home improvement and building supply stores, underpinned by effective management structures, advanced and uniform systems, intensive training and effective logistics. In 2008 it is expected to make some progress towards its revised medium-term return on sales target of 9,0%.
TRADING PROFIT BEFORE TAX RETURN ON SALES
Actual 2007
7,7%Previous target
8,0%
Revised medium-term target
9,0%
International benchmark 2007
10,0%The difference between operating and trading profit before tax is the impairment charge.
We finalised the integration of our three complementary but differentiated brands. We are making significant progress with establishing divisional leadership structures, business processes and IT systems.
Massbuild 2007 2006 2005Sales Rm 4 948,3 3 892,8 1 509,5 EBITA Rm 363,0 290,4 144,4 EBITA as % sales % 7,3 7,5 9,6 Operating profit before interest Rm 363,0 290,4 144,4 Operating profit before interest as % sales % 7,3 7,5 9,6 Net finance costs Rm 16,8 6,4 4,4 Operating profit after interest Rm 379,8 296,8 148,8 Operating profit after interest as % sales % 7,7 7,6 9,9
Inventories Rm 829,3 602,4 410,9 Inventory days days 86 80 146
Net capital expenditure* Rm 101,2 105,6 47,1
Cash flow from operating activities Rm 277,5 191,4 57,3
Number of stores 64 65 62 Trading area m2 294 039 287 914 238 919 Average trading area per store m2 4 594 4 429 3 854 Number of employees 6 400 5 125 3 760
Sales per store R000 77 317 59 889 114 259 Sales per m2 R000 17 14 16 Sales per employee R000 773 760 1 103
Sales
EBITA
21,4%
14,2%
Massbuild Divisional Review
*Net capital expenditure is defined as capital expenditure less disposal proceeds. The ratios have been calculated using year-end balance sheet figures. Massbuild includes Builders Warehouse, Federated Timbers, De La Rey and Servistar. For 2005, the one-month figures for Federated Timbers, De La Rey and Servistar, acquired on 1 June 2005, have been excluded when calculating the ratios. The latter three chains are currently being rebranded to Builders Trade Depot, Builders Warehouse and Builders Express respectively.
68 MASSMART ANNUAL REPORT 2007
Operational Review
Masscash Divisional Review
Highlights include…
Sales of over R11,8 billion reflect real growth of 5,7%
Profit before tax of R291,7 million and a 2,5% return on sales
Margin manage ment, cost control and working capital continue to improve
Total trading space increased by 1,9% to 246 276 m2
ABOVE: Robin Wright, Divisional Chief Executive of Masscash, in the Jumbo Store in Crown Mines, Johannesburg.
69Operational Review
Masscash has 65 CBW and seven Jumbo wholesale cash and carry outlets trading in South Africa, Lesotho, Namibia and Botswana, and a voluntary buying organisation, Shield.
CBW, Shield and Jumbo Grant Pattison (36) BSc (Eng) Chairman
Guy Hayward (42) BCom, CTA, CA(SA) Non-executive Director
Jay Currie (33) BSc Non-executive Director
Robin Wright (51) BCom, CA(SA) Divisional Chief Executive Founded CCW 1985
Neville Dunn (38) BCom, CA(SA) Financial Director Joined CBW 2002
Mike Marshall (50) FCMA Business Systems and Process Director Joined Shield 2004
Craig Surmon (45) Marketing Director Joined CBW 1987
Fred Cresswell (40) BSc (Civil Eng), MBA Operations Director Joined Massmart 2001 and Jumbo 2002
Jane Bruyns (46) Management Diploma (Henley Bus. College) HR Director Joined Dion October 1994 and Jumbo June 2005
At a glance…
14 CCW stores acquired 1 June 1998, 22 Browns and Weirs stores acquired 1 July 2001Two chains combined under CBW format from 1 July 2001
Now 65 stores
Operating in RSA, Lesotho, Namibia, Botswana
Food/ liquor/ groceries
LSM 2 – 6
6 stores acquired 1 April 2001
Now 7 stores
Operating in RSA
Food/ groceries/ ethnic cosmetics
LSM 2 – 6
378 members acquired 1 March 1992
Now 574 members and 658 outlets
Operating in RSA, Botwana, Namibia, Swaziland
Food/ groceries
LSM 2 – 6
Masscash Divisional Review
Chain Number of stores at the start of the year
Stores acquired
Stores closed
Number of stores at the end of the year
CBW 62 5 -2 65 Soweto (Gauteng, Johannesburg) Meadowdale (Gauteng, Johannesburg) City Deep (Gauteng, Johannesburg) King Williams Town (Eastern Cape) Thaba Nchu (Free State) Botshabelo (Free State) Ladybrand (Free State)
Jumbo 7 – – 7
70 MASSMART ANNUAL REPORT 2007
OverviewWith 72 CBW and Jumbo wholesale cash and carry outlets, Masscash is a primary supplier of essential grocery items to a broad base of consumers – from individuals to small traders, entrepreneurs and feeding schemes in the public and private sectors. Its Shield division is a voluntary buying organisation serving some 658 independent food outlets.
During the year, Masscash mitigated the twin challenges of rising inflation and multiple product shortages through superior procurement skills and leverage with suppliers to ensure a steady flow of affordable products to its broad range of customers, particularly those in rural areas.
The division grew sales by 14,4%, with average product inflation of 8,7%, reflecting steady volumes and a slightly increased market share. Operating profit before tax of R291,7 million grew by 34,9% reflecting improving margins from recently implemented regional procurement structures, good expense control and improved working capital. The integration of Jumbo into CBW’s management and reporting structures is proceeding well and is expected to be complete before the end of calendar 2007. Regional procurement structures were established, covering all chains, to enhance routes to market.
Management capacity and information systems continue to be strengthened and improved. Jumbo’s finance and accounting functions were converted onto the Great Plains IT platform during the financial year and these functions are expected to be combined with CBW in the coming financial year. The development and testing of an enhanced point-of-sale system, to replace several disparate systems in CBW, was completed. Early in the new financial year, this system was successfully piloted and rollout to all Masscash stores will commence shortly.
Good progress is being made with CBW’s programme to expand service departments – including meat, bakery, fruit and vegetables – in certain of its stores, and to enhance retail grocery ranges. Private label ranges are also receiving focus to cater more closely for customer needs.
CBW secured several contracts for public and private sector feeding schemes during the year, underscoring the validity of its high-volume/ low-margin business model.
The division acquired Thaba Powersave Cash & Carry during the year, an established and profitable business with three outlets covering the
Operational Review
Masscash Divisional Review
FROM LEFT: In-store pictures of Multisave in Meyerton, Johannesburg, and Jumbo in Crown Mines, Johannesburg.
71Operational Review
broader Bloemfontein area. These outlets use a hybrid model that features a retail and wholesale offering in the same store. This acquisition enhances our regional presence and has allowed us to better understand the strength of this hybrid model which we intend to selectively rollout to the CBW store base.
In recent years, in addition to the above, significant management attention has been given to restoring the trading performances of Jumbo and Shield and these results demonstrate that this has largely been achieved. In the new financial year, the focus will shift to optimising Masscash’s trading format to capitalise on its unique positioning in the southern African wholesale/ retail landscape.
TRADING PROFIT BEFORE TAX RETURN ON SALES
Actual 2007
2,6%Previous target
3,0%
Revised medium-term target
3,0%
International benchmark 2007
3,0%The difference between trading and operating profit before tax is the impairment charge.
The consolidation of CBW, Shield and Jumbo into a unitary Masscash division is proceeding well.
The performances of the three hybrid stores exceeded expectations and excites us about this format’s potential.
Masscash 2007 2006 2005Sales Rm 11 794,7 10 314,0 9 296,6 EBITA Rm 290,0 208,4 207,9 EBITA as % sales % 2,5 2,0 2,2 Operating profit before interest Rm 277,8 203,0 207,9 Operating profit before interest as % sales % 2,4 2,0 2,2 Net finance costs Rm 13,9 13,2 (0,8)Operating profit after interest Rm 291,7 216,2 207,1 Operating profit after interest as % sales % 2,5 2,1 2,2
Inventories Rm 765,0 654,1 593,2 Inventory days days 26 25 25
Net capital expenditure* Rm 59,8 72,4 45,5
Cash flow from operating activities Rm 333,7 155,0 3,5
Number of stores 72 69 65 Trading area m2 246 276 241 701 221 112 Average trading area per store m2 3 421 3 503 3 402 Number of employees 4 608 4 375 4 180
Sales per store R000 133 775 120 104 113 661 Sales per m2 R000 39 34 33 Sales per employee R000 2 560 2 356 2 224
*Net capital expenditure is defined as capital expenditure less disposal proceeds. The ratios have been calculated using year-end balance sheet figures.Shield is shown as average sales to each independently owned outlet (i.e. this represents only a portion of the outlets’ sales). The above results exclude amounts relating to the discontinued operation (Furnex). Details can be found in note 3 in the annual financial statements on page 131.
Sales
EBITA
17,1%
33,9%
Masscash Divisional Review
72 MASSMART ANNUAL REPORT 2007
We are steadily proving that meaningful collaboration between our four divisions, under the stewardship of resources at the Massmart centre, makes the value of the Group significantly greater than the sum of its parts. This collaboration occurs under two broad sets of activities, referred to internally as Channel and Shared Services.
ChannelChannel leads and facilitates collaboration between the Divisions by organising forums in particular areas of competence and interest that bring together the very best skills in the Group.
Each Forum is chaired by a member of the Group Executive Committee tasked with extracting value from that Forum in four ways:
Synergies through sharing profit-generating and cost-reduction opportunities.
Peer review of performance and the adherence to good standards across the divisions.
Shared learning through peer review and the measurement of internal performance, external market shares and sharing qualitative learning between divisions.
Standards and legislative compliance by our Chains.
Forum performance is measured by the value extracted through collaboration, as recognised by the Divisions, both quantitatively and qualitatively. It is also measured in the quality of the communities that are developed around functional areas across the Divisions.
The Channel has both trading forums and non-trading functional forums.
Trading forums
The Trading Forums – Food and Liquor; General Merchandise; Cellular; and Home Improvement – focus on the procurement and sale of goods in these broad categories through our stores.
During the year, the Forums continued to drive their now relatively mature agendas, achieving meaningful commercial objectives such as joint strategic supplier reviews, internal product category reviews and enhancing private and exclusive label strategies across our Divisions.
The Home Improvement Forum is the newest forum but has already had a positive impact across the Group.
The Cellular Forum was reorganised and reconstituted to shift its focus from tactical trading issues to strategic concerns with a more material impact on the Group.
Functional forums
The Functional Forums – Technology, Information and Process; Human Resource; and Operations – focus on the management of skills and the procurement of resources and services required to support key Group-wide activities.
The Human Resource forum has successfully driven shared initiatives across the Group, including Equity Graduates, Scarce Skills and Diversity programmes, while the Technology, Information and Process forum (TIP) has concentrated on several joint procurement and peer-review initiatives that have created significant value for the Group this year. The Operations forum is in its infancy but will become a powerful vehicle to drive synergies within the community of skills and resources tasked with operating Massmart’s stores and warehouses.
Shared ServicesUnlike the looser collaboration found in the Channel, Shared Services represents a formal commitment to provide appropriate services from the Massmart centre to more than one Division. These Services must respond to divisional needs and be of higher value (measured as quality, cost and benefit) than can be sourced externally or generated inside the Division. A shared service team’s relationship with the Divisions is as a service provider – the Divisions are their customers and their reason for existing. Therefore services must at all times strive for excellence and become best of breed in relation to their competitors.
Shared Services currently includes: Supplier Contract negotiation and administration; International Commerce; Internal Audit; Employee Benefits; Group Training; and our new initiative – Private Label management. This latter service will focus on the sustainable management of brands that are private or exclusive to Massmart and shared across trading divisions.
Operational Review
Channel and Shared Services Collaboration Review
Shared services must respond to Divisional needs and be of higher value than can be sourced externally.
Channel leads and facilitates collaboration across the Group in high impact areas of competence.
73
Sustainability Report
Sustainability Report
Sus
tain
abili
ty R
epor
t
Learners at Diepsloot Combined School, beneficiaries of Massmart educational support.
74 MASSMART ANNUAL REPORT 2007
Massmart’s Sustainability PropositionOur sustainability proposition is to achieve commercial success by adopting a cost-effective mass distribution business model that simultaneously offers benefits on both ends of the retail value chain without compromising our commitment to socially responsible business practice.
Effic
ient
Sup
plie
r Ch
anne
l
Commercial Success
Socially Responsible Practice
Market leadership andsuperior total returns
Optimal triplebottom linecommitment
Lowest costroute tomarket
Ethicalcommitment
to allstakeholders
Highestvalue to
cost ratioproposition
Optimal C
ustomer
Value
Sustainability Milestones
This approach recognises that, for Massmart, good sustainability practice will involve:
practices with commercial objectives;
channel to their markets;
by providing affordable access to quality, safe merchandise; and
manner which will involve embracing opportunities and managing risks arising from economic, environmental and social (triple bottom line) developments.
At the core of this proposition is our commitment to apply the highest ethical standard of conduct in our dealings with all Massmart stakeholders.
We launch our first ever sustainability report. We adopt a comprehensive Ethical Code of Conduct and Environ-mental Policy, and we commit to investing 1% of profit after tax in Corporate Social Investment initiatives.
We enhance our sustainability reporting by including statistical sustainability performance data and sustainability objectives.
We announce a policy to provide free ARVs to our permanent staff and their spouses, and we launch the Massmart WDB Rural Women’s and the Massmart Umsobomvu Youth Development Funds.
Our Sustainability Report is significantly improved by the inclusion of an inter- nally verified Key Performance Area (KPA) Scorecard.
We establish a Massmart Sustainability Committee, we announce the billion Rand Thuthukani Staff Empowerment Transaction and we start surveying the environmental practices of marine food suppliers.
Our sustainability reporting is further enhanced by making appropriate use of cross references to additional website based sustainability data and by introducing commentary from our Sustainability Committee.
We launch an integrated environmental strategy and we significantly increase our proactive engagement with external stakeholders from Government and Civil Society.
About this ReportWe have, after discussion with stakeholder representatives, incorporated the best elements of previous sustainability reports into this fourth report. These elements have been supplemented by fresh stakeholder-inspired requirements that include:
improve readability;
sustainability proposition to provide the reader with a better
sustainability actions (see
documentation to supplement information presented in this report;
responsiveness with reference to “icon” sustainability
We are optimistic that we have, by
stakeholder input, produced a report that is readable, informative and relevant to the sustainability
If you, the reader, would like to offer input about this report, then please e-mail your comments to [email protected].
FROM LEFT: Massmart Sustainability Committee: “KK” Combi, M Rubin, D Brand, D Mokhobo, P Langeni, G Pattison, B Leroni.
“Massmart is being actualised to be more than just a vehicle pursuing profit.”Ethics Institute of South Africa.
MASSMART ANNUAL REPORT 2007
have consolidated our perspectives on sustainability, particularly
commitment.
Governance
Stakeholder engagement
interest in our activities – people from whom we can learn. We have
Environmental commitment
retail peers, has enabled Massmart to formulate a workable environmental framework.
We have also updated the Massmart environmental policy to reflect our
We are encouraged that, beginning from a modest base, each year’s execution has been better than the previous year and we are confident of further improvement in the years ahead.
Sustainability Report
transformation performance.
out of the Thuthukani staff empowerment scheme. This task,
Our review on BBBEE and transformation resulted in several recommen dations to enhance Massmart’s initiatives in this field:
1. Conduct a skills audit to identify development opportunities for black employees.
2.
3. sup pliers to improve their empowerment status.
4.
enterprise development fund.
5. Massmart enterprise development investment in line with
6. Task Massmart Internal Audit to assess the effectiveness of third-party enterprise develop ment par tners such as
7.development funds in fewer causes.
this report was published.
Grant PattisonIncoming Chief Executive Officer10 October 2007
Visit: www.massmart.co.za
“KK” CombiChairman, Sustainability Committee10 October 2007
Sustainability Report 77
At Massmart we listen empathetically and try our best to respond constructively to stakeholder feedback. This table describes a selection
Retail customers asked for a stimulating, high service technology retail experience.
Massmart launches new concept Dion Wired stores.
Wholesale customers asked for increased support to compete more effectively with national retail chains.
Massmart increases level of
better merchandise deals.
Investors asked for improved remote access to results presentations.
Massmart implements webcast
results presentation.
Employees asked for improved access to affordable health cover. introduce an affordable subsidised
primary healthcare solution for employees.
Employees asked for more information about our corporate social investment projects.
corporate video.
The Society for Family Health (SFH) asked us to improve their trading terms thereby improving affordability of Lovers Plus condoms.
Environmental interest groups asked for higher levels of supplier and customer-focused environmental stewardship.
focus to include customer and supplier advocacy opportunities.
Sustainability interest groups asked for improved access to sustainability data.
Massmart increases the scope of sustainability information available on the Massmart website.
At Massmart we keep abreast of social developments and respond
a selection of social issues:
HIV/Aids crisis and poor access to appropriate treatment. staff and their spouses.
Broad-based black economic empowerment transactions tend to bypass the average South African.
Relatively poor levels of black representation in specialist retail positions and high levels of unemployed graduates.
Unacceptably high levels of youth unemployment. Development Fund with Umso bomvu to establish
outside our stand-alone stores.
Continued rural degradation and increasing poverty in rural communities.
unemployed rural women in business.
Crisis in the education proposition to the poorest South Africans.
Massmart amends corporate social invest-ment policy to focus on initiatives that im-
-est of the poor.
“A hungry child can’t learn”Food insecurity, despite the best efforts of
problem in many parts of
affordable food supplies and invests up to
South African society continues to be affected by high crime levels.
Massmart increases the level of security
At Massmart we work hard at
stakeholder priorities.
The progress we have made in several key areas of sustainable development is encouraging. Just as importantly, the accuracy and relevance of information reported is improving year by year as we embed appropriate reporting disciplines and protocols.
Given the evolving and often qualitative nature of sustainability reporting, we have developed a methodology that allows quanti tative data to be verified and evaluated for reasonableness by Massmart Internal Audit Services.
Verification Statement
The Massmart Internal Audit Services (MIAS) conducted a review of the data reported in the preliminary and final Sustainability Scorecards. The review was con ducted in terms of assurance standards and entailed the verification of the authenticity of data presented against internal and external sources. All significant reported Internal Audit findings have been satisfactorily addressed prior to publication. On this basis we are satisfied to report that the data presented in the Scorecards fairly represents the position of Massmart’s Sustain ability performance for the financial year ending 30 June 2007.
Verification approach
The objective of the review was to provide an opinion, based on the AA1000 Assurance Standard prin ciples of completeness, materiality and responsiveness on the:
Our work included the following:
Employment Practices Scorecard to assess whether reported in formation was consistent with source documents supplied by business units.
whether reported information was con sistent with source documents supplied by business units and external sources.
Responsibilities of respective parties
Massmart is responsible for com piling the Sustainability Scorecards, for selecting sustainability reporting indicators, and for the information and data presented.
MIAS’s responsibility is to present our independent opinion regarding the Sustainability Scorecards, the materiality of issues covered, and to formulate recommendations to management.
Limitation of scope
The following scope limitation was applicable:
operational sites were not subjected to completeness testing.
in the scorecards fairly represents the position of Massmart’s performance.Massmart Internal Audit Services
Massmart’s economic value added contribution increased by
in 2007.
FROM LEFT: The Massmart Internal Audit Services Sustainability Verification Team Lindsay Samuels – Internal Auditor, Nokubonga Ngidi – Audit Manager.
% Massmart shoppers who were able to make their planned purchases in Massmart stores 78,0%
Notreported
% shoppers who were totally or quite satisfied with the shopping experience in Massmart stores
% shoppers who indicated they would repeat shopping at Massmart stores
% customers who were satisfied with the resolution to problems raised with the store 73,0%
% of customers who feel that prices of products are always competitive at our stores –
Supplier Satisfaction Scorecard
Sustainability indicator 2007 2006 2005
% favourable supplier perceptions of Massmart distribution channel efficiency 100%
Notreported
% favourable supplier perceptions of Massmart stewardship of their brands 71%
% favourable supplier perceptions of Massmart responsiveness to market opportunities 71%
% favourable supplier perceptions of Massmart fairness in procurement negotiations
% favourable supplier perceptions of Massmart ethics 88% 100%
Employment Practices Scorecard
Customer satisfaction scorecard:customer problems was not available for Massdiscounters and is therefore not
certain results is attributable to the introduction of a more conservative respondent rating scale which has resulted in marginal positive responses now being interpreted as neutral responses.
Supplier satisfaction scorecard: in certain results is attributable to the introduction of a more conservative respondent rating scale which has resulted in marginal positive responses now being interpreted as neutral responses.
MASSMART ANNUAL REPORT 200780
Sustainability Report
Scorecards
Sustainability indicator 2007 2006 2005
spend including staff contributions
spend less staff and supplier contributions
Total Group spend as a % of profit after tax 1,1%
Massdiscounters
Masswarehouse (Makro)
Masscash
and Shield)
Warehouse,
Express)
Staff and supplier contributions
Environmental Scorecard
Sustainability indicator 2007 2006 2005
Water consumption
Electrical consumption
Sites with recycling programmes 137
Supplier environmental surveys conducted 14 8 0
Environmental partnerships with suppliers 0 0 0
Greenhouse gas emissions Unknown Unknown Unknown
Massmart maintains a comprehensive risk register that covers all risk categories and includes input by internal and independent external risk specialists. Appropriate risk management strategies have been implemented for identified risks and these are continually reviewed. Given that sustainability risks and business risks are constituent parts of the same risk spectrum and intrinsic to corporate governance, we have combined our risk
report.
For ease of reference, we elaborate here on four risks relevant to the subject matter of this sustainability report and our responses: crime,
and environmentally sensitive merchandise.
Impact of crime on customer and staff safety
The rate of armed and violent incidents of crime in South Africa continues to be of concern. Unchecked, this could further affect employees, customers, our business and the overall business environment.
We are continually improving procedures and controls to minimise the risk of losses or injury through potential criminal incidents. Massmart is also an active participant in the
shares information on all incidents of crime across the major retail chains.
Staff reticence to participate in voluntary HIV counselling and testing
We are concerned that after 18 months of actively heightening
submitted to voluntary testing. Sadly, a further trend – which we are monitoring closely – indicates that
We believe these issues can be remedied through perseverance, and Massmart will continue to invest in initiatives to build awareness and concentrate on destigmatising
Attracting and retaining specialised (buying and planning) and executive retail-level skill and experience
There are clearly many talented people with the potential to be placed
retail candidates which has resulted in an extremely competitive job market. This situation impacts on staff costs and our ability to achieve transformation targets.
We continue to invest in initiatives – such as the Massmart scarce skills programme – to retain, build and promote talent internally.
Inadvertent procurement of environmentally sensitive merchandise that undermines consumer brand perceptions
While we have always ensured that product specifications comply with published legislative and regulatory standards, we have noted a significant increase in the incidence and complexity of voluntary environmental criteria that are not incorporated into existing regulatory frameworks. Sensible identification and application of these criteria requires considerably deeper understanding of environmental issues by Massmart buyers.
We are currently developing buyer awareness programmes to train buyers to apply sensible environmental screens as part of their new merchandise procurement activities.
Sustainability Report Scorecards
81
MASSMART ANNUAL REPORT 200782
Sustainability Report
Performance Against Objectives
Broad-based Black Economic Empowerment
PROMISE MASSMART RESPONSE
Engage an accredited verification agency to review Massmart’s empowerment status once the codes of good practice have been gazetted.
Massmart continued the process of self-assessment initiated in 2005, given that the accreditation of broad-based black economic empowerment agencies has still to be completed by SANAS.
Conduct a comprehensive commu nication campaign to ensure staff empowerment beneficiaries understand their rights as Massmart shareholders.
Massmart implemented an awareness campaign comprising leaflets, video and workshops with all 14 627 staff beneficiaries of the Thuthukani Staff Empowerment Trust: 98% of staff surveyed indicated they understood their rights as shareholders.
Invest further capital in Massmart Enterprise Development activities.
Massmart invested a further R1 million in the Massmart WDB Rural Women’s Enterprise Development Fund following a comprehensive audit of the fund’s performance by Massmart Internal Audit Services.
Engage with strategic suppliers to determine their empowerment status.
Massmart has renewed engagement efforts with our top 200 suppliers to determine their empowerment status.
Continue efforts to formulate competitive supply agreements with black start-up suppliers.
Massmart has, despite considerable effort, enjoyed little success in concluding supply agreements with small black suppliers. Supply agreements have however been concluded with a variety of medium-sized black suppliers such as Vezubuhle Assets, Thokozani, M’Hudi and Ses’fikile.
Host a workshop to orientate start-up suppliers to the issues associated with entering into competitive supply agreements in the retail industry.
Massmart has, after consulting with emerging suppliers, initiated the development of a self-study pack that orientates emerging suppliers to the retail procurement process. The pack will be available on request to all potential emerging Massmart suppliers.
Refer to page 87 for Case Study 3: A new breed of winemakers
Massmart has invested a further R1 million in the Massmart WDB Rural Women’s Enterprise Development Fund.
Suppliers and Customers
PROMISE MASSMART RESPONSE
Research the influence that socially responsible consumerism exerts on customer buying behaviour.
Massmart engaged Bateleur Khanya Research Solutions to conduct a customer intercept survey that measured attitudes towards environmental consumerism.
Improve sharing of sales and forecast information with suppliers.
This has been driven by two divisions: Massdiscounters and Masswarehouse. In Massdiscounters, the digital sharing of information with suppliers through a web portal has been extended to cover more than 60% of the division’s retail purchases and in Masswarehouse, integration with the Makro SAP system has been completed for five major suppliers.
Increase frequency of high-level Group interaction with strategic suppliers.
The four major trading forums (General Merchandise, Food, Home Improvement and Cellular) – each of which includes a member of the Massmart Executive Committee and divisional executives responsible for purchasing that product category – have implemented a focused calendar of strategic supplier interactions to strengthen relationships.
Refer to page 97 for Case Study 11: Enviromental consumer highlights
Sustainability Report
83Performance Against Objectives
Environmental
PROMISE MASSMART RESPONSE
Appoint an environmental consultant with retail expertise.
Massmart appointed an external retail experienced environmental advisor.
Conduct a critical review of the scope of Massmart’s environmental focus.
We reviewed our environmental focus and have developed an environmental agenda focused on operational, supplier and consumer advocacy opportunities.
Extend the scope of the supplier environmental review process to include the Group’s top 40 food suppliers.
Our environmental advisor developed a supplier environmental survey which was distributed to 20 high-impact strategic suppliers and to which 14 suppliers responded. All participating suppliers were adjudged to be applying acceptable environmental standards.
Continue the rollout of internal energy-saving and recycling activities.
The divisions continued to implement energy-saving technologies and recycling initiatives although rollout continues to be slower than desired.
Human Capital
PROMISE MASSMART RESPONSE
Launch a centralised programme to develop scarce buying, planning, store management and business analysis skills.
We launched the Massmart merchandise development, Massmart analyst development and Massmart senior management development programmes in response to the scarce-skills challenge confronted by the retail industry: 82 candidates are currently involved in these development programmes.
Launch a graduate development programme aimed at equity candidates.
We launched the Massmart graduate development programme in January 2007. An initial intake of 22 black graduates is participating in this two-year programme. A further intake is planned for January 2008.
Conduct in-depth research to identify opportunities for improving levels of job satisfaction.
Massmart engaged The Hay Group to conduct a survey of staff attitudes. Opinions were elicited from a sample representing 30% of the Group’s staff complement.
Refer to page 89 for Case Study 5: Building our future
Massmart has appointed an external environmental advisor to the Group.
Corporate Social Investment
PROMISE MASSMART RESPONSE
Facilitate the practical implementation of Massmart’s staff volunteerism policy in operating divisions.
The divisions, with the exception of Massdiscounters and Masscash, requested this project be postponed due to resource constraints. Both Massdiscounters and Masscash run staff volunteerism programmes while Masswarehouse operates a staff payroll contribution scheme.
Commission an independent review of the effectiveness of the Group’s corporate social investment focus.
An internal review of the Group’s CSI activities revealed the need for improved focus. This led to the decision to establish, in the year ending June 2008, a centrally co-ordinated CSI fund to which all operating divisions will contribute and which will account for up to 50% of divisional CSI expenditure. This fund will be supplemented by a maximum of two division-specific icon CSI interventions accounting for the remaining 50% of divisional spending.
Refer to page 91 for Case Study 6: Helping our people help others
Massmart has continued to increase the intensity of stakeholder engagement to improve the extent, quality and value of these activities to all parties, and to integrate the information gathered as an input into corporate decision-making and planning.
Through this process, we are developing a more coherent and appropriate positioning of our environmental, black economic empowerment and corporate social investment practices and building the credibility of our Group as trustworthy, frank and accessible.
In addition to prior reported stakeholder engagement activities (government submissions, participation in industry forums, stakeholder surveys, media queries and others), we have added three proactive activities to our programme:
1. Improving non-financial media accessibility through informal one-on-one meetings with members of the press.
2. Improving information sharing and collaboration with organisations that have recognised competence in areas directly relevant to Massmart’s sustainability focus. This has involved working more closely with the Unisa Centre for Corporate Citizenship (brand citizenship) and WWF (environmental), and sharing relevant information, such as the results of our survey on consumer attitudes towards environmental consumerism.
Sustainability Report
Stakeholder Engagement
Overview
“We have been encouraged by the level of participation of government and civil society in our round-table discussion programme.”Grant Pattison, Incoming Chief Executive Officer
Massmart has continued to increase the intensity of stakeholder engagement primarily through regular round-table discussion groups.
MASSMART ANNUAL REPORT 200784
Improve staff understanding of Massmart strategy and performance by publishing a simplified Employee Annual Report.
Improve type, quality, relevance and accessibility of information to stakeholders through Massmart website.
Improve real-time accessibility of bi-annual results presentations to shareholders and investors by implementing webcast func-tionality into results presen tations.
2008 P
RIO
RIT
IES
Massmart hosts environmental conference
JUNE 2007 ISSUE 6Massmart sells over 400 environmentally friendly products ~ Page 3Why BEE wines are the toast of Makro ~ Page 12 Massmart scoops 3rd prize in Excellence survey ~ Page 13
3. Improving face-to-face interaction with stakeholders from government and civil society. This involves a regular discussion group programme that engages stakeholders on areas of mutual interest such as the impact of environmental issues on consumer buying behaviour. Massmart typically hosts three types of round-table discussion:
experts from civil society and government are invited and which are open to the press.
a broad range of ideological perspectives from both government and civil society are invited.
specific consumer interest groups.
We have been greatly encouraged by the positive response to these interactions by government and civil society representatives. Valuable contributions have been made by representatives from the departments of Trade and Industry, Environmental Affairs and Tourism, and Justice, Gauteng Department of Education, WWF, South African National Consumer Union, South African Consumer Goods Council, South African Institute of Race Relations, Free Market Foundation, Umsobomvu Youth Fund and Unisa Centre for Corporate Citizenship.
Stakeholder Engagement
Case Study 1 Massmart hosts environmental conferenceAs part of developing an appropriate green strategy to address pressing environmental issues, in April 2007, Massmart hosted a climate change discussion with representatives from WWF, the Council for Scientific and Industrial Research (CSIR), the Department of Environmental Affairs and Tourism and the media.
Perhaps one of the most addressable concerns raised by the experts for a Group like Massmart was South Africa’s status as one of the most energy-inefficient countries in the world, given its history of cheap and plentiful electricity. Through customer education, surveys and alternative and affordable green product options in store, we realise that we can play a role in raising public awareness of the long-term benefits of energy efficiency and the products that reduce energy consumption.
Case Study 2 Massmart and Unisa Centre for Corporate Citizenship Think-tankThere is a global trend, driven largely by concerned consumer lobbyists, to encourage companies to disclose the principles behind their brands once all the trimmings – such as marketing, advertising, corporate image and branding – have been peeled away. Consumer bodies are demanding to know where products are sourced and manufactured and under what circumstances, and what impact these have on social and environmental issues.
In line with our commitment to sound ethical principles across all our chains and brands, Massmart will host and support (including funding) the activities of a Unisa Centre for Corporate Citizenship Think-tank on brand citizenship that is researching and developing the concepts of brand citizenship and ethical consumerism.
Although this concept is in its infancy, we believe it will become a driving force worldwide. By adopting a proactive approach, once the research is completed, we can begin developing and implementing plans to ensure the products available in our chains conform to the relevant standards of ethical consumerism.
PICTURES FROM LEFT: Massmart’s inhouse magazine, Personal Best, and the logos of key stakeholder partners.
pic tocome
Sustainability Report 85Stakeholder Engagement
Massmart’s Board-approved policy covers all aspects of empowerment,
February 2007 gazetting of the codes of good practice on broad-based black economic empowerment, Massmart’s overall empowerment
to the scorecard criteria for socio-economic and skills development. While we were disappointed by this apparent deterioration, we welcome the certainty provided by the finalised codes and are applying renewed effort to lift our rating above the estimated 35% average for the retail sector to 45% by June 2009.
To achieve this target, we have conducted a rigorous review of opportunities to enhance our empowerment status and identify areas for improvement. In the short term, we are prioritising preferential procurement and enterprise development.
Although we recognise the importance of scorecard credentials, our commitment to empowerment far exceeds scorecard points. Our overarching motivation is to act in a way that underscores the very essence of empowerment – constantly seeking and implementing initiatives that have a greater qualitative socio-economic development impact than points on a scorecard would indicate.
For example, in May 2007, we contributed a further R1 million to the Massmart WDB Rural Women’s Enterprise Development Fund. In scorecard terms, this translates to some 0,5 points. In qualitative terms – according to WDB Micro-finance – the loan provides micro-financing opportunities to 1 300 rural women and benefits around 6 000 family members every year.
Similarly, a loan of R60 000 from the Massmart Umsobomvu Youth Enterprise Development Fund to aspirant Hot Dog Café franchise owners fails to register scorecard points. However, this funding translates into a fast-food business opportunity outside Massmart stores that generates up to R720 000 in annual turnover. After deducting running costs and franchise loan repayments, these young beneficiaries can take home some R120 000 each year while increasing the value of their franchise.
Sustainability Report
Broad-based Black Economic Empowerment
Thuthukani Staff Empowerment Trust participants are already receiving financial benefits through dividends.
“Approximately 1 300 rural women and 6 000 family members benefit from every R1 million invested in the Massmart WDB Rural Women’s Enterprise Development Fund.”BEN NKUNA WDB MICRO-FINANCE MANAGER
MASSMART ANNUAL REPORT 200786
Overview
Develop a self-study small business guide to supplying retailers that will be distributed to potential small business suppliers to the Group.
Increase Group investment in enterprise development, focusing on interventions that provide assistance to current and potential customers.
Implement shorter payment terms for emerging small- and medium-sized black-owned suppliers.
2008 P
RIO
RIT
IES
Given that participants in this initiative were all previously unemployed and
life. There are currently ten Massmart/Umsobomvu-funded Hot Dog Café franchise owners operating rent-free in prime space outside selected Game, Jumbo Cash and Carry, and Builders Warehouse stores.
In October 2006, Massmart issued units in the R1 billion Thuthukani Staff Empowerment Trust to 14 627 participating employees. The 18,0 million Massmart shares used to establish the trust were issued at R49,98. At 30 September, Massmart shares were trading at R83.38, representing significant capital growth in the Thuthukani Trust.
Importantly, Thuthukani participants are already receiving financial benefits through dividends, the first of which was announced in March 2007, and paid to participating staff with their April salaries.
The Thuthukani Trust was established to share value with employees and – as importantly – to enable employees to manage and vote their 8,2% stake at Massmart’s annual general meetings. During the year, a group-wide and independently administered trustee election process was held to elect four of the nine staff trustees required to represent the interests of staff shareholders. A fifth independent trustee was appointed by staff representatives and the remaining trustees were appointed by Massmart.
Our biggest disappointment during the year was our poor result in procuring merchandise from small black entrepreneurs for resale in our stores, primarily because of the intensive coaching on demand required to assist these entrepreneurs, for which we are not geared. In an attempt to overcome this hurdle, we are investing in a self-study small business guide to supplying retailers. This will be issued to small business entrepreneurs hoping to enter into commercial transactions with our Group. Given our primary business focus, we prefer not to develop an in-house small business advisory unit and this retail-specific self-study measure represents a further attempt to help new entrepreneurs as fairly as possible.
Broad-based Black Economic Empowerment
As a leader in the wine wholesale and retail sector, constantly searching for exciting new products for customers and reinforcing its commitment to preferential procurement, Makro stocks a carefully selected range of South African wines produced by black economic empowerment groups. One of these, Ses’fikile, is produced by three women who are determined to share their passion for winemaking with a huge and relatively untapped consumer market. Leaving established but unfulfilling careers behind, this energetic trio is already producing wines that successfully compete with well-established labels. With the support of retailers like Makro, which showcases empowerment wines to its customers, previously disadvantaged winemakers are making their mark on South Africa’s world-class wine industry.
Case Study 4 Breathing life into employee share schemesOn paper, employee share schemes are often a mass of numbers – millions of shares issued in complex tranches to thousands of employees under complicated criteria. The reality is simpler, as two Massmart employees who are participating in the Thuthukani staff empowerment scheme discovered when they received their maiden dividends with their April salaries. For head office driver and 20-year Massmart veteran, Kaiser Dikgale, the windfall will go towards painting recent extensions to his home. For Lucas Matsiane, his dream is that the capital growth of his share options will fund a second home – for his children – near his familial home when he retires in seven short years. For both men, and 14 725 other employees, Massmart share options are part of their long-term financial planning and peace of mind.
Visit: www.massmart.co.za : Select Sustainable Development on home page, scroll to BBBEE and access Qualitative Analysis of Massmart’s 2006 and 2007 Scorecard Performance pdf.
Case Study 3 A new breed of winemakers
Sustainability Report 87
PICTURES FROM LEFT: Case Study 3: Jackie Bacela, Nondumiso Pikasle and Nomvuyo Xaliphis’ Ses’fikile wine products. Case Study 4: Thuthukani shareholder Lucas Matsiane outside his family home in Hammanskraal.
Broad-based Black Economic Empowerment
MASSMART ANNUAL REPORT 200788
OverviewAs a leading wholesaling and retailing Group, our people are more than an important asset. They are the reason for our existence – their knowledge, skill and experience underpin the procurement processes that get the goods customers want into our stores and their attitude to service builds the customer loyalty so important to our success.
As such, Massmart’s approach to its human capital – the people who make up our 26 744-strong full-time and flexi-time workforce – is founded on equal opportunity, respect for human rights, a group-wide commitment to external guidelines such as the universal declaration of human rights and International Labour Organisation (ILO) charters, and complying with the letter and spirit of relevant legislation. In territories where labour legislation is not yet mature, we apply the standards and practices governing our South African operations.
BenefitsIn return for the contribution of our people, Massmart provides a stimulating, safe and entrepreneurial working environment, attractive benefits and performance-based rewards, and personal development opportunities for members of every team to reach their full potential.
salary surveys and union negotiations are complemented by progressive remuneration practices and benefit options that include share ownership.
funds, and retirement funding, Massmart also offers insured benefits such as insured life, disability, dread disease and funeral cover.
Massmart’s employment costs for the review period was R1,95 billion spanning 26 744 people.
Sustainability Report
Human Capital
Massmart’s approach to human capital is founded on the principle of equal opportunity and respect for human rights.
Improve Group-wide human resources data accessibility and reporting.
Implement affordable healthcare programmes for employees, to expand the pool of medically insured people.
Accelerate the pace of transformation in Massmart and roll out diversity training to all divisions.
2008 P
RIO
RIT
IES
THOMAS MABONA NORMAN MAINGANYALENNY LETLHAKE
Sustainability Report 89
PICTURE FROM LEFT: Case Study 5: Massmart Graduate Trainees.
Training and developmentIn keeping with our entrepreneurial approach, Massmart runs both centralised and decentralised training programmes, focused on the Group’s operational priorities and areas of identified skills shortages. Our total direct training and development investment annually is some 1% of payroll, supplemented by non-classroom development initiatives such as management and executive mentoring.
Working closely with the wholesale and retail sector education and training authority (W&RSETA), Massmart has 331 learnerships under way to address the shortage of skills in our industry. The scope of our Group training services function has been broadened to manage developmental priorities across our chains cost-effectively and to capitalise on synergies.
To continue building the foundations of a sustainable business, our various executive training programmes (including leadership development and succession planning at all levels) have been intensified. Massmart’s
businesses that will maximise individual potential and entrench our Group as a preferred employer.
During the year ending June 2007 Massmart trained 12 123 people, 80,5% of whom were previously disadvantaged, at a cost of R20,9 million.
Employee relationsResponsibility for managing employee relations, including relationships with trade unions, is vested in Massmart’s divisional human resources directors, reporting to their respective boards. Various processes and forums are used to facilitate employee participation and elicit feedback. These include employee-elected trustees to manage the Thuthukani Empowerment Trust and staff participation in forums such as health and safety shop steward and transformation committees.
Human Capital
As a salesman in Makro’s Wonderboom store, 34-year-old Norman
year graduate development programme. This has exposed him to other operational areas in the Group and allowed him to develop an understanding
because I had to bring in the sales,” says Norman. “Once I saw how involved receiving was – scheduling deliveries and validating stock – I gained new respect for the work they do.”
The graduate development programme is exposing some 22 black South African graduates to a diverse range of Massmart activities and building the required retail skills each year. By the end of the period, Norman and others like him will have a thorough understanding of how the Group operates its retail businesses, from procurement to sales. They will also have had the opportunity to determine where their personal interests lie and will have received intensive training in that area.
The programme has a dual thrust – preparing the Massmart senior managers of tomorrow and positioning the Group as a career option for those who want to become professional retailers. Some 900 applications are received for each intake, so selection processes are thorough.
Last word from Norman: “I feel like this programme was created with me in mind.” It was – you and many others like you who hold our future in your hands.
Case Study 5 Building our future
JERRY MALESHANE PAUL SEBOOA MERCY MOKHWANYATHEMBO MOSIPHARUDOLPH SIBISI THANDO SITHUNGU NOZIPHO DLAMINI
MASSMART ANNUAL REPORT 200790
We recognise the rights of our employees to associate freely and bargain collectively and over 41% of our workforce is represented by bona fide employee representative bodies, principally the South African Commercial Catering and Allied Workers Union (SACCAWU). Detailed processes are in place to ensure transparency and fairness and these are widely communicated.
During the year, we conducted an in-depth staff survey across our workforce, which included focus groups. A second initiative focused on senior management to assess leadership styles, Group skills and climate. The wealth and quality of data from these exercises will enable Massmart to establish internal and external benchmarks for continuous improvement.
Health and safetyIn addition to complying with relevant legislation, Massmart’s risk managers and Grant Thornton conduct regular safety and health audits, phase II of our Impilo wellness programme is under way and there is constant communication through diverse channels on safety and health issues.
A total of 737 occupational accidents were reported accross the Group during the financial year ending June 2007, resulting in 944 lost days.
In several aspects, there has been encouraging use of our Impilo wellness programme, initiated in August 2006. While this focuses on addressing the impact of HIV/Aids on employees and their families, the programme extends to broader health issues such as drug-resistant tuberculosis, occupational health, nutrition and lifestyle.
Sustainability Report
Human Capital
People from previously disadvantaged backgrounds comprise 28% of senior management, 42,5% of middle management and 73,1% of supervisory management in the Group.
91
PICTURE FROM LEFT: Case Study 6: Bayanda Sikiti and the Dangerous Heroes ladies’ football team.
Bayanda Sikiti is a Game employee. At 22, he is also the coach of the Dangerous Heroes football club – a ladies’ team he helped create because young women in his community were abusing drugs while still at school. “My aim is for them to be able to face their problems as a team. When we work together, we are strong. Our goal is to play in the Vodacom Women’s League because it’s the biggest in South Africa.”
Bayanda’s spirit of volunteerism was a natural fit with Massdiscounters’ unique employee volunteer programme, which enables employees to apply for one of 10 monthly product-based grants and get time off from
Heroes team now proudly takes to the field in full kit supplied by Game’s Maynard Mall store, and Bayanda is equally proud of the willing help he received from his employer.
Visit: www.massmart.co.za : Select Sustainable Development on home page, scroll to HIV/Aids. Select HIV/Aids Statistics as at (date) pdf.
Case Study 6 Helping our people help others
Since February 2007:
focused on raising HIV/Aids awareness through voluntary counselling and testing. By September 2007, we expect to have testing facilities in place at all Massmart sites across the country.
week-long programme, training selected employees as certified Impilo Friends to create HIV/Aids awareness in the workplace, focus on the wellness programme – which covers many aspects of general health – and provide support and guidance to fellow employees.
As at 30 June 2007, Massmart had 2 276 trained fire fighters, first aiders, and health and safety representatives spanning all employment categories.
Employment equityClearly defined employment equity policies and targets are in place. People from designated groups currently occupy 42,5% of middle management, 28% of senior management and 18% of top management positions in the Group. Women comprise 41% of our workforce.
Underscoring Massmart’s commitment to transformation and employment equity, a diversity management training programme was initiated at executive level in 2007. This will be rolled out across all divisions over the next two years to entrench an appreciation of the value of diverse thinking and cultures. We have recently renewed our focus on employing people with disabilities.
Massmart also pays particular attention to ensuring that, in constituting staff forums such as employment equity committees, and occupational health and safety committees, we consider issues of diversity related to race, gender, age and employee level.
Occupational levels Guidelines2007
%2006
%2005
%
Top management Massmart Executive Committee and chain directors 17,8 13,6* 21
Professionally qualified specialists and middle management
Professionally qualified and experienced specialists; middle management; interpretive decisions; Paterson grade D 42,5 39,3 43
Technically skilled and qualified
Junior management; routine or process decisions; Paterson grade C (i.e. supervisors or foremen) 73,1 83,4 83
Semi-skilled and discretionary decision-making
Non-management; discretionary, operative, sub-system or automatic decisions; Paterson grade B 90,9 90,1 88
Unskilled and defined decision-making Non-management; defined decisions; Paterson grade A 98,5 97,5 98
Total permanent 83,8 83,4** 83
* The decline from 2005 to 2006 reflects revised occupational level guidelines.** This excluded Builders Express.
Estimated African, Coloured and Indian (aci) diversity profile
Sustainability Report Human Capital
Overview
MASSMART ANNUAL REPORT 200792
We believe that one of our most meaningful contributions to sustainable development is giving suppliers an efficient channel to their markets while offering consumers low-price access to high-quality, safe merchandise that adds value to their lives.
Our challenge is therefore to ensure highly competitive pricing for our customers without compromising the sustainability of our own and our suppliers’ businesses.
We meet this challenge, in part, by focusing on operational excellence which allows us to maintain an exceptionally low cost base and operate profitably at one of the lowest gross margins in the industry. This is good for both the profitability of our suppliers and the pockets of our customers.
To maintain this operating model also requires a firm negotiating stance which inevitably creates constructive tension in supplier relationships. We understand this could lead to confrontational relationships which is not good for our suppliers, our customers or for our own business.
We are therefore committed to keeping supplier negotiations fair, free of abuse and free of unethical trading practices. This includes operating an outsourced ethics line for suppliers to report any unethical practice, relationship surveys to identify supplier attitudes toward the Group, regular relationship meetings between suppliers at multiple management levels in our chains and buyer training on our code of ethical conduct.
For our customers, providing access to quality, safe merchandise is as important as competitive pricing. We focus on employing extremely competent buyers who are specialists in their fields and well versed in the quality, performance, health and safety criteria required to meet our procurement standards. We apply numerous quality screens to ensure our merchandise complies with regulatory requirements such as SABS and HACCP standards.
Sustainability Report
Suppliers and Customers
Massmart is committed to keeping supplier negotiations fair, free of abuse and free of unethical trading practices.
We take every precaution to ensure that customers don’t become victims of crime at stores… Massmart has one of the highest security specifications in the retail industry.
Review the social proposition behind selected merchandise brands.
Explore the implementation of an enhanced product assurance process in respect of products sourced from the Far East, that will provide increased levels of assurance for human rights and environmental good practice.
Open direct channels of engagement with Chinese-based suppliers of direct imports through workshops in Chinese ports of origin in order to smooth supply chain inefficiencies and improve product assurance standards.
2008 P
RIO
RIT
IES
Sustainability Report
93
Massmart chains also ensure peace of mind for shoppers by backing merchandise with comprehensive product guarantees, after-sales support, refund and repair policies.
As a Group, we are broadening this peace of mind for our customers by ensuring they can buy products from our stores in good conscience. Suppliers are required to provide undertakings that they operate ethically by, for example, applying employment practices that are consistent with the law and workers’ rights as determined by the International Labour Organisation and that they are not complicit in any human rights abuses.
More recently we have initiated a programme to survey the environmental policies of our key suppliers to determine their sensitivity to the environmental impact of their manufacturing practices.
In the context of personal customer safety, minimising the impact of crime is a priority as it affects both our customer and supplier relationships. For customers, we take every precaution to ensure they do not become victims of crime in our stores. Accordingly, Massmart has one of the highest security specifications in the retail industry. This includes planning store operations so that back office cash-handling processes are separated from customer service activities.
We also collaborate closely with our industry peers and partners, the SAPS and crime-fighting organisations to learn from each other’s successes and improve the industry’s crime-prevention capability. This typically involves sharing crime intelligence, analysing crime and especially violent crime trends in the industry, working together to develop best practices in crime prevention strategies and facilitating a close working relationship with the SAPS and other organisations such as Business Against Crime, to which we contributed R1 million during the review period.
Suppliers and Customers
Case Study 7 Massmart narrows the gap between social and business imperativesMassmart is addressing HIV/Aids in South Africa by identifying areas in which it can help curb the spread of the disease, such as through the Group’s Impilo programme. Recently, Massmart found another way to help by improving its trading terms for a non-profit supplier of condoms to make these prophylactics more affordable for customers.
The Society for Family Health (SFH) is a non-profit section 21 company and the South African affiliate of Population Services International (PSI), the largest social marketing organisation in the world which uses commercial marketing skills to sell good-health practice to citizens of 70 countries. Given that the Massmart Group represented a significant percentage of PSI’s Lovers Plus and Choice brands condoms, more favourable trading terms would make a considerable impact in ensuring affordable condoms were available to South Africans.
Massmart’s initiative sparked a chain reaction that spread beyond the Group to other chains throughout the retail industry, resulting in significant savings for the supplier and for customers, and – more importantly – increased use of condoms.
Between January and June 2007, the SFH reported condom sales of 13,3 million. This was unprecedented volume growth and a clear example of how doing the right thing for the community can also be good for the bottom line.
Case Study 8 Private labelMassmart’s extensive private label programme provides exceptional value to our customers. At present, the private label programme is well established in selected food categories, sport, outdoor and do-it-yourself equipment.
In the food arena, Massmart applies regular and random independent quality audits to ensure its private label products conform to stringent standards such as the good manufacturing practices required by SANAS 1449, labelling standards and food safety. Massmart’s internal audit service also conducts annual audits on food safety and quality assurance. Demonstrating this commitment further, Massmart was a founder member of the Food Safety Initiative, a division of the Consumer Goods Council of South Africa.
Massmart’s private label brands include Camp Master outdoor equipment, Garden Master garden equipment, Mastercraft DIY equipment and food brands, Aro, Heritage and First Value.
When buying any of these private label products, customers are assured of stringent quality control, best supplier practices and competitive pricing.
PICTURES FROM LEFT: Case Study 8: A selection of Massmart Private label brands
Massmart remains keenly aware of the role corporate South Africa can play in nation building by contributing generously to uplifting disadvantaged people in our society. We annually invest at least 1% of after-tax profit in social development activities that benefit the poorest of the poor. Over the past three years, this has amounted to approximately R28 million.
We concentrate on education-based initiatives aligned with government’s
and that are likely to have the most impact on individual lives. Acknowledging that our skill lies in mass distribution of merchandise, not social development, we provide financial and in-kind support that enables development experts to take care of detailed operational issues.
We do however leverage our wide procurement and distribution network to enhance our social development impact. For example, a rising percentage of our Group spending on corporate social investment will now be devoted to supporting school feeding schemes, given the obvious synergy this has with our food distribution activities.
each chain, such as Game’s Tools to Learn and Tools to Teach programme which provide stationery packs to learners and teachers at disadvantaged schools, Makro’s Excellence in Education initiative which rewards educator achievements with R30 000 gift vouchers for educational materials, and the artisan development programme at Builders Warehouse.
Sustainability Report
Corporate Social Investment
“At Massmart, we like being in a position to give back to society. It’s good for nation building, it’s good for the people we assist, it’s good for business and it’s good for our own sense of humanity.”GRANT PATTISON, INCOMING CHIEF EXECUTIVE OFFICER
Massmart invests 1% of profit after tax in education-based CSI initiatives aligned with government’s socio-economic
MASSMART ANNUAL REPORT 200794
Overview
Provide selected NGOs with the opportunity to add social research questions to Massmart consumer research surveys.
Finalise and establish a centrally co-ordinated national school feeding scheme initiative, operated close to Group stores and in which all chains participate.
Implement a programme to leverage Group communication material to raise awareness about missing children.
2008 P
RIO
RIT
IES
Responding to stakeholder feedback to communicate our corporate social investment activities more effectively, we recently devoted an entire issue of our in-house magazine to the people and causes that have benefited from our social development initiatives. The purpose was twofold: to highlight the relevance and impact of our activities to our stakeholder communities and to showcase the extraordinary efforts of ordinary people – including our own employees – in making a difference.
Some of the organisations that benefited from our support in the year ending June 2007 included:
Alafang Secondary SchoolAllanridge Secondary SchoolAlexandria High SchoolCentral Johannesburg CollegeBhukulani Senior
Secondary SchoolBokgoni Technical
Secondary SchoolBotse-Botse High SchoolCape Peninsula Feeding SchemeDiepsloot Combined SchoolEbokodweni Primary SchoolEldorado Park Secondary SchoolForte Secondary SchoolGonyane Public SchoolIvory Park Secondary SchoolKE Mathebula Children’s HouseKgomotso Secondary SchoolKgosi Neighbourhood FoundationMasithwalisane Secondary SchoolMen on the Side of the Road
Phateng Comprehensive SchoolPhumulani Secondary SchoolPJ Simelane Secondary SchoolRethabile Children’s HomeRally to Read Tools to TeachSebatsa Secondary SchoolSoshanguve High SchoolSolomon Mahlangu
Secondary SchoolStarfish Greathearts FoundationThandeke CrècheTomorrow TrustTshwane CollegeTsiba EducationTwilight Children’s ShelterVula CollegeWalmer High SchoolZakariyya Park Combined SchoolBusiness Against CrimeFree Market FoundationWWF
Corporate Social Investment
For Floyd Qwathi, 31, each day started and often ended on the side of the road, waiting to be one of the lucky ones to secure a day’s work. His life changed when he was approached by a recruiter from Men on the Side of the Road, an NGO looking for candidates for the Builders Warehouse-sponsored artisan skills development programme. This encompasses 10 weeks of training in one specific field as an outcome-based training initiative on par with an NQF III course. Today, Floyd has a certificate that
and has helped 80 people earn qualifications as bricklayers, carpenters and plumbers. For Builders Warehouse, it offers the chance to address unemployment in a relevant way and to the benefit of its own business sector, with graduates employed either in Builders Warehouse stores or by building contractors.
Case Study 10 Assisting AIDS orphansContributing to the education of South African youths is always worthwhile. It is even more so when those benefiting are affected by the HIV/Aids pandemic. Massmart actively supports both these areas of social investment, and where they meet you’ll find the most worthy recipients. This is the case with Palesa Poo.
Nineteen-year-old Palesa lost both her parents to Aids. She dreamt of earning good results on her matric exams so that she could study further and eventually open her own business. Her reality is that she lives alone, and had no support for the extra studying to achieve this.
Thanks to her enrolment in Tomorrow Trust, an organisation Makro helps fund, she found that support. Palesa was tutored in accounting, economics, mathematics and English. She also spent her school holidays in study programmes, so no time was lost preparing for her year-end exams.
By contributing to post-secondary educational organisations like Tomorrow Trust, Makro has made a real difference in Palesa’s life. Although orphaned by Aids, this student’s future is still bright.
Case Study 9 From roadside piecework to graduate skills
Sustainability Report 95
PICTURES FROM LEFT: Case Study 9: Floyd Qwathi, a participant in the Builders Warehouse artisan skills training programme. Case Study 10: Palesa Poo, participant in Tomorrow Trust’s Holiday School.
Corporate Social Investment
MASSMART ANNUAL REPORT 200796
Overview
Pilot test interventions (such as better merchandise labelling) to help customers make environmentally responsible purchasing decisions.
Create and implement a guide to responsible environmental procurement for buyers.
Engage with willing suppliers to explore and, where feasible, implement opportunities to rationalise packaging waste.
As the science has evolved, so we have become more focused on the risks that climate change, environmental degradation and proliferation of waste pose to our business and to society, and we are starting to explore the role we must play in mitigating these impacts.
But we want to be informed and sensible about our response to these challenges. In the past year, we have therefore accelerated the development of our corporate environmental strategy. Our overall approach is to proceed prudently, to avoid acting opportunistically and to acknowledge and learn from any mistakes we may make along the way.
A principal aspect of our environmental focus has been to move beyond internal operational compliance towards identifying opportunities to extend our focus to include both the supply and distribution sides of our value chain. This includes creating awareness among buyers about environmental procurement considerations.
In early 2006, we retained an external environmental advisor who is helping us identify and assess potential risks and opportunities in our operations, our supply chain and our value proposition to customers. We are using this information to engage with our senior executive, buyers, store managers and suppliers.
To inform the process, we conducted an environmental review of local and global retail industry practice, particularly European retailers that have a well-established track record of environmentally friendly retail practice.
Sustainability Report
Environment
Our environmental approach is to proceed prudently, to avoid acting opportunistically and to learn from our mistakes.
“At Massmart we have become more focused on the risks that climate change, environmental degradation and proliferation of waste pose to our business and society...”Grant Pattison Incoming Chief Executive Officer
2008 P
RIO
RIT
IES
ENVIRONMENTALLY FRIENDLY
ISO 14001 ENVIRONMENTAL CERTIFICATION
Sustainability Report 97
From this review, we created an environmental framework for action that incorporates three broad areas:
Operational advocacy – ensuring internal operational practices are guided by environmental considerations. Our current priorities are to implement waste recycling at all stores, instal energy-saving and water conservation options in stores and to incorporate environmentally friendly design principles into new store design.
Supplier advocacy – engaging closely with selected suppliers about their environmental practices. Our priorities are to track the manufacturing practices of key suppliers, work with suppliers to reduce packaging waste and to carefully screen environmentally sensitive merchandise.
Consumer advocacy – promoting environmental consumerism. Our current priorities are to improve labelling standards on environmentally sensitive merchandise and to improve awareness of environmentally friendly merchandise choices.
This environmental framework has been presented to the Executive committees of all Massmart divisions as the basis for defining environmental commitments specific to each division.
The Group has also implemented additional data-gathering processes to improve our understanding of each of the identified areas of environmental advocacy. Massmart now conducts a regular customer survey that tracks, among other issues, the influence of environmental considerations in customer purchasing decisions.
We also survey the environmental commitment of our suppliers and follow up any areas of concern with a site visit by the Group’s environmental advisor. Finally, as part of our ongoing risk assessment process, Grant Thornton prepares a bi-annual report that assesses environmental compliance in selected stores.
Environment
Case Study 11 Environmental consumer survey highlightsIn April 2007, Massmart launched a pilot survey to enhance our understanding of customer attitudes to environmental consumerism and the results were used to identify our environmental priorities. The survey, conducted by an external research organisation, spanned over 500 representative Game customers and provided illuminating results, including:
purchasing products;
harmful ingredients;
shop; and
terms to interviewers.
Massmart shared the full survey results with WWF to help that organisation derive further insight about consumer attitudes towards the environment.
Case Study 12 Environmentally friendly products at Builders WarehouseTwo years ago, our Massbuild division began stocking a target range of green products in Builders Warehouse stores. With initial response seemingly limited to specific consumer Groups like farmers, Builders Warehouse took the initiative to get suppliers involved by inviting them into the stores to explain the benefits of environmentally friendly products.
Today, there are over 400 environmentally friendly options on Massmart shelves from wind-up torches and dynamo-powered cellphone chargers, to energy-efficient lighting, solar-powered products and water-saving devices. All green products have been thoroughly tested and conform to local regulatory standards.
Builders Warehouse has now taken this initiative further by having dedicated areas for these products to make it easier for consumers to take the green option.
visit: www.massmart.co.za/environment : Select Sustainable Development on the home page, scroll to Environment and access Key Supplier Environmental Risk Survey Summary pdf.
PICTURES FROM LEFT: Case Study 12: A selection of the environmentally friendly products at Builders Warehouse.
USING LESS ELECTRICITY
WIND-UP TORCHESPOWERED BY YOU
ENERGY EFFICIENT
ENERGY EFFICIENT
MASSMART ANNUAL REPORT 200798
Sustainability Report
Global Reporting Initiative (GRI III)
GRI III
REFERENCE CONTENT PAGEStrategy and Analysis1.1 Statement from Chief Executive Officer ............................ 76
1.2 Key impacts, risks and opportunities .......................77 & 81
Organisational Profile2.1 – 2.7 Profile and markets2.8 Scale, including: ..............................................................1-7
2.9 Significant changes
2.10 Awards received .............................................................. 27
Report Profile3.1 Reporting period .......................12 months to 30 June 2007
3.2 Most recent previous report .................................June 2006
PR5 Practices on customer satisfaction, ......................................... 80
Compliance with marketing communications standards ............................Fully compliant
PR7 ......................................... Zero
PR8 ....................................... Zero
PR9 .............................................. Zero
99
Corporate Governance
Corporate Governance
Cor
pora
te G
over
nanc
e
Adelle van Schalkwyk, BA, HDip LLaw, LLB, LLM and LLD, one of Massmart’s seven accredited Ethics officers, inside the Palace of Justice in Pretoria.
100 MASSMART ANNUAL REPORT 2007
We will always ensure that we act in good faith, with care, diligence and skill in the way that we manage our business.
We believe that sustainable and effective corporate governance is demonstrated through a consistent pattern of “doing the right thing”, through good times and the bad.
101
Corporate Governance
Acting Ethically
(2.1.8)
It is possible that the term good corporate governance has become slightly overused and in some cases even abused in company reports and brochures. There can be a temptation to demonstrate one’s adherence to good corporate governance by producing detailed checklists or highlighting the skills of the non-executive directors, for example. At Massmart we accept that the first steps towards good corporate governance must embrace the requirements of a particular governance framework – in our case, the King II Report on Corporate Governance – but believe that sustainable and effective corporate governance is demonstrated through a consistent pattern of “doing the right thing”, through good times and the bad.
(2.1.5)
Our Group is committed to complying with all legislation, regulations and best practices relevant to our business, in every country where we conduct business.
(8.4.7) (9)
For the financial year under review, the Board confirms that the Group complied with every major aspect of the Code of Corporate Practices and Conduct as set out in the King II Report on Corporate Governance. An index illustrating the Group’s compliance to this code can be found on pages 110 and 111.
(2.1)
The Board(2.1.1) (2.1.4) (2.1.6) (2.1.17) (3.2.4)
The Board of Massmart is responsible for directing the Group towards the achievement of the Massmart vision and so the Board is accountable for the development and execution of the Group’s strategy, operating performance and financial results, all practised within the Group’s Governance Authorities.
(2.1.18)
The Board attempts to finesse the often conflicting dynamics of encouraging entrepreneurial behaviour in the Group against the constraints of corporate governance.
(2.1.3) (2.3.1) (2.5.2) (2.7.10) (6.3.3) (6.3.4)
The Board is responsible for its own composition, the appointment of the Chairman and Chief Executive Officer, and the constitution and composition of its committees. The Board has a charter setting out its policies, roles and responsibilities in the execution of its mandate described above. Each Board Committee also has a charter, or terms of reference, that is formally signed off by the Board. Annually, in November the Committees and Board review, and amend, if necessary, the respective charters to ensure their relevance.
(2.3) (2.3.3)
Immediately after the financial year-end the following changes to the Board, which had earlier been widely communicated, took place:
(2.3.2) (2.3.3)
CEO with effect from 1 July 2007.
Chairman.
The directors were unanimously of the view that the interests of all Massmart stakeholders will be best served by the retention of the skills
(2.7.7)
To facilitate and ensure good governance, the Chairman of the four Board committees will be held by independent directors; the roles of CEO
(2.1.2) (2.2.1) (2.4.1) (2.7.6)
Prior to these changes the Board comprised three executive directors and 11 independent non-executive directors. Subsequent to these changes the Board now comprises two executive directors, 11 independent non-executive directors and one non-executive director.
Brief biographical details of each Board member are reported on pages 9 to 11.
The role of all directors is to bring independent judgement and experience to the Board’s deliberations and decisions in the interests of the Company.(2.2.2) (2.2.3)
All directors retire by rotation every three years. Unless requested to serve a further term by the Board, retiring directors are not proposed for re-election by the shareholders. In addition, shareholders must ratify the initial appointment of each director at the first annual general meeting of shareholders following that director’s appointment.
AUG2006
NOV2006
FEB2007
MAY2007
CS Seabrooke
–
NN Gwagwa –
GRC Hayward
JC Hodkinson
IN Matthews
P Maw
S Nothnagel – –
GM Pattison
MJ Rubin
Board process and evaluation(2.6) (2.6.1)
The Board meets four times a year and on an ad hoc basis should a particular issue demand its attention. In addition, the Board meets once
and the Group.
(2.7.1) (2.7.2) (2.7.4)
The Board’s authority is devolved sequentially through the Massmart
Committees as formally prescribed by the Massmart Governance Authorities. In addition, the Board has delegated certain specific responsibilities to Board Committees, as described more fully below. These Committees assist the Board and directors in discharging their duties and responsibilities under King II and the Governance Authorities. Full transparency of the Committees’ deliberations is encouraged and the formal minutes of all Committee meetings are included in the papers at the ensuing Board meeting.
(2.6.2)
The Board works to a formal agenda that covers strategy, structure, operating performance, growth initiatives, sustainability and other key activities of the Group. To do so effectively, formal documents and minutes of all Board Committees are included in the Board papers.
(2.1.7) (2.1.9) (2.7.8) (2.10.3)
cost, in the proper execution of their duties and responsibilities. They have direct, unfettered access to the Group’s external auditors, professional advisors and to the advice and services of the Company Secretary.
(2.6.3)
Independent directors have unrestricted access to any executive, manager or employee.
Introduction
Corporate Governance
102 MASSMART ANNUAL REPORT 2007
Corporate Governance
Acting Ethically
(2.3.6)
The Nomination and Remuneration Committee facilitates a comprehensive annual formal performance evaluation of the CEO, comprising a self-evaluation; an evaluation of the CEO by every non-executive director by way of a questionnaire which includes open-ended comments; and an appraisal of the CEO by each of his direct reports using a different questionnaire. The Chairman provides the summary and feedback of the above to the CEO, and he is encouraged to probe and debate any aspect of the evaluation with the Board.
(2.7.10) (2.8) (2.8.1) (2.8.2)
In addition, all Board members complete a detailed Board self-assessment each year, probing the composition, duties, responsibilities, process and effectiveness of the Board. Similarly, all Board Committee members complete detailed self-assessments covering their committees.
(2.3.5)
Finally, all Board members formally assess the Chairman’s performance and the Chief Executive Officer provides the feedback.
These assessments are approached in a constructive manner and provide valuable input that is used to enhance the effectiveness of the Chairman, the CEO and the Board and its committees.
(2.7)
Board Committees
REMUNE- RATION
RISK SUSTAIN-
CS Seabrooke
NN Gwagwa
GRC Hayward
JC Hodkinson
IN Matthews
P Maw
GM Pattison
MJ Rubin
(2.7.3)
Greater detail on each Committee’s terms of reference, focus areas and meetings held during the financial year is shown below.
(2.7.5)
Audit Committee(2.7.6) (2.7.7) (6.3.1) (6.3.2)
Nigel Matthews (Chairman), Chris Seabrooke and Peter Maw, all of whom are independent non-executive directors and who each have the requisite financial and commercial skills and experience to contribute to the
the Chief Financial Officer, senior financial executives of the Group and representatives from the external and internal auditors attend Committee meetings by invitation.
ensuring that they are designed in response to identified key business and control risks, and have been effective throughout the period;
audit functions;
that the appropriate accounting policies have been adopted and consistently applied;
appropriate; and
ensuring that they give a true and fair view, consistent with information known to the Committee.
(6.3.4)
Annually the Committee considers whether it is meeting its duties and responsibilities as set out in the Board-approved Committee charter.
(2.7.3) (6.1.2) (6.1.5)The Committee reviews the scope, as well as the independence and objectivity, of the external auditors. The nature and extent of non-audit services provided by the external auditors is reviewed annually to ensure that fees for such services do not become so significant as to call into question their independence of Massmart. The Committee has adopted a guideline that fees paid to the Group external auditors for non-audit services (excluding due diligence investigations) should not exceed the level of audit fees charged to the Group. If it appears that this guideline will be breached on a consistent basis, non-audit services will be outsourced to alternative auditors.
(6.1.1)
The Audit Committee annually recommends the appointment of the
including tax reviews and advice, and reviews of information technology systems and applications.
(4.2.3) (4.2.4)The Committee reviews the scope and coverage of the Internal Audit department, and has approved that department’s coverage and work plan for the forthcoming year.
The internal and external auditors have unfettered access to the Audit Committee and its members, and both present formal reports to the meetings.
The Audit Committee met three times during the year and members of the Committee also met regularly with the head of Internal Audit and the external auditors.
(2.7.9)
AUG2006
FEB2007
MAY2007
IN Matthews
CS Seabrooke
P Maw
103Corporate Governance
(2.7.5) (2.7.6) (2.7.7)
Nomination and Remuneration Committee
Committee comprised Messrs Chris Seabrooke (Chairman), Nigel
the Committee. The CEO attends by invitation.
(2.5.11) (2.5.12) (2.7.9)
The Committee is responsible for:
policy and the short- and long-term incentive policies for directors, executives, management and staff;
directors and executive management; and
for ensuring that succession plans are in place for the CEO, the
(2.5.7)
The Committee recommends to the trustees of the Massmart Employee Share Trust that award shares or options should be granted in terms of the scheme rules. Annually, the Committee reviews the Group’s employee benefit funds, specifically the in-house medical scheme and the provident and pension funds, considering their performance, financial stability and general principles of the benefit levels being applied.
Bi-annually, the Committee receives a report prepared by independent remuneration consultants on recent trends in, and the current levels of, short- and long-term executive remuneration in South Africa.
(2.5.4)
The Group’s philosophy and practice concerning executive remuneration is described later in this report on page 106, and greater details of individual directors’ remuneration are provided on pages 163 to 165.
The Nomination and Remuneration Committee met four times during the year.
(2.5.3) (2.7.9)
)
MEETINGS:
AUG2006
NOV2006
FEB2007
MAY2007
CS Seabrooke
IN Matthews
(2.7.6) (2.7.7) (3.2.6)
Risk Committee
The Risk Committee comprises Messrs Nigel Matthews (Chairman),
and Norman Gray (Head of Internal Audit). Nigel Matthews chairs both the Risk and Audit Committees to ensure the appropriate exchange of key issues between the two Committees.
In order to facilitate the effective operation of the Committee to assess risk at all levels in the Group, the Committee is not comprised exclusively of non-executive directors which is the preference of the King II Report.
The Board considers risk management to be a key business discipline designed to balance risk and reward and to protect the Group against risks and uncertainties that could threaten the achievement of our business objectives.
(3.1.2) (3.1.3)
The Board’s risk strategy has been established through debate with the executive directors where the Group’s risk tolerance has been considered and balanced against the drive towards the achievement of its strategies and objectives.
(3.1.1) (3.1.7) (3.2.2)
The Risk Committee is responsible to the Board to oversee the Group’s risk management programme. The day-to-day responsibility for risk management, including maintaining an appropriate loss prevention and internal control framework, remains with the executives of the Group and
(2.7.9)
2006 2007
IN Matthews
P Maw
GM Pattison
GRC Hayward
S Nothnagel –
–
N Gray
In addition to these meetings, an interim report is prepared annually in February by the executives on the Committee and is circulated to the Committee. This report evaluates the status of the risks identified in the current Group Risk Register, notes any risk incidents that may have occurred since the previous Committee meeting and comments on the internal and external risk environment.
(2.7.3) (3.1.5) (3.1.6) (3.2.3)
The Committee’s primary role is one of oversight and therefore it reviews and assesses the dynamic interventions, within the Group’s available resources and skills, required in response to business-specific, industry-wide and general risks. The Committee tables a Group Risk Register,
Committee, to the Board annually in August.
(3.1.4) (3.2.7)
This register summarises the major risks facing the Group, taking into account the likelihood of occurrence, the potential impact, and any mitigating factors or compensating controls. Together with the ambit of the Audit Committee, the Risk Committee oversees the maintaining of a sound system of risk management and control with regard to operations, safeguarding assets, reliability of management reporting, and compliance with laws and regulations.
(2.1.11) (3.2.7) (8.2)
The 10 major risks facing the Group, not strictly ranked in priority, are shown in the table on pages 104 and 105.
104 MASSMART ANNUAL REPORT 2007
Corporate Governance
Acting Ethically
Risk ResponseANOTHER MAJOR STORE FIRE
In the last 13 years Makro has had three stores totally destroyed by fire. The most recent fire, in May 2004, allegedly caused by a subcontractor working on the roof, occurred despite significant and costly fire detection and prevention measures implemented following the previous Makro store fire in
Makro, and possibly the Group, would be able to secure adequate catastrophe insurance cover or, alternatively, may secure adequate insurance cover but at a significant premium. Compounding this risk is the relatively high insurable values associated with inventory contained in the Group’s larger warehouse
Makro and the rest of the Group work closely with external risk assessors, insurance brokers and our major insurers in order to ensure that our stores have the highest possible level of fire detection and prevention.
secure, effective and efficient IT systems, including data and information. Major IT implementations or initiatives can distract management, be costly, destabilise the current IT platform and/or perform sub optimally post-implementation. Finally, at a strategic level, there exists the potential for misalignment between business strategy and the IT capability, which can result in reduced operational effectiveness.
All the Group’s IT development, for hardware and software, must be specifically approved and then monitored by the Group’s Technology, Information and Processes Forum (TIP), representing all the Chains’ IT executives, Massmart Internal Audit and, where appropriate, the external
Massmart Internal Audit has significant IT expertise and independently assesses all IT developments and is part of the “go-live” decision on any project. External auditors review the IT general control environment in the
There is the possibility of: the Group unnecessarily or inadvertently increasing its market shares in potentially low- or no-growth South African markets; or that the rate of market growth slows dramatically in the Group’s major categories; or that there is a change in market structure caused by long-term shifts in consumer behaviour or preferences. Any of these potential scenarios may have potentially adverse financial consequences over the longer term.
growth relative to the market, i.e. market share movements. The Group reviews new product categories and businesses within strict strategic criteria, and only considers exposure in those markets that offer good growth opportunities. All store opening decisions are approved at Group level after being financially assessed against a ten-year view of the socio-demographics of that particular market (this view is provided by external researchers).
This covers four broad issues including: the national scarcity of retail-specific skills; the challenge to develop and retain sufficient business and leadership skills internally to ensure our longer term competitiveness; a possible overdependence on key leaders in the Group; and the need for an actively managed leadership succession pipeline.
The Group considers this a major area of focus and deals with it on several levels. The Executive Committee actively monitors and manages the progress, development and likely succession plans for the “Top 200” employees, as well as monitoring a further 200 employees. In addition, there are in-house education programmes prepared and presented in conjunction with GIBS and Babson Retail that focus on developing our middle and junior executives. Annual “fire-side chats” are held with each executive in the Group, which are attended by that person’s superior and a third person – either the Group Organisation Executive or HR person in that Chain. The Group’s remuneration policy, including short-term incentives, is to pay salaries in the upper quartile.
There is the possibility of adverse or undue reputational exposure due to the Chains or the Group not fulfilling, or under delivering towards BEE requirements. In the broader national context, inadequate transformation at all levels by us and other South African businesses will curb the country’s longer-term growth potential and maintain the current, unacceptable and unsustainable, levels of social and economic inequality.
executive level.
The Board-approved BEE Strategy, dated February 2004 and covering the elements of the Code of Good Practice, has been effectively implemented Group-wide and we believe that much progress has been achieved.
meetings, and a senior executive at Massmart has overall responsibility for delivering to the strategy.
A BEE staff share issue amounting to 10% of the pre-dilution shares of Massmart was implemented in October 2006. All permanent Massmart employees, not already participants in the current share trust, are beneficiaries. The rights awarded to general staff have voting and dividend rights.
105Corporate Governance
Risk Response
This refers to the impact of the consequences of the virus on Massmart and its broader community. Separate from the human tragedy, potential business impacts include higher levels of employee deaths, reduced available skills, lower productivity and higher absenteeism, and higher direct and indirect costs of employment. Accelerated death rates amongst our consumer base may affect local sales or may render uneconomic certain stores that are significantly exposed.
Over the last three years, HIV prevalence has been measured in all the
statistical methods, is 7% amongst permanent employees and 12% amongst
support initiatives and offering voluntary counselling and testing programmes. In 2006, Massmart implemented a comprehensive HIV/Aids awareness and treatment programme which includes the provision of free antiretrovirals to all permanent staff and spouses.
This concern focuses on two potential impacts, the first being the financial impact on the business’s trading and the second being the possible adverse effect on consumer expenditure of dramatic changes in key economic variables including inflation, interest and exchange rates.
and indirectly, any sudden changes in the exchange rate will affect the stock valuation, although there may be a lag where the Group has entered in forward exchange contracts on its own direct imports to combat this eventuality. Furthermore, foreign currency fluctuations in those African countries where Game operates stores can also affect the level of sales and earnings reported by those stores in South African currency, as well as resulting in potentially adverse balance sheet translation difference.
Increases in interest rates will make South African corporate funding more expensive, with an adverse impact on profitability. Higher inflation rates may affect Group profitability where these cost increases cannot be controlled or
inflation rates may make long-term property leases with higher fixed escalation rates appear expensive and potentially affect profitability.
South African consumer behaviour appears to be more affected by sudden and large changes in economic variables, including exchange rates and local interest and inflation rates, than by gradual changes in these variables. It follows that a sudden deterioration in one or several of these economic variables may dampen levels of consumer expenditure, thereby reducing sales growth and potentially Chain or Group profitability too.
All direct foreign exchange liabilities are covered forward, resulting in certainty about the expected landed cost of merchandise and also providing a 4 – 6 month buffer against changing the cost of imported inventory should there be any sudden deterioration in the exchange rate. The value of inventory in the supply chain between manufacturer and retailer has also been actively managed lower by all participants. This reduces the extent of any imported inventory that is over- or under-valued following a sudden change in the exchange rate.
Interest rates on the Group’s medium-term debt has been fixed to provide certainty as to the future cost of this funding, and this will keep the Group immune to any adverse increases in corporate borrowing rates.
possible, taking market conditions into account, and certain property leases are inflation-linked, within a cap (maximum rate) and collar (minimum rate).
Salary and wage increases are negotiated in the context of the current South African socio-economic environment, and where a negotiated increase may be higher than is suitable, productivity measures may be introduced to reduce the net cost of the higher wages.
There is the risk of human, financial and reputational exposure through high levels of inventory shrinkage, armed robberies for cash or merchandise, and losses from fraud, internal and external. The rate of armed and violent crime has increased to unacceptable levels and if left unchecked can adversely affect employees, customers, the business and the overall business environment.
The Group is continually improving its procedures and controls to ensure that the risk of potential losses or injury through criminal incidents is minimised. Massmart is also an active participant in the Business Against Crime/ECR forum that shares information on all incidents of crime across the major retail chains. There is a whistle-blowing facility, Tipoffs Anonymous, through which employees, customers or suppliers can report unethical or dishonest acts. Staff fraud is dealt with severely.
Game has 12 stores across sub-Saharan Africa and Makro two stores in Zimbabwe. The level of complexity unavoidably increases with the greater distances involved, the associated communication and logistical challenges and the multiple regulatory environments. There is also the increased exposure to foreign currencies and the related potential volatility of Rand-reported sales and earnings. There is the small and unpredictable risk that a store’s earnings, assets, repatriation of cash and/or inventory may be seized or prevented from being lawfully accessed by Massmart.
Before investing in each country, a thorough country pre-evaluation is performed, which must include confirmation of a transparent foreign exchange policy. There is a dedicated team, led by a senior executive, responsible for all Game’s African stores. The risk diversifies slightly with multiple African stores.
There is a growing threat of there being potentially significant reputational risk associated with the failure to meet stakeholders’ increased expectations around sustainability in its many forms. These expectations may be shaped by a variety of standards of conduct as encapsulated in codes such as, but
Socially Responsible Investment Index, Broad-based Black Economic Empowerment codes of good practice, Marine Stewardship Council, Forestry Stewardship Council and ISO 14001 certification. Increasingly, the Group needs to comply with some or all of these standards.
The Group has implemented transparent and honest stakeholder interactions with special interest groups, which inform our view on stakeholder expectations and the management thereof. The ongoing identification, monitoring and adoption of relevant principles and standards of sustainability that are consistent with Massmart’s core values and industry norms.
106 MASSMART ANNUAL REPORT 2007
Corporate Governance
Acting Ethically
(2.6.5) (2.7.6) (2.7.7)
Sustainability Committee
The Sustainability Committee comprises Messrs KK Combi (Chairman),
Mokhobo.
(2.6.5) (2.7.3)
The role of the Committee is to assist the Group to discharge its business sustainability responsibility with respect to the implementation of practices that are consistent with good corporate citizenship. This includes evaluating and formulating an opinion about the Group’s Broad-based Black Economic Empowerment (BBBEE), transformation, Corporate Social Investment (CSI), environmental, health and safety, and stakeholder engagement activities.
(2.7.9)
AUG2006
NOV2006 2006
JAN2007
FEB2007 2007
KK Combi
GM Pattison
MJ Rubin
(8.2)
A separate sustainability section appears in this report on pages 73 to 98.
The Sustainability Committee’s priority during the year in review was to evaluate Massmart’s BBBEE and transformation performance. Their evaluation findings are described in the Sustainability section on page 86 of this report.
Annual General Meeting(2.5.3) (2.7.9) (6.3.5)
Attendance by all directors at Massmart’s annual general meeting is encouraged while attendance for Committee Chairmen is compulsory. At the November 2006 Massmart annual general meeting the Chairmen of the Remuneration and Nomination, Audit and Risk Committees were in attendance, as were the Board Chairman, CEO and CFO. In addition, five other non-executive directors attended the annual general meeting.
Executive CommitteeThe Massmart Executive Committee is the most senior executive
Committee is chaired by the CEO (Grant Pattison) and comprises the Chief Financial Officer (Guy Hayward), Group Organisation Executive (Pearl Maphoshe), Group Commercial Executive (Jay Currie), Group
of Shield and Jumbo) resigned with effect from June 2007.
The Committee deliberates, takes decisions or makes recommendations on
the Board-approved Governance Authorities, the decisions or recommendations are sometimes referred to the Board or its relevant Committee for final approval, while in other cases the power to take decisions is delegated to individual subsidiary boards, or subsidiary executive committees.
The Executive Committee has specific responsibility, inter alia, for:
markets and competition;
assets;
throughout the Group; and
management appointments.
In many respects, the relationship between the Massmart Board and the Executive Committee is analogous to the Supervisory Board and Manage-ment Board relationship found in the European governance model.
(2.5) (2.5.10)
Remuneration of directors and executivesMassmart strives for remuneration policies that enable it to recruit, retain and motivate the executive talent needed to achieve superior performance. The Nomination and Remuneration Committee, with periodic advice from external executive remuneration consultants, ensures the provision of executive remuneration packages that are competitive with reference to other major South African retail companies, as well as other companies similar to Massmart in their size, spread and complexity.
(2.5.5)
The Massmart remuneration policy strives for fixed remuneration at the median to upper quartile of comparable positions, but places particular emphasis on generous annual incentives for high performance for both executive directors and executive management. This policy, communicated to and understood by the Group’s executives, codifies a range of performance incentives linked to annual headline earnings per share
an element of the annual incentive bonus was linked to non-financial performance, specifically the achievement of employment equity targets approved by the Nomination and Remuneration Committee. This incentive will amount to between one and three months’ salary in addition to the headline earnings per share or profit before tax growth bonuses. The Nomination and Remuneration Committee also has the discretion to make ad hoc awards for superior individual performance.
(2.5.7)
In addition, long-term equity incentive plans ensure the alignment of executive reward with shareholders’ interests, in particular the sustained creation of shareholder value. New issues of annual allocations of shares or options are only allowed when Massmart’s growth in earnings per share
is based upon a factor of the executive’s total prior year remuneration plus incentive bonus.
107Corporate Governance
Committee can elect to receive scheme shares, whilst all other participants receive options.
(2.5.1)
Non-executive directors receive fees in the top quartile for their role as directors and for their roles on Board Committees.
to 165.
(6.2.6) (8.1)
Shareholder communication
regardless of how hard this may be in periods of difficulty or underperformance.
(7.1) (7.2) (8.4.3)
Massmart reports formally to shareholders twice a year (in February and August) when its half-year and full-year results, together with a thorough executive overview, are announced and issued to shareholders and the media. On both occasions the Chief Executive Officer, Chief Financial Officer and selected Group executives give presentations to institutional investors, analysts and the media.
Early in January and July, shortly after the conclusion of the half-year and full-year trading periods, on release of the annual report and at the Group’s annual general meeting in November, Massmart releases sales updates reporting on the Group’s year-to-date sales performance.
Chief Financial Officer together meet regularly with institutional shareholders and, in addition, are available for meetings or conference calls with analysts and any existing or prospective Massmart shareholder.
Massmart’s website, www.massmart.co.za, provides financial and business information about the Group and includes electronic copies of all recent formal announcements, public statements and presentations made by Massmart.
Share buy-back programmeAnnually, the Group seeks, and obtains, the approval of the shareholders in general meeting to purchase Massmart shares. This authority – valid until the following year’s annual general meeting and subject to the
purchase its own shares up to a maximum of 15% of the issued shares, at a price not greater than 10% above the preceding five-day weighted average. Shareholders have been asked to renew this authority at the forthcoming November 2007 annual general meeting.
R313 million were purchased by a Massmart subsidiary or by the Massmart Employee Share Trust. The amount and timing of any future purchases will be determined by the Board and are dependent on the Board’s view on the intrinsic value of Massmart shares, the ruling market price from time to time, and prevailing market conditions.
The Massmart Employee Share Trust acquires shares from time to time to partially mitigate the dilution caused by the Company issuing new shares when options are exercised by participants.
(2.9)
Share dealings(2.9.1) (2.9.2)
No director, executive or employee may deal, directly or indirectly, in Massmart shares where that person may be aware of unpublished price-sensitive information. There are strict closed periods during which all directors, executives and employees are not allowed to deal in Massmart shares. The periods begin one month prior to the end of each reporting
release of the Group results. A closed period also applies whenever Massmart issues a cautionary announcement.
In addition, all directors, executives and employees, and their associates, as defined by the JSE, are not allowed to deal in Massmart shares in the final hour of trading on the JSE. All share dealings by a director, executive or employee must be authorised by either the Chief Executive Officer or Chief Financial Officer. Any dealings by the Chief Executive Officer are authorised by the Chairman.
(3.2.3)
Accountability, risk and control(3.2.5) (8.4.1)
The Board recognises its responsibility to report a balanced and accurate assessment of the Group’s financial results and position, its business, operations and prospects. Aspects of how this is achieved are covered in the section below.
Internal control framework(2.1.6)
Massmart maintains clear principles and procedures designed to achieve accountability and control across the Group. These are codified in the Governance and Approvals Framework that describes the specific levels of authority and the required approvals necessary for all major decisions at both Group and divisional level. Through this framework, operational and
and Chain boards. This is designed to maintain an appropriate control environment within the constraints of Board-approved strategies and budgets, while providing the necessary local autonomy for day-to-day operations.
Audit Committee(6.2.1) (6.2.2)
The Audit Committee receives regular reports on Group companies’ financial performance, internal controls, adherence to accounting policies and areas of significant risk, amongst others. After considering these reports, the Committee formally reports to the Board, twice each year, regarding the overall framework and effectiveness of controls. The Group’s interim reports are always subject to independent review by the external auditors.
Internal Audit(4.1.1) (4.2.1)
The Audit Committee considers Massmart Internal Audit to be an independent, objective body providing assurance to the Group’s activities. Internal Audit comprises a dedicated team of 30 staff that, although managed from Massmart Corporate, is deployed group-wide. The team is comprised of appropriately qualified and experienced personnel, including internal audit professionals and managers with retail experience, to ensure the delivery of a relevant and high-quality service. The Internal Audit team has 69 degrees and over 300 years of work experience of which 35% is in retail and 60% is in audit. Pleasingly, 67% of the audit staff and 60% of audit management are ACI, compared to 30% and 45% five years ago.
108 MASSMART ANNUAL REPORT 2007
Corporate Governance
Acting Ethically
(4.1.2) (4.1.4) (4.1.6)
The responsibilities of Internal Audit are defined and governed by a charter approved by the Audit Committee and Board. The Head of Massmart Internal Audit reports functionally to the Audit Committee to ensure the department’s independence and reports only administratively to the Chief Financial Officer. The appointment or dismissal of the Head of Internal Audit is subject to ratification by the Audit Committee. Internal Audit has unfettered access to the Board and all information within the Massmart
Internal Audit and all employees are required to cooperate positively.
(4.1.5)
The Internal Audit team, which has the unequivocal support of the Board and the Audit Committee, formally reports any material findings and
on a quarterly basis. The reports highlight whether actual or potential risks to business are being appropriately managed and controlled. Progress in addressing previous unsatisfactory audit findings is monitored until Internal Audit can report the proper resolution of the problem area. In addition, the Head of Internal Audit formally attends every Audit
and provides an advisory role to both the Risk Committee and the Ethics Officers Forum.
(3.2.1) (4.2.2) (4.2.3) (4.2.4)
Massmart Internal Audit applies a risk-based approach that aligns its audit methodology to the internal and, where applicable, external risks facing Massmart. The annual audit plan, which is pre-approved by the Audit Committee, is determined through a continuous assessment and
some audit tasks are outsourced to consultants with appropriate skills, for example certain forensic work or highly specialised IT reviews. Internal Audit utilises audit programmes and technologies that are designed and selected after assessing the significant business, strategic and control risks. The results of these programmes provide audit assurance regarding the adequacy and effectiveness of controls. In addition to providing this assurance, Massmart Internal Audit applies its knowledge and understanding to advise local and executive management on best practice processes and controls that could be implemented to improve overall effectiveness and efficiency.
There is significant Internal Audit involvement in Information Technology (IT) throughout the Group in order to ensure satisfactory IT governance and assurance. All new major IT systems in the Group require specific Massmart Internal Audit sign-off prior to implementation. The Internal Audit role is twofold: to assess the process and controls around large IT projects at significant phases of these projects; and to assess the control environment within existing IT systems and the Group’s general computer control environment.
(4.2.5) (6.1.3) (6.1.4)
Massmart Internal Audit and External Audit scope and efforts are properly coordinated in order to provide efficient and effective assurance to the Audit Committee.
(4.1.3)
An independent quality assurance review was completed in the year on Massmart Internal Audit by PricewaterhouseCoopers. This assessed Massmart Audit against the International standards for the professional practice of Internal Auditing as promulgated by the Institute of Internal Auditors. Massmart Audit was found to “generally conform”, which is the highest compliance rating of the Institute of Internal Audit standards. This review included a qualitative benchmarking process that compared Massmart Internal Audit to an international database. The benchmarking process noted Massmart Internal Audit’s maturity as ‘strong practice’. The benchmark review concluded “that Massmart Internal Audit enjoys incomparable status with regard to the authority and sponsorship granted to it by the Audit Committee and Management and the independence displayed in the execution of internal audit activities, as best practice was exceeded by some distance.”
(3.1.3)
Risk
The Board assesses the risks in the Group’s business environment, with a view to eliminating or reducing them in the context of the Group’s strategies and operations.
Litigation and legal
In the normal course of business, Massmart is subject to various legal proceedings, actions and claims. These matters are subject to risks and uncertainties that cannot be reliably predicted. The Board does not believe that there is any material pending or threatened legal action.
Information technology
Protecting Massmart’s electronic assets is increasingly complex as networks, systems and electronic data expand and, in some cases, are
internet for communication brings additional risk. Ensuring proper system security, data integrity and business continuity is the responsibility of the Board, but is given effect by the Audit Committee, the Risk Committee, the Massmart Technology, Information and Process Forum (TIP) and Massmart’s formally contracted information technology business partners and providers.
Financial risk and appraisal
Financial targets agreed in Group budgets and strategy processes are predicated on assumptions about the future that are uncertain and may prove incorrect or inaccurate. The monitoring and management of this risk is the responsibility of the Executive Committee. Monthly performance is measured and compared to the budget and prior year, and corrective or remedial action taken as appropriate.
procedures, including reviews by internal and external auditors, there are risks arising from the Group’s cash management and treasury operations, direct and indirect taxation, and employee or third-party fraud or economic crime.
Corporate ethics and compliance(5.2.1) (5.2.2) (5.2.3) (5.2.4)
Massmart is committed to achieving the highest standards of ethical behaviour and continued its strong emphasis on promoting awareness of, and compliance with, Massmart’s Code of Ethical Practice.
Massmart maintained its close relationship with the Ethics Institute of South Africa and a further three employees attended the Ethics Officers Certification course and two more employees were accredited as ethics officers. Furthermore, the Institute requested that Massmart provide material for an ethics case study that is to be included in a booklet that will be distributed by the United Nations to multinational companies and governments around the world.
acquired Massbuild division, and the formulation and regular meeting of the Ethics Officers Forum have ensured the continued focus on the consistent application of ethics practice and training in the organisation.
(3.1.8)
the ethics climate at Massmart. The fully independent line, the operation
suppliers with the opportunity to report perceived cases of unethical practice. All reports received are thoroughly investigated and acted upon under the guidance of the Group Ethics Officer who is responsible, from an ethics perspective, to the Massmart Audit Committee. Total calls and reports for the year under review were 44% higher than the previous year.
109Corporate Governance
REPORTS
July 33 3 3 27 3
August 43 1 7 35 4
September 49 7 10 32 8
October 51 8 18 25 10
November 42 7 7 28 7
51 6 11 34 9
January 58 7 8 43 9
February 58 2 15 41 8
March 73 3 21 49 13
April 65 1 14 50 6
May 49 1 9 39 6
June 43 7 9 27 10
Total 615 53 132 430 93
110 MASSMART ANNUAL REPORT 2007
KING II REFERENCE CONTENT PAGE2 BOARDS AND DIRECTORS2.1 The Board ..................................................... 9-11, 1012.1.1 Accountable and responsible for Company performance
and affairs .............................................................1012.1.2 Unitary board structure of executive and non-executive
directors .................................................................1012.1.3 Provide strategic direction, appoint CEO and plan
succession ....................................................... 17, 1012.1.4 Full and effective control over Company .....................1012.1.5 Ensure compliance to laws, regulations and codes of
business practice ....................................................1012.1.6 Define levels of materiality .............................. 101, 1072.1.7 Unrestricted access to all Company information ..........1012.1.8 Develop corporate code of conduct ...........................1012.1.9 Option of independent professional advice .................1012.1.10 Consider effectiveness due to size, diversity and
demographics ...........................................................172.1.11 Identify key risk areas and key performance
indicators ......................................................... 18, 1032.1.12 Identify and monitor non-financial aspects ..................782.1.13 Record facts and assumptions concluding going-
concern status ................................................ 34, 1182.1.14 Explain effect of proposed special resolutions
in notice .................................................................1932.1.15 Encourage shareholders to attend AGM ....................1912.1.16 CV of director standing for re-/election at AGM to
accompany notice in annual report ......................... 9-112.1.17 Charter of responsibilities disclosed in annual
report .....................................................................1012.1.18 Balance corporate governance and
entrepreneurship .....................................................1012.2 Board composition .................................................9-112.2.1 Balance of executive and non-executive
directors .......................................................... 17, 1012.2.2 Procedures for appointments to the Board .................1012.2.3 Programme ensuring staggered rotation for
Board continuity .....................................................1012.3 Chairperson and Chief Executive Officer ....................1012.3.1 Clear division of responsibilities ................................1012.3.2 Chairperson preferably independent and non-
executive ........................................................ 17, 1012.3.3 Functions of CEO and Chairperson to
be separate ...........................................................1012.3.4 Requirements where role of CEO and Chairperson
are not separate .......................................................na2.3.5 Board to appraise performance of Chairperson .......... 1022.3.6 Chairperson to appraise performance of CEO ..............1022.4 Directors ...............................................................9-112.4.1 Appropriate balance of power and authority ................1012.4.2 Quality of non-executive directors ................................172.4.3 Capacity of directors categorised in annual report ..... 9-112.4.4 Shadow directors to be discouraged .............................nr2.4.5 Holding non-executive directorships
in other companies ................................................ 9-112.4.6 Formal orientation programme for
incoming directors ......................................................nr2.4.7 New directors to receive development and
education ...................................................................nr2.4.8 ”Fit and proper” test for new directors ..........................nr2.5 Remuneration ..........................................106, 163-1672.5.1 Sufficient for quality required by Board .......................1072.5.2 Appoint Remuneration Committee .............................101 2.5.3 Membership of Remuneration Committee
disclosed in annual report and chairperson to attend AGM .................................................... 103, 106
KING II REFERENCE CONTENT PAGE2.5.4 Full disclosure of director remuneration on
individual basis ............................................... 103, 1642.5.5 Substantial part of remuneration to be
performance-based ..................................................1062.5.6 Shareholders to approve share options granted
to non-executive directors ..........................................na2.5.7 Factors to consider when issuing share options ... 103, 1062.5.8 Overriding principle of full disclosure by director
applies to all share schemes .....................................1632.5.9 Executive directors’ fixed-term contracts should
not exceed three years ................................................nr2.5.10 Statement of Remuneration Philosophy in
annual report ..........................................................1062.5.11 Remuneration Committee to play integral part
in succession planning of CEO and Executive Committee ..............................................................103
2.5.12 Remuneration Committee to determine non- executive director fees and approval to be obtained at AGM ............................................ 103, 191
2.6 Board meetings .......................................................1012.6.1 Meet at least quarterly and disclose in annual
report .....................................................................1012.6.2 Efficient and timeous briefing of Board .......................1012.6.3 Non-executive directors to have access to
management ...........................................................1012.6.4 Regular review of effectiveness of internal controls ......1022.6.5 Inclusion of relevant non-financial information ............1062.7 Board committees ...................................................1022.7.1 Assist Board ............................................................1012.7.2 Formal delegation of duties and responsibilities
to committees .........................................................1012.7.3 To have clear terms of reference, lifespan,
function, reporting process and scope of authority ................................................ 102, 103, 106
2.7.4 Transparency and full disclosure to the Board .............1012.7.5 Minimum requirement: Audit and Remuneration
committees .................................................... 102, 1032.7.6 Non-executive directors to
play important role .........................101, 102, 103, 1062.7.7 Preferably chaired by independent non-
executive director ............................101, 102, 103, 1062.7.8 Free to take independent outside advice ....................1012.7.9 Disclose composition, objectives and meetings held in
annual report; and chairpersons to attend AGM ........................................ 102, 103, 106
2.7.10 Subject to regular evaluation by Board .............. 101, 1022.8 Board and director evaluation ...................................1022.8.1 and 2.8.2 Board effectiveness to be assessed at least
annually ..................................................................1022.9 Dealings and securities ................................... 107, 1172.9.1 and 2.9.2 Formal policy concerning closed periods of trading ......1072.10 Company Secretary ..................................................1162.10.1 Pivotal role in corporate governance ..........................1162.10.2 Empowered to fulfil duties ...........................................nr2.10.3 Provide guidance to directors with regard to
discharge of their duties .................................. 101, 1162.10.4 Induct new directors and assist CEO with
annual Board plan ......................................................nr2.10.5 Central source of guidance and advice on ethics
and good governance ...............................................1162.10.6 Subject to “fit and proper” test ....................................nr3 RISK MANAGEMENT3.1 Responsibility
3.1.1 Board responsible for risk management process, management accountable for execution .....................103
3.1.2 Set risk strategy policies and communicate to employees ............................................................. 103
The following index represents the Group’s compliance with the King II Report. More detail can be found on pages 101 to 109 of this report.
Corporate Governance
King II Index
111Corporate Governance
KING II REFERENCE CONTENT PAGE3.1.3 Determine Company’s tolerance for risk ............ 103, 1083.1.4 Maintain sound system of risk management
and internal controls to provide assurance of organisational objectives ...........................................103
3.1.5 Ensure documented assessment of key risks at least annually ..........................................................103
3.1.6 Board Committee to review risk management process and significant risks .....................................103
3.1.7 Risk management and internal control to be embedded in Company practice ................................103
3.1.8 Confidential reporting process to cover fraud and other risks ........................................................108
3.2 Application and reporting3.2.1 Comprehensive system of control
to be established .....................................................1083.2.2 Risks to be assessed on an on going basis ................1033.2.3 Develop system of risk management that enhances
stakeholders’ interests .................................... 103, 1073.2.4 Board to identify and monitor key risk areas and
performance indicators ..................................... 18, 1013.2.5 Reports from management to provide balanced
assessment of risks and effectiveness of system of control ................................................................107
3.2.6 Board responsible for disclosure in annual report ........1033.2.7 Risk to be viewed from negative and positive
perspective .............................................................1034 INTERNAL AUDIT (IA)4.1 Status and role4.1.1 Effective internal audit function .................................1074.1.2 Board to formally define purpose, authority
and responsibility .....................................................1084.1.3 Consistent with Institute of Internal Auditors (IIA) ........1084.1.4 Head of IA to report to CEO and have full access to
chairpersons of the Board and Audit Committee .........1084.1.5 Report at all Audit Committee meetings .....................1084.1.6 Audit Committee involved with appointment/dismissal
of head of IA ...........................................................1084.1.7 Segregation of duties between Internal and
External Audit ..........................................................1024.2 Scope of Internal Audit4.2.1 Independent, objective assurance and
consulting activity ....................................................1074.2.2 Provide assurance on processes and
confirmation of control systems .................................1084.2.3 IA plan based on risk assessment .................... 102, 1084.2.4 Audit Committee to approve IA work plan .......... 102, 1084.2.5 Co-ordinate with internal and external
providers of assurance to ensure proper coverage of controls ........................................ 102, 108
5 INTEGRATED SUSTAINABILITY REPORTING5.1 Sustainability reporting5.1.1 Report at least annually..............................................985.1.2 to 5.1.4 Report on adopted principles, implementation
of practices and demonstration of resulting changes and benefits .................................................82
5.2 Organisational integrity / code of ethics5.2.1 Codify standards of ethical behaviour .........................1085.2.2 Demonstrate commitment to code ............................1085.2.3 Disclosure of adherence to code ...............................1085.2.4 Dealings with individuals/entities without same
level of integrity ..........................................................nr
KING II REFERENCE CONTENT PAGE6 ACCOUNTING AND AUDITING6.1 Auditing and non-audit services 6.1.1 Audit Committee to recommend external
auditors ..................................................................1026.1.2 Auditors’ professional ethics and independence ..........1026.1.3 External auditors to work in conjunction with
Internal Audit.................................................. 102, 1086.1.4 Consultation between external and
internal auditors ......................................................1086.1.5 Audit Committee to set principles for utilisation
of external auditors for non-audit services ..................1026.2 Reporting of financial and
non-financial information6.2.1 Audit Committee to determine review level of
interim report ..........................................................1076.2.2 Reasons and auditors review tabled at
Board meeting .........................................................1076.2.3 Facts and assumptions used in going-concern
assessment to be minuted by the Board ....................1186.2.4 Review going-concern assessment at interim ..............1026.2.5 State where non-financial aspect subject to
external validation .......................................................nr6.2.6 Distribution via broad range of communication
channels .................................................................1076.3 Audit Committee6.3.1 Board-appointed with majority independent
non-executive directors.............................................1026.3.2 Chairperson to be an independent non-
executive director and not the Chairperson of the Board ...............................................................102
6.3.3 and 6.3.4 Written terms of reference with fact disclosed in annual report ................................................. 101, 102
6.3.5 Membership disclosed in annual report and Chairperson to attend AGM .......................................106
7 RELATIONS WITH SHAREOWNERS7.1 and 7.2 Constructive engagement with institutional
investors .................................................... 84, 85, 1077.3 Effect of proposed special resolutions to be
included in notice of AGM.........................................1937.4 Utilise poll for special business or contentious
issues ........................................................................nr8 COMMUNICATION8.1 Balanced and understandable report to
stakeholders ................................................ 73-98, 1078.2 Transparency and accountability concerning
non-financial matters ...........................73-98, 103, 1068.3 Comprehensive and objective assessment of
Company activities .......................................................18.4 Directors to report on the following in
annual report: 8.4.1 Directors’ responsibility to prepare financial
statements that fairly present state of affairs of the Company ...................................... 107, 115, 116
8.4.2 Auditors’ responsibility to report on fair presentation of affairs ..............................................115
8.4.3 Maintenance of adequate accounting records, internal control and risk management ....... 107, 115, 116
8.4.4 Consistent use of appropriate accounting policies .................................................116
8.4.5 Adherence to applicable accounting standards ...........123 8.4.6 Going-concern assumption .......................................1188.4.7 Adherence to the Code ............................................1019 Implementation of the Code duty and responsibility of
Board and individual directors ...............................101
na: not applicablenr: not reported
c
King II Index
112 MASSMART ANNUAL REPORT 2007
In the year 2006, the Global Compact Regional Learning Forum (RLF) arranged for the preparation of seven case studies pertaining to anti-corruption practices and initiatives from around southern Africa. These case studies documented different approaches to fighting corruption in the corporate sector - drawn from two southern African countries, namely Malawi and the Republic of South Africa.
“It is not often that one finds a company where financial success is matched by demonstrated ethical commitment. Massmart may be viewed as providing tangible evidence for the assertion that well-managed companies are motivated to act ethically.”SOURCE: PREPARED BY ETHICS INSTITUTE OF SOUTH AFRICA FOR GLOBAL COMPACT CASE STUDY SERIES
Two of these cases were prepared for the 4th International Learning Forum meeting of the UN Global Compact, which took place from the 22nd - 24th of November 2006 in Accra, Ghana. The other five were prepared separately by the Ethics Institute of South Africa, which was commissioned by the RLF. The following is an extract from one of the five case studies prepared by the Ethics Institute of South Africa:
Group Consolidated Annual Financial Statements
Group Consolidated Annual Financial Statements
Gro
up C
onso
lidat
ed
Annu
al F
inan
cial
S
tate
men
ts
113
MASSMART ANNUAL REPORT 2007114
115Group Consolidated Annual Financial Statements
Group Consolidated
Approval of the Annual Financial Statements
Approval of the Annual Financial Statements
Companies Act of South Africa. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, these financial statements present fairly, in all material respects, the consolidated and separate financial position of Massmart Holdings Limited as at 30 June 2007, and its consolidated and separate financial performance and consolidated and separate cash flows for the year then ended in accordance with International Financial Reporting Standards and in the manner required by the Companies Act of South Africa. Deloitte & ToucheRegistered Auditors
Per B EscottPartner10 October 2007
Buildings 1 and 2, Deloitte PlaceThe Woodlands Office Park, Woodlands DriveSandton
National Executive: GG Gelink Chief Executive, AE Swiegers Chief Operating Officer, GM Pinnock Audit, DL Kennedy Tax, L Geeringh Consulting, L Bam Strategy, CR Beukman Finance, TJ Brown Clients & Markets, NT Mtoba Chairman of the Board, J Rhynes Deputy Chairman of the Board
A full list of partners and directors is available on request.
The annual financial statements were approved by the Board of Directors on 10 October 2007 and signed on its behalf by: GM PattisonChief Executive Officer GRC HaywardChief Financial Officer
Company Secretary certificateI, Ilan Zwarenstein, the Company Secretary for Massmart Holdings Limited, certify that to the best of my knowledge and belief, all returns required of a public company have, in respect of the year under review, been lodged with the Registrar of Companies and that all such returns are true, correct and up to date. I ZwarensteinCompany Secretary
Annual compliance certificate for issuers with a primary listing on the JSEI, the undersigned, Guy Robert Charles Hayward, being duly authorised hereto, certify to the JSE Limited (“the JSE”) that Massmart Holdings Limited and its directors have, during the twelve months ended 31 December 2006, complied with all Listings Requirements and every disclosure requirement for continued listing on the JSE imposed by the JSE during that period. GRC HaywardDuly authorised hereto, for and on behalf of the directors of the Company
Independent auditor’s report
To the members of Massmart Holdings Limited
We have audited the Group annual financial statements and annual financial statements of Massmart Holdings Limited, which comprise the consolidated and separate balance sheets as at 30 June 2007, and the consolidated and separate income statements, the consolidated and separate statements of changes in equity and consolidated and separate cash flow statements for the year then ended, and a summary of significant accounting policies and other explanatory notes and the directors’ report, as set out on pages 116 to 188.
Directors’ responsibility for the financial statements
The Company’s directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and in the manner required by the
as at 30 June 2007
116 MASSMART ANNUAL REPORT 2007
Group Consolidated
Directors’ Report
Directors’ responsibilitiesThe directors acknowledge responsibility for the preparation of the annual financial statements, which, in their opinion, fairly present the results and cash flows for the financial year and the state of affairs of Massmart Holdings Limited and its subsidiaries at the end of the financial year.
The external auditors are responsible for reporting on the fair presentation of these financial statements.
The Company and its subsidiaries have maintained adequate accounting records and an effective system of internal controls to ensure the integrity of the underlying information.
Appropriate accounting policies, supported by sound and prudent managerial judgements and estimates, have been consistently applied except for Makro Zimbabwe as indicated in note 8 on page 135.
The Audit Committee of the Board reviews the financial information presented and ensures that there has been adherence to International Financial Reporting Standards. Internal and external auditors of Group companies have unrestricted access to the committee.
Group financial resultsThe financial results of the Group are set out in the income statement on page 119, the cash flow statement on page 121 and the statement of changes in equity on page 122. The financial position of the Group is set out in the balance sheet on page 120.
Share capitalThe following ordinary shares were in issue during the year under review:
Dividend policyMassmart’s dividend policy, revised in February 2007, is to declare and pay an interim and total annual dividend based on a 1,7 times cover (2006: 2 times), using headline earnings, unless circumstances dictate otherwise.
Dividends to shareholdersWith regard to the final distribution to shareholders, the directors resolved to distribute to shareholders registered in the books of the Company on Friday, 26 October 2007, a final cash dividend of 123 cents (2006: 80 cents) per share, bringing the total dividend for the year to 320 cents (2006: 210 cents) per share.
A Thuthukani dividend equivalent to 25% of the Massmart ordinary dividend per share (30,75 cents) will be paid to the Massmart Thuthukani Empowerment Trust on Monday, 29 October 2007.
Directorate and SecretaryThe current directorate of the Company is shown on pages 9 to 11.
The Company Secretary provides a central source of guidance and advice to the Board, and within the Company, on matters of ethics and good governance.
Mr A Cimring, CA(SA), resigned as Company Secretary on 22 November 2006 and Mr I Zwarenstein, CA(SA), was appointed in his place. Mr Zwarenstein’s business and postal addresses are the same as that of the Company.
Mr S Nothnagel resigned as executive director on 1 December 2006, and there were two non-executive appointments, viz. Dr Nolulamo Nobambiswano Gwagwa and Mr Kuseni Douglas Dlamini, who were both appointed on 1 November 2006.
In accordance with the provisions of the Company’s Articles of Association, KD Dlamini, NN Gwagwa, JC Hodkinson, MJ Lamberti and P Langeni will retire at the annual general meeting. Being eligible, KD Dlamini, NN Gwagwa, JC Hodkinson, MJ Lamberti and P Langeni offer themselves for re-election.
117Group Consolidated Annual Financial Statements
Directors’ Report
Interests of directors in the Company’s sharesAt 30 June 2007, directors owned ordinary shares in the Company, or options over ordinary shares in the Company, directly or indirectly, aggregated as to beneficial and non-beneficial ownership, as follows:
* With effect from 30 June 2007, MJ Lamberti resigned as Chief Executive Officer and was appointed Chairman of the Board.** Of these shares, 400 000 are owned by the Sabvest Group which is controlled by the Seabrooke Family Trust.
At the date of this report, the directors’ holdings were as follows:
Details of shares issued and options granted by the Company in terms of the rules of the Massmart Share Incentive Scheme are dealt with in note 28 on page 158.
SubsidiariesThe following companies are principal subsidiaries of the Company:
De La Rey 1001 Building Materials (Proprietary) Limited
1994/000266/07
Federated Timbers (Proprietary) Limited
2004/035206/07
Jumbo Cash & Carry (Proprietary) Limited
1996/012181/07
Masscash Holdings (Proprietary) Limited
1997/014716/07
Massmart International Holdings Limited (incorporated in Mauritius)
47902 C1/GBL
Massmart Management and Finance Company (Proprietary) Limited
1992/004084/07
Masstores (Proprietary) Limited 1991/006805/07
Servistar (Proprietary) Limited 1948/031897/07
Shield Buying and Distribution (Proprietary) Limited
1984/011353/07
Details of the Company’s interests in material subsidiaries are set out in note 36 on page 168.
Borrowing powersIn terms of the Articles of Association, the Group has unlimited borrowing powers. At 30 June 2007, borrowings were R567,9 million (2006: R756,7 million).
Going concernThe directors are of the opinion that the business will be a going concern in the year ahead. In reaching this opinion, the directors considered the following factors:
short-term borrowing capacity if required;
of our customer, product or geographic markets; and
positive issues.
AddressThe Company’s registered office and postal address are shown on the inside back cover of this annual report.
LitigationThere are no current, pending or threatened legal or arbitration proceedings that may have, or have had in the previous 12 months, a material effect on the Group’s financial position.
Significant eventsThuthukani, the Company’s Broad-based Empowerment Equity issue to all the Massmart Group’s qualifying permanent staff, approved by shareholders in July 2006, became effective on 1 October 2006. Details of this BEE transaction were published in the circular issued to shareholders dated 16 June 2006.
Mr MJ Lamberti’s service contract as Chief Executive Officer ended on 30 June 2007. He remains on the Board as Non-executive Chairman while the former Chairman, Mr CS Seabrooke, has been appointed Non-executive Deputy Chairman. Former Chief Executive Officer Designate, Mr GM Pattison, was appointed Chief Executive Officer with effect from 1 July 2007.
Subsequent eventsNo material facts or circumstances have occurred between 30 June 2007 and the date of this report.
Trade and other payables 26 6 755,7 5 875,7 Provisions 27 3,9 5,3 Taxation 534,4 410,9 Other current liabilities 24 131,6 175,0 Bank overdrafts 37.10 37,0 65,3
Total equity and liabilities 10 849,6 9 618,4
121
for the year ended 30 June 2007
Group Consolidated Annual Financial Statements
Balance SheetCash Flow Statement
Group Consolidated
Cash Flow Statement
Notes2007
Rm2006
Rm
Cash flow from operating activitiesOperating cash before working capital movements 37.1 1 926,4 1 543,6 Working capital movements 37.2 (28,3) 260,4
Cash generated from operations 1 898,1 1 804,0 Interest received 56,0 63,8 Interest paid (100,4) (96,5)Investment income 53,6 34,6 Taxation paid 37.3 (531,6) (487,4)Dividends received 2,5 3,2 Dividends paid (565,1) (402,8)
Net cash inflow from operating activities 813,1 918,9
Cash flow from investing activitiesInvestment to maintain operations 37.4 (152,9) (178,5)Investment to expand operations 37.5 (317,9) (184,1)Proceeds on disposal of property, plant and equipment 37.6 10,6 8,3 Investment in subsidiaries 37.7 (160,0) – Disposal of subsidiary 37.8 – 25,7 Other investing activities (70,6) (130,9)
Net cash outflow from investing activities (690,8) (459,5)
Cash flow from financing activitiesShares issued (net of costs) – 71,5 (Decrease)/increase in non-current liabilities (17,2) 487,0 Decrease in current liabilities (45,2) (34,2)Net acquisition of treasury shares 37.9 (226,0) (18,3)
Net cash (outflow)/inflow from financing activities (288,4) 506,0
Net (decrease)/increase in cash and cash equivalents (166,1) 965,4 Foreign exchange movements taken to statement of changes in equity (1,5) 6,1
Cash and cash equivalents at the beginning of the year 1 376,3 404,8
Cash and cash equivalents at the end of the year 37.10 1 208,7 1 376,3
122
for the year ended 30 June 2007
MASSMART ANNUAL REPORT 2007
Group Consolidated
Statement of Changes in Equity
Share capital
Rm
Share premium
Rm
Non-distributable
reservesRm *
Share-based payment reserve
Rm *
Retainedprofit
Rm
Equity attributable
to equity holders of the parent
Rm
Minority interests
RmTotal
Rm
Balance as at 30 June 2005 2,0 209,4 96,1 26,0 1 187,8 1 521,3 37,7 1 559,0 Profit for the year – – – – 828,5 828,5 24,7 853,2 Exchange differences and
Balance as at 30 June 2007 2,0 254,7 88,7 116,7 1 776,9 2 239,0 25,8 2 264,8
* These reserves have been combined in the balance sheet as non-distributable reserves.
123Group Consolidated Annual Financial Statements
1. Accounting policies
Basis of accounting
The financial statements have been prepared on the historical cost basis except for the revaluation of certain non-current assets and financial instruments to fair value.
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and in a manner required by the Companies Act of South Africa. The principal accounting policies adopted are set out below.
These policies have been consistently applied except for Makro Zimbabwe as indicated in note 8 on page 135.
Basis of consolidation
The Group annual financial statements incorporate the annual financial statements of the Company and the entities it controls. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The operating results of the subsidiaries are consolidated from the date on which effective control is transferred to the Group and up to the effective date of disposal.
Separate disclosure is made of minority interests where the Group’s investment is less than 100%. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority’s interest in the subsidiary’s equity are allocated against the interest of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.
All intercompany transactions and balances, income and expenses are eliminated in full on consolidation.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group.
Business combinations
The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which are recognised and measured at fair value less costs to sell.
The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.
Segmental information
The Group is organised into four divisions for operational and management purposes. Massmart reports its primary business segment information on this basis and on a secondary basis by significant geographical region based on location of assets.
Comparative figures
When an accounting policy is altered, comparative figures are restated if required by the applicable accounting statement and where material. Details of these restatements have been included in the relevant notes to the annual financial statements.
Interests in associates
An associate is an enterprise over which the Group has significant influence, and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
The results, assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. The carrying amount of such interests is reduced to recognise any decline, other than a temporary decline, in the value of individual investments. The carrying amount reflects the Group’s share of net assets of the associate and includes any goodwill on acquisition, less any impairment in the value of individual investments.
Any excess of the cost of acquisition over the Group’s share of the fair values of the identifiable net assets of the associate at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment. Any deficiency of the cost of acquisition below the Group’s share of the fair values of the identifiable net assets of the associate at the date of acquisition (i.e. discount on acquisition) is credited to profit or loss in the period of acquisition.
Where a Group enterprise transacts with an associate of the Massmart Group, unrealised profits and losses are eliminated to the extent of the Group’s interest in the relevant associate, except where unrealised losses provide evidence of an impairment of the asset transferred.
Goodwill
Goodwill arising on consolidation of a subsidiary represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to profit or loss in the period of acquisition.
Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.
On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Statement of Changes in EquityNotes to the Annual Financial Statements
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
124 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
The Group’s policy for goodwill arising on the acquisition of an associate is described under “Interests in associates” above.
Non-current assets held for sale
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification.
Non-current assets (and disposal groups) classified as held for sale are measured at the lower of the assets’ previous carrying amount and fair value less costs to sell.
Property, plant and equipment
Freehold land is shown at cost and is not depreciated. Property, plant and equipment is shown at cost less accumulated depreciation, and reduced by any accumulated impairment losses.
Property cost includes professional fees. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.
Where expenditure incurred on property, plant and equipment will lead to future economic benefits accruing to the Group, these costs are capitalised. Repairs and maintenance are expensed as and when incurred.
Depreciation is charged so as to write off the cost of assets, other than land, over their estimated useful lives, using the straight-line method, on the following bases:
and motor vehicles 4 to 10 years
Useful life and residual value is reviewed annually and the prospective depreciation is adjusted accordingly.
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease.
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.
Internally generated intangible assets – research and development expenditure
Expenditure on research activities is recognised as an expense in the period in which it is incurred.
Internally-generated intangible assets are amortised on a straight-line basis over their estimated useful lives. Where no internally- generated intangible asset can be recognised, development expenditure is charged to profit or loss in the period in which it is incurred.
Intangible assets
Trademarks are measured initially at purchased cost and are amortised on a straight-line basis over their estimated useful lives.
Amortisation is charged so as to write off the cost of assets over their estimated useful lives, using the straight-line method, on the following bases:
Useful life is reviewed annually and the prospective depreciation is adjusted accordingly.
Impairment of tangible and intangible assets excluding goodwill
At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount for an individual asset, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash- generating units for which a reasonable and consistent allocation basis can be identified.
The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of an asset (cash-generating unit) is increased to the revised estimate of its recoverable amount. This is done so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
Revenue recognition
Revenue of the Group comprises net sales, royalties, franchise fees, interest received, investment income, finance charges, property rentals, management and administration fees, dividends and excludes value-added tax. Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and sales related taxes.
Sales of goods are recognised when goods are delivered and title has passed.
125Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
Interest income is accrued on a time basis, by reference to the principal outstanding and the interest rate applicable.
Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.
Other revenue is recognised on the accrual basis in accordance with the substance of the relevant agreements and measured at fair value of the consideration receivable.
Leasing
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
Assets held under finance leases are capitalised at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor, net of finance charges, is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs (see below).
Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease.
Foreign currencies
The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates (i.e. its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in the currency, which is the functional currency of the Group, and the presentation currency for the consolidated financial statements.
Transactions in currencies other than the Group reporting currency (South African Rands) are initially recorded at the rates of exchange prevailing on the dates of the transactions. In order to hedge its exposure to certain foreign exchange risks, the Group has a policy of covering forward all its foreign exchange liability transactions of a trading nature (see below for details of the Group’s accounting policies in respect of such derivative financial instruments).
At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement and retranslation of monetary items are included in profit and loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit and loss for the period. However, where fair value adjustments of non-monetary items are recognised directly in equity, exchange differences arising on the retranslation of these non-monetary items are also recognised directly in equity.
On consolidation, the assets and liabilities of the Group’s overseas operations (including comparatives) are translated at exchange rates prevailing on the balance sheet date. Income and expense items are
translated at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of.
The financial statements (including comparatives) of foreign subsidiaries and associates that report in the currency of a hyperinflationary economy are restated in terms of the measuring unit current at the balance sheet date before they are translated into South African Rands.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
Government grants
Government grants for staff training costs are recognised in profit or loss over the periods necessary to match them with the related costs and are deducted in reporting the related expense. Income is not recognised until there is reasonable assurance that the grants will be received.
Retirement benefit costs
Payments to defined-contribution plans are charged as an expense as they fall due. There are no defined-retirement benefit plans in the Group.
Post-retirement healthcare benefit
Post-retirement healthcare benefits are provided by certain Group companies to qualifying employees and pensioners. The healthcare benefit costs are determined through annual actuarial valuations by independent consulting actuaries using the projected unit credit method. Such gains or losses are recognised over the expected remaining working lives of the participating members. Adjustments are made annually through profit or loss for provisions held for members who have already retired. Actuarial gains and losses are recognised in full in the period in which they occur.
Taxation
Income tax expense represents the sum of the tax currently payable and deferred tax.
The tax charge payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred taxation is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. In general, deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities, which affects neither the tax profit nor the accounting profit at the time of the transaction.
126 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.
Secondary Taxation on Companies (STC) is payable on net dividends paid and is recognised as a tax charge in profit or loss in the year it is incurred.
Any tax on capital gains is deferred if the proceeds of the sale of the assets are invested in similar assets. The tax will ultimately become payable on sale of the similar asset.
Inventories
Inventories, which consist of merchandise, are valued at the lower of cost and net realisable value. Cost is calculated on the weighted-average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.
Financial instruments
Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument.
Financial assets are classified into the following specified categories: financial assets as ‘at fair value through profit or loss’, ‘held-to-maturity investments’, ‘available-for-sale financial assets’, and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.
Effective interest method
The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period.
Income is recognised on an effective interest basis for debt instruments other than those financial assets designated as ‘at fair value through profit or loss’.
Loans and receivables
Trade receivables, loans and other receivables are measured initially at fair value, and are subsequently measured at amortised cost using the effective interest method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit and loss when there is objective evidence that the asset is impaired.
Cash and cash equivalents
Cash and cash equivalents are measured at fair value. For purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held on call with banks and investments in money-market instruments that are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value, net of bank overdrafts.
Investments
Investments are recognised and derecognised on a trade date basis where the purchase or sale of an investment is under contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, plus directly attributable transaction costs.
At subsequent reporting dates, debt securities that the Group has the express intention and ability to hold to maturity (held-to-maturity debts securities) are measured at amortised cost using the effective interest method, less any impairment loss recognised to reflect irrecoverable amounts. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the investment’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Impairment losses are reversed in subsequent periods when an increase in the investment’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised cost would have been had the impairment not been recognised.
Investments other than held-to-maturity debt securities are classified as either investment held for trading or as available for sale, and are subsequently measured at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in profit or loss for the period. Unrealised gains and losses on available-for-sale investments are recognised directly in equity until the disposal or impairment of the relevant investment, at which time the cumulative gain or loss previously recognised in equity is included in the profit or loss for the period. Impairment losses recognised in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through profit or loss. Impairment losses recognised in profit or loss for debt instruments classified as available-for-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss.
Listed investments are carried at market value, which is calculated by reference to stock exchange quoted selling prices at the close of business on the balance sheet date.
Financial liabilities and equity
Financial liabilities are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. Debt instruments issued, which carry a right to convert to equity that is dependent on the outcome of uncertainties beyond the control of both the Group and the holder, are classified as liabilities except where conversion is certain. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
127Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
Financial liabilities, other than derivative instruments, are recognised at amortised cost, comprising original debt less principal payments and amortisations.
Financial liabilities include finance lease obligations, interest-bearing bank loans and overdrafts, and trade and other payables. The accounting policy for finance lease obligations is outlined on page 125.
Bank borrowings
Interest-bearing bank loans and overdrafts are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognised over the term of the borrowings in accordance with the Group’s accounting policy for borrowing costs (see below).
Trade payables
Trade and other payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest method.
Equity instruments
Equity instruments are recorded at the proceeds received, net of direct issue costs.
Derivative financial instruments and hedge accounting
The Group’s activities expose it primarily to the financial risks of changes in foreign exchange rates and interest rates.
The Group uses foreign exchange forward contracts to hedge its exposure to foreign currency fluctuations relating to certain firm trading commitments. The use of financial derivatives is governed by
provide written principles on the use of financial derivatives consistent with the Group’s risk management strategy. The Group does not to trade in derivative financial instruments for speculative purposes.
Derivative financial instruments are initially measured at fair value on the contract date, and are re-measured to fair value at subsequent reporting dates.
The effective portion of the changes in fair value of derivative financial instruments that are designated and qualify as cash flow hedges are recognised directly in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. If
the hedged firm commitment or forecast transaction results in the recognition of an asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability. Amounts deferred in equity are recognised in profit or loss in the same period in which the hedged firm commitment affects profit or loss.
Changes in the fair value of derivative financial instruments that do not qualify as cash flow hedges are recognised in profit or loss as they arise.
The hedge is de-designated as a cash flow hedge at the Shipped on
expired, terminated, exercised, or no longer qualifies for hedge accounting. At the time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecast transaction is recognised in profit or loss. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to profit or loss for the period.
Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, and it is probable that the Group will be required to settle that obligation. Provisions are measured at management’s best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material.
Share-based payments
The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the effect of non-market-based vesting conditions.
used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.
Borrowing costs
All other borrowing costs are recognised in profit or loss in the period in which they are incurred.
128 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
2. Technical review International Financial Reporting Standards (IFRS)
Massmart adopted International Financial Reporting Standards (IFRS) with effect from 1 July 2005. The Group is exposed to the following suite of standards. The impact of each standard has been indicated in the right-hand column.
Standard Standard’s name ImpactIFRS 1 First-time Adoption of IFRS Immaterial financial impact and increased disclosure
IFRS 2 Share-based Payment Material financial impact and increased disclosure
IFRS 3 Immaterial financial impact and increased disclosure
IFRS 4 Insurance Contracts None
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations Immaterial financial impact and increased disclosure
IFRS 6 Exploration for and Evaluation of Mineral Resources None
IFRS 7 Financial Instruments: Disclosures This standard has not been early adopted
IFRS 8 Operating Segments This standard has not been early adopted
IAS 1 Presentation of Financial Statements No financial impact but increased disclosure
IAS 2 Inventories No financial impact
IAS 7 Cash Flow Statements No financial impact
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors No financial impact but increased disclosure
IAS 10 No financial impact but increased disclosure
IAS 11 Construction Contracts None
IAS 12 Income Taxes No financial impact
IAS 14 Segment Reporting No financial impact
IAS 16 Property, Plant and Equipment Practical application challenging, immaterial financial impact and increased disclosure
IAS 17 Leases No financial impact
IAS 18 Revenue No financial impact
IAS 19 No financial impact but increased disclosure
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
None
IAS 21 The Effects of Changes in Foreign Exchange Rates Material financial impact and increased disclosure
IAS 23 None
IAS 24 Related Party Disclosures No financial impact but increased disclosure
IAS 26 None
IAS 27 Consolidated and Separate Financial Statements Financial impact and increased disclosure
IAS 28 Investments in Associates Immaterial financial impact and increased disclosure
IAS 29 Financial Reporting in Hyperinflationary Economies Financial impact and increased disclosure
IAS 30 None
IAS 31 Interests in Joint Ventures None
IAS 32 Financial Instruments: Disclosure and Presentation No financial impact but increased disclosure
IAS 33 Earnings Per Share No financial impact but increased disclosure
IAS 34 Interim Financial Reporting No financial impact but increased disclosure
IAS 36 Impairment of Assets Immaterial financial impact and increased disclosure
IAS 37 Provisions, Contingent Liabilities and Contingent Assets No financial impact but increased disclosure
IAS 38 Intangible Assets Immaterial financial impact and increased disclosure
IAS 39 Financial Instruments: Recognition and Measurement No financial impact but increased disclosure
IAS 40 Investment Property None
IAS 41 Agriculture None
AC 500 Preface to South African Statements and Interpretations of Statements of Generally Accepted Accounting Practice
No financial impact
AC 501 Accounting for “Secondary Tax on Companies (STC)” No financial impact
AC 502 Substantively Enacted Tax Rates and Tax Laws No financial impact
AC 503Transactions
No financial impact
129Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
IFRS 7 Financial Instruments: Disclosures, was issued on 18 August 2005 to replace IAS 32 Financial Instruments: Disclosure and Presentation (also replacing IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions this standard is for year-ends beginning on or after 1 January 2007. Although early adoption is encouraged, the Group has chosen not to do so. This standard will have no financial impact on the Group, but will require extensive additional disclosure. Examples of additional disclosure include: a sensitivity analysis on profit or loss and equity for changes in relevant risk variables, a liquidity analysis reflecting timing of undiscounted future cash flows for all financial liabilities and increased credit risk disclosures. We have enhanced our disclosure in this report to accommodate some of the standard’s additional requirements.
IFRS 8 Operating Segments, was issued on 30 November 2006 to replace IAS 14 Segment Reporting. The effective date of this standard is for year-ends beginning on or after 1 January 2009. Although early adoption is permitted, the Group has chosen not to do so. The standard requires the Group to adopt the ‘management approach’ to reporting segment information, effectively using its internal management reporting system to collect the data. While this is a change in approach from IAS 14 Segment Reporting, the effect will have no financial impact on the Group. The standard will impact Group disclosure.
Operating Segments will be adopted as part of that project. We anticipate these new standards will require as much work and planning as the initial IFRS adoption and feel comfortable that we have an adequate experienced team to manage the process.
Interpretations of Statements of Generally Accepted Accounting Practice
of financial statements. The role of the IFRIC is to provide timely guidance on newly identified financial reporting issues not specifically addressed in International Financial Reporting Standards (IFRSs) or issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop. It thus promotes the rigorous and uniform application of IFRSs.
The following IFRICs were issued since the start of the financial year or issued earlier but become effective for the current financial year. Many of these have no impact on the Group, and have been included for completeness. The impact of each IFRIC has been indicated in the right-hand column.
IFRIC Name Effective date Impact on the GroupIFRIC 4 Determining Whether an Arrangement
Contains a LeaseAnnual periods beginning on or after 1 January 2006
Extensive research was completed to determine if this IFRIC applied to the Group. It was clear that it did not and thus has no impact on the Group.
IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds
Annual periods beginning on or after 1 January 2006
This IFRIC has no impact on the Group.
IFRIC 6 Liabilities Arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment
Annual periods beginning on or after 1 December 2005
This IFRIC has no impact on the Group.
IFRIC 7 Applying the Restatement Approach under IAS 29Financial Reporting in Hyperinflationary Economies
Annual periods beginning on or after 1 March 2006
This IFRIC has no impact on the Group. It was written for companies reporting in a hyperinflationary economy for the first time.
IFRIC 8 Scope of IFRS 2 Share-based Payment Annual periods beginning on or after 1 May 2006
This IFRIC was early adopted. It had an impact on the Group and was incorporated into the IFRS restatement in the prior year.
IFRIC 9 Reassessment of Embedded Derivatives Annual periods beginning on or after 1 June 2006
This IFRIC has no impact on the Group.
IFRIC 10 Interim Financial Reporting and Impairment
Annual periods beginning on or after 1 November 2006
This IFRIC has no impact on the Group.
IFRIC 11 IFRS 2 Group and Treasury Share Transactions
Annual periods beginning on or after 1 March 2007
This IFRIC clarifies elements of IFRS 2 and has no additional impact on the Group above the original IFRS.
IFRIC 12 Service Concession Arrangements Annual periods beginning on or after 1 January 2008
This IFRIC has no impact on the Group.
IFRIC 13 Customer Loyalty Programmes Annual periods beginning on or after 1 July 2008
This IFRIC has no impact on the Group.
IFRIC 14Minimum Funding Requirements and their Interaction
Annual periods beginning on or after 1 January 2008
This IFRIC has no impact on the Group.
The relevant IFRIC Interpretations have been applied prospectively from the date of issue or other specified effective date.
130 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
previously issued IFRIC becomes effective.
Circulars
A circular is issued by the JSE or the South African Institute of Chartered Accountants (SAICA) where guidance or clarification is required on an identified financial reporting issue on a South African platform (as opposed to an IFRIC, discussed above, that operates on an international platform). This assistance is required to establish and improve standards of financial accounting and reporting for the benefit of users, preparers and auditors of financial statements. It thus promotes the rigorous and uniform application of the standards.
The following circulars were issued since the start of the financial year. Many of these have had no impact on the Group, and have been included for completeness. The impact of each circular has been indicated in the right-hand column.
Circular Name Date issued Impact on the GroupCircular 11/2006
Auditor-GeneralJuly 2006 This circular has no impact on the Group.
Circular 12/2006 Operating Leases August 2006 This circular replaces Circular 07/2005 and has no additional impact on the Group above the original circular.
Circular 01/2007 Medical Schemes’ Summarised Financial Statements January 2007 This circular has no impact on the Group.Circular 02/2007 Recognition and Measurement of Short-term
Insurance ContractsJanuary 2007 This circular has no impact on the Group.
Circular 03/2007Auditor-General
March 2007 This circular has no impact on the Group.
Circular 04/2007 Letter For Auditors to Send to Clients Outlining The Requirements of Section 45 of The Auditing Profession Act – The Duty To Report on Reportable Irregularities
April 2007 This circular has no impact on the Group.
Circular 05/2007 Template Letters for Auditors: Compliance with the Reporting Requirements of Section 45 – Duty To Report on Reportable Irregularities
May 2007 This circular has no impact on the Group.
Circular 07/2007Accounting, Auditing, Legislation and Ethics
May 2007 This circular has no impact on the Group.
Circular 08/2007 Headline Earnings July 2007 This circular will have a financial impact on the Group. See below for a detailed explanation.
Circular 09/2007 Statement of Generally Accepted Accounting Practice for Small and Medium-sized Entities (SMEs)
October 2007 This circular has no impact on the Group.
Where a circular impacts the Group, the results of the Group have been adjusted retrospectively, as if the Group had always accounted for the circular correctly.
Circular 08/2007 Headline Earnings does not permit early adoption for results published before 1 September 2007. Thus this circular will be accounted for in the 2008 financial year. This circular is far more ‘rules based’ than its predecessor, Circular 02/2007 Headline Earnings, disallowing entities from adjusting for disliked applications of IFRS. However, as the Group applied the original circular in the spirit within which it was written, the new circular will not require a change in accounting for headline earnings or headline earnings per share. Where the new circular does effect the Group is in the prescribed starting point for the calculation of headline earnings. The Group currently uses earnings attributable to the equity holders of the parent as its starting point, and will now be required to use earnings as defined by IAS 33. The difference lies in the Thuthukani dividend, which is adjusted for in headline earnings per share, but not headline earnings. More detail on this adjustment can be found in note 12 on page 138.
Summary
Guidance has been obtained from IFRICs and circulars effective on 10 October 2007, also listed above. Due to the nature and volatility of Exposure Drafts (EDs), no review has been provided.
The Group maintains the view that the standards set the minimum requirement for financial reporting. The financial statements in this annual report have been prepared with the aim of exposing the reader to a very detailed view of the numbers, using a simplified approach, in the hope of facilitating a deeper and informed understanding of the business.
131Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
2007Rm
2006Rm
3. Discontinued operationFurnex, a chain in the Masscash division, was disposed of during the prior financial year. This was done because the rapid rollout of the smaller-store Game format was beginning to compete with Furnex members in regional towns. The effective date of sale was 28 February 2006.The profit for the period from the discontinued operation can be analysed as follows:Profit from Furnex for the period – 3,7Loss on disposal of Furnex – (1,8)
– 1,9
The results of Furnex for the period from 1 July 2005 to 28 February 2006 are as follows:Revenue – 484,4
Finance costs (95,9) (0,6) (96,5)Finance income 63,7 0,1 63,8
Net finance costs (32,2) (0,5) (32,7)
Net profit before taxation 1 295,9 4,7 1 300,6
Current tax (402,4) – (402,4)Deferred tax 2,9 (2,8) 0,1Secondary Tax on Companies (45,1) – (45,1)
Taxation (444,6) (2,8) (447,4)
Profit for year 851,3 1,9 853,2
The above reflects the effect of the Group’s continuing and discontinued operations for 2006.
133Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
2007Rm
2006Rm
5. RevenueSales 34 807,6 29 963,6Change in fair value of financial assets carried at fair value through profit or loss 61,1 38,9Instalment-sale finance charges 51,6 51,3Dividends from unlisted investments 67,3 59,5Less: Interest paid on a related liability (64,8) (56,3)Royalties and franchise fees 25,7 19,8Management and administration fees 0,4 2,9Property rentals 1,2 0,9Other 14,6 –
34 964,7 30 080,6
The above excludes amounts relating to the discontinued operation. Details can be found in note 3 on page 131.
Notes2007
Rm2006
Rm
6. Impairment of assetsTangible assets 13 6,6 –Goodwill 14 12,2 –Intangible assets 15 – 5,4Inventory and consumable goods 7,5 –
26,3 5,4
The impairment of assets in the current year relates to the write-off of Dion inventory, consumables and plant and equipment arising from the decision to discontinue the original Dion format and the impairment of certain goodwill in Jumbo arising from a minor acquisition in 2001.
134 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
2007Rm
2006Rm
7. Operating profitCredits to operating profit include:Foreign exchange profit 113,1 186,4Profit on disposal of tangible and intangible assets 4,9 2,5Insurance gain 2,8 –Net monetary gain on hyperinflation translation (Makro Zimbabwe) – 22,2
Charges to operating profit include:Depreciation and amortisation (owned assets):
Land and buildings 665,3 587,4Plant and equipment 24,8 20,6Computer equipment 9,9 10,8Motor vehicles 10,1 6,8
Loss on disposal of tangible and intangible assets 5,7 1,4Fees payable:
Administrative and outsourcing services 181,8 154,7Consulting 13,5 17,0
Auditors’ remuneration:Current year fee 13,7 10,0Prior year underprovision 0,9 0,3Tax advice 1,7 1,4Consulting and business reviews 2,7 1,1Contract assignments 0,9 –
The above excludes amounts relating to the discontinued operation. Details can be found in note 3 on page 131.
135Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
2007CPI Index
2006CPI Index
8. HyperinflationIn the prior year the financial statements were drawn up using the current cost approach.The Zimbabwe consumer price index rebased to 100 in 2005 was used to restate changes in the general purchasing power of the local currency.Opening balance 158 709 12 354Movement in the year 11 508 118 146 355
Closing balance 11 666 827 158 709
The Group owns two Makro stores in Zimbabwe.A parallel rate of R1 to Zim$56 538 was used to translate the results in the prior year.The financial impact on net profit attributable to equity holders of the parent was a loss of R1,1 million in the prior year.In the current year, the decision was taken to deconsolidate the results of Makro Zimbabwe prospectively. This decision was taken in light of the recent developments in the country. The Zimbabwean government has forced retailers to sell goods at a predetermined value that has not been established in conjunction with the Zimbabwean retailers. The definition of control is “the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities”. It is Massmart’s view that it temporarily no longer “controls” the operations in Makro Zimbabwe, and thus will exclude its results prospectively.On deconsolidation, the investment in Makro Zimbabwe has been reflected as an “available-for-sale” financial asset. At year-end, the fair value of this asset has been determined to be zero and the adjustment taken to equity as a reserve. Details can be found in note 16 on page 143.
2007Rm
2006Rm
9. Net finance costsFinance costsInterest on bank overdrafts and loans 88,3 84,6Interest on obligations under finance leases 12,1 11,9
100,4 96,5
Finance incomeIncome from investments and receivables 56,0 63,8
56,0 63,8
Details on the loans and finance leases can be found in note 24 on page 153.The above excludes amounts relating to the discontinued operation. Details can be found in note 3 on page 131.
136 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
2007Rm
2006Rm
10. TaxationCurrent yearSouth African normal taxation
Current taxation 481,4 376,5Deferred taxation 10,1 (3,5)
Two companies in the Group participate in export partnerships. As the companies are liable for the tax effect of the participation, the amount is classified as a taxation charge.
% %
The rate of taxation is reconciled as follows:Standard corporate taxation rate 29,0 29,0Exempt income (1,2) (2,2)Disallowable expenditure 3,1 2,4Withholding taxation 0,7 –Prior year under provision (including impairment) (0,4) 1,5Secondary taxation on companies 3,6 3,2Other (0,7) 0,4
Effective rate 34,1 34,3
The above excludes amounts relating to the discontinued operation. Details can be found in note 3 on page 131.
137Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
2007Rm
2006Rm
11. Dividends paid to shareholdersFinal cash dividend No 13 (2006: No 11) 160,1 143,7Interim cash dividend No 14 (2006: No 12) 396,1 259,1Thuthukani Preference Share dividend No 1 (2006: n/a) 8,9 –
Total dividend paid 565,1 402,8
No 13 of 80 cents declared on 23 August 2006 and paid on 18 September 2006 (R160,1 million).No 14 of 197 cents declared on 21 February 2007 and paid on 19 March 2007 (R396,1 million).No 15 of 123 cents proposed on 22 August 2007 to be declared on 2 October 2007 and paid on 29 October 2007 (R247,3 million).*
No 1 of 49,25 cents declared on 21 February 2007 and paid on 19 March 2007 to the Massmart Thuthukani Empowerment Trust(R8,9 million).
No 2 of 30,75 cents proposed on 22 August 2007 to be declared on 2 October 2007 and paid on 29 October 2007 to the MassmartThuthukani Empowerment Trust (R5,5 million).*
*This amount is provisional as the shares in issue can only be finalised on the last day to register which is after the date of this annual report.
138 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
2007Rm
2006Rm
2007Cents/share
2006Cents/share
12. Earnings per shareAttributable and headline earnings per shareThe calculation of attributable and headline earnings per share is based on a weighted average of 200 461 258 (2006: 199 506 551) ordinary shares.The calculation is reconciled as follows:
Profit attributable to the equity holders of the parent 1 058,8 828,5 528,2 415,3Thuthukani dividend (4,4)* –Adjustments after taxation and minorities:
(Profit)/loss on disposal of movable assets 0,7 (0,8) 0,3 (0,4)Impairment of assets 24,1 3,8 12,0 1,9Loss on disposal of Furnex 6,2 – 3,1 –CGT on sale of treasury shares 2,4 – 1,2 –Write-off of costs incurred on failed acquisition – 3,3 – 1,6Loss on disposal of discontinued operation – 1,8 – 0,9
Diluted attributable and diluted headline earnings per shareThe calculation of diluted attributable and diluted headline earnings per share is based on a weighted average of 204 037 431 (2006: 204 885 706) ordinary shares.The calculation is reconciled as follows:
Profit attributable to the equity holders of the parent 1 058,8 828,5 528,2 415,3Thuthukani dividend (4,4)* –Adjustment for impact of issuing ordinary shares – – (9,3) (10,9)
Weighted average shares outstandingWeighted average shares outstanding for basic and headline earnings per share 200 461 258 199 506 551Potentially dilutive ordinary shares resulting from options outstanding 3 576 173 5 379 155
Weighted average shares outstanding for diluted and diluted headline earnings per share 204 037 431 204 885 706
* An interim dividend of 50 cents per share was distributed to all Thuthukani participants. This equates to an effect on earnings per share of 4,4 cents resulting in a basic earnings per share of 523,8 cents per share. In year one, the Thuthukani dividend is equivalent to 25% of the ordinary dividend. Next year, the Thuthukani dividend is equivalent to 50% of the ordinary dividend. Headline earnings per share has been calculated using headline earnings adjusted by 4,4 cents, being the weighted-average effect of the Thuthukani dividend.
The Thuthukani ‘A’ preference shares are currently anti-dilutive and will not have an effect on diluted and diluted headline earnings per share.The above excludes amounts relating to the discontinued operation. Details can be found in note 3 on page 131.
139Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
Cost/carryingvalue
Rm
Accumulateddepreciation
Rm
Net bookvalue
Rm
13. Property, plant and equipment2007Owned assets
Freehold land and buildings 170,2 16,0 154,2Fixtures, fittings, plant and equipment 1 229,9 651,4 578,5Computer hardware 249,2 162,7 86,5Leasehold improvements 258,9 62,3 196,6Motor vehicles 47,8 19,7 28,1
1 956,0 912,1 1 043,9
Capitalised leased assetsFreehold land and buildings 49,4 5,2 44,2Fixtures, fittings, plant and equipment 5,5 3,4 2,1Computer hardware 0,2 0,2 –Motor vehicles 54,7 21,1 33,6
109,8 29,9 79,9
Total 2 065,8 942,0 1 123,8
2006Owned assets
Freehold land and buildings 167,7 11,5 156,2Fixtures, fittings, plant and equipment 1 012,7 570,2 442,5Computer hardware 204,2 129,6 74,6Leasehold improvements 211,0 44,7 166,3Motor vehicles 40,7 17,6 23,1
1 636,3 773,6 862,7
Capitalised leased assetsFreehold land and buildings 49,5 3,2 46,3Fixtures, fittings, plant and equipment 5,0 2,0 3,0Computer hardware 0,6 0,3 0,3Motor vehicles 46,7 14,7 32,0
101,8 20,2 81,6
Total 1 738,1 793,8 944,3
A register of land and buildings as required by the Companies Act of South Africa is available for inspection by members at the registered offices of the companies in the Group.Certain capitalised leased property, plant and equipment is encumbered as per note 24 on page 153.
140 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
Openingnet book
valueRm
AdditionsRm
Additionsthrough
acqui-sitions
RmDisposals
Rm
Depre-ciation
continuingoperations
Rm
Depre-ciationdiscon-tinued
operationRm
Foreignexchangegain/(loss)
Rm
Reclassi-fications
RmWrite-offs
Rm
Closingnet book
valueRm
13. Property, plant and equipment continuedReconciliation of property, plant and equipment2007Owned assets
The write-off in the current year relates to the impairment of assets held in the original Dion format that have been discontinued. The write-off
The Group has reviewed the residual values and useful lives of the assets for reasonability. There were no material adjustments in the current period.There is no investment property in the Group and all assets are held at historical cost.Depreciation has been split for continuing and discontinued operations. Details on the discontinued operations can be found in note 3 on page 131.
141Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
2007Rm
2006Rm
14. GoodwillReconciliation of goodwill:At the beginning of the year 1 196,4 1 149,9Additions 163,7 46,3Impairment (12,2) –Exchange differences (1,1) 0,2
At the end of the year 1 346,8 1 196,4
Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units
losses, the carrying amount of significant goodwill had been allocated as follows:243,0 248,2
The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired.When testing Goodwill for impairment, the recoverable amounts of the CGUs are determined as the lower of value in use and fair value less costs to sell. The key assumptions for the value in use calculations are discount rates, growth rates and expected changes to selling prices and direct costs during the period. Management estimates discount rates using rates that reflect current market assumptions of the time value of money and the risks specific to the CGUs. The growth rates are based on industry growth forecasts. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market.The Group prepares cash flow forecasts based on the CGU’s June 2007 results for the next five years. A terminal value is calculated based on an estimated growth rate of 3%. This rate does not exceed the average long-term growth rate for the relevant markets.The rate used to discount the forecast cash flows is 14%.
Jumbo Cash & Carry (Pty) Limited recognised a goodwill impairment of R12,2 million arising from a minor Jumbo acquisition in 2001.Impairment has been split for continuing and discontinued operations. Details on the discontinued operations can be found in note 3 on page 131.
Intangible assets are amortised over the estimated useful life of the asset, which, on average, is three years for computer equipment and 10 years for trademarks.Amortisation has been split for continuing and discontinued operations. Details on the discontinued operations can be found in note 3 on page 131.
143Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
2007Rm
2006Rm
16. InvestmentsInvestment in associateShare of post-acquisition profit, net of dividend received 0,5 0,2Amounts owing to associate 0,2 –
0,7 0,2
Details of the Group’s associate at 30 June 2007 are as follows:Name of associate Clidet No 484 (Pty) LimitedPlace of incorporation and operation South AfricaProportion of ownership interest 33,3%Proportion of voting power held 33,3%Principal activity Investment property33,3% of the R100 share capital was purchased for R33. The financial reporting date for Clidet No 484 (Pty) Limited is 30 June.Summarised financial information in respect of the Group’s associates is set out below:Total assets 31,6 32,1Total liabilities 30,1 31,6
Net assets 1,5 0,5
Group’s share of associate’s net assets 0,7 0,2
Revenue 5,4 4,8
Profit for the year 1,0 0,5
Group’s share of associate’s profit for the year has been included in ‘Other operating costs’ in the consolidated income statement. 0,3 0,2
Unlisted investmentsFair value through profit or loss (FVTPL)Held for trading
38,9 33,5Investment in offshore trading structure 168,2 115,9
Total financial assets classified as held for trading 207,1 149,4
Designated as at FVTPLUnison distribution receivable 2,3 –
Total financial assets designated as at FVTPL 2,3 –
Total fair value through profit or loss (FVTPL) 209,4 149,4
Loans and receivablesTrencor export partnership 4,6 4,9
Total loans and receivables 4,6 4,9
Held-to-maturity investments carried at amortised costPreference share investment 485,3 420,5Offset of related long-term liability (459,3) (384,5)Other investments 0,3 0,3
Total held-to-maturity investments 26,3 36,3
144 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
2007Rm
2006Rm
16. Investments continuedAvailable-for-saleInvestment in Makro Zimbabwe – –
Total available-for-sale – –
Total unlisted investments 240,3 190,6
Listed investmentsOther investments 0,2 0,1
0,2 0,1
Total investments 241,2 190,9
Reconciliation of financial assets carried at fair value through profit or loss (FVTPL)Opening balance 149,4 105,0Fair value adjustments taken to the income statement 61,1 38,9Foreign exchange adjustment taken to the income statement (1,1) 5,5
Closing balance 209,4 149,4The bare dominium revaluation relates to Massmart’s share in the Makro properties.The investment is in an offshore trading structure.The Unison distribution receivable is based on insurance premium contributions.
Reconciliation of loans and receivablesOpening balance 4,9 7,0Disposals – (0,5)Investment realised (0,3) (1,6)
Reconciliation of held-to-maturity investmentsOpening balance 36,3 43,3Amortisation taken to the income statement (10,0) (7,0)
Closing balance 26,3 36,3The preference share investment represents cumulative preference shares in Fullimput 65 (Pty) Limited. A long-term liability of the Group is secured by a cession of the preference shares and legal offset is permitted.
Reconciliation of available-for-sale investmentsOpening balance – –Deconsolidation of Makro Zimbabwe 13,2 –Fair value adjustment of investment in Makro Zimbabwe (13,2) –
Closing balance – –
Makro Zimbabwe was deconsolidated in the current year and the investment has been carried as an available-for-sale financial asset. At year-end, the fair value of this asset has been determined to be zero and the adjustment taken to equity as a reserve.
The directors value the unlisted investments, net of the offset of the related long-term liability, at R240,3 million (2006: R190,6 million).For IAS 39 Financial Instruments: Recognition and Measurement accounting treatment of these investments, see note 38,“Financial risk management”.
145Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
2007Rm
2006Rm
17. Other financial assetsHousing loans to the directors and Executive Committee members of Massmart Holdings Limited:
1,9 1,1Advanced during the year – 0,8Repayments (1,6) –
0,3 1,9
Employee share trust loans to the directors and Executive Committee members of Massmart Holdings Limited:
144,5 71,9Advanced during the year 32,8 83,8Repayments (50,2) (11,2)
127,1 144,5
Other employee loans:Housing and staff loans 5,2 5,0Employee share trust loans 1,5 5,0
Finance lease deposit 39,3 34,3
46,0 44,3
173,4 190,7
These loans are classified as “Loans and receivables” for IAS 39 Financial Instruments: Recognition and Measurement purposes. See note 38, “Financial risk management”, for IAS 39 accounting treatment.All housing and staff loans, including loans to directors, bear interest at various rates below the prime interest rate. The loans to the employee share trust participants, including executive directors, attract interest of zero percent and are secured by the underlying shares. The finance lease deposit accrues interest at 13,6%.Detailed housing and employee share trust loans to the directors and Executive Committee members of Massmart Holdings Limited:
Lamberti, MJRm
Pattison, GMRm
Hayward, GRC
Rm
OtherExecutive
CommitteeRm
200731,5 45,3 20,0 49,6
Advanced during the year 0,8 6,9 0,7 24,4Repayments (32,3) (3,7) (3,3) (12,5)
– 48,5 17,4 61,5
200637,4 5,1 12,1 18,4
Advanced during the year 1,1 41,1 8,7 33,7Repayments (7,0) (0,9) (0,8) (2,5)
31,5 45,3 20,0 49,6
146 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
2007Rm
2006Rm
18. Deferred taxationThe movements during the year are analysed as follows:
Net asset at the beginning of the year 312,3 330,4Charge to profit or loss for the year 3,1 0,2(Credit)/debit to equity 1,9 (16,7)Disposal of subsidiary – (1,6)
Net asset at the end of the year 317,3 312,3
Deferred taxation balances are presented in the balance sheet as follows:Deferred taxation assets 432,8 409,5Deferred taxation liabilities (115,5) (97,2)
Increase in allowance recognised in profit or loss 12,1 28,6
92,4 80,3
Trade receivables are classified as “Loans and receivables” for IAS 39 Financial Instruments: Recognition and Measurement purposes. See note 38, “Financial risk management” for IAS 39 accounting treatment.No interest is charged on the trade receivables for the first 30 days from the date of the invoice. Thereafter, differing structures exist between the chains with interest being charged between prime and 25% per annum on the outstanding balance. Trade receivables between 30 days and 180 days are provided for based on estimated irrecoverable amounts from the sale of goods, determined by reference to past default experience. It is the Group’s policy to provide fully for all receivables that are past due because historical experience is such that these receivables are generally not recoverable.
defines credit limits by customer. Limits and scoring attributed to customers are reviewed quarterly to once a year. There is no customer who represents more than 5% of the total balance of trade receivables.Included in the Group’s trade receivables balance are debtors with a carrying amount of R4,0 million which are past due at the reporting date for which the Group has not provided. The Group considers the amounts recoverable and currently holds security over these debtors. The average age of these receivables is 90 days.In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the directors believe that there is no further credit provision required in excess of the allowance for doubtful debts.Included in the allowance for doubtful debts are specific trade receivables with a balance of R1,1 million which have been placed under liquidation. This represents the difference between the carrying amount of the specific trade receivable and the present value of the expected liquidation proceeds.
“A” convertible redeemable non-cumulative participating preference shares, which have a par value of 1 cent, are held in the Thuthukani Empowerment Trust. These shares carry one vote per share, which is cast by the trustees, and carry the right to dividends. On election of the beneficiary the shares will convert to ordinary shares on a one-for-one basis and will rank pari passu with all ordinary shares then in issue.
Skills Trust. These shares carry one vote per share, which is cast by the trustees, and do not carry the right to dividends. On election of the beneficiary, the shares will convert to ordinary shares on a one-for-one basis and will rank pari passu with all ordinary shares then in issue.
Share options granted under the Massmart Holdings Limited Employee Share TrustAs at June 2007, executives and senior employees have options over 10 239 002 ordinary shares (of which 7 217 626 are unvested). As at June 2006, executives and senior employees had options over 12 206 168 ordinary shares (of which 8 196 329 were unvested).Share options granted under the Employee Share Incentive Scheme plan carry no rights to dividends and no voting rights. Further details of the Employee Share Incentive Scheme are contained in note 28 on page 158.The preference shares issued during the year were issued at par value.The total share buy-back (including shares bought in the market by the Share Trust) for the year was 4,4 million shares (2006: 2,7 million) at an average price of R71,85 (2006: R54,71) totalling R313,2 million (2006: R148,3 million).The directors have the authority, until the next annual general meeting, to issue the ordinary shares of the Company up to a maximum of 5% of the shares already issued.The directors have the authority, until the next annual general meeting, to issue the non-redeemable cumulative non-participating preference shares of the Company.
2007Rm
2006Rm
22. Non-distributable reservesForeign currency translation reserve 15,6 9,1Hedging reserve 1,2 –Share-based payment reserve 116,7 43,4Capital redemption reserve fund 0,2 0,2Deferred taxation on trademarks 6,4 12,2Amortisation of trademarks 77,7 77,7Fair value adjustment of available-for-sale financial asset (13,2) –Change in minority interests 0,8 0,8
205,4 143,4
Reconciliation of the foreign currency translation reserveOpening balance 9,1 (0,5)Translation on consolidation 0,6 10,5Deconsolidation of Makro Zimbabwe 5,9 –Hyperinflation adjustment – (0,9)
Closing balance 15,6 9,1
Exchange differences relating to the translation from the functional currencies of the Group’s foreign subsidiaries into Rands are brought to account by entries made directly to the foreign currency translation reserve.
151Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
2007Rm
2006Rm
22. Non-distributable reserves continued
Reconciliation of the hedging reserveOpening balance – –Gain recognised on cash flow hedges 1,2 –
Closing balance 1,2 –
The hedging reserve represents hedging gains and losses recognised on the effective portion of cash flow hedges. The hedge is released from equity at the same time the forecast transaction is recognised in profit or loss. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to profit or loss for the period.
Reconciliation of the share-based payment reserveOpening balance 43,4 26,0Share-based payment expense on the Massmart Holdings Limited Employee Share Trust 19,0 17,4Share-based payment expense on the Massmart Thuthukani Empowerment Trust 52,2 –
2,1 –
Closing balance 116,7 43,4
The share-based payment reserve arises on grant of share options to employees under the Employee Share Incentive Schemes. Details of the Employee Share Incentive Schemes can be found in note 28 on page 158. The share-based payment valuation was performed by Alexander Forbes for all periods and all schemes are equity-settled share schemes.
MASSMART SHARE SCHEMESMASSMART HOLDINGS LIMITED EMPLOYEE SHARE TRUSTDetails of the share options outstanding during the year are as follows:
2007
Number ofshare options
2007Weighted
averageexercise price
Rand
2006
Number ofshare options
2006Weighted
averageexercise price
Rand
Outstanding at the beginning of the year 12 206 168 26,79 13 621 884 22,12Granted during the year 3 742 348 82,97 1 285 337 53,86Forfeited during the year (1 468 158) 43,29 (484 210) 27,23Exercised during the year (4 241 356) 17,29 (2 216 843) 13,68Expired during the year – – – –
Outstanding at the end of the year 10 239 002 48,86 12 206 168 26,79
Exercisable at the end of the year 3 021 376 4 009 839
152 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
2007 2006
22. Non-distributable reserves continued
MASSMART HOLDINGS LIMITED EMPLOYEE SHARE TRUST continuedThe weighted average share price at the date of exercise for share options exercised during the year was R74,11. The options outstanding at the end of the year have a weighted average remaining contractual life of 4,1 years (2006: 4,2 years). In 2007, options were granted on 25 August 2006, 1 October 2006, 15 November 2006, 23 February 2007, 2 April 2007 and 24 May 2007. The estimated fair values of the options granted on those dates are R16,22, R17,20, R18,30, R28,99, R24,55 and R27,47 respectively. In 2006, options were granted on 1 October 2005, 1 November 2005, 30 November 2005, 1 April 2006 and 23 May 2006. The estimated fair values of the options granted on those dates are R16,01, R15,46, R13,91, R16,19 and R14,82 respectively.These fair values were calculated using the binomial model. The inputs into the model were as follows:Weighted average share price (Rand) 86,40 63,30Expected volatility 29,7% – 31,3% 29,4% – 32,6%Expected life 3 – 5 years 3 – 5 yearsRisk-free rate 7,4% – 8,5% 7,1% – 7,8%Expected dividend yield 3,6% – 3,9% 3,8% – 3,9%
Expected volatility was determined by calculating the historical volatility of the Company’s share price over the number of previous years corresponding with the option lifetime. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
MASSMART THUTHUKANI EMPOWERMENT TRUSTThe weighted average share price at the date of exercise for share options exercised during the year was R80,98. The options outstanding at the end of the year have a weighted average remaining contractual life of 5,0 years. In 2007, options were granted on 2 October 2006. The estimated fair values of the options granted on that date is R24,75.These fair values were calculated using the binomial model. The inputs into the model were as follows:Weighted average share price (Rand) 56,91 n/aExpected volatility 30,1% – 32,3% n/aExpected life 5,0 n/aRisk-free rate 8,3% – 8,4% n/aExpected dividend yield 3,7% n/a
Expected volatility was determined by calculating the historical volatility of the Company’s share price over the number of previous years corresponding with the option lifetime. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
MASSMART BLACK SCARCE SKILLS TRUSTNo options were exercised during the year. The options outstanding at the end of the year have a weighted average remaining contractual life of 4,1 years. In 2007, options were granted on 1 October 2006 and 2 April 2007. The estimated fair values of the options granted on those dates are R17,20 and R24,55 respectively.These fair values were calculated using the binomial model. The inputs into the model were as follows:Weighted average share price (Rand) 58,26 n/aExpected volatility 30,1% – 31,3% n/aExpected life 4,1 n/aRisk-free rate 7,7% – 8,5% n/aExpected dividend yield 3,7% – 3,9% n/a
Expected volatility was determined by calculating the historical volatility of the Company’s share price over the number of previous years corresponding with the option lifetime. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
153Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
2007Rm
2006Rm
23. Minority interestAt the beginning of the year 50,6 37,7Changes in minority interests (37,3) (0,4)Income attributable to minorities 15,3 24,7Distribution to minorities (2,8) (11,4)
At the end of the year 25,8 50,6
The minority interest at year-end relates to the minority shareholders in Masscash Holdings (Pty) Limited.2007
Rm2006
Rm
24. Non-current liabilitiesInterest-bearingUnsecuredMinority shareholders’ loans – 10,7Less: Included in current liabilities – (10,7)
Medium-term payable 3,4 3,3Less: Included in current liabilities (3,4) (3,3)
SecuredMedium-term bank loans 429,7 578,9Less: Included in current liabilities (116,2) (149,2)
Foreign bank loan 54,9 57,2Less: Related cash deposit (54,9) (57,2)
313,5 429,7
Capitalised finance leases 101,2 101,8Less: Included in current liabilities (12,0) (11,8)
89,2 90,0
Total interest-bearing liabilities 402,7 519,7
Interest-freeUnsecuredMinority shareholders’ loans 1,9 2,2Less: Included in current liabilities – –
Income received in advance 140,8 –Less: Included in trade and other payables (47,6) –
Operating lease liability 475,0 498,9Less: Included in trade and other payables (13,2) (26,4)
Total non-interest-bearing liabilities 556,9 474,7
Total non-current liabilities 959,6 994,4
154 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
24. Non-current liabilities continuedIncluded in current borrowings is a medium-term payable of R3,4 million (2006: R3,3 million), which is an amount owing to the Massmart Education Foundation relating to cash held on its behalf.Two medium-term bank loans, raised in 2001, were repayable in 10 equal instalments over five years (last payment was during the 2007
were secured by intragroup cross suretyships.A further two medium-term bank loans, raised in the prior year to fund the Massbuild acquisitions, are repayable in nine equal instalments over five years. The loans bear interest at a fixed rate of 8,8% and 8,7% respectively. The loans are secured by intragroup cross suretyships.The foreign bank loan relates to a US Dollar denominated loan in one of Massdiscounter’s foreign operations which has a legal right of offset with a US Dollar denominated cash deposit. The interest rate is 0,5% below the US Dollar prime overdraft rate.Capitalised finance leases include vehicle, fixtures, fittings, plant and computer equipment and property leases, repayable in monthly instalments varying from one to five years at varying interest rates, some linked to the prime overdraft rate and one fixed at 13,8%.The capitalised finance leases are secured by moveable assets with a book value of R35,7 million (2006: R35,3 million) and the property lease by the value of the underlying land amounting to R44,2 million (2006: R46,3 million).The income received in advance is for extended warranties which are sold within the Group and which will be released over the next two to four years.The operating lease liability relates to the lease-smoothing adjustment required by IAS 17 Leases.The maturity profile of amounts payable under medium-term bank loans, short-term payables, minority shareholder loans and the finance leases is as follows (excludes operating lease liability and income received in advance):
* Included in current borrowings on the balance sheet.
For IAS 39 Financial Instruments: Recognition and Measurement accounting treatment, see note 38, “Financial risk management”.
156 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
2007Rm
2006Rm
25. Non-current provisionsOnerous lease provision 2,8 4,2Less: Payable within one year included in current provisions (0,7) (1,0)
Provision for post-retirement medical aid contributions and other medical aid provisions 45,0 39,0Less: Payable within one year included in current provisions – –
47,1 42,2
Repayablewithin 1 year*
Rm
Repayable in2 – 5 years
Rm
Repayableafter 5 years
RmTotal
Rm
2007 0,7 2,1 45,0 47,82006 1,0 3,2 39,0 43,2
* Included in current provisions in note 24.
Certain Group companies provide post-retirement healthcare benefits to their retirees. This fund is accounted for as a defined-benefit plan and measured using the projected unit credit method. The liability is unfunded. The main assumption used in calculating the costs and the provision is an “interest rate – medical inflation rate” gap of 1,5% (2006: 1,5%).
2007Rm
2006Rm
The net expense recognised in the income statement is:Current service cost 1,8 1,6Interest cost 3,3 2,4
(1,0) (1,8)Net actuarial loss recognised in the year 1,9 7,0
Net expense recognised as part of employment costs 6,0 9,2
Movements in the post-retirement medical aid liability:Opening defined-benefit obligation 39,0 29,8Expense as above 6,0 9,2
Closing defined-benefit obligation 45,0 39,0
The last valuation of the liability for the post-retirement medical aid contributions was performed as at June 2007 by Alexander Forbes, Fellow of the Institute of Actuaries (2006: Alexander Forbes). The current year costs have been assessed in accordance with the advice of independent actuaries.The net actuarial loss in the current year arose as a result of a combination of the following factors:– A higher than expected decrease in the number of in-service members resulted in a net gain of R4,5 million.– A loss of R6,8 million arose as a result of the use of updated mortality tables.– Lower than expected inflation of medical scheme contributions resulted in a gain of R0,3 million.– Previously, the date of joining the medical scheme was used as an approximation for in-service members’ date of employment. Using the
actual dates of employment for in-service members we could match to previous valuations resulted in a gain of R1,0 million. Other miscellaneous items, including a change in death-in-service subsidy, resulted in a net loss of R1,0 million.
Other than the changes listed above, the remaining assumptions are consistent with the assumptions applied in the prior year.
157Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
2007Rm
2006Rm
26. Trade and other payablesTrade payables 5 285,8 4 604,7Operating lease liability 13,2 26,4Sundry payables and other accruals 1 456,7 1 244,6
6 755,7 5 875,7
Trade and other payables are classified as “Loans and receivables” for IAS 39 Financial Instruments: Recognition and Measurement purposes. See note 38, “Financial risk management” for IAS 39 accounting treatment.The Group has financial risk management policies in place to ensure that all payables are paid within the credit timeframe. Settlement discounts received range from 0,25% to 10%.
28. Employee Share Incentive SchemesMASSMART HOLDINGS LIMITED EMPLOYEE SHARE TRUSTTotal shares and options available to the scheme 39 500 39 500
Total shares and options available to the scheme 39 500 39 500Shares and options allocated to participants who are still employees (37 514) (33 618)Shares which have been paid for and transferred which are more than 10 years old 1 395 1 260
Remaining capacity for issue in terms of the JSE practice 3 381 7 142
Opening balance of shares and options 19 077 22 131New shares and options offered to employees and executive directors 4 121 2 325Shares sold by employees and directors (8 189) (4 887)Shares repurchased from/forfeited by employees and options lapsed/forfeited (1 614) (492)
Closing balance of shares and options 13 395 19 077
The closing balance includes 3 155 538 (2006: 6 871 370) shares and 10 239 002 (2006: 12 206 168) options. Shares and options previously issued to employees who then subsequently left the Group are excluded from the figures above. This has the effect of enabling these shares and options to be re-issued in terms of the scheme.
Options may be exercised at any time, but shares arising out of options may only be sold when they have vested with the participant.
Vesting occurs over a five-year period as follows:
In terms of the scheme rules, all share loans on offers made prior to 22 May 2002 must be repaid or options exercised no later than 10 years from the offer date. For subsequent offers, share loans must be repaid or options exercised no later than six years from the offer date.
159Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
28. Employee Share Incentive Schemes continued
The following options granted to employees and directors in terms of the Massmart Employee Share Incentive Scheme have not yet been exercised:
Offer date Expiry dateExercise price (R)
No of optionsat June 2006
No of optionsforfeited
and expiredNo of options
exercisedNew options
granted
No ofoptions atJune 2007
22 September 1999 21 September 2009 12,37 718 289 – 584 018 – 134 27110 March 2000 9 March 2010 14,61 299 000 – 250 250 – 48 75013 November 2000 12 November 2010 12,25 382 500 – 75 000 – 307 50027 August 2001 26 August 2011 10,95 2 154 258 – 1 342 250 – 812 00816 January 2002 15 January 2012 12,03 162 500 12 500 100 000 – 50 00022 May 2002 21 May 2008 13,88 705 760 9 225 343 693 – 352 84231 October 2002 30 October 2008 15,23 20 569 10 285 10 284 – –15 November 2002 14 November 2008 17,30 25 662 – 12 831 – 12 83119 November 2002 18 November 2008 17,43 50 000 – – – 50 0001 January 2003 31 December 2008 18,30 18 350 – 9 174 – 9 1761 February 2003 31 January 2009 18,90 117 987 – 88 488 – 29 4991 April 2003 31 March 2009 17,82 342 723 104 554 214 104 – 24 0651 May 2003 30 April 2009 18,06 64 213 31 728 9 302 – 23 18327 May 2003 26 May 2009 18,98 769 007 23 023 239 074 – 506 91031 May 2003 30 May 2009 19,14 342 883 17 236 133 760 – 191 8871 September 2003 31 August 2009 24,59 118 272 – 15 090 – 103 1821 November 2003 31 October 2009 28,20 60 000 – 15 000 – 45 00026 February 2004 25 February 2010 27,63 156 245 – 63 964 – 92 2811 March 2004 28 February 2010 27,90 9 904 – 2 476 – 7 4281 April 2004 31 March 2010 30,22 25 996 – 5 952 – 20 04415 April 2004 14 April 2010 32,55 19 454 – – – 19 45426 May 2004 25 May 2010 29,87 831 045 56 118 166 647 – 608 28031 May 2004 30 May 2010 30,20 705 561 5 651 272 330 – 427 5801 September 2004 31 August 2010 35,31 829 579 22 500 105 500 – 701 57925 February 2005 24 February 2011 45,24 58 351 12 000 6 786 – 39 5651 April 2005 31 March 2011 41,91 1 104 077 600 000 101 019 – 403 0581 May 2005 30 April 2011 43,42 43 172 – 6 779 – 36 39327 May 2005 26 May 2011 42,97 638 403 47 388 52 929 – 538 08631 May 2005 30 May 2011 42,88 147 071 5 287 2 156 – 139 6281 October 2005 30 September 2011 52,48 8 642 – – – 8 6421 November 2005 31 October 2011 51,91 68 248 – – – 68 24830 November 2005 29 November 2011 51,19 280 939 64 636 12 500 – 203 8031 April 2006 31 March 2012 58,74 139 967 5 638 – – 134 32923 May 2006 22 May 2012 54,13 787 541 240 389 – – 547 15225 August 2006 24 August 2012 51,93 – – – 267 946 267 9461 October 2006 30 September 2012 56,42 – – – 104 367 104 36715 November 2006 14 November 2012 62,04 – 200 000 – 428 028 228 02823 February 2007 22 February 2013 67,79 – – – 453 353 453 3532 April 2007 1 April 2013 82,67 – – – 39 398 39 39824 May 2007 23 May 2013 94,25 – – – 2 449 256 2 449 256
MASSMART THUTHUKANI EMPOWERMENT TRUSTTotal shares and options available to the scheme 18 000 –
Opening balance of shares and options – –New shares and options offered to eligible employees 18 124 –Shares sold by employees and directors (111) –Shares repurchased from/forfeited by employees and options lapsed/forfeited (782) –
Closing balance of shares and options 17 231 –
Vesting occurs over a six-year period as follows:
The following options granted to eligible employees in terms of the Massmart Thuthukani Empowerment Trust have not yet been exercised:
Offer date Expiry dateExerciseprice (R)
No of optionsat June 2006
No of optionsforfeited and
expiredNo of options
exercisedNew options
grantedNo of optionsat June 2007
1 October 2006 2 October 2012 49,98 – 782 440 111 225 18 124 590 17 230 925
– 782 440 111 225 18 124 590 17 230 925
2007000s
2006000s
MASSMART BLACK SCARCE SKILLS TRUSTTotal shares and options available to the scheme 2 000 –
Opening balance of shares and options – –New shares and options offered to employees 687 –Shares sold by employees – –Shares repurchased from/forfeited by employees and options lapsed/forfeited (61) –
Closing balance of shares and options 626 –
Vesting occurs over a five-year period as follows:
Offer date Expiry dateExercise price (R)
No of optionsat June 2006
No of options forfeited and
expiredNo of options
exercisedNew options
grantedNo of options at June 2007
1 October 2006 2 October 2011 56,42 – 60 947 – 661 471 600 5242 April 2007 3 April 2012 82,67 – – – 25 464 25 464
– 60 947 – 686 935 625 988
161Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
29. Retirement benefit informationAll full-time permanent Massmart staff are members of either the Massmart Pension Fund, the Massmart Provident Fund or the SACCAWU National Provident Fund. These funds are defined-contribution funds and are subject to the Pension Funds Act, 1956. Following the recent acquisitions, many of their staff are still members of the retirement funds of the previous business owners. Projects are under way to transfer these employees to one of the above funds in future.The Massmart Pension Fund and the Massmart Provident Fund are required to submit a statutory actuarial valuation to the Financial Services
suitable in nature, in terms of the liabilities as at valuation date. The funds’ actuary performs an annual actuarial review of the funds. The last one performed at February 2007, based on the draft audited financial statements, also confirmed the funds being in a sound financial condition.Contributions received by the funds for the year ended 30 June 2007 amounted to R187 million (2006: R166 million). The Group’s contribution of R112 million (2006: R100 million) was included in the income statement for the year as part of the employee costs.
2007Rm
2006Rm
30. CommitmentsCommitments in respect of capital expenditure approved by directors:
Contracted for 101,0 183,0Not contracted for 327,7 143,0
428,7 326,0
Commitments contracted for include one Makro and three new Game stores to be opened. Two Dion stores are to be converted to Game stores, and one Game store is to be refurbished.
exercised this right. The amount to be paid in future, should Massmart exercise its right, totals R73,5 million (2006: R42,2 million).Capital commitments will be funded utilising current facilities.
2007Rm
2006Rm
31. Operating lease commitmentsLand and buildings
Year 1 667,5 608,8Years 2 to 5 2 728,6 2 592,9Subsequent to year 5 2 625,6 2 679,4
6 021,7 5 881,1
Plant and equipmentYear 1 19,2 7,4Years 2 to 5 31,8 24,2Subsequent to year 5 2,0 2,5
53,0 34,1
OtherYear 1 3,6 16,3Years 2 to 5 4,2 16,9Subsequent to year 5 – 28,8
7,8 62,0
Promissory notes that represent commitments under non-cancellable operating leases of R1 059,9 million (2006: R1 172,5 million) entered into by Masstores (Pty) Limited on behalf of Makro are included in operating lease commitments in land and buildings. These leases terminate in December 2020 and have a discounted present value of R678,9 million (2006: R702,8 million). In accordance with IAS 17 Leases, the rentals paid are amortised over the entire remaining lease period on a straight-line basis.
162 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
2007Rm
2006Rm
32. Contingent liabilities– –
There are no legal or arbitration proceedings, of which the Group is aware, which would have a material effect on the Group’s financial position.
2007Rm
2006Rm
33. Related-party transactionsTransactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below.
Compensation of key management personnelThe remuneration of directors and other key management (defined as the Massmart Executive Committee) during the year was as follows:Short-term benefits 66,2 56,5Post-employment benefits 1,6 1,5Other long-term benefits 8,1 6,0Gains on exercise of share options 91,5 16,3
167,4 80,3
The remuneration of directors and key executives is determined by the Remuneration Committee having regard to the performance of individuals and market trends. There was an equal number of members in the Executive Committee in 2006 and 2007.
Other related-party transactions
Keil. John Keil was previously a director and the former owner of Servistar.
From time to time, in the normal course of business, Massmart and its divisions make use of private aircraft hired from competitively selected charter companies, two of which operate aircraft indirectly beneficially owned by Mark Lamberti.Loans to directors have been disclosed in note 17 on page 145.
163Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
34. Directors’ emolumentsThe comments below provide further background and context to the figures disclosed in this note, Directors’ emoluments, and Interests of directors in the Company’s Share Scheme (note 35).
MJ LambertiMark’s salary and allowances were unchanged from 2006 at R2,4 million while his other benefits increased by R0,1 million. In line with the Group’s Short-term Executive Incentive Scheme which rewards executives based upon growth in HEPS (growth in HEPS excluding the first-time effect of the Thuthukani IFRS 2 charge was 36,4%), he received R4,8 million, being 24 months’ salary, as a bonus. In addition, in special recognition of his lifetime achievements in his leadership of Massmart and to mark his retirement as CEO, the Remuneration Committee awarded a discretionary bonus of R5,0 million, taking his total bonus to R9,8 million.During the 2007 financial year, in anticipation of his standing down as CEO, Mark sold 4 534 537 Massmart shares of which 401 746 shares had been purchased in the open market and the balance were shares purchased from the Massmart Holdings Limited Employee Share Trust. In respect of the latter he realised a gain of R268,8 million.
Mark has an indirect and non-beneficial interest in a trust that owns 500 000 Massmart shares.
GM PattisonPursuant to his appointment as Deputy CEO and later CEO Designate, Grant received a 16,7% increase to his salary and allowances for the 2007 financial year, from R1,9 million to R2,2 million. In line with the Group’s Short-term Executive Incentive Scheme which rewards executives based on growth in HEPS, (growth in HEPS excluding the first-time effect of the Thuthukani IFRS 2 charge was 36,4%), he received R3,5 million, being 24 months’ salary, as a bonus. As a condition of his appointment as CEO he was required to enter into a restraint of trade agreement in consideration for which he received R3,1 million.
Grant did not sell any Massmart shares or options during the 2007 financial year.Through the Share Scheme, Grant has 1 846 138 Massmart shares and options. The average length of time that he has held these shares and options is 3,0 years and the average strike price is R38,57 per share.
GRC HaywardGuy received a 12,5% increase to his salary and allowances for the 2007 financial year, from R1,6 million to R1,8 million. In line with the Group’s Short-term Executive Incentive Scheme, which rewards executives based on growth in HEPS, (growth in HEPS excluding the first-time effect of the Thuthukani IFRS 2 charge was 36,4%), he received R3,2 million, being 24 months’ salary, as a bonus.During the 2007 financial year, Guy converted and sold 325 000 Massmart shares and options which he had held for more than five years, realising a gain on exercise of share options of R9,8 million.Through the Share Scheme, Guy still has 752 413 Massmart shares and options. The average length of time that he has held these shares and options is 3,4 years and the average strike price is R35,06 per share.
S NothnagelFanus resigned with effect from 30 November 2006. Upon his resignation and during his subsequent six-month notice period, Fanus converted and sold 324 618 Massmart options which he had held for almost four years, realising a gain of R17,0 million. He forfeited 620 070 Massmart options.
164 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
34. Directors’ emoluments continued
Services asdirectors of
Massmart Holdings
LtdR000
Salaryand
allowancesR000
Bonusesand
perform-ance-
relatedpayments8
R000
Other benefits
R000
Retire-ment and
relatedbenefits
R000
Otherwise in
connectionwith the
affairs ofMassmart
HoldingsLtd
R000Subtotal
R000
Fringebenefit ofinterest-
free loans used tofinanceshares
R0009
Gains onexerciseof shareoptions
R000TotalR000
For the year ended 30 June 2007Executive directors
1. Relates to the 1 000 000 shares issued pursuant to the signing in March 2003 of a four-year service contract which terminated in June 2007.
2. Resigned as executive director on 30 June 2007 and appointed Non-executive Chairman on 1 July 2007.
3. Appointed Chairman on 1 July 2003 and resigned as Chairman on 30 June 2007 and appointed Deputy Chairman on 1 July 2007.
4. Appointed on 1 November 2006.
5. Executive director from 25 May 2005 and resigned as a director on 30 November 2006. The figures include his notice period.
6. Appointed CEO on 1 July 2007.
7. Restraint of R3,1 million paid on appointment as CEO.
8. In order to match incentive awards with the performance to which they relate, bonuses above reflect the amounts accrued in respect of each year and not amounts paid in that year.
9. Held in terms of the rules of the Company’s share scheme.
10. Individual not recipient of fees – fees paid to Company.
165Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
34. Directors’ emoluments continued
Services asdirectors of
Massmart Holdings
LtdR000
Salaryand
allowancesR000
Bonusesand
perform-ance-
related payments
R0007
Other benefits
R000
Retire-ment and
relatedbenefits
R000
Otherwise in con-nectionwith the
affairs ofMassmart
HoldingsLtd
R000Subtotal
R000
Fringebenefit ofinterest-
free loans used tofinanceshares
R0008
Gains onexerciseof shareoptions
R000TotalR000
For the year ended 30 June 2006Executive directors
1. MJ Lamberti’s salary will not be increased for the duration of his contract.
2. Relates to the 1 000 000 shares issued pursuant to the signing in March 2003 of a four-year service contract.
3. Appointed Chairman on 1 July 2003.
4. Appointed on 25 August 2004.
5. Executive director from 7 December 2004.
6. Executive director from 25 May 2005.
7. In order to match incentive awards with the performance to which they relate, bonuses above reflect the amounts accrued in respect of each year and not amounts paid in that year.
8. Held in terms of the rules of the Company’s share scheme.
9. Individual not recipient of fees – fees paid to Company.
166 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
35. Interests of directors in the Company’s share schemeDetails of directors’ shares and share options per director:
Relevant dateSubscription
price (R) Market
price (R)
Number of shares/
share options
Gain onsale/
exercise(R000) Expiry date
Lamberti, MJ4 632 791
No movement –
4 632 791Shares sold 15 November 2006 4,29 62,97 (1 532 791) 89 951
15 November 2006 10,95 62,97 (600 000) 31 21415 November 2006 12,50 62,97 (465 463) 23 493
22 May 2007 17,42 94,72 (3 791) 29322 May 2007 12,50 94,72 (1 034 537) 85 06123 May 2007 17,42 94,52 (496 209) 38 254
500 000
* These shares are indirectly and non-benefically owned by MJ Lamberti.
Pattison, GM1 041 138
New shares/options granted 23 May 2006 54,13 750 000 22 May 2012
1 791 138New shares/options granted 24 May 2007 94,25 55 000 23 May 2013
1 846 138
Comprising: 13 November 2000 12,25 400 000 12 November 201027 August 2001 10,95 150 000 26 August 2011
27 May 2003 18,98 55 219 26 May 200926 May 2004 29,87 35 919 25 May 20101 April 2005 41,91 400 000 31 March 2011
23 May 2006 54,13 750 000 22 May 201224 May 2007 94,25 55 000 23 May 2013
*
167Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
35. Interests of directors in the Company’s share scheme continued
Relevant dateSubscription
price (R) Market
price (R)
Number of shares/
share options
Gain onsale/
exercise(R000) Expiry date
Hayward, GRC1 027 524
Options exercised 17 November 2005 10,95 52,56 (75 000) 3 12128 November 2005 10,95 51,00 (50 000) 2 003
New shares/options granted 23 May 2006 54,13 150 000 22 May 2012
1 052 524Options exercised 3 November 2006 10,95 60,12 (200 000) 9 835Shares sold 16 March 2007 14,61 81,99 (56 389) 3 799
20 March 2007 14,61 79,01 (93 611) 6 029New shares/options granted 24 May 2007 94,25 49 889 23 May 2013
752 413
Comprising: 10 March 2000 14,61 8 643 9 March 201013 November 2000 12,25 100 000 12 November 2010
27 August 2001 10,95 150 000 26 August 201119 November 2002 17,43 50 000 18 November 2008
26 May 2004 29,87 43 881 25 May 20101 April 2005 41,91 200 000 31 March 2011
23 May 2006 54,13 150 000 22 May 201224 May 2007 94,25 49 889 23 May 2013
Nothnagel, S819 240
Options exercised 28 February 2006 17,82 60,78 (74 552) 3 203New shares/options granted 23 May 2006 54,13 200 000 22 May 2012
36. Principal subsidiariesDetails of Massmart’s material subsidiary companies are as follows:
Numberof shares
in issue000s
Place of incorporation and operation
Ownership%
Votingpower
%Principal activity
Shares atbook value
Rm
Indebted-ness
Rm
2007Name of company
Materials (Pty) Limited– South Africa 100 100 Selling of building materials 28,4 210,4
Federated Timbers (Pty) Limited – South Africa 100 100 Wholesale and retail of DIYproducts
– 0,4
Jumbo Cash & Carry (Pty) Limited – South Africa 100 100 Wholesale cash and carry 74,5 –Masscash Holdings (Pty) Limited – South Africa 100 100 Holding company 1,0 –Massmart International Holdings
– South Africa 100 100 Management, investmentand finance
– (243,0)
Masstores (Pty) Limited 200 South Africa 100 100 Retailing, warehousing,mass merchandising
– (408,3)
Servistar (Pty) Limited – South Africa 100 100 DIY retailer – 112,7
Limited4 443 South Africa 100 100 Wholesale and retail
marketing and distribution30,4 14,5
134,3 (387,2)
Holdings Limited.The above details are given in respect of interests in subsidiaries, where material. A full list of subsidiaries is available to shareholders, on request, at the registered office of the Company.
169Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
2007Rm
2006Rm
37. Notes to the cash flow statement37.1 Cash flow from trading Profit before taxation 1 628,9 1 300,6 Adjustment for:
Depreciation, amortisation and impairment 267,2 208,9 Net (gain)/loss on disposal of property, plant and equipment 0,7 (1,1) Interest income (56,0) (63,8) Interest expense 100,4 96,5 Investment income (53,6) (34,6) Dividend income (2,5) (3,2) Share-based payment expense 73,3 17,4 Loss on discontinued operation – 1,8 Unrealised foreign exchange loss (1,0) 30,3 Other non-cash movements (31,0) (9,2)
1 926,4 1 543,6
37.2 Working capital movements Increase in inventories (819,5) (560,8) Increase in trade receivables and prepayments (110,4) (91,1) Increase in trade payables 903,0 913,9 Decrease in provisions (1,4) (1,6)
(28,3) 260,4
37.3 Taxation paid Normal taxation:
Amounts owing at the beginning of the year 259,2 279,9 Amounts owing at the end of the year (282,6) (259,2)
Amounts charged to the statement of changes in equity (2,9) 17,0 Amounts on disposal of discontinued operation – 2,2 Taxation charged to the income statement (excluding deferred taxation) 557,9 447,5
531,6 487,4
37.4 Investment to maintain operations Land and buildings/leasehold improvements 13,9 35,5 Vehicles 17,6 18,8 Plant and equipment 77,6 100,5 Computer hardware 14,7 18,3 Computer software 29,1 5,4
152,9 178,5
37.5 Investment to expand operations Land and buildings/leasehold improvements 34,8 18,1 Vehicles 13,4 6,0 Plant and equipment 186,7 99,0 Computer hardware 32,6 18,1 Computer software 34,5 18,7 Trademarks and other 1,0 2,3 Goodwill 14,9 21,9
317,9 184,1
170 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
2007Rm
2006Rm
37. Notes to the cash flow statement continued
37.6 Proceeds on disposal of property, plant and equipment Land and buildings/leasehold improvements 0,1 2,1 Vehicles 7,8 4,6 Plant and equipment 2,4 1,4 Computer equipment 0,3 0,2
10,6 8,3
37.7 Investment in subsidiaries Fair value of assets and liabilities acquired in subsidiaries:
Cash impact of acquisition, net of cash and cash equivalents acquired 160,0 –
37.8 Disposal of subsidiary Net assets at date of disposal:
Cash and cash equivalents – 25,9 Trade receivables and prepayments – (162,6) Property, plant and equipment – (0,7) Taxation – (2,2) Trade payables – 112,7 Provisions – 4,2 Long-term debt – 124,0 Loans and investments – (77,4) Loss on disposal of subsidiary – 1,8
Cash and cash equivalents received on sale – 25,7
37.9 Net acquisition of treasury shares4,5 –
Loss from the share trust 216,5 – Share premium movement on treasury shares acquired 5,0 18,3
226,0 18,3
37.10 Cash and cash equivalents at the end of the year Cash on hand and balances with banks 1 245,7 1 441,6
(37,0) (65,3)
Cash and cash equivalents at the end of the year 1 208,7 1 376,3
The above includes amounts relating to the discontinued operation. Details can be found in note 3 on page 131.
171Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
38. Financial risk management38.1 Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the
return to stakeholders through the optimisation of the debt and equity balances. The capital structure of the Group consists of debt, more specifically long-term interest-bearing debt and equity attributable to equity
holders of the parent, comprising share capital, share premium, non-distributable reserves and retained profit. (See notes 21 and 22 on pages 150 to 152.)
structure through the payment of dividends, new share issues and share buy-backs as well as the issue of new debt or the redemption of exisiting debt.
38.2 Categories of financial instruments Fair values of financial instruments All financial instruments have been classified according to the relevant IAS 39 Financial Instruments: Recognition and Measurement
category. There is no difference between their fair value and carrying value and they are accounted for as follows:
Financial assets Fair value through profit or loss (FVTPL) These are held at fair value and any adjustment to fair value taken to the income statement. Listed investments are carried at market
value by reference to stock exchange quoted selling prices.
Loans and receivables These are held at amortised cost less any impairment losses recognised to reflect irrecoverable amounts.
Held-to-maturity investments These are held at amortised cost less any impairment losses recognised to reflect irrecoverable amounts.
Available-for-sale investments These are held at fair value and any adjustment to fair value is taken to equity. The total value taken to equity in the year was
R13,2 million.
Financial liabilities All financial liabilities are held as non-trading liabilities and are shown at amortised cost. The cash flows expected from the Group’s participation in export partnerships over the next two to five years cannot, in the opinion of
the directors, be accurately fair valued and therefore have not been discounted. For fair presentation purposes, it is noted that any fair value impairment in the amounts due to the Group by virtue of its participation in such partnerships would result in a corresponding reduction in the fair value of the related deferred tax liability. Consequently, such fair value impairment would have no impact on either cash flow statement or income statement of the Group.
172 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
2007Rm
2006Rm
38. Financial risk management continued
38.2 Categories of financial instruments Financial assets Fair value through profit or loss (FVTPL)
Held for trading 207,1 149,4 Designated as at FVTPL 2,3 – Loans and receivables
Financial liabilities Fair value through profit or loss (FVTPL) Held for trading – – Designated as at FVTPL – – Loans and receivables Interest-bearing liabilities – non-current 402,7 519,7 Interest-free liabilities – non-current 1,9 2,2 Interest-bearing liabilities – current 131,6 175,0 37,0 65,3 Trade and other payables 6 755,7 5 875,7
Interest rate managementThe interest-bearing debt funding requirements and the investment of surplus cash funds are managed by Massmart through its own commercial bank facilities.
Liquidity risk managementThe Group’s liquidity requirements are assessed on an ongoing basis as part of the Group’s treasury function. No significant risk exists as the Group is conservatively structured and the operations generate positive cash flows.
2007Rm
2006Rm
Total banking and loan facilities 3 492,2 3 492,2Actual interest-bearing debt (567,9) (756,7)
Unutilised banking facilities 2 924,3 2 735,5
been secured by cross-suretyships between Group companies.
Credit risk managementPotential areas of credit risk include trade and consumer accounts receivable and short-term cash investments.Trade accounts receivable consist primarily of a large, widespread customer base. Group companies regularly monitor the financial position of their customers. Where considered appropriate, credit guarantee insurance is used. The granting of credit is controlled by application and account limits. Provision is made for both specific and general bad debts, and at the year-end management did not consider there to be any material credit risk exposure that was not already covered by credit guarantee insurance or bad debt provisions.
173Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
38. Financial risk management continued
The following table shows the split of credit exposure:
Currency risk managementAll foreign-denominated trading liabilities are covered by forward exchange contracts. Foreign-denominated assets are not covered by forward exchange contracts.
Forward foreign exchange contractsForward exchange contracts are entered into to manage exposure to fluctuations in foreign currency exchange rates on specific trading transactions. The Group’s policy is to enter into forward contracts for all committed foreign currency purchases.Forward foreign exchange contracts have been accounted for according to IAS 39 Financial Instruments: Recognition and Measurement. Fair value has been determined using money market derivative rates at 30 June 2007 and the net gain or exposure on the contracts has been reflected in the financial statements.
At year-end, the open forward exchange contracts were as follows:
Foreigncurrency(millions)
Fair valueadjustment
Rm
Contractequivalent
RmAverage
rate
2007USD 55,2 (0,7) 399,3 7,2
0,2 – 3,0 14,3Euro 3,1 0,2 30,6 9,9
(0,5) 432,9
2006USD 49,6 35,7 303,1 6,1
0,3 0,5 3,8 13,7Euro 3,5 4,7 32,5 9,4
40,9 339,4
The latest maturity date on open forward foreign exchange contracts is 15 March 2008.
174 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
39. Segmental reportingPrimary business segmentsThe Group is organised into four divisions for operational and management purposes, being Massdiscounters, Masswarehouse, Massbuild and Masscash. Massmart reports its primary business segment information on this basis. The principal offering for each division is as follows:
Massdiscounters – general merchandise discounterMasswarehouse – warehouse club discounterMassbuild – home improvement retailer and building materials supplierMasscash – food wholesaler and buying association
Net capital expenditure 354,0 21,4 120,3 34,3 105,6 72,4Depreciation and amortisation 203,0 5,2 83,3 43,9 37,6 33,0Impairment losses 5,4 – – – – 5,4Non-cash items other than depreciation and
The corporate column includes certain consolidation entries.
All intercompany transactions have been eliminated in the above results.The above results exclude amounts relating to the discontinued operation. Details can be found in note 3 on page 131.* EBITA is earnings before interest, tax and asset impairments.
175Group Consolidated Annual Financial Statements
Notes to the Annual Financial Statements
39. Segmental reporting continued
Secondary geographic segmentsThe Group’s four divisions operate in two principal geographical areas – South Africa and the rest of Africa.
All intercompany transactions have been eliminated in the above results.The above results exclude amounts relating to the discontinued operation. Details can be found in note 3 on page 131.
40. Critical accounting judgements and key sources of estimation uncertaintyCritical judgements in applying the Group’s accounting policiesIn the process of applying the Group’s accounting policies, which are described in note 1, management has not made any critical judgements that have a significant effect on the amounts recognised in the financial statements apart from those involving estimations.
Key sources of estimation uncertaintyKey sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year relate only to the impairment of goodwill. Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. The carrying amount of goodwill at the balance sheet date was R1 346,8 million (2006: R1 196,4 million). An impairment loss of R12,2 million was recognised in the current year. No impairment loss was recognised in the prior year. Details of the impairment loss calculation are provided in note 14 on page 141.
Two additional areas of estimation uncertainty that could have an immaterial adjustment to the carrying amounts of assets and liabilities within the next financial year relate to the IFRS 2 Share-based Paymentvaluation by accredited valuators, Management feels that the risk has been mitigated. For more details on the valuations, please see note 22 on page 150 and note 25 on page 156 respectively.
41. Events after the balance sheet dateNo significant events took place after the balance sheet date.
176 MASSMART ANNUAL REPORT 2007
for the year ended 30 June 2007
Group Consolidated
Notes to the Annual Financial Statements
42. Shareholder analysisThe following analysis of shareholders was extracted from the shareholder register as at June 2007:
Directors of the Company 6 0,07 2 836 943 1,41 Share trust 1 0,01 1 777 815 0,88
Public shareholders 8 184 99,92 196 458 073 97,71
8 191 100,00 201 072 831 100,00
Beneficial shareholders holding 5% or moreNo shareholders held beneficially, directly or indirectly, more than 5% of the Company’s shares.
Foreign custodians and managers holding 5% or moreThe following foreign custodians and managers held beneficially, directly or indirectly, more than 5% of the Company’s shares:
1. RevenueDividends received (included are dividends from subsidiary companies) 1 047,2 109,5Management and administration fees received (included are management and administration
Charges to operating profit include:Foreign exchange loss – 1,0Share-based payment 0,9 –
3. Net finance (costs)/incomeFinance costsInterest on Group loans (8,5) (5,0)
Finance incomeInterest on Group loans 1,1 7,9
Net finance (costs)/income (7,4) 2,9
4. TaxationCurrent yearSouth African normal taxation Current taxation 6,4 5,8 Deferred taxation (0,8) (2,9)Secondary taxation on companies 57,5 43,4
63,1 46,3
Prior year underprovision:South African normal taxation Current taxation – 1,3
– 1,3
Total 63,1 47,6
The rate of taxation is reconciled as follows: % %
Standard corporate taxation rate 29,0 29,0Exempt income (29,1) (66,8)Disallowable expenditure 0,5 1,2Prior year underprovision – 2,7Secondary tax on companies 5,5 84,9Loss on sale of Furnex Stores (Pty) Limited – 47,3Foreign income 0,1 –Other – 1,8
Effective rate 6,0 100,1
Massmart Holdings Limited
Notes to the Annual Financial Statementsfor the year ended 30 June 2007
Statement of Changes in EquityNotes to the Annual Financial Statements
184
for the year ended 30 June 2007
MASSMART ANNUAL REPORT 2007
Massmart Holdings Limited
Notes to the Annual Financial Statements
2007Rm
2006Rm
5. Interest in subsidiariesShares at cost less amounts written off 134,3 134,3Amounts owing to subsidiaries (134,3) (279,3)
– (145,0)
Details of net shares at cost can be found in note 36 on page 168 in the consolidated financial statements.
6. Other financial assetsUnlisted investments Preference shares – Fullimput 65 (Pty) Limited1 485,3 420,5 Investment in Imagegate Limited (UK)2 4,9 4,7 Investment in Massmart Black Scarce Skills Trust 0,2 –Listed investments 0,2 –
490,6 425,2
The directors’ valuation of the unlisted investments at 30 June 2007 is R490,4 million (2006: R425,2 million).The preference share investment represents cumulative preference shares in Fullimput 65 (Pty) Limited. A long-term liability of the Group is secured by a cession of the preference shares.
Notes1. Classified as a “held-to-maturity” financial asset for IAS 39 purposes.2. Classified as a “loan and receivable” financial asset for IAS 39 purposes.For IAS 39 accounting treatment of these financial assets, see note 38 on page 171 in the consolidated financial statements.
7. Deferred taxationThe major movements during the year are analysed as follows:Net asset at the beginning of the year 2,9 –Charge to profit or loss for the year 0,8 2,9
Net asset at the end of the year 3,7 2,9
The major components of deferred taxation are analysed as follows:Other temporary differences 3,7 2,9
8. Issued capitalAuthorised500 000 000 (2006: 500 000 000) ordinary shares of 1 cent each 5,0 5,0 – –20 000 000 (2006: 20 000 000) non-redeemable cumulative non-participating preference shares of 1 cent each 0,2 0,2 – –18 000 000 (2006: 18 000 000) “A” convertible redeemable non-cumulative participating preference shares of 1 cent each 0,2 0,2 – –2 000 000 (2006: 2 000 000) “B” convertible redeemable non-cumulative participating preference shares of 1 cent each – – – –Issued201 072 831 (2006: 201 040 697) ordinary shares of 1 cent each 2,0 2,0 254,7 262,617 967 866 (2006: nil) “A” convertible redeemable non-cumulative participating preference shares of 1 cent each 0,2 – – –2 000 000 (2006: nil) “B” convertible redeemable non-cumulative participating preference shares of 1 cent each – – – –
Number of sharesShare capital
RmShare premium
Rm
Ordinary sharesBalance at the beginning of the previous year 199 640 697 2,0 209,4Shares issued in terms of the Massmart Holdings Limited Employee Share Trust 1 400 000 – 71,5
Ordinary shares in issue – June 2006 201 040 697 2,0 280,9Treasury shares (335 764) – (18,3)
Ordinary shares in issue excluding treasury shares – June 2006 200 704 933 2,0 262,6
Balance at the beginning of the year 201 040 697 2,0 262,6Converted preference shares of the Massmart Thuthukani Empowerment Trust 32 134 – (4,5)
Ordinary shares in issue – June 2007 201 072 831 2,0 258,1Treasury shares (265 720) – (3,4)
Ordinary shares in issue excluding treasury shares – June 2007 200 807 111 2,0 254,7
Ordinary shares, which have a par value of 1 cent, carry one vote per share and carry the right to dividends.
“A” convertible redeemable non-cumulative participating preference sharesBalance at the beginning of the year – – –Shares issued in terms of the Massmart BEE transaction 18 000 000 0,2 –Shares converted to ordinary shares (32 134) – –
Balance at the end of the year 17 967 866 0,2 –
“A” convertible redeemable non-cumulative participating preference shares, which have a par value of 1 cent, are held in the Thuthukani Empowerment Trust. These shares carry one vote per share, which is cast by the trustees, and carry the right to dividends. On election of the beneficiary, the shares will convert to ordinary shares, on a one-for-one basis and will rank pari passu with all ordinary shares then in issue.
186 MASSMART ANNUAL REPORT 2007
Massmart Holdings Limited
Notes to the Annual Financial Statements
Number of sharesShare capital
RmShare premium
Rm
8. Issued capital continued
“B” convertible redeemable non-cumulative participating preference sharesBalance at the beginning of the year – – –Shares issued in terms of the Massmart BEE transaction 2 000 000 – –
Balance at the end of the year 2 000 000 – –
“B” convertible redeemable non-cumulative participating preference shares, which have a par value of 1 cent, are held in the Black Scarce Skills Trust. These shares carry one vote per share, which is cast by the trustees, and do not carry the right to dividends. On election of the beneficiary, the shares will convert to ordinary shares on a one-for-one basis and will rank pari passu with all ordinary shares then in issue.
Share options granted under the Massmart Holdings Limited Employee Share TrustAs at June 2007, executives and senior employees have options over 10 239 002 ordinary shares (of which 7 217 626 are unvested). As at June 2006, executives and senior employees had options over 12 206 168 ordinary shares (of which 8 196 329 were unvested).Share options granted under the Employee Share Incentive Scheme carry no rights to dividends and no voting rights. Further details of the Employee Share Incentive Scheme are contained in note 28 on page 158 in the consolidated financial statements.
The preference shares issued during the year were issued at par value.
The total share buy-back (including shares bought in the market by the Share Trust) for the year was 4,4 million shares (2006: 2,7 million) at an average price of R71,85 (2006: R54,71), totalling R313,2 million (2006: R148,3 million).
The directors have the authority, until the next annual general meeting, to issue the ordinary shares of the Company up to a maximum of 5% of the shares already issued.
The directors have the authority, until the next annual general meeting, to issue the non-redeemable cumulative non-participating preference shares of the Company.
The share-based payment reserve arises on grant of share options to employees under the Employee Share Incentive Scheme. Details of the Employee Share Incentive Scheme can be found in note 28 on page 158 in the consolidated financial statements. The share-based payment valuation was performed by Alexander Forbes for all periods and the scheme is equity-settled.
2007Rm
2006Rm
10. Contingent liabilitiesCross-suretyships under banking and other financial facilities 4 171,2 4 195,2
4 172,2 4 195,2
Banking facilities incorporate, amongst others, letters of credit, forward exchange contracts and electronic fund transfers. These facilities have been secured by cross-suretyships between Group companies.Other financial facilities relate to Promissory Notes that represent commitments under non-cancellable operating leases of R1 060 million (2006: R1 172 million) entered into by Masstores (Pty) Limited on behalf of Makro and are included in operating lease commitments in land and buildings. These leases terminate in December 2020 and have a discounted present value of R679 million (2006: R703 million). In accordance with IAS 17 Leases, the rentals paid are amortised over the entire remaining lease period on a straight-line basis.
11. Notes to the cash flow statement11.1 Cash flow from trading Profit before taxation 1 045,0 47,5 Adjustment for:
Interest received (1,1) (7,9) Interest paid 8,5 5,0 Investment income (1 047,2) (109,5) Share-based payment expense 0,9 – Other non-cash movements 1,7 77,2
7,8 12,3
11.2 Working capital movements Decrease in trade and other receivables 2,3 14,4 Increase/(decrease) in trade and other payables 8,8 (26,4)
11,1 (12,0)
11.3 Taxation paid Amounts owing at the beginning of the year 8,3 7,0 Amounts charged to the income statement 63,1 47,6 Deferred taxation 0,8 2,9 Amounts owing at the end of the year (15,3) (8,3)
Cash amounts paid 56,9 49,2
11.4 Dividends paid Amounts owing at the beginning of the year – – Amounts charged to the income statement 565,8 403,5 Amounts owing at the end of the year – –
Cash amount paid 565,8 403,5
188
for the year ended 30 June 2007
MASSMART ANNUAL REPORT 2007
Massmart Holdings Limited
Notes to the Annual Financial Statements
2007Rm
2006Rm
11. Notes to the cash flow statement continued
11.5 Disposal of subsidiary Net assets at date of disposal:
Cash and cash equivalents – 26,8 Accounts receivable and prepayments – (162,6) Property, plant and equipment – (0,7) Taxation – (2,2) Trade payables – 112,7 Provisions – 4,2 Long-term debt – 124,0 Loans and investments – (77,4)
– 24,8 Cash and cash equivalents received on sale – 24,8
11.6 Net acquisition of treasury shares BEE transaction costs 4,5 – Loss from the share trust 216,5 – Share premium movement on treasury shares acquired 5,0 18,3
226,0 18,3
Shareholder Information
Shareholder Information 189
Sha
reho
lder
Info
rmat
ion
Massmart business partners photographed in front of the JSE Limited.From left to rightChantell Ladeira (Deutsche Securities),Brian Escott (Deloitte & Touche),Bennie Graham (ABSA Bank Limited),Heloise Murray (Edward Nathan Sonnenbergs),Isana Cordier (The Standard Bank of South Africa Limited) andHelen De Goede (First National Bank)
190 MASSMART ANNUAL REPORT 2007
191Shareholder Information Notice of Annual General Meeting
Notice is hereby given that the annual general meeting of the Company
will be held at 08:30 at Massmart House, 16 Peltier Drive, Sunninghill
Ext 6, Sandton, on Wednesday, 21 November 2007, for purposes of:
1. Transacting the following business:
1.1 to receive and adopt the annual financial statements of the
Company and the Group for the year ended 30 June 2007;
1.2 to elect directors in the place of those retiring in accordance
with the Company’s Articles of Association; and
1.3 to transact such other business as may be transacted at an
annual general meeting.
2. Considering and, if deemed fit, passing, with or without modification,
the following ordinary and special resolutions:
Ordinary resolutions:
1. “Resolved that the annual financial statements of the Company and
the Group for the year ended 30 June 2007, circulated together with
this notice, be and are hereby adopted.”
2. “Resolved that Mr KD Dlamini, who retires in terms of the Articles of
Association and has offered himself for re-election, be and is hereby
re-elected to the Board of Directors of the Company.”
3. “Resolved that Dr NN Gwagwa, who retires in terms of the Articles of
Association and has offered herself for re-election, be and is hereby
re-elected to the Board of Directors of the Company.”
4. “Resolved that Mr JC Hodkinson, who retires by rotation and has
offered himself for re-election, be and is hereby re-elected to the
Board of Directors of the Company.”
5. “Resolved that Mr MJ Lamberti, who retires by rotation and has
offered himself for re-election, be and is hereby re-elected to the
Board of Directors of the Company.”
6. “Resolved that Ms P Langeni, who retires by rotation and has offered
herself for re-election, be and is hereby re-elected to the Board of
Directors of the Company.”
Shareholder Information
Notice of Annual General Meeting
7. “Resolved that the non-executive directors’ annual remuneration for
the 2008 financial year be set as follows:
Chairman of the Board R625 000
Deputy Chairman R450 000
Directors R185 000
Committee chairmen R185 000
Committee members R87 000”
8. “Resolved that Messrs Deloitte & Touche be and are hereby re-
elected as the Company’s auditors for the ensuing financial year.”
9. “Resolved that all the ordinary shares in the authorised but unissued
share capital of the Company be and are hereby placed under the
control of the directors in terms of section 221(2) of the Companies
Act, 1973 (Act 61 of 1973), as amended (“the Act”), who shall be
authorised to allot and issue such shares to such person or persons
on such terms and conditions as they may deem fit but not exceeding
5% of the number of shares already in issue. Such allotment will be
in accordance with the Act and the Listings Requirements of the JSE
Limited (“JSE”)”.
10. “Resolved that, subject to the JSE Listings Requirements, the
directors be and are hereby authorised to issue the ordinary shares in
the authorised but unissued share capital of the Company for cash to
such person or persons on such terms and conditions as they may
deem fit, subject to the following:
10.1 the shares shall be of a class already in issue;
10.2 the shares shall be issued to public shareholders (as defined
in the JSE Listings Requirements) and not to related parties (as
defined in the JSE Listings Requirements);
10.3 the issues in the aggregate in any one financial year shall
not exceed 5% (five percent) of the number of shares already
in issue;
10.4 the maximum discount at which the shares may be issued
shall be 10% (ten percent) of the weighted average traded
price of the shares over the 30 (thirty) business days prior to
the date that the price of the issue is determined or agreed by
the directors;
for the year ended 30 June 2007
192
for the year ended 30 June 2007
MASSMART ANNUAL REPORT 2007
Shareholder Information
Notice of Annual General Meeting
10.5 the authority hereby granted will be valid until the Company’s
next annual general meeting, provided that it will not extend to
beyond 15 (fifteen) months;
10.6 once the securities have been issued, the Company shall
publish an announcement in accordance with paragraph
11.22 of the JSE Listings Requirements.”
Special resolution:
The approval of a 75% (seventy-five percent) majority of the votes cast by
members present or represented by proxy at the annual general meeting
and entitled to vote is required for this resolution to become effective:
1. “Resolved that the Company and its subsidiaries be and are hereby
authorised in terms of sections 85(2) and 85(3) of the Act, and the
JSE Listings Requirements, from time to time to acquire the ordinary
and/or preference shares in the issued share capital of the Company
from such shareholder/s, at such price, in such manner and subject
to such terms and conditions as the directors may deem fit, but
subject to the Articles of Association of the Company, the Act and the
JSE Listings Requirements, and provided that:
1.1 the authority hereby granted will be valid until the Company’s
next annual general meeting, provided that it will not extend to
beyond 15 (fifteen) months from the date of registration of this
special resolution;
1.2 acquisitions may not be made at a price greater than 10% (ten
percent) above the weighted average of the market value for the
shares determined over the 5 (five) business days prior to the
date that the price for the acquisition is effected;
1.3 acquisitions in the aggregate in any one financial year shall not
exceed 15% (fifteen percent) of that class of the Company’s
issued share capital;
1.4 the repurchase of securities will be effected through the order
book operated by the JSE trading system and will be done
without any prior understanding or arrangement between the
Company and the counterparty;
1.5 the Company will only appoint one agent to effect the
repurchases on the Company’s behalf;
1.6 the Company will only undertake a repurchase of securities if,
after such repurchases, the Company complies with the JSE
listing shareholder spread requirements;
1.7 neither the Company nor its subsidiaries may repurchase
securities during a prohibited period unless a repurchase
programme is in place where the dates and quantities of
securities to be traded during the relevant period are fixed and
where full details of the programme have been disclosed in an
announcement over SENS prior to the commencement of the
prohibited period;
1.8 an announcement complying with 11.27 of the JSE Listings
Requirements will be published by the Company when the
Company and/or its subsidiaries over any twelve month period
have cumulatively repurchased 3% (three percent) of the
Company’s issued ordinary and/or preference share capital and
for each 3% (three percent) in aggregate thereafter.”
Statement by the Board of Directors
In accordance with the JSE Listings Requirements, the directors state that:
a) the intention of the directors is to utilise the authority at a future date,
provided that the cash resources of the Company are in excess of its
requirements. In this regard, the directors will take into account, inter
alia, an appropriate capitalisation structure for the Company and the
long-term cash needs of the Company, and will ensure that any such
utilisation is in the interests of the shareholders;
b) having considered the effect of the maximum number of ordinary and
preference shares that may be acquired pursuant to the authority and
the date upon which such acquisition/s will take place:
– the Company and its subsidiaries will be able in the ordinary course
of business to pay their debts for a period of twelve months after
the date of this notice of annual general meeting;
– the assets of the Company and its subsidiaries will be in excess of
the liabilities of the Company and its subsidiaries for a period of
twelve months after the date of this notice of annual general
meeting, such assets and liabilities being fairly valued in accordance
193Shareholder Information Notice of Annual General Meeting
with International Financial Reporting Standards and in accordance
with the accounting policies used in the Company and the Group
annual financial statements for the year ended 30 June 2007;
– the issued share capital and reserves of the Company and its
subsidiaries will be adequate for purposes of the business of the
Company and its subsidiaries for a period of twelve months after
the date of this notice of annual general meeting;
– the working capital available to the Company and its subsidiaries
will be adequate for purposes of the business of the Company and
its subsidiaries for a period of twelve months after the date of this
notice of annual general meeting.
The Company will ensure that its sponsor provides the necessary sponsor
letter on the adequacy of the working capital in terms of the JSE Listings
Requirements, prior to the commencement of any purchase of the
Company shares on the open market.
Reason and effect
The reason for special resolution number 1 is to give a mandate to the
directors to repurchase ordinary and preference shares in the Company.
The effect of special resolution number 1 will be that the Company and
its subsidiaries will be authorised to acquire ordinary and preference
shares in the Company.
Voting and proxies
All holders of ordinary and preference shares in the share capital of the
Company are entitled to attend and vote at the annual general meeting.
Subject to any rights or restrictions for the time being attached to any
ordinary and/or preference shares, on a show of hands, every holder of
ordinary and/or preference shares who is present in person, or in the case
of a company, the representative appointed in terms of section 188 of the
Act, has one vote. On a poll, each holder of ordinary and/or preference
shares has so many votes for each ordinary and preference share (as the
case may be) as is determined in accordance with section 195 of the Act,
read with the Company’s Articles of Association.
In terms of the Listings Requirements, Massmart ordinary shares held by
and registered in the name of The Massmart Holdings Limited Employees
Share Trust will not have their votes at the annual general meeting taken
into account for Listings Requirements resolution approval purposes.
However, Massmart preference shares held by the Massmart Thuthukani
Empowerment Trust and the Massmart Black Scarce Skills Trust will have
their votes at the annual general meeting taken into account for Listings
Requirements resolution approval purposes.
If you hold certificated shares (i.e. have not dematerialised your shares in
the Company) or are registered as an own name dematerialised
shareholder, then:
meeting by completing the attached form of proxy and returning it to
the registered office of the Company to be received by no later than
48 hours prior to the time appointed for the holding of the meeting
(excluding Saturdays, Sundays and public holidays).
If you own dematerialised shares (i.e. have replaced the paper share
certificates representing the shares with electronic records of ownership
under the JSE’s electronic settlement system, STRATE Limited (“STRATE”)),
and are not registered as an “own name dematerialised shareholder” (i.e.
specifically instructed your Central Securities Depository Participant
(“CSDP”) to hold your shares in your own name on the Company’s sub-
register), then, subject to the mandate between yourself and your CSDP
or broker:
CSDP or broker, as the case may be, and obtain the relevant letter of
representation from it; alternatively
194
for the year ended 30 June 2007
MASSMART ANNUAL REPORT 2007
Shareholder Information
Notice of Annual General Meeting
represented at the meeting, you must contact your CSDP or broker, as
the case may be, and furnish it with your voting instructions in respect
of the annual general meeting. You must not complete the attached
form of proxy. The instructions must be provided in accordance with the
mandate between yourself and your CSDP or broker, as the case may
be, within the time period required by your CSDP or broker, as the case
may be.
CSDPs, brokers or their nominees, as the case may be, recorded in the
Company’s subregister should, when authorised in terms of their mandate
or instructed to do so by the owner on behalf of whom they hold
dematerialised shares in the Company, vote by either appointing a duly
authorised representative to attend and vote at the annual general
meeting or by completing the attached form of proxy in accordance with
the instructions thereon and returning it to the registered office of the
Company to be received not less than 48 hours prior to the time
appointed for the holding of the meeting.
In terms of the JSE Listings Requirements for special resolution number
1, general information is included in the annual report attached,
including:
(i) Directors and management (pages 9 – 13);
(ii) Major shareholders (page 176);
(iii) Material changes (page 116);
(iv) Directors’ interests in securities (page 117);
(v) Share capital of the Company (page 149); and
(vi) Litigation (page 118).
The directors whose names appear on pages 9 to 11 of the annual report
collectively and individually accept full responsibility for the accuracy of
the information given and certify that to the best of their knowledge and
belief there are no facts that have been omitted which would make any
statement false or misleading, and that all reasonable enquiries to
ascertain such facts have been made and that the circular (the notice to
the annual general meeting) contains all information required by law and
the JSE Listings Requirements.
By order of the Board
Ilan Zwarenstein
Company Secretary
Johannesburg
10 October 2007
195Shareholder Information
Shareholder Information
Form of Proxy
Notice of Annual General Meeting; Form of Proxy
For use by certificated and own name dematerialised shareholders onlyMassmart Holdings LimitedRegistration number 1940/014066/06JSE share code: MSMISDN code: ZAE000029534
I/We (Please print names in full)
of (address)
being a member/members of the abovementioned Company and holding ordinary shares
and/or preference shares in the Company hereby appoint:
or failing him/her, or failing him/her, the chairman of the annual general meeting as my/our proxy to vote for me/us on my/our behalf at the annual general meeting of the Company to be held at 08:30 on Wednesday, 21 November 2007 at Massmart House, 16 Peltier Drive, Sunninghill Ext 6, Sandton, and at every adjournment of that meeting.
Signed at this day of 2007.
Signature
Please indicate with an “X” in the appropriate space below how you wish your vote to be cast. If you return this form duly signed, without any specific directions, the proxy shall be entitled to vote as he/she thinks fit.
In favour of resolution
Against resolution
Abstain from voting
Ordinary resolutions
1. Adoption of the annual financial statements
Ordinary shares
Preference shares
2. Re-election of Mr KD Dlamini to the Board of Directors
Ordinary shares
Preference shares
3. Re-election of Dr NN Gwagwa to the Board of Directors
Ordinary shares
Preference shares
4. Re-election of Mr JC Hodkinson to the Board of Directors
Ordinary shares
Preference shares
5. Re-election of Mr MJ Lamberti to the Board of Directors
Ordinary shares
Preference shares
6. Re-election of Ms P Langeni to the Board of Directors
Ordinary shares
Preference shares
7. Approval of the non-executive directors’ annual remuneration
Ordinary shares
Preference shares
8. Re-election of Messrs Deloitte & Touche as the Company’s auditors
Ordinary shares
Preference shares
9. Placement of the unissued ordinary share capital under the control of the directors
Ordinary shares
Preference shares
196 MASSMART ANNUAL REPORT 2007
Shareholder Information
Notes to the Proxy
10. Authorisation for the directors to issue ordinary shares for cash, limited to 5% of the shares in issue
Ordinary shares
Preference shares
Special resolution
1. Authority for the Company to buy back its own shares
Ordinary shares
Preference shares
A member entitled to attend and vote at this meeting is entitled to appoint one or more proxies to attend, speak and vote in his/her stead. A proxy need not be a member of the Company. Proxies must be lodged at the registered office of the company not less than 48 (forty-eight) hours before the time for holding the meeting.
1. A form of proxy is only to be completed by those ordinary shareholders
who are:
1.1 holding ordinary shares in certificated form; or
1.2 recorded on the subregister in dematerialised electronic form
in “own name”.
2. If you have already dematerialised your ordinary and/or preference
shares through a Central Securities Depository Participant (“CSDP”)
or broker and wish to attend the annual general meeting, you must
request your CSDP or broker to provide you with a letter of
representation or you must instruct your CSDP or broker to vote by
proxy on your behalf in terms of the agreement entered into between
yourself and your CSDP or broker.
3. A member may insert the name of a proxy or the names of two
alternative proxies of the member’s choice in the space provided. The
person whose name stands first on the form of proxy and who is
present at the annual general meeting of shareholders will be entitled
to act as proxy to the exclusion of those whose names follow.
4. A member’s instructions to the proxy must be indicated by the
insertion of the relevant numbers of votes exercisable by the member
in the space provided. Failure to comply with the above will be
deemed to authorise the proxy to vote or to abstain from voting at the
annual general meeting as he/she deems fit in respect of all the
member’s votes exercisable thereat. A member or the proxy is not
obliged to use all the votes exercisable by the member or by the
proxy, but the total of the votes cast and in respect of which
abstention is recorded may not exceed the total of the votes
exercisable by the member or by the proxy.
5. Forms of proxy must be lodged with or posted to the Company’s
