HILTON TARRANT: Integrated global retailer, Steinhoff International, results for the year to June 2013 show revenue up 44% to R115.5bn, operating profit 41% higher and headline earnings per share up by 25%. The group with retail outlets in 21 countries and manufacturing operations in seven was boosted by the rand, which was 10% weaker against the euro, which is Steinhoff’s core market. Markus Jooste is chief executive of Steinhoff. Markus, a good year for you, a year that brings a lot of firsts, this is a year where you have a full comparison of Conforama behind you and the first full year of your subsidiaries JD Group and Kap Industrial?
MARKUS JOOSTE: Yes, Hilton, thank you, it’s been an interesting year for us. It was a tough year because we had tough trading conditions in Europe for the biggest part of the year and also in South Africa since December the consumer came under pressure. But Steinhoff’s diversity, as you have said it in your opening line, obviously hedges us against this by operating in so many different countries and the volumes that have now achieved a turnover of R115bn is obviously a big milestone for us in our lives and overall we are satisfied with the year, Hilton.
HILTON TARRANT: Markus, in Europe, your turnover in euros was it €5.9bn? How does that compare to the year before?
MARKUS JOOSTE: It was absolutely the same, it was flat.
HILTON TARRANT: So obviously boosted by the weaker rand there?
MARKUS JOOSTE: Well, the conversion will be up 10% in rand terms because the translation reserve is the same but obviously for us it was more important to increase the profit by 23%, which then in euro terms show you on a flat turnover we had a 13% increase in profit.
HILTON TARRANT: Markus, as far as trading in Europe is concerned we are seeing economic data out of the continent suggesting that we are starting to see signs of a recovery there. What’s trading on the ground like?
MARKUS JOOSTE: We have certainly since Easter, Hilton, seen an improvement, it started in Portugal and Spain, it then continued in the UK, things are picking up for us on a monthly basis. Now in July and August we’ve seen in France the first time positive growth on the top line. So yes, it’s definitely in a better space than the same period last year.
HILTON TARRANT: You are looking to buy Kika-Leiner, the Austrian retailer, 50 stores in Austria, the remainder of those stores, about 23, in Eastern and Central Europe. How big is this business, Markus?
MARKUS JOOSTE: Hilton, Kika-Leiner does on a group basis roughly about €1.2bn turnover.
HILTON TARRANT: And I guess some attraction in that it owns its properties as well?
MARKUS JOOSTE: It owns its own properties and that fits with our investment criteria and after the Conforama integration the last three years the group is now well practiced in doing that and this extra volume will again improve profitability and margin.
HILTON TARRANT: Speaking of volumes, scale starting to kick in in the business, you have effectively doubled your purchasing power in the last three years, meaning that all that sourcing, all that manufacturing becomes a lot more efficient.
MARKUS JOOSTE: Yes, if you look at the division of central sourcing our profits improved by 36% and we improved the margin from 8% to 10%, so those benefits have flowed through in this year and we believe there’s more to come.
HILTON TARRANT: Markus, with Kika-Leiner on the horizon obviously you’ve integrated Abra in Poland into the group following the JD Group transaction, is Eastern Europe the next area of focus for you?
MARKUS JOOSTE: Well, we’ve been looking at it for a long time and, as you know, we’ve invested in factories there already since the ‘90s. But Eastern Europe you must remember, Hilton, is a little bit like South Africa where the consumer is a bit over-geared, so we are a little bit cautious to go too quick there but obviously it gives us a growth area next to Europe for the years to come.
HILTON TARRANT: What about Australia, New Zealand relatively small in your life, 2% of your business. You’ve opened a big-box retailer in Australia, how is that trading?
MARKUS JOOSTE: It’s been a big highlight for us for the year, Hilton. We opened in March and that business has exceeded every expectation or budget that we had for it. It’s been a huge success and that obviously now opens the door to roll out the concept throughout the rest of the country.
HILTON TARRANT: Markus, the property division, sizeable in its own right, R31bn worth of assets there. What’s the strategy of owning properties and building a very sizeable property portfolio?
MARKUS JOOSTE: Our stores in Europe are on average about 6000sqm of trading space and attached to it a 4000sqm warehouse, so you must now imagine a store of
10 000sqm of which we now have nearly 280 of them. That’s not the type of building you want to lease or rent from somebody else because you can’t move. Once you are there and the licence is licenced specifically to the property. So by owning the property and making use of the low interest environment in Europe and pay that property off over a five, six year period, you actually hedge the risk of the business substantially where you don’t have a rent outflow. Plus rent, which is one of your biggest expenses in retail, is capped from day one and never has an increase in it.
HILTON TARRANT: Markus, here at home in South Africa, Kap doing very well in the financial year, JD Group perhaps less so?
MARKUS JOOSTE: JD obviously suffered also as a result of the consumer pressure in South Africa that started in December and it worsened as the year went on until June. But JD today is a diversified retail group, our motor division did very well, the DIY is doing well and they’ve been in consumer finance for more than 30 years, so they know that business well. They’ve seen these cycles, this is probably the fourth one in my time. So one has to react quickly, which they did in February to start to pull back and I’m confident that we’ll go through the cycle and come out on top like always again into the future.
HILTON TARRANT: Is trading looking better since year end here in South Africa?
MARKUS JOOSTE: No, it’s still tough.
HILTON TARRANT: Markus, across the group there has been a change in the dividend policy, cash only from this year, not shares as has been the case in the past, what’s behind that change?
MARKUS JOOSTE: We’ve started our retail expansion in 2005 in Europe and obviously coming from South Africa one has to protect your capital and especially if you grow the business and that’s why since 2009 and with the financial crisis we thought it prudent to raise capital that way and we preserved nearly R3.5bn of capital that way. The group is now at a maturity, Hilton, with producing R14bn, R15bn of EBITDA that we don’t have to do that anymore and, therefore, this year we are very pleased to be able to give shareholders a cash dividend from our free cash flow that we received at Steinhoff International. That will grow into the future as Europe starts to pay higher dividends from the retail division.
HILTON TARRANT: Markus, your outlook for the 2014 financial year?
MARKUS JOOSTE: I hope it’s going to be a good one, Hilton. It’s very difficult to make forecasts, as you know, in the world we live in today because volatility is rife and anything can happen. But what I’ve seen for the first two months I’m very positive about the year ahead.
HILTON TARRANT: Markus Jooste is chief executive of Steinhoff International. I must disclose I do hold Steinhoff shares.