Dfi Retail Intl Regulatory News (DFI)

To: Business Editor 3rd March 2016

For immediate release

The following announcement was issued today to a Regulatory Information Service approved by the Financial Conduct Authority in the United Kingdom.

DAIRY FARM INTERNATIONAL HOLDINGS LIMITED

2015 PRELIMINARY ANNOUNCEMENT OF RESULTS

Highlights

· Sales of continuing businesses up 5% in constant currency

· Underlying profit down 14% in challenging operating environment

· Investment in Yonghui Superstores and acquisition of San Miu

· Home Furnishings and Restaurants perform well

· Strong operating cash flows

"The current economic headwinds in Asia will continue to make trading conditions difficult for the Group's businesses in 2016. Despite this, the Group is continuing to invest in the development of its store network, supply chain infrastructure, IT systems and people to improve its competitive position. Dairy Farm's market-leading businesses, healthy balance sheet, and exposure to Asia's growth markets position it well for long-term success."

Ben Keswick

Chairman

Results

The final dividend of US¢13.50 per share will be payable on 11th May 2016, subject to approval at the Annual General Meeting to be held on 4th May 2016, to shareholders on the register of members at the close of business on 18th March 2016.

DAIRY FARM INTERNATIONAL HOLDINGS LIMITED

PRELIMINARY ANNOUNCEMENT OF RESULTS

FOR THE YEAR ENDED 31ST DECEMBER 2015

OVERVIEW

Dairy Farm continued to pursue its long-term growth plans in 2015. Solid sales growth was achieved despite the regional economic slowdown, although some of this growth came at the expense of lower margins. The impact of the lower margins, together with adverse exchange rate movements, has led to lower operating profits. The Group completed a number of strategic moves, including the investment in a 20% stake in Yonghui Superstores in mainland China, the acquisition of the San Miu supermarket chain in Macau, and the required divestment of 30% of the ordinary shares in its food retail business in Malaysia.

PERFORMANCE

The Group's overall performance in 2015 was impacted by the challenging retail environment, with both the Food Division and the Health and Beauty Division reporting lower profits, although most key businesses achieved positive like-for-like sales growth. The Home Furnishings and Restaurants Divisions reported good increases in both sales and profits.

Sales including 100% of associates and joint ventures increased by 37% to US$17.9 billion, including contributions from Yonghui Superstores and San Miu from the respective dates of acquisition. Sales for continuing businesses in US dollar terms were flat at US$13.1 billion, although at constant rates of exchange they were up 5%. Underlying profit was US$428 million, 14% below 2014, while at constant rates of exchange it was down 13%. Underlying earnings per share were US¢31.66, down 14%.

The profit attributable to shareholders in 2015 of US$424 million, including a net non-trading item of US$4 million arising mainly from a provision for closure of the Starmart chain in Indonesia, was 17% behind 2014.

The Group's operating cash flow remained strong with a net inflow of US$700 million, US$24 million higher than in 2014 largely due to tight inventory management. Lower capital expenditure resulted in the free cash flow before investments being US$396 million, a 19% improvement over 2014. Net debt at the end of 2015 was US$482 million, compared with net cash of US$475 million at the prior year end due to the impact of investment activities, including a US$912 million investment in Yonghui Superstores.

In response to challenging trading conditions, the Board is recommending a reduced final dividend of US¢13.50 per share (US¢16.50 per share in 2014), giving a total dividend for 2015 of US¢20.00 per share.

BUSINESS DEVELOPMENTS

Increased emphasis was placed on strengthening the Group's market share in each format and on building consistent operating practices across different countries. Expansion of the store network continued in all formats, together with the renovation of existing stores to offer an improved shopping experience.  The Group, including associates and joint ventures, added a net 427 stores in 2015, including its interest in 382 Yonghui stores in mainland China and 15 San Miu supermarkets in Macau. At 31st December 2015, the Group had 6,528 stores in operation in 11 countries and territories.

The operating environment for the Food Division was especially fragile in 2015.  In the face of such headwinds, the performance in Greater China, including Hong Kong, was resilient. Profits in Singapore and Malaysia were lower in challenging trading conditions. The results in the Philippines showed improvement. Progress was made in developing the business in Indonesia, although margin investment, cost inflation and higher stock provisions continued to impact profitability.

The convenience store operations in Hong Kong and mainland China performed well, but in Singapore regulatory restrictions dampened sales performance and profitability.

In the Health and Beauty Division, Hong Kong and Macau had a good year and reported further growth in sales and profits despite the well-publicized slowdown in Mainland tourist arrivals. In Singapore, improved profits were achieved despite increased costs, but the overall results for the Division were held back by a disappointing performance in Malaysia. In the Philippines, good progress was made on the integration of the Rose Pharmacy business. Further investments were made in the corporate brand programme and in renovating existing stores.

In Home Furnishings, the IKEA businesses had an outstanding year. Hong Kong and Taiwan traded well, while the first store in Indonesia performed ahead of expectations in its first full year following its opening in October 2014.

In the Restaurant Division, Maxim's delivered another good performance. Satisfactory sales and profits growth were reported in most of its segments. The company continued to expand a number of formats across mainland China and to grow its Starbucks operations in Hong Kong and Vietnam.

CORPORATE DEVELOPMENTS

In February, Dairy Farm met the local regulatory requirements in Malaysia with the divestment of 30% of the ordinary shares in its food retail business, GCH Malaysia.

The 15 store supermarket chain in Macau, San Miu, was acquired in March, reinforcing Dairy Farm's well-established retail presence in the territory. The integration of the business has been smooth and initial results have been promising.

In April, the Group completed the purchase of a 19.99% interest in Yonghui Superstores in mainland China following receipt of the required regulatory approvals. The Group is also soon to invest a further US$200 million in the company to maintain its interest following a proposed placement by Yonghui of a 10% shareholding to the Chinese internet retailer, JD.com.

In addition, the Group has established an on-line presence in Guardian Singapore, which is the first of several planned moves into e-commerce. Significant investment is being made in IT infrastructure and systems, as well as supply chain, to improve efficiency and to increase productivity. Investment is ongoing in existing stores to enhance the shopping experience and in building the people capability needed to support the Company's growth objectives.

PEOPLE

Dairy Farm's solid performance in 2015, in the face of significant market challenges, reflects the hard work and dedication of our employees. On behalf of the Board, I would like to thank them for their efforts and wish them well for the year ahead.

Giles White retired as a Director on 31st July 2015 and we would like to thank him for his significant contribution to the Board. Jeremy Parr joined the Board on 1st August 2015. James Riley is to step down from the Board on 31st March 2016 and be replaced by John Witt on 1st April 2016. We would also like to thank James for his significant contribution. Y. K. Pang will join the Board on 1st August 2016.

PROSPECTS

The current economic headwinds in Asia will continue to make trading conditions difficult for the Group's businesses in 2016. Despite this, the Group is continuing to invest in the development of its store network, supply chain infrastructure, IT systems and people to improve its competitive position. Dairy Farm's market-leading businesses, healthy balance sheet, and exposure to Asia's growth markets position it well for long-term success.

Ben Keswick

Chairman

GROUP CHIEF EXECUTIVE'S REVIEW

Dairy Farm is a leading Asian retailer and operates across four broad formats: Food (including Supermarkets, Hypermarkets and Convenience stores), Health and Beauty stores, Home Furnishings stores and Restaurants. The Group operates multiple formats in most markets to satisfy different market segments and trades under well recognized brands, such as Wellcome, Cold Storage, Giant, Hero, 7-Eleven, Mannings, Guardian, IKEA and Maxim's.  Dairy Farm strives to bring to Asian consumers the benefits of modern retail practices and to pioneer new ideas which excite our customers.

The Group has strong market positions in 11 Asian countries and territories, and continues to make significant investment in support of these businesses. In addition to driving organic growth, the Group seeks further investment opportunities in current and new markets in Asia. This approach builds upon the Group's knowledge and expertise, as well as providing a good balance of risk and return. By combining our investment approach with a healthy balance sheet, Dairy Farm seeks sustained long-term earnings growth.

2015 PERFORMANCE

Sales, including 100% of associates and joint ventures, for continuing businesses in 2015 were flat at US$13.1 billion while at constant exchange rates were up by 5%.  Including contributions from Yonghui and San Miu from their respective dates of acquisition, total sales increased by 37% to US$17.9 billion (2014: US$13.1 billion). Solid like-for-like sales growth was achieved in most of major businesses, but profitability was impacted by intense margin pressure and more challenging trading conditions. Underlying net profit for 2015 of US$428 million was 14% behind the prior year's US$500 million. At constant exchange rates, underlying profits would have been US$437 million, 13% lower than 2014.

Despite the profit decline, the Group's cash performance has been especially strong. Strict working capital management has helped year-on-year operating cash flows to improve by 4% to US$700 million. After capital expenditure, the Group's cash flows from operations have improved by 19% to US$396 million. As a result, the Company had consolidated net debt of US$482 million at year end, even after US$1.1 billion of investments in acquisitions including the 19.99% stake in Yonghui in mainland China and the 100% purchase of San Miu supermarkets in Macau.

The Group also achieved market share gains in most of its businesses. This has been a key priority for all Divisions as they strive to strengthen customer traffic and brand equity even in the face of tough market conditions.

Underlying profits in the Group's Food Division declined, due mainly to weaker performances in Indonesia and Singapore. Wellcome and 7-Eleven in Hong Kong traded well. Wellcome in Taiwan also delivered encouraging results with its targeted focus on upscale customers. In mainland China, 7-Eleven showed further improvement despite the market slowdown.  In Singapore, further margin erosion resulted from higher labour costs and rents, soft consumer sentiment and a weaker Singapore dollar.  Disappointing sales from newly opened Cold Storage stores and restrictions on alcohol sales, which had a particular impact on 7-Eleven, put further pressure on the results.

In Malaysia, the introduction of GST in April and weak consumer confidence dampened retail spending and profitability. Nevertheless, improved retail execution, assortment enhancements and tactical investments in margin to improve price perception have helped to maintain sales in a soft market.  In the Philippines, the upscale and community supermarkets reported sales growth, while hypermarket sales were slightly positive. In Indonesia, profitability declined significantly as a result of higher labour costs, price investments to drive customer traffic and changes associated with more rigorous stock management. Results from PT Hero were also depressed by 12% with the weakening rupiah affecting the outcome on translation. Hero has agreed on the disposal of its Starmart chain.

In the Health and Beauty Division, Hong Kong and Macau performed well, despite the impact of declining Mainland tourist arrivals. Guardian in Singapore achieved encouraging improvement in both sales and profit performance. The Division's overall result was, however, held back by poorer results in Malaysia and Indonesia. Mannings in mainland China expanded further its footprint with the addition of 25 net new stores. Three new Mannings stores were opened in Cambodia, while Vietnam added 13 stores to its network. In the Philippines, the integration of Rose Pharmacy is well on track.

IKEA in Hong Kong and Taiwan reported pleasing like-for-like sales growth. A new pick up point in Tainan was opened to enhance convenience for customers in Southern Taiwan.  The first IKEA store in Indonesia, which opened in October 2014, continued to perform ahead of expectations.

The Group's restaurant associate, Maxim's, delivered another year of solid results.  Expansion of its Chinese casual dining restaurants and Japanese restaurants continue in mainland China.  Maxim's opened 44 net new outlets during the year, including six in mainland China, six Starbucks outlets in Vietnam and the first Starbucks in Cambodia.

KEY DEVELOPMENTS

Dairy Farm strives to share know-how and find synergies across its businesses. Co-operation on supply chain, corporate brand, IT, human resources, financial policies and back office support is complemented by a culture which has been codified and shared across the Company. At the heart of these 'Pioneer' cultural values is a strategic priority to build strong 'consumer-pull' retail models in each of our businesses.

At the same time, the Group is working continually to build its presence across Greater China and Southeast Asia and to sharpen its portfolio of brands and businesses. In that context, key developments during 2015 were as follows:

· Divestment in February of 30% of the ordinary shares in the food retail business in Malaysia to meet local regulatory requirements.

· Acquisition in March of the 15 store Macau-based San Miu Supermarket Limited, which complements the existing 7-Eleven and Mannings operations in the territory.

· Acquisition in April of a 19.99% shareholding in Yonghui Superstores Company Limited, following receipt of required regulatory approvals. The Group also announced in August its plans to invest a further US$200 million in early 2016 so as to maintain its 19.99% interest following a placement by Yonghui of a 10% shareholding to JD.com.

· Addition of a net 427 stores during the year including its interest in 382 Yonghui stores in mainland China and 15 San Miu supermarkets in Macau, gave a total store count of 6,528 as at 31st December 2015.

· Maxim's completed the redevelopment of its new Maxim's Centre at Cheung Sha Wan in Hong Kong and celebrated the grand opening in November.

BUSINESS REVIEW

FOOD

Food (excluding Yonghui) reported US$8.2 billion in sales, a decrease of 2%, while operating profit declined by 21% to US$236 million principally driven by disappointing results for supermarkets and hypermarkets in Singapore and Indonesia. Importantly though, significant progress has been made on our key priority for the Food Division: - driving fresh participation through range and quality enhancements, increasing corporate brand penetration and improving the shopper experience in all of our stores.

FOOD - SUPERMARKETS/HYPERMARKETS

Supermarkets/Hypermarkets reported US$6.3 billion in sales (excluding Yonghui), a decrease of 3% (2014: US$6.5 billion) while operating profits declined by 24% to US$172 million.

In Hong Kong, despite a competitive trading environment and declining Mainland visitor traffic, Wellcome achieved gains in both sales and market share. In the face of steep increases in rental costs, profitability remained strong due to sales growth and prudent management of other costs. In 2015, the Group acquired and successfully integrated the San Miu supermarket business in Macau, which delivered a higher than expected profit contribution.

In Taiwan, Wellcome achieved excellent results with higher sales and profits. Category differentiation in dry goods and a strengthened fresh food offer helped improve sales in the Wellcome stores. The Group expanded the Jasons network from 12 to 18 stores during the year and developed a stand-alone Jasons format for residential areas.

In Indonesia, Giant supermarkets had a better year and produced double digit sales growth, while the Giant hypermarkets also grew. Hero supermarkets were steady. While overall margins improved, partly due to excellent growth in fresh food, earnings suffered from increases in labour costs, stock clearance activities and store rationalization.

The Group will continue to drive its price leadership position while enhancing its fresh food assortment, tightening retail disciplines and improving the shopping experience for customers in the stores. Particular attention is being focused on the cost structure and a more measured approach is being taken to new store expansion.

In Malaysia, the Group experienced a strong first quarter before the introduction of 6% GST on 1st April. Post-GST consumer apprehension, currency weakness, lower subsidies and political uncertainty brought consumer sentiment to its lowest point in ten years and negatively impacted sales in the remainder of the year. Although the market is expected to remain challenging in 2016, the Group is enhancing its product range, improving stock controls, broadening the fresh product offer and streamlining logistics and costs. An extensive training programme has been implemented to further enhance merchandise management.

In the Philippines, like-for-like growth was positive across all banners. The Group opened three new Rustan's and three new Wellcome stores, and ended the year with 56 outlets. Enhancing the quality and breadth of the fresh offer, embracing more impactful merchandising and display practices and building corporate brands are central to the Group's plans for 2016.

In Singapore, sales were slightly down on prior year due to low category growth and intense competition. Increased labour and rental costs impacted net margins, which were also affected by price competition and promotional intensity. Operating profit was significantly lower than in 2014, mainly due to lower margins from Cold Storage's price campaigns, a store rationalization programme and operational challenges. In a difficult segment, Giant ended the year with improvement in both sales and profits. Addressing a weak economic outlook for 2016, the Group is optimizing its product offer with improved fresh items and ready-to-eat meals, with the aim of growing market share, boosting stock management capability and fine tuning brand positioning.

In Vietnam, Giant achieved strong like-for-like sales with increases in both customer traffic and basket size. Facing strong competition from new entrants and existing players, the Group repositioned its fresh strategy with lower prices and a wider product offer to grow market share.

FOOD - CONVENIENCE STORES

Convenience stores reported US$1.9 billion in total sales, an increase of 1% over the previous year (2014: US$1.9 billion). Operating profit dropped by 12% to US$64 million.

In mainland China, 7-Eleven saw a pleasing increase in sales and profits over the previous year, with like-for-like sales growth and store network expansion. Despite signs of an economic slowdown in China, profitability improved. Ready-to-eat was the leading category in terms of sales and contribution and this category will continue to be a major area of focus in 2016.

In Hong Kong, the Group achieved excellent like-for-like growth and gained market share across most categories. Rapidly escalating operating costs, especially store labour and rental expenses, crimped profit growth. Sales momentum in Macau slowed during the second half of the year due to an increase in cigarette taxes in July and reductions in tourist numbers from mainland China.

In Singapore, 7-Eleven's results were impacted by lower sales from the tourist segment, by lower liquor sales partly due to new regulations curtailing late night alcohol sales, and by increased store labour costs and operating costs in the Distribution Centre. Major initiatives for the coming year will focus on strengthening the ready-to-eat supply chain.

In Indonesia, the Group is to exit the convenience store segment.

HEALTH AND BEAUTY

Health and Beauty achieved US$2.6 billion (2014: US$2.5 billion) in total sales, an increase of 4%, while operating profit declined 15% to US$185 million (2014: US$219 million).

In Hong Kong, Mannings' sales and profit reported further growth despite having four fewer stores than the previous year. Like-for-like sales growth was pleasing, market share increased, and the Mann Card member base grew by 18% year-on-year to reach 2 million. In Macau, good sales and profits were achieved despite lower tourist arrivals from mainland China. Mannings put particular focus on promotions targeting local customers and introduced new ranges of Health Food supplements. 

In mainland China, a challenging economic environment and increased competition put pressure on sales with higher losses. The Beauty and Baby categories achieved positive results, but other categories experienced a decline in like-for-like sales.

In Singapore, Guardian achieved solid like-for-like sales growth with all major categories performing well. Market share also grew, and the full-year profits were ahead of prior year.

In Malaysia, Guardian experienced reduced sales and profits in a soft economy affected by a weakening currency, rising costs and declining business and consumer confidence. The Group has invested in marketing campaigns and is focusing on improving its range in core categories, as well as improving retail operating disciplines in the stores.

In Indonesia, Guardian delivered a third consecutive year of double-digit like-for-like sales growth despite a tough economic environment for consumers.

In the Philippines, integration of Rose Pharmacy into the Group continues. Significant investment has been made, and Group executives have been placed in key management roles in the business. Two refurbished stores with a wider Health and Beauty focus have yielded encouraging results.

In Vietnam, very strong like-for-like sales growth was evident with gains in both customer count and basket size. Guardian opened 15 new stores and closed two, ending 2015 with 38 outlets.

The Division is continuing to build its corporate brand portfolio and to improve corporate brand penetration in all businesses. It will continue to drive consistent approaches to brand positioning, space range and display, merchandising practices and supply chain. Existing e-commerce offers in Singapore will be extended, and investment is being made to support enhanced customer relationship management.

HOME FURNISHINGS

Home Furnishings achieved record profits and sales during 2015. Operating profit rose by 25% to a record US$64 million (2014: US$51 million), riding on increased sales of US$568 million, up 14% from US$497 million in 2014. 

The launch of the METOD kitchen range provided an innovative, commercial solution for customers and the new range was warmly received by the market.

Like-for-like sales growth was strong in Hong Kong and Taiwan, driven largely by gains in customer count. The first full year of operations in Indonesia saw highly encouraging sales and profits, providing a firm foundation for ongoing business expansion. IKEA introduced consumer financing to improve affordability for Indonesian consumers.

Believing that our people are the driving force behind the brand, the Group invested in people and talent development, inviting global IKEA resources to conduct functional reviews and introduce 'best-in-class' practices.

On-line offers will be launched in each of the Group's IKEA markets in 2016 with the objective of increasing sales and market penetration. The Group is also planning to increase customer touch points by exploring pick-up point opportunities in all three markets.

RESTAURANTS

Restaurants reported US$1.9 billion in total sales, representing an increase of 8% over the previous year (2014: US$1.7 billion), while the profit contribution increased by 9%. The business delivered another year of record earnings.

2015 saw a number of important milestones for the group, including automation of mooncake production to enhance efficiency and capacity, improvements in procurement - including food cost control and direct sourcing - which contributed to profit margins, and the opening of new headquarters facilities at Maxim's Centre.

Restaurants achieved steady growth in sales and profits in Hong Kong, and deepened their penetration in mainland China through the launch of a number of Chinese and Japanese chain restaurants in new cities. Additional Starbucks stores were opened in Vietnam in Ho Chi Minh City and Hanoi as initial efforts are focused on these two major cities.

In December 2015, the group launched operations in Cambodia as a franchisee of Starbucks. This new market offers significant opportunities as there is no dominant market player. The group is currently working to fully understand local tastes and preferences.

Despite a competitive market environment, the group's diversity of brands addressing various market segments continues to be a key advantage, providing an appealing portfolio for landlords and developers seeking an interesting mix of F&B tenants. Maxim's reputation and heritage have also benefited the operations in the Mainland, allowing the group to secure preferred locations in high traffic shopping malls operated by Hong Kong property developers, despite strong competition from local players.

Looking ahead, the macro economy and local business environments are expected to be challenging in 2016, with continued currency volatility and fragile consumer confidence. The group sees exciting prospects, however, with a number of establishments opening at the Shanghai Disney Resort in June 2016, including the staff canteen, The Cheesecake Factory and Japanese chain concepts Ippudo and Dondonya. Maxim's will also continue to expand its presence in Vietnam and Cambodia through Starbucks and will explore further opportunities for acquisitions and/or franchising throughout the region.

THE YEAR AHEAD

With the economic slowdown in the region, trading conditions for the Group are expected to remain challenging in the near future, especially in Southeast Asia countries. The Group's approach, however, remains to drive sales and profit growth in ways that build long-term value. To that end, the Group continues to invest in new and existing stores, strengthen its brands, improve operations and enhance the shopper experience across all formats. Despite these investments, operating cash flow remains strong and the Group's balance sheet is in sound shape.

Dairy Farm expects to achieve organic growth across its formats in existing markets as its primary source of growth. The Group will selectively consider acquisition opportunities where they can enhance our current portfolio of brands and businesses.

The Group's success depends critically on the passion, commitment and hard work of its people. I want to thank them for their tremendous contributions which have ensured another solid year at Dairy Farm even in the face of difficult conditions for retailers across Asia.

Graham Allan

Group Chief Executive