Integrated annual report 2016 - Clicks Group Limited · Clicks group Integrated annual report 2016. ... 1 200 1 500 10-year SHare prICe perForManCe ... where Clicks is the country’s

Integrated annual report 2016

CONTENTS

addItIonal onlIne reportIngThe Integrated Report is the group’s primary reporting medium and this is supplemented by additional reports and information available online at www.clicksgroup.co.za

Financial reporting • Annualfinancialstatements2016• Five-yearfinancialreview• Annualresults2016• Annualresults2016presentation

governance• Corporategovernancereport2016• ApplicationofKinglllprinciples2016

Forward-looking statementsTheIntegratedReportincludesforward-lookingstatementswhichrelatetothepossiblefuturefinancialpositionandresults of the group’s operations. These statements by their nature involve risk and uncertainty as they relate to events and depend on circumstances that may or may not occur in the future.

Thegroupdoesnotundertaketoupdateorreviseanyoftheseforward-lookingstatementspublicly,whethertoreflectnewinformationorfutureeventsorotherwise.Theforward-lookingstatementshavenotbeenreviewedorreportedon by the group’s external auditor.

2 Introducing the report 4 Group profile8 Group strategy and business model

13 Managing material issues16 Investment case 18 Chairman’s report22 Chief executive’s report28 Chief financial officer’s report34 Operational review: Clicks 40 Operational review: UPD44 Board of directors46 Creating value through good governance 50 Creating value through good citizenship55 Rewarding value creation64 Shareholder analysis65 Shareholders’ diary65 Corporate information

annual general meeting• Noticetoshareholders• Formofproxy

Sustainability• Socialandethicscommitteereport2016• Five-yearsustainabilityreview

reVIeW oF 2016good trading performance as Clicks gains market share

UPD maintains margin in difficult year

operating profit up 12.6% to r1.6 billion

diluted HepS up 14.2% to 438.5 cps

total shareholder return of 35.3%

1 200 new jobs created

outlooK For 2017Consumer environment to remain challenging

Continued organic growth prospects for Clicks into the longer term

Record capital expenditure of r577 million to support growth

directors and management confident of sustaining performance and delivering on medium-term targets

MedIuM-terM targetS 2016–2018targets

Performance in 2016

2017 – 2019 targets

Return on equity (%) 50–60 49.2 50 – 60

Return on assets (%) 14–18 13.8 14 – 18

Inventory days 55–60 66 60 – 65

Operating margin (%)

• Group 6.0–7.0 6.5 6.0 – 7.0

• Retail 7.0–8.0 7.8 7.5 – 8.5

• Distribution 2.0–2.5 2.5 2.0 – 2.5

r32.6 billion shareholder value created in 20 years of JSe listing

1

Clicks Group Integrated Annual Report 2016

INTrOduCINg ThE rEpOrT

Clicks Group has pleasure in presenting its sixthIntegrated Report to shareholders for the 2016financial year. In this report we aim to demonstratehow thegroup’shealth,beautyandwellnessstrategycreates value for shareholders while balancing our responsibilities towards our other stakeholders.

reportIng SCope and boundaryThe report covers material information relating to the businessmodel,strategy,materialissuesandrelatedrisksandopportunities,financialandoperationalperformance,and governance for the period 1 September 2015to 31 August 2016. In addition the report focuses onthe strategic objectives, operating plans, targets andprospects for the 2017 financial year. The IntegratedReport is supplemented by the annual financialstatements which are also available on the website.

Reporting covers the group’s main operating entities ClicksandUPD,whichcollectivelyaccountfor95%ofturnover,andfocusesontheoperationsinSouthAfricawhere the majority of revenue is generated.

The Integrated Report is aimed primarily at our shareholderswhoaretheprovidersoffinancialcapital.However, other key stakeholders also influence thegroup’s ability to create sustainable value, includingourcustomers,staff,suppliers,industryregulatorsandfinancialinstitutions.

There have been no changes from last year in the reporting scope and boundary.

reportIng CoMplIanCeThe reporting process has been guided by the Integrated Reporting Framework of the InternationalIntegratedReportingCouncil (IIRC), theKingCodeofCorporate Principles 2009 (King lll), the JSE ListingsRequirements and the Companies Act. Financialinformation is reported in accordance with International FinancialReportingStandards.

MaterIalItyThe report focuses on information which the directors believe is material to investors’ understanding of the group’sabilitytocreatevalueintheshort,mediumandlonger term. The materiality test applied by the board is based on internal and externalmatters, both positiveandnegative,thatsubstantivelyaffectthegroup’sabilityto deliver its strategy and could have a material impact onrevenueandprofitability.

Management has extensive interaction with shareholders andanalysts,and thisprovides insight into the issuesthat the investment community considers important in their valuation of the business.

aSSuranCeThe content of the Integrated Report has been reviewed by the board and management but has not been independently assured.

Theannual financial statementshavebeenassuredbythegroup’sindependentauditor,Ernst&YoungInc.(EY).

Thenon-financialandsustainability-related informationcontained in the report has been approved by the board’ssocialandethicscommittee.Accreditedserviceproviders and agencies have provided selected non-financial performancemetrics, includingmarket sharestatistics and the BBBEE rating. Management hasverified the processes for measuring all other non-financialinformation.

CapItalS oF Value CreatIonThe IIRC Framework recommends reporting toshareholders on the capital resources that are applied in the creation of value. These are classified as thefinancial,manufactured,intellectual,human,socialandrelationship,andnaturalcapitals.

The performance and activities relative to these six capitals are covered throughout the report and highlighted on pages 10 and 11, although we havechosen not to present the Integrated Report according to these capitals.

The Integrated report is aimed primarily at our

shareholders who are the providers of

financial capital.

Integrated reportIng FraMeWorKThe directors believe the group has materially reported in accordance with the IIRC Framework in the 2016Integrated Report.

dIreCtorS’ approVal The board acknowledges its responsibility to ensure the integrity of the Integrated Report. The directors have collectivelyassessedthecontentandconfirmthereportaddressesallmaterial issues,andfairlyrepresentstheintegrated performance of the group.

The audit and risk committee, which has oversightresponsibilityforintegratedreporting,recommendedthereport forapprovalbytheboard.The2016IntegratedReport was unanimously approved by the board on 10 November 2016andsignedonitsbehalfby:

David Nurek David KnealeIndependent Chiefexecutiveofficernon-executivechairman

2016markedthe20thanniversaryoftheClicksGroup’s listing on the JSE. Celebrating themilestoneare,fromleft,VikeshRamsunder(chiefoperating officer, Clicks), Bertina Engelbrecht(grouphumanresourcesdirector),DavidKneale(chiefexecutiveofficer),VikashSingh(managingdirector of UPD) and Michael Fleming (chieffinancialofficer).

300

600

900

1200

1500

10-year SHare prICe perForManCe

Aug 2006

Aug 2008

Aug 2010

Aug 2012

Aug 2014

Aug 2016

ClicksGroupFoodandDrugRetailersIndexAllShareIndex

32


grOup prOfIlE

geograpHIC Store FootprInt

South Africa 653

Namibia 23

Botswana 8

Swaziland 4

Lesotho 1

Namibia 23 Botswana

8

Lesotho 1

Swaziland 4

South Africa 653

Retail (includes Clicks, Musica, The Body Shop, GNC and Claire’s)

Distribution (includes UPD and Clicks Direct Medicines)

SegMentContrIbutIon

Turnover

69%

31%

83%

17%

Operatingprofit

Clicks Group is a retail-led healthcare group listed in the Food and Drug Retailers sector on the JSE.

Founded in 1968, the group has been listed on theJSE since 1996. Following changes in South Africanlegislation in 2003 to allow corporate pharmacyownership,thegroupenteredtheretailpharmacymarketwiththe openingofthefirstClickspharmacyin2004.

UPDwasacquired in2003 toprovide thedistributioncapability for the group’s healthcare strategy.

The group is today a leader in the healthcare market where Clicks is the country’s largest pharmacy chainwith400in-storepharmaciesanda19.6%shareoftheretailpharmacymarket.UPDhasa24.1%shareoftheprivate pharmaceutical wholesale market.

Strong groWtH MoMentuM

48

103.0

2007

45%

61

131.5

2008

45%

84

165.9

2009

50%

106

211.4

2010

50%

125

249.7

2011

50%

152

273.4

2012

56%

168

298.3

2013

56%

190

336.8

2014

56%

235

383.9

2015

59%

272

438.5

2016

59%

Dividendpershare(cents)DilutedHEPS(cents)Dividendpayoutratio

The group’s history is available at www.clicksgroup.co.za

23.4%dividend per

share 10-year CAGR

our ValueSWe are truly passionate about our customers

We believe in integrity, honesty and openness

We cultivate understanding through respect and dialogue

We are disciplined in our approach

We deliver on our goals

20.0%diluted HEPS

10-year CAGR

54


grOup prOfIlE (CONTINuEd)

FranCHISe brandS

Profile Customers Footprint Market share

Clicks is South Africa’s leading health and beauty retailer, offering value for money in convenient and appealing locations. Clicks has the largest retail pharmacy chain in the country.

Clickstargetsconsumers in the growing middle to upper income markets (LSM 6 – 10).Clicks ClubCardisone of the largest loyalty programmes inSouth Africawithover6.2millionactive members.

511 stores

400 pharmacies

19.6% of retail

pharmacy

29.3% of front

shop health


UPD is South Africa’s leading full-range pharmaceutical wholesaler and the only one with a national presence. UPD was acquired by the group in 2003 to provide the distribution capability for the group’s healthcare strategy.

UPDfulfilsthepharmaceutical supply needs ofClicks,majorprivate hospital groups and over 1 200independentpharmacies. UPD alsoprovidesbulk distribution services to pharmaceutical manufacturers.

5 distribution

centresin South Africa

and one in Botswana

24.1% of private

pharmaceutical market

Profile Standalonestores PresenceinClicks

The Body Shop sells natural, ethically-produced beauty products, and has been operated under a franchise agreement with The Body Shop International since 2001.

53 stores

In 88 Clicks stores

GNC is the largest global specialty health and wellness retailer, and has been operated under an exclusive franchise agreement for southern Africa since 2014.

5 stores

In 261 Clicks stores

Claire’s is one of the world’s leading specialty retailers of fashionable jewellery and accessories for young women and girls, and has been operated under an exclusive franchise agreement for southern Africa since 2015.

5 stores

In 123 Clicks stores


Musica is the country’s leading entertainment retail brand and was acquired in 1992.

Musica focuses on the16 – 35year-oldagegroup in the middle to upper income markets (LSM 6– 10).

115 stores

69% of Cds

52% of dVds

76


grOup STrATEgy ANd BuSINESS mOdEl

CLICKS GROUP’S strategy is to create sustainable long-term shareholder value through a retail-led health, beauty and wellness offering

retaIl FootprInt

(ConVenIenCe)ExtensivestoreandpharmacynetworkinSouthAfrica

allowing for easy access to customers

Measured store expansion into neighbouring countries ofBotswana,Lesotho,Namibia

andSwaziland

our CuStoMerSClickstargetsmiddletoupperincomecustomers

CustomersinLSMgroups6–10

ClicksClubCardhas6.2millionactivemembers

78%ofClubCardholdersarefemale

61%ofClubCardholdersareaged25–49

CLICKS’ strategy is to be the customer’s first choice health and beauty retailer

produCt SourCIng

(Value)Consistentlygoodvalue-for-money

products delivered through competitive prices and effective promotions

produCt deVelopMent

(dIFFerentIatIon)Differentiatedofferingthrough

wide ranges of private label and exclusivebrands,

including franchise brands

CuStoMer engageMent

(reWardS)LoyaltyrewardedthroughClubCard

programme

Directmarketingbasedon purchasing behaviour

SerVICe

(CuStoMer Care)Greatcustomerservicefrom friendly and knowledgeable staff in well-presentedstoresC

LICKS’ VALUE-CREATING BUSINESS MODEL

Integrated and CentralISed Supply CHaInUPDprovidesanintegratedhealthcaresupplychainchannelforClicks,withnationalcoverageanduptotwicedailydelivery

Centralisedsupplyfromdistributioncentrestoallretailstores(achieved96.4%centralisedsupplyin2016)

InForMatIon teCHnologyEfficientandflexiblebespokeandproprietarysystems:• Planning,orderingandstoreranging• Loyaltymanagement• Healthcaremanagement• Omni-channelmanagement• Warehousemanagement

MotIVated and SKIlled peopleValues-drivenculturewithequitablerewardandrecognitionmechanisms

Committedtotraininganddevelopment(investedR57.8millionin2016)

Buildingpharmacycapacitythroughin-housePharmacyHealthcareAcademyandbursaryprogramme

98


grOup STrATEgy ANd BuSINESS mOdEl (CONTINuEd)

Value CreatIon In 2016Inputs and capitals Inputs and capitalsValue created in 2016 Value created in 2016

1The financial resources deployed by the company.

Turnover r24.2 billion

Total shareholder return 35.3%

Cashgeneratedfromoperationsr1.8 billion

Return on equity 49.2%

FINANCIAL 4The competency, capability and experience of the board, management and employees.

Directorsandexecutivemanagementdevelopandexecutethestrategy to create value for shareholders

14 093 permanent employees who provide customers with medicines,productsandservices

r57.8 million invested in employee skills developmentHUMAN

2The infrastructure used in selling merchandise, including the retail store network, distribution facilities, online store and information technology systems.

Opened 32 retail stores;totalstores689

39 new Clicks pharmacies;totalnow400

online store launched

9 distribution centres

r433 million capital investmentMANUFACTURED

5Relationships with stakeholders influencing the business, primarily shareholders, customers, suppliers and employees.

Shareholders:r876 million returned to shareholders in dividendsandsharebuy-backs

Customers:over 1 million new ClubCard members;now6.2millionmembers

Customers:r309 millioncash-backpaidtoClubCard members

Employees:r2.7 billion paid to employees

Suppliers:r21.3 billion paid to suppliers

SOCIAL AND RELATIONSHIP

3 6The collective knowledge and expertise across the business as well as the intellectual property of the group.

The group’s operations have a low environmental impact and therefore use limited natural capital.

Clicksgained market share in all key product categories

Privatelabelandexclusivebrands21.0% of health and beauty sales

Clicksindependentlyratedasleading health and beauty retailer in Sa

Commitmenttoreduce carbon footprint and generatesavingsthroughenergyandwaterefficiency

2 072 tons of recycling in supply chain

INTELLECTUALNATURAL

1110


MATERIAL ISSUES havebeenidentifiedwhichcouldimpactpositivelyornegativelyonthegroup’sabilitytocreateand sustain value. These material issues are reviewed annually by the board and management where all relevant internal,industryandmacroeconomicfactorsareevaluated.Theneeds,expectationsandconcernsofthestakeholdergroupsthataremostlikelytoinfluencethegroup’sabilitytocreatesustainablevalue,notablyshareholders,customers,suppliersandstaff,arecentraltodeterminingthematerialissues.Followingtheboard’sreviewforthe2017financialyear,thematerialissuesareunchangedfrom2016.

RISKS relating to each material issue are based on the major risks on the group’s register. The accompanying graphic indicates the levels of risk before (inherent risk) and after (residual risk) mitigation plans have been implemented.

OPPORTUNITIES are presented for each material issue to indicate how the group is using its competitive advantage to manage the impacts of the material issues on value creation.

1 tradIng enVIronMent

2 CoMpetItIon

3 regulatIon

4 people

Central to determining the material issues are the needs, expectations and concerns of the

stakeholder groups most likely to influence the group’s ability to create sustainable value. These are our

shareholders, customers, suppliers, financial institutions and employees.

mANAgINg mATErIAl ISSuES MaterIal rISKS IM

PACT

Catastrophic

Major

Moderate

Minor

Insignificant

Remote Unlikely Reasonably possible Probably Almostcertain

PROBABILITY

InHerent rISK

IMPA

CT

Catastrophic

Major

Moderate

Minor

Insignificant

Remote Unlikely Reasonably possible Probably Almostcertain

PROBABILITY

reSIdual rISK (aFter Current MItIgatIonS)

1Trading environment

2Increased retail competition

3Regulatory impact

4Shortagesofcritical skills

top MaterIal rISKS by InHerent rISK ratIng

1

234

1

2

3

4

1312


mANAgINg mATErIAl ISSuES (CONTINuEd)

1tradIng enVIronMentSouthAfrica’s retail tradingenvironment,whichhasbeenseverelyconstrained in recent years,is coming under increasing pressure owing to the deteriorating economic conditions in the country andgreaterdemandsonconsumerdisposable income.Social unrest,politicaluncertaintyandthe weakening labour market are limiting economic growth and this is being compounded by the volatileanddepreciatingcurrency.Consumerconfidenceisatlowerlevelsthanrecordedduringtheglobalfinancialcrisisof2008/2009andconsumersarefacinghigherhealthinsurancecosts,risingfood,utilityandgenerallivingcosts,aswellasincreasingdebtservicingcostsowingtorisinginterest rates.

rISKS• Furtherdeteriorationinthe

economic environment will depress consumer spending which is already under severe pressure.

• Lackofgrowthinprivatehealthcare market.

opportunItIeS• Clickswillcontinuetopursueastrategyto

improvepricecompetitiveness,growsalesvolumesandentrenchClicksasavalueretailer.

• Focusondifferentiators,includingextensiveand convenient store and pharmacy footprint; privatelabelandexclusiveranges;ClicksClubCardloyalty;andconsistentlyhighlevelsofcustomer care.

2CoMpetItIonAsahealth andbeauty retailerClicks faces competitionon several fronts, includingcorporateand independentpharmacy,national food retailers,generalmerchandisechains, andspecialisthealthandwellnessstores.Thelevelofcompetitionisbeingintensifiedbythesustainedexpansionofnationalfoodchainsandcorporatepharmacy,andnewentrantsintothelocalmarket.Inthecurrent constrained consumer spending environment retailers are increasingly price competitive andadoptingaggressivepromotionalstrategiestoattractcash-strappedconsumersandprotectsalesvolumes.InthisclimateClicksGroupisoneofthefewlistedretailerstohaveincreasedsalesvolumes while maintaining its operating margin.

rISKS• Expansionbycorporate

pharmacy and retail chains impacting on market share growthinClicks.

• Increasingpricecompetitiveness of retailers could negatively affect sales andprofitabilityinClicks.

opportunItIeS• Clickshasanextensivestorenetworkandplans

toopen25newstoreseachyear,expandingto800storesinthelongerterm.

• Continuedexpansionofthepharmacynetworkwiththelong-termplantoopenpharmaciesinallClicksstoresinSouthAfrica.

• ContinuedrecruitmentofnewmemberstotheClicksClubCard.

• Ongoingimprovementsinpricing,productofferand customer service.

3regulatIonHealthcaremarketsarehighlyregulatedacrosstheworldandapproximately50%ofthegroup’sturnover is in regulated pharmaceutical products. The group supports regulation that advances the government’s healthcare agenda of making medicines more affordable and more accessible to all SouthAfricans.However, thecurrentregulatoryregime imposesobstacleswhich inhibitaccessto affordable healthcare and also limits customer choice. Management actively engages with the DepartmentofHealthonanongoingbasisoncurrentandproposed regulationand legislationwhich impacts the business and its customers.

rISKS• Legislativeandregulatory

changes introduced by the DepartmentofHealth(DoH),SAPharmacyCouncil(SAPC)andMedicinesControlCouncil(MCC)couldimpactonClicksandUPDturnoverand margins.

• Impactsincludetheabilityto obtain pharmacy licences and to launch private label and exclusive scheduled and complementary medicines.

opportunItIeS• EnsureClicksandUPDareoperatingefficientlyto

maintainmarginsandprofitability.

• ContinuemanagementengagementwiththeDoH,SAPCandMCConlegislationandregulation.

• FormalwrittenandoralsubmissionstoDoH,SAPCandMCCinresponsetodraftlegislationor regulations.

• Asthemarketleadersinretailpharmacyandpharmaceuticalwholesaling,positionClicksandUPDtobenefitfrommarketconsolidationarisingfrom changes in legislation and regulation.

4peopleAttractingandretainingtalentiscriticaltothegroup’ssustainedperformanceinanindustrywherescarce retail and healthcare skills are in high demand locally and internationally. This is addressed through the group’s ongoing investment in its people through competitive remuneration packages and incentive schemes, career path planning, creating a stimulating working environment,transformationandempowerment,withR244millioninvestedintrainingandskillsdevelopmentoverthepastfiveyears.Abroad-basedemployeeshareownershipplan(ESOP)hasenabledstafftoshareinthelong-termgrowthandsuccessofthebusiness,andatthesametimeretaincriticalskillsinthegroup.AsthelargestemployerofpharmacystaffintheprivatesectorinSouthAfricathe group is actively building capacity to address the critical shortage of pharmacists which is a challenge the world over.

rISK• Inabilitytorecruit,attract

and retain talent for core businessneeds,includingmerchandiseandplanning,store management and pharmacy.

opportunItIeS• Salariesandincentivesexternallybenchmarkedto

ensure the group remains competitive.

• Broad-basedESOPimprovesretentionandcreateslonger-termwealth.

• Bursaryandinternshipprogrammestoattractpharmacy graduates.

• Retailgraduateprogrammelaunched.

• Accreditedtrainingprogrammesforstoremanagement,keystoreroles,andmerchandiseand planning being developed.

• Seniorleadershipdevelopmentprogrammestrengthens pool of management talent.

1514


INVESTmENT CASE

Clicks group offers attractive organic growth prospects for investors wanting non-cyclical equity exposure to the South African retail and healthcare sectors.

32.7% total shareholder

return three-year CAGR

7 groWIng CuStoMer loyaltyClubCardisoneofthelargestretailloyaltyprogrammesinSouthAfrica• 6.2millionactiveClubCardmembersgenerate77%ofsales• Targettoreach7.5millionmembersoverthenextthreeyears1 FaVourable MarKet dynaMICS

• HealthcaremarketsaredefensiveandgrowinginSouthAfrica• Increasingproportionofpopulationenteringtheprivatehealthcaremarket• Improvinglivingstandards,increasingurbanisationandlongerlifeexpectancyis

contributing to a growing market for health and beauty products

5expandIng pHarMaCy baSeObjectivetooperateapharmacyineveryClicksstoreinSouthAfrica• Pharmaciescurrentlyin82%ofstores• Targetingtoopen30–35pharmacieseachyear• 39pharmaciesopenedin2016• Retailpharmacymarketsharegoalof30%inthelongterm• Primarycareclinicsin195Clicksstores

8 eFFICIent Supply CHaInUPDprovidesanefficienthealthcaresupplychainchannelforClicks• UPDofferswholesaleanddistributionservicestopharmaceuticalmanufacturers• Centralisedsupplyfromcompany-owneddistributioncentrestoallretailstores(96%of

product through centralised distribution)2 reSIlIent buSIneSS ModelOver80%ofgroupturnoverisindefensivemerchandisecategories• AsavalueretailerClicksispricecompetitivewithnationalretailers• AsacashretailerClicksislessinterestratesensitivethancredit retailers

6 dIFFerentIated produCt oFFerPrivatelabelandexclusivebrandsofferdifferentiatedrangesathighermargins• Targettogrowprivatelabelto25%oftotalClickssales;currently21%• ExclusivehealthandbeautyfranchisebrandsdifferentiateClicksoffer

9eFFeCtIVe CaSH and CapItal ManageMent• Highlycash-generativebusiness

–R5.4billioncashgeneratedbyoperationsoverpastthreeyears• Returnsenhancedthroughactivecapitalmanagement

–Industry-leadingreturnonequityaveraging53.3%overpastthreeyears–R2.3billionreturnedtoshareholdersindividendsandsharebuy-backsinpastthree years

• Wellinvestedstorebaseandsupplychain–R1.1billioncapitalexpenditureinpastthreeyears

3 MarKet leaderSHIpClicksandUPDoccupymarket-leadingpositions• ClicksisthelargestretailpharmacychaininSouthAfrica• UPDisthecountry’sonlynationalfull-rangepharmaceuticalwholesaler

10 globally CoMpetItIVe operatIng MargInSRetailandUPDoperatingmarginsrankinupperquartileofglobaldrugstoresandpharmaceuticalwholesalers 4 expandIng retaIl FootprInt

Over500convenientlylocatedClicksstores• Targetingtoopen25storeseach year• 25Clicksstoresopenedin2016• GoaltoexpandClicksstorebaseinSouthAfricato800inthelongterm

1716


ChAIrmAN’S rEpOrT

oFFSHore SHareHoldIng

7.6%

2008

47.1%

2010

58.4%

2012

59.3%

2014

68.6%

2016

reSIlIent FInanCIal perForManCeSouthAfricaisinthemidstofoneofthemostchallengingtimes in recentdecades,withpoliticaluncertaintyandinstability,civilandsocialunrest,adeterioratinglabourmarket and unprecedented currency volatility being a feature of the past year.

These factors are all compounding South Africa’salready weak growth prospects, while the threat ofa sovereign rating downgrade looms ominously over the country.

Retail spending has come under increasing pressure in this environment, with financially stressed consumersalso encountering increasing interest rates, higherfood, utility and education costs, and rising healthinsurancecosts.Consumerandbusinessconfidenceisunderstandably low.

However,thegrouphasonceagainshownitsresilienceinthe face of growing economic headwinds and produced anotherstrongperformance,particularlyfromtheClickschain which has entrenched its leading position in the competitive health and beauty retail sector.

The group’s performance for the year translated into an increaseof14.2%indilutedheadlineearningspershareto438.5 cents.Shareholderswillreceiveatotaldividendof272.0 centspershare,15.7%higherthanlastyear.Dividendshavegrownatanannualcompoundrateof23.4%overthepasttenyearswhilethepayoutratiohasincreasedfrom45%to59%overthesametime.

In the past three years the group has generated a total shareholder returnof134%,drivenbyourstrategyofpursuingorganicgrowthintheSouth Africanmarket.

20 yearS oF JSe lIStIngInMarch this year the group celebrated its 20th yearof listing on the JSE. New Clicks Holdings, as ourcompanywasknown,listedatapriceofR3.70withamarketcapitalisationofR915million.In2016theshareprice reached an all-time high of R130.50, with themarketcapitalisationexceedingR30 billion.

Sinceitsdebutonthestockmarketin1996thegrouphas generated shareholder value of R33 billion.

While the scale of the group has shownphenomenalgrowth over the past 20 years the business has alsochangedfundamentally.Atthetimeoflistingthegroupwas not yet active in the retail pharmacy or wholesale pharmaceutical markets.

Today Clicks is the country’s leading retail pharmacychainandUPDisSouthAfrica’sforemostpharmaceuticalwholesaler and distributor.

TheJSEisoneofthemostadmiredexchangesgloballyand is to be commended for its high corporate and regulatory standards. This has certainly contributed to theClicksGroupattractingextensiveforeigninvestment,with69%ofoursharescurrentlyheldbyoffshorefundmanagers.

CoMpellIng InVeStMent CaSeThe strong organic growth prospects for the core Clicks chain creates a compelling investment casefor investors seeking equity exposure to the retail and healthcaresectorsinSouthAfrica.

The healthcare markets in which we trade are defensive and growing, with an increasing proportion of theSouth African population entering private healthcare.Improvinglivingstandards,increasingurbanisationandlonger life expectancy are all contributing to the growth in the health and beauty products market.

Our business model is resilient, with over 80% ofrevenue in defensive merchandise categories. Clicksand UPD have market-leading positions and theiroperating margins rank in the upper quartile of global drugstores and pharmaceutical wholesalers.

14.2%growth in

diluted HEPS

15.7%increase in

total dividend

The group has once again shown its resilience in the face of growing economic headwinds and produced another strong performance.

Our business model is resilient, with over 80% of revenue in

defensive merchandise categories.

1918


Clickscurrentlyhasover500storesandmanagementhas revised the longer-term store goal, confident thatthe chain can grow to 800 stores in South Africaover the next ten years.Clicks remains committed toits objective of incorporating a pharmacy into every Clicks store and growing its retail pharmacy marketshareto30%inthelongterm.

The investment case is supported by sustained financialandoperationalperformance,aprovencapitalmanagement strategy which enhances returns to shareholders and the group’s ability to generate strong freecashflows.

board and goVernanCeAs a boardwe recognise that good governance cancreatesustainablevalueandenhancelong-termequityperformance. It is pleasing to report that the group qualified for inclusion in therecently introducedFTSE/JSE Responsible Investment Index. As part of theevaluationfortheindexthegroup’senvironmental,socialand governance (ESG) standardswere independentlyevaluated,andweattained100% for thegovernancepillar. This authoritative endorsement of the group’s governance standards should provide assurance to our shareholders and potential investors.

Our board is stable with an appropriate balance of skills and expertise. The diversity of the directors in terms

ChAIrmAN’S rEpOrT (CONTINuEd)

of gender, race and their professional backgroundsencourages constructive debate and ensures that the board considers the needs of our wide range of stakeholders and interest groups. The independence oftheboardisreviewedannuallyandallsixofthenon-executivedirectorsareclassifiedasindependent.

DrNkakiMatlala,whohas servedasan independentnon-executive director since 2010, will be retiringfrom the board at the annual general meeting in January 2017.WethankDr Matlalaforhiscontributionoverthepastsixyears,particularlyinhisspecialistfieldofhealthcare,andwishhimwell.

The governance landscape in South Africa will beenhancedwiththeintroductionoftheKingIVCodeofCorporatePrincipleswhichwillbeeffectivefrom2017.Therehavebeensignificantcorporategovernanceandregulatorydevelopments,bothlocallyandinternationally,sincetheintroductionofKing IIIin2009whicharebeingincorporated into the new code. The directors welcome governance codes which facilitate value creation without adding burdensome compliance requirements on companies.

aCKnoWledgeMentSThe strong financial and operational performanceover the past year is a credit to the group’s leadership and I thank David Kneale and his executive teamfor ensuring that the business maintains its market-leading position. I also wish to acknowledge the role played by our 14 100 employees in delivering theseresults and for their commitment to meeting the needs of our customers.

My fellow non-executive directors have continued toprovidevaluableinsightandoversight,andIthankthemfor their support.

Thank you to our customers, shareholders andinvestment analysts, suppliers and industry regulatorsfor your continued support and engagement.

David NurekIndependentnon-executivechairman

As a board we recognise that good governance can create sustainable

value and enhance long-term equity

performance.

2120

Clicks Group IntegratedAnnualReport2016

ChIEf EXECuTIVE’S rEpOrT

SuStaIned Strong retaIl tradIngClicks Group delivered another strong tradingperformance in2016asall retailbrandsstrengthenedtheir competitive positions and recorded market share gains in the current constrained consumer environment.

Retailhealthandbeautysales,includingClicksandthefranchisebrandsofTheBodyShop,GNCandClaire’s,increased by 13.5% and all of our major productcategoriesshoweddouble-digitgrowth.

The core Clicks chain performed particularly well,reportingsamestorevolumegrowthof6%fortheyear.

This performance highlights the resilience of the health and beauty markets in which we trade and demonstrates the defensive nature of the group’s business model.

PharmacyandfrontshophealthsalesinClicksarebeingunderpinnedbytwokeymarkettrends:thegreateruseof genericmedicines and the increasing shift to self-medication. Sales of generics increased by 19% andaccountfor48%ofClicks’sales,asweactivelyswitchpatientstolower-costgenericalternatives.

The global interest in wellness is particularly evident in SouthAfricaascustomers take responsibility for theirown health andwell-being, and are choosing to self-medicate. This is evident in the 19% growth in over-the-counterpharmacysalesanddouble-digitgrowthinfront shop medicines and supplements.

delIVerIng on our StrategyThe group has made excellent progress in delivering on its strategy of creating sustainable long-termshareholder value through a retail-led health, beautyand wellness offering.

The main driver of the group’s strategy is the Clickschain,whichaimstobe“thecustomer’sfirstchoiceinhealth and beauty retailing”. This strategy is founded on the five brand pillars of value, product differentiation,customer care, convenience and rewards as outlinedonpage8.

Clicksisthelargestretailpharmacychaininthecountrywith 400 in-store pharmacies, with primary careclinicsin195ofthepharmacies.Anet39pharmacieswere opened and the objective remains to operate a pharmacy in every Clicks store in South Africa.Our share of the retail pharmacy market has increased to19.6%.

Front shop health market share increased to 29.3%withthebabycategorygrowingto12.1%.Inthehighlycompetitive beauty category, skincare market shareincreasedto27.5%andhaircareto25.7%.

TheClicksstorebasewasexpandedto511followingthe opening of a net 25 new stores. The chain has26 storesinneighbouringBotswana,Lesotho,NamibiaandSwaziland.

Clicksextendeditsfootprintfurtherwiththelaunchofitsonlinestorewhichoffers15 000products,witha“clickandcollect”facilityinallstoresacrossSouthAfrica.

Private label and exclusive brands ensure weoffer customers differentiated product ranges. These productsnowaccountfor21.0%oftotalClickssales,with oneout of every four front shopproductssoldonlybeingavailableatClicks.Ourthreeexclusivefranchise brands, TheBodyShop,GNCandClaire’s,entrench our product differentiation strategy, as doesourpartnershipwithSorbet.

The group’s portfolio of retail franchise brands also performedwell,withsalesgrowthof14.2%inTheBodyShopdrivenbynewproduct ranges.GNC, the globalleader in health and wellness supplements, is nowavailable in over 260 Clicks stores and has shownimpressive growth. However, regulatory challengesare hampering the launch of new products into the South Africanmarket(referto“Burdensomeregulationsrestricting growth” below).

Claire’s,themostrecentadditiontoourfranchisebrandstable, has shown a pleasing performance in its firstfull year in the group and has extended its footprint to 123 Clicksstores.

Musica continued to gain market share and now has over69%ofthecountry’sCDmarketand52%oftheDVDmarket.Thetechnologycategory,whichincludesheadphones,speakersandturntables,showeddouble-digitgrowthastotalsalesinMusicaincreasedby1.2%.WhileweacknowledgethatMusicaisnon-coretothegroup’sstrategy,thebusinessremainscashgenerativeandprofitable,andwewillcontinuetofocusthebrand’sstore footprint on destination retail locations.

UPD,thegroup’spharmaceuticaldistributionbusiness,experienced a tough year, as we had anticipated,and grewturnoverby6.1%.Thepharmaceuticalmarkethas shown minimal volume growth while the regulated single exit price (SEP) increase of 4.8% in 2016waslower than the 7.5% granted in the previous year.DespitetheseheadwindsUPDmaintaineditsoperatingprofit by driving efficiencies and through good costmanagement.

Overall group turnover increased by 9.5% toR24.2 billionwithsellingpriceinflationbeingcontainedto4.9%fortheyear.

The trading performances of Clicks and UPD are covered in the operational review on pages 34 to43. The financial performance is detailed in the chieffinancialofficer’sreportonpages 28to33.

1 200new jobs created

6.2mClicks ClubCard active members

The group has made excellent progress in delivering on its strategy of creating sustainable long-term shareholder value through a retail-led health, beauty and wellness offering.

The group is planning another year of record capital investment of

R577 million in 2017.

2322


ChIEf EXECuTIVE’S rEpOrT (CONTINuEd)

DuringtheyearthegrouppartneredwithSorbetHoldingswhenitacquireda25%stakeforR20 millioninSorbetBrands, the companywhich holds the trademarks totheSorbetbrand insouthern Africa.SorbetBrands isresponsibleforthedevelopmentoftheSorbetproductrangewhichisexclusivelyavailableinClicksstoresandintheSorbetchainofover100 franchisedbeauty salons.

Clickshasmadeanextensiveinvestmentinimprovingcustomer service in store. This includes employing 300 new beauty advisers (960 in total) and 85morehealthcare and GNC consultants (540 in total),while over200pharmacyandclinicprofessionalswereappointed.

Clicks ClubCard attracted over one million newmembers following the successful relaunch of the loyalty programme, bringing total membership to 6.2 millionactive customers. ClubCard members received overR300 millionincashbackoverthepastyear.

UPD,whichprovidesanefficienthealthcaresupplychainfor Clicks, is amarket leader in both pharmaceuticalwholesale and bulk distribution. Total managed turnover at R15 billion was consistent with last year owing tomarketpressuresimpactingthefinewholesalebusinessand no new distribution contracts being awarded.

InVeStIng For groWtHThegrouphasawell-investedstorebaseandsupplychain,evidencedbycapitalexpenditureofoverR1.1 billioninthepastthreeyears.

Record levels of capital expenditure of R433 million (2015: R370 million) have beeninvestedin2016tosupportthegroup’sgrowthstrategies outlined above.

Over60%of this investmentwas innewretailstores and refurbishments to maintain the qualityoftheexistingstoreestate,withfurtherspendon ITandretail infrastructure,andUPDwarehousing and infrastructure.

The group is planning another year of record expenditure of R577 million in 2017. This willincludeR343 millionallocatedto37 newretailstores, 30 to 35 new pharmacies and over70 store refurbishments. Over R180 millionhas been allocated to IT systems and retail infrastructure, which will include thecommencementoftheexpansionoftheClicksdistributioncentreinCenturion.TheR47 millionfor UPD warehousing and infrastructure willinclude the extension of the pharmaceutical warehouseinCape Town.

InVeStIng In our FutureInthepastyearClicksGroupcreatedover1200newjobs as we invested in improving customer service,as outlined above. The group now employs 14 100permanent staff.

Clicksisalsoinvestingindevelopingmanagementcapacitywithin the chain and introduced a future store manager programme,withover100 traineesinthefirstyear.

Clicks isthe largestemployerofpharmacystaff intheprivate sector, with over 2 500 pharmacy and clinicprofessionals, and is actively building capacity toaddress the shortage of pharmacists. In the past year Clicksinvestedinbursariesfor106pharmacystudents,provided 83 pharmacy internships and trained over280 pharmacy assistants through the in-houseHealthcareAcademy.

burdenSoMe regulatIonS reStrICtIng groWtH We believe the Medicines Control Council’s (MCC)approach to complementary and alternative medicines (CAMS)andhealthsupplementsisrestrictingthegrowthof these markets and limiting customer choice. In the caseof theClicksGroup this isdirectly impactingonGNC’sabilitytobroadenitsproductofferwithnewlines.

While we support the need to regulate healthsupplements,weviewtheMCC’sproposedregulationsonCAMSasunclear,impracticalandover-burdensome.We are working in conjunction with industrybodies, including the Health Products Associationof South Africa (HPASA) and the Self-MedicationAssociation of South Africa (SMASA), to lobby forchanges to these regulations.

Ourrecommendationsincludethefollowing:

• CAMS that are produced in licensed facilities incountries with mutual recognition agreements with South Africa should not go through the fullregistration process. The MCC should allowfor a fast-track process for CAMS registered bya recognised authority outside the country.

• In registering a CAM theMCC should only focuson elements that most directly relate to safety and efficacy,whiletestingshouldbelimitedtothemostunstable ingredients in the formulation only.

• Health supplements should be removed from thedefinitionofacomplementarymedicineasitisnota medicineasdefinedbytheMedicinesAct.

• Separate standards should be implemented inconsultation with industry to regulate supplements under food law.

106 bursaries granted

to pharmacy students

2524


ChIEf EXECuTIVE’S rEpOrT (CONTINuEd)

outlooKThe directors believe that the group’s strategy remains appropriate to provide competitive advantage in the current trading environment and will continue to deliver sustainablegrowth.Thegroupstrategy,aswellasthestrategiesofClicks andUPD, is therefore unchangedfor the2017financialyear.

IntheyearaheadClickswillcontinuetofocuson offeringcustomers great value by investing to maintain price competitiveness and offering effective promotions. Productrangeswillbedifferentiatedthroughthefastergrowth of private label ranges and the chain’s portfolio of exclusive and franchise brands.

ClubCard is core to driving engagement with ourcustomers and rewarding them for their loyalty, andwearetargetingtoachieve6.5millionactivemembersin the year ahead.

Managementwill continue tomakeClicks evenmoreconvenienttocustomersandplantoopen20to25 newstoresand30to35newpharmacies.

UPDwillfacecontinuingmarginpressurefromthefastergrowth in generics while our independent pharmacy business is also likely to remain under pressure.

On the positive side, the increase in the single exitprice(SEP)ofmedicinefor2017at5.7%willbehigher

than the level of 2016while the distribution businesshas scope for growth where it is currently only utilising approximately70%ofcapacity.

Weexpecttheweakconsumerspendingenvironmenttocontinueinto2017asloweconomicgrowth,togetherwithongoingpoliticalandsocialuncertainty,willplacefurtherfinancialpressureonconsumers.

Our health and beauty markets are resilient and we will trade through this tough environment by providing value tocustomersandmanagingourcostsefficiently.

One of the key elements of the group’s investment case referencedonpages 16and17 is thestrongorganicgrowth opportunity for Clicks. We remain positiveabouttheprospectsforClicksinthemediumandlongterm,andbelievewecanexpandthestorefootprintinSouth Africato800overthenextdecade.

Wearecommittedto investing instores, ITandsupplychaintofacilitategrowth,andinthedevelopmentofourpeople to meet the needs of the business into the future.

The board and management are confident of thegroup’s ability to sustain performance and deliver on its financialandoperatingtargets.

appreCIatIonOur customers have continued tomake us their firstchoice health and beauty retailer and we thank them for their loyal support.

Thank you to our chairman, David Nurek, and thenon-executivedirectors for their insightandguidance,and support of the executive team.

The group’s performance in demanding trading conditions is a credit to the quality of our people across the business. My thanks are due to all our staff at headoffice,storesanddistributioncentresacrossthecountry.Inparticular,Ithankmycolleaguesonthegroupexecutive, Michael Fleming, Bertina Engelbrecht andVikeshRamsunder,fortheirleadershipandsupport.

David KnealeChiefexecutiveofficer

In the year ahead Clicks will continue

to focus on offering customers great value by investing to maintain price competitiveness and offering effective

promotions.

We remain positive about the prospects for Clicks

in the medium and long term, and believe we can

expand the store footprint in South Africa to 800 over

the next decade.

2726


ChIEf fINANCIAl OffICEr’S rEpOrT

IntroduCtIonClicks Group continued to deliver highly competitivereturns to shareholders against the backdrop of a deterioratingeconomicenvironment,withthebusinessgenerating strong organic revenue growth and cash flows while investing record levels of capital to fundlonger-termgrowth.

Diluted headline earnings per share (HEPS) grewby 14.2% to 438.5 cents and the total dividendwas increased by 15.7% to 272.0 cents per share.The groupdeliveredatotalshareholderreturnof35.3%,based on the dividend payout and the growth in the share price over the year. Over the past three years the group has delivered a compound annual growth rate in totalshareholderreturnof32.7%perannum.

ThegrouphaspaidcashdistributionsofR3.2 billiontoshareholderssince2006,with the totalcash returnedtoshareholdersamountingtoR6.7 billionoverthepast10 years.

Thegroup’smedium-termfinancial targets rank in theupper quartile relative to comparable global health and beauty retailers such as Walgreens (USA), CVS(USA),RaiaDrogasil(Brazil),RiteAid(USA)andCelesio(Germany).Theretail,distributionandgroupoperatingmargintargetswereachievedin2016whilethegroupismarginallybelow themedium-term targeted rangeson inventory management, return on assets (ROA)andreturnonequity(ROE),whichremainsamongthehighestintheretailsectorat49.2%.

FInanCIal perForManCeThe review of the group’s financial performance forthe year ended 31 August 2016 focuses on the keyline items of the statements of comprehensive income and financial position which management considersmaterial to the group’s performance.

The following review should be considered together with theannualfinancialstatementsavailableonthewebsite,the summary statements of comprehensive income and financialpositionandthefive-yearanalysisoffinancialperformanceonpages30and33 respectively.

Statement of comprehensive incomeTurnoverGroup turnover increased by 9.5% to R24.2 billion(2015: R22.1 billion), with selling price inflation beingcontainedto4.9%fortheyear.

Turnover was consistent for both halves. There is generally minimal seasonal effect on the group’s turnover asthefestiveseasoninthefirsthalfofthefinancialyeariscounter-balancedbythewinterseason,whichisthepeak trading period for the healthcare business.

Retailturnover,includingClicks,TheBodyShop,GNC,Claire’sandMusica,increasedby12.8%.Retailsellingpriceinflationaveraged4.3%fortheyear.Comparablestore sales growth of 9.8% was driven by strongpromotional activity which resulted in real volume growthof5.5%.Theopeningofanet32retailstores,including25Clicksoutlets,accounted for3%of retailturnover growth.

Distribution turnover grew by 6.1%, impacted by thelower regulated single exit price (SEP) increase of4.8%in2016comparedto7.5%in2015,theongoinggenericisation of medicines and the slower growth of the pharmaceutical market.

ThetradingperformanceofClicksandUPDiscoveredintheoperationalreviewonpages34to43.

Total incomeThe investment in everyday competitive pricing,supportedbyeffectivepromotionalactivity,contributedtotheretail total incomemargindecliningby30basispointsto33.7%.

UPDmaintaineditstotalincomemarginat7.8%.

Owing to the faster growth in the retail business the group’s total income margin improved by 30 basispointsto26.3%,withtotalincomeincreasingby11.0%toR6.4billion.

AverageROEoftheotherfoodanddrugretailersClicksGroupROE

31.6%

59.9%

2012

26.9%

55.6%

2013

28.8%

57.0%

2014

30.2%

53.7%

2015

32.9%

49.2%

2016

return on equIty (roe)

Operating marginTurnover (R’million)

15 437

6.6%

2012

17 543

6.3%

2013

19 150

6.4%

2014

22 070

6.3%

2015

24 171

6.5%

2016

turnoVer and MargIn

total SHareHolder return Three-year CAGR

32.7%

29.6%

2014

35.8%

2015

35.3%

2016

Cash inflow from operations before working capital

changes increased to R1.85 billion.

2928


ChIEf fINANCIAl OffICEr’S rEpOrT (CONTINuEd)

Operating expenditureThegroup’soperatingexpensesincreasedby10.5%.

Retail operating expenditure as a percentage of turnover improved to 25.8% from 26.2%. Expense growth of11.2%reflectstheinvestmentinnewstores,the additionof39pharmaciesandthefocusonenhancingcustomerservice in stores. The 13.1% increase in employmentcostsincludesthechargeforthebroad-basedemployeeshareownershipschemewhichincreasedtoR65million(2015:R52million) for theyear.Comparable retailcostgrowthwascontainedat6.4%.

UPDdemonstratedexcellent cost control in adifficultmarket and restricted expense growth to 7.4%.Expensesforthesecondhalfgrewbyonly2.5%afterthebusiness invested inonce-offsecurityupgrades inthefirsthalf.

Operating profitOperating profit increased by 12.6% to R1.6 billion(2015: R1.4 billion) as both retail and distributionbusinesses maintained margin in the challenging trading conditions.Thestrongergrowthoftheretailbusiness,whichaccountsfor83%ofgroupprofit,resultedinthegroupmarginexpandingby20basispointsto6.5%.

Statement of financial positionThe ratio of shareholders’ interest to total assets was 29.3% (2015: 26.6%) and the average gearing levelduringtheyearwas23.9%.

Theratioofcurrentassetstocurrentliabilitiesatyear-endwasconsistentat1.1 times(2015:1.1 times),indicatingthat working capital remains adequately funded.

The group continues to hedge direct exposures to foreign exchange rate fluctuations which impactbetween8%and9%of thecostofsales in the retailbusiness. This ongoing hedging strategy was particularly effectiveduringthefirstninemonthsofthefinancialyeargiventhesignificantdevaluationoftherandagainstallmajor currencies during 2016. The ongoing volatilityof the rand continues to be challenging to forecast. In addition,thegrouphedgedelementsofthelong-termincentiveschemefor the2016–2018period.Furtherdetail on the respective hedges and risk management is containedinnote16intheannualfinancialstatementson the group’s website.

InventoryGroup inventory days improved from 68 to 66 dayswhichwasoutsidethemedium-termtargetedrangeof55to60days.Overallgroupinventorieswere7%higherthan the prior year.

Retail inventory levelswere 15.5%higher at year-endas the business focused on maximising availability,particularly in the current constrained environment wherespendingpeakssharplyovermonth-ends.Clickshasalsoincreaseditsinventoryholdingofhigher-marginprivatelabelandexclusivebrandedproduct.UPDstocklevelsnormalisedat40days,downfivedaysfromtheprior year.

Trade and other receivablesTrade receivables continued to be well controlled at 43 days,relatingprimarilytotheUPDbusiness.1 847

Operating profitbefore

working capital

(19)

Workingcapital

movements

(39)

Netfinancecosts

(444)

Taxation

(433)

Capex

(586)

Dividends

(290)

Sharebuy-backs

(67)

Other financing

and investing activities

CaSH FloW analySIS R’million

SuMMary StateMent oF CoMpreHenSIVe InCoMe

R’million 2016% of

turnover 2015% of

turnover%

change

Turnover 24 171 22070 9.5

Retail 16 640 68.8 14758 66.9 12.8

Distribution 11 055 31.2 10415 33.1 6.1

Intragroup (3 524) (3103) 13.6

Total income 6 368 26.3 5735 26.0 11.0

Operating expenses (4 796) 19.8 (4339) 19.7 10.5

Retail (4 298) (3867) 11.2

Distribution (591) (550) 7.4

Intragroup 93 78

Operatingprofit 1 572 6.5 1396 6.3 12.6

Retail 1 306 7.8 1151 7.8 13.5

Distribution 276 2.5 258 2.5 6.7

Intragroup (10) (13)

Lossondisposalofproperty,plantandequipment (6) (9)

Netfinancingcosts (53) (57) (7.8)

Shareofprofitofanassociate 2 –

Income tax (421) (375) 12.3

Profitfortheyear 1 094 955 14.6

SuMMary StateMent oF FInanCIal poSItIon

R’million 2016 2015%

change

Non-current assets 2 507 2009 24.8

Property,plantandequipment 1 345 1222 10.1

Othernon-currentassets 1 162 787 47.6

Current assets 5 870 5547 5.8

Inventories 3 479 3250 7.0

Trade and other receivables 2 013 1871 7.6

Other current assets 378 426 (11.0)

Total assets 8 377 7556 10.9

Equity 2 452 2013 21.8

Non-currentliabilities 406 308 31.5

Currentliabilities 5 519 5235 5.4

Trade and other payables 5 148 4898 5.1

Other current liabilities 371 337 10.2

Total equity and liabilities 8 377 7556 10.9

3130


ChIEf fINANCIAl OffICEr’S rEpOrT (CONTINuEd)

Cash and capital managementCash inflow from operations before working capitalchanges increased by R147 million to R1.85 billion.Working capital was well managed during the yearresulting in a net cash outflow of R19.5 million forthe year.

The group’s capital management strategy is focused on investing in the organic growth of the business and returning surplus funds to shareholders through dividendsandsharebuy-backs:

• Capital expenditure of R266 million was investedin opening 41 new retail stores and refurbishing48 stores;R141millioninITandretailinfrastructure;and R26 million in UPD for warehousing andinfrastructure.

• The group returned R876 million to shareholdersthrough dividend payments of R586 million andsharebuy-backsofR290million.

Over the past ten years the group has acquired R3.5 billioninsharesatanaveragepriceofR23.86.

dIVIdendSThe total dividend for the financial year wasincreased by 15.7% to 272 cents per share(2015:235 cents),basedonthedividendpayoutratioof59%ofHEPS.Thiscomprisestheinterimdividendof76cents (2015: 65.5 cents)andafinaldividendof196cents(2015:169.5 cents).Adividendof27.2centsper “A”share (2015:23.5cents)wasdeclaredforparticipantsintheemployee share ownership programme.

MedIuM-terM FInanCIal targetS Financialtargetsaredisclosedonpage1toprovideguidancetoshareholdersonthegroup’smedium-termperformanceexpectations.Themedium-termtargetsfor2017to2019havebeenreviewedbasedontheperformance for2016and the outlook for the next three years.

The board and management have reviewed and revised thefollowingtargets:

PerformancemetricRevised

targetPrevious

targetOperatingmargin:Retail(%) 7.5–8.5 7.0–8.0Inventory days 60–65 55–60

The change in the retail operating margin and inventory daystargetsreflectthegrowingportfolioofprivatelabeland exclusive brands which will enhance margin but require investment in inventory to support growth.

ThetargetsforROE,ROAandoperatingmargin(groupand distribution) are unchanged.

FInanCIal planS For 2017Capital expenditureofR577million isplanned for the2017financialyear:

• R343 million for 37 new stores across all retailbrands, 30 to 35 new pharmacies, and 74 storerefurbishments. Provision has also been madefor capital expenditure to rebrand the Medicross pharmacies and Netcare hospital front shopssubject to Competition Tribunal approval of thetransaction;

• R187millionforITsystemsandretailinfrastructure;and

• R47millionforUPDwarehousingandinfrastructure.

Total retail trading space is expected to increase by approximately 5%.

The group remains committed to returning cash to shareholders which is surplus to the group’s operational and capital investment requirements through dividends andsharebuy-backs.

appreCIatIonThank you to our shareholders both locally and internationally as well as the broader investment community for their ongoing interest and engagement with the group. My thanks are also due to the dedicated finance staff across the group for their support inconstantly striving to achieve best reporting standards.

Michael FlemingChieffinancialofficer

The group returned R876 million to

shareholders through dividend payments and

share buy-backs

FIVe-year perForManCe reVIeW

5-yearcompound growth (%) 2016 2015 2014

2013Restated*

2012Restated*

Statements of comprehensive incomeTurnover (Rm) 11.3 24 171 22070 19150 17543 15437Operating expenses (Rm) 9.8 (4 796) (4339) (3954) (3590) (3262)Operatingprofit (Rm) 10.9 1 572 1396 1218 1104 1012Profitbeforetax (Rm) 11.0 1 515 1330 1207 1050 958Headline earnings (Rm) 10.9 1 099 960 838 756 693

Statements of financial positionNon-currentassets (Rm) 12.1 2 507 2009 1772 1602 1505Trade and other receivables (Rm) 15.0 2 013 1871 1608 1508 1172Inventories (Rm) 14.1 3 479 3250 2614 2225 2080Other current assets (Rm) (17.6) 8 25 3 18 9Cashandcashequivalents (Rm) 83.1 370 401 195 92 7Total assets (Rm) 14.5 8 377 7556 6192 5445 4773

Total equity (Rm) 20.5 2 452 2013 1567 1377 1349Non-currentliabilities (Rm) 8.9 406 308 286 252 286Currentliabilities (Rm) 15.8 5 519 5235 4339 3472 2923Callborrowings (Rm) (100.0) – – – 344 215Total equity and liabilities (Rm) 14.5 8 377 7556 6192 5445 4773

Statements of cash flowsCashinflowfromoperatingactivities before dividends paid (Rm) 14.7 1 345 1290 1464 1008 759Dividendspaid (Rm) 14.6 586 491 429 394 337Capitalexpenditure (Rm) 14.9 433 370 337 310 256

Returns and margin performance5-year

averageTotal income margin (%) 26.8 26.3 26.0 27.0 26.8 27.7Operating margin (%) 6.4 6.5 6.3 6.4 6.3 6.6Return on assets (%) 14.5 13.8 14.0 14.4 14.8 15.3Return on shareholders’ interest (%) 55.1 49.2 53.7 57.0 55.5 59.9Inventory days 64 66 68 64 59 63Assetturnover (times) 3.1 2.9 2.9 3.1 3.2 3.2Return on net assets (%) 83.0 93.5 96.7 85.2 69.7 69.7Shareholders’interesttototalassets (%) 26.9 29.3 26.6 25.3 25.3 28.2Netdebttoequity (%) (2.8) (15.1) (19.9) (12.5) 18.3 15.4

Share performance

5-year compound growth (%)

Headline earnings per share –basic (cents per share) 13.1 462.4 399.2 341.7 302.0 273.5Headline earnings per share –diluted (cents per share) 11.9 438.5 383.9 336.8 298.3 273.4Cashequivalentearnings (cents per share) 14.4 576.5 527.2 433.7 386.2 362.9Netassetvalue (cents per share) 22.1 1 037 839 647 558 533 Dividendsdeclared (cents per share) 16.8 272.0 235.0 190.0 168.0 152.0Dividendcover (times) 1.7 1.7 1.8 1.8 1.8Weightedaveragenumberof shares in issue (net of treasury shares) (’000) 237 565 240603 245364 250297 253154Weightedaveragedilutednumber of shares in issue (net of treasury shares) (’000) 250 501 250204 248892 253434 253258Sharesrepurchased (Rm) 290 176 285 354 12Sharesrepurchased (’000) 3 360 2376 4620 6187 217

* 2013and2012resultshavebeenrestatedduetotheadoptionofIAS19(Revised)–EmployeeBenefitsandIFRS10–ConsolidatedFinancialStatements.

Acomprehensivefive-yearreviewisavailableonthewebsiteatwww.clicksgroup.co.za.

fortheyearended31August

3332


OpErATIONAl rEVIEW

27.0%front shop sales

from private label

19.6%retail pharmacy

market share

Clicks delivered another resilient trading performanceintheweakconsumereconomy,gainingmarketsharein allkeyproductcategories.Salesincreasedby13.5%driven mainly by volume growth through effective value promotions and price competitiveness.

The chain was rated as the country’s leading health and beauty retailer for the seventh consecutive year in The TimesSowetanRetailAwards2016,deliveringon its strategy of being the customers’ first choicehealthandbeautyretailer.Refertopage 8fordetailontheClicksstrategyandbusinessmodel.

Clicks has continued to demonstrate its commitmenttocustomerservice,developingmanagementpotentialand building capacity for the pharmacy profession. This includedcreating1200new jobstoenhanceservice,introducing a future store manager training programme aswellasinvestinginbursariesforpharmacystudents,providing pharmacy internships and training pharmacy assistants. Refer to the chief executive’s report on page 25fordetailontheseinitiatives.

Health and beauty sales*

% increase

% contribution

to total sales

Pharmacy 14.2 27.3

Frontshophealth 14.9 23.1

Beauty and personal care 13.3 33.1

Generalmerchandise 10.8 16.5

Total turnover 13.5 100.0

* IncludesClicks,TheBodyShop,GNCandClaire’s.

Retail pharmacy market share increased to 19.6%(2015:18.7%)aspharmacysalesgrewby14.2%.

Genericmedicines continued to grow faster asmorepatients are being switched to these lower priced alternatives, with sales increasing by 18.6% andaccountingfor47.7%(2015:45.4%)ofpharmacysales.Over-the-counter medicines, which do not require aprescription,grewby18.1%.

Frontshophealthshowedstrongsalesgrowthof14.9%.Allofthekeysub-categoriesperformedwell,includingmedicines which grew by 13.1%, supplements by10.6%andfirstaidanddiagnosticsby15.4%.

Baby merchandise continues to be the fastest growing category inClicks,withsales increasingby19.7%andmarketsharegrowingto12.1%.

Growth of 13.3% in beauty and personal care isattributabletoeffectivepromotions,productinnovationand wider ranges in more stores. The skincare sub-category showed the strongest growth at 18.1%while fragrance benefited from extended ranges andincreasedsalesby16.5%.Haircaresalesgrewby7.5%afterrelativelymutedgrowthinrecentyears,withethnichaircareup13.7%.

Generalmerchandisegrewsalesby10.8%.Inthecoreproductcategories,confectionerysalesgrewby10.9%andelectricalby12.0%,withthemarketshareofsmallhouseholdappliancesincreasingto20.0%.

CoMpetItIVe and dIFFerentIated oFFerPrivate labelandexclusivebrands increasetheappeal of the Clicks brand, offer differentiatedranges at competitive prices and are also margin enhancing. Sales of private label productsincreased to 21.0% (2015: 19.8%) of totalsales inClicks,with frontshopsalesat27.0%(2015: 25.7%).

Thebest-sellingrangesofthegroup’sexclusivehealthandbeautyfranchisebrands,TheBodyShop,GNCandClaire’s,furtherdifferentiatetheClicksoffer.The BodyShophasapresencein88Clicksstores,GNCin261 storesandClaire’sin123Clicksstores.ClicksisalsotheexclusiveretailstockistoftheSorbetproductrangeandthis partnership was strengthened during the yearwhenClicksGroupacquireda25%stakeinSorbet Brands(for furtherdetail refer tothechiefexecutive’sreportonpage24).

CuStoMer loyalty and reWardSClicksClubCardhasbeenpartofthechain’sDNAsinceits launch two decades ago. Following the successfulrelaunchofClubCardin2015theloyaltyprogrammehasattractedoveronemillionnewmembers,bringing totalmembership to 6.2 million. The relaunch has enabledcashback rewards to be loaded directly onto customers’ cards to increase convenience and modernise the programme,withoverR300millionreturnedtocustomersincashbackbenefitsinthepastyear.

ClubCardmembersaccountedfor77%ofsalesinClicksand the average basket value of ClubCardmembersremainsdoublethatofnon-ClubCardmembers.

110

2006

157

2008

251

2010

306

2012

339

2014

400

2016

groWtH In pHarMaCIeSClicks ClubCard attracted over one million new members in 2016, bringing total active membership to 6.2 million customers.

private label and exclusive brands

increase the appeal of the Clicks brand, offer differentiated ranges at competitive prices and are also margin

enhancing.

3534


OpErATIONAl rEVIEW: ClICKS (CONTINuEd)

Plans and targets for 2016 Achieved in 2016 Plans and targets for 2017

Developing a competitive and differentiated front shop product offer

Increase front shop private label and exclusivebrandsalesto26%

Expandpresenceoffranchisebrands inClicks

Frontshopprivatelabelandexclusive sales27.0%(2015: 25.7%) oftotalsales

FranchisebrandsinClicksstores• TheBodyShop:88stores

(2015: 86)• GNC:261stores(2015:257)• Claire’s:123stores(2015:1)

Increase front shop private label and exclusivebrandsalesto28.0%

ExpandpresenceoffranchisebrandsinClicks• TheBodyShop:103stores• GNC:300stores• Claire’s:150stores

Creating a great customer experience in pharmacies

Expandprivatelabelscheduledgeneric medicines range

Growrepeatprescriptionserviceto 40%ofrepeatscripts

Expandclinicservicesandopen23 newclinics

100privatelabelmedicines(2015: 76)

41.2%ofscriptsnowonrepeatprescription service

Net38clinicsopened195clinicsatyear-end

Expandprivatelabelscheduledgeneric medicines range by 32 products

Growrepeatprescriptionserviceto50%ofrepeatscripts

Expandclinicservicesandopen10 newclinics

Growing the retail footprint

Open20to25newClicksstores

50storestobeexpanded/refurbished

Open25to35newpharmacies

Net25storesopened(2015:22)

511storesatyear-end(2015:486)45storesexpanded/refurbished(2015:38)

Net39pharmaciesopened(2015: 22)400pharmaciesatyear-end(2015: 361)

Open20to25newClicksstores

60storestobeexpanded/refurbished

Open30to35newpharmacies

Driving customer loyalty through ClubCard

Increase membership to 5.5 million

GrowBabyClubto250 000 members

GrowSeniorsClubto 650 000 members

6.2millionmembers(2015: 5.0 million)

311000BabyClubmembers

752000SeniorsClubmembers

Increase membership to6.5million

GrowBabyClubto 400 000 members

GrowSeniorsClubto 800 000 members

Maintaining a motivated and skilled work force

200pharmacyassistantstobe enrolled

100pharmacybursarystudents

50internships

283pharmacyassistantsenrolled


83pharmacyinternships

300pharmacyassistantsto be enrolled


90internships

pErfOrmANCE AgAINST OBJECTIVES IN 2016 ANd plANS fOr 2017StoreS, pHarMaCIeS and onlIneClickscontinuestoexpanditsstorefootprinttoincreasecustomer convenience. A net 25 new stores wereopenedtoincreasethebrand’sfootprintto511atyear-end.This includes26stores inneighbouringNamibia,Swaziland,BotswanaandLesotho.Afurther45storesacross the chain were extended or refurbished to ensure the stores are modern and appealing to customers.

Market share (%) 2016 2015Health

Retail pharmacy* 19.6 18.7Frontshophealth** 29.3 29.2Baby** 12.1 11.2

Beauty and personal careSkincare** 27.5 26.8Haircare** 25.7 25.4

GeneralmerchandiseSmallhouseholdappliances*** 20.0 19.2

* IMS.** ACNielsen(comparativesrestated).*** GfK(comparativerestated).

Clicksisthelargestretailpharmacychainwith400in-store pharmacies, with a net 39 opened in the pastyear.Primarycareclinicsinpharmaciesareanintegralpart of the healthcare offering to customers and a driver of pharmacy foot traffic. The number of clinics wasincreasedby38to195.

Clicks launched its online store late in the financialyear, enabling customers to buy 15 000 products at www.clicks.co.za, with a “click and collect” facility inall stores in South Africa. The online store increasescustomer convenience and in the near term is expected togeneratesalessimilartoasmallClicks store.

outlooK For 2017Clicks will continue to focus on offering good valuethrough appealing promotions and differentiated product ranges.

Private label together with exclusive and franchisebrandsare targeted tocontribute25%ofsales in themedium term. The presence of all three franchise brands willbeexpandedtoadditionalClicksstoresintheyearahead. The private label generic medicine range will be extendedbyafurther32products.

ClubCard membership is targeted to increase to6.5 million.

Clicks will sustain store growth by opening 20 to25 new stores in 2017, with the ultimate goal ofreaching800 ClicksstoresinSouth Africa.Afurther30to35 newpharmacieswill beopened,while thegoalremains to incorporate a pharmacy into every Clicksstore.Afurther10clinicswillbeopened.

Vikesh RamsunderChiefoperatingofficer

400in-store

pharmacies

Clicks launched its online store, enabling

customers to buy 15 000 products at

www.clicks.co.za

3736


OpErATIONAl rEVIEW: ClICKS (CONTINuEd)

ClICKS EXECuTIVE mANAgEmENT

Vikesh Ramsunder (45)

Chief operating officer

Joinedthegroupin1993

PreviouslymanagingdirectorofUPDandpriortothatwasheadoflogisticsatClicks

Extensiveretail,distributionandlogistics experience

Gordon Traill (45)

Head of finance


Previouslyheadofgroupfinanceand head of internal audit

PriortothisheldvariousfinancialpositionswithAllianceBootsintheUK

Sedick Arendse (46)

Head of stores


PreviouslychiefsalesandoperationsofficeratNashua

Extensiveexperienceinretailoperations,supplychain,branddevelopment and management consulting

Alex Anson-Esparza (46)

Head of merchandise and marketing


PreviouslyEuropeancommercialdirector for a leading global travel retail operator

Extensiveinternationalretailexperience,includingTescoStoresintheUK

Jacques de Kock (46)

Head of supply chain


FormerlygroupheadofITandbeforethatworkedfortheIkanoGroupinEurope

Over15years’internationalretailandFMCGexperienceinlargesupplychainand IT organisations

Rachel Wrigglesworth (51)

Head of healthcare


PreviouslycommercialheadatUPD

Pharmaceuticalmanufacturing,hospitals,pharmacy and commercial healthcare experience

Nandipha Ngumbela (41)

Head of human resources


PreviouslyHRdirectoratChevronSA

Experienceinhumanresourcesmanagement,employeerelations,organisationdevelopment,transformation and talent management

Chris Tugman (48)

Group head of information technology


PreviouslyITdirectoratMassbuild,adivision of Massmart

ExperiencedinITsystemsimplementations and management in retailandFMCG

3938


OpErATIONAl rEVIEW

UPDproducedacreditableperformanceinatoughyearandgrewreportedturnoverby6.1%inapharmaceuticalmarket which has shown minimal volume growth.

Theregulatedsingleexitprice(SEP)medicineincreaseof4.8%in2016waslowerthanthepreviousyear’s7.5%.

UPDcontinues to faceongoingmarginpressure fromthefastergrowth in lowerpricedgenerics,whichnowaccountfor48.2%(2015:45.7%)ofmedicines.

Despite thesemultiple challengesUPDmaintained itsoperating margin at 2.5% by driving efficiencies andthrough good cost management.

Total managed turnover, combining fine wholesalingturnover with the turnover managed on behalf of bulk distributionagencyclients,wasconstantatR15.2 billionas there was no net increase in distribution business.

UPDmaintains itsmarket-leadingpositions inboth thepharmaceutical wholesale and bulk distribution markets.

Fine wholesale turnover

% change

% contribution

Clicks 13.5 44.9

Hospitals 4.2 31.8

Independent pharmacy (9.4) 16.4

Other channels (6.4) 6.9

Finewholesaleturnover 4.6 100.0

Finewholesaleturnovergrewby4.6%.ClicksremainsUPD’s largest single customer, with sales to Clickspharmacies increasing by 13.5% and accounting for44.9%offinewholesaleturnover.

TheproposedSEPincreasefor2017at5.7%ishigherthanthelevelfor2016,withthefirst instalmentofthisincreaseof2.9%grantedinOctober2016.

The increasing penetration of generics is expected to continuetoplacepressureonthemarginandasUPDhasahigh fixedcostbase thebusiness isconstantlyfocusedon improvingefficiencies.UPD’s independentpharmacy business is also likely to remain under pressure.

CapitalexpenditureofR47millionhasbeencommittedfor warehousing and infrastructure, including theexpansionof theCapeTowndistribution facilitywhichis expected tobecompletedby theendof the2017financialyear.

The business will tender for new agency distribution contracts as it is currently only utilising approximately 70%ofitswarehousecapacity.

InthecurrentenvironmentUPDwillfocusonbecomingmoreefficientandmaintainingitshighlevelsofserviceto distribution agency clients. This will enable the businesstomakeprogresstowardsachievingitslong-term strategic objective of growing market share in both finewholesaleandbulkdistributionto30%.

Vikash SinghManaging director

Sales to the private hospital groups, including LifeHealthcare,MediclinicandNetcare,grewby4.2%andcontributed31.8%ofturnover.

UPD services approximately 1 200 independentpharmacies and sales to this channel contracted by 9.4%butstillaccountfor16.4%ofturnover.

The new distribution centre in Port Elizabeth wascompletedshortlyafteryear-endatacostofR27 million.UPD owns its five distribution centres located inGauteng(LeaGlen),CapeTown,Durban,BloemfonteinandPortElizabeth.

Product availability, which is core to offering superiorrangeandservicetocustomers,was96.5%andUPDmaintainedon-timedeliveriesat98.5%.

Through its distribution business UPD offers localand international, generic and originator pharmamanufacturers an efficient and cost-effective supplychain solution.

outlooK For 2017In the year ahead UPD aims to increase wholesalemarket share through the growth of the Clickspharmacychannel,benefitingfromtheplannedopeningof30to35newpharmaciesinClicks.Atthesametimemanagement plans to increase Clicks’ buying levelsfromUPDto98.5%fromthecurrent98.3%.UPDisalsoaimingtomaintainvolumesfromtheprivatehospitals,its other core customer group.

despite multiple challenges UPD maintained its operating margin at 2.5% by driving efficiencies and through good cost management.

r15.2bntotal managed

turnover

24.1%market share

98.5%on-time

deliveries

4140


pErfOrmANCE AgAINST OBJECTIVES IN 2016 ANd plANS fOr 2017

Plans and targets for 2016 Achieved in 2016 Plans and targets for 2017

Growing private wholesale pharmaceutical market share to 30%

Increasemarketshareto26%

Maintain volume of business with private hospital groups

IncreaseClicks’buyinglevelsfrom UPDto98%

Marketshare24.1%

Salestohospitalgroupsincreased4.2%withvolumesgrowingat2.2%

Clicks’buyinglevelsfromUPDat 98.3%

Increasemarketshareto24.5%

Maintain volume of business with private hospital groups

IncreaseClicks’buyinglevelsfromUPDto98.5%

Growing pharmaceutical distribution market share to 30%

Tender for additional agency distribution contracts

Nonewmajoragencydistributioncontracts secured

Tender for new agency distribution contracts

Ensuring effective pharmaceutical quality management

Maintain licences

Continuousimprovementinqualitystandards and implement electronic quality management system

Licencesmaintained

Electronicqualitymanagementsystem implemented

Maintain licences

Extendcoldchaincapabilities

Driving operational excellence and cost reduction

Maintainon-timedeliveriesof98%

Reduce labour and transport costs

98.5%on-timedeliveries

Labourandtransportcostsbelowinflationat3.1%and5.0%growthrespectively

Target98.5%on-timedeliveries

Reduce labour and transport costs

Maintaining a motivated and skilled work force

Maintainemployeeturnoverat14% Employeeturnover13.2%(2015: 14%)

Targetemployeeturnoverof14%

Compliancetrainingforallemployees Trained1600employees,includingcasual labour

Compliancetrainingforallemployees,includingadministrative staff

Improve quality of talent and succession process

Recruited eight middle managers for executive learnership programme

Implement pharmacy assistants learnerships

Recruit graduates for operations and supply chain management

OpErATIONAl rEVIEW: upd (CONTINuEd)

upd EXECuTIVE mANAgEmENT

Vikash Singh (43)

Managing director


PreviouslyheadofoperationsanddistributionatUPD,andpriortothatwasnationalfinanceandriskmanagerforlogisticsatClicks

Financeandlogisticsexperience

Sanjeeth Baliraj (44)

Head of finance and procurement


PreviouslyCFOandCIOforImperialCarRental/Europcar

FinanceandcommercialexperienceinmultinationalFMCGproduction and logistics

Robert Magnus (47)

Sales and marketing executive


PreviouslynationalsalesmanageratAdcockIngramHealthcare

Healthcare sales experience across both the private and public sectors

JC Preller (41)

Distribution executive


PreviouslynationalsalesmanageratRAMHand-to-HandCouriers

Supplychainandlogisticsexperience across multiple industries with strong commercial and operation background

Chris Nursey (52)

Head of information technology


Previouslyseniormanager(technologyconsulting)at Accenture

Experienceinapplicationdevelopmentand the implementation of large IT solutionsintheFMCG,bankingandresources industries

Julie Hulme (45)Business process executive


Formerlyqualityassurancedirector(EMEAregion)forKimberlyClarkCorporation

ExperienceinFMCG,engineeringandmanufacturing

Palesa Seakamela (37)

Quality compliance manager


Previouslyqualityandregulatoryaffairsmanagerat Afrox

Experienceinqualityandregulatorycompliance in pharmaceutical manufacturing and distribution

Leon Steyn (44)

General manager – Coastal


PreviouslybranchmanageratUPDCape Town

Warehouseanddistribution experience

Selven Naicker (42)

General manager – Inland


PreviouslydistributioncentremanagerforUTI Pharma

Inventory and logistics experience

4342


David Nurek (66)Independent non-executive chairmanDip Law, Grad Dip Company LawAppointed1997ChairmanofthesocialandethicscommitteeMember of the remuneration and nominations committeeDirectorships:Non-executivechairmanofDistellGroup,LewisGroupandTrencorExpertiseandexperience:Legal,commercialandgovernance

Prof. Fatima Abrahams (54)Independent non-executive directorB Econ (Hons) (cum laude), M Com and D ComAppointed2008ChairpersonoftheremunerationandnominationscommitteeMember of the social and ethics committeeDirectorships:IliadAfrica,LewisGroup,TheFoschiniGroupandMarsh.ChairpersonofTSiBAEducation.Expertiseandexperience:Humanresourcesandremuneration

John Bester (70)Independent non-executive directorB Com (Hons), CA (SA), CMS (Oxon)Appointed2008ChairpersonoftheauditandriskcommitteeMember of the remuneration and nominations committeeDirectorships:Non-executivechairmanofAscendisHealthandnon-executivedirectorofHomeChoiceHoldings,PersonalTrustInternational,SovereignFoodInvestments,TowerPropertyFundandWesternProvinceRugby.TrusteeoftheChildren’sHospitalTrust.Expertiseandexperience:Accountingandfinance

Bertina Engelbrecht (53)Group human resources directorB Proc, LL M, admitted attorneyAppointedasadirectorin2008Member of the social and ethics committeeExpertiseandexperience:Humanresources.FormerlygeneralmanagerofShellSAEnergy.

Michael Fleming (49)Chief financial officerB Com, CTA, CA (SA)Appointedasadirectorin2011Expertiseandexperience:Accounting,financeandinvestorrelationsmanagement.FormerlychieffinancialofficerofTigerBrandsandnon-executivedirectorofOceana Group.

Fatima Jakoet (56)Independent non-executive directorB Sc, CTA, CA (SA), Higher certificate in financial marketsAppointed2008Member of the audit and risk committeeDirectorships:MMIHoldings,TongaatHulett,RandRefinery,AfriSamandvariousMTNsubsidiariesExpertiseandexperience:Accountingandfinance

David Kneale (62)Chief executive officerBAAppointedasadirectorin2006Member of the social and ethics committeeExpertiseandexperience:Retailandcommercial.FormerlychiefcommercialofficerofBootsplc.

Dr Nkaki Matlala (63)Independent non-executive directorB Sc, M Sc, M D, M Med (Surgery), FCSAppointed2010Member of the audit and risk committee and the social and ethics committeeDirectorships:HospitalAssociationofSouthAfricaandchairmanofPhodisoHoldings.TrusteeoftheUniversityofLimpopoTrust.Expertiseandexperience:Medicalandhealthcare

Martin Rosen (66)Independent non-executive directorAppointed2006Member of the remuneration and nominations committeeExpertiseandexperience:Retailandmarketing

BOArd Of dIrECTOrS

David Nurek Prof. Fatima Abrahams John Bester

Michael Fleming Fatima Jakoet

David Kneale Dr Nkaki Matlala Martin Rosen

board CoMpoSItIon and dIVerSIty

Male 67%Female 33%

Executive 33%Independent non-executive 67%

Black 44%White 56%

Bertina Engelbrecht

4544

Clicks Group IntegratedAnnualReport2016

CrEATINg VAluE ThrOugh gOOd gOVErNANCEapproaCH to goVernanCe The directors recognise that good governance can createshareholdervaluebyenhancinglong-termequityperformance. While the board is unwavering in itsadherencewith legislation, regulationsandcodes, thegroup’s commitment to good governance goes beyond compliance.

The directors believe that governance can contribute to valuecreationthrough:

• agreaterdegreeofintegratedreportingonfinancialandnon-financialmeasures;

• improved quality of management reporting tothe board;

• improvedreportingtoshareholders;

• enhancedaccountabilitytoshareholders;

• greatertransparencyanddisclosure;

• equitable performance management and rewardstructures;

• effectiveleadershipanddecision-making;

• moreeffectiveriskmanagementandmitigation;and

• avoidingsanctionorpenaltiesfornon-compliance.

The group’s robust governance and compliance frameworkisbasedontheprinciplesofaccountability,transparency,ethicalmanagementandfairness,andaphilosophy of sound governance is entrenched across the business.

This abridged governance report is supplemented by the group’s corporate governance report on the website which provides detailed disclosures on the functioning of the board and its committees, risk management,corporate accountability and compliance.

role oF tHe boardThe directors are accountable for the sustainability of the business and are responsible to the shareholders of the company who elect them. The role of the board includes approving strategic plans, monitoringoperational performance, ensuring effective riskmanagement and internal controls, and monitoringlegislative, regulatory and governance compliance.The board is also required to approve significantaccountingpoliciesandtheannualfinancialstatements,monitor transformation and empowerment, managedirector selection and appointment, and ensure thegroup has effective remuneration policies and practices. Certain of these functions are delegated to boardcommittees. The board charter details the authority,responsibility,compositionandfunctioningoftheboard.

Key ISSueS addreSSed In 2016The board continued to operate within its mandate and conducted its affairs as outlined in the board charter. In additiontheboardaddressedthefollowingissues:

• evaluatedandapproved the long-termagreementwith Netcare to outsource its Medicross retailpharmacies and Netcare hospital front shopoperationstoClicks;

• approved the Clicks Group’s acquisition of a25% stake in the newly created Sorbet Brands,a company which holds the trademarks to the Sorbetbrandinsouthern Africa;

• reviewedthetalentandsuccessionplanforseniormanagement;

• approvedthecapitalexpenditurefortheexpansionoftheClicksdistributioncentreinCenturion;and

• evaluatedthepotentialimpactofthecomplementaryand alternative medicines (CAMS) regulations onthe group.

board CoMpoSItIon Theboardconsistsofninedirectors,withthreesalariedexecutivedirectorsandsixindependentnon-executivedirectors.

Director StatusYear appointed

DavidNurek Independentnon-executive director

1997

FatimaAbrahams Independentnon-executive director

2008

JohnBester Independentnon-executive director

2008

BertinaEngelbrecht Executivedirector 2008

MichaelFleming Executivedirector 2011

FatimaJakoet Independentnon-executive director

2008

DavidKneale Executivedirector 2006

NkakiMatlala Independentnon-executive director

2010

Martin Rosen Independentnon-executive director

2006

Theexecutivedirectorshaveanaverageof7.6years’serviceontheboardandthenon-executivedirectorsanaverageof9.8years.

Brief credentials on the directors and their expertise and experience are included on pages 44 and 45 ofthis report.

IndependenCe oF dIreCtorSAll six non-executive directors are classified as beingindependentintermsofKinglll.Thiswasconfirmedinthe2016 internal evaluationof the statusof the non-executive directors which included an assessment of thechairman,DavidNurek,whohasservedasanon-executivedirectorfor19years.

There are no shareholder interests represented on the board,furtherconfirmingtheindependenceoftheboard.

board dIVerSIty Thediversityofthedirectorsintermsofgender,raceandtheir professional backgrounds encourages constructive debate and ensures that the board considers the needs of a wide range of stakeholder interests.

dIreCtor eleCtIon Regular election of directors ensures that shareholders are able to exercise their right to appoint directors theybelievewill add value to thecompany.One-thirdof the non-executive directors are required to retireat the AGM each year. Executive directors retire onthethird-yearanniversaryoftheirappointmentormostrecentre-electiontotheboard.

annual perForManCe eValuatIonGood governance is maintained through the annualevaluation undertaken by the directors of the performance of the board, the chairman, the chiefexecutive officer, individual directors and all boardcommittees.

The 2016 evaluation indicated that the board and itscommittees have discharged their responsibilities adequately. The directors believe the board contributes tovaluecreationinthecompany,iswellbalancedandhas the relevant knowledge to make a meaningful contribution to the group’s affairs.

board and exeCutIVe relatIonSHIp The roles of the chairman and chief executive are separate and clearly defined, ensuring that nodirector has unrestricted decision-making powers.The chairman, David Nurek, leads the board andthe chief executive, David Kneale, is responsible forthe executive management of the group.

The board and executive management team work closely in determining the strategic objectives of the group.Authority hasbeendelegatedby theboard tothe chief executive and the group executive committee for the implementation of the strategy and the ongoing management of the business.

goVernanCe StruCture

Shareholders Regulators

Board of Directors

GroupExecutiveCommittee

Remuneration andNominations

Committee

SocialandEthicsCommittee

External Audit

Internal Audit

AuditandRiskCommittee

4746


board and CoMMIttee MeetIng attendanCe

BoardAudit

and risk

Remuneration and

nominationsSocial

and ethics

Number of meetings 4 4 3 2

DavidNurek 4+ 3^ 2+

FatimaAbrahams 4 3^^+ 2

JohnBester 4 4+ 3

BertinaEngelbrecht 4 2

MichaelFleming 4

FatimaJakoet 4 4

DavidKneale 4 2

NkakiMatlala 4 4

Martin Rosen 3 2 2

Meeting attendance 2016 (%) 97 100 92 100

Meetingattendance2015(%) 95 92 100 90

+ Chair.^ Chairsnominationsagendaitems.^^ Chairsremunerationagendaitems.

board oVerSIgHtSpecialised governance functions are delegated tothree committees to assist the board in meeting its oversight responsibilities. All board committees arechaired by independent non-executive directors andthe composition of the committees conforms to the requirementsofKing lll.Detaileddisclosureonthe rolesand functioning of the committees is included in the corporate governance report on the website.

KIng III applICatIonThe group voluntarily applies the principles of the King CodeofGovernancePrinciples2009(KingIII)andtheboard remains satisfiedwith themanner inwhichthe group has applied the recommendations of the code. Governance processes are regularly reviewedto align with legislative and regulatory changes and to reflect changes in the business to ensure processesremain relevant.

etHICS and ValueSThe group strives to achieve the highest ethical standards of business practice. A set of values anda behavioural code of conduct require staff to display integrity, mutual respect and openness, and affordsthem the right and obligation to challenge others who are not adhering to these values. Policies have beenimplemented which require all employees to adhere to ethical business practices in their relationships with colleagues,suppliers,intermediaries,shareholdersand

investors. These policies also set stringent standards relating to the acceptance of gifts from third parties and declarationsofpotentialconflictsofinterests.

antI-CoMpetItIVe ConduCtClicksGroupdoesnotengage inpracticesthatcouldlimit competition or that could adversely impact on customers. Robust risk management and supervisory oversight processes are in place to ensure adherence to competition law and regulations. The group occupies a market-leading position in healthcare retailing andsupply in South Africa and guards the confidentialityof intellectual property, customer and supplier data,business processes and methodologies. Effectivegovernance processes have ensured that the group hasnotbeensanctionedforanti-competitivepracticesorfornon-compliancewiththeCompetitionActduringthe year.

goVernanCe FoCuS areaS In 2017The governance landscape in South Africa will befurther enhancedwith the introduction of the King IVCode of Corporate Principles which will be effectivefrom 2017. There have been significant corporategovernanceandregulatorydevelopments,both locallyand internationally, since the introduction of King IIIin 2009 which are being incorporated into the newcode. The directors welcome governance codes which facilitate value creation without adding burdensome compliance requirements on companies.

CrEATINg VAluE ThrOugh gOOd gOVErNANCE (CONTINuEd)

The directors welcome governance codes

which facilitate value creation without adding burdensome compliance

requirements on companies.

4948


CrEATINg VAluE ThrOugh gOOd CITIzENShIp

broadenIng aCCeSS to HealtHCare InVeStIng In our peopleClicks group supports the national healthcare agenda of making medicine more affordable and accessible for all South Africans. Being the largest employer of pharmacy staff in the private sector in the country, the group is actively building capacity through training and financial support to address the critical shortage of pharmacists.

Attracting and retaining talent is critical to the continued success of the business. The group is committed to the ongoing investment in its people through training and development, competitive remuneration and incentive schemes, career path planning, creating a stimulating working environment, transformation and empowerment.

partnerSHIpS294 Clicks stores pickup points for State patients on chronic medication

Partnering with Western Cape and Northern Cape Departments of Health to provide baby immunisation and family planning services

r4.1 million committed to Public Health Enhancement Fund over the past four years to improve public healthcare, address skills shortages and advance research

eMployMent equIty and dIVerSItyClicks Group is committed to creating a diverse workforce by attracting and developing previously disadvantaged people, women and employees with disabilities. buIldIng CapaCIty

r18.2 million invested in bursaries for pharmacy students since 2012

83 pharmacy internships provided in 2016

283 pharmacy assistants enrolled in 2016

eMployee SHare oWnerSHIp planIntroduced in 2011 to enable employees to share in the long-term growth and success of the business, the broad-based employee share ownership plan (ESOP) is also a mechanism to attract and retain scarce talent while accelerating transformation. The scheme vests in 2018 and 2019.

2 535 pharmacy and

clinic professionals across Clicks

14 093 employees across

retail stores, distribution centres

and head office

204 million units of medicine delivered by upd

400 Clicks pharmacies across South africa to broaden access to healthcare

4 935 employees trained in 2016

1 200 net new jobs created in 2016

31.1 million prescriptions filled for customers in 2016

195 clinics in Clicks pharmacies provide primary care health services

r57.8 million invested in training and development in 2016

520 000 clinic services provided in 2016

91% of permanent employees are black

62% of permanent employees are female

160 employees with disabilities

44% black directors

33% female directors

50% black members of the group executive committee

6 814 employees now shareholders

87% black employee shareholders

64% female employee shareholders

r21.4 million paid in dividends to participants in the scheme since 2012

5150


CrEATINg VAluE ThrOugh gOOd CITIzENShIp (CONTINuEd)

InVeStIng In our CoMMunIty CreatIng StaKeHolder ValueClicks group continues to demonstrate its commitment to making a sustainable contribution to the communities in which it trades. This is achieved through both enterprise development, by accelerating the sustainability and financial independence of black enterprises, as well as social investment through financial and product donations to non-profit organisations and initiatives.

management considers the legitimate needs, expectations and concerns of stakeholders that influence the group’s ability to create sustainable value. The group’s primary stakeholders are shareholders, customers, suppliers, government and industry regulators, and employees.

r876m returned to

shareholders through dividends and share

buy-backs

level 3 BBBEE rating in 2016

under previous codes of good practice.

rated level 6 under new codes

r444 million paid to government in taxes

r21.3 billion paid to suppliers

r15.1m invested in socio-economic development projects aligned to the group’s focus on health and well-being

r7.3m invested in enterprise development programmes

r309 million cash back to customers through ClubCard loyalty programme

ClICKS HelpIng HandS truStThe Clicks Helping Hand Trust benefits the lives of ordinary South Africans by offering free preventative testing and wellness services through the footprint of over 190 Clicks clinics countrywide. Since the establishment of the Trust in 2011 over 120 000 lives have been positively impacted.

upd oWner-drIVer SCHeMeUPD contracts small enterprise owner-drivers to deliver products from UPD to Clicks, independent pharmacies, hospitals and clinics.

tHe applIanCe banKThe Appliance Bank (TAB) equips unemployed men with technical skills to repair donated damaged household appliances and the business skills to buy and on-sell the repaired electrical appliances. TAB currently only operates in Cape Town and is an off-shoot of the highly successful social entrepreneurship programme, The Clothing Bank.

Mom and baby wellness and family services have reached over 55 000 families

HIV testing provided to over 18 000 South africans through a campaign to encourage individuals to know their HIV status

Heart disease testing for more than 15 000 people to encourage healthier lifestyle choices

Diabetes testing and education for over 15 000 people on the prevention and early detection of the disease

Girls on the Go campaign to provide reusable and washable sanitary pads to 5 000 schoolgirls

55 owner-drivers contracted to deliver products for upd

r37 million paid to the driver scheme in 2016

r417 million paid since the start of the scheme in 2003

Clicks donates all returned domestic electrical appliances to tab

r2.7bn paid to employees

for services and talent

17 men recruited into the pilot programme and trading exceptionally well

5352


rEWArdINg VAluE CrEATION

The group’s remuneration policy is based on the total rewardsstrategyand integrates thefivekeyelementsthat attract, motivate and retain human capital toachievethedesiredbusinessresults,namely:

• compensation;

• benefits;

• performanceandrecognition;

• learninganddevelopment;and

• work-lifebalance.

The reward principles of market competitiveness,internal equity, equitable treatment and pay forperformance are entrenched in the policy.

The policy is transparent with a pay framework that clearly differentiates between occupational levels of work and pay grades that facilitate remuneration benchmarking for each job within a skill pool.

The remuneration mix includes a combination of monetary and non-monetary rewards provided toemployeesinexchangefortheirtime,efforts,talentandperformanceatanindividual,teamandcompanylevel.

Monetaryrewardsincludeannualguaranteedpay,variablepaysuchasshortandlong-termincentivesthatrelatetoperformancetoagreedtargets,aswellasotherbenefits.

Non-monetary rewards are less tangible and rangefrom formal and informal recognition programmes,training and job rotation opportunities and exposure to stimulatingworkassignments,allofwhicharedesignedtomotivate,affiliateandretainemployees.

Employees receive a total reward statement annuallywhich provides a personalised comprehensive view of all their rewards.

Pay levels are set with reference to benchmarkednational and retail market data; premiums are paid for scarceandcriticalskillssuchaspharmacy,buyingandplanning, finance and IT skills based on suchmarketdata; and are reviewed annually to ensure the group remains competitive in the employment market.

Annualsalaryincreasesaremeritbased,withincreasesbeing directly related to the employee’s annual performance rating. The range of increase percentages per performance rating is applied consistently across the group,includingtotheexecutivedirectors.The annualincrease for an employee in the bargaining unit is based on a collective bargaining process (refer to the section onmanagementandstaffonpage57).

ClicksGroup’sremunerationpolicyisaimedatdrivingahigh-performanceculturethatcreatessustainablevalue for shareholders.

Theremunerationpolicy,whichisoutlinedinpart 1ofthisreport,willagainbeproposedtoshareholdersforanon-bindingvoteattheannualgeneralmeeting(AGM)inJanuary 2017.Theapplicationoftheremunerationpolicyin2016,andhowthegrouphasrewardedvaluecreation,iscoveredinpart2ofthis report.

ThereportfocusesprimarilyontheremunerationoftheClicksGroupexecutiveandnon-executivedirectors,withtheremunerationpaidtodirectorsforthe2016financialyeardetailedonpages61to63.

Clicks Group values the views and insights of investors, and encourages shareholders to proactivelyengage with management on remuneration issues to enable informed decisions to be made when voting on the group’s remuneration policy.

PART 1: reMuneratIon polICy

5554


rEWArdINg VAluE CrEATION (CONTINuEd)

reMuneratIon StruCtureThetotalrewardsframeworkprovidesflexibilitytomeetthe differing needs of employees.

Annual guaranteed pay is determined by consideringthefollowingfactors:

• thesizeofthejob,basedontheHayjobevaluationmethodology;

• thenatureof the job relative to itsdefinedmarketposition,includinganymarketpremiumsforscarceand critical skills;

• individual performance as assessed during thebiannual performance review process; and

A significant portion of short-term and long-termremuneration is variable and designed to incentivise executive directors.

Short-term incentive schemeAbonusof40%(60%inthecaseofthechiefexecutiveofficer) of annual guaranteed pay is paid on theachievement of an on-target performance with theperformance hurdles of at least 95% of the targetedgroupRONAandoperatingprofit.

Performance exceeding the targeted performance mayresultinthepaymentofahigherbonus.Thisis,however,self-fundedandonlypaidifthegroupexceedsthetargetedoperatingprofit.Theschemealsoprovides forastretchperformance incentive to drive extraordinary performance. The stretch performance hurdle is met when the targeted groupRONAisachievedandthetargetedoperatingprofithas been exceeded by at least 5%.

Bonus payments are capped at 120% of annualguaranteedremunerationforthechiefexecutiveofficerandat80%fortheotherexecutivedirectors.

The achievement of targets is reviewed by the committee before any incentive payments are made to executive directors and is also subject to review by the group’s external auditor.

long-term incentive schemesExecutivedirectorsparticipateinthecash-settledlong-termincentiveschemeswhicharedetailedonpages 58and59.

ManageMent and StaFFSeniormanagers receiveanannualguaranteedsalaryand participate in the short-term incentive bonusscheme. Salaries may include premiums for scarceandcriticalskills.Alimitednumberofseniormanagersparticipate in the long-term incentive scheme, basedon strategic contribution to their business unit and their individual performance levels.

An annual performance-based salary increase ispaid to all permanent monthly non-bargaining unitemployees.Theannual increasedate is1Septemberwhich is aligned with the group’s financial year andbudgeting period.

Collective salary increases are negotiated with therepresentative trade union for the Clicks bargainingunit. The negotiation team is headed by the Clickshuman resources executive. Trade union membership comprises 18% of the total group employees

(2015: 28%).Theemployeesinthebargainingunitalsoparticipateinthegroup’sshort-termincentiveschemes.

All store employees’ compensation complieswith thesectoral determination or statutory requirements in all countries in which the group operates and the minimum rates of pay as determined for the retail industry are either met or exceeded.

eMployee SHare oWnerSHIp prograMMe The employee share ownership programme (ESOP)was implemented in2011toattractandretainscarceand critical skills, accelerate transformation, buildemployee commitment and enable employees to share in thegrowthandsuccessof thebusiness.Executivedirectors and senior employees participating in the group’sLTIschemesdidnotparticipateintheESOP.

Entry to the schemeclosed in2015and the schemevestsin2018and2019.

ThroughtheESOPscheme10%ofthegroup’sissuedshares (after the issue of “A” shares equating to29.2 million“A”shares)wereplacedinasharetrustforallocation to all full-time permanent staff. Employeeswith more than five years’ service, pharmacists andsenior employees from designated employment equity groups received a 15% enhancement of their shareallocation.

Shares are held by 6 814 employees, with blackstaff holding 87% and women 64% of the shares.Pharmacistscomprise5%oftheESOPbeneficiaries.Participating employees receive a cash dividendannually, equal to 10% of the total dividend paid toordinary shareholders each year.

group retentIon SCHeMeSThe group retention schemes are aimed at retaining talented employees by providing them with a long-term financial incentive which isaligned with shareholders’ interests.

Theschemestargethigh-potentialemployees,black staff and employees with scarce and critical skills. There are currently 35 employees participatinginthescheme,ofwhich26%areblackand49%arewomen.

• individualpositioninthepaybandrangerelativetocompetence and talent positioning.

The remuneration and nominations committee (the committee) reviews the group’s overall pay frameworkannuallyagainstdefinedmarketbenchmarksperjobgrade,jobsizeorskillpool.

The group’s benchmarking and market information is based on independent surveys, including thePricewaterhouseCoopers REMchannel, Deloitte TopExecutiveandTheHayGroupsurveys.Thegroupalsoparticipates in a bi-annual benchmarking exercise tomaintain a competitive remuneration position in respect of pharmacists and pharmacy managers.

exeCutIVe dIreCtorS’ reMuneratIonTheremunerationofexecutivedirectorsconsistsofthreecomponents:

Guaranteed remuneration Variable and performance-related remuneration

Annualguaranteedpay,comprisingbasesalary,retirementandotherbenefits;allowsforflexibleretirement fund contributions

Annualshort-termcash-basedincentive bonus

Long-termincentiveschemes

Performance measurementAnnualindividualperformance review

Averagemonthlyreturn onnetassets(RONA)

Operatingprofit

Dilutedheadlineearningspersharegrowth over a three year period subject to performance hurdles

Total shareholder return growth overathree-yearperiodsubjecttoperformance hurdles

guaranteed remunerationBase salaries are set according to an annual benchmarking exercise of the executive roles in similar-sized market capitalisation companies on theJSE using data in the Deloitte Top Executive survey.This benchmarking exercise recognises the complexity in the group’s business model and the regulatory environment within which the group operates.

The annual performance review of all employees focuses on both financial and non-financial levers across thefollowingmetrics:

• Financialperformance• Business process improvement metrics, including

transformationtargets,wherethiscanbeinfluencedby the employee.

• Customersatisfaction• Learningandgrowth

All employees are required to achieve a satisfactoryperformance rating to fully qualify for participation in the short-termincentivescheme.

The performance of the chief executive officer isassessed by the chairman and the board, whilethe performance of the other executive directors is evaluated by the chief executive officer and reviewedby the committee.

The annual pay increase of the executive directors is directly related to individual performance ratings and aligned to the annual increase ranges per performance rating as determined by the committee and applied consistently across the group.

The sustainability of the group’s business is critical in determiningremunerationandtheboardissatisfiedthatthe performance targets do not encourage increased risk-takingbytheexecutives.

5756


InCentIVe SCHeMeSShort-termandlong-termincentivesareanintegralpartof the total rewards framework and aim to align employee performance with the interests of shareholders.

Short-term incentive schemesAll permanent employees in the group participate inthe short-term incentive schemes which reward theachievement of performance targets of the business.

RONA-based short-term incentive scheme Performance for the group’s RONA-based short-termincentivescheme ismeasuredat thegroup,businessunit and team level against agreed targets. Althoughthe scheme rewards team performance, individualperformance as measured through the group’s annual performance appraisal process may limit the value of the payment should an employee not meet individual performance targets.

Performanceexceedingthetargetedperformancemayresultinthepaymentofahigherbonus,providedthisisfundedbyanincreaseintheoperatingprofit.Bonusesfor management and staff are capped at two times the valueofanon-targetbonus.

Retail store incentive schemeThe retail store incentive scheme rewards staff in retail stores for outperforming quarterly store sales targets.

long-term incentive schemesLong-termincentive(LTI)schemesareaimedataligningexecutive remuneration with shareholder interests by rewarding executives for the creation of shareholder valueoverthemediumterm.Participation inthe long-term incentive schemes is limited to senior executives.

TheLTIschemesareregularlyreviewedandenhancedto align with evolving best practice locally and internationally, based on engagement with majorshareholders.

The schemes are cash settled and based on share appreciation units. As there are no shares issued interms of the LTI schemes, there is no share dilution.Awardsaremadeannually,witheachschemehavingathree-yearperformanceperiod.

2013 to 2016 ltI scheme Appreciation units are allocated to participants in thescheme based on a multiple of the annual guaranteed pay. The base value for each appreciation unit is calculated at the date of allocation by multiplying the group’s reported diluted headline earnings per share (HEPS)byaninternalpriceearningsratioof12.

Anexercisevalueisdeterminedattheendofthethree-yearperiodbymultiplyingthepublisheddilutedHEPSfortheyearbythefactorof12.

The difference between the exercise value and the base value is the amount paid out in cash.

Participantsarerequiredtoapply25%oftheafter-taxcashsettlementvaluetopurchaseClicksGroupsharesin the open market and to retain these shares for a minimum of one year.

Followingengagementwithshareholderstofurtheralignexecutive and shareholder interests, the LTI schemewas enhanced by implementing performance hurdles. Theseperformancehurdlesareasfollows:

Diluted headline earnings per share

Performancehurdle

Range(basedonthree-yearCAGRindilutedHEPS)

PercentageofLTIpayout

Weak 0%ornegativegrowth 0%

Below target Upto7.9%growth 70%

On target 8%to14.9%growth 100%

Abovetarget 15%to19.9%growth 150%

Exceptional Above20%growth 200%

2014 to 2017, 2015 to 2018 and 2016 to 2019 schemesTheLTIschemesalignexecutiveandlong-terminvestorinterests by including both an earnings performance metric as well as exposing participants to market volatility.

The value of appreciation units granted is apportioned equallybetweentwoperformancecomponents:

(1) diluted HEPS, as applied in the 2013 to 2016scheme above; and

(2) totalshareholderreturn(TSR).

Thefinancialincentivereceivedbytheparticipantsisthegainearnedontheappreciationunitsoverathree-yearperiod.TheTSRunitsarealsosubjecttothefollowingperformancehurdles:

Total shareholder return

Performancehurdle(basedonthree-yearCAGRinTSR) PercentageofLTIpayout

Below10% Unitallocationforfeited

Above15% Unitallocationincreasedby50%

Above20% Unitallocationincreasedby100%

TSR is defined as “the overall return to shareholderswhichisequaltothe20-dayvolumeweightedaverageprice (VWAP) appreciation of a Clicks Group Limited

share plus dividend payments reinvested over the three-year performance period divided by the VWAPofaClicksGroupLimitedshareatthecommencementof the three-yearperformanceperiod,expressedasapercentage”.

Refertothechieffinancialofficer’sreportonpage 28 for detailonthegroup’sTSRCAGRperformanceof32.7%per annum over the past three years.

The remuneration multiple used to determine the number of appreciation units granted is unchanged from previous schemes.

Acaphasbeenintroducedtolimitthevaluepayableattheendofthethree-yearperformanceperiodtonomorethanfivetimestheannualguaranteedpayofparticipantsin the scheme. TheClicksGroup has implemented aprogramme to hedge against the economic risk linked to the share price based on the anticipated payout of theTSRportionofthelong-termincentive.

The requirement for scheme participants to purchase shares with the proceeds does not apply to this scheme as theTSRportionof the LTI is already correlated tothe Clicks Group share price plus dividends paid toshareholdersoverathree-yearperiod.

Currently 14 (2015: 14) executives participate in theschemes. The appreciation units allocated to executive directors under the three schemes is detailed in the table below. The relevant amounts have been expensed through the statement of comprehensive income.

2014 – 2017 scheme 2015 – 2018 scheme 2016 – 2019 scheme

HEPSunitsallocated atR40.42

per unit

TSRunitsallocated atR66.34

per unit


per unit

TSRunitsallocated atR93.82

per unit


per unit

TSRunitsallocated

atR126.03 per unit

BertinaEngelbrecht 145967 88936 143484 70454 136830 57129

MichaelFleming 221178 134760 207736 102004 198404 82837

DavidKneale 597476 364034 571438 280590 547320 228517

Short-term and long-term incentives are an integral part of the total rewards framework and aim to align employee performance with the interests of

shareholders.


5958


exeCutIVe SerVICe CondItIonSThe chief executive officer is subject to a 12-monthnoticeperiodandtheotherexecutivedirectorstoasix-month period. The retirement age for the chief executive is65whiletheotherexecutivedirectorsretireattheageof63.Noneoftheexecutivedirectorsareappointedonfixed-termcontracts.

non-exeCutIVe dIreCtorSThe fee structure is aligned to the King lllremuneration guidelines that non-executivedirectors receive a base fee for serving on the board or any committee, together withan attendance fee per meeting. The base fee comprisesapproximately75%ofthetotalfee.The chairman of the board or any committee receives ahigher fee.Directors’ feesarepaidfor a calendar year.

The group’s policy is to pay non-executivedirector fees in a range of 80% to 120% ofthe median of a comparator group of eight JSE-listed retail companies. The fee structurefor non-executive directors is benchmarkedannually.

In line with best governance practice, non-executive directors do not participate in incentive schemes and none of the non-executive directors have service contracts with the group.

reMuneratIon goVernanCe The committee is responsible for overseeing all elements ofremuneration,includingtheremunerationphilosophyand policy, and the implementation of the policy.The committee operates under the authority delegated by the board and ensures the group has a competitive remuneration policy and governance framework which is aligned with the group’s strategic and organisational performance objectives.

As recommended by King III, the committeecomprises only independent non-executive directors.The committeeischairedbyProfessorFatima Abrahamsand includes John Bester, David Nurek andMartin Rosen.The chief executiveofficerandthegrouphuman resources director attend committee meetings by invitation to provide input on remuneration issues and are recused from discussions that relate to their own performanceappraisal and remuneration.Detail on thecommitteemeetingattendanceisincludedonpage48.

Anexternalrewardsspecialistisretainedtoadvisethecommittee on remuneration trends and benchmarking of both executive and non-executive remuneration.The members of the committee have independent access to the adviser and may request professional advice on any remuneration issue.

Theprimaryresponsibilitiesofthecommitteeinclude:

• ensuringtheremunerationpolicy isalignedtoandpromotes the achievement of the group’s strategic objectives and encourages individual performance;

• ensuring thatannualguaranteedpay,scarceskillspremiums,benefitsandincentives,areappropriatelybenchmarked to ensure the group is competitive in the employment market;

• ensuring all benefits, including retirement benefitsandotherfinancialarrangements,are justifiedandcorrectly valued;

• reviewingandapprovingtheperformanceevaluationofthechiefexecutiveofficerandexecutivedirectorsagainst agreed deliverables;

• reviewing incentive schemes to ensure alignmentto shareholder value creation and that the schemes are administered in terms of the rules; and

• reviewing the remuneration of non-executivedirectors and recommending adjustments to the feesattheAGM.

annual salary increaseTheaverageperformance-linkedincreaseeffectivefrom1 September 2016is6.6%(2015:5.6%).Anannualsalaryincreaseof7.7%wasgrantedtoallstaffinthebargainingunitinSouthAfrica.

Short-term incentive schemesRONA-basedshort-term incentive scheme:Thegroup,Clicks,UPDandgroupservicesexceeded theshort-termtargets and R94.3million will be paid in accordance with the scheme rules (2015: R77.5 million). This includesincentivespaidintermsoftheretailstoreincentiveschemewhereR25.5million(2015:R9.8 million)waspaidtoretailstorestaffforthe2016year.

employee share ownership schemeAdividendofR6.3 million(2015:R4.9 million)waspaidtoschemeparticipantsin2016.

group retention schemesDuringthefinancialyearR10.9 million(2015:R5.5 million)waspaidouttoparticipantsintheschemes.

long-term incentive schemeThegroupachieveda three-year13.7%per annumCAGR indilutedHEPS for the year ended31August2016.This represented an on-target achievement and the remuneration committee approved the long-term incentivepaymentofR64.7million(2015:R53.0million)toschemeparticipants.

dIreCtorS’ reMuneratIonexecutive directors’ remuneration

Director(R’000) Salary

Pensionfund

Other benefits

Total annual

guaranteed package

RONAshort-

term incentive

Performance based

long-term incentive**

Total variable

pay Total

2016

BertinaEngelbrecht 2833 472 – 3 305 1368 5155 6 523 9 828

MichaelFleming 4140 587 57 4 784 1981 7826 9 807 14 591

DavidKneale 7807 966 2 8 775 5449 20876 26 325 35 100

Total 14780 2025 59 16 864 8798 33857 42 655 59 519

2015

BertinaEngelbrecht 2579 371 – 2950 1239 4041 5280 8230

MichaelFleming 3819 594 57 4470 1877 6304 8181 12651

DavidKneale 7037 1011 2 8050 5072 16668 21740 29790

KeithWarburton* 1425 190 27 1642 n/a n/a n/a 1642

Total 14860 2166 86 17112 8188 27013 35201 52313

* Resignedasanexecutivedirectoron28January2015,withremunerationdiscloseduntilthisdate.** Paymentsrelatingtotheperformancefortheyearended31AugustarepaidinNovember.Theexpenseisprovidedforoverthe

three-yearvestingperiodintherelevantfinancialyear.

PART 2: reWardIng Value CreatIon In 2016


6160


non-exeCutIVe dIreCtorS’ FeeSThe fee structure for non-executive directors is benchmarked annually against a retail comparator group ofThe Foschini Group,MrPriceGroup,PicknPayStores,ShopriteHoldings,TheSparGroup,TruworthsInternational,MassmartHoldingsandWoolworthsHoldings.

Followingthe2016benchmarkingsurveytheproposedfeesfornon-executivedirectorsfor2017havebeenrevisedtobringtheboardandcommitteememberswithinthegroup’spolicyrangeof80%to120%ofthecomparatormedian.

Theproposed total fees for non-executive directors for the 2017 calendar year represents an increase of 13.2%overthepreviousyear.Thefeesforthe2017calendaryeararesubjecttoapprovalbyshareholdersattheAGMinJanuary 2017.

2017* 2016*

Board position

Proposed base fee

R

Proposed meeting fee

R

Proposed total fee

RBase fee

RMeeting fee

RTotal fee

R

Board chairman** 825 000 275 000 1 100 000 727500 242500 970000

Board member 210 000 70 000 280 000 180000 60000 240000

Chair:Auditandriskcommittee 195 000 65 000 260 000 177375 59125 236500

Member:Auditandriskcommittee 108 750 36 250 145 000 97500 32500 130000

Chair:Remunerationandnominations committee 82 500 27 500 110 000 75000 25000 100000

Member:Remunerationandnominations committee 46 500 15 500 62 000 45000 15000 60000

Chair:Socialandethicscommittee n/a n/a n/a n/a n/a n/a

Member:Socialandethicscommittee 45 000 15 000 60 000 45000 15000 60000

* Feesrelatetothecalendaryear.** Feesfortheboardchairmanareinclusiveofallcommitteememberships.

non-executive directors’ remuneration

Director(R’000)

2016Directors’

fees

2015Directors’

fees

DavidNurek 950 878

FatimaAbrahams1 409 368

JohnBester 521 476

FatimaJakoet 359 326

NkakiMatlala 417 376

Martin Rosen 270 260

Total 2 926 2684

1 IncludesR21740(2015:R19800)forperformingtheroleofchairpersonofTheClicksGroupEmployeeShareOwnershipTrust.

total directors’ remunerationR’000 2016 2015

Executivedirectors(includingthelong-termincentivescheme) 59 519 52313

Non-executivedirectors 2 926 2684

Total directors’ remuneration 62 445 54997

directors’ shareholdings at 31 august2016 Beneficial shares 2015Beneficialshares

Director Direct Indirect Total Direct Indirect Total

DavidNurek – 100 000 100 000 – 200000 200000

JohnBester 12 000 10 000 22 000 12000 10000 22000

BertinaEngelbrecht 98 755 – 98 755 91701 – 91701

MichaelFleming 20 837 – 20 837 24833 – 24833

DavidKneale 259 802 – 259 802 309256 – 309256

Martin Rosen – 2 000 2 000 – 2000 2000

Total 391 394 112 000 503 394 437790 212000 649790

The total numberofordinary shares in issue is246137763and thepercentageof issuedsharecapital heldbydirectorsis0.20%(2015:0.26%).DetailsofdealingsinClicksGroupsharesbydirectorsduringthefinancialyeararecontainedinthedirectors’reportintheannualfinancialstatementsonthewebsite.


6362


ShArEhOldEr ANAlySISat31August2016

Public and non-public shareholdersNumber of

sharesPercentage

of shares

Publicshareholders 236 020 474 95.9Non-publicshareholdersSharesheldbydirectors 503 394 0.2TreasurystockheldbyNewClicksSouthAfricaProprietaryLimited 9 443 445 3.8TheNewClicksHoldingsShareTrust 170 450 0.1

Totalnon-publicshareholders 10 117 289 4.1Total shareholders 246 137 763 100.0

Accordingtothecompany’sregisterofshareholders,readinconjunctionwiththecompany’sregisterofdisclosureofbeneficialinterestsmadebyregisteredshareholdersactinginanomineecapacity,thefollowingshareholdersheld3%ormoreoftheissuedsharecapitalat31August2016:

Major beneficial shareholders holding 3% or more

2016Percentage

of shares

2015Percentage

of shares

GovernmentEmployeesPensionFund 15.6 17.8GICPrivateLimited 4.4 3.5FidelityInternationalGrowthFund 3.2 4.0MawerInternationalEquityPooledFund 3.0 2.7

Major fund managers managing 3% or more

2016Percentage

of shares

2015Percentage

of shares

PublicInvestmentCorporation(SA) 14.5 15.2BaillieGifford&Co(UK) 5.3 4.4FidelityManagement&Research(US) 5.0 7.4MawerInvestmentManagement(CA) 4.7 3.8GIC(Singapore) 4.3 3.4WasatchAdvisors(US) 3.7 2.3AberdeenAssetManagement(UK) 3.6 3.2Fund managers no longer managing over 3%:CoronationFundManagers(SA) 1.2 6.5MFSInvestmentManagement(US) 2.4 3.5

geograpHIC dIStrIbutIon oF SHareHolderS

South Africa and rest of Africa 31.4%

USA and Canada 45.9%

United Kingdom, Ireland and Channel Islands 8.8%

Europe 6.6%

Other countries 7.3%

2016

ShArEhOldErS’ dIAry

COrpOrATE INfOrmATION

annual general meeting 26January2017

preliminary results announcements

InterimresultstoFebruary2017 onorabout21April2017

FinalresultstoAugust2017 onorabout26October2017

publication of 2017 Integrated annual report November2017

ordinary share dividend

2016 final dividend

Lastdaytotradewithdividendincluded 24January2017

Dateofdividendpayment 30January2017

2017 interim dividend

Lastdaytotradewithdividendincluded July2017

Dateofdividendpayment July2017

2017 final dividend

Lastdaytotradewithdividendincluded January2018

Dateofdividendpayment January2018

Clicks group limitedIncorporatedintheRepublicofSouthAfricaRegistrationnumber1996/000645/06Incometaxnumber9061/745/71/8

JSEsharecode:CLSISIN:ZAE000134854ADRtickersymbol:CLCGYADRCUSIPcode:18682W205

registered addressCnrSearleandPontacStreetsCapeTown8001Telephone:+27(0)214601911

postal addressPOBox5142CapeTown8000

Company secretaryMatthewWelz,LLBE-mail:[email protected]

auditorsErnst&YoungInc.(EY)

principal bankersTheStandardBankofSouthAfrica

JSe sponsorInvestecBankLimited

transfer secretariesComputershareInvestorServicesProprietaryLimitedBusinessaddress:70MarshallStreet,Johannesburg2001Postaladdress:POBox61051,Marshalltown2107Telephone:+27(0)113705000

Investor relations consultantsTier1InvestorRelationsTelephone:+27(0)217023102E-mail:[email protected]

Formoreinformation,pleasevisitourwebsiteonwww.clicksgroup.co.za

6564


Documents

Integrated annual report 2016 - Clicks Group Limited · Clicks group Integrated annual report 2016. ... 1 200 1 500 10-year SHare prICe perForManCe ... where Clicks is the country’s