Directors' report for the year ended 23 December 2012

Directors’ responsibilities

The Directors acknowledge responsibility for the preparation of the annual financial statements which, in their opinion, fairly present the results and cash flows for the 26 weeks ended 23 December 2012 and the state of affairs of Massmart Holdings Limited and its subsidiaries at the end of the period. The external auditors are responsible for reporting on the fair presentation of these financial statements.

The Company and its subsidiaries have maintained adequate accounting records and an effective system of internal controls to ensure the integrity of the underlying information. Appropriate accounting policies, supported by sound and prudent managerial judgments and estimates, have been consistently applied.

The Audit and Risk Committee of the Board reviews the financial information presented and ensures that there has been adherence to International Financial Reporting Standards. Internal and External Auditors of Group companies have unrestricted access to the Committee.

Group financial results

The financial results of the Group are set out in the income statement, statement of comprehensive income, the statement of cash flows and the statement of changes in equity. The financial position of the Group is set out in the statement of financial position.

Dividend

In light of the new South African Dividend Tax introduced with effect from 1 April 2012 (“Dividend Tax”), Massmart has adjusted the Company’s dividend policy, which is now to declare and pay an interim and final cash dividend representing a 1.55 times dividend cover unless circumstances dictate otherwise (the policy was 1.7 times dividend cover prior to the introduction of the Dividend Tax). For the 26 weeks ended 23 December 2012, the Board has resolved to maintain the absolute value of the final cash dividend in the prior financial year, adjusted for the change in the Dividend Tax Legislation, notwithstanding the resultant lower dividend cover, due to the strong liquidity position of the Group and its growth prospects. The Group’s final cash dividend has been adjusted to reflect the benefit to the Company of no longer paying the Secondary Tax on Companies (“STC”) on the net dividend.

With regard to the final distribution to shareholders, the Directors resolved to distribute to shareholders registered in the books of the Company on 22 March 2013, a final cash dividend of 275 cents (December 2011: 252 cents).

Shares in issue

Please find the movement in ordinary and preference shares for the period under review below:

Ordinary shares    
Closing balance June 2011   213,883,460
Converted preference shares*   2,241,001
Closing balance June 2012   216,124,461
Converted preference shares*   785,734
Closing balance December 2012   216,910,195
* The preference shares relate to Massmart’s Thuthukani Empowerment Trust and Black Scarce Skills Trust    
Preference shares    
Closing balance June 2011   15,488,410
Converted to ordinary shares   (2,241,001)
Closing balance June 2012   13,247,409
Converted to ordinary shares   (785,734)
Closing balance December 2012   12,461,675

On 1 October 2012, the final conversion of ‘A’ preference shares to ordinary shares through the Thuthukani Trust occurred. The participating employees had the option of converting their remaining share allocation into Massmart ordinary shares and continue to receive 100% of the dividend on their ordinary shares or they could sell their remaining share allocation and receive net proceeds after tax and selling expenses.

Directorate and secretary

The current directorate of the Company is shown here. In line with the Walmart International regional reporting structure that was implemented post the Massmart-Walmart merger, Doug McMillon, who is the Chief Executive Officer and President of Walmart International Operations, resigned from the Massmart board of directors with effect from 20 August 2012. Doug was appointed to the Massmart board upon completion of the Massmart-Walmart transaction on 20 June 2011.

David Cheesewright, who is the Chief Executive Officer and President of Walmart’s Europe Middle East Africa (EMEA) region into which Massmart reports, has been appointed in Doug’s stead with effect from 20 August 2012. David was previously appointed as an alternate director on the Massmart board on 23 November 2011.

The Board now comprises ten directors of whom seven are non-executive and four are independent. In addition, each Board committee is chaired by an independent director.

The Company Secretary provides a central source of guidance and advice to the Board, and within the Company, on matters of ethics and good governance.

The Company Secretary is Philip Sigsworth, CA(SA), whose business and postal addresses are the same as that of the Company. Philip was appointed on 7 May 2012.

In accordance with the provisions of the Company’s Articles of Association, Messrs. MJ Lamberti, G Pattison and JP Suarez, and Ms. P Langeni will retire at the annual general meeting. Being eligible, they all offer themselves for re-election.

Interests of Directors in the Company’s shares

At 23 December 2012, Directors owned ordinary shares in the Company, or options over ordinary shares in the Company, directly or indirectly, aggregated as to beneficial and non-beneficial ownership, as follows:

  December 2012   June 2012
  Shares   Options   Shares   Options
  Beneficial   Non- beneficial   Beneficial   Non- beneficial   Beneficial   Non- beneficial   Beneficial   Non- beneficial
Non-executive directors                              
MJ Lamberti              
CS Seabrooke              
D Cheesewright              
JA Davis              
NN Gwagwa 9,800         9,800      
P Langeni 9,800         9,800      
CD McMillon         2,400      
JP Suarez              
Executive directors                              
GM Pattison 696,473     205,603     696,473     254,603  
GRC Hayward 222,894     270,529     394,394     270,529  
I Zwarenstein     182,659         202,659  

At the date of this report, the Directors’ holdings were as follows:

  December 2012   June 2012
  Shares   Options   Shares   Options
  Beneficial   Non- beneficial   Beneficial   Non- beneficial   Beneficial   Non- beneficial   Beneficial   Non- beneficial
Non-executive directors                              
MJ Lamberti              
CS Seabrooke              
D Cheesewright              
JA Davis              
NN Gwagwa 9,800         9,800      
P Langeni 9,800         9,800      
JP Suarez              
Executive directors                              
GM Pattison 596,473     205,603     696,473     254,603  
GRC Hayward 222,894     270,529     222,894     270,529  
I Zwarenstein     182,659         202,659  

Subsidiaries

As at the date hereof, the following companies are principal subsidiaries of the Company:

  • Massbuild (Proprietary) Limited (previously Builders Trade Depot)
  • Masscash Holdings (Proprietary) Limited
  • Massmart International Holdings Limited (incorporated in Mauritius)
  • Massmart Management & Finance Company (Proprietary) Limited
  • Masstores (Proprietary) Limited
  • Mystic Blue Trading 62 (Proprietary) Limited

2004/035206/07
997/014716/07
47902 C1/GBL
1992/004084/07
1991/006805/07
2005/018657/07

Details of the Company’s interests in material subsidiaries are set out in note 36. Details of the Company’s interests in material subsidiaries are set out in
note 36. Total net profit after tax for all subsidiaries for the 26 weeks ended 23 December 2012 amounted to R240.4 million (Dec 2011: R803.8 million/Jun 2012: R458.6 million).

Borrowing powers

In terms of the Memorandum of Incorporation, the Group has unlimited borrowing powers. At 23 December 2012, borrowings were R1.7 billion (June 2012: R2.1 billion).

Going concern

The Directors are of the opinion that the business will be a going concern in the year ahead. In reaching this opinion, the Directors considered the following factors:

  • strong positive cash flows from trading;
  • no recurring operating losses at Divisional and Group level;
  • well-controlled working capital and good quality inventory;
  • approved short- and long-term financing, with sufficient additional short-term borrowing capacity if required;
  • key executive management in place;
  • there have been no material changes that may affect the Group in any of our customer, product or geographic markets; and
  • budgets to December 2013 reflect a continuation of the above positive issues.

Litigation

As part of the litigation relating to the Walmart/Massmart merger, in March 2012, the Competition Appeals Court ordered Massmart to commission a study comprising experts appointed by Massmart and the two intervening parties to the litigation. The objective of the study was to determine the most appropriate means by which South African suppliers could be empowered to respond to the challenges posed by the merger. The commissioned study resulted in separate opinions offered by Massmart and the two intervening parties. In October 2012, the Court issued its ruling relating to the study by ordering Massmart to establish a supplier development fund (Fund) to minimise the risks to micro-, small- and medium-sized producers of South African products caused or potentially caused by the merger. The Court further ordered Massmart to contribute up to a maximum amount of R200 million to the Fund. This amount, in addition to the R40 million previously committed via the Fund, totals a Massmart commitment to supplier development initiatives of R240 million. Among other governance details related to the organisation of the Fund, the Court further ordered Massmart to report annually to the Competition Commission of South Africa details of its supplier development activities. Massmart is in the process of complying with the order.

There are no litigious cases or exposures.

Change in year-end

In order to align the Group better with Wal-Mart Stores, Inc. (Massmart’s ultimate holding company), Massmart’s year-end has changed from the end of June to the end of December.

The change in year-end means that Massmart will report audited results for the six months to 23 December 2012 in April 2013, and audited results for the twelve months to December 2013 in April 2014.

Direct and ultimate holding companies

The Company’s direct holding company is Main Street 830 (Proprietary) Limited and the Company’s ultimate holding company is Wal-Mart Stores, Inc.

Subsequent events

With effect from the end of January 2013, Massmart acquired control of seven Makro stores that had previously been lease-held. The cash consideration paid for control amounted to R575 million.

On behalf of the Board

Philip Sigsworth

Company Secretary

8 April 2013

Massmart address

The Company’s registered office and postal address are as follows:

Registered office
Massmart House
16 Peltier Drive
Sunninghill Ext 6
Sandton
2146
South Africa

Postal address
Private Bag X4
Sunninghill
2157
South Africa