Coles Group Limited

Thank you for standing by and welcome to the Coles Group 1H26 results conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Leah Weckett, Managing Director and Chief Executive Officer. Please go ahead.

Good morning and thank you for joining us for our half-year results call this morning. Before I begin, I would like to acknowledge the traditional custodians of this land on which we meet today, the Wurundjeri peoples of the Kulin Nation. We acknowledge their strength and resilience and pay our respects to their elders past and present. I'm joined in the room today by Charlie Elias, our CFO, Matt Swindells, our Chief Operations and Supply Chain Officer, Anna Croft, our Chief Commercial and Sustainability Officer, Michael Courtney, our Chief Customer Experience Officer, and Claire Lorber, our Chief Executive of Liquor. Moving now to slide three. I'm pleased that we've been able to deliver another very strong set of results in what is a competitive operating environment. We delivered strong supermarket earnings growth with continued sales momentum. E-commerce was a key contributor again, with sales growing by 27%. Our automation programs are delivering tangible benefits and we delivered cost savings of $133 million through our Simplify and Save to Invest program. Of course, what matters most to us is our customers, which is why the improvements in our customer satisfaction scores across the business during the half was a key highlight for me. Finally, we completed our liquor lamb banner simplification program and while there are challenges in the overall liquor market, we are seeing positive growth across our convenience portfolio, which is really pleasing. Moving on to slide four and the financial results. We reported group sales revenue of $23.6 billion, an increase of 2.5%. Excluding significant items, group EBIT increased by 10.2% and MPAT increased by 12.5%. In supermarkets, adjusted for the competitive industrial action in the PCP and excluding tobacco, sales revenue increased by 6.1% and supermarkets EBIT increased by a very strong 14.6% underpinned by top line growth and EBIT margin expansion of 55 basis points. Charlie will talk more to the financials in his presentation. Moving on to slide five. During the half, we maintained a consistent focus on executing against our strategic priorities, which once again underpinned our performance for the period. Let's get into this in some more detail, starting on slide six with our first pillar, destination for food and drink. We know value remains front of line for consumers, and delivering on our value commitment to customers remains a priority for us. During the half, we strengthened our value proposition, expanding our range of everyday value products, We ran a winter and spring value campaign and our shop, scan, win European glassware continuity programs each delivered strong engagement with our customers. Our exclusive to Coles portfolio continues to perform well with sales growth of 5.7%. We launched more than 500 new products and the range was recognised with 17 product of the year awards. We know our own brand portfolio is a unique differentiator for Coles. These new products and awards underscore the momentum we are building in quality and innovation across the portfolio. We also entered into some really exciting exclusive partnerships during the half. One of these was with Marks and Spencer, where we brought a number of their iconic favourites to Australian homes. This included their well-known Percy Pig and Colin the Caterpillar lollies, which turned out to be our most successful lolly launch ever. Our partnership with Grilled also proved popular, particularly with the rising takeaway trend for those who want to recreate their restaurant or takeaway dinner in their own home. These collaborations broadened our appeal and helped ensure we remain a destination for inspiration and everyday meals. We were also pleased with how we executed over the Christmas period, starting with our Christmas range, which showcased more than 340 own-brand Christmas products and exclusive specialty drinks. We worked hard in the lead up to Christmas to ensure value was felt where customers needed it most. Our $1 seasonal produce lines in the week before Christmas were a simple but powerful example of that commitment. Operationally, we delivered our highest monthly default results since December 2020, an important sign of the progress we are continuing to make in availability and overall execution. This leads me to our customer satisfaction scores on slide seven. As I said at the start, the improvements in customer satisfaction scores were a real highlight with strong improvement across our key metrics of quality, availability, store look and feel and price. The big takeaway here is that customers are noticing the changes we are making. Improved availability, sharper value and better execution in stores are translating directly into stronger satisfaction scores and that gives us real confidence as we look ahead. There is always more to do but we are very pleased with the progress we are making. Moving now onto slide eight and the next pillar of accelerated by digital. We reported another strong half in our e-commerce business with 27% revenue growth in supermarkets, penetration now over 13% and double digit growth across all shopping missions, whether that be same day, next day, click and collect or our immediacy offering. We are focused on making sure we have a great offer across all online channels. We've made a lot of progress in e-commerce over the last few years and customers are responding to this. We know customers have different shopping missions throughout the week and the investments we have made allow us to provide them with exceptional service that matches their shopping mission. For example, our CFCs allow us to provide the biggest range, better availability and improved freshness for those customers who are looking to do their weekly shop. And our expanded partnership with Uber and our windowless click and collect rapid offer provides us with a leading immediacy proposition. During the period, we made investments in our digital assets and have seen particularly strong growth in our app metrics, with monthly active non-visitors to the app growing by 32% and the app share of e-commerce revenue now at 54%. Our CSC volumes increased in the half with sales growth again outpacing total supermarket e-commerce sales growth. Same day deliveries commenced in Melbourne in the first quarter and Sydney in the second quarter and we also had a major catchment extension to Geelong and the surf coast in Victoria. In terms of our immediacy offering, as I mentioned, we expanded our partnership with Uber Eats with now up to 17,000 products available to purchase through the Uber Eats app. And the windowless click and collect rapid was also expanded to 255 stores nationally. Overall, our online NPS saw a meaningful uplift, driven by improved availability, fulfillment and the overall digital customer experience. But one of the most important points to make here is that we were able to make all of these investments, grow our business, expand catchments and our immediacy offering, while driving efficiencies through technology, scale and a strong operational focus. We made further improvements to our picking processes in store, increased orders per van and installed two key automation technology features in the CFCs with on-grid robotic pick arms and auto frame loading. So it's been a very pleasing half in terms of e-commerce. Moving now to slide nine and loyalty. Flybuys remains an important driver of customer engagement across Colts as well as a key element of our overall value proposition. During the half, fly-bys exceeded 10 million active members, growing by 6.2%. This highlights the continued relevance of personalized value for our customers. We were also pleased to see strong growth in our Colts Plus subscriptions, with customers recognizing the additional benefits they've received by becoming part of Colts Plus family, including free deliveries, free rapid click and collect, and double fly-by points. Moving now to slide 10 and our Delivered Consistently for the Future pillar. Our SSI program remains a core part of our DMA. We know the importance of operational efficiency. Delivering consistent and sustainable cost savings through our SSI program enables us to help offset inflation and reinvest in the customer offer and we see the benefits of that both in our top line as well as our bottom line. This half we delivered cost savings of $133 million. This brings us to around $700 million since the beginning of FY24 We remain firmly on track to achieve more than $1 billion in benefits over the four-year program. Consistent with previous years, there were many initiatives across different parts of the business that contributed. Again, a common theme was the use of AI and other technology automation to improve the effectiveness and efficiency of our processes. This leads me to slide 11. We've been building and deploying AI for over a decade. What has changed recently is the pace of capability and the breadth of where we can apply it. For our customers, we are already scaling AI to drive more relevant offers and engagement through personalisation across the shopping journey. AI is helping us deliver more personalised and relevant experiences, which... ..tailoring... ..engine... is improving relevance, conversion and overall customer satisfaction. In parallel, we're also now moving into the next wave, agentic commerce, conversational AI and real-time personalisation, capabilities that will transform how customers engage with us over time. We are proving the relevance, timing and effectiveness of offers and rewards for customers and helping them to find value whilst improving our promotional effectiveness. In our operations, AI is embedded across operational decision-making with a clear focus on outcomes to improve availability, reduce waste and lift productivity. We're using AI in forecasting, demand planning and ranging to improve accuracy and availability. And in stores and in our e-commerce business, AI is helping optimise rostering, improve workflows, pick efficiencies and dynamic work. Across our supply chain, AI supports optimisation in transport and improved workflows. We're also using AI in stores for computer vision, for object recognition and loss technology. Now looking ahead, we're building an end-to-end optimisation capability across the supply chain, from automated DC pallet flows to transport to replenishment. So decisions are all made as one system and not in silos. A digital twin also lets us simulate scenarios before we change operations. Then we can apply this to execute the best plan in the real network. The result is improved availability, lower waste, lower cost to serve and faster response time to any disruptions. And we're also looking to optimise online fulfilment capacity across our stores, CFCs and DCs, helping us to decide where orders should flow, how much capacity to allocate and when to flex resources. And finally, for our team members, we're embedding AI tools that make work easier and more productive. Our knowledge assistant is helping teams quickly access policies and procedures, and we've rolled out AI productivity tools, including Chat, GPT, Enterprise, and Microsoft Copilot. And we're partnering with OpenAI on team training. So it's fair to say that AI is well and truly entrenched within our business, is delivering strong results, and has been for some time. But the pace of change is accelerating and we are really excited by the opportunities that are emerging, particularly in customer-facing adjunct AI and we will be talking about this more in the future as these start to scale. Moving to the next slide. Alongside our financial performance, we remain committed to the role we play in supporting our team members, suppliers and the environment. So beforehand, over to Charlie, I would like to cover off some of our achievements in this area. I will start with our team members. Through our November team engagement poll survey, we maintained our highest ever team member engagement score, remaining in the top four tile. This is a strong reflection of the culture and leadership across the business. Almost 70,000 team members provided their feedback and it was pleasing to see that delivering for our customers remains one of our strongest areas, with 90% of team members recognising our commitment to meeting our customer needs. We also continue to support the well-being of our team members, including through initiatives such as R U OK? Day, where our stores and distribution centres came together to reinforce our care and courage values. We recently launched Round 14 of the Coles Nurture Fund, continuing our long-standing commitment to supporting innovation, sustainability and growth within the Australian supplier community. And we celebrated excellence across our supply base in the 2025 Supplier Partner Awards, recognising achievements across each of our key trading categories. Our community partnerships remain a defining part of who we are. This half, we raised more than $1.6 million for Movember and more than $1.8 million for the Second Bite Christmas Appeal, helping to provide over 9 million meals for Australians experiencing food insecurity. And finally, we continue to make progress on our sustainability commitments. 87.7% of eligible packaging is now recyclable or reusable and we maintain 100% renewable electricity usage across our operations and we continue to divert more than 85% of solid waste from landfill. With that, I'm now going to hand over to Charlie who will take you through the financial results in some detail.

Great. Thank you Leah and good morning everyone. I'm now on slide 14 which details our group results. Excluding significant items, we reported group sales revenue of $23.6 billion, an increase of 2.5%, group EBITDA of $2.2 billion, an increase of 7.8%, and group EBIT of $1.2 billion, an increase of 10.2%. NPAT, excluding significant items, increased by 12.5%. Off the back of these results, the Board declared a fully franked interim dividend of $0.41 per share an increase of 10.8% compared to the prior corresponding period. This is a consistent progression of shareholder returns over time. Moving on to the segment overview on slide 15. Let's start with supermarkets. Sales revenue increased by 3.6% with our value proposition continuing to resonate with customers. If we adjust the competitor industrial action and excluding tobacco, sales revenue increased by 6.1%. even increased by 14.6%, reflecting the strong top line growth coupled with even margin expansion of 55 basis points to 5.8%, which was underpinned by a 65 basis point increase in gross profit margin. The strong gross profit result was achieved notwithstanding the significant investments we made in value due to the annualized benefits of our RPC program, strategic sourcing, SSI initiatives, and the growth of Coles 360. Lower tobacco sales also contributed 37 basis points to GP margin. In liquor, sales revenue declined by 3.2%. The liquor market remained subdued and competitive intensity increased through the period, particularly at the big box end of the market. During the half, we completed our simple Liquorland store conversion program and our convenience portfolio, representing around 90% of our store network. delivered positive sales growth. We are seeing a shift in customer behaviours towards convenience led purchases and pleasingly our stores are well positioned in this convenient space. There is some work to be done to optimise our Liquorland warehouses now that the conversions are complete. Overall liquor EBIT was impacted by a softer top line and $13 million in one-off costs relating to the Simply Liquorland conversions. In other, revenue relates solely to the product supply agreement we have with Viva Energy. As outlined in the results released, the PSA, which is due to expire in April, has been extended and is now due to expire at the end of November to allow Viva to complete the transition to New South Wales, WA and Queensland. The increase in other EBIT was predominantly due to the higher net property gains in the prior corresponding period. Turning to operating cash flow on slide 16. Before discussing the numbers, I want to highlight the timing impact. The half year ended on the 4th of January and similar to last year, it resulted in an additional payment run in the final week, creating an additional cash outflow of approximately $560 million. The timing effect impacted several metrics including cash realisation, working capital and net debt. These metrics will normalise in the second half. Operating flow excluding interest and tax was $1.5 billion. with a cash realisation ratio of 69%. Adjusting for these additional payment run, the cash realisation ratio was 94%. For the full year, we continue to expect cash realisation at 100% with the first half timing impact reversing in the second half. The working capital movement primary reflects increased inventory to support availability over the Christmas period and lower trade and other payables following the additional payment run. The movement in provisions and other largely reflects the FOA provision, which is non-cash but recognised in EBITDA. Now I'll now move to capital expenditure on slide 17. Gross operating capital expenditure on an accrued basis was $476 million, a decrease of $66 million compared to the prior corresponding period. We had a higher weighting towards store renewals and new stores across supermarkets, a lick of this hearth, as well as a lower spend in relation to our Victorian ADC and this was as a result of a milestone payment having been recorded in a prior corresponding period. Pleasingly, our Victorian ADC remains both on time and on budget. We also incurred lower capital expenditure in relation to our investments in lost technology. As you know, CapEx falls into four key areas, store renewals, growth initiatives, efficiency initiatives and maintenance. Within renewals we completed 160 store renewals across our network consisting of 35 supermarkets and 127 liquor stores. These included 122 simply liquor land conversions. Within growth we opened 6 new supermarkets and 11 new liquor stores. We also continue to invest in our e-comm business. Efficiency initiatives included investments in the Victorian ADC, store front end service and liquor-easy ordering. Maintenance capital included our ongoing refrigeration electrical replacement programs and lifecycle replacement of store and technology assets. We continue to optimize our property portfolio with net property capital expenditure increasing by $157 million, primarily due to an increase in property acquisitions and developments and lower proceeds from divestments. And to reiterate the guidance we provided at our FY25 results, We continue to expect capital expenditure of approximately $1.2 billion for the full year as we continue to invest in store renewals, digital technology and growth initiatives. Turning to funding and dividends on slide 18. Our funding position remains strong. At the end of the half, our weighted average drawn debt maturity was 4.4 years with undrawn facilities of $1.9 billion. As I said earlier, the Coles Board declared a fully franked interim dividend of 41 cents per share which is a 10.8% uplift versus first half 25 and shows a consistent progression of shareholder returns over time. We will also have a franking credit balance of approximately $600 million after the payment of our interim dividend. Finally, we retained a headroom within our rating agency credit metrics and a strong balance sheet to support growth initiatives our current published credit ratings of BBB Plus with S&P Global and BAA1 with Moody's. With that, I'll hand it back to Leah to take us through the outlook and concluding comments.