Metcash Limited

Good day and thank you for standing by. Welcome to Medcash 2026 Full Year Results Briefing. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press Start 1&1 on your telephone. Please be advised that today's conference is being recorded. I would now like to turn the call over to your first speaker today, Mr. Doug Jones, Group CEO. Thank you. Please go ahead.

Thank you, operator, and good morning, everybody. Welcome to the Medcash Limited FY26 full-year results presentation. As the operator said, my name is Doug Jones, Group CEO, and I'm joined this morning in Sydney by Deepa Sita, Group CFO, Grant Ramage, Food CEO, Kylie Walbridge, Liquor CEO, Scott Marshall, CEO of the Total Tools and Hardware Group, and for the first time, Daniel Jenkinson, Chief Growth Officer, as well as Steve Ash, EGM Investor Relations. Given we issued results pre-release in early May on the 11th, and given the final results are in line with those, I'm going to start today with the strategy update before I get to the results detail. Before I begin, though, I'd like to acknowledge the traditional custodians of the land on which we're meeting today. We're in Wala medical country, and I pay my respects to elders across country, past, present, and emerging. I want to start with our investment thesis and a couple of comments there. If you step back, the investment case rests on a few simple points. Firstly, we operate in large, growing, essential markets. We hold leading positions in supplying independent and non-chain food, liquor, and hardware businesses. We have unmatched supply chain and logistics capability and flexibility, and we sit in the middle of the value chain as an indispensable link between suppliers and customers. So why does that matter? Because it's what drives resilient, quality cash flows, supports steady shareholder returns, and does so with moderate and controllable capital requirements. The message on this page is not that we are simply large. It's that our scale and platform translate into attractive economics. What supports that investment case is the Metcash system or platform we've built over time. There are three mutually reinforcing elements to this platform, scale, trusted capabilities, and competitive networks. The scale is clear, but just as important is how those elements work together as the Metcash platform. We combine wholesale, retail, services, and customer networks across food, liquor, and hardware and tools. These capabilities reinforce each other and make the model stronger than any individual part would be on its own. This is what gives us a sustainable, competitive advantage and creates room for incremental growth opportunities around the core. We operate across three large and attractive markets, and in each one we've got a strong position. In food and liquor, we're the leading supplier to independent retailers in essential categories. In hardware and tools, we hold leading positions in key trade and professional segments, supported by a growing retail network. Diversification is built in. We're not reliant on any single category or earning stream. That gives the group both resilience in the short term and multiple avenues for growth over time. Across the group, the operating model is consistent. And alongside our purpose, this is what links our pillars and is what sits behind the construction of the portfolio. We share the same core strategic objectives in each pillar, a scaled supply chain, strong supplier services, competitive networks, and a diversified customer base. That consistency drives efficiency, supports margin resilience, and allows capability to be leveraged across the group. This is not three separate business. It's one repeatable system driving performance at scale. And it's designed to help us deliver honest value by combining the benefits of scale with the agility and community connections of independent retailers. I want to be clear that we've got a long way to go and much to work on. We're not claiming perfection. And there are significant opportunities ahead of us in opening new stores, increasing our teamwork score, and growing new channels, by way of example. But there is clear progress on our core strategy. The business today is structurally stronger than it was a few years ago. First, competitiveness is improving. Pricing has strengthened across all pillars, and the IGA network is more competitive than ever. We're going to talk about that in some detail. Second, the earnings mix is evolving with greater diversification, with retail and food service inconvenience now a larger part of the group. That matters because it reduces volatility, improves the overall quality of earnings, and presents new growth options. And third, we are strengthening the platform itself. We're not changing it. This is not cyclical. It's a structural shift in how the business is built and where the earnings come from. In hardware and tools, we've completed the merger, removed duplication, and reset the business. We're progressing with a clear eye on a return to mid-cycle economics. Where market conditions are weak, the disciplined work to make our own weather is still progressing, and it's being done ahead of the up-term as we try to recover faster than the market. A big part of all of this is the technology platform. We're building a modern, AI-ready operating environment in partnership with Microsoft. The rollout has well progressed with horizon nearing completion in food and liquor. The benefits are already clear. Better inventory, improved service levels, and stronger data capability. This is about improving how the business runs and lifting performance over time while lowering the cost and risk of future upgrades and development. Horizon is nearing completion and is currently in user acceptance testing phase. We're planning for the first of two final deployments in the last quarter of 26. If we're in a position to go ahead with the second deployment this year without assuming unreasonable risk, our cost guidance will remain unchanged. We'll continue to balance cost, time, quality, and risk in these final stages of the program. We haven't been sitting idly. We've been investing to extend our competitive advantages. And those investments are now clearly delivering. They're driving three outcomes, scaling our networks, improving efficiency, and strengthening our ability to serve customers and suppliers. You can see that in total tools, with strong network and earnings growth. You can see it in food service and convenience, which has scaled quickly and is now a more meaningful contributor. And you can see it operationally, where productivity improvements are increasing capacity and supporting growth. These investments are improving performance today and making the business more scalable for the future. This is not just supporting earnings, it's building a stronger earnings profile that includes higher margin businesses. Speaking of which, Around the core, we're also building additional growth drivers, and they're contributing. And importantly, they're scaling. In retail media, we've built a national network with meaningful revenue and strong momentum. I'm excited to share for the first time this morning the news that we've recently signed a partnership agreement with QMS and the Nine Network, which will accelerate our growth by providing access to a much bigger pool of advertisers and to their scaled network and sales teams. For their clients, it broadens the range of media available. The sorted B2B online products and service marketplace at $5.9 billion revenue is now a significant part of how we operate and engage with customers and supports the modernization of our core wholesale revenue stream. And in retail ownership, we've taken the first steps in food, deliberately building our capability and asset base in a disciplined way. We have big targets here, but we'll be guided by disciplined capital management frameworks that mean that each store or group of stores must fit strategically as well as financially. The common theme is clear. These are margin accretive opportunities that broaden the earnings base. I'll move into the group overview and step through the results in more detail. The key message here, as we go through the section, is one of consistency, a resilient core, a diversified portfolio, and a business that continues to generate strong cash. At an operational level, the result is clear. Food and liquor again provided a stable base of earnings, performing well in a competitive and value-conscious consumer environment, and all this in the face of the continued decline in tobacco sales. Harder-end tools improved sales momentum through the year, despite weak trade markets, reflecting targeted operational actions, and the group maintained strong financial discipline. We kept tight control of costs, working capital, and capital expenditure. We continued to execute the Metcash platform strategy, extending into more products and services, while protecting and strengthening the core. The results reflect solid execution, with the factors impacting performance understood and actively managed. The key material pressure in the results sits in hardware, and that's cyclical, which is why we're working hard to address it. The financials reflect all that. Revenue was $19.6 billion and grew 3.8% excluding tobacco. EBITDA and EBIT both grew on a normalized basis, and operating cash flow was strong at $558 million. The three-year cash realization ratio remains at around 104%, leverage is at the lower end of the range, and dividends were maintained at around 70% payout. So the takeaway is resilient earnings, strong cash conversion, and balance sheet flexibility. Looking at the result by pillar, the portfolio is doing its job. Food and liquor did the heavy lifting in a tougher consumer environment once again. Hardware and tools revenue accelerated in the second half, but earnings still reflect weak trade markets with pressure in retail margins. The strength in food and liquor provides stability, while hardware gives us upside when markets improve, and that's why the diversified portfolio matters. This is a new view. If you look at the business by revenue stream, you can see the same story in a different way. We introduced this view at the half-year results, but now we show earnings as well as revenue. And we'll continue to disclose this in addition to the pillar view, which will remain our primary segmental analysis. A dependable, high-quality wholesale base remains the core earnings engine, while higher growth and higher margin streams are broadening the shape of the business. It's important because it improves resilience today and expands earnings opportunities over time. And it also informs how the business should be viewed, not as a single channel wholesaler, but as a more diversified platform. I really want to bring this to life in this next slide. It shows the progression over time. We've maintained a stable wholesale base while building higher growth streams like food service and convenience and retail. The direction is consistent across both revenue streams and pillars. We're not replacing the core. We're building on it to improve diversification and earnings quality. Since FY19, earnings from wholesale have grown by 35%, but the proportion of the total earnings base has reduced from 91% to 76%. I also want to use this slide to get ahead of a likely question about the low growth in total earnings over the last few years. It's important to remember that since FY21, we've lost $1.8 billion in tobacco sales. Our estimate of the single-year earnings impact between then and now from tobacco itself and the last associated products to be around $25 million. So to be clear, that's $25 million lower earnings than we had in FY21. During this period, the food pillar earnings have grown by 35%. In the same period as the hardware cycle has turned, hardware retail earnings are off by $30 million. What this means is we've offset at least $65 million of earnings by growing the rest of the business. These facts highlight the point that our core is larger and more profitable than it was. I'll now hand over to Deepa to take you through the financials. The headlines are straightforward. Resilient earnings, strong cash generation, and a disciplined approach to capital.

Thanks, Doug, and good morning, everyone. I'll build on Doug's overview by stepping through the group financials, focusing on the quality of earnings, the cash generation, as well as how disciplined capital management continues to support both resilience as well as future growth. Starting with the financial overview slide, FY26 reflects another year of resilient earnings, strong cash generation, and balance sheet flexibility. Revenue for the year was approximately $19.6 billion, up 3.8% excluding tobacco, reflecting solid underlying momentum across the core businesses. At the earnings level, the business delivered growth, excluding strategy and integration costs, which are one-off in nature. Importantly, cash conversion continues to be a standout. The three-year cash realization ratio is 104.2%, well above our target range, reflecting consistent working capital discipline, with the three-year measure providing the most meaningful view across the cycle. The balance sheet remains strong, with leverage at one times, which is at the lower end of our target range. The Board has declared a final dividend of 9.5 cents per share, reflecting a moderate increase against the annual target payout ratio, and have suspended the DRP. We have maintained a disciplined approach to capital allocation, moderating investment and prioritizing high return opportunities aligned to our framework. This reflects a consistent approach through the cycle, adjusting investment in line with conditions while maintaining a strong focus on the core business and sustainable returns. As a result, we have delivered strong free cash flow and preserved balance sheet flexibility. Overall, the group enters FY27 from a position of growth and strength, with high quality earnings, strong cash generation, and financial capacity to support both returns and growth. Turning now to the capital management framework. This framework underpins our track record for strong cash generation, disciplined investment, and consistent shareholder returns. While the framework has been refreshed to improve clarity, the underlying philosophy remains unchanged. At its core, it is focused on maximizing long-term shareholder value through disciplined capital allocation and delivering returns above the risk-adjusted cost of capital. The framework is anchored in cash generation, with a target three-year cash realisation ratio of 80% to 90%. Supporting this is a clear and consistent approach to how we invest, built on three elements. Clear capital allocation priorities, rigorous assessment of returns, cash generation and risk, and strong governance, including board oversight and post-investment reviews. With that foundation in place, capital is deployed in a clear and consistent sequence. First, investing in the core business, thereby maintaining and strengthening operations. Second, maintaining financial strength and operating within our leverage range. Third, delivering consistent shareholder returns through a fully franked dividend aligned to our payout ratio. And finally, investing in growth and, where appropriate, return surplus capital to shareholders. The sequencing is key. It ensures we invest from a position of strength, maintain balance sheet discipline, and deliver sustainable returns, with growth investment focused on strategic fit, returns, and execution. Turning now to the FY26 outcomes, which demonstrate this framework in action, investment spend moderated to approximately $244 million, with the prior year including the superior foods acquisition. Leverage remained at the low end of the target range at around one times, preserving sufficient financial flexibility. The total annual dividend declared amounted to 18 cents per share, reflecting a payout ratio of approximately 74% of underlying impact. The key dates for the dividend are provided in the appendix section of the deck. ROFI was approximately 20%, with the moderation reflecting the expected impact of recent acquisitions and investment in long-term capability, as well as the softer earnings in hardware. The net debt remained well controlled over the period, with levels broadly stable and consistent with our disciplined approach to capital management and target leverage settings. Overall, these outcomes demonstrate disciplined capital deployment, strong cash performance, and retained capacity to support growth. Turning to the P&L, revenue in EBITDA remained stable, supported by the strength and diversification of the portfolio. EBITDA before strategy and integration costs increased 3.5% to $774 million. Depreciation and amortization increased year on year, driven by prior acquisitions and ongoing investments. The step-up was noted at the half, with the second half broadly in line with the first. Looking ahead, depreciation and amortization is expected to increase by a low double-digit percentage in FY27, as Project Horizon and other assets come on stream. Notwithstanding the increased depreciation and amortization, EBIT before strategy and integration costs grew by 1.6% and underscores our continued emphasis on cost management as well as operational efficiency. Corporate costs are expected to be in the range of $20 to $22 million per half in FY27. This reflects ongoing investment in growth and capability initiatives, as well as variable employee entitlement costs normalizing to target levels. Net finance costs were $123.7 million in line with the prior guidance. Looking ahead, FY27 net finance costs are expected to be between $130 and $135 million, assuming a moderate increase in rates. The year-on-year change in underlying EPS at 24.5 cents is largely attributable to the one-off strategy and integration costs, which are reflected within EBIT. Excluding these costs, underlying EPS is in line with the prior year. Turning to the cash flow, cash generation continues to be a key strength of the group. Operating cash flow increased to $558 million, supported by solid trading and continued focus on working capital. Investing cash flows reduced significantly, reflecting lower acquisition activity, while capital expenditure remained well managed at $175 million. More broadly, capital has been actively managed with investment directed to high-return strategic initiatives and core platform capability, while overall spend moderated following a period of elevated investment. This disciplined approach has been a key contributor to the strong free cash flow this year, while supporting continued investment in the business. Looking ahead, FY27 CapEx is expected to be approximately $150 million, excluding acquisitions, and will continue to be assessed in line with the Capital Management Framework. The group retains a strong balance sheet flexibility and remains well within the parameters of the capital management framework. Working capital continues to be optimized, with average working capital days improving to 12.7 days. Total funds employed increased in line with strategic investment priorities, while net debt and equity positions remained well balanced. The increase in intangible assets reflect acquisition activities during the year, including goodwill arising from business combinations. In addition, ongoing investments in capitalized software continue to build out core platform capability, partially offset by normal amortization. Together, these investments are strengthening the platform and supporting sustainable growth over time. Finally, on debt and funding, the group maintains a strong and well-balanced funding position, with total committed facilities of $1.57 billion and approximately $967 million of undrawn capacity at year end. Closing net debt was $616.6 million, while the average net debt amounted to approximately $835 million, providing a more representative view of leverage through the year. Leverage remains well within the target range, supporting continued financial flexibility. The weighted average cost of debt reduced to 5.2%, supported by active treasury management. We are currently progressing refinancing activities as part of the normal funding cycle, with strong lender support reflecting confidence in the group strategy and cash generation profile. So in summary, the group has delivered resilient earnings in a challenging environment. Cash generation remains strong and reliable, and our disciplined capital management framework continues to support both returns and growth. Thank you. I'll now hand back to Doug.