Wesfarmers Limited

Ladies and gentlemen, thank you for holding and welcome to the West Farmers 2023 Half Year Results Briefing. Your lines will be muted during the briefing, however you will have an opportunity to ask questions immediately afterward and instructions will be provided on how to do this at that time. This call is also being webcast live onto the West Farmers website and can be accessed from the homepage of westfarmers.com.au. I would now like to hand the conference over to the Managing Director of West Farmers Limited, Mr Rob Scott.

Well, hello everyone and welcome to West Farmers 2023 Half Year Results Briefing. I'm joined here in Perth with our Divisional Managing Directors and our CFO Anthony Gianotti. This morning I'll provide an overview of the group's performance and progress on strategic priorities. Then Anthony will discuss the financial performance in more detail. I'll then conclude with the outlook for the group, and then Anthony and our divisional managing directors and I will welcome the opportunity to take your questions. So I'll start the presentation off on slide four, which is a slide that will be familiar to most of you. Our objective is to deliver a satisfactory return to shareholders over the long term. We try and achieve this through strengthening our existing businesses, securing growth opportunities through entrepreneurial initiative, renewing the portfolio and ensuring sustainability in everything we do. This means anticipating the needs of our customers, looking after our team members, treating suppliers fairly and ethically, contributing positively to the communities in which we operate, taking care of the environment and acting with integrity and honesty. Overall, we're making good progress in these areas. And as a group, we have exited the COVID pandemic in a much stronger position than when we entered it a few years ago. Now turning to slide five, which sets out the highlights for the half. I'd like to talk to three key takeaways from our results. Firstly, the pleasing financial results for the half highlight the strength of the Westfarmers portfolio of businesses and operating model. The group's net profit after tax was $1.4 billion, an increase of 14.1%. Our largest divisions performed particularly well during the half, with Kmart's group earnings more than doubling, a near 50% increase in the earnings at Wessef, and another strong result at Bunnings. The businesses responded well to market conditions during the half, and in general are benefiting from strong execution and operating results. as they progress efficiency and productivity initiatives, continue to execute their strategies, and begin to realise benefits from investments made in recent years. The second point is that the group's portfolio is well positioned to deliver returns to shareholders over the long term, with progress made on key strategic initiatives. And finally, as always, we've maintained our focus on long-term value creation consistent with our core objective. Now, turning to slide six, At a divisional level, our businesses continue to make good progress on their strategic agendas, with strong results for the half. I'll use this slide to touch on some of the key points, and then Anthony will provide more detail on the financials. Bunnings delivered another strong performance, highlighting the strength and resilience of its operating model. Bunnings further strengthened its consumer offer during the half through refresh and expansion of product ranges and the trial of new store-in-store formats in some categories. On the commercial side, investments in CRM technology are providing greater flexibility and value to commercial customers, while recent expansions to Bunnings frame and truss operations allow it to meet growing demand and support deeper engagement with customers at the commencement of a build. Bunnings has made significant progress on its digital agenda in recent years. and engagement through the PowerPass app, fly-by scan rates, and the strength of its educational and social content continues to improve. With Kmart, it's clear that their low price positioning and differentiated offer are resonating with customers and Kmart Group's performance this half reflected excellent operational execution in addition to the impact of cycling the lockdowns last year. Kmart's focus and investment on digitising its operations both in stores and through the supply chain are delivering productivity and efficiency benefits and help to mitigate cost pressures faced during the half. Target continued to deliver improvements in its product offer, particularly in its focus categories of apparel and soft home. This half was also the first period of generally uninterrupted trading since the major network changes across Kmart and Target were completed, and it's pleasing to see the benefits of this significant program of work coming through in the results. With WESF, very strong operational performance meant that they were able to take advantage of the favourable commodity price environment, and the division delivered record earnings for the half. We continued to make good progress at the Mount Holland lithium project, with first ore stockpiled at the mine in December, and we expect the first earnings from the sale of spodumene concentrate in 12 months' time. You would have seen in the release material that we've provided some updated timing and cost estimates for the project, with these changes relating principally to the Kwinana refinery. The Covalent team have managed the COVID disruptions and inflationary challenges well, but there have been some increases in CapEx estimates that Anthony will touch on soon. Officeworks saw increased demand across key categories that were impacted by lockdowns in the prior period. Recent investments in modernising its supply chain supported productivity improvements at their new Victorian Customer Fulfillment Centre and will further strengthen Officeworks' omnichannel proposition. Industrial and safety again improved its performance, benefiting from a disciplined focus on meeting customer needs and driving productivity benefits. And a highlight was the final deployment of Blackwood's ERP system. In the new health division, transformation activities were accelerated with investment in supply chain capabilities and technology that will strengthen the competitive position of API and its pharmacy partners. We continue to make good progress with the key data and digital initiatives across the group. The focus and investment across our divisions is starting to pay off. And whilst there is still much to do, we've turned our focus over the last year on developing capabilities across the group that will drive deeper digital engagement with customers and leverage the best that our stores and digital platforms have to offer. An example of this is the OnePass membership program, which was further strengthened during the period. with Bunnings joining the program in November and the announcement of a multi-year strategic partnership with Disney, providing a unique bundled discount to One Pass and Disney Plus members. The strong progress with our digital agenda makes the performance of Catch this half particularly disappointing. Catch was slow to adjust as online demand moderated post-COVID and this was compounded by some operational and executional challenges. We've taken decisive actions with restructuring activities commencing in the half and a new managing director, Brendan Sweeney, joining the business in October. Now moving to slide seven. As mentioned earlier, we believe that the portfolio is well positioned to deliver returns to shareholders over the long term. The portfolio is comprised of strong businesses with clear competitive advantages. Across the major retail businesses, we expect to benefit from our trusted brands, strong value credentials and omnichannel offering. With these businesses underpinned by large-scale, low-cost operating models and differentiated owned brands and exclusive products. With WESF, they have a track record of operational excellence and also strategically positioned manufacturing and processing capabilities with access to key raw materials and close proximity to customers in critical industries. We've recently established new avenues for value creation in the areas of healthcare and in critical minerals. These are new sources of value for shareholders that are not reflected in current earnings. We're pleased with the progress at Mount Holland and the team continues to explore capacity expansion opportunities to meet the strong demand for lithium produced in Australia. A little under a year ago, we invested in API and whilst the transformation is only just accelerating, we believe this new division has the potential to deliver returns to shareholders over the long term and is a platform for value creation. In recent years, we've significantly expanded our data and digital capabilities, as I mentioned earlier. And today we average over 210 million digital interactions with customers each month, nearly three times greater than in the 2019 financial year. And we've shared some information on slide 51 that I'd refer you to. We continue to accelerate the growth of our One Pass program, and whilst it's very early days, the program is already delivering valuable customer insights. From the early data to date, we see that One Pass members are generally a younger cohort of customers that shop with greater frequency and increase their spend across the group after joining. One Pass is complemented by our large-scale loyalty and membership programs in Flyby, Sister Club and Power Pass at Bunnings, which all deliver value for customers and provide the group with unique insights across different customer cohorts and demographics. The quality of the group's data has materially improved in recent years, and during the half, over 55% of our retail sales were to known and contactable customers, compared to about 34% a few years ago. Through better understanding our customers, we are better able to anticipate their needs and improve the efficiency of our businesses. We know our most valuable customers shop with us both in store and online. And one factor that differentiates West Pharma's data and digital ecosystem is the group's extensive store network. Today, Click and Collect represents 30% of online sales, which drives foot traffic in store and improves profitability. Now turning to slide eight. During the half, we continued to build better outcomes for the environment, our team, and the communities in which we operate. Recognising its link to long-term value creation, we continued to build climate resilience in our businesses. For the half, we achieved a 15% decrease in Scope 1 and Scope 2 emissions from our major retailing divisions. At a group level, emissions increased, with this largely driven by higher ammonia production following the planned shutdown in the prior period and the addition of the new health division. Adjusting for these two factors, the group's emissions declined for the half. The group's TRIFA result increased on the prior period with this change due to a change in reporting methodology at Bunnings, as well as an increase in manual handling injuries in Bunnings. We remain firmly committed to improving our performance in this critical area. It was fantastic to see the group retain Indigenous employment parity, with Aboriginal and Torres Strait Islander team members representing 3.4% of our Australian workforce. Now, turning to slide nine, you can see the summarised performance for the group. I'll now hand over to Anthony, who will talk to this in more detail, together with the group balance sheet and cash flow.

Thanks, Rob, and hello, everyone. On slide 11 in the presentation, we provide some of the detail on sales and revenue growth across the group, but I'll start on slide 12 and speak to sales and earnings together for each of our divisions. For Bunnings, sales growth of 6.3% for the half reflected growth across all major trading regions and in both the commercial and the consumer customer segments. It was pleasing to see customers' shopping frequency and foot traffic to stores increasing during the half. However, spring trading results were affected by the prolonged period of wet weather experienced on the east coast, with consumer sales in garden and outdoor living categories the most impacted. Bunnings continued to focus on delivering great value for customers, with ongoing investment in price during the half. Inflationary cost pressures impacting cost of doing business were well managed through disciplined cost reductions and tech-enabled productivity improvements. Pleasingly, Bunnings continued to invest to support its strategic agenda across digital, supply chain and expanding the commercial offer. Overall, Bunnings' earnings increased 1.5% to $1.3 billion for the half or an increase of 2.1% excluding the net contribution from property sales. Kmart Group delivered significant sales and earnings growth in the half, with earnings increasing 114% to $475 million, underpinned by the strength of Kmart's lowest price position and strong execution during the period. Kmart Group's result reflects a strong rebound from the significant impact of COVID in the prior year. But importantly, comparable sales results demonstrated good underlying demand growth over and above the benefits of cycling lockdowns. Kmart's comparable sales increased 17.1% and was supported by growth in both comparable transactions and units sold in the half. Target's comparable sales increased 2.8%, reflecting continued improvements in its product offer. As Rob's already noted, a disciplined approach to cost and margin management were a feature of Kmart Group's performance this half in what was clearly a more challenging cost environment. Rapid changes in exchange rates, higher international freight costs, increased shrinkage and general cost inflation pressures all impacted earnings in the period, but Kmart was able to leverage its scale and sophisticated sourcing capabilities to defray some of these costs. WESF delivered record earnings of $324 million for the half. The strong result was supported by continued favourable prices for LPG, ammonia and related products, as well as an increase in the production of ammonia following the significant planned shutdown that took place in the prior corresponding period. The WESF result also includes its share of operating costs associated with the development of the Mount Holland Lithium Project, which increased during the period as activity accelerated. Office work sales increased 4.6% and earnings were up 3.7% in the half. Sales were supported by an increase in demand across key categories that were most affected by lockdowns in the prior half, including print and create, stationery and art and education. Sales growth also continued in technology categories, despite cycling elevated levels in the prior corresponding period. Higher levels of promotional activity in technology, particularly across the highly competitive cyber week, impacted margins during the half. This higher promotional activity was partially offset by a shift in sales mix towards higher margin products. Industrial and safety delivered another pleasing improvement in performance, with earnings growth of 14.6%, supported by higher sales across the division, stronger margins in workwear group and core gas, along with a modest gain from the sale of the green cap consulting business during the half. These factors were partly offset by higher cost inflation in Blackwoods, which adversely impacted margins, as well as higher costs associated with further investment in digital capabilities, including the final deployment of the ERP system. In West Farmers Health, sales results were supported by both new customer acquisition and growth from existing trade partners in the wholesale business. Sales also benefited from elevated demand for COVID-related antiviral products, but as you would expect, sales of these products will moderate as community COVID infections decline. Health earnings of $27 million reflected continued progress on transformation activities with investment in supply chain capabilities, network changes and merchandise strategies accelerating during the half. Earnings in health also included $7 million of non-cash expenses associated with assets recognised as part of the acquisition. As Rob acknowledged earlier, the financial performance of catch for the half was disappointing. And while some of the moderation in GTV was a product of broader market conditions, sales were also impacted by poor range selection and execution issues in the first party business. As a result, Catch incurred elevated clearance costs during the half in order to address slow-moving stock. In addition, Catch incurred higher fulfilment and delivery costs associated with commissioning issues at the new Moorbank Fulfilment Centre and elevated fuel costs during the half. Reflecting some of the actions taken to address recent underperformance, Catch's result also includes $33 million of restructuring costs relating to inventory provisions, team member redundancies and asset write-offs. Turning now to slide 14 and our other businesses and corporate overheads, which reported a loss for the half of $75 million. The main driver of the loss was the reduced contribution from the BWP Property Trust, which saw a significant reduction in upward property revaluations compared to the prior corresponding period. This was partly offset by higher earnings from the group's interest in West Pine and Gresham during the half. As outlined at the full year results, we continue to invest in the development of the One Pass membership program and the group's customer and data insights capabilities, with a net cost of $41 million for the half being broadly in line with the $40 million that we reported in the prior corresponding period. Corporate overheads were slightly higher at $78 million for the period. Turning now to working capital and cash flow on slide 15. Divisional operating cash flows increased 13.4% for the half, with divisional cash generation of 97%. While this result remained below what we would typically expect in the first half, we did see an improvement from the position at the full year as the businesses' working capital positions continued to normalise. The improved cash flow for the half was driven by growth in divisional earnings and strong cash generation in Kmart as supply chain conditions improved and the level of buffer stock held reduced. These benefits were partially offset by three factors. Firstly, the continued normalisation of inventory cover in Bunnings, as well as higher levels of stock investment in direct sourced products in line with business growth. Secondly, lower payables at the end of the period across the retail businesses due to an earlier than normal stock build to avoid supply chain disruptions in the lead up to the busy Christmas trading period. This meant that payments typically made in January fell earlier in December. And finally, the impact of higher fertiliser prices on inventory in WESF as the business built stock prior to the peak selling season in the second half. Barring any further COVID disruptions, we do expect to see further normalisation of working capital balances through the second half. Group operating cash flows increased 26.7% to $1.97 billion, reflecting higher divisional operating cash flows as well as lower tax paid due to the timing of tax instalments and lower instalment rates during the half. Free cash flow for the half increased 43.8% to $1.36 billion, reflecting the impact of acquisitions in the prior corresponding period partially offset by higher capital expenditure during the half. Moving now to capital expenditure on slide 15. The group invested net capex of $676 million during the half, an increase of about 16% on the prior corresponding period. This was largely driven by $204 million of project capex and $21 million of capitalised interest in relation to the Mount Holland lithium project, along with the addition of the health business and increased investment in data and digital projects across the group. Proceeds from the sale of PP&E declined for the half, largely reflecting the timing of Bunnings property disposals. For the 2023 financial year, we expect net capital expenditure for the group to be between $1 and $1.2 billion. This estimate includes around $400 million to support the development of the Mount Holland lithium project and a further $40 million of associated capitalised interest. Estimates for WESF's share of total capex for the Mount Holland lithium project have been revised and we now expect total development capex excluding capitalised interest of between $1.2 to $1.3 billion in nominal dollar terms. The updated estimate represents an increase of around 10% to 20% on the guidance that we provided at the time of FID of approximately $950 million in real 2021 dollars. This equates to approximately $1.1 billion in nominal dollar terms if escalated at actual and forecast CPI. The updated guidance has been provided in nominal dollar terms in order to provide greater clarity on the actual investment we are making and what will ultimately be recognised on our balance sheet. The expected increase in capital cost relates principally to the refinery and is largely due to COVID related disruptions to key infrastructure items sourced from offshore and some engineering delays. Turning to the balance sheet and debt management on slide 16. The strength of our balance sheet continues to provide significant flexibility and capacity to support investment in growth initiatives across the group and to take advantage of value accretive opportunities as they arise. The group has benefited from actions taken over the past two years to reposition the balance sheet to optimise the cost and maturity profile of our debt. the average cost of funds for the half declined from 3.7% to 3.06%, with a weighted average term to maturity of 4.6 years. As at the end of the first half, West Farmers had available unused bank financing facilities of approximately $2 billion. Our strong investment-grade credit ratings from Standard & Poor's and Moody's were maintained, and the group retains considerable headroom within its key credit metrics. And finally, the dividends on slide 17. The Board has determined to pay a fully franked interim dividend of 88 cents per share, representing a 10% increase on the prior year. The dividend is in line with our historical interim payout ratio and consistent with our dividend policy, which takes into account available franking credits, balance sheet position, credit metrics and cash flow generation. Thank you and I'll now hand back to Rob to cover outlook for the group.