Wesfarmers Limited

Ladies and gentlemen, thank you for holding and welcome to the West Farmers 2023 full 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 on the West Farmers website and can be accessed from the homepage of westfarmers.com.au. I would now like to hand the call over to the Managing Director of West Farmers Limited, Mr. Rob Scott.

Thanks very much and welcome everyone to the 2023 full year results briefing. And I'm joined here in Perth today with all of our divisional managing directors and our CFO, Anthony Gianotti. To begin, I'll provide an overview of the group's performance, provide some comments on the positioning of our portfolio and our progress on strategies, following which Anthony will provide some more detail on our financial performance. And then I'll make some comments on the group's outlook and then Anthony and our divisional managing directors and I will welcome any questions that you have. So I'll start on slide four, which will be familiar to most of you. It sets out West Farmer's corporate objective, which is to deliver a satisfactory return to shareholders. we defined satisfactory as a top quartile total shareholder return over the long term. And we acknowledge that we can only achieve this if we continue to anticipate the needs of our customers, look after our team members, treat suppliers fairly and ethically, contribute positively to the communities where we operate, take care of the environment and act with honesty and integrity. So turning to slide five, I wanted to highlight three key takeaways from our results. Firstly, I'll start with our financial performance and it's pleasing to again report a strong set of results for the year with net profit after tax increasing 4.8% to $2.5 billion. Importantly, the group's profit result was underpinned by a 12.9% divisional earnings growth as our operating businesses continue to execute well and respond well to the market conditions. And you'll note that the difference between the divisional and group earnings is largely related to the change in non-cash property revaluations. There was strong growth in cash flows and the quality of the profit result have enabled the board to resolve to pay a fully franked final dividend of $1.03, bringing the total dividend to the year to $1.91, representing a 6.1% increase on the prior year. The second point I wanted to highlight was the group's portfolio of high-quality businesses provides both a mix of resilience and growth, and this gives us confidence as we look to the future. Our businesses are benefiting from their strong value credentials on everyday products. We are well progressed with proactive productivity and efficiency initiatives, and we will have new earning streams coming online this year as our lithium business ramps up the sale of spodumene concentrate. And finally, as always, the group maintains its long-term focus on value creation. Having worked to establish significant platforms for growth, the focus is now on executing these strategies to expand our operations in lithium and health to businesses that will benefit from strong demand over the decades ahead. And we're also proactively progressing a strong pipeline of growth opportunities across our existing divisions that you'll hear about today. And we maintain our focus on strengthening our climate resilience and pursuing opportunities that will contribute to global decarbonisation and responsibly support the energy transition. Turning to slide six, and the strong divisional earnings result for the year, which underpinned the group's performance. The divisional results are a credit to the 120,000 team members across the group who have maintained their focus on meeting customer needs and their commitment to the group's objectives. While divisional earnings growth for the year include the benefits of cycling lockdowns in the first half, it also reflects the benefits of strong execution within the retail businesses, leveraging their leading value credentials and omnichannel offers to meet changing customer needs, and also the industrial businesses benefiting from strong plant availability. The delivery of incremental growth as our divisions entered into new categories, enhanced ranges and expanded their operations has been another important contributor. And then realisation of productivity and efficiency benefits from proactive initiatives in recent years. This includes supply chain modernisation projects, the digitisation of operating processes and the increasing use of AI and predictive analytics. It's important to note that We have achieved earnings growth in Bunnings, Kmart and Officeworks whilst retaining our lowest price positioning. In fact, it's our commitment to lowest prices that allows these businesses to be successful, delivering a win-win outcome for customers and our shareholders. Turning to slide seven, I'll use this slide to speak to some of the divisional highlights and then Anthony will give more detail on the financial results. Bunnings delivered solid sales growth reflecting the resilience of demand across its offer and strong execution of its strategic agenda. Bunnings again demonstrated its capacity to grow its proposition and addressable market whilst maintaining strong returns. During the year this included the successful PETS launch and continued advancement of their whole of build commercial strategy. Bunnings also continues to make significant progress on its digital agenda with increasing engagement through the Power Pass app, Bunnings Marketplace and One Pass and Flyby programs, along with improvements in its educational and social content. Kmart Group delivered significant sales and earnings growth this year. The strong underlying trading performance in Kmart reflected successful execution of pricing strategies and operating initiatives in addition to the benefits from a normalisation of trading. With value continuing to become more important to households, Kmart's lowest price positioning is resonating strongly, attracting new customers during the year Following actions to simplify Target's operations in recent years, and we've continued to maintain a low cost base, and this has contributed positively to the Kmart Group earnings result for the year. And as recently announced, this year Kmart Group will pursue opportunities to leverage the strengths of Kmart's technology platforms and selected ANCO ranges within Target. WESF delivered record results for the year and continued to make good progress in the development of its lithium business and in its evaluation of incremental growth projects within the chemicals division. The excellent operating results, plant reliability and safety focus from WESF are a highlight for the group. Significant earnings growth in office works reflected benefits realised from productivity investments in recent years, as well as improved back-to-school trading, growth in B2B sales, and continued above-market growth in technology categories. Industrial safety again improved its performance, with the final deployment of Blackwood's ERP system in the first half a highlight for the year. The health division continued to advance its transformation plan with investment in supply chain capabilities, improvements to the customer offer and network changes to strengthen the competitive position of API and its pharmacy partners. The health team has also progressed attractive digital health opportunities, including the acquisition of instant scripts, which completed early July this year. The investments made in recent years to develop the group's data and digital capabilities are gaining traction and delivering value across the operating divisions and through the One Pass program and the group shared data asset. It's worth reflecting that e-commerce sales across our divisions, excluding catch, have grown by 150% or more than $1.4 billion since the 2019 financial year. Our businesses have also continued to develop and trial more sophisticated analytics models which are delivering improved outcomes in areas such as demand forecasting, product design, in-store and online availability and marketing effectiveness. And last year was the first year of rollout for the One Pass membership program, which is adding value to customers in our divisions, with more to come this year. As I noted at the first half results, Catcher's performance for the year was disappointing. Changes made throughout the year have supported improvements to performance in the second half, with losses reducing, and progress on key operational and customer metrics. Encouragingly, Catch continues to attract and retain a younger and digitally native customer cohort with strong engagement through the One Pass program. The Catch team remains focused on ensuring that financial and operating results continue to improve with clear plans in place for the year ahead. And it's worth noting that the investments made in Catch over recent years are being leveraged across the group to provide some centralised e-commerce fulfilment capabilities and to strengthen digital marketing programs. Turning to slide eight and the progress with our sustainability agenda. Recognising it's linked to long-term value creation, we continue to build climate resilience in our businesses Our divisions achieved a 2.4% decrease in Scope 1 and Scope 2 emissions, making good progress towards their net zero targets. And progress was made to better understand our dependencies on nature through pilot participation in an emerging TNFD framework. As the largest admitter of the group, WESF continues to make pleasing progress, taking actions aligned with its net zero road map. Reflecting on our commitment to provide a safe and fulfilling work environment for team, improvements in safety results were recorded across most businesses. At a group level, TRIFA increased on the prior period, which was largely attributable to Bunnings, where results were impacted by a change in injury classifications to better align with the group measures, as well as some increases in manual handling injuries. The group remains at proportional representation with approximately 3.3% of Australian team members identifying as Aboriginal or Torres Strait Islander. The focus in the last 12 months has turned towards measures to support career progression of Indigenous leaders across the group and we've had over 100 team members participate in the West Farmers Indigenous Leadership Programme. Turning to slide nine, you can see the summarised performance for the group, but I'll hand over to Anthony now who can talk about the financial performance in more detail.

Thanks, Rob, and hello, everyone. I'll start on slide 11, which provides detail on sales and revenue growth across the group. I'll speak to sales and earnings performance for each of the divisions on the next slide, but at an overall level, we were pleased with the solid sales result across the group for the 2023 financial year. As customer behaviour continued to normalise and as value has become increasingly important, our retail businesses benefited from the everyday and value-focused nature of their offers, as well as from good execution of their strategies during the year. As we noted in February, first-half retail sales growth reflected both strong underlying demand, together with the impact of cycling COVID-related lockdowns in the prior corresponding period. In the second half, we saw some moderation in retail sales growth, but overall trading conditions remained robust with solid sales growth in Bunnings and strong growth within Kmart and Officeworks. Turning to divisional earnings performance on slide 12. In Bunnings, sales growth of 4.4% was supported by growth across both consumer and commercial segments. Bunnings continued to demonstrate the resilience of its operating model, with all trading regions delivering sales growth for the year despite the impact of prolonged wet weather across the East Coast during the 2022 spring trading season. Bunnings sales were supported by continued building activity and robust demand from commercial customers, which was offset by slightly lower consumer sales in the second half. Bunnings has seen some good consumer demand continue for necessity products that support recurring home repairs and maintenance and for smaller scale DIY projects. But compared to the second half last year, consumers have demonstrated a more cautious approach to bigger ticket purchase decisions and the commencement of larger projects. Overall, Bunnings earnings of $2.2 billion represented an increase of 1.2% or 1.9% after excluding the net impact of property contributions. This result continues what has been a remarkable period of growth for the business with earnings up 42% since 2019. Kmart Group delivered record earnings for the year of $769 million, an increase of 52%. The result reflects a combination of strong underlying consumer demand, solid execution of pricing strategies and operational plans, as well as benefits in the first half from a normalisation of trading conditions versus COVID-affected results in the prior year. As anticipated, we have seen a continued strong response from customers to Kmart's lowest price positioning, with comparable sales growth of 14.5% for the year and 12% in the second half. Kmart delivered sales growth across all categories, as well as growth in units sold and transactions relative to the prior year. Target sales results were broadly in line with the prior year, but with more variable performance across categories, particularly in the second half. Target continued to trade well across its apparel range, but with more challenging results in toys and home, highlighting the opportunity for the division to leverage the strengths of Kmart's ANCO range in these areas. Kmart Group continued to leverage its direct sourcing capability and progress proactive productivity and cost control measures, which helped mitigate cost pressures from inflation, increased shrinkage and ongoing exchange rate volatility during the year. And finally, as announced in July, the division is working to further integrate back-office sourcing and merchandising functions across Kmart and Target, which will deliver further long-term efficiencies. WESF delivered revenue growth of 8.7% and earnings growth of 23.9%, lifting earnings to a record $669 million for the year. A significant increase in earnings in chemicals was supported by higher average ammonia prices, strong customer demand and continued excellent operating results for the year. The chemicals result also benefited from a temporary pull forward of earnings associated with the time lag in pricing of customer contracts as ammonia prices declined in the second half. In clean heat, earnings were impacted by a lower Saudi contract price and higher WA natural gas costs during the year. And earnings for fertilisers decreased as a result of lower commodity pricing and a later seasonal break. As Rob's mentioned, construction of the Mount Holland mine and concentrator was completed during the year and commissioning of the concentrator is now underway ahead of the first planned sales of spodumene concentrate in the 2024 financial year. Officeworks' performance was pleasing, with sales growth of 6% and earnings growth of 10.5% to $200 million for the year. Sales were supported by improved back-to-school trading, significant growth in B2B sales and above-market sales growth in technology. As we noted in the release, Officeworks' second-half results included a sales benefit from the back-to-school voucher program in NSW. More broadly over the year, it was encouraging to see increased demand as more normal trading conditions returned in categories that were most impacted by COVID, including stationery, art, office supplies and print and create. Highlighting the benefits of proactive actions taken over recent years, Officeworks' strong earnings growth this year was enabled by ongoing investments to drive productivity and efficiency across stores, supply chain and in the support centre. Industrial and safety delivered another improvement in performance with earnings growth of 8.7%, supported by sales growth across the division and a modest gain in the first half from the sale of the green cap consulting business. Despite an improvement in performance, earnings were impacted by inflationary cost pressures and the timing lag in changes to customer contracts in Blackwoods. In West Farmers Health, sales were supported by new customer acquisition, elevated demand for COVID-19 antiviral products in the wholesale business and solid sales across the Priceline health and beauty categories, albeit with sales moderating in the second half. Earnings of $45 million reflected increased investment in the acceleration of transformation activities, the costs associated with the transition to the new Sydney Fulfillment Centre and the impact of higher operating costs in Clear Skincare. The result also included $13 million of non-cash amortisation expenses associated with purchase price accounting adjustments. Catch reported a loss of $163 million, including restructuring costs of $40 million relating to inventory provisions, team member redundancies and asset write-offs. As Rob has just reiterated, it's clearly a disappointing earnings result and the focus on actions to improve performance is ongoing. The underlying loss for the second half of $48 million was a reduction on the $75 million recorded in the first half. This reflected restructuring initiatives to reduce headcount and exit unprofitable first party products, as well as improvements in supply chain and fulfilment costs. Turning now to slide 13 and covering our other businesses and corporate overheads, which reported a significant reduction in earnings with a loss of $206 million compared with earnings in the prior year of $7 million. The key driver here was the impact of negative property revaluations in BWP Trust and BPI, which, while non-cash in nature, accounted for $164 million of the reduction in earnings. Other corporate earnings were also impacted by a decrease in dividend revenue due to the progressive sale of the group's interest in coals, a lower group insurance result, the benefit of the home-based equity distribution in the prior period and higher corporate overheads which included further investment in the group's cyber security capabilities during the year. Finally, we continued to invest in the development of the One Pass membership program and the group's customer and data insights capabilities through One Digital, with a net cost of $82 million, which is broadly in line with $80 million in the prior year. We expect a net cost of approximately $70 million for the 2024 financial year. Turning to working capital and cash flow on slide 14. Divisional operating cash flows increased 45.6% for the year, or 40.7% if you exclude the health division, which only contributed a partial year of cash flows in the prior year. Strong divisional earnings growth, as well as normalisation in the businesses' working capital positions, supported an increase in divisional cash generation to 101%. The group's inventory balance at the end of the year includes the impact of lower commodity pricing in Wessef and the reduction of inventory buffer levels at Kmart, partially offset by the impact of unit cost inflation across the retail businesses and investment in stock availability within our health division. Overall, we are comfortable with inventory positions across the group with good stock availability in the retail divisions, lower seasonal holdings versus the prior year and inventory cover ratios having now returned to be broadly in line with our pre-COVID levels. At a group level, operating cash flows increased 81.6% to $4.2 billion for the year, reflecting the higher divisional operating cash flows as well as lower tax paid due to the timing of payments. Free cash flows for the year increased $3.6 billion, reflecting higher operating cash flows, proceeds from the sale of the group's 2.8% interest in coals, and the impact of acquisitions in the prior period, partially offset by higher capital expenditure and lower proceeds on the sale of property. Moving to capital expenditure on slide 15. The group invested gross capex of $1.3 billion during the year, an increase of 12.6% on the prior period. This was largely driven by development capex of $394 million and capitalised interest of $42 million relating to the covalent lithium project, along with continued investment in data and digital and the addition of the health division. Proceeds from the sale of PP&E declined for the year, reflecting reduced Bunnings property activity. For the 2024 financial year, we expect net capital expenditure for the group to be in the range of $1.1 to $1.4 billion. And this estimate includes around $370 million to support the ongoing development of the covalent lithium project, as well as capex associated with a number of expansion projects in WESIF, including ammonia and sodium cyanide capacity expansions and ammonium nitrate depoddle necking. These projects remain subject to approvals. WESF's share of total capex for the covalent lithium project remains in line with prior guidance of between $1.2 to $1.3 billion in nominal terms and excluding capitalised interest. Turning to balance sheet and debt management on slide 16. The strength of our balance sheet continues to provide the group with significant flexibility and capacity to support investment in growth initiatives and to take advantage of value accretive opportunities that may arise. We continue to actively monitor the group's debt mix and manage exposure to variable rates. The average cost of funds for the year increased from 3.1% to 3.3% with a weighted average term to maturity of 4.4 years. Total finance costs increased $135 million as a result of higher average debt balances resulting from the funding of acquisitions and capex associated with covalent lithium. At the end of the financial year, the cost of drawn debt was around 3.7% and the group had available unused bank financing facilities of around $2.6 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, to dividends on slide 17. As Rob mentioned, the board has determined to pay a fully franked final dividend of $1.03 per share, which brings our total dividends for the year to $1.91 per share. This is consistent with our dividend policy, which considers available franking credits, balance sheet position, credit metrics, and our cashflow generation. And with that, I'll now hand back to Rob to cover off outlook for the group.