Wesfarmers Limited

Ladies and gentlemen, thank you for holding and welcome to the West Farmers 2024 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 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.

Hi everyone and welcome to our 2024 half year results briefing. Today I'm joined in Perth with all of our divisional managing directors and our CFO Anthony Giannotti. To begin I'll provide an overview of the group's performance, some comments on the positioning of our portfolio and progress on strategies and then Anthony will provide more detail on our financial performance and the balance sheet. And I'll then conclude with some comments on the group's outlook. And then Anthony and our divisional managing directors and I would welcome any questions that you have. So starting on slide four, a slide that will be familiar with all of you. So it sets out the West Farmers corporate objective, which is to deliver a satisfactory return to shareholders. And we define satisfactory as top quartile shareholder returns over the long term. We know that we can only achieve this if we continue to anticipate the needs of our customers, look after our team, treat suppliers fairly and ethically, contribute positively to the communities where we operate, take care of the environment and act with integrity and honesty. Turning to slide five, I wanted to start on financial performance and we were pleased with the results for the half with net profit after tax increasing 3% to $1.4 billion and operating cash flows up 47% to $2.9 billion. 3% profit growth was achieved against a backdrop of the expected decline in WESF earnings given ammonia prices and continued cost pressures facing households and businesses. Kmart was a standout result highlighting the financial benefits that come from delivering great value ANCO products to customers through a scalable business model that drives productivity, operating efficiency and category expansion. As a result of the strong financial performance, the Board has determined to pay a dividend of 91 cents, which is a 3.4% increase on the prior corresponding period. Looking across the portfolio, there are a few points that provide confidence about the positioning of the group. We have businesses with clear and sustainable sources of competitive advantage, particularly in our larger divisions. there remain significant opportunities for incremental growth through product innovation, addressable market expansion and capacity investment across the existing divisions. And we see the potential for attractive long-term returns over time in our health and lithium businesses, with these factors all supported by the cash-generative nature of our businesses and our focus on operating responsibly. So turning to the next slide, six, I'd like to talk about some of the specific themes we saw in the first half. Overall, the group's performance reflected strong execution from high-quality businesses. We see strong execution through our businesses' success in meeting changing customer needs, driving product innovation and delivering productivity initiatives and new growth projects. The high quality of the businesses is attributable to factors such as our trusted brands, the strength of our teams, the resilience in demand across our product range, competitive advantages through the scale of our sourcing operations and the alignment of our industrial businesses to industries where Australia is globally competitive. Through recent results we've talked about the benefits of our core retail offer providing market-leading value on everyday products and this has again been a clear feature of our results for the half. Our retail businesses saw growth in customer transactions and sales as customers were discerning with their spending, seeking out value and being more selective with purchases. We saw strong growth in lower price point and own brand products. And we acquired new customers and increased share of wallet as customers sought value and as we expanded our offer into new categories. As some input costs moderated and our businesses realised benefits from ongoing productivity initiatives, the retail divisions were able to deliver thousands of price cuts for customers during the half. On the industrial side, it was good to see the continued strong operating results with WESF executing well and achieving good operational performances. Overall, these results are a credit to the 120,000 team members across the group who maintain their focus on meeting customer needs and their commitment to the group's objective. Turning to slide seven, I'll use this slide to speak to some of the key divisional highlights and then Anthony will talk in more detail to the financials. 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 while maintaining strong returns. This included progress on the pets range and the expanded cleaning offer, both of which are trading well and delivering great value to customers. Bunnings also continued to make significant progress with its digital agenda, increasing digital sales and a strong customer engagement through the PowerPass and customer apps, the Bunnings marketplace and also through their educational and social content. Kmart Group recorded a very strong result with significant growth and record earnings for the half. This result reflects many years of effort developing and refining Kmart's unique business model. The strength of ANCO product development and sourcing provides a clear point of difference. It enables Kmart to deliver lowest prices across the growing ANCO range, with these products resonating strongly and attracting new customers. Kmart continues to innovate and delivering strong growth in apparel categories, including the new Youth Apparel range. The expanded beauty range also traded strongly and contributed to growth for the half. Kmart Group made good progress on steps to further integrate Kmart and Target, and select ANCO ranges have been introduced to Target this calendar year with positive early results. WESF delivered excellent operating results, with plant reliability and safety focus a highlight. Covalent made good progress in the development of its integrated lithium project, successfully commissioning the concentrator and commencing the ramp-up of spodumene concentrate operations. Good progress also continued on the construction of the hydroxide refinery at Kwinana, which was more than 65% complete at the end of the half. And as previously indicated, WESF's financial result reflected lower international commodity prices, particularly ammonia, which has been elevated in recent years. Officeworks recorded growth across key categories and continued market share gains in technology, while also progressing actions to modernise its operations and realise productivity improvements in store through its supply chain and through its store support functions. Industrial safety again improved its performance and has benefited from its strong focus on customer and its digital capabilities. The Health Division continued to advance its transformation plan with investment in supply chain, improvements to the customer offer and network changes to strengthen the competitive positioning of API and its pharmacy partners. The Health Teams also expanded its digital health and medical aesthetics capabilities with the completion of the acquisition of Instant Scripts and Silk Laser Australia during the half. Significant enhancements to the customer value proposition of the One Pass membership program continued to support growth in member numbers and provided incremental benefits to the retail business during the half. We know that One Pass members are higher frequency, higher value customers compared to non-members and they enjoy shopping in-store and online. And importantly, we see the one pass program supporting customer acquisition and retention for the divisions and incremental sales as members increase the spending after they join the program. Catch's performance continued to improve during the half with successful execution of the restructuring program commencing in December 2022, providing a simplified first party offer and significantly reducing the cost base. The catch offer has resonated with OnePass members who value the broader range in e-commerce options and our data shows that customers that join OnePass increase their spend on catch. Turning to slide eight and progress on our sustainability agenda. Recognising its link with long-term value creation, we continue to build climate resilience across our businesses. Our divisions achieved a 7.8% reduction in Scope 1 and Scope 2 emissions, making good progress towards their interim emissions reduction and renewable energy targets, and our longer-term progress towards net zero. As the larger emitter of the group, WESF continues to make pleasing progress, taking actions aligned with its net zero roadmap. Reflecting on our commitment to provide a safe and fulfilling work environment for our team members, improvements in safety results were recorded across most businesses, and at a group level, we saw TRIFA improve to 10.9, driven mostly by improved results in Bunnings. The group remains at proportional representation with approximately 7.7% of Australian team members identifying as Aboriginal or Torres Strait Islander team members. And we continue to support career progression of Indigenous leaders with a further 37 team members completing the West Farmers Indigenous Leadership Program through the half. Now, turning to slide seven, you'll see the summarised financial performance of the group, and I'll now hand over to Anthony, who will talk in more detail to the financials.

Thanks Rob and hello everyone. Slide 11 in the presentation provides some of the 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 our sales results for the half, which was underpinned by a really strong result across our retail businesses and in particular across Kmart. On slide 12, at a total level, divisional earnings increased 2.3% for the half, with strong results in retail, more than offsetting the impact of lower commodity prices in WESF. Our retail businesses executed very well during the period, enabling them to deliver great value to customers, which supported the pleasing financial results. Excluding catch and the impact of property sales, retail earnings across the group increased by over 9% for the half. Across all the retail businesses, we saw continued cost of doing business pressures, which were generally well mitigated by productivity actions, resulting in stable margins for Bunnings and Officeworks. And in Kmart, the stronger margin for the half reflected the benefits realised through the ANCO direct sourcing model. As we've said many times before, we don't manage our retail businesses to short-term margin targets. Instead, we see margin percentage as an outcome and focus on growing margin dollars over the long term. I'll now step through the divisional results in more detail. In Bunnings, we saw further demonstration of the resilience of its operating model with sales growth of 1.7%, supported by growth in both consumer and commercial segments. Consumer transactions, unit volumes and store visitations all grew during the half, as Bunnings saw continued demand for home repair and household products across a range of categories. Commercial sales were supported by demand from trades and builders as they worked through the pipeline of outstanding work. Activity did moderate through the half as new building starts normalised from the peaks that we've seen in recent years. Bunnings continued to focus on delivering great value for customers with ongoing investment in price, supported by cost discipline, business improvement initiatives and moderating global supply chain costs. Overall, Bunnings' earnings of $1.28 billion represented an increase of 3.1%, excluding the impact of property contributions. Kmart Group delivered record earnings of $601 million for the half, an increase of 26.5%. Customers continued to respond strongly to Kmart's lowest price positioning with comparable sales growth of 7.5% for the half. Kmart delivered sales growth across all categories as well as growth in units sold, transactions and customer numbers relative to the prior corresponding period. Kmart's trading performance was supported by continued improvements in the product offer, particularly in higher margin apparel categories. The end-to-end ANCO direct sourcing model enabled efficiency and earnings benefits as Kmart extended its lowest price leadership. Targets comparable sales declined 2.9% for the half with variable performance across categories. Targets apparel range continued to trade well but results across toys, home and general merchandise products were more challenged and many of these categories have now been replaced with ANCO product. Kmart Group continued to progress proactive productivity and cost control measures which helped to mitigate ongoing cost of doing business pressures and higher shrinkage during the half. In WSF, revenue declined 21.2% and earnings declined by 46.9% to $172 million for the half. As previously indicated, revenue and earnings were impacted by lower global commodity prices relative to the elevated pricing environment that we've seen in the last few years. In chemicals, excellent operating performance continued, but earnings decreased significantly due to the lower average global ammonia price. In clean heat, earnings were impacted by a lower Saudi contract price and higher WA natural gas costs during the half. And earnings in fertilisers decreased as a result of declining global commodity prices, partially offset by strong sales volumes due to a later 2023 seeding season. As Rob mentioned, the production of spodumene concentrate has entered the ramp up phase with first product available for sale in the first half of the 2024 calendar year. Good progress has also been continued on the construction of the Kwinana Refinery with the timing of first production and capital expenditure expectations in line with the previous guidance. In Officeworks, sales increased 1.8% and earnings increased 1.2% to $86 million for the half. It was pleasing to see continued growth across key categories, including technology, stationery, education and print and create, partially offset by declining furniture sales. Officeworks continued to invest in everyday low prices and promotional initiatives to deliver value for customers, and the business achieved strong sales growth during the Black Friday and Cyber Monday period. Earnings growth was supported by ongoing investments in productivity initiatives and disciplined cost management, which helped to mitigate ongoing cost of doing business pressures. During the half, Officeworks opened its new automated customer fulfilment centre in WA, along with three new stores and a new head office, resulting in higher lease interest costs. Industrial and safety delivered a solid result for the half. Revenue increased 3.2% with growth recorded across all businesses. And earnings increased 4.3% with the business managing ongoing domestic cost pressures and making continued investment to support long-term growth. Westfarmers Health continues to progress its accelerate transformation plan, building capabilities and taking actions to position it for long-term success. Sales for the half was supported by pleasing growth in price line and new customer acquisitions in the wholesale business. This was offset by a significant reduction in COVID-19 antiviral sales. Excluding the impact of amortisation from purchase price accounting, Health's earnings increased 5.9% to $36 million for the half. The earnings result includes some early benefits from improvements to the retail and wholesale offers, albeit these were largely offset by the necessary investment in longer-term transformation activities, as well as the short-term impacts from 60-day dispensing, recent PBS price changes and higher costs in clear skincare. Catch reported an improved performance for the half with a loss of $37 million, excluding restructuring costs. The result was underpinned by significant reductions in the in-stock range in order to exit unprofitable lines, and the business continued to improve fulfilment efficiency and further reduce the cost base. Performance during the half represents continued improvement relative to the $48 million loss in the prior half and $75 million loss in the prior corresponding period. We expect restructuring and cost-out initiatives to continue to reduce operating losses into the second half. Turning now to slide 13 on other businesses. Our other businesses and corporate overheads reported a loss of $95 million for the half compared to a loss of $75 million in the prior corresponding period. A key driver of this was the impact of lower property revaluations in BWP Trust, with the group's share of profit from associates and joint ventures declining from $44 million to $15 million. Group overheads were broadly in line with the prior corresponding period, while other corporate earnings were slightly higher, driven by a higher group insurance result, partly offset by lower dividend income following the sale of the group's remaining interest in Coles in April of 2023. Finally, we continue 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 investment of $39 million for the half. It's worth noting that the growing financial benefits of higher customer frequency, uplift in One Pass member spend and improved personalisation are reflected within the Retail Division's sales and earnings results. Turning to working capital and cash flow on slide 14. Divisional operating cash flows increased 27.1% for the half with divisional cash generation of 120%. Strong divisional cash flows were supported by strong earnings growth in Kmart and a favourable net working capital result which contributed $568 million for the half. The strong cash inflow from working capital was driven by Bunnings' disciplined management of stock levels, as well as the impact of lower international shipping rates, and a normalisation in WESF following the impact of elevated commodity prices and the timing of fertiliser seasonal breaks in the prior corresponding period. These factors were partially offset by working capital investment in the health division, including the removal of higher cost debtor funding arrangements and changes to supplier payment terms. At a group level, operating cash flows increased 47% to $2.9 billion, reflecting higher divisional cash operating cash flows, as well as lower tax paid due to the timing of payments. Free cash flow for the half increased 47.4% to $2 billion, reflecting higher operating cash flows partially offset by the impact of cash consideration for the acquisitions of Silk and Instant Scripts. Moving to capital expenditure on slide 15. The group invested a gross capex of $577 million during the half, which was 14.6% lower than the prior corresponding period. This was driven by fewer store openings in Bunnings due to the timing of new and replacement stores and the completion of construction at the Mount Holland Concentrator in the 2023 financial year. Proceeds from the sale of property, plant and equipment declined for the period, reflecting reduced property activity at Bunnings. As a result, net capital expenditure for the half declined 1.4% to $570 million. For the full year, we're expecting net capital expenditure for the group to be in the range of $1 to $1.2 billion, and this estimate includes around $350 million associated with the ongoing development of the covalent lithium project. 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 interest rates. The average cost of funds for the half increased from 3.3% at the full year in June to 3.8% for the half. with a weighted average term to maturity of 4.4 years. Our strong investment grade credit ratings from Standard & Poor's and Moody's were maintained, and the group retains considerable headroom within these key metrics. At the end of the half, the group had available unused bank financing facilities of approximately $2.4 billion. And finally, to dividends on slide 17. As Rob's already mentioned, the board has determined to pay a fully franked interim dividend of $0.91 per share. This is consistent with our dividend policy, which considers available franking credits, our balance sheet position, credit metrics and, of course, cash flow generation. In line with recent practice, the group does intend to purchase shares on market to satisfy shares issued as part of the dividend investment plan. And with that, I'll now hand back to Rob to cover Outlook.