Wesfarmers Limited

Ladies and gentlemen, thank you for holding and welcome to the West Farmers 2024 full year results briefing. Your lines will be muted during the briefing. However, you will have an opportunity to ask a question immediately afterwards and instructions will be provided how to do so 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. Please go ahead.

Thanks very much and hi everyone. Welcome to our 2024 full year results briefing. In Perth today, I'm joined by our Divisional Managing Directors and our CFO, Anthony Gianotti. As we ordinarily do, I'll give an overview of the group's performance for the year, provide some comments on the portfolio and then Anthony will provide more detail on the financial performance. I'll conclude with some comments on current market conditions and the outlook for the group. And then the divisional managing directors, Anthony and I, would welcome any questions that you may have. So starting on slide four, a slide that will be familiar to all of you, it sets out the Westfarmers corporate objective, which is to deliver a satisfactory return to shareholders. We define satisfactory as top quartile shareholder returns over the long term. 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, contribute positively to the communities in which we operate, take care of the environment and act with integrity and honesty in all our dealings. So moving to slide five, starting with our financial performance. This year, West Armour's net profit after tax increased 3.7%. to $2.6 billion and operating cash flows increased 9.9% to $4.6 billion. Our businesses demonstrated strong operational execution as the group's profit result was achieved in a challenging market environment with continued cost of living pressures, subdued activity in residential construction and volatility in key commodity prices. We had expected some of these challenges, especially with persistent cost pressure and and our businesses benefited from our early proactive decisions to focus on a range of productivity measures. As a result, we were able to mitigate cost pressures and continue to provide great value for customers. Notably, all our major retailers grew sales and earnings for the year, which for 2024 financial year is a very pleasing outcome. This year, Kmart Group's performance was a standout, with earnings growth of nearly 25%, highlighting the market leading value of its ANCO products, its unique sourcing capabilities and ability to operate more efficiently. Due to the continued growth in profit and cash flows, the board has resolved to pay a fully frank final dividend of $1.07 per share, which brings the total dividend for the year to $1.98 per share, a 3.7% increase. Looking across the portfolio, our quality businesses and commitment to responsible long-term management gives us confidence that we're well positioned to deliver returns over the long term. Turning to slide six, as mentioned, the results reflect strong execution from a portfolio of high-quality businesses where we have trusted brands, competitive advantages in scale and sourcing, and exposure to industries with attractive long-term growth, such as health and wellbeing and critical industries. This past year, our retail businesses have focused on continuing to provide market-leading value, and our major retailers benefited from their everyday low price positioning, which resonated with customers in the current environment. Their focus on reducing costs and improving productivity has helped to lower prices at a time when many households and businesses are doing it tough. Importantly, we continued to retain our everyday low price positioning at Bunnings, Kmart and Officeworks, which benefited households and business customers as they focused on balancing their budgets. Our customers have responded well to price drops, including more than 3,000 price drops at Kmart in the last year. Our businesses are continuing to meet changing customer needs and expand their addressable markets through providing new products and service offerings and capturing a greater spend from younger generations, such as Gen Zs and millennials, while continuing to meet the needs of the broader market. On the industrial side, our businesses again delivered strong operating results, with WESF achieving increased plant production and supporting customers in critical industries. Set out on the slide are some examples of actions we're taking to drive sustainable long-term returns. Key to our success this year has been the ongoing focus and investment in technology and digitisation across the portfolio. This helps unlock operational benefits, productivity improvements, as well as improving the product and service offering through a stronger omni-channel experience for our retail customers. Turning to slide seven, I'll use this to talk to some of the key divisional highlights and then Anthony will provide more detail on the financials. Bunnings demonstrated the resilience of its offer and strong execution of its strategic agenda, continuing to grow sales and earnings in challenging market conditions. This year, Bunnings continued to expand its range with innovation across categories such as smart home, supporting an increase in customer demand. Bunnings also continued to invest in supply chain, data and technology projects to strengthen the customer experience across channels, such as the new Bunnings local delivery service. The business continued to improve its whole-of-build commercial strategy, and in the second half, Bunnings opened a new state-of-the-art frame and trust site to supply customers with pre-made products frame and trusses with greater efficiency at a lower cost. Kmart Group recorded significant earnings growth. The result reflects Kmart's consistent focus over many years on developing world-class end-to-end sourcing capabilities to deliver market-leading own brand products through ANCO. This focus has enabled Kmart to deliver a step change in performance driven by its everyday low price positioning and provided new growth opportunities for the future. The performance has also been supported through leveraging digitization to improve operating performance. Now that Kmart and Target integration is largely complete, Target is benefiting from Kmart systems, processes, and capabilities. Wessef delivered strong operating results with good plant production rates and great safety performance for the year. As previously outlined, Wessef's financial result reflected lower global commodity prices, At our covalent joint venture, the focus remains on developing the integrated mine, concentrator and refinery and we expect the project to deliver satisfactory returns over the long term. Officeworks continue to focus on evolving its product offer and gained market share in technology while also progressing actions to modernise its operations including a new automated customer fulfilment centre in Western Australia. Industrial and safety continue to improve its performance benefiting from recent investments and a strong focus on productivity. The health division increased earnings while continuing to invest in transformation activities, focusing on opportunities to improve returns. Sales growth in retail and pharmacy wholesale was pleasing and is benefiting from these recent investments. The health team is focused on integrating the instant scripts and silk acquisitions which were completed during the year and are performing well in line with expectations. and the health division is now moving from a phase of building capabilities to realising the benefits of these investments. One Digital continues to play an important role, accelerating omnichannel growth for our retail and health divisions. During the year, significant enhancements were made to the OnePass membership program with the addition of new retail partnerships, delivering even better value for its members. It has been pleasing to see these enhancements resonate with members, and OnePass is driving incremental sales for the divisions and improving customer retention. We know that OnePass members are significantly more valuable than non-members, shopping across more brands more often and spending more after joining the program, with members shopping three times more frequently compared to non-members per annum. Catch reduced its losses on the prior year, following actions to reset the operating model and reduce the cost base. It's clear that the competitive environment in Australian e-commerce retail is intensifying with the growth of international e-commerce and marketplace retailers. In this environment, the group's investment in Catch, which provides a marketplace platform and fulfilment capability, provides valuable insights and capabilities for the group's broader operations and also improves the offer for OnePass members. So CATCH is now scaling up its marketplace, which is a capital light strategy that will better utilise its supply chain assets and digital capabilities, whilst also strengthening the group's e-commerce offering. Now, these actions are expected to reduce ongoing investment and improve returns, and progress will continue to be monitored very closely. Turning to slide eight and the progress on our sustainability agenda. As one of the largest employers in Australia with around 120,000 team members, we know our businesses play critical roles in our economy, providing the first job to thousands of teenagers, often casual, still in school, through to terrific multi-decade careers built on great experience and development opportunities across retail and industrials. We know that our success is linked firmly to the creativity and commitment of our teams and have long recognised that we'll only achieve Westfarmers' purpose if we continue to look after our team and provide a safe and fulfilling work environment. In this context, it was pleasing to record improvements in safety across most businesses. At a group level, TRIFA declined slightly from 11.3 to 11, albeit with an increase in the year of earnings. At the end of the year, WESF had not recorded a single lost time injury for 17 consecutive months. The group remains at proportional representation with 3.8% of Australian team members identifying as Aboriginal or Torres Strait Islander. And recognising its link to long-term value creation, we continue to build climate resilience across our businesses. During the year, divisions achieved a 5.4% reduction in Scope 1 and Scope 2 market-based emissions, building on improvements in recent years and working towards our targets with respect to emissions reduction and renewable energy targets. Turning to slide nine, you can see the summarised financial performance. I'll now hand over to Anthony, who will talk in more detail on the divisional financials and the balance sheet and cash flow.

Thanks, Rob, and hello, everyone. On slide 11 in the presentation, we've provided some further detail on the sales performance across each of the divisions for the year and for the second half. I'll speak to the performance of each division on the next slide, but at an overall level, we were pleased with the sales results for the year. In particular, the strong growth across our retail businesses, which reflected the market-leading value credentials and our everyday low price proposition, which resonated with customers in a difficult trading environment. This was particularly the case in Kmart, where comparable sales increased 6.4% on the prior year, while Bunnings had a pleasing second half, increasing sales by 2.9%. The revenue decline in WSF was driven by lower global commodity prices relative to the elevated levels we saw in the last financial year. On slide 12, at a total level, divisional earnings increased 1.8% for the year, with the strong results in retail more than offsetting the impact of lower commodity prices and earnings in WESF. Our retail businesses executed well during the period, enabling them to deliver great value to customers and benefit from the continued investment in efficiency and productivity. On a combined basis, Bunnings, Kmart Group and Officeworks increased earnings by 6.8%, Across the retail portfolio, the focus remained on keeping prices low, which supported growth in transactions and sales dollars and allowed our businesses to further fractionalise costs. I'll now step through the divisional results in more detail. Firstly, in Bunnings, sales growth of 2.3% was supported by growth in both consumer and commercial segments, driving growth in transactions and units sold. As household budgets remained under pressure, consumer sales growth was supported by bunning strong value credentials with bulk pack quantities, own brand products and entry-level ranges all performing strongly. Pleasing second half sales growth was supported by sustained demand for repairs and maintenance, online channel growth and range innovation, partly offset by a market funding in building activity. Commercial sales growth reflected continued demand from trades, Demand from builders moderated through the year as new building starts were lower relative to recent years. Bunnings maintained its strong cost discipline and continued to invest in business improvement initiatives to support ongoing reinvestment in prices and improved experiences for customers. Bunnings earnings before property contributions of $2.25 billion represented an increase of 2.6% with the impact of lower property activity for the year, resulting in Bunnings overall earnings increasing by 0.9%. Kmart growth delivered record earnings of $958 million for the year, an increase of 24.6%. We continue to see a strong response from customers to Kmart's lowest price positioning and ANCO product range. Sales at Kmart increased across all categories, with units sold, transaction volumes and customer numbers all growing on the prior year. Earnings growth for the year reflected Kmart's strong trading performance, including strong growth in apparel sales as a result of improvements in the product offer and well-executed pricing strategies. Target's comparable sales declined of 3.6% for the year, which included a disrupted period of sales with the changeover in Target's general merchandise range to ANCO. Pleasingly, the core apparel range in Target performed well, with positive sales growth for the year and the ANCO range is tracking in line with expectations. Kmart Group continued to focus on productivity measures, including the integration of the Target back-office, which along with the moderation in key input costs, mitigated the impact of cost of doing business pressures and higher shrinkage. In WESF, revenue declined 16.9% and earnings declined 34.2% to $440 million for the year. The result was largely driven by lower global commodity prices with strong operating performance delivering higher sales volumes across all segments of the business. In chemicals, earnings decreased significantly due to the lower global ammonia pricing and higher WA natural gas costs compared to the prior year. In clean heat, earnings were also impacted by higher WA gas costs and a lower Saudi contract price. In fertilisers, despite strong sales volumes from a later 2023 seeding season, earnings declined due to the lower realised margins in a more competitive market environment. Good progress was made this year on construction of the lithium hydroxide refinery, which was approximately 80% complete at the end of the financial year. Due to subdued market pricing and the high unit cost of production as volumes ramped up during the half, WSF's sale of spodumene concentrate in the second half contributed to a loss of $26 million for the 2024 financial year. This loss includes WSF's share of covalent corporate and overhead costs. In office work, sales increased 2.3% and earnings increased 4% to $208 million. The result was supported by growth across key categories including technology, stationery, art, education and print and create, partially offset by lower furniture sales. The sales result also reflected strong Black Friday and end of financial year trading and and solid sales growth during the back-to-school period as Officeworks cycled the New South Wales government's back-to-school voucher program last year. The earnings result was supported by disciplined cost management and productivity initiatives across Officeworks stores, supply chain and support centre. These actions helped mitigate the impacts of ongoing cost of doing business pressures during the year. Industrial and safety delivered a solid result for the year. Revenue increased 1.5%, supported by revenue growth in Blackwoods and Corgas, reflecting higher demand from major customers, while revenue in Workwear Group was in line with the prior year. Earnings increased 9%, with recovery in operating margins helping to offset ongoing domestic cost pressures. West Farmers Health continued to focus on its transformation program to accelerate growth and improved returns. Earnings of $50 million reflected the continued investment in transformation activities and the integration of recent acquisitions, including $9 million of integration costs associated with the acquisitions made during the year. Excluding non-cash amortization expenses relating to business acquisitions, earnings increased 20.7% to $70 million. Priceline delivered strong sales growth supported by store network expansion promotional activity and online sales, and wholesale delivered sales growth despite cycling a significant reduction in COVID-19 antiviral sales. Catch reported a loss of $96 million for the year, which included an $18 million non-cash impairment to Catch's brand value and $5 million in restructuring costs. Excluding these costs, loss has improved by $50 million compared to the prior year. A priority this year was to remediate catchers in stock business and to exit unprofitable lines which impacted GTV. As Rob mentioned, now that the remediation activities are complete, the focus is shifting to scaling the capital light marketplace and we expect losses in the 2025 financial year to continue to reduce. Turning now to slide 13. Our other businesses and corporate overheads reported a loss of $167 million, and consistent with previous years, the result included the impact of a number of one-off movements and items. The key driver here was the favourable property revaluations recorded in BWP Trust, with the group share of profit from associates and joint ventures increasing to $19 million. Group overheads were broadly in line with the prior year, while other corporate earnings increased by $8 million. This increase reflected a favourable group insurance result and proceeds received as part of the value share mechanism agreed on the sale of home base. This was partially offset by lower dividend income this year following the sale of the West Farmers remaining interest in Coles back in April 2023. Finally, through One Digital, we continued to develop the One Pass membership program and the group shared data asset with a net investment of $70 million. As you've previously mentioned, 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. Turning to working capital and cash flow on slide 14. Divisional operating cash flows increased 4% for the year with divisional cash realisation of 101%. The divisional cash flow result reflects favourable working capital management in Bunnings, which saw higher stock turns, and this was partially offset by higher closing inventory in Kmart due to the later sell-through of winter apparel and lower payables due to the timing of year-end payments, as well as working capital investment in the health division. This was primarily from changes to supplier and customer payment arrangements. Overall, we're comfortable with inventory health across the group. with good stock availability across the retail divisions and improved stock turn over the year at both Bunnings and Kmart Group. At a group level, operating cash flows increased 9.9% to $4.6 billion, reflecting the strong divisional cash flows as well as lower tax pay due to the timing of tax instalments. Free cash flows for the year decreased 11.1% to $3.2 billion, which reflects the cycling of proceeds from the sale of the group's remaining interest in Coles back in 2023 and the impact of cash consideration for the acquisition of Silk and Instant Scripts this year. Moving to capital expenditure on slide 15. The group invested gross capital expenditure of $1.1 billion for the year, which was 16.5% lower than the prior corresponding period. This was driven by lower spend on new stores and development activity in Bunnings and lower development spend on the covalent lithium project due to the timing of project spend. Proceeds from the sale of PP&E declined for the period, reflecting reduced property disposals at Bunnings, and this resulted in net capital expenditure for the year declining 11.7% to just over $1 billion. For the 2025 financial year, we expect net capital expenditure for the group in the range of $1.1 to $1.3 billion, and this will obviously be subject to net property investment and project timing at WESF. This guidance includes the balance of the remaining capex associated with the construction of Wessex share of the covalent lithium refinery with first product expected in mid 2025. 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 and growth initiatives and to take advantage of value accretive opportunities that may arise We continue to actively monitor the group's debt mix and we manage exposure to variable interest rates. The average cost of funds for the year increased from 3.3% to 3.9% with the impact of interest rate increases largely mitigated by the group's fixed rate bonds and interest rate hedging programs. Other finance costs increased 23% to $166 million, reflecting lower capitalised interest following the commissioning of the Mount Holland mine and concentrator and higher average interest rates during the period. On a combined basis, other finance costs, including capitalised interest, increased 8.5%. We continued to strengthen our core credit metrics and maintained our strong investment grade credit ratings from Standard & Poor's and Moody's. And the group maintains considerable headroom, and at the end of the financial year, the group had available unused bank financing facilities of around $1.9 billion. And finally, the dividends on slide 17. As Rob's mentioned, the board has determined to pay a fully franked final dividend of $1.07 per share, which brings the total dividend for the full year to $1.98. This is consistent with our dividend policy, which considers available franking credits, balance sheet position, credit metrics and cash flow generation. In line with recent practice, the group does intend to repurchase shares on market to satisfy the shares issued as part of the dividend investment plan. I'll now hand back to Rob to cover Outlook.