Wesfarmers Limited

Ladies and gentlemen, thank you for holding and welcome to the West Farmers 2025 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.

Thanks very much. Well good morning and good afternoon everyone and welcome to our half year results briefing. So today I'm joined by our Divisional Managing Directors and our CFO Anthony Gianotti. To begin I'll talk to the group's performance and key highlights across the portfolio and then Anthony will provide more detail on our financial performance. I'll conclude with some comments on the group's outlook, and Anthony, our divisional MDs, and I would then welcome any questions that you may have. So I'll start on slide four, which is a slide that you will be familiar with. The West Farmers' objective is to deliver a satisfactory return to shareholders, which we define as a top quartile total shareholder return over the long term. And we acknowledge that we can only achieve this if we anticipate the needs of our customers, look after our team, treat suppliers fairly and ethically, contribute positively to the communities in which we operate, take care of the environment and act with integrity and honesty. And this half has once again provided us with many opportunities to demonstrate progress in these areas and you'll hear this throughout our presentation. So turning to slide five, and there are three points I'd like to highlight from today's result. First, our financial performance. It was pleasing to deliver growth in sales, earnings and dividends in what was a challenging trading environment, with many households and B2B customers restricting their spending. We delivered net profit after tax of $1.5 billion, an increase of 2.9%. And as a result, the board determined to pay a fully franked dividend of $0.95 per share, a 4.1% increase on the prior corresponding period. The second point is that this result demonstrates strong execution across the group's portfolio of businesses. Our divisions continued to benefit from their proactive productivity initiatives and this enabled reinvestment in their customer offers, delivering even greater value, service and convenience for customers. And there's also been a lot of transformation and growth activity that will set our divisions up well for the future. It was particularly pleasing to see the group's largest divisions performing well, with Bunnings and Kmart Group's strong value credentials continuing to resonate, driving growth in transactions, sales and earnings. The third point is I wanted to note that we undertook a number of portfolio actions to improve shareholder returns and renew the portfolio, and some of which I'll talk to shortly. This is another result that demonstrates the resilience of our portfolio of businesses and the capacity of our divisions to adapt and prosper in tough markets. I'm also confident that we're entering 2025 with our businesses in better shape to manage risks, but also to benefit from any improvement that may occur in economic activity. Turning to slide six, I won't step through every division in detail on this slide, but I'll describe a few highlights from the half and then Anthony can talk to some of the financial results. Bunnings demonstrated the resilience of its offer and it continued to grow sales and earnings despite challenging market conditions, particularly in residential construction. Kmart Group's result builds on the very strong performance delivered last year as they continue to drive greater efficiency and expand and improve their ANCO product offer. This result also includes the integration of Kmart and Target systems and processes, which is simplified operations, and also the ongoing digitisation of operations, global sourcing and supply chain functions. Wessef delivered solid operating results for the half, supported by the chemicals business, and the covalent JV continued to make good progress at the Kwinana lithium hydroxide refinery, with construction 95% complete and commissioning 50% complete at the end of the half. In health we continue to invest in transformation activities and have been encouraged by the progress and performance of the consumer segment comprising Priceline, MediAesthetics and Digital Health that grew transactions, sales and earnings. Health's result was impacted by the wholesale segment which experienced higher supply chain costs with actions underway to improve efficiency. There were also one-off costs associated with an outsourcing of support functions in the health division to ultimately support future growth of the group. One Digital, which comprises our shared data asset, One Data and membership program, OnePass, continued to drive incremental sales for our retail and health divisions, leveraging the group's unique data and digital assets and omnichannel capabilities. And work is underway to develop a group retail media network, which will leverage the group's significant omnichannel audiences. Turning to slide seven, this slide sets out some of the recent portfolio actions and demonstrates the group's financial discipline and focus on shareholder returns. First, in December, we announced the sale of Corgas to a subsidiary of Nippon Sanso for $770 million. Now, while this sale is subject to certain consents and approvals, it's a great example of our disciplined approach to portfolio management. The sale recognises Core Gas's strong growth in recent years and gives customers and team members the opportunity to join Nippon Sanso, a leading global industrial gas company. More recently, we announced the wind-down of catch, which includes the transfer of catch's fulfilment centres to Kmart Group and some digital capabilities to our retail divisions. This decision will improve Westfarmers' earnings in FY26 as we eliminate the business's losses. It will also strengthen our retail division's omnichannel offers and improve Kmart Group earnings. The move to next day delivery for much of Kmart and Targus East Coast operations will be a great outcome for their customers. During the half, we also completed the divestment of Wessex LPG and LNG distribution businesses, which will improve Wessex financial returns. And we also completed incremental bolt-on acquisitions, expanding Officeworks digital education offer and also supporting health's digital strategy. Turning to slide eight. During the half we continued to deliver better outcomes for the environment, our people, our suppliers and the communities in which we operate. The group's TRIFA improved from 10.9 to 9.9 at the end of the half. This was largely driven by an improvement in Bunnings where we're starting to see the results of a multi-year program to create a safer workplace. We continued to embed climate resilience in our businesses, acknowledging its link with long-term value creation. And during the half, our divisions achieved a 2.5% reduction in Scope 1 and 2 emissions. And a source of pride for our teams is the $55 million of direct and indirect community contributions made during the half, supporting more than 8,000 community organisations across Australia and New Zealand. Now, turning to slide nine, you can see the summarised performance of the group, but I'll hand over to Anthony, who will talk in more detail to divisional performance and the group's balance sheet and cash flows.

Thanks, Rob, and hello, everyone. I'll start on slide 11 in the presentation, where we've provided some further details on the sales performance 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 ability to deliver good sales growth in what was a challenging retail environment. This was particularly the case for our largest divisions, Bunnings and Kmart Group, which performed well as their everyday low prices, market-leading offers and strong execution drove growth in transactions and sales. Turning to slide 12. At a total level, divisional earnings grew 4% for the half, and on a combined basis, Bunnings and Kmart Group increased earnings by 4.4%. Our retail businesses continued to execute well during the period, enabling them to deliver great value to customers and benefit from their continued investments in efficiency and productivity. Our retail divisions remained focused on keeping prices low and investing in the omnichannel customer experience. This supported growth in sales and allowed our businesses to mitigate cost headwinds and to fractionalise costs. I'll now step through the divisional results in a bit more detail. Firstly, in Bunnings, sales growth of 3.1% was supported by growth in both consumer and commercial segments. Higher growth in the consumer segment was supported by sustained demand for repair and maintenance products, growth in digital sales and strong demand for new and expanded product ranges. Commercial sales growth was supported by higher demand from trades and organisations, which was partially offset by lower demand from builders, where activity remains impacted by the subdued residential construction environment. During the half, Bunnings maintained its strong cost discipline and continued to invest in business improvement initiatives to support ongoing reinvestment in price and experience for customers. Overall, excluding the net impact of property contributions, Bunnings earnings increased 3.2% to $1.32 billion for the half. Kmart Group delivered earnings of $644 million for the half, an increase of 7.2%. This result is off the back of a significant increase in earnings in the prior corresponding period, with the division reporting 36% growth on a two-year basis. Kmart Group continued to benefit from its strong value credentials and unique ANCO product offer, which supported growth in units sold, transactions and customer numbers. Minor reductions in items per basket and average sell price in an inflationary environment demonstrated customers' focus on value and Kmart Group's commitment to low prices. Importantly, the earnings result was supported by the successful execution of long-standing productivity initiatives, including the integration of target systems and processes, which helped mitigate cost pressures and the impact of a lower Australian dollar. In WESF, earnings increased 2.9% to $177 million, with higher earnings across all businesses, partially offset by the impact of losses from our lithium business, which remained in ramp-up during the half. Favourable ammonium nitrate recontracting outcomes and strong demand across the gold mining sector resulted in higher earnings in chemicals, despite the impact from lower global commodity prices. In clean heat, earnings benefited from a higher Saudi contract price, which was partially offset by higher WA natural gas costs. In fertilisers, earnings improved as a result of higher sales volumes with a strong end to the 2024 growing season. In lithium, WSF's sale of spodumene concentrate in the first half contributed a loss of $24 million. This loss reflected lower market pricing and higher unit costs of production as volumes from the concentrator continued to ramp up through the half. The reported loss also includes WSF's share of Covalent's corporate and overhead costs. In Officeworks, sales increased 4.7% and earnings increased 1.2% to $87 million for the half. The result was supported by above-market growth in technology and an increase in demand across key categories as Officeworks' everyday low prices and value resonated with customers. Pleasing sales growth to consumer customers, including during the Black Friday period, were partially offset by softer sales growth to business customers. This is reflecting the challenging conditions affecting small to medium-sized businesses. Earnings growth was also impacted by one-off costs associated with the acquisition of Box of Books and the closure of Circonomy, as well as increased competitive intensity in technology categories. In industrial and safety, revenue declined 1.9%, reflecting the challenging economic conditions affecting customer demand, particularly across strategic customers in the mining and manufacturing sectors. Earnings decreased 8.2%, to $45 million, and this result includes one-off restructuring costs of $7 million to reset the operating model and the cost base in both Blackwoods and Workwear Group, with the benefits from these actions expected to be realised in the second half. The restructuring initiatives are expected to mitigate ongoing cost pressures and support sustainable earnings growth by leveraging the recent investment in new ERP systems across both Blackwoods and Workwear Group. Earnings excluding the restructuring cost increased 6.1% to $52 million. In West Farmers Health, we saw continued focus on transformation activities to accelerate growth and improve returns. Earnings of $28 million included $4 million of restructuring costs, as well as $9 million in non-cash amortisation expenses relating to business acquisitions. Excluding these costs, earnings increased 13.9% to $41 million, and we expect the restructuring costs incurred in the first half to be recovered within the remainder of the financial year. As Rob mentioned earlier, we were pleased with the performance of the consumer segment. Priceline's strong performance was driven by strategic price reductions on key value lines, network expansion, and the launch of new and exclusive brands. Metaesthetics performance improved from actions taken to optimise the network following the acquisition of Silk, including the closure of 34 unprofitable clinics over the last 12 months, the majority of which were clear skincare clinics. This stronger performance in consumer was offset by the pharmaceutical wholesale segment, which was impacted by higher supply chain costs during the half. This was primarily due to higher last mile fulfilment costs impacted by inflationary pressures and the renewal of recent freight contracts. Wholesale has a supply chain cost-out program underway and is expected to benefit from investments to optimise the network, including from the recently constructed fully automated fulfilment centre in Brisbane and the construction of a new DC in Cairns. Catch reported a loss of $39 million for the half, which was in line with the preliminary half-year earnings result which we announced in January. Catch will cease to trade in the fourth quarter of the 2025 financial year with one-off costs associated with the wind-down and transition expected to be between $50 million and $60 million. These costs will be incurred in the second half of this financial year and do not include the operating losses from catch as the business continues to trade through the second half. Turning now to slide 13 on other businesses. Our other businesses and corporate overheads reported a loss of $88 million, which was a $7 million improvement on the prior half. The key driver was the impact of upward property revaluations in the Bunnings Warehouse Property Trust, with the contribution from BWP increasing from $13 million in the prior half to $35 million. Group overheads were broadly in line with the prior corresponding period, while other corporate earnings were lower, driven by a lower group insurance result. Finally, we continued to develop capabilities in One Digital, including the OnePass membership program and the group's shared data asset, with a net investment for the half of $30 million. One Pass member numbers and retention rates continue to increase through the half, with One Pass members shopping more frequently and spending more across the group's brands after joining the program. As previously mentioned, the benefits of incremental sales from 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. Overall, the working capital and cash flow position remained strong during the half, with cash realisation across our retail businesses of 113%. Despite the strong performance in cash realisation, divisional operating cash flows decreased 6.3%, primarily as a result of cycling a significant increase in cash flows in the prior half, which benefited from normalisation in WestEff's networking capital in its fertiliser business. In this half, the divisional cash flow result reflected networking capital investment in Bunnings to support higher customer demand and in Wessef to support the upcoming fertilisers growing season. At a group level, operating cash flows decreased 11.1% to $2.6 billion due to the lower cash flow from divisions and higher tax paid during the half. Overall, we're comfortable with the inventory health across the group with good stock availability across all of our retail businesses and improved stock turn in Bunnings, Officeworks and Health compared to the prior corresponding period. Free cash flows for the half were $2 billion in line with the prior corresponding period as lower operating cash flows were partially offset by the acquisitions of Silk and Instant Scripts in the first half of the 2024 financial year. Moving now to capital expenditure on slide 15. The group invested gross capex of $594 million during the half, which was 2.9% higher than the prior corresponding period. This was driven by new store and expansion projects in Bunnings, partially offset by reduced spend in Wessex following the completion of commissioning activities at the Mount Holland Concentrator in the 2024 financial year. Proceeds from the sale of PP&E increased for the period, reflecting higher property activity at Bunnings. As a result, net capital expenditure for the half declined slightly to $555 million. For the full year, we do expect net capital expenditure for the group to be in the range of $1.1 to $1.3 billion, which is in line with our previous guidance. 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. Net financial debt decreased by $400 million over the half and the group's cost of funds of 3.92% were broadly in line with the position at the 30th of June. Our debt maturity profile improved slightly during the half with a weighted average term to maturity of 4.6 years. Our other finance costs, including capitalised interest, increased 3.2% to $97 million. Our key credit metrics improved during the half, and the group maintains considerable debt headroom within our targeted rating band. At the end of the half, the group had available unused bank financing facilities of around $1.1 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 95 cents per share and this is consistent with our dividend policy which considers available franking credits, balance sheet position, credit metrics and our cash flow generation. In line with what we've done in recent practice, the group does intend to purchase shares on market to satisfy any shares that will be issued as part of the group's dividend investment plan. And with that, I'll now hand back to Rob to cover Outlook.