Woolworths Group Limited

Thank you for standing by and welcome to the Woolworths Group F23 half-year earnings announcement. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Brad Banducci, Managing Director and CEO of Woolworths Group. Please go ahead.

Good morning, everyone, and welcome to the Woolworths Group's half-year results for the F23 financial year. Joining me today are Stephen Harrison, our Chief Financial Officer, who will present our H23 results a little later, Natalie Davis, Managing Director of Woolworths Supermarkets, Amanda Bible, Managing Director of WooliesX, Vaughan Ingram, Managing Director of our newly formed W Living, Spencer Son, Managing Director of Woolworths New Zealand, Dan Haake, our newly appointed managing director of Big W, and last but not least, Carl Brent, managing director of the Woolworths Food Company. Before we start the presentation today, I would like to acknowledge the traditional custodians of the land on which we meet today, the Gadigal people of the Eora Nation, and I'd like to pay my respects to elders past, present, and future. I would also like to acknowledge our Kiwi team members and customers as they deal with the devastating impact of the recent flooding events and Cyclone Gabriel just last week. Our thoughts are with those who have experienced loss as a result of extreme weather events, whether it's in New Zealand or in Australia. I will start today's presentation with an overview of the group's performance and our progress on our strategic agenda. Steve will then present our financials before handing back to me to finish with current trading and outlook before handing over for questions. If you're following by the slides, I'm going to go straight to slide four. The group's performance for the half reflects a very balanced result with improved customer and financial outcomes compared to the COVID impact of prior year. This was achieved through a more stable operating rhythm, the non-reoccurrence of direct COVID costs in the prior year, strong seasonal trading, and a continued focus on better experience for our customers. Most of our customer metrics improved on a year ago and Q1 of this financial year. Group VOC MPS ended the period at 51, up two points in last year, and up one point in Q1. The highlight to me remains our customer care scores, which are very strong across all of our businesses. A focus on value and availability throughout the HOS, as well as an inspirational Christmas for our customers, led to solid sales growth in the HOS. Group sales increased 4% in last year to $33.2 billion, and group EBITs were four significant items, increased 18.4% to $1.6 billion. On a three-year compound annual growth basis, which we strongly believe is the best way to assess our performance given the variable impact of COVID by half, group sales and group evidence increased by 7.5% and 7.1% respectively. By segment, Australian food sales increased by 2.5% in age one and even increased by 18.2% However, if we were to exclude the very material direct coverage costs incurred in the prior year, EBIT increased by 4.3%. In Australian B2B, PFD was the major driver of the strong half, although our B2B supply chain business, PC Plus, also performed strongly. Australian B2B sales were up 23%, and EBIT more than doubled in the prior year. In New Zealand food, H1 EBIT was $122 million New Zealand dollars, which was within the earnings range provided at our Q1 sales results in November. Pleasingly, we have seen some signs of stabilisation in Q2 and improved sales momentum over the half. The recent weather events have created new challenges for us and our focus at the moment is on assisting our impacted customers and teams in any way we can. Importantly, our DCs have not yet been materially impacted. Stock is flowing through them out to our stores where it's needed. Big W's EBIT improved materially in H1 due to strong sales growth and cycling in a period of COVID-related temporary store closures in the prior half. Moving to slide five. A key feature of the half was the continued reversion of customer shopping patterns to pre-COVID levels. customer mobility has increased our shopping stores more often which in turn impacted e-commerce sales which were down 9.5% across the group on the prior year. Customers also shopping more on the weekend at malls and shopping centres are also seeing an increase in visitation relative to neighbourhood stores. I should just add that this trend has continued into H2 and I would say in the last two weeks if you looked at the behaviour two pre-COVID is literally back to where we were in a very broad sense. One thing that has remained constant, however, is the growth in digital engagement. Digital engagement across our group websites and apps has continued to grow strongly with average weekly digital traffic compared to the prior year of 9.5% in the half to 22.7 million visits. Approximately 50% of digital traffic growth is coming from our apps, particularly every day. Turning to slide six, This is just a brief recap on our food and everyday needs ecosystem and the headline to me is we've made good progress in activating our ecosystem over the half to both strengthen our cornerstone businesses listed in the slide as well as drive longer term growth. On slide seven we just talked about some of our progress against our strategic priorities in the half. I won't go through it in any detail except to give you some of my personal highlights. Being awarded most trusted brand for the third consecutive year by Roy Morgan and being named most valuable by Brand Finance is a validation of all the work we are continuing to do to do the right thing in every way we pitch up with all of our stakeholders. Clearly this is a work in progress. There's lots of challenges with it, but it's nice to see the consistency of recognition we've achieved in particular on most trusted brand. RT3, which is right team, right task, right time. has now been embedded nationally in all of our Woolworths supermarkets and metro food stores. And we're getting better at using it to ensure that we have the right team in place and do the right tasks for our customers. This is a critical change project for us, and I'm sure we'll get questions later which Natalie will answer. At the end of December, we had 14.1 million everyday rewards members, and active rewards members had grown by over 5%. Membership programs are coming back into vogue globally and are a critical way for us not only to know more about our customers and personalize what we do for them, but to add even more value for our members who invariably are our best customers. Our B2B supply chain, also known as PC+, launched a new partnership between Community Enterprise Queensland and our Australian grocery wholesalers to provide North Queensland remote communities with affordable or with an own exclusive product. There's a lot we're doing in the First Nations space. I expect we might get some questions later on it. This is something we don't talk about and I think we're really proud of. As Australia's leading food retailer, it's critically important that we make sure that we get value out to the communities that need it most. Turning to slide eight, inside what was known as the David Errington slide, this slide highlights our progress on our major warehouse investments delivered since 2019 and what is still to come over the next few years. Now, no doubt we'll get questions on our progress on our supply chain transformation, given it is outside of stores the biggest investments inside our group, and we are continuing to work through the inevitable teething challenges of commissioning new technology. We are, however, starting to make good progress and are pleasingly past the halfway mark in our multi-year transformation. So a long way to go, but it's nice to be well-progressed and starting to see benefits coming to our P&L at the same time as we continue to make investments in our balance sheets. And hopefully everyone is aware our new facilities, or expanded facilities in some instances, will provide our customers with a wider range of fresher products and our business with safer and lower long-term operating costs. And of course, not to be underestimated, is the capacity for future growth. After a number of years of disruption, primarily through COVID, but some of it in how we've had to commission our technology, MSRDC is starting to deliver for us and hits record new volumes, especially over the Christmas period. In H1, the facility consistently averaged 2.3 million cartons per week, which is very close to our business case. While there is more we can do to continue to lower our cost per carton within MSIDC, we are currently materially below where we would have been had we not invested in this facility, just over 30%. In terms of the other activities to call out, our new fresh DC in Christchurch, Auckland, in New Zealand, Christchurch, New Zealand, we've commissioned it. And we're making very good progress on our first automated customer fulfillment center in partnership with Kanap in Auburn. And our material investment in Moorbank in our NDC and new RDC is progressing to plan. Moving on to slide nine, it shows the progress we're making across our digital platforms and adjacencies. As I mentioned earlier, digital is critical to us, and engagement continues to grow through weekly digital visits across the group, and they're up 29% on a three-year CAGR. And a lot going on there. To call out one that I think is important is our real-time offer program, the real-time loyalty program that gives the ability to do real-time offers, which we commissioned fully during the HOF, and it can add a lot of value to the broader digital engagement agenda. Turning to more everyday in the current environment, our everyday brand is a fantastic way to provide additional value for our members. In addition to the growth in the number of members in Everyday Rewards, I've spoken about already, all of our everyday businesses, including insurance, mobile and WPay, grew sales on the prior year. The power of Everyday Rewards was also evident when MyDeal became an Everyday Rewards partner in January with Just in that very short period, over 27,000 MyDeals customers linking their cards to Everyday Rewards in the first week. B2B Food, as talked about in growth, has had a solid half driven by PFT, which benefited from a strong market and new customer growth. Sales up 26.4% in the last year. We are starting to see the early benefits of battery creation across B2B Food in the group, with B2B PFT now supplying more supermarkets seafood, Australian Grocery, Holt Taylor's jointly tendered with PFT when it makes sense for various contracts that come up and just to PFT being able to access some of our preferential rates for a range of goods not for resale. In B2B, Supply Chain, Primary Connect, Third Party Business, PC Plus, they also had a good first half. Finally, during the half, we welcomed Mardale and Shopper Media to all this group that happened in and in December we announced the proposed acquisition of a 55% equity investment in Petspiration Group, subject to the relevant approvals. We expect all of these investments to strengthen our cornerstone businesses and assist in delivering longer-term growth for Woolworths Group and no doubt I will get questions on them later. Slide 10 shows our continued journey on sustainability and we did continue to materially progress our agenda on that topic, but like everything, there's always much more to do. Another one I talk about a lot is our TRIFA total injury frequency rate, which declined by 7.3% compared to the prior year. We are starting to be much better at also measuring our scope one, two, and three emissions. We only talked to the reduction in Scope 1 and 2 emissions, which is by 7.9% compared to last year, and hope to come back in future periods and start talking about Scope 3 and our progress, not only on measuring it, but reducing it in partnership with our supplier partners. Our commitment to removing virgin plastic across our products continued, and we now have removed over 12,000 tonnes of virgin plastic packaged in Australia, which is a 26% reduction relative to IF18 baseline. We're also progressing the phase now to 15 cent reusable plastic shopping bags nationally. Queensland and ACT joined other states by moving across to this run and down stock in the last couple of weeks. And our aspiration is to be completely out of multi-use plastic bags by the end of this calendar year. Finally, not everything goes your way in the sustainability space, and we are disappointed by the challenges that we've had with soft plastics in particular, the red cycle program. But all of our stakeholders should rest assured of our commitment to leaning in, working with governments, grocery manufacturers, other retailers, and the recycling industry more generally to find the right long-term solution in this space. and it is a major priority for us right now just given a lot of the challenges and negativity that are sitting around this issue. For those that have had the chance to review our results materially in detail, you will see that we have included extra disclosure in this role by providing more detailed sales and profit measures for both Australian food retail and WooliesX as part of our Australian food segments. This has not been an easy thing to do. We've worked very hard on doing it. I'm sure it can be refined, and we look forward to feedback in this meeting or in subsequent ones on how we might do that. But we did think it was important to do, given the increasing importance of e-commerce, digital, media, rewards and services in activating our ecosystem and strengthening our cornerstone retail businesses. It's done as a sub-segment because there are clear judgment decisions we have had to make in how we allocate costs inside this portfolio, particularly because of our reliance, deliberately so, on using our physical infrastructure, particularly our stores, to fulfill the vast majority of what we're doing in e-commerce sense. And then inside the WooliesX context, there's a lot of judgment decisions required in how you allocate the costs of your building a digital platform. So there's a lot of judgment calls. That's why they're in the sub-segments. I think the benefit of it is you start to get a sense of it and we create a baseline which we can report progress from, which we think is very important. So we hope that this new disclosure will provide better insights into underlying performance and, as I say, afford a fewer collective feedback and challenge on sub-segments. I'll now turn over to Steve to talk about our financial results and then come back to talking about the outlook.

Over to you, Steve. Thanks, Brad, and good morning, everyone. I'll start on slide 14 with the half on F23 results summary for the group. Group sales for the first half of F23 increased 4% to $33.2 billion, supported by strong seasonal trading in our food businesses. and the cycling of COVID lockdowns in the prior year in BW and Australian B2B, with sales growth accelerating in Q2 as we cycled the easing of COVID impacts in the prior year. Group EBIT before significant items increased 18.4% to $1.637 billion, with the growth in EBIT margin increasing 60 basis points to 4.9%. EBIT growth reflects Our growth in sales, the non-recurrence of material COVID costs in the prior year of $239 million and increased stability in our operating rhythm. Group NPAT attributable to equity holders of the parent entity before significant items was up 14% on half on F22 to $907 million. We've also included on this slide our three-year sales and EBIT CAGR to demonstrate the growth we've achieved relative to pre-COVID, which shows strong through-the-cycle growth and reflects the resilience of the group's earnings when you look through the volatility caused by COVID over the last three years. I'll discuss the dividend later in the capital management section. So turning to slide 15, our group trading performance. On this slide, we've laid out a half-one F23 trading performance by business unit together with the three-year CAGRs by business. In Australian food, H1 total sales increased by 2.5% despite a reduction in e-commerce sales of 7.5% as customers returned to stores or more customers returned to stores. Through the half sales, momentum improved with Q2 sales growth of 5.8% due to a strong seasonal trading period and as we cycled a more normal quarter in the prior year. Australian food EBIT was up 18.2%. We've always indicated that direct COVID costs would be removed when no longer required, and we were able to achieve that. Excluding these costs incurred in the prior year, Australian food even increased by 4.3%, which is a solid result, delivering earnings leverage despite material cost inflation. As just discussed by Brad, we provided for the first time additional disclosures within the Australian food operating segment. Woolworths Food Retail represents our Woolworths supermarket stores, our metro stores and our e-commerce business. Profitability measured through directly attributable profit and EBIT increased by 20.8% with a strong profit improvement from stores. Ecom DAP declined on the prior year largely driven by the impact of lower sales and high delivery costs. Woolies X profitability declined by 30.4% to $83 million largely driven by the decline in Ecom profitability I just mentioned with higher EBIT in cartology offset by increased investment in digital and technology in the half. Australian B2B sales increased by 23% and even more than doubled, driven by a very strong half from PFD. This was somewhat offset by losses in some of our other smaller B2B businesses that are not yet at scale. New Zealand food had a challenging half, impacted by lower sales growth, ongoing COVID disruptions and a material increase in team costs. While even declines 39% to $122 million in New Zealand currency, The half one performance was within the earnings range we disclosed at the end of Q1. Pleasingly, the business is showing increasing signs of stability with Q2 sales growth of 5.3%. Big W performance was one of the key highlights of the half as the business experienced a more normal trading environment, cycling a period of temporary store closures in the prior year. Sales growth was strong at 15.3%. and the EBIT margin recovered to 5% with EBIT in the half of $134 million. Our other segment includes a range of things including group costs, the performance of Quantium, MyDeal, our property trading, and our share of profits from Endeavor. The net loss in the half was $85 million compared to $69 million in the prior year. Excluding our Endeavor Group contribution, the net loss is expected to be $250 million for the full year of F23, This is an increase from our previous guidance and is due to one-off costs associated with recent M&A activity and the expected losses from my deal, which did trade in line with plan for the first quarter of ownership in Q2. The group also reported significant items in the half of $76 million related to updates to the end-to-end payroll review, which is now complete, as Brad discussed. Increased redundancy costs associated with previously announced supply chain costs network changes and future DC closures, the reversal of the historic onerous lease provision related to Big W store network which is no longer required and costs associated with the exit of Summer Gate which we have recently announced. Moving to slide 16 and our balance sheet metrics, average inventory days from continuing operations increased 0.9 days to 31.1 days compared to half 22. This was largely driven by our food businesses due to higher investment in inventory to mitigate ongoing supply chain and availability challenges. ROFI from continuing operations was 14.2%, an increase of 50 basis points compared to F22 full year and 10 basis points compared to half 1 F22 due to higher EBIT from continuing operations. Now moving to slide 17 where we've included a summary of our capital management framework and called out some of the highlights for the half. In half one we generated operating cash flows of $2.9 billion before interest and tax which was up 11.6% on the prior year and I'll touch on some of the other capital management highlights including capex and dividends on later slides. Moving to slide 18 and cash flows. Pleasingly EBITDA from continuing operations grew strongly in reflecting the improved group trading result just described. We had a modest net working capital inflow of $27 million in half one with high inventory holdings to mitigate supply chain disruptions and to provide availability being largely offset by payables. Cash flow from operating activities before interest and tax was up 11.6%, an increase of $299 million on the prior year. Interest paid increased by $37 million due to higher interest rates and higher average net debt in the half, in part due to lower net debt in the prior year following the repayment of the Endeavour Group intercompany loan in June 2021, which was used to fund the share buyback in October 2021. Cash tax pay declined 30% compared to the prior year, reflecting the lower prior year earnings. Investing activities of $839 million was below the prior year, primarily due to proceeds on the partial sell-down of our Endeavour Group shareholding with proceeds of $634 million, which will be used to fund our investment in Petspiration Group, which is expected to close in mid-calendar 2023, obviously subject to regulatory approval. And I'll talk to CapEx on our next slide. So closing on page 18, our cash realisation ratio for the first half was 101%. Moving to CapEx on slide 19, operating CapEx for the half was $928 million, which was driven by an increase in stay-in-business CapEx with the prior year being impacted by COVID restrictions and restricting our ability to do some of that work. IT spend increased predominantly due to lifecycle management and the replacement of store equipment, together with increases in new stores, renewals and digital products. CAPEX also included $76 million on projects with strong sustainability benefits in areas such as refrigeration, solar and LED lighting. There's no change to our full-year guidance with operating CAPEX still expected to be $2 billion. Moving to dividends and funding on slide 20, the board today approved an interim dividend of $0.46 per share, an increase of 17.9% compared to the prior year, reflecting the strong earnings growth in the half. The payout's broadly in line with our typical payout ratio for half one, and the four-year payout ratio is still expected to be in the 70% to 75% range. Turning to debt and funding, there are no material maturities occurring in half two, and the next material maturity is the $750 million syndicated bank facility maturity in November 2023, which will be refinanced, and we expect this to be completed prior to the end of the fiscal year. We remain committed to a solid investment grade credit rating and have significant headroom under our current ratings of BBB from S&P and BAA2 from Moody's. Thank you and let me turn back to Brad.