Woolworths Group Limited

Thank you for standing by and welcome to the Woolworths Group Limited FY23 full 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 will 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 Woolworths Group's full year results for the 2023 financial year. Joining me today are our CFO, Stephen Harrison, who will present our financial results a little later, Nancy Davis, Managing Director of Woolworths Supermarkets, Amanda Beigel, Managing Director of Woolies X, Vaughan Ingram, Managing Director of W Living, Spencer Son, Managing Director of Woolworths New Zealand, Dan Haake, Managing Director of Big W, Guy Brent, Managing Director of the Woolworths Food Company, and last but not least, Annette Carantoni, Managing Director of Primary Connect. I'm going to start and actually just talk through the slides if you've got the slide presentation so you can follow the commentary in parallel. I was going to start on slide three with an acknowledgement of country. Before we start the presentation, I would like to acknowledge the many traditional owners of the land on which we operate and pay our respects to their elders, past and present. We recognise their strengths and enduring connection to the lands, waters and skies as the custodians of the oldest continuing cultures on the planet. We remain committed to actively contributing to Australia's reconciliation journey through listening and learning, empowering more diverse voices and working together for a better tomorrow. I will start today 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 we move to questions. Just on slide four, inflation and rising cost of living pressures on household budgets was the key issue in F23 for both our customers and our team. As a group, we prioritised living value convenience in response and it remains our key priority as we move into F24. Improved financial performance in F23 reflects a return to relative stability following the material disruption in the last three years. Group sales increased by 5.7%, with higher growth in H2 as we finished cycling COVID impacts in the prior year, and inflation remained elevated. Group EBIT growth of 15.8% was driven by higher sales and improved operating rhythm, the non-recurrence of $323 million direct COVID costs, and the benefits from our ongoing investments in our customers' teams and platforms over a number of years. Excluding direct COVID costs in the prior year, EBIT increased by 3.4%. On slide five, you will see our customer metrics remained largely stable over the year. However, value perception was impacted by the inflationary environment. As customers returned to shop in more on weekends and in the evenings, some small controllable Voice of customer measures will also impact as we work hard to adjust team rosters to reflect more traditional shopping patterns. We recognise we need to do more in the year ahead to improve customer advocacy by delivering consistent customer shopping experiences and providing ever more value to our customers. While we have room to improve, I am encouraged and proud that our team continue to show care for our customers with that metric remaining our highest store controllable bulk metric across the group. On slide six, we wanted to highlight the shift back to pre-COVID customer behaviors. After many years of disruption, during the year we saw customers shopping more frequently, but with smaller baskets. Our customers are also using more shortcuts to find value, particularly our saver families. Own brands are growing strongly, particularly in the last quarter, and especially in areas like pantry essentials, such as rice, pasta, and long-life drinks. Our members are also unlocking extra value through everyday rewards, with active everyday rewards members continuing to grow. Inflation is impacting all parts of our group, but its impact on the cost of living is having uneven impacts on our customers, as shown on slide seven. While inflation has been rising for much of the last two years, we have seen it begin to moderate in Q4, which has continued into the first quarter of F24. In Australian food retail, item growth has been broadly in flat in H2 despite higher inflation. The impact of cost of living pressures on our Big W customers has been more pronounced than in our food business, as you would expect. H2 sales were below our initial expectations, customers cut back on discretionary items and the sector became increasingly competitive, in particular in Q4. Pleasingly, while we have seen our budget customers reduce their spend, mainstream and premium customer numbers are increasing as customers traded to Big W for its value. On slide 8, It shows how we across the group have responded to the challenging environment by delivering value to our customers in a number of different ways. This includes our seasonal prices drop campaigns with our latest price drop campaign for spring launching this week, representing a saving of 17% on the basket of dropped products. Everyday Rewards members are increasingly looking for ways to save through boosters and bank for Christmas, And we also launched in-store member prices this week to add to the way our custom members can unlock additional value. Big W has also played a role in delivering value for our customers with great prices and specials, particularly for key events such as back to school and annual toy sales. As mentioned at the outset, value remains our number one priority in F24 and we remain focused on finding ways to help our customers and members stretch their dollar further every time they shop with us. On slide nine, while value remains the key focus for all customers, demand for convenience and seamless connected shopping experiences continues to grow. Average weekly traffic to group digital platforms in F23 increased by 16.3%, and weekly average visits to Woolworths and Everyday Rewards websites and apps reached 16.3 million in Q4. For the first time, digital visits to our food and everyday rewards apps surpassed web visits in F23. Woolies X e-commerce sales reached $5.1 billion in F23, which was up $3.7 billion, or a CAGR of 38% on F19. After some challenging normalization in the first half, e-commerce sales returned to growth of 13.2% in H2, with same-day and express services growing rapidly as customers seek ever more convenience. Amazingly, over 80% of our e-commerce sales are now fulfilled within 24 hours of order. I will skip over slide 10 and talk about some of the highlights across our connected group on the later slides. Then moving to slide 11. Delivering sustainable growth and creating long-term shareholder value is only possible through investing in our customers' teams, communities, and platforms. Having the right prices for our customers is paramount, and we continue to ensure that all of our businesses have a strong customer value proposition. But good prices are not enough. Customers also expect us to provide them with convenience and a good shopping experience. E-commerce and digital is an area where we have invested materially in recent years to meet customer demand and to build a strong foundation for future growth. We have also made good progress in our Value Core and Up store and merchandising segmentation program in Woolworths Supermarket. In terms of our team, we're not only focused on supporting our team through competitive pay, but also through delivering meaningful hours and careers through multi-skilling opportunities, as well as cross-store working, which was recently launched nationally to all team members. We enhance team members by rolling out everyday extra for teams and continue to prioritize safety, health, and well-being with further investments planned in F24 to upgrade team safety measures. Investment in our community aligns to our purpose and sustainability commitments for a better tomorrow. I'm pleased to say that we have now not only removed single-use plastic bags, but also reusable plastic bags, which, once the phase-out completes, equates to more than $350 million pure bags in circulation annually. As announced last week, we have also updated our food waste commitment called Reducing Hunger and Food Waste, which will see an additional $9 million of investment in our food relief partners across the group in F24 to help address the issue of food insecurity. And finally, investment in our platforms, including our infrastructure, is critical, enabling greater efficiency greater efficiency, and improving the resilience of our end-to-end value chain. Digital analytics capabilities are also only increasing in importance, and we will continue to build on the strong foundation of momentum. We'll touch on some of our supply chain progress in a later slide. On slide 12, we wanted to provide some examples of how the group's adjacencies are increasingly contributing to growth. PFD had a strong year. with sales growth of 28%, supported by new customer growth. Customer, or retail as many call it, media business cartology grew sales by 29%, despite a more challenging advertising market, with the shop and media integration now complete. WIC also had a strong year to deliver over 30 high-value analytics use cases in the year, and Primary Connect's third-party business, PC+, also enjoyed strong growth. In our everyday needs businesses, Big W is working in partnership with MyDeal, with the Big W range available since August last year on the MyDeal marketplace, and we expanded our online health offer with the acquisition of key technology and warehouse assets of Super Pharmacy. Our proposed investment in pet stock remains subject to ACCC approval. Turn into slide 13. Since we provided an update at H1, MSIDC and Melbourne FreshDCs have reached new levels of consistency, averaging 2.4 million cases and 1.4 million cartons per week, respectively. Development of new projects remains on track, including the Moorbank Precinct, where our National Distribution Centre has transitioned to its commissioning and testing phase and is expected to launch in H1 of F25. Our Christchurch FreshDC in New Zealand and our Auburn E-commerce Fulfillment Centre in Sydney are also on track to open in 2024. Slide 14 shows some highlights on our sustainability journey across our three pillars in F23. Woolworths Group was recognised once again for our efforts on inclusion and belonging, achieving platinum status from the Australian Workplace Equality Index. We also launched our latest Innovate Reconciliation Action Plan in June of this year. Efforts to reduce our Scope 1 and 2 emissions in the year resulted in a 36% reduction from our baseline, and we announced our commitment to a fully electric home delivery fleet by 2030. On the product side, we are proud to obtain the title of Healthiest Owned Brand for the fourth year in a row, and it is great to see our customers continuing to embrace our free food for kids with 30 million pieces of fruit shared in F23. It's also important, I think at this stage, for me to acknowledge the tragedy of two of our team members who lost their lives during work this year in our Woolworths Jasmine Supermarket and in our Minchin Breed Distribution Centre. We're deeply affected by this loss, and our thoughts remain with the family and friends and colleagues affected. Investigation into these events are ongoing, and we are absolutely committed to ensuring learnings are acknowledged and rapidly implemented. Our teams deserve to go home safe. I will now turn over to Steve to talk about our financial results, and then come back to talk about our outlook. Thanks, Steve.

Thanks, Brad, and good morning, everyone. I'll start today on slide 17 with the F23 results summary for the group. Group sales for the year increased 5.7% to $64.3 billion, with solid sales growth across all segments in F23. In half two, sales benefited from a return to more normal trading conditions, no longer cycling the impact of COVID and the impact of elevated inflation. Group EBIT before significant items increased 15.8% to $3.116 billion, with the group EBIT margin increasing 43 basis points to 4.8%. EBIT growth reflects sales growth, the non-recurrence of COVID costs in the prior year of $323 million, a more stable operating environment, and the realisation of benefits from investments we've made in recent years. Group NPAT attributable to equity holders of the parent entity before significant items was up 13.7%, on F22 to $1.721 billion. The last three or four years has resulted in some earnings volatility for the group with significant disruption from COVID, which has largely normalized in F23. As we look back over the last four years and as presented on this page, sales have increased at a compound annual growth rate of 7.1% and even increased at a 7.4% CAGR, which we believe reflects strong growth for the group over that period. and I'll discuss the dividend later in the capital management section. Turning to slide 18 in our group trading performance. On this slide, we've laid out our F23 trading performance by business unit, showing the performance for the full year and for the second half. In Australian food, F23 total sales increased by 5%, with half two sales up 7.6%. Sales growth was driven by items returning to modest growth from mid-January, e-commerce returning to strong growth in the second half, and the impact of elevated inflation in the half. Australian food EBIT increased by 19.1% in F23, with half-two growth of 21.1%. Excluding the material COVID costs in the prior year of $211 million in Australian food, F23 EBIT increased by 9.5%. The EBIT increase excluding the cycling of COVID costs in the prior year reflects leverage achieved from sales growth, growth margin improvements primarily from improved promotional effectiveness, category and business mix changes, and an improvement in underlying productivity from a return to a more normal, stable operating environment. As you may recall, we also provided additional disclosure on Woolies X in half one to show the profit contribution of e-com and our other Woolies X businesses. Woolworths Food Retail is our Woolworths supermarkets and metro food stores and e-commerce. Woolworths food retail EBIT increased by 18.3% in F23, largely driven by stores. Ecom directly attributable profit declined marginally on the prior year. However, DAP grew strongly in the second half as Ecom sales returned to strong growth. Woolies X profit measured through directly attributable profit for Ecom and EBIT for the balance of Woolies X increased by 23% to $181 million in F23. A 4.9% decline in Ecom DAP for the year, driven by the performance in half one, was more than offset by a 71% increase across the other Woolies X businesses, driven by another strong performance from Cartology in F23. Australian B2B sales increased by 17.4% in F23, with half two sales growth slowing somewhat to 12% growth. While PFD had another strong result in half two, Australian B2B trading results were impacted by the sale of Summergate and the exit of our international business in the half. EBIT for F23 increased by 13% to $63 million, but excluding exit costs and losses from discontinued businesses in B2B, EBIT would have increased by 68.7%. It was a very challenging year for New Zealand food in F23, with EBIT declining by 21% to New Zealand dollars, $249 million. Despite continued challenges for customers and teams from devastating weather events, in half two, we did see more stability return to the business, and in half two, EBIT was up by 10.3% on the prior year, and also up on half one. Big W's first half performance helped deliver a strong F23 result, with sales up 8%, and EBIT up 165% to $145 million. However, the sales environment became increasingly challenging over the year with half sales flat due to a decline in sales in Q4 of 5.7%. Half to even declined by 64% to $11 million with flat sales, increased stock loss, higher wage costs impacting the result despite strong item-based productivity in Big W. Our other segment, which includes group costs, the performance of Quantium and MyDeal, property and our share of profits from Endeavour Group. The net loss for the year in other was 185 million which was in line with the guidance of $250 million excluding our share of Endeavour Group earnings provided at the half. And for F24 we expect our net loss from the other segment to be in line with F23 at $250 million excluding our share of Endeavour earnings. Group also reported significant items of $117 million before tax in F23 which included $76 million recognised in half one and $41 million recognised in half two, relating to the revaluation of put option liabilities on non-controlled interest in PFD and Quantium, which we are required to review and, if necessary, revalue each reporting period. EBIT from continued operations, including significant items, increased by 4.6% to $1.618 billion in F23. Moving to slide 19 in our key balance sheet metrics, Average inventory days increased by 1.1 days to 29.7 days. This was largely driven by the impact of high inventory holdings across the year to improve availability, together with the impact of inflation on inventory holdings during the year. Closing inventory days declined by 0.6 days as inventory levels normalised, particularly in Q4. ROFI increased by 120 basis points compared to F22 to 14.9%. and was up 71 basis points on half on F23, largely driven by higher group EBIT. Now onto our capital management framework on slide 20. A capital management framework continues to serve as well as a way to create long-term value for our shareholders. In F23, we generated operating cash flow of $6 billion before interest and tax, which was up 25% on the prior year. I'll describe some of the other highlights in the following slides. Moving to the cash flow on slide 21, the group generated operating cash flow of $6 billion for the year. This was driven by a 10.4% increase in EBITDA and a working capital inflow of $439 million. The reduction in working capital was largely due to a reversion to more normal inventory levels following strong sales growth during the year and a gradual improvement in supply chain reliability, particularly in Q4 2020. While lease interest was flat on the prior year, non-lease interest increased by $74 million, reflecting higher floating rates and higher average net debt during the year. Cash tax paid declined by 30% compared to the prior year. In F23, we're mainly paying F22 tax liabilities, with the decline in cash tax paid largely reflecting the decline in taxable earnings in F22. Investing activities of $1.8 billion was was below F22, primarily due to the proceeds of $634 million on the partial sell-down of our Endeavor Group shareholding in December. And I'll provide a bit more detail on CapEx on the next slide. Finally, our cash realisation ratio for the year was 113%, with working capital inflows and lower cash tax pay driving the strong result. Moving to slide 22 on CapEx, operating CapEx for the year was $1.9 billion, broadly in line with F22 and a little below our $2 billion guidance. The split between growth and sustaining CapEx was also consistent with the prior year. Within sustaining CapEx, supply chain declined on the prior year, reflecting the lumpy nature of some of the investments in supply chain transformation, particularly the more brank precincts. offset by an increase in SIB investments and IT projects across the group in F23. Growth CapEx was broadly in line with F22 while the net investment in property increased year on year. CapEx also included $123 million on projects with strong sustainability benefits in areas such as refrigeration, solar, LED lighting and energy management. As we look forward to F24, our operating CapEx is again expected to be approximately $2 billion. Moving to dividends and funding on slide 23. The board today approved a final dividend of 58 cents per share, an increase of 9.4% on the prior year, reflecting the strong earnings growth in the half. The F23 dividend payout ratio of 73.6% is in line with our typical payout ratio in the range of 70 to 75%. Turning to debt, net debt to EBITDA in F23 declined 2.6 times from 3.2 times in the prior year, due to strong cash generation during the year and the increase in EBITDA. However, the reduction in net debt also benefited from the cash inflow from the sale of a 5.5% stake in Endeavour Group in December, which will be used to fund the investment in PetStock Group, which remains subject to ACCC approval. We remain committed to solid investment-grade credit ratings and have significant headroom under our current ratings of BBB from S&P and BAA2 from Moody's. The group has $400 million in domestic MTNs maturing in April, which will be refinanced or repaid prior to maturity. Thank you, and I'll now hand back to Brad.