Wesfarmers Ltd Old

Ladies and gentlemen, thank you for holding and welcome to the West Farmers 2023 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 onto the West Farmers website and can be accessed from the homepage of westfarmers.com.au. I would now like to hand the conference over to the Managing Director of West Farmers Limited, Mr Rob Scott.

Well, hello everyone and welcome to West Farmers 2023 Half Year Results Briefing. I'm joined here in Perth with our Divisional Managing Directors and our CFO Anthony Gianotti. This morning I'll provide an overview of the group's performance and progress on strategic priorities. Then Anthony will discuss the financial performance in more detail. I'll then conclude with the outlook for the group, and then Anthony and our divisional managing directors and I will welcome the opportunity to take your questions. So I'll start the presentation off on slide four, which is a slide that will be familiar to most of you. Our objective is to deliver a satisfactory return to shareholders over the long term. We try and achieve this through strengthening our existing businesses, securing growth opportunities through entrepreneurial initiative, renewing the portfolio and ensuring sustainability in everything we do. This means anticipating the needs of our customers, looking after our team members, treating suppliers fairly and ethically, contributing positively to the communities in which we operate, taking care of the environment and acting with integrity and honesty. Overall, we're making good progress in these areas. And as a group, we have exited the COVID pandemic in a much stronger position than when we entered it a few years ago. Now turning to slide five, which sets out the highlights for the half. I'd like to talk to three key takeaways from our results. Firstly, the pleasing financial results for the half highlight the strength of the Westfarmers portfolio of businesses and operating model. The group's net profit after tax was $1.4 billion, an increase of 14.1%. Our largest divisions performed particularly well during the half, with Kmart's group earnings more than doubling, a near 50% increase in the earnings at Wessef, and another strong result at Bunnings. The businesses responded well to market conditions during the half, and in general are benefiting from strong execution and operating results. as they progress efficiency and productivity initiatives, continue to execute their strategies, and begin to realise benefits from investments made in recent years. The second point is that the group's portfolio is well positioned to deliver returns to shareholders over the long term, with progress made on key strategic initiatives. And finally, as always, we've maintained our focus on long-term value creation consistent with our core objective. Now, turning to slide six, At a divisional level, our businesses continue to make good progress on their strategic agendas, with strong results for the half. I'll use this slide to touch on some of the key points, and then Anthony will provide more detail on the financials. Bunnings delivered another strong performance, highlighting the strength and resilience of its operating model. Bunnings further strengthened its consumer offer during the half through refresh and expansion of product ranges and the trial of new store-in-store formats in some categories. On the commercial side, investments in CRM technology are providing greater flexibility and value to commercial customers, while recent expansions to Bunnings frame and truss operations allow it to meet growing demand and support deeper engagement with customers at the commencement of a build. Bunnings has made significant progress on its digital agenda in recent years. and engagement through the PowerPass app, fly-by scan rates, and the strength of its educational and social content continues to improve. With Kmart, it's clear that their low price positioning and differentiated offer are resonating with customers and Kmart Group's performance this half reflected excellent operational execution in addition to the impact of cycling the lockdowns last year. Kmart's focus and investment on digitising its operations both in stores and through the supply chain are delivering productivity and efficiency benefits and help to mitigate cost pressures faced during the half. Target continued to deliver improvements in its product offer, particularly in its focus categories of apparel and soft home. This half was also the first period of generally uninterrupted trading since the major network changes across Kmart and Target were completed, and it's pleasing to see the benefits of this significant program of work coming through in the results. With WESF, very strong operational performance meant that they were able to take advantage of the favourable commodity price environment, and the division delivered record earnings for the half. We continued to make good progress at the Mount Holland lithium project, with first ore stockpiled at the mine in December, and we expect the first earnings from the sale of spodumene concentrate in 12 months' time. You would have seen in the release material that we've provided some updated timing and cost estimates for the project, with these changes relating principally to the Kwinana refinery. The Covalent team have managed the COVID disruptions and inflationary challenges well, but there have been some increases in CapEx estimates that Anthony will touch on soon. Officeworks saw increased demand across key categories that were impacted by lockdowns in the prior period. Recent investments in modernising its supply chain supported productivity improvements at their new Victorian Customer Fulfillment Centre and will further strengthen Officeworks' omnichannel proposition. Industrial and safety again improved its performance, benefiting from a disciplined focus on meeting customer needs and driving productivity benefits. And a highlight was the final deployment of Blackwood's ERP system. In the new health division, transformation activities were accelerated with investment in supply chain capabilities and technology that will strengthen the competitive position of API and its pharmacy partners. We continue to make good progress with the key data and digital initiatives across the group. The focus and investment across our divisions is starting to pay off. And whilst there is still much to do, we've turned our focus over the last year on developing capabilities across the group that will drive deeper digital engagement with customers and leverage the best that our stores and digital platforms have to offer. An example of this is the OnePass membership program, which was further strengthened during the period. with Bunnings joining the program in November and the announcement of a multi-year strategic partnership with Disney, providing a unique bundled discount to One Pass and Disney Plus members. The strong progress with our digital agenda makes the performance of Catch this half particularly disappointing. Catch was slow to adjust as online demand moderated post-COVID and this was compounded by some operational and executional challenges. We've taken decisive actions with restructuring activities commencing in the half and a new managing director, Brendan Sweeney, joining the business in October. Now moving to slide seven. As mentioned earlier, we believe that the portfolio is well positioned to deliver returns to shareholders over the long term. The portfolio is comprised of strong businesses with clear competitive advantages. Across the major retail businesses, we expect to benefit from our trusted brands, strong value credentials and omnichannel offering. With these businesses underpinned by large-scale, low-cost operating models and differentiated owned brands and exclusive products. With WESF, they have a track record of operational excellence and also strategically positioned manufacturing and processing capabilities with access to key raw materials and close proximity to customers in critical industries. We've recently established new avenues for value creation in the areas of healthcare and in critical minerals. These are new sources of value for shareholders that are not reflected in current earnings. We're pleased with the progress at Mount Holland and the team continues to explore capacity expansion opportunities to meet the strong demand for lithium produced in Australia. A little under a year ago, we invested in API and whilst the transformation is only just accelerating, we believe this new division has the potential to deliver returns to shareholders over the long term and is a platform for value creation. In recent years, we've significantly expanded our data and digital capabilities, as I mentioned earlier. And today we average over 210 million digital interactions with customers each month, nearly three times greater than in the 2019 financial year. And we've shared some information on slide 51 that I'd refer you to. We continue to accelerate the growth of our One Pass program, and whilst it's very early days, the program is already delivering valuable customer insights. From the early data to date, we see that One Pass members are generally a younger cohort of customers that shop with greater frequency and increase their spend across the group after joining. One Pass is complemented by our large-scale loyalty and membership programs in Flyby, Sister Club and Power Pass at Bunnings, which all deliver value for customers and provide the group with unique insights across different customer cohorts and demographics. The quality of the group's data has materially improved in recent years, and during the half, over 55% of our retail sales were to known and contactable customers, compared to about 34% a few years ago. Through better understanding our customers, we are better able to anticipate their needs and improve the efficiency of our businesses. We know our most valuable customers shop with us both in store and online. And one factor that differentiates West Pharma's data and digital ecosystem is the group's extensive store network. Today, Click and Collect represents 30% of online sales, which drives foot traffic in store and improves profitability. Now turning to slide eight. During the half, we continued to build better outcomes for the environment, our team, and the communities in which we operate. Recognising its link to long-term value creation, we continued to build climate resilience in our businesses. For the half, we achieved a 15% decrease in Scope 1 and Scope 2 emissions from our major retailing divisions. At a group level, emissions increased, with this largely driven by higher ammonia production following the planned shutdown in the prior period and the addition of the new health division. Adjusting for these two factors, the group's emissions declined for the half. The group's TRIFA result increased on the prior period with this change due to a change in reporting methodology at Bunnings, as well as an increase in manual handling injuries in Bunnings. We remain firmly committed to improving our performance in this critical area. It was fantastic to see the group retain Indigenous employment parity, with Aboriginal and Torres Strait Islander team members representing 3.4% of our Australian workforce. Now, turning to slide nine, you can see the summarised performance for the group. I'll now hand over to Anthony, who will talk to this in more detail, together with the group balance sheet and cash flow.

Thanks, Rob, and hello, everyone. On slide 11 in the presentation, we provide some of the detail on sales and revenue growth across the group, but I'll start on slide 12 and speak to sales and earnings together for each of our divisions. For Bunnings, sales growth of 6.3% for the half reflected growth across all major trading regions and in both the commercial and the consumer customer segments. It was pleasing to see customers' shopping frequency and foot traffic to stores increasing during the half. However, spring trading results were affected by the prolonged period of wet weather experienced on the east coast, with consumer sales in garden and outdoor living categories the most impacted. Bunnings continued to focus on delivering great value for customers, with ongoing investment in price during the half. Inflationary cost pressures impacting cost of doing business were well managed through disciplined cost reductions and tech-enabled productivity improvements. Pleasingly, Bunnings continued to invest to support its strategic agenda across digital, supply chain and expanding the commercial offer. Overall, Bunnings' earnings increased 1.5% to $1.3 billion for the half or an increase of 2.1% excluding the net contribution from property sales. Kmart Group delivered significant sales and earnings growth in the half, with earnings increasing 114% to $475 million, underpinned by the strength of Kmart's lowest price position and strong execution during the period. Kmart Group's result reflects a strong rebound from the significant impact of COVID in the prior year. But importantly, comparable sales results demonstrated good underlying demand growth over and above the benefits of cycling lockdowns. Kmart's comparable sales increased 17.1% and was supported by growth in both comparable transactions and units sold in the half. Target's comparable sales increased 2.8%, reflecting continued improvements in its product offer. As Rob's already noted, a disciplined approach to cost and margin management were a feature of Kmart Group's performance this half in what was clearly a more challenging cost environment. Rapid changes in exchange rates, higher international freight costs, increased shrinkage and general cost inflation pressures all impacted earnings in the period, but Kmart was able to leverage its scale and sophisticated sourcing capabilities to defray some of these costs. WESF delivered record earnings of $324 million for the half. The strong result was supported by continued favourable prices for LPG, ammonia and related products, as well as an increase in the production of ammonia following the significant planned shutdown that took place in the prior corresponding period. The WESF result also includes its share of operating costs associated with the development of the Mount Holland Lithium Project, which increased during the period as activity accelerated. Office work sales increased 4.6% and earnings were up 3.7% in the half. Sales were supported by an increase in demand across key categories that were most affected by lockdowns in the prior half, including print and create, stationery and art and education. Sales growth also continued in technology categories, despite cycling elevated levels in the prior corresponding period. Higher levels of promotional activity in technology, particularly across the highly competitive cyber week, impacted margins during the half. This higher promotional activity was partially offset by a shift in sales mix towards higher margin products. Industrial and safety delivered another pleasing improvement in performance, with earnings growth of 14.6%, supported by higher sales across the division, stronger margins in workwear group and core gas, along with a modest gain from the sale of the green cap consulting business during the half. These factors were partly offset by higher cost inflation in Blackwoods, which adversely impacted margins, as well as higher costs associated with further investment in digital capabilities, including the final deployment of the ERP system. In West Farmers Health, sales results were supported by both new customer acquisition and growth from existing trade partners in the wholesale business. Sales also benefited from elevated demand for COVID-related antiviral products, but as you would expect, sales of these products will moderate as community COVID infections decline. Health earnings of $27 million reflected continued progress on transformation activities with investment in supply chain capabilities, network changes and merchandise strategies accelerating during the half. Earnings in health also included $7 million of non-cash expenses associated with assets recognised as part of the acquisition. As Rob acknowledged earlier, the financial performance of catch for the half was disappointing. And while some of the moderation in GTV was a product of broader market conditions, sales were also impacted by poor range selection and execution issues in the first party business. As a result, Catch incurred elevated clearance costs during the half in order to address slow-moving stock. In addition, Catch incurred higher fulfilment and delivery costs associated with commissioning issues at the new Moorbank Fulfilment Centre and elevated fuel costs during the half. Reflecting some of the actions taken to address recent underperformance, Catch's result also includes $33 million of restructuring costs relating to inventory provisions, team member redundancies and asset write-offs. Turning now to slide 14 and our other businesses and corporate overheads, which reported a loss for the half of $75 million. The main driver of the loss was the reduced contribution from the BWP Property Trust, which saw a significant reduction in upward property revaluations compared to the prior corresponding period. This was partly offset by higher earnings from the group's interest in West Pine and Gresham during the half. As outlined at the full year results, we continue to invest in the development of the One Pass membership program and the group's customer and data insights capabilities, with a net cost of $41 million for the half being broadly in line with the $40 million that we reported in the prior corresponding period. Corporate overheads were slightly higher at $78 million for the period. Turning now to working capital and cash flow on slide 15. Divisional operating cash flows increased 13.4% for the half, with divisional cash generation of 97%. While this result remained below what we would typically expect in the first half, we did see an improvement from the position at the full year as the businesses' working capital positions continued to normalise. The improved cash flow for the half was driven by growth in divisional earnings and strong cash generation in Kmart as supply chain conditions improved and the level of buffer stock held reduced. These benefits were partially offset by three factors. Firstly, the continued normalisation of inventory cover in Bunnings, as well as higher levels of stock investment in direct sourced products in line with business growth. Secondly, lower payables at the end of the period across the retail businesses due to an earlier than normal stock build to avoid supply chain disruptions in the lead up to the busy Christmas trading period. This meant that payments typically made in January fell earlier in December. And finally, the impact of higher fertiliser prices on inventory in WESF as the business built stock prior to the peak selling season in the second half. Barring any further COVID disruptions, we do expect to see further normalisation of working capital balances through the second half. Group operating cash flows increased 26.7% to $1.97 billion, reflecting higher divisional operating cash flows as well as lower tax paid due to the timing of tax instalments and lower instalment rates during the half. Free cash flow for the half increased 43.8% to $1.36 billion, reflecting the impact of acquisitions in the prior corresponding period partially offset by higher capital expenditure during the half. Moving now to capital expenditure on slide 15. The group invested net capex of $676 million during the half, an increase of about 16% on the prior corresponding period. This was largely driven by $204 million of project capex and $21 million of capitalised interest in relation to the Mount Holland lithium project, along with the addition of the health business and increased investment in data and digital projects across the group. Proceeds from the sale of PP&E declined for the half, largely reflecting the timing of Bunnings property disposals. For the 2023 financial year, we expect net capital expenditure for the group to be between $1 and $1.2 billion. This estimate includes around $400 million to support the development of the Mount Holland lithium project and a further $40 million of associated capitalised interest. Estimates for WESF's share of total capex for the Mount Holland lithium project have been revised and we now expect total development capex excluding capitalised interest of between $1.2 to $1.3 billion in nominal dollar terms. The updated estimate represents an increase of around 10% to 20% on the guidance that we provided at the time of FID of approximately $950 million in real 2021 dollars. This equates to approximately $1.1 billion in nominal dollar terms if escalated at actual and forecast CPI. The updated guidance has been provided in nominal dollar terms in order to provide greater clarity on the actual investment we are making and what will ultimately be recognised on our balance sheet. The expected increase in capital cost relates principally to the refinery and is largely due to COVID related disruptions to key infrastructure items sourced from offshore and some engineering delays. Turning to the balance sheet and debt management on slide 16. The strength of our balance sheet continues to provide significant flexibility and capacity to support investment in growth initiatives across the group and to take advantage of value accretive opportunities as they arise. The group has benefited from actions taken over the past two years to reposition the balance sheet to optimise the cost and maturity profile of our debt. the average cost of funds for the half declined from 3.7% to 3.06%, with a weighted average term to maturity of 4.6 years. As at the end of the first half, West Farmers had available unused bank financing facilities of approximately $2 billion. Our strong investment-grade credit ratings from Standard & Poor's and Moody's were maintained, and the group retains considerable headroom within its key credit metrics. And finally, the dividends on slide 17. The Board has determined to pay a fully franked interim dividend of 88 cents per share, representing a 10% increase on the prior year. The dividend is in line with our historical interim payout ratio and consistent with our dividend policy, which takes into account available franking credits, balance sheet position, credit metrics and cash flow generation. Thank you and I'll now hand back to Rob to cover outlook for the group.

Thanks Anthony. I'll turn to page or slide 19. So through the first five weeks of the second half, our retail divisions continued to trade well and trading has been broadly in line with the divisional sales growth reported for the first half. As inflation remains elevated and high interest rates are impacting demand in parts of the economy, households are facing headwinds and becoming more value conscious. The group's retail businesses are well positioned for this environment with their strong value credentials and low cost operating models. There are also increasing costs of doing business in Australia and New Zealand, such as rising costs of labour, labour shortages, higher energy and power prices, and higher costs in domestic supply chains and transportation. Our businesses are well progressed with key productivity and efficiency initiatives across these areas that are where the costs are within our control. In summary, we continue to invest to strengthen our existing operations and develop our platforms for future growth. This includes WESF, Covalent Lithium and our new health division. And we believe that the actions we've taken in recent years, together with our strong balance sheet and high quality businesses, make Westfarmers well positioned to deliver satisfactory return to shareholders over the long term. That ends our presentation and we're now happy to take your questions.

Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. We do ask that you limit your questions to one per caller and that clarifying questions are concise. You may rejoin the queue for any additional questions. Your first question comes from Sean Cousins from UBS. Please go ahead.

Thanks. Good afternoon from Sydney. Maybe some questions on Bunnings, please. Can you maybe just address a few small issues to the headcount cuts that occurred in the first half and any extra warehouse costs for inventory? And then more on the first half, 23, what drove the pre-property impact margin compression? Costs are rising. You might have invested in price. And if there was any price investment or price rises occurring later, Should that be seen as an enabler of ongoing market share gains and then hence a more resilient profile of the revenue line there, please?

Thanks, Sean. Well, I think ultimately we have a really resilient business model. But I'll start with margins. We are very returns focused. And I think when you look at the long term, the margin's broadly in line. And we're really continuing to ensure that we have a really strong value proposition in the market for our customers and earn the right to be chosen there. every day by them. And obviously, we really want to stay focused on maintaining our low-cost operating model. The headcount changes you mentioned in the first half, they were very, very small and they were really, you know, from a practical point of view, some realignment of a couple of functions in a post-COVID environment where we're able to actually get back out and spend time with our team rather than necessarily run things from more of a sort of a support centre focus. And the change in margin from last year is really price investment. As you know from what I've said in the past, it does vary significantly category to category. We've got inflation in some categories, deflation in others, and movement in COGS that sort of goes up and down. So we are very, very focused on that value proposition. So I think when you sort of think about going forward, where we're positioned, we want to continue to invest for long-term growth. That's very much at the heart of what we do. We've got some really good leverage through our operating model in our stores and ability to flex labour up and down very, very quickly and also leverage some of the sort of tech investments we've made around point of sale, you know, registers, trade desks, those sorts of things to be able to. drive more productivity through the store network, which sets us up to be able to make the investments we need to make for long-term growth. And on the warehousing costs, I think that one's a bit of a furphy, to be honest. We always increase warehouse space over the summer. We've done that every year that I can remember in the 17 years I've been in Bunnings. It was really just an outcome of access to sites. We ended up with a couple of sites more than probably usual because we couldn't get the bigger sites. So really it just normalised itself out and not much to see in that space.

That's great. Thanks, Mike.

Thank you. Your next question comes from Adrian Lund from Citi. Please go ahead.

Oh, hi. Just a follow-up question to Sean's. The way I understand it, most of the margin required in Bunnings is price investment, so correct me if I'm wrong on that, but if I look at the COVID cost this half, I understand they're not material, whereas in the CCP they were in the order of $40 million for Bunnings. That, to me, indicates about a 100 basis point underlying decrease in margin. Now, I understand that you want to invest in price and stay competitive, but I'm trying to understand, as the market leader, why you wouldn't be putting, passing on the price increases from suppliers. Is there increased competition in the market, or are you concerned about volume impact to price increase?

Well, I think it's a fiercely competitive market and we sort of go to great lengths every year to sort of point that out and it does sort of swing around category to category. And, you know, for me, it's very much around, you know, the customer value proposition and having long-term trust. But it's a really rational approach we take. You know, we're moving hundreds of prices every day. You know, some are going up, some are coming down. We're now starting to see price decreases from some of our suppliers. We absolutely pass them on when we need to, but it is striking that balance, and it is also about investing in long-term growth. We've got very strong growth aspirations, and I think when you look at our EBIT margin and you model it over the last decade or so, there's a real consistency to that, which reflects the very long-term approach we have to growing the business in a really profitable and sustainable way.

Thank you. Can I just ask one clarifying question on the price investment that relates to growing to new market segments? Is part of that trying to push that further into trade? I know you're trying to increase the mix of sales and trades. Is that part of it, please?

Yeah, look, ultimately, the sort of trade customer that we go after, Adrian, is very much the small to medium builder. So we're not chasing the really large volume builders where margins are really, really tight. We sort of see the customer margin mix between that sort of customer and the retail consumer as quite similar. And yeah, we've got a stated position to grow commercial to a a more significant part of their operating model, which I think gives us further resilience, but I don't think you should read into that, that there's a significant swing in margin between consumer and commercial, and the lift in commercial and a half there was, but that's in line with our strategic ambitions, but it wasn't a material shift either.

Thank you very much, Mark. Thank you. Your next question comes from David Errington from Bank of America.

Please go ahead. Hey, Rob. Rob, look, I don't want to be focusing on the negatives. I think this is a great result, and you're doing a great job across the board. But when you're losing $100 million from a business as peripheral as cash, I think we need to discuss it. And look, I don't want to sound condescending, but as you'd know better than anyone, growth is pretty hard to get. And to bleed $100 million of cash from cash is frankly just unacceptable, as you've highlighted. My question is, what can we as investors or market followers expect going forward? How much pain are you prepared to put up with? How much patience do you expect us to have? Because if this business doesn't improve, like if the consumer does weaken in the second half, which seems to be what most pundits are believing, One would have to expect that, you know, performance could get worse before it gets a little better. So can you give us a bit of an overview as just what to... You know, because the business is going well, but it's just a shame that you're just going to bleed so much money here and you're offsetting such a good performance across the other businesses. I mean, your investments in Tidman are doing... You know, lithium's great, Bunnings is great, Kmart's coming back. But to bleed this on catch... It's just ordinary. So what can we expect going forward here, Rob? Do we put $200 million loss in for the full year? Is it going to get worse next year? When are you going to cut it? Can you give us a bit of an overview as to what you're thinking going forward? Because it's now in the too important basket, this one.

Yeah. Well, David, firstly, look, I agree with you. It's not good enough. It's unacceptable. We're not satisfied with this at all. So what can you expect? You can expect that we are taking very serious action to improve the financial performance. So we would expect, well, we would demand that the financial performance improves from here on. There are a number of things that are well within our control to improve the financial performance. There are other very deliberate decisions we're making around investment, such as the development of the Moorbank facility and the Fulfilled by Catch solution. We're still pleased about directionally where that's going and the opportunity to deliver value for the group there. Unfortunately, this year we're incurring a net cost around that, but over time we're confident that that will deliver value. The other thing, David, with catch is that we still see opportunity financially for catch within the group, but not at any cost, right? Not at any cost. Now, we have a lot of flexibility around how we scale up or scale down the investment. So that is within our control. So we'll make very commercial decisions going forward. So I would expect that the earnings loss will improve in the second half and we'll make very deliberate decisions around the investment we're making. And if we're not seeing the value come through either at the catch level or across the group, then we'll materially cut back on that investment. But I guess it's going to be a disappointing year for Catch, but it will need to improve. It'll need to improve materially in the years ahead, or we just simply won't keep investing at the current level.

How hard will it be to exit? Is it barriers to exit this business? Is it too entwined with K-Mart? Because I remember the investment originally was under Ian Bailey. And I don't want Ian Bailey walking away from this one too easily because my understanding was that he was knee-deep in this acquisition as well. So, you know, is it entwined in the businesses here that you can't get out? No. It seems to me that this is...

Certainly not entwined, David. We made a very deliberate decision to keep the business with a separate management team. Obviously, there have been certain things that we've pursued around Fulfilled by Catch and some of the product sharing capabilities, but they're very much on an arm's length basis. I'm optimistic that we can improve the financial performance and create value for shareholders, but there are various options that we could consider. This is inherently a valuable business. We've made a few mistakes. We need to fix it up. And, you know, I guess I'd say just judge us by what we do over the next year or so. But clearly, I see the current level of losses as totally unsatisfactory. So we're not going to accept that over the longer term.

The clock's ticking, though, as you say.

Thank you. Your next question comes from Michael Simotas from Jefferies. Please go ahead.

Thanks very much. Can I just follow on with a little bit more detail on catch? Can you quantify the benefits that you'll get from the $33 million spend on restructuring? And are you sort of comfortable with the shape of the business for now and you just need to execute better or are we likely to see more restructuring come through?

I might just make one quick comment on that and then Anthony can provide the detail on the provision. Look, I think it's worth acknowledging that we made some very deliberate decisions around investing heavily in the business through COVID. We, you know, we invested very heavily in range and inventory. We dramatically expanded the first-party retail business, which, you know, was not a core capability of the old catch business. We invested heavily in supply chain capability, technology, personnel, and then we saw the market adjust very dramatically, faster than we expected around... decrease in online transactions. So we clearly overinvested. The provision is really focusing on resetting some of that overinvestment. But I'll let Anthony talk to the specifics.

Yeah, Michael, just in terms of your question around the $33 million, about two-thirds of that, so about $20 million, is related to further stock clearance activity that we have to undertake. So as we called out, there was a level of stock clearance that was undertaken during the first half, but there's more work to do to reset the first-party business, and so we expect some further clearance activity into the second half, and $20 million is in relation to stock provisions for that. The balance is partly to do with the redundancy program, which was announced at the end of January. And so that has largely been done, and we'll start to see some benefits of that from a cost perspective as we go through the half. And the other piece, it was some write-off of some plant and equipment at the Truganina DC as we restructure some of that. So it's just a component of that. So that pretty much makes up the $33 million restructuring provision that we took at the half.

Okay, just a clarification. So just in terms of the business as it stands now in terms of the assets in it and the number of people, do you think there's a way or a path to value creation for the group in its current form or are you likely to need to make more adjustments?

No, look, I think overall the reset of the cost base, the headcount, the refocusing of the first-party retail business provide a basis from which Catch can move forward and develop a profitable and viable business. business, like clearly we are continuing to invest in a very deliberate way in the business. So we're confident that at least this reset is going to materially improve financial performance. I think it's also important, and whilst not diminishing the disappointment we have in the performance, we've made some very significant investments in data and digital across the group over the last four or five years. Overwhelmingly, those investments have added material value to our businesses and the group. Not everything has gone right as we've gone through that process, but more has gone right than has gone wrong. We are looking to learn from the disappointing result within catch and adjust very quickly, and we'll continue to monitor it very closely.

Thank you very much.

Thank you. Your next question comes from Craig Wolford from MST Marquee. Please go ahead.

Hi Robyn, Anthony. I think I'll continue on the catch theme but more about how it relates to the broader retail businesses. You've got the two automated DCs that can be used for delivery and the sense that I got from the strategy day was that one pass would allow you to use the DCs from catch for deliveries. Is there much going through those catch DCs for the West Farmers retail businesses and how does it impact your thinking around online delivery, which is, as you've called out, about 70% of your online orders.

Yeah, Craig, I'll let Ian and Nicole can talk in more detail about this. But there are various strategies that we're pursuing to build more capacity and to improve the efficiency of e-commerce fulfillment across the group. And Officeworks are obviously very well advanced in terms of the use of e-commerce. automated technology within their Melbourne CFC. We have adopted exactly the same technology and software within the Moorbank facility, so there's some obvious synergy there. And then the Moorbank facility is providing a solution that is expected to deliver better cost outcome than Kmart is currently able to deliver. So, you know, there are various strategies that we are pursuing. This will continue to evolve. We say, you know, catch is providing some optionality around this, leveraging technology and capability across the group. But it's not the only it's not the only solution that we can pursue. But I'm happy to provide let perhaps Nicole or Ian provide more context if you'd like. Maybe Nicole.

Yeah, sure. Yeah, we're actually really happy with the performance of Moorbank now. We've invested in that heavily and working closely with the Kmart group, we did a pilot for their online orders in New South Wales and that has been successful and we're looking to scale that. I think the other thing to call out is we introduced next day delivery in Metro Sydney and Melbourne running into peak and that was also very successful. So we're looking at expanding that. But fulfilment in all e-commerce business is a key focus, and we just need to keep improving. And if we can drive those efficiencies for not only Catch, but also for the wider West Farmers and the Kmart group, then I think that's a really good outcome.

Great. Thanks for that, Nicole.

Thank you. Your next question comes from Lisa Deng from Goldman Sachs. Please go ahead.

I just wanted to understand the GP margin trend for some of the key retail businesses, especially Bunnings and Kmart. It looks like the raw material cost, if I'm just looking at the group, grew by 35% year on year. So I just wanted to understand how it sort of folds into each of the groups or businesses. Thanks.

Lisa, as you know, we don't provide specific details on gross profit margin. I think we could get... I think Mike's already answered that question pretty well around how they have dealt with price investment having regard to cost increases. The other point I think you need to recognise with Bunnings as well is that the margin differential between commercial and retail... and the significant difference that we observed in the first half around sales growth. So mix has an impact on margin in short-term scenarios like that. I might let Ian provide some observations around how we're dealing with price and cost generically within Kmart and Target, and then if you like, Sarah can comment on Officeworks.

Yeah, just briefly, Lisa. Very much like Bunnings, we try and figure out how do we maximise the EBIT dollars that we can generate in any given year. And so, of course, we'll look to figure out what's the right margin, what's the right price point to hit and the resulting margin that flows from that in order that we can maximise that outcome. As you can see through the half, we did pretty well on turning the sales into profit dollars. So clearly there hasn't been a major movement within that margin number. And certainly I'm pretty happy with how it's currently trending as we manage pricing implications as well as cost movements. What we are seeing now, of course, is a reduction in costs, particularly in raw materials, things like cotton and polyester and some of the other raw materials are starting to fall now relative to their peak through COVID-19. And so that starts to help us as we manage margin as we go forward.

Yeah, and Lisa, from an Officeworks perspective, I think, look, Mike summarised how similarly as EDLP retailers, we address price in our respective categories. As you know, we have a very broad business. We sell a lot of different products with over 40,000 SKUs. And so cost inflation and what we're seeing is very varied depending on what we're talking about. So technology hardware, we know, for example, there's a lot of monitors in the market right now. So we're not seeing significant cost inflation, obviously, in that side of our business. But on the flip side, paper, where pulp and gas inputs are really growing, we are certainly seeing some inflationary pressures. We look at it category by category, and we just make sure that we continue to invest in maintaining our trusted EDLP position with customers to make sure that we are giving them the best value.

Lisa, it's Anthony. Just quickly to add to your question, I just want to be clear, when you're looking at cost of goods sold for the group, that includes all of the group. It includes WESF. So that will significantly distort the percentage that you look at. Exactly. Yeah, that's what I was asking. Yeah.

I do understand that. That's why I wanted to understand the trend potentially for the retail businesses yeah okay well i think that the retail mds have just covered that but just wanted to be clear i don't think you're going to be able to draw any conclusions from looking at that uh cogs number because there's a lot going on in there yeah so sorry just to clarify the bunnings gp trend right or the gp margin trend understand we won't talk about the specifics um is down right largely due to the price investment um offsetting whatever you know different category mixes or pricing that we may have put through

Do I understand that correctly? No, I wouldn't say that. I think if you look at our margins over time, they're broadly consistent, but we just don't dive into the detail. And as I said before, the mix between the type of B2B customer that we're servicing and the B2C customer is very similar from a profile point of view.

Lisa, when you have much stronger growth on the commercial side of the business than the retail side of the business in a short period of time, that will have a margin impact. When you have significant wet weather activity and that impacts certain outdoor products that generally trade at higher margins, then that's going to have an impact. So that's why... we probably sound like a broken record, but we always caution around drawing too many conclusions from short-term trends in margin because they can be driven by very short-term factors.

Got it. Thank you.

Thank you. Your next question comes from Ben Gilbert from Jarden. Please go ahead.

Good afternoon. Question for you, Mike, just on Bunnings. I'm just keen on understanding how you guys are thinking about category expansion because I think one of the things that Bunnings has done such a good job over the last 30 odd years has been expanding their garden, kitchen, lighting, kids play equipment, etc. As you move forward, do you still see some outside of pure commercial, do you still see some big legs or opportunities around categories? Would you go so far as to extend in one that might be a little bit less obvious, such as things like PET or electronics? I know you play in electronics partially, but what's the bigger push towards it?

Yeah, it's a great question, Ben, and it's probably one that I'll expand on come Strategy Day. But as I touched on last Strategy Day, you know, pets is something we see as an adjacent category. It's been a category that we've had a range in Bunnings for a really long time around sort of durables and dog houses and chook pens and all those exciting things. But, you know, I think you can expect to see quite a big expansion in that category over the next few months. I think we do see a big market opportunity, a lot of customer demand for the things we've been selling and we've been testing and learning through some promotional drops of pet durables over the summer period, which have been really pleasing for us. So that's one. And I think you might remember, I sort of think about the Bunnings ranging lens being sort of everything from the front gate to the back fence of a property or a job site. So it does give us a lot of adjacent markets. We want profitable growth, so we're not going to chase into categories where there's really low margin and really high service expectations without operating models that would support that. And our expanding online capability gives us more optionality in that space over time. And then there's a range of other categories. So I think we'll not only continue to grow the categories we're in, we're all about growing the market and growing our share, but we do see some exciting opportunities in some adjacent categories where we see good customer demand and opportunity to enhance competition and bring a new value proposition to the market.

And does that include marketplaces? I saw a report, one in the industry report that last week that had you guys as the third most engaged marketplace in Australia.

are you looking to put any more effort or investment around that in terms of growing range and trying to sort of accelerate the gtv uh in that site i'll need you to send me that report so i can use it in my appraisal bin that'd be really really helpful um but um look marketplace marketplace is all about bringing people into the bunnings ecosystem and having them stay there we know that customers are shopping you know for things for the home make the home safer make the home more secure make the home more livable and that's happening more and more as people work from home more often but They're also interested in the things that sit across a range of different categories that we don't think we've got capability in, either to have it in store or have the merchandising capability today. So partnering up with some good trusted partners across adjacent categories there allows us to provide a service to customers. It's good to know that it's... It's resonating and we certainly see that with some growth there. But it is really, you know, something that's nice to have within the ecosystem and, you know, we'll keep tinkering and building away at that over the next little while. And I think it leans into some of the broader ecosystem aspirations we have as a broader West Farmers team as well. Great. Thank you.

Thank you. Your next question comes from Brian Raymond from JP Morgan. Please go ahead.

Thanks for taking the question. Just on global sourcing, obviously it's a big part of the Kmart business. We've seen pretty steep reduction in global shipping costs, and as I understand it, factory costs in China have also come back a bit with less global demand coming through for production. So just keen to understand for Kmart, but also for other businesses where it's relevant, I assume Bunnings and should have some leverage to this, the lower shipping costs and other global supply chain costs. What sort of timeline should we expect that to flow through? I assume it hasn't yet, and what sort of magnitude that is coming throughout? Thanks.

Thanks, Brian. It's Ian here. I'll start off on this one. When you look at cost of goods, there's so many factors involved. Clearly, there's the raw materials, there's the production cost, there's the international shipping, as you called out, and there's FX. So there's a number of dimensions. Clearly, that all plays through into the price that we then charge to the end consumer. And we're constantly trying to figure out how do we keep that price as low as we possibly can. So therefore we do move pricing around both up and down as we see those changes. So as we do see these costs coming through into our system, what you'll see us do is we'll adjust pricing so that we can capitalise on that and continue to grow market share. In terms of how quickly does that come through, some comes through very quickly. So if you've got seasonal categories where we're dropping product in which we're not currently carrying, then of course then it's almost immediate in terms of the raw materials. And frankly, the business model of Kmart in particular is super good at extracting that value earlier than most other businesses will be able to access it because of our pure line of sight through to the raw materials and the factories. When you've got other products, clearly it goes into a rolling average cost. And so there's a period of time it takes to wind through the system as we sell through the products that we have. But we're certainly talking in terms of months there, not halves or years.

Right. Is it meaningful for any other businesses, just before we move on?

From a Bunnings point of view, about 30% of our inventory is directly sourced and comes through, but there's nothing in what I'd answer that Ian hasn't already covered.

Yeah, and I'd say from an Officeworks perspective, exactly the same.

Okay, great. Thanks, everyone.

Thank you. Your next question comes from Grant Saligari from Credit Suisse. Please go ahead.

Good afternoon or morning to you. I wonder whether the directors would comment on customer shopping behaviour that we're seeing in terms of just shopping frequency, value trends, basket size trends, and just a brief comment on quality of inventory, if they would mind, please.

Yeah, I might start. Grant, I think from a money's point of view, if you look at the commercial side, that's really helpful for us because we can see more into the pipeline. The nature of the contracts and things like that suggests to us that there is a good pipeline. If you look at the numbers that are being called out on housing starts, they drop a little bit, but it's not material. And you then see a reversion to what we've seen over a number of different housing cycles, which is... Moving to alteration and addition, you then look at the demand for trades and the shortage of trades and the shortage of apprentices. That pushes people to DIY things themselves. My guess is you'll hear a bit about movement to value from my colleagues. For us, when we see this sort of market and you're not going out and doing things, you're not travelling as much because... Things are a bit tighter. You're spending more time at home, and I think for a business like Bunnings, with the assortment and the price mix and the value proposition, that positions us well to participate strongly in the consumer market and the commercial market.

Yeah, on the Kmart side of the equation, everything we have within our boxes is at an incredible price, as you know. So we pretty much haven't seen too much price inflation that some businesses saw through the COVID period. Therefore, our basket size has moved around, but to a much, much lesser extent than other retailers would have had through the last three years. If you look at it on a pre-COVID level, it is marginally higher than it was, and some of that's explained by a slight change in shopper behavior where they do put a little bit more in the basket now than they did pre-COVID. In the case of our business, we're still seeing transaction growth and comp transaction growth at a total customer level. Yeah, I think a relatively modest change as we've gone through over the last period of time.

Yeah, and I think from an Officeworks perspective, we continue to see, recognising our channel mix with our every channel offer, we continue to see strong return to stores with really strong transaction growth in stores and a normalisation of our online channel, albeit we will... as we saw in the first half, normalised at a level that's materially higher than pre-COVID levels. Similarly, in terms of customer behaviour, then in terms of basket, as well as our B2B business, similar to Mike, we're seeing good growth in our B2B business as people continue to invest in how they work and continue to invest in their business, recognising a lot of our business customers are small business and mid-sized business, And we expect that to continue in the second half. And we are seeing the value in the basket move around as prices move. So particularly recognising the strong tech and high level of ASP sitting in tech for us. But we did see good growth in tech in the first half.

And lastly, Grant, just on your question on inventory quality, I think we're in pretty good shape across the group. The only one which we've already called out is Catch, so we'll continue to have clearance activity in the second half. But across the rest of the businesses, we're in good shape. We have called out, and as Ian said on a number of occasions, we're still holding some buffer stock in Kmart. And we will obviously monitor how supply chains normalise and hopefully disruptions are removed. And as that becomes clearer and we get more confidence, then we'll remove some of that buffer stock as we move forward. And as I said before, I think we're hoping that working capital will improve in the second half. Thank you.

Thank you. Your next question comes from Richard Barwick from CLSA. Please go ahead.

Thanks, guys. My question is for Ian Bailey. There's obviously a big drop in the online penetration evident in both Kmart and Target. To what extent did that reduction contribute to earnings and the EBIT margin?

Yeah, thanks, Richard. I think what you've got there is a material return of customers back to stores. Now, some of that is the fact that stores were closed in the previous half for the comparable period, and some of it is we've just seen a real shift back of consumers back into stores full stop. which I think has probably surprised everybody in the market. I think if you're comparing year on year, it's super hard to do that comparison because of those store closures on the way through. If I actually look at the dollar value we're doing online, I'm still pretty happy with where it's going. I'm pretty happy with the growth trajectory that we're delivering. We very much want to grow our share of wallet with customers full stop. and we're very happy to do that, whether it's home delivery, click and collect, or in stores. And then we manage the business model to ensure that we deliver the right value for shareholders as well as consumers.

Can you offer a comment then, Ian, on the profitability of the online sales compared to the in-store sale?

Yeah, well, every sale that we get through the various channels is contributing to our profit, and so that's the way that we look at it. So obviously we're already running our business, so we've already got the fixed cost, so if we can get an incremental sale and we can make a margin from that, then it adds to the bottom line. So that's very much the way we look at it. And then we look at it from the broader perspective of if we can deepen our engagement with our customers and our most engaged customers shop online and in-store, then we get a greater share of wallet.

Yeah, okay, great. Thanks, Ant.

Thank you. Your next question comes from Ross Curran from Macquarie. Please go ahead.

Hi, team. I guess the question is one for Anthony. Notwithstanding the delays in getting the lithium plant up and running, that lithium investment will start throwing off quite a lot of cash fairly soon. And just looking at the maturity profile of your debt over the next three years, there's a nice expiry of debt between now and 2027. I'm just thinking how you're thinking about the cash generation out of Mount Holland, the cash that's going to throw off, the maturity profile of the debt, and what we should think about gearing going forward once this point does come on stream.

Thanks, Ross. Yeah, well, there's a lot in that, I think. So certainly, as Ian has already pointed out, we're looking to have sales of spodumene in FY24. They'll obviously be ramping up in the second half of FY24, so we obviously won't have full volumes. current Spodumene prices, that should certainly contribute to earnings for the group. And yes, that will obviously help us in terms of our debt position. What we try to do with our debt profile, though, is have a mix of shorter-term bank debt and longer-term bond debt, which you've seen in our profile. And that obviously gives us the flexibility. It gives us the flexibility to pay off the shorter term debt when we got the cash flows coming through, but we underpin our debt position with some longer term cheaper bond debt. So at the moment, the mix of debt is currently sort of half and half, but that will obviously shift and change as we move forward, depending on what sort of cash flows we can generate, what sort of dividends we can pay out. And obviously, as we've said before, franking credits have no value to us, so we want to get them to shareholders where we can. So I think it's a combination of all of those factors, but making sure we have a debt position that's flexible enough to accommodate those changes in earnings and investment, I would add, because we do want to look at opportunities opportunistically, and so we want to make sure we've got a strong balance sheet to be able to do that as well.

Thank you. Your next question comes from Phil Kimber from E&P Capital. Please go ahead.

Hi, guys. Just a question on the Coventland business. And apologies if you'd answered it earlier as I've just jumped on the call. But I think from memory, it's roughly 400,000 tonnes a year of spodumene. So you mentioned it'll ramp up over the second half of fiscal 24. But, you know... Is something like 100,000 tonnes a semi-sensible expectation of what you might sell? Because I guess we're just not sure about exactly the ramp-up profiles of the business.

Yeah. Hi, Phil. Ian Hanson here. I'm not sure whether your $100,000 that you're referring to is on a 100% basis or a 50% basis. In other words, our share or the total volume being generated by the concentrator. The nameplate capacity of $380,000, you're very close with $400,000. Well done. I think 100 would seem sensible, given that we would see the sales revenue flowing in in the first part of calendar year 24, although the concentrator may become operational later. late 23, calendar year 23, we'd probably see the sales in calendar year 24. And if you think about the concentrator having a nameplate capacity of 380 and we'll get six months' worth of operation, but it's ramping up, so our share of 380 at our nameplate capacity would be 190. If you say maybe 50%, 60% operation, then I think you're 100,000 is probably close to the mark in terms of expectations. But, of course, we'd like to see more, and if we can get more out, we will.

And can I also, as a follow-up, just ask, we can go back, and I think there's some data on the cost for the mine, so putting the lithium refinery business to one side, just the mining costs. Back at the time Kidman was being acquired, are they still broadly relevant now or has there been a massive change that we should be aware of in terms of the cost per tonne of mining?

I think the costs which were announced back at the time of FID, which were based upon the updated definitive feasibility study, would have changed significantly. They were produced back in 2020. The world is totally different today. We've seen significant changes in commodity prices, including input costs such as reagents. I think one of the things we need to be aware of is that traditionally West Farmers doesn't publish its costs associated with our production of other products. And probably going forward, we're not going to do that with lithium either. We will obviously provide updates about production and operations, but normally we don't give any background on costs per tonne. Okay, thanks.

Thank you. Your next question comes from Sean Cousins from UBS. Please go ahead.

Thanks. Just some quick follow-ups. Ian, so you're saying that US $5,400 a tonne, which you provided a year or so ago, that doesn't apply anymore, the lithium hydroxide cost per tonne.

All I'm saying, Sean, is that that was a cost at a point in time from, I think, the UIDFS back in 2020. We haven't reworked those costs as yet, but we won't be restating those costs.

Okay, I might take it offline because I think you've provided those costs. And just what were the operating costs in Mount Holland that you incurred this year in Wessef?

Oh, they're very minimal, Sean. Yeah, it's pretty small. It's associated with the office and the accommodation, Sean.

Sean, Rob here. I think the number you're quoting is that US$5,400 real number. That's your number? Yes, that was a number that was reported as part of previous reporting on the project from our joint venture partner as well, which was absolutely the correct number at the time. The point I think that's worth remembering on the cost side The integrated project should be a very low-cost producer. So from a structural point of view, given the quality of the ore base, the concentrating process, and then over time the refining process, it should remain a very cost-competitive project. What Ian is highlighting is that what's happened over the last three years globally is that we've seen cost inflation. And then there are certain input costs, certainly on the refining side around reagents, where we've seen significant inflation. Now, these are costs that everyone in the market... is going to have to deal with. As Ian also said, a lot of the reporting that goes on around costs, contracts and so forth is being done by companies that are having to report that data for the purposes of trying to get finance. That is not an issue for us. So although we were required to disclose that data point previously, it's not something we're necessarily going to give a regular update on. But what you will see is you will see the ultimate profitability of the project that will be reported on a regular basis.

Gotcha. And just another quick clarification, the catch guidance of loss making in the second half but less than the first half Is the way you're looking at the first half pre or including the $33 million restructuring costs?

No, Sean, pre. So it'll be less than the underlying loss of $75 million.

Okay, that makes sense. That's helpful. Thank you.

Thank you. Your next question comes from Adrian Lim from Citi. Please go ahead.

Yeah, thanks for taking one more question. This one's for Sarah on Officeworks, please. So, look, while JB Hi-Fi's Australian brand is not an exact comp for Officeworks, they are both in the technology categories. And if I look at, you know, Officeworks even today versus three years ago, it's basically flat and JB Hi-Fi Australia's is up 63%, while they've also grown the top line about seven percentage points faster. So can you talk to how the business is performing in the context of its peers and how you think the market share has been moving, please?

Thanks, Adrian. Look, I'll start by saying I appreciate your comparison, but obviously we are very different businesses. So as you know, we run five different portfolios within Officeworks. So we have our stationary education and art business, and our furniture business, our technology business, and obviously as well we also have our print and create business and our Geeks2U business. Each of those businesses through the COVID period have been really, have suffered really different impacts. So with store closures, stores being open and also as we highlighted in the first half results, we have seen quite a lot of volatility around stationary education and art and also print and create with store closures. Those are businesses that are high margin businesses. but also are businesses that really heavily benefit from two things. One is foot traffic into stores. They're very store-driven businesses. They are also, particularly for our stationary education and art business, strongly skewed to B2B as well as B2C. So obviously with small businesses suffering disruption and a number of our B2B customers over that period, we have been impacted quite differently. We also have quite a broad competitor base in each of those businesses, not just JB Hi-Fi. So what I would say is in our technology business specifically, we've seen strong growth through the last three years, which is delivering a good EBT return for us. So we're pleased with the progress we've made on our strategy and we're looking forward to exploring more of the opportunities and explaining them at the strategy day. Particularly, we see opportunities in the B2B side of technology and also in the telco areas as well as attached. Still lots of adjacencies for us to explore to drive profitable growth, but we're really pleased with the progress on the tech strategy.

Thanks for that, Sarah.

Thank you. Your next question comes from Craig Wolford from MST Marquee. Please go ahead.

Hi, Rob. I just wanted to circle back on Bunnings. It might be for Mike. The contribution, I may have missed it, but what contribution to group sales did commercial have? And is there any comments you can provide about the first quarter versus second quarter performance? I'm not really trying to get too caught up in the minutiae of the quarters per se, but trying to understand November and December, which were far less impacted by lockdowns in the prior year. and therefore maybe a better read on underlying trends?

Sure. Well, I think, as you remember, Craig, everywhere but metropolitan Melbourne, we were able to trade through. So unlike a lot of retailers, I think the essential nature of the products and services we offer was recognised by governments and we were allowed to trade. So we didn't have some of the big bounces that you've seen across the board, which I think underlies the strength of our performance on a CAGR basis over the last few years. It's... around about 10%, which I think is incredible when you sort of think about the size Bunnings was pre-pandemic and where it is today. Consumer commercials, it's sort of sitting around the sort of 65-35, 65 consumer, 35 commercial. That's broadly in line with what I talked about at Strategy Day last year. It is growing, but it hasn't grown materially in that period of time. The one thing we saw... You know, we try to avoid sort of conversation around weather, you know, within the Bunnings business. But I do think the sustained wet at the start of the second quarter, particularly in major trading regions like Vic and New South Wales, was really, really challenging. And the first 30-degree day in Sydney, I think, was not till January. So it was definitely a cooler start. But in saying that, our December and Christmas trading, we were really, really pleased with.

But that weather... Probably affected both commercial and consumer, right? Or are you trying to steer me one way or another?

It certainly has a more immediate impact on consumer because it's the time of the year where you're out and about doing things in the garden. You're prepping decks. So, you know, it's across a range of categories. It's not just gardening. We did see a slowdown in a few site starts and we sort of saw that through some delays in orders in frame and trust and things like that. But... And trades are pretty resilient and they find, you know, other places to go. So they get inside, you know, properties and do some of the sort of fix to finish work and things like that. So it was certainly more pronounced on the consumer side.

Okay. Thanks, Mike.

Thank you. Your next question comes from Lisa Dang from Goldman Sachs. Please go ahead.

Hi guys, just one follow up on catch. So that $33 million is more about stock clearance and the redundancy packages. Are we at any risk of having to do goodwill write downs or impairments on the acquisition value?

Thanks, Lisa. Look, obviously we always do impairment testing, but a lot of the goodwill associated on the acquisition of catch actually sits under the Kmart Group CGU. So there's probably less likelihood of an impairment of goodwill. We're obviously still covering other assets like brand name for catch, but most of the other assets are real assets sitting there. So Like any of our businesses, we have to undertake impairment testing every half year. So I guess there's always a risk, but as it relates to Goodwill, most of the Goodwill related to catch on the acquisition is actually sitting in the Kmart CGU.

Okay. So actually, can you potentially let us know how much Goodwill was recognised on acquisition?

I'd have to go back and have a look, but I think it's about $140 million, I think, from memory.

And when you do impairment testing, what are the key criteria that you guys test for?

Well, there's a whole bunch of things that we test for depending on which methodology you're using under impairment testing. But we obviously look for impairment triggers. We then undertake DCF valuations if that's the appropriate approach. So we look at forecast and future earnings. We look at net realisable value of assets. If it can't be supported by the cash flows in the business, you then look at the underlying value of the assets that are sitting there. So if they are stock, for example, you then go through a realisable value of those individual assets. So it's a, obviously, technical accounting approach to the way that we look at impairment, like every other company is required to do, which is quite a thorough process. So, yeah.

But bottom line is that you don't believe at this stage to be a high risk of potential goodwill impairment?

No, I don't.

Yeah. Okay. Got it. Thank you. Thank you. Your next question comes from David Errington from Bank of America. Please go ahead.

Rob, just a couple of quick follow-ups, probably to Mike and Ian. Mike, in Melbourne, I can remember following on from the weather comment, I can remember in Melbourne, I reckon there would have been about two months in the key selling period, like Father's Day in that September, October, November period, where all of Melbourne was underwater. How many I know that you don't want to call out how much your sales would have been impacted, but how many weekends do you reckon you saw really wet weather? And I remember John Gillum always used to say, you know, when the sun shines in spring, people do DIY. When it rains, they just don't. How many weekends do you reckon in trading you reckon were negatively affected by the weather? And I suppose, Ian, as well, I don't reckon we had a spring on the eastern coast. How much did that affect your sales?

I think we've called out the fact that it was an impact to spring. And I always look at the underlying resilience of the business being if seasons are behaving the way they're meant to and are we performing the way we're meant to? And the answer is yes when you looked at markets like Queensland and Western Australia and South Australia. So it was probably too many weekends for my liking. David, particularly Father's Day when it was the first one in three years where we'd had everyone out and about able to do stuff. But... You know, we have certainly seen into November, December, a later take-up of gardening activities that probably were done a little bit earlier, you know, by consumers. But certainly, you know, I think Melbourne Cup Day 2022 was 30 degrees and 21 was... What year are we in? Yeah, anyway, the year before last was 27 or 28 degrees on Cup Day and it was hailing in 13 this year. So it just shows you the seasonality that we have to work through. But pleasingly, we've had a strong November, December, and that started to sort of pull through sales in those categories.

You're being a bit modest, I reckon, Mike. I reckon you've done a great result given the weather. Thank you, David.

Yeah, just on the Kmart side of the equation, again, same states, New South Wales, Victoria, were the ones that were the most impacted. If you look outside of that, we actually had pretty good conditions in the other states and we saw pretty good sell-throughs on seasonal apparel in particular. A lot of our stock that we sell, of course, is not seasonal. So the 365 just sells pretty constantly irrespective of what's going on. When we do look at that through those two states, you know, we've managed it. So we probably had to hit, you know, particularly in Target, a few more promotions than we would have liked as we went through November and December to keep the inventory flowing. And then, of course, we've tackled clearance as we needed to and the inventory quality as we ended the half is pretty good. You do also get a bit of a bounce when the weather does, when the sun does shine, you do get a kick. So it's not like you lose all of those sails, but there is a net impact over the season. But we've managed it in the context of our overall inventory and just taking the action where we needed to.

Yeah. If I could sneak one more and we're coming to the end of the call. Just to Ian Hanson, the offtake arrangements that you've got, Ian, with lithium... with global counterparts, I'm assuming that's on hydroxide. You wouldn't have arrangements. Can you give us a bit of an idea of what percentage of sales are forward orders? And if the refinery keeps getting pushed back, is that a problem that you have to, you know, you've got to deliver that before you, you know, take or pay sort of stuff? Or can you give us a bit of an idea how much, you know, with your forward orders, how that works?

Yeah, thanks, David. We don't have any contracts in place yet for the spodumene concentrate. However, they will be in the near future. And, of course, that's short-term selling positions. For the lithium hydroxide, we're still working with significant global counterparties, be they OEMs or battery manufacturers. The negotiations are well advanced. The way the contracts will work, they will come on foot upon successful commissioning of the lithium hydroxide facility. So, therefore, there will be no exposure to the time it takes for the lithium hydroxide refinery to come online and produce quality product.

Right. And the price that you said at hydroxide, is that at the spot price at the time or is that a contractual price set in advance?

The contracts that we've been working on will have a market linkage price. Right.

Okay. So it'll be closer to one of these at the time. Yeah. Okay. Thanks. Look forward to seeing you in March too.

Yeah. Thanks, David.

Thank you. Your next question comes from Brian Raymond from JP Morgan. Please go ahead.

Thanks for taking the follow-up. Just a quick one. I just wanted to clarify on the outlook comment where the first five weeks of trade is running at similar levels to the first half. For Bunnings and Officeworks, they're pretty normalised growth rates. But just trying to make sense of the Kmart numbers, given the strong year-on-year growth in the first half, it implies that that's maintained in the teens in January. Most competitors have not competitors so much, but other retailers have called out a slowdown in January. So just trying to understand how that underlying run rate looks maybe versus January pre-COVID to try to get a feel for if things have accelerated because it's a very big number compared to what most retailers are producing at the moment. Thanks.

Yeah, thanks, Brian. Ian here. I think, first of all, yeah, obviously look at the comp number, not the headline, to try and isolate out the closures as you look through that. If you cast your mind back to this time last year, particularly through January and February, COVID was still very prevalent. Kmart was more impacted, I think, in the product categories we planned than any other retailer by the reticence of customers to visit stores just because of how busy our stores are. So if you are a customer that's worried about COVID, then we were a place to avoid. So I think our base when you look at last year was probably a little softer through January and Feb. And then, of course, as we went through the half, we saw those customers return and we ended up with a very strong half, as you probably remember. as we went through. So I'd expect our sales numbers, and they have been, they've been pretty solid through the last period of time. We feel like we're trading well, we feel like we're drawing customers, we feel like we're gaining share from the data we can see, but I would expect the absolute number to moderate as we go through the half because the base is different.

Right, so just to clarify, so Jan 2023 versus Jan 2020 on 19 is not as unusually high as we might imply from that 17% life-alike number.

Yeah, I think on one of the sheets we did like a three-year KGAR to give you a sense, and that was sitting at, I think, at 5%, and that included all the target closures that we had embedded within that number. So the business is a much stronger business now than it was pre-COVID. So I think the work we've done around improving the product offer in a whole bunch of ways as we've run through the very strategy days has meant our price leadership position has continued to extend. Our product is better than it was, and I think that's playing through in our sales at the moment.

Yeah, great. Thank you.

Thank you. There are no further questions at this time.

Okay, thanks everyone for your time and if any questions, please give Simon and the team a call. Have a good day.