Woolworths Holdings Ltd

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

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

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

Thanks Steve. Just on current trading before we turn the floor over to questions. Seven weeks in since we came for us. We've had a strong start to the second half. While comparisons to the previous year are impacted by the fighting of last year's Omicron outbreak, which really happened around New Year's Eve for us and we clearly did impact January, operating conditions in our business have continued to stabilise and sales growth has been robust. In Australian food, Woolworths Food Retail sales for the first seven weeks grew by 6.5%. Coincidentally, on a three-year CAGR basis, sales increased by 6.5% as well. E-commerce sales trends have started to stabilise and with e-commerce also returning to growth. Inflation continues to remain stubbornly elevated and while customers are adjusting the way they shop, the overall impact on our business at this stage from these adjustments remains modest with a combination of tailwinds and headwinds and we'll come back to talking if need be around the trading in phenomenon we've seen in our business and we talked about it in the media call. As you might imagine just given that inflation is coming down but not as quickly as we would like, we remain very focused ensuring our customers can get their what is worth through our various programs of prices drop, low price specials, personalized offers and range curation. All focused on meeting the needs of the communities and customers we serve. And as Natalie mentioned in the media call this week we announced our new Prices dropped forward in the program with over 400 prices on everyday essentials. Australian food trading momentum has continued to improve relative to H1, with sales increasing by 6.3% for the first seven weeks, through a CAGR of 4.4%. But it is worth referencing that EBIT in H2 is expected to be higher than H1, but the extent of the improvement remains still uncertain. And obviously recent events make it very hard for us to be precise. impacted by the recent devastating weather events. Big W sales growth was strong at 9.7% for the first seven weeks, as recycled the impact of Omnicron in the previous year, with the three at CAGR of 7.5%. Of course, as with food, we remain cautious about the impact of cost-delivered pressure on discretionary spend, but believe that Big W's range and value proposition positions it well in the current environment. In summary, sales growth has been solid in the half to date and the operating rhythm of our business continues to improve. However, group EBIT growth in H2 will be below H1 as we will be cycling a more normal second half with less direct COVID-related expenses. We will continue in this half and in the year ahead to continue to balance the needs of all of our stakeholders, providing our customers with great value, treating our suppliers fairly, offering competitive pay for our team, the right hours and a positive working environment, continuing to play our part in creating a better tomorrow and importantly delivering sustainable financial returns for our shareholders. Thank you as always to our customers for their support and our team for their unwavering commitment and care. I'll now turn the call over to the operator for questions.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're using a speakerphone, please pick up the handset to ask your question. The first question today comes from David Errington from Bank of America. Please go ahead.

Morning, Brad. I'll do the normal tradition and limit it only to one question. But my question to you is, You've emphasised stability in operating rhythm returning. And yesterday, Coles really talked up that they were suffering supply chain challenges still. You haven't raised that this time around. And I noticed a really good result in supermarkets, that your voice of customer has improved. So my question to you is, are you... are you not seeing supply chain challenges or are you seeing them but you're just dealing with them better? And I suppose where I'm going with this, I'm trying to work out what would be the latency of earnings because when I look at your three-year CAGR, your sales in supers are up 5.5 but your EBIT's only up 7.6. I would like to probably see a little bit more leverage there which tells me that you're still being held back in your supply chain So there's a bit in that, but I'm just trying to work out, you have pointed out supply chain challenges in the past. You're basically saying that your operating rhythm now has improved and Coles really highlighted yesterday that they were challenged. So I'm just trying to work out where you're at and what we can expect to see forward with increased productivity and efficiencies coming through.

Yeah, thanks, David. I think it's a great question. I think, and I'll go through the detail, but the number of it is relative to what we experienced last, in the last couple of years, it was, you know, much more manageable for us. But let me go through some of the detail, if I can. Firstly, the biggest pain point for our customers is availability. So availability score is not where we want it to be. And so outside of value for money, it's availability. And often availability is related to value for money. Some of our other stocks on some of our key value lines, this creates a loop, if you know what I mean. So we've seen enormous opportunity and the easiest way for us to improve our customer scores is in availability, which is running at sub 70 and has been continued in that range despite all the work we can do. Now in availability, it's become more localized where the gaps are, David, in the store. So we had availability across the whole store. Now it's becoming much more localized, whether it's dry dog food, whether it's a lot of frozen challenges, particularly in potatoes, but in vegetables. still some capacity processing challenges in poultry and so on. So a bit more localised, still there, a big opportunity. So no doubt about it. To give you a sense of some of the scores, our outbound service level is still running around 80 or below 80. So that is our service level of delivering what is right to our stores. And our store service level in a store in terms of what is our availability at any one point in time is about 95, should be at 98. So we're leaving customer experience sales and we've got customer experience opportunities, sales opportunities and of course operating cost opportunities up in the supply chain. But we're not using those to kind of distract from where we are. We just need to continue to work on them. In the month of January, you look at what happened in Derby and Broome in Western Australia. The amount of effort and cost that went into transportation, not necessarily DCs for us, that's where our issue is more. Transportation and DCs to address that The issue is in January as well into FNQ and into DNT and the routes that some of our truck drivers need to drive and the actual drive times. It is rather extraordinary. So, you know, hopefully that will come back and will help us. So you're right, still a big opportunity for us outside of value, the biggest opportunity. But the nice thing is we're making progress, David. And it's credit to Annette Carantoni and the incredibly hard-working Primary Connect team We talk about this a lot in Woolworths, not a lot outside of Woolworths. The highlight was from about September, we started to hit our budgeted productivity measures, despite the disruption and despite the volatility we're seeing in demand, and that predictability of achieving that has continued to increase. A long way to go, certainly not declaring victory. Still some secondary in the contractors who work in the business, but yeah. Hopefully over the hump. I'm looking at a net, as I said. We'll see.

Sounds like you're working your way through it a lot better. It sounds like you really got your act together this half. So, yeah, well done.

Well, I mean, I know I jested a bit. Pardon me for that. But, you know, we've been working on upgrading our supply chain since 2019 with very material costs, and our shareholders have been very patient. You've rightly pointed out the number of times, the materiality of that investment. You know, it's nice to be starting to see some of the benefits come out of it. Not all of them. We've got a long way to go. There's still some major investments, as you know, particularly more banks still to come. But it's kind of nice to see that. It's nice to be sitting with MSI to see under a dollar per carton right now. We know that that's not good enough yet. But it's still nice to be materially below where we were. And so, yes. A team that has a little bit of wind behind their back is a team that will continue to improve. A team that feels like it's all ahead is just really hard to motivate, excite a team, and we're in the first position, former, not the latter.

Excellent. Well, thank you, Brad. Thank you for your answer.

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

Good morning, guys, and well done on the result. Can I just follow on from Ero's question? It sounds like you've still got a bit to do to get back to your operating rhythm and then to deliver on some of the productivity investments that you've made. Your margins in the first half in Australian food improved nicely and approaching 6%, the highest level we've seen in quite some time. As you do get the benefits of getting back to your operating rhythm and you do start to deliver some returns from the investments you've made. Do you think you can bank much of that upside in the form of margin expansion, or is it now time to reinvest some of that to generate better customer experience, market share, et cetera?

Yeah, thanks. Thanks, Michael. Obviously, this is the question we'll find out during the course of the second half, as you know. Very important to state, and we said it in the media call, and you would understand this, If you look at the margin expansion, it primarily is driven by mix and the material ongoing decline in our tobacco business, which quarter, quarter, half, and half is down 15%. And you run that in very low double-digit GP numbers. So you get a major mix adjustment that just washes through the numbers. If you isolate for that, and the growth in our media business, and we report that through the GP line, you don't see margin expansion of materiality You see some moving pieces, but they all sort of come together. The third biggest benefit we had in the half actually was our next-gen promotional program, which has been done in partnership with WIC and the commercial team, more with supermarkets where we've just been better at promotional effectiveness. So there hasn't been a lot of margin expansion, and in fact, when you look at the categories You see material investments bias and you look at our price index in particular to Aldi, which I think is the key one to look at. You see the index, I think, in as good a shape as I can remember in the last three to five years at the moment. So, yeah, we feel good on that level. If you come back to GP, I would just call our biggest risk right now is stock loss and it's stock adjustments. I don't want to overplay it, but we've had a great performance in that, but we are seeing some early signs of challenges in the stock adjustment space, not in the dump or waste space. We've become much better at that. So we just need to actively continue to lean into that. So I think that's where our risk lies. Assuming we have a rational market, assuming we continue to work on value and bringing value to life for our customers, So it's all a work of opportunity for us. If you look at the value we deliver in value indices to whomever, Coles, LV, Specialty, the index itself is great. Our customers don't often give us full credit for the index and that is to do with helping them find the value more effectively in our business and helping call it out whether it's, there's a lot of great work going on on how we think about tailoring the range to the store concerns that they can find the value or the form of value they're looking for more easily or how we make sure our customers realize how much value they get through everyday rewards and their member benefits or whatever the case may be. So a lot of work there. So I haven't answered your question. This is obviously, you know, we're not talking about an outlook for profit, but those are the major things on our minds right now.

That does help, but it sounds like most of the improvement in your EBIT margin, which is what I was referring to, has actually been from items below the gross profit margin line, at least at a product level. Yeah, absolutely.

Yeah, one of the things we, you know, we talk about achievements in our business, and the achievement in our business was we need our team, and this is true inside stores and supply chain, to be focused on item-based productivity. and not on just the headline sales number. And from about September, we really moved into really, you know, it was a major achievement for the team, given you had negative items during the half. Now that, you know, slowly has gone slightly, you know, flat. But you had this major negative items as we cycled the impact of COVID. And to get our team to focus on item-based productivity, you know, was a conversation we talked about at the end of last year. at the end of last year's results and it happened during the first half and it's one of the great achievements in in the business i'd call out thank you that's really helpful the next question comes from tom karath from baron joey please go ahead um morning guys just got a question on rt3 can you maybe just step us through when that was implemented

And maybe talk about how much benefit was kind of banked in the half and then how you're thinking about, I guess, the future benefits of that program. Thanks.

Tom, I'm glad you're on the line and I hope you continue to be one of our most loyal connected customers across the board. Thomas, which we can come back to and attribute some of that to you. But Tom, I might get Natalie with no jest to just talk through where we are with RT3, why we did it and then what we see as the benefits going forward.

Yes, thank you for the question. This has been a really huge and important change for our store team. So as Brad said, this is our new rostering tool. We started this work about two years ago and started piloting it in South Australia, also in our metro stores and then Just over the last half, I think we completed the rollout in about October, November just before Christmas to every store in the country. So we're at the point now where every store is leveraging RT3 to do their rostering every week. There's two really significant changes for us as we've rolled this out. One is that we've actually remeasured all our labour standards and that's really important because Previously, we had a bit of a black box of a model and it hadn't been updated and our store teams were losing trust in labour standards. And so as we've rolled this out, we've worked with an external engineering company, the Connors Group, to actually remeasure all the tasks in our stores and to create a true baseline of the hours across departments, across time of day, et cetera, in our stores. So we have a very good baseline now from which we can understand where we are investing hours in our stores, where the opportunities are for productivity and then being able to realise those opportunities across our store fleet. The second change was actually our department managers now effectively every week take on the role of making sure that they have the right team in every department on the right day at the right time throughout the day and that's been a huge change We found that in many of our stores, for example, we have a lot of contracted hours, Mondays to Wednesdays or mornings, and actually customers are shifting into the evenings or into the weekends as they shop. And so what our team has been doing as we've rolled this out is actually having a lot of conversations in the store, shifting team hours in the store to where they're needed, whether that's because tasks are being done at that time, such as taking inventory or filling inventory or that's when our customers are in our stores and we need people on our checkout. So a very big and important change and in states where we've rolled this out initially, such as Tasmania and in SA, We are seeing as we go through, it takes a while actually for the team to obviously have those conversations, begin to move the hours, but we are seeing both voice of customer and voice of team improve over time. So very important for us to establish that baseline and we'll still spend the next six months refining that system and the way we're using it and responding to the team feedback that we're achieving We've also, as we've done that, really focused our team on meaningful hours. So we're trying to also make sure that rather than recruiting more team, we're actually finding opportunities for our existing team to work more hours in their store. It might be in a different department. And we're also trialling a system now which lets them provide ability for neighbouring stores or resort stores in resort season. So we really want to make sure that our team gets more hours and more meaningful hours and shifts from us as we roll this out So in parallel I think your question was also about productivity. So as we've rolled this out we now have a great baseline and it's really informed a number of productivity opportunities and we've started to implement those opportunities we've rolled out. an enhanced inventory routine, for example, which removes manual tasks in stores so our team doesn't need to roll cages anymore. They can just double beep, as we call it, the cage, quick scan everything, and they know what can fit on the shelf and what they need to take out. So we're at the beginning, I think, of a really good journey in terms of making sure we have the right hours for our customers and our team in stores at the right time, but also having a very informed productivity pipeline for the future.

Thanks, Matt. Just a few other comments there just at the high level. Tom, I think we've been pretty overt that we felt our key competitors led us in the space in terms of where they did rostering and leveraged Kronos dimensions to do that. So this was a thoughtful way that we wanted to tackle the same opportunity. It's an item-based tool, so I think it's very important. It's been one of the things that has really helped us get item-based productivity back into our business irrespective of the additional productivities. savings we have, and as Natalie said, it gives us a nice baseline for the various other key productivity initiatives that we're scaling up across the group.

Thanks, guys. I'm a very happy customer.

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

Thanks. Good morning. Just a question regarding Australian food. The start to second half 23, it's six and a half total sales growth. Coles indicated that volume growth had come back for them from mid-January. Has Woolworths seen that, or has there potentially been an improvement on the volume decline that you had in the second quarter 23, perhaps?

Yes, is the answer, Sean. You know, you... It's very noisy, by the way, items, and are you including... fresh items like fruit or not, because there's a lot of price elasticity in items that can be quite sensitive. But if you look in aggregates, we've actually seen items actually, funnily enough, remain remarkably stable, but in a relative sense. So I've gone from negative to slightly positive, and that's strengthened over the last seven weeks.

Sorry, so you guys are in volume growth. Sorry, just to be really clear. Yeah.

And then maybe...

And maybe just a quick follow-up, just on stock loss to Mike's question, where is that number and is the issue that you're facing theft or is it product perishing? I'm just curious, just to clarify that, please.

Obviously, we're not going to give you the number, but thank you for asking. It is about where we had been. It's only modestly about where we had been, Sean, so we don't want to overplay it. Actually, New Zealand is still ahead of us in terms of stock loss and One of our conversations is if we're not careful, we could end up a bit more in the New Zealand scenario. So we're taking a lot of lessons out of that. But it is in stock adjustments, which has got non-payments, is a key factor that drives it, as you point out. So we just need to stay on top of it and continue to work on our plan and continue to roll out all of our various stock loss initiatives. Great, thank you.

The next question comes from Adrian Lemme from Citi. Please go ahead.

Good morning Brad and team. Well done on the big W result. I was interested in the range that you've effectively given for that business. It seems to be a fairly tight range when not many other retailers in that space are giving guidance. So just wondering if there's anything specific giving you confidence to provide guidance and then also If you could give an idea of where maybe the inventory days or inventory to sales are positioned for Big W relative to its history, please.

Thanks, Adrian. Actually, we thought the guidance was to reduce whatever someone might just take the first half and extrapolate it to the second. So there was no other reason than us just, you know, obviously discounted department stores are highly leveraged to the first half, in particular the Christmas trade. So we just wanted to make sure, given it's been If you look at the 3D numbers, you get the right track, but there's temptation to just extrapolate the first half, and that doesn't work quite the same way in a department store. Don't read anything else into it outside of that. I think that's a great question, one that should be asked on inventory. Steve, did you want to start on inventory, and then maybe we can bounce back into

Yeah, sure, Brad. I mean, inventory is up modestly in Big W. I think we called out that it's up lower than sales. Actually, if you looked through it on a three-year view, actually sales, and this is not a CAG of it, it's a cumulative three-year view, sales are up like 25%, 26%, and inventory is up more like seven. So, yeah, we feel like... actually our inventory is in pretty good shape. You know, Dan can talk to the details, but we're not. It's something, you know, in a DDS world, you're always monitoring and always trying to stay on top of, but we don't feel like we're sitting on material excess inventory, which is probably at the heart of your question.

Yeah, I support what Steve said, and I think just important to call out that we're obviously monitoring inventory very closely, just given a bit of the uncertainty in the market in general, rush discretionary spend. and the like. We think it's under control, and maybe the other bit of context is that obviously the supply chain is still normalizing, right? So, receding stock and the timing of those receipts will, you know, still, you know, not fully normalized, but it's all things that we're just monitoring closely.

Right.

Thanks very much for that question.

The next question comes from Ben Gilbert from Jarlan. Please go ahead.

Morning, Brad and team. Just interested, I know you said you're not providing profit guidance, Brad, but you just made that comment before that you don't see second half EBIT growth being greater than the first half. And I'm just keen to understand your thinking around that in the sense that I appreciate Big W is not going to be as strong as you said in New Zealand, but New Zealand's going to be a bit better. So that sort of washes out. And you started to half up six and a half in food. You've talked to benefits coming through to Tom's question around rostering and some of the benefits of supply chain and presumably get some operating leverage coming through the business. Is that just a cautious comment or do you sort of genuinely believe that even if these top line rates don't, if we're to continue in food, you couldn't print sort of around an 18% type number again in the second half?

Thanks, Ben. It's a great question. Cautious optimism is certainly my modus operandi. But look, it's just we don't have as many direct COVID-related costs in the second half. So we saw those come out We just wanted to make sure everyone's very cautious on, you know, looking at what, and we've been quite, hopefully, diligent in reporting direct COVID-related costs, not indirect ones, which a lot of the questions David had on supply chain. So we're just, we're not cycling the same materiality of direct COVID-related costs. It will be fair to say the start to the second half has been ahead of our expectations, and I think that's just a product of the hard work our team actually did against Christmas and a lot of conversations involved with how we how we really wanted to make the best of the opportunity we had in January given Omnicron disruption last year. So, you know, but seven weeks is hardly a half.

Well, just on that cost point, Brad, do you think X the COVID costs and maybe X wages, which feel like we're going to get another step up with Fair Work, do you think some of those cost pressures are easing when you look at a lot of the initiatives that you're putting through into the business?

What I will say, we are... You know, in the first half, when we talked about it, then every cost that you looked at was going up, and it was only a question of what percentage of that cost was going up. And so whether it was goods for resale, goods not for resale. So there was just, you know, normally you have something that kind of offsets. There are more offsets that come through, in particular the products we sell, and you would have seen a material reduction in international shipping charges. It'll take a while to flow through, but we also see some counterbalance in benefits, which, you know, which is terrific, I would say, Ben. In terms of then inside the cost that we directly control, as I said, I think we do, you know, we can talk about the productivity, you know, plans, but core operating productivity is the key. And we've made great progress, but we're still not where we were pre-COVID. And, you know, our goal in this path is to get there. You know, we can see a lot of sites, but if I looked at e-commerce, Amanda, For a moment, we know that given the disruptions and so on, that there's still a lot we can do just on items picked per labor hour or the number of drops we do per truck roll and so on. So we can still see some room in core productivity. And then we have a really, we think a pretty robust series of productivity improvement plans that we're rolling out across the group. And that sort of gave a sense of that. We don't need new ideas in the group. We need to roll up and scale and realize the ones that we currently have had. Some of them, as we've talked before, have had to go slow because of COVID disruption and, you know, we just had to put them on the back burner. So we do intend to really try and scale those up best we can, assuming we continue with the stability. So I know I'm being a bit high level on it, Ben, but, you know, there's as many positives as there are challenges on the cost base in the soft, which is good. And so we'll see how it plays through.

Fantastic. Thanks, Bob. The next question comes from Lisa Deng from Goldman Sachs. Please go ahead.

Hi, thank you for the additional disclosure on WooliesX. I wanted to ask a little bit about e-commerce profitability. So it seems that during the half, our sales came down by 7.5, but profitability came down by 37. So it is, you know, a highly fixed cost leveraged business. And if we're saying that the e-com is now reverting back to growth, then do we also expect, you know, a similar amount of positive operating leverage as we look into the second half? Additionally, with the CFC's opening or, you know, the Auburn CFC and a couple more planned opening, what do we think about sort of like a 24, 25 profitability for e-com, please?

Thank you. Thank you, Lisa, for the A very intelligent question. Obviously, we're not going to answer some of it, but we can at least give you some colour to it. I'm glad you asked it because there are a number of exhausted people at this table to actually create the sub-segment reporting that you've seen today. I need to thank them all for doing it. One of our conversations in the group was, it was actually a really challenging half for e-commerce. Why would we show it when we were at, we think, a low point in our cycle for e-commerce? And we decided we weren't going to use that as a reason not to do it. But it was a challenging half for e-commerce. And as with everything, you know, when you started the half, we knew it would come off because of COVID, you know, disruptions, you know, cycling, particularly in New South Wales early in the half and then later in the half in Victoria. But it came off more dramatically than we had expected. And so our forecasts in e-commerce that we're putting to our plans were higher than the numbers we had. So adjusting... was very painful to get this unit productivity. We called it in e-commerce, and Amanda can talk to it. So you really are seeing the product of that. What we really need for e-commerce is stability and our forecast to be accurate, and we're starting to see that be true as we come through that volatility. And so some of the benefits. I'll let Amanda talk to that. You have been very diligent to call out as well the commissioning of two CFCs and a half, which is really painful to do, because you do need to fill them up. And it's been a lot of work between Woolworths Supermarkets and Woolies X as we've moved volumes out of stores into the CFCs. They are an important part of what we do, but boy, they're painful to get them putting commissions and scaled up. But over to you, Amanda.

Yeah, thanks. Thanks, Brad and Lisa. Look, just to recap on what happened last half in terms of e-commerce sales, the first quarter was a very, say, dramatic and volatile decline. And that's where, Brad, as you're talking to, we really needed to start to focus on item productivity, which is what we did, particularly in New South Wales and Victoria, which obviously we had had a massive uplift in the prior year. So that was really the first half was getting all of our settings right in the first quarter. And then in the second quarter, Actually, a different dynamic has started to play out, which is quite interesting. Yes, there is still a very strong return to stores for some of our occasional shoppers, and we're actually collectively happy to support that shift. We've also seen a real increase in same-day, and so the order profile coming through from our customers looks a little bit different. Fabulous in terms of unlocking, actually, Our store network and our speed to customer are just a slightly different profile than what we've seen during the COVID years where customers for the most part are home, we're running four or five hour windows, very, very large baskets as customers are ordering more. And so we've just seen a real shift actually back to pre-COVID shopping behaviour and we've had to adjust to that. So one of the big contributors to the decline in profitability in the half to e-com is really, yes, the overall sales and that's flowing straight through. And then the other big shift that we've seen is actually in last mile. So last mile for us is an area that, you know, frankly has been quite challenging and challenging. particularly in our fleet last mile, and that's an area that we're focused on for the second half. That's driven by all sorts of things, as I say, basket sizes being slightly different as we see a higher water frequency coming up. We've also got a lot more traffic on the roads, and I know that sounds like quite a basic sort of comment, but actually that has a very, very material impact on our ability to drive drop density. which is a big, big factor. And then on top of that, as if we didn't have enough in the last mile, there's the fuel and the wages that sort of played a role. As we look forward, you know, I think the way that we're looking at it is we've got a lot of great opportunity and productivity. We did a lot of great work, I think, with the supermarkets team, particularly in the first half, and we're pretty excited about actually some of the efficiency we're starting to see come through there. And same for our CFCs as well. Yeah, we had a good ramp up with the first two, Brad. Yes, it was painful. But we're really actually quite pleased with the two being Rochdale and Carringbar, how they're performing now. So again, looking forward to them improving.

So we're not going to give you the outlook, Lisa, for obvious reasons. But, you know, like in all parts of our business, having a more stable operating rhythm is really important. We're not commissioning any new CFCs, so just getting the right balance into that business is,

Just a follow-up. Thank you for that. That was very helpful. But follow-up, now that we've gone through the exercise of getting to an EBIT or allocated EBIT for e-com, is that going to be now part of that team's KPI, like a key KPI as well?

It was before this, Lisa, but clearly it's a much more overt KPI now that we've told it to our shareholders. So, yes, we do take it very seriously. We always have, but You know, this has elevated it, obviously, in the focus inside our business.

I mean, in all seriousness, we've used this measure for six years. It's a well-established measure within our business. We've road-tested it, we've improved it, and so, you know, it actually is a very good KPI for us.

Thank you. The next question comes from Brian Raymond from J.P. Morgan. Please go ahead.

Good morning. My question's just around... the comment you made in the outlook that you're not really seeing any material impact from high inflation at this stage. I understand that's probably more of a net effect from what you said earlier, Brad, just trying to understand sort of how you're seeing shocking behaviour around trading down a mix effect, giving volumes back into flat to maybe positive, and overall sales are still at 6.5%, which is probably below where inflation is. I'm just keen to understand how that mix effect is playing out for your customers, people trading down or changing their behaviour meaningfully.

I mean, Brian, this is the key question, and we keep studying it. I wish we could just come back and just give you this crystal clarity to demonstrable moves, but there's actually good news in not doing that either. So the word we used in the media call was trading in, and we've sort of seen this trading in phenomenon going on. And it starts with actually trading in to the home versus from out of home. And even in our upstores in the last two weeks, we've seen a material lift in sales. You can't help but believe that that's a practical demonstration of trading in to the store. We see trading in from specialty as we talked about in the media call where, you know, beauty is one of the highest growth categories right now, not a category we've ever really been able to get traction. But Emco is our highest growth brand there, the market leader which is sort of this value luxe kind of phenomenon. And so you can see trading in from specialty into store, inside our stores we can see You know, in many cases, trading into, you know, macro, you know, value with values. Macro is really booming for us and it's growing very strongly, particularly actually in long-life categories, to my great surprise. And I'm happy to have been proven wrong, I should say, for the team. But, you know, when we're lining it up and it's giving the customer you know, good, healthy alternative at a price that's slowly beneath market leader, we've seen that happen. So we've seen a lot of that trading in that is not necessarily negative, Ryan. You know, value-added solutions for us are a big part of the growth in the Woolworths Food Company, the Thomas Ducks range that Natalie talked to earlier, cooked barbecue ranges. So, you know, there's a lot of value that sits there. So we don't necessarily see that as all as negatives. And then what you're starting to find, and if each customer finds value their own way, if you know what I mean, but they seem to balance each other out. Some customers are moving, as we talked about earlier, from fresh into frozen. We've had availabilities from frozen into canned. So there's quite a lot of those movements. But net-net is, at the moment, it's not a net negative. People are trading into Woolworths Group in general, and that's a positive. That doesn't mean we should rest on our laurels for a moment. This all requires consistent focus and material effort from our team. As you would be aware, our strategy is to do the right thing for every community or store and every customer segment. We need to continue to work and refine and challenge the model that we have in place. But so far, so good in the first seven weeks.

Great. Thank you.

The next question comes from Grant Saligari from Credit Suisse. Please go ahead.

Good morning. Thanks. Brad, you increased the guidance for losses in the other segment, which I presume is sort of my deal and mainly in some M&A costs. Could you give us an idea of, I guess, the path forward for that business? It's a small problem at the moment in terms of drag on earnings, but it could get to be a bigger drag in the future. You know, see just how you see that business evolving and, you know, what sort of drag it could potentially be on the profit line.

Yes, thank you, Grant. I'd like you, Steve, to talk to the segment and I'll come back specifically to my deal. But, Steve, if you want to talk to the segment, then I'll come back.

Yeah, Grant, in our August results, we guided to a total of excluding the contribution for Endeavor of $220,000. That's a combination of what we anticipate from MyDeal and also the M&A costs associated with the shopper, the completion of the MyDeal and our pets for action transaction. But just to clarify, there are a range of things that sit in that other segment. So it has all of our groups you know, investments in things like payroll remediation teams, risk, sustainability. It's got our property, actually our property trading, you know, we had a slight decline in gains on property in the half. And it also has Quantium and it has MyDeal as well as our share of Endeavor Profit. So there's a range of things that sit in there. So hopefully that helps contextualise why we've changed the numbers, Brad. Did you want to then talk to MyDeal?

Yeah, look, I think it's... It's a very important question actually, Rod. You casually slipped it into the conversation, but it is a very important question. The investment in my deal was based on us actually strengthening our extended range capabilities across the group because extended range is key to provide a more holistic customer experience, whether in our individual businesses or across the group. And there's a capability there that we need to use in order to do that. In addition to that, we do get an introduction to a number of new customers that don't always shop out of the brands, and we need to ideally bring them into Everyday Rewards and give them access as members to a number of other benefits. So it is a capability play as much as an investment in the business in its own right, and we do need to progress how we realize that capability inside the group. That's something we will need to come back to and report at the full year. We've made our first step of Big W range being on MyDeal. That range is going very well which gives us a cube we're looking for. It does resonate. However, the priority right now is using MyDeal to actually create an extended range for Big W. We're very sensitive to the fact that we've got 5 million people a week coming to the Big W digital property. We can do a better job of monetising that but even more importantly to me, Grant, and we can come back later in other sessions, talk about how extended range can drive more digital traffic to that platform. We're the number two shopping app in Australia right now behind Amazon with everyday rewards. But we are materially behind Wes, as is Amazon in the overall traffic they're driving to the ecosystem. And having extended range is a really important mechanic to help us drive that overall traffic profile. So lots to do. The good news is they traded In line with expectations in the second half, that's not true for a number of other marketplaces, but that doesn't justify the premium. So we need to come back and report how we've progressed to justifying the premium. But as I say, we're not sitting there trying to triple the size of my deal. We're trying to say, use this capability, and we need to come back and show you how we've done that.

Okay. All right. Thank you.

The next question comes from Ross Curran from Macquarie. Please go ahead.

Hi, team, and congratulations on a great result. I just want to focus a bit on New Zealand and my thoughts go out to your team members and customers over there at the moment. Specifically, I want to talk about wages. So we've got a 19% wage increase over two years. That's a fairly significant EBIT margin headwind. You've given us some guidance in the second half for margins in New Zealand where profits should improve. But can you talk us through how you're offsetting some of that EBIT margin pressure from wages?

Look, I mean, that is one of the key factors while we're just trying to keep management on expectations here. That increase, Ross, just to give you context, and Spencer can give more context for his understandable reasons, he's on the line from New Zealand right now. We had found ourselves during the context of our enterprise agreements equivalent to New Zealand being uncompetitive in wages. This was leading to material turnover in our stores. and risks of very low team morale. So we needed to address it for being uncompetitive. We needed to get to the sustainable living wage, and we were seeing it in the turnover motivation of our team. Since we've done that agreement, there has been a dramatic change in team attitude, retention, and our performance on our customer metrics, which has flowed through into ourselves metrics. So there's no doubt Whether we would have liked to number that big, no, but there's no doubt the investment is part of why we started to see the momentum move in New Zealand. And if you wanted the benefit of going there, but if you do, you will see that it's dramatic and demonstrable and very pronounced. Now, of course, we need to work hard at getting that sales momentum through the business to monetize itself and address the material increase as well as take all the learnings out of Australia on productivity, and the bones of RT3 and get it into New Zealand as quickly as we are. And that's what we're working hard to do. But Spencer never gets questions in these sessions, so Spencer, I can't see you. I hope you're still there. Can I throw over to you to add to that?

Yeah, thanks, Brad and Ross, for the question. Brad, I mean, you've pretty much covered it. You know, it was important for us to address the pay rates. We were lagging the market, as Brad said, as a result of a previous collective agreement signed, we saw the impact of that in a very tight labor market through significant attrition. And so, one, we needed to do right by the team, and the thesis is that that will improve retention, team advocacy, and result in lower attrition, all of which we've seen. which I think the biggest opportunity for us to address that is through improving our base productivity and reducing the cost of high labor turnover. So that's really the thesis of doing right by our team and all of that materializing through improving our base productivity. So, yeah, you've covered most of it there, Brad. Thank you.

And I would call out, Ross, just finally, our whole productivity metrics are improving in New Zealand, but not at a pre-COVID level. So, you know, it's had actually more disruption just through, you know, Benin Island, indents, shipping into New Zealand, a number of other issues. So we've still got a bit more. I feel like it's a performance review, Spencer, but it's a bit more core productivity there that we're working on, of course.

Thank you very much.

The next question comes from Craig Wolford from MST Marquis. Please go ahead.

Morning, Brad and team. I just wanted to understand the cost performance on the food business, which was obviously very good in the half, even if you strip out COVID costs. I was getting CDB up 3%. Can you just itemise some of the factors that may have contributed to what looks like well-contained cost outcomes? Is it some of the initiatives that have taken place or is there anything else that we should be mindful about?

Yeah, Craig, I'll take that one, and thanks for the question. But clearly the biggest benefit, you know, is the removal of those COVID costs, which, you know, I think in Australian food we had $160-odd million in the prior year mostly. As we know there is material wage inflation going on so enterprise agreement which ties to the fair work ruling was 4.6% plus of extra super. So we actually ran close to over 5% wage inflation. So I think the team did actually an excellent job in offsetting it. That is the combination of some of the productivity initiatives that now spoke about, but in particular that focus on managing our cost to units. We're actually a volume-based business. We move cartons through our DCs and items through the checkout those metrics, whether or not it was the scan rate or the carton fill rate in long life or the e-com pick rates or the cartons per pallet in supply chain and logistics or the DCP, our carton pick rate per picker, like those were just our key focus and I think Brad referenced it from mid to late Q1 we really got in our groove of managing those costs to units and so I think that combined with the focus on managing costs and being focused on controlling the things that we can control and landing some of those productivity initiatives allowed us to, I think, get a reasonably modest cost growth in light of the quite mature inflation that we are facing with where wage rates are right now.

Just the way you record your own cost of transport and logistics, the vast majority of that sits in the CODB, doesn't it, as well? Because that must have been quite a headwind. Transportation is in GP, Craig, and the DCs are in DDB. And they were obviously better results. Great. Thanks, guys.

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

Hi, guys. Sorry. Just a couple of quick questions. Big W obviously had a fantastic result, you know, lapping lots of store lockdowns. Have you seen any change in shopper behaviour in that part of the business, you know, over the recent months?

Thanks, Phil. I'll get Dan to give a little bit of colour as we go into now. It runs to a different rhythm. You know, we have the Christmas, but then you also have this back to school, which is which is a very big event, and sort of, you know, so we're slowly coming out of that into a more stable rhythm, so we'll kind of know in the next couple of weeks, you know, where the dramatic changes are, but get down a little bit of color from what you've seen if you look through the detail.

Yeah, for sure. I think, you know, the story of H1 is really one of normalization, and I think it's played out in two ways. One is the cycling of lockdowns through Q1, but then in particular, a normalization of our e-com versus in-store growth. So we've both gotten a dramatic lift through the COVID period, but are also now seeing a dramatic shift back into stores. And we do report the Q2 three-year CAGRs, and I think the three-year CAGR is the thing to look at. And there is a piece in the analyst pack as well on kind of the first seven weeks, and so we have seen the Q2 trend roughly continue so far, but we've got back-to-school Easter coming, so we'll see how the market overall behaves. We're conscious of the economic pressures, the impact of that on discretionary spend, so it's kind of too soon to call it for the half, but so far consistently.

I mean, as you might imagine, Phil, we're using the word trading inside supermarkets, but also inside Big W. We're hoping a lot of customers will trade into the affordable inspiration that was there. You know, the home category, the entertaining party. So, you know, that thesis to be borne out, but, you know, if we're careful and we deliver the right value and the right comps, there's hopefully a very powerful trading opportunity.

The conversation we're having as a team is clearly looking at it as an opportunity.

Okay, great. And quickly on the B2B business, we don't have a lot of history there. Is there much seasonality in that business? Should we use the first half result as a bit of a guide for the second half?

To be honest, I think we're learning about this business in parallel with you, Phil. I mean, PFD does have a seasonal bump going through Christmas. It's not quite as pronounced, but there is a seasonal bump there. Given the strong growth, it's hot and... And some of that growth is through acquiring new customers. It's kind of a tricky one to talk to. I don't know, Guy, if you've got insights. So it did have a bump. I just don't know how much of the bump was customer-driven versus seasonality-driven. And to be honest, it had strong momentum in the last couple of months.

So that's the major driver of the overall revenue there. But Guy, would you? Yeah, I think the point about PFD as well is it's got a very diverse customer base as well. So... Clearly, we're looking at the out-of-home consumption trends coming through in PFD and it is resilient given that a lot of the... What we're also seeing in out-of-home actually is that customers trade into different segments of the out-of-home eating market. So they'll move from restaurants and cafes into fast food chains. So we're delighted actually with... with the way the business is trading and the strength of the business. But it will be modestly first half-weighted? Yeah, first half-weighted given Christmas, yeah.

I'm sorry, we don't have a bit of answer. That way we will find out together.

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

Thanks for allowing a follow-up. Just a broader question regarding New Zealand. Can you maybe talk a bit about the broader benefits Woolworths gets from its business in New Zealand and then moreover how it also can bring some of its Australian learnings, you called out productivity, RT3, there into that business. And maybe just looking over the medium term, what does success look like? And possibly with a reference to return on funds employed, because even back in 19 and 18, it was less than 10%. It was like 9.5, 9.8, like that. But just curious, what are the benefits and what should we be thinking about success looking like over the next sort of few years, please?

Thanks, Sean. I'd have to say COVID had rather stopped a lot of the benefits we thought we could realize across the Tasman. And I think we spent, it took a year and a half before we saw you in person from the day you joined New Zealand. So, you know, our central thesis was and is and continues to be, we build strong capabilities inside the group and then we work with each one of our businesses to help them realize the benefits of that capability. Where we build the capability does depend on which business is how advised it is in what it does. And generally, if we're going to invest in a new capability, if the team has the capacity to engage, it starts in the supermarket. And that's why, like Wicca, our advice analytics team started the next-gen promo and range personalization inside the supermarket. But it's not always the case. There are many things New Zealand has historically done better than Australia. There are other things that occur elsewhere in the group, but we're trying to codify those and then share the collective benefits. We are making good progress on this, but because of the isolation of New Zealand, it has been hard to really, in truth, drive it across the Tasman for good reasons over the last couple of years. But we do expect to do it. If I look at the kinds of things to talk to this, just to give you a sense of it, Sean, you know, with cartology, the launch of cartology has gone fabulously well for us in New Zealand. It's got off to a great start, delivering great outcomes. Actually, when we start looking at it for that stage of the journey, there's many of the learnings and benefits we want to bring back here. That cartology team reports in towards New Zealand, but also into cartology, so the sharing's there. I'll look at that as a real highlight. And now that we are already leveraging our increasing capabilities on driving DC productivity, The primary connect team is lined up there as well. We've got a lot of teams going across the Tasman. In fact, this week with the cyclones, we sent facilities management team to give the team their rest as well as supply chain experts to deal with disruption. So starting to see that happen, which is exciting. We've actually sent some of our high potential talents in the rewards area. One card has been a A very strong program in base engagement, but not really involving additional engagement. So we've seen, you know, the link between OneCard and Everyday Rewards tighten up. And we've seen, you know, we've sent some really strong people over there. Our real-time royalty platform, which has been very successfully implemented in Australia, it's called Eagle Eye. Again, one of the acronyms, you know, I always get a bit confused. We're looking at applying it there, and that's a big priority. A large version of IT3 we're working to take across the Tasman. An exchange promotional thing that we've built inside supermarkets is actually in the process of being implemented in New Zealand. Funnily enough, we're testing some other ways. We think about better buying in New Zealand, and we hope to bring back, and they are the right place for us to test that. It's a big investment by our work. So there are many others I'm forgetting, Sean, but As we get stability, we are hoping it becomes a much more active part of the group, and there are things we can help New Zealand with, and there are things New Zealand is helping us with. I should reference, as I sort of look around the table, the number of people who we've brought out of New Zealand that have mentally helped Australia, whether it's Natalie coming back, Sally Copeland in our e-commerce business, our Chief Financial Officer for WazeX, and many others. So there is, you know, You should never forget the talent rotation. But we're early in that journey, Sean, so that's what we need to do, and Spencer and team are committed to doing, and the proof will be in the pudding. On overall ROFI, you do need to look at the ROFI of this business, X, the goodwill that was paid many years ago on New Zealand. We can all debate that, but it sits there. It can cloud decision-making because... You need to look at the incremental ROI that you get from investments, and you start looking at that, you get a much more positive view of the group. But, hey, lots to do. It'd be nice if we had stability, including on the political landscape in New Zealand, so that we can actually do this and prosecute it. But, you know, as of the rest of the group, we see a lot of upside.

Sorry, Brad, but can you get back to previous Rofi? Do you think you can, or is there something that's fundamentally changed in the business? Sorry.

Any forecast we have, we can definitely improve. There's no question about that. So, you know, we're not going to give a forecast.

Thank you. The last question today comes from Craig Wolford from MST Marquis. Please go ahead.

Hi, Brady. Just a quick follow-up on the price inflation outlook, as you said, on the food side. I remember back in August, you talked about five times the number of price rise requests or submissions coming through your buying team. What can you comment now on the magnitude and breadth of price rises you're seeing from suppliers? Yeah, thanks, Craig. It's a really good question to finish on, actually, because it is our number one priority in the next couple of months, so I appreciate you finishing on that question. In the opening comments, our thesis had been, and it is bearing out, but not to the extent that we had thought. If you look at one year inflation, prices going up, it should start going down given inflation popped up in November 2021. We are starting to see one-year inflation slowly go down, not as quickly as we had expected, and Matt can talk to you a bit of the detail there. But, you know, we're looking at one year and two years. So two years holding slightly elevated, but one year is coming down. And that's really important for us. We do need to see it continue to go down. And as I say, we're starting to see parts of the store that have gone deflationary, which is kind of helpful vegetable for at least the current period, and so on. So it is coming down. coming down but it's just not as quick and there's a lot of very specific factors that result in that. And so we need to actively engage and that will talk to where we are in the number of supply requests in the long last sections of our store. So it's the things that you wouldn't normally talk about that I'm worried about. I'm worried about baby in particular for me, worried about the child. because these all go back to families, young families, and they are a key demographic for us to talk to. So, you know, it is a moving piece. I would say what is important is the international freight rates, downward adjustment, how many people are hedged, does create a material cost benefit that we would hope engaging with our supply partners, it will be shared with our customers. But, Matthew, you're on the day today on the number of increase.

Yeah, I think the cost asks that were coming through in terms of volume did decrease over December, January but it probably reflects just the seasonal timing of cost asks. So we're at similar levels to where we were last year at the moment and the level of the cost ask is still relatively high and that hasn't come down yet. We're hoping we'll see the year on year inflation moderate as Brad said but our suppliers are still coming to us and feeling cost pressures coming through. I think the positive outlook is really around fruit and vegetables and Brad talked about vegetables in particular now being fantastic value. We did ask our growing team around the outlook going into winter this year and they're quite positive because of milder weather and also very full dams. They are hopeful around supply of things like tomatoes, broccoli, lettuce and strawberries as we go into that winter selling period and Q1 at week 24. I think we'll continue to see some improvement coming through in fresh, driven by vegetables in particular, but moderating inflation in the long run.

I think that's a nice question. It gives me the ability to say thank you all for your questions. Our priority is actually in line with the questions we had. We need to get availability right and get the right experience for our customers. We need to deliver value for money. We need to continue to improve our core and align productivity And then the overlay on that is continuing to progress our overall strategic agenda. We'll be speaking to you very soon on Q3 sales. We are closer to Easter than we are to Christmas, so it's on our mind. So look forward to speaking to you soon. Truth is in our stores. And, you know, just a real call-out, I think, to our very hard-working teams on all the effort they put into the half. Thanks very much.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.