Metcash Limited (MG9.F) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for joining at short notice. We're providing this update a little more than a month ahead of our financial results release for the first half of financial year '25, really in the interest of making sure that the market is fully informed. I'll make a few comments and then open up for questions, and I will be available through the day, if there are other conversations that you'd like to have. So a couple of comments. So firstly, as you heard me say many times, we've got a portfolio of businesses in the group, and we've provided a sales update for each segments of our group. I won't go through them individually. But you can see a stable performance out of food and liquor. I do want you to note that Superior, in the last few weeks, has cycled a number of customer wins from last year. Please note also that the liquor sales to retail customers or to all customers and not just IBA. And then, of course, you'll note that the overall hardware sales are not materially different from those that we provided at AGM, but wholesale sales, which are primarily in DIY categories, do offset the weakness that we've experienced in trade volumes. And those trade categories are directly supplied from suppliers to our stores, so not included in our wholesale sales. We've been aware for some time, and we've talked about for a while now, the hardware and tools market not being at the optimal point in the cycle. And we've experienced continued and accelerating weakness in the trade market, and this has impacted IHG's trade sales from our retail network and to a degree, also Total Tools. And you will recall me talking about this trend at the AGM a few weeks ago. The latest numbers that are coming through are the -- which are the subject of our update today, continue to reflect that. I also want to point to some updates from public companies in the space, including James Hardie, Big River and Reece as good examples, where they're reporting soft trade volumes and in some cases, operating deleverage and resulting profit declines. We have been and are now accelerating action on costs in response. And I want to just share an example to give you an idea of the urgency. In the last 12 months, we've reduced total labor hours across IHG's retail business by more than 9% and more than 15% over the last 2 years. And I also want you to know that our cost programs are not isolated to hardware. You're aware that we've got efforts across the group to remove costs. I also want to state that we do believe strongly in the strategies and the market positions of these and all our businesses on a through-the-cycle basis. I've referenced our portfolio. I want you to remember that we have a wide range of business models as well, including wholesale and retail as well, of course, as franchising and brand income. And it's pleasing that our core wholesale businesses continue to deliver steady, reliable performances. Retail performance is, as I've said many times, more cyclical and does leverage up and down. This should not be the first time you're hearing this from me. So while it's obviously not great to deliver low earnings in retail, it really shouldn't be too much of a surprise given the market conditions. And of course, we'll continue to keep you updated. I'm now going to open it up for questions.

[Operator Instructions] First question comes from the line of Michael Simotas from Jefferies.

First question from me. Can we just confirm that it is only the IHG business that has deteriorated and has sort of required this update today? And the reason I ask is because if you look at the sales trends for food and liquor, and I'm wary about focusing on too short a period, but it looks like they deteriorated quite significantly in the last 6 weeks.

Michael, so yes, the deterioration that's required this update is primarily IHG. All of our businesses are operating in the environment in an economy that we're all deeply familiar with. But IHG is the one that's accelerated. As I noted in my comments, Total Tools is exposed as well to the slowing in trade. So there is some impact there. Total Tools, you all remember, were also impacted by pricing pressures at the start of this half. But we've seen a normalization of that through the period, again, as I noted at the AGM. Food is down in the period around 0.5% and really, that's tracking in line the main with inflation.

Okay. No, that's helpful. And then just the second one to understand the IHG issue a little bit better. So if you look at the sales trend, it's improved over the course of the half. You've given us some explanation on the mix between retail and wholesale. Is there any color you can give us on the trends in trade versus DIY? And has there been any change in product gross margin? Or is it just mix?

Yes. Thanks for the question. Happy to give you a bit more color. The couple of points. The first is that DIY is pretty steady in the retail business. No material change in trend. The second is that, as I've said and really the subject of today's call is that the trade -- sales of traded categories from our retail business were and continue to be depressed and that slowdown has accelerated. And from a margin perspective, we are starting to feel some gross margin pressure in trade as the market broadly feels that slowdown. I think it's entirely normal. What's pleasing, we pay close attention to whether we're losing or gaining customers. And while I don't have a formal market read on a month-by-month basis, indications are that we're holding on to the customers that we have and trading smartly with them. You don't want to be obstinate in your trading and holding price at the detriment of sales. So I think we're in control. We're trading well. But yes, there has been some margin compression. It's not massive, and it's not of overly -- over concern to me.

Next, we have David Errington from Bank of America.

Doug, yes, look, it is a worry this housing market at the moment. I mean, as I said, you're not the only one that's suffering at this point in time. I'm just trying to delve a little bit more deeper into it and what your customers are telling you and what sort of time frame can we expect to come through this? If you could give us a bit of that, that would be really appreciated because I'm just worried as to how deep this cycle could go down before we turn around. Now I know that's probably -- you're trying to ask the same questions yourself, but if you could have a bit of a go, what are the areas that you're finding this happening most in? Is it the start of the house? Is it the end of the house? Is it the renovation market? Is it the -- if you can give us a little bit more color as to what your customers are telling you and when they expect to come out of this, that would -- I know it's a tough question. But if you could give us a bit of color on that, that would be really appreciated.

Yes. No problem. I'm obviously not in a position to speculate, but -- and you're right, it is a tough question. Our customers are telling us, and when I say customers, remember, I talk to our store owners and to their customers who are also the customers in our retail business. But they're broadly telling us that the activity has decreased across all parts of the home build. In some instances, homes that were under construction are now completing and the pipeline isn't being restocked through approvals and then starts. Now that's obvious, so you probably don't need me to tell you that. But we're seeing it on the ground. Just in the last 24 hours, I've spoken to a number of our customers and experienced customers. One of them told me just this morning that in his 40 years of being in this industry, this is the fastest slowdown he's ever experienced. And he is saying that his customers are reporting the same thing. Now he was a Victorian-based retailer. And certainly, Victoria is the worst. There are pockets of the country that are still in growth and that are doing okay, and those areas would be within Queensland and WA, but New South Wales and South Australia are also very weak. So I'm sorry, I can't tell you when I think it will revert, but it's going to require consumer confidence. We know the drivers of those are interest rates, inflation. On the demand side, we've had lots of talk about government intervention and stimulus. We know that immigration is an important driver, and we watch closely all of those things, and you should as well, as well as approvals.

Yes. I suppose what you're telling us, just before I go on the second question, what you're actually telling us is that the run rate is getting worse. The momentum is getting worse at this current point in time. It's decelerating, but at an accelerating speed. That's pretty much what you're telling us. Is that correct?

Well, that's exactly what I'm telling you. That's why I'm doing this call. And I would imagine you all -- your first question was, well, what's changed since you last updated us, and that's exact change.

Yes. And the second question, if you could give us a little bit of sugar because all of us are obviously trying to work out our numbers. But the reality is that everything you're saying in summary, you're on track in food, you're on track in liquor. So everything is pretty much -- there's no real change there. But what you're basically saying is that the hardware side, that market has got worse. It's the cyclical part of your business. You're more exposed into retail now than what you were, so that makes it even more cyclical. So where we need to sharpen our pencils is in that hardware. Is that basically the summary of what you're trying to tell us today?

Yes. I'm hoping that I'm explicit about that. I wanted to say what I said to Michael as well, which is in food and liquor, we're in the same market that all of our competitors are. There are parts of our customers groups that are doing it tough. And so we're tracking along, as you can see in the sales numbers, very much in line with the market, but you shouldn't expect outperformance there.

Next question comes from the line of Bryan Raymond from JPMorgan.

Just wanting to get a bit more color around the magnitude of organic earnings decline in IHG. If we're putting aside some of the new acquisitions, obviously, that are still annualizing in and Total Tools, is it possible to give us a feel for the magnitude of underlying earnings decline in IHG that you're seeing at the moment?

Yes, Bryan, I mean, I'm obviously not going to get into the detail of individual pillar performance. We haven't even finalized our year-end -- sorry, our half year-end. And so you'll need to wait for December for that detail, but it's significant in the retail part of our business. And yes, I'm afraid I'm going to have to leave it at that.

Right. Are the new acquisitions -- sorry, the acquisitions on the trade side that you've made this year, are they sort of wrapped up in a similar condition? Should we be building in some of the same sort of pressures into the frame and truss side and -- so there is Alpine and Bianco?

Yes. Generally, frame and truss activity is affected and suffering the same trends, if you like. And the -- but our acquisitions are performing as we would have expected them to perform in this market. So yes, of course, they're affected, but not worse.

Okay. Great. And then just my second one is just on the competitive environment. So there's obviously reduced activity and demand levels, which are pretty well talked about across the market. How is the competitive environment at the moment? Obviously, you've got some major competitors and a lot of independent competitors. Are you seeing heavy discounting or more low-margin sales come through than -- is there any irrational behavior is what I'm trying to get at in the market in response to this weak demand in order to try to gain share to offset some of that pressure?

I'm going to answer the question in trade because I think that's where you're asking it.

Yes, that's correct.

And so the answer is, yes, we are seeing, and I think I said that in response to someone's question earlier, we are seeing margin pressure because our competitors are sharpening their pencils on pricing. But I would say that we're not seeing any irrational behavior. I mean, I think, it's entirely rational to look to hold on to your customers by increasing discounts to them, but I would not describe it as irrational.

Our next question comes from the line of Adrian Lemme from Citi.

Doug, I just had a question on the earnings seasonality this year. It seems like the market's got sort of higher earnings in the second half, and you've noted the slower momentum in hardware. Can I just double check with the timing of all the acquisitions? Is there -- are they fully contributing this half? Or is there more of a contribution in the second half, please?

Adrian, is your question in hardware specifically?

Well, I guess you've got that and you had Superior Foods. I just wanted to understand that, yes, because the market seems to have higher earnings in the second half. So I'm just trying to understand whether we should annualize this first half or there's other factors at play, please?

Yes, so I'll give you some directionally -- what I hope are directionally helpful comments. So firstly, Superior is in this year for 11 months. It came in from June. Bianco and Alpine came in right at the end of last year, so they'll be in for 12 months. There were a few smaller acquisitions in the IHG business last year that will roll over and annualize. But there isn't a major acquisition that is going to either annualize or come in, in the second half.

Our next question comes from the line of Tom Kierath from Barrenjoey.

Doug, just one on the costs. Just be interested in -- I don't know if you can quantify how much costs you've taken out in the half, probably can't. But just talk about when you started kind of going a bit harder on the cost base? And how we should think about that kind of annualizing into the second half? Whether there will be kind of more cost out just given the timing of those cost initiatives, please?

Yes, sure. Tom, so you'll recall in the second half of '24, in IHG, the cost-out initiatives that had been started 6 to 12 months before that really started to manifest. And I think we spoke -- the language I used at the time was offset the inflationary and regulatory cost pressures in that half. And actually, remember, we had a better second half of H2. And so those cost-out programs, the benefits of that continues and will essentially be in for the full year. The reason that I talked about a 12-month and a 24-month data point on labor hours was because I want to point to the fact that this is not a knee-jerk panicked reaction. It's been something that, frankly, any good retailer would be doing is taking out costs in line with both current levels of sales and anticipated. And so those are structurally in our business already. It's definitely true that in the last 24 months, in our hardware business, we've really tightened the screws on discretionary costs. And again, that was not a new program. But on the other side of it is inflation in costs is dislocated, if you like, from inflation in products. So when we talk about product inflation that's been coming down, as we all know. But I think we also all know that across the country, inflation in cost has remained higher, and so we're certainly feeling the effect of that. And so that -- and that inflation was slightly slower than our cost out. And that inflation manifests through labor, rent, where you've got leases that are CPI-linked and that they reset in the last couple of years. And of course, on -- particularly in Victoria, regulatory increases relating to payroll taxes and land taxes. And so you've got a little bit of a timing difference between product and costs, but then within costs, cost-outs and cost increases. So in summary, what I want you to hear is we've been on a journey for a long time, but you do get to a point of leverage where you just are unable to continue to take costs out at the rate that your sales are declining. And that's a function of the structure. The last point I want to make is that we are mindful of the strong position we have in this business. And you don't want to get to the point where your cost-out efforts actually become self-fulfilling from a sales slowdown perspective. And particularly in trade, it is an assisted sale. And that means that you need someone and someone knowledgeable to assist the customer, whether it's on the phone, on site or in the store or in the trade yard. And so we have to be careful that we don't damage our business for the long term.

Our next question comes from Craig Woolford from MST Marquee.

Doug, quite a different question, I guess. What's your time line on appointment of CEO for the hardware business? And how do you think about that given some of the conditions that you've been through?

Craig, the time line is imminent. It will be soon. So we'll finalize that. And I think about that, as you would expect, I'm very keen that we get a permanent leader into the business as quickly as possible.

Absolutely. And then on the food business, the tobacco declines in sales, if anything, have accelerated a little bit, and that's what we can see from other operators and some of the industry feedback. Is that hitting a point where it's having more of a margin impact on the business? How do you manage and contain the headwind that is the drop in tobacco given illicit?

Yes, Craig, I mean, I probably don't have a new message for you on that one. So it hasn't had a -- if I use your phrase, it hasn't hit a point that it is fundamentally any different to what it's been in the last few years.

Yes, I mean it's just that it's declined. We've got double-digit declines on top of double-digit declines. It hasn't leveled out. Has it as a headwind?

No, it hasn't. I mean the government needs to get on top of this urgently. So it hasn't, but there's nothing I can say now that you haven't heard from me before. So I won't waste my breath or your time.

Next question comes from the line of Phillip Kimber from E&P Capital.

Doug, just a couple of ones for me. I just wanted to check, I think, you were sort of saying the acquisitions are trading as expected given the current environment. So should we assume, I think, you gave some historical numbers, and I'm really talking Alpine and Bianco here. Are they -- should we assume that those historical earnings that you gave would be under pressure given the environment? Is that sort of what you're saying when you're saying they're trading as expected given the current environment?

Yes, that's exactly right. They operate in the same environment. I mean, they -- you got to remember that, for example, Alpine is -- it's a single site and it's in Victoria, and it has -- it's trading as you would expect in that market. Alpine is in South Australia, and it's a 10-site operation with a much broader business. And so they are -- the reason I use that language, Phil, is because we have not been surprised by their performance in these markets, and that's a good thing. And I think I said this at the time during Q&A in February, we valued them as such. I always try and be very transparent with you guys, and so I don't mind saying this slowdown is faster than we anticipated. But we knew that the market was at the bottom half of the cycle, and we anticipated that. So that's the best I can give you.

Okay. And then the second one was really just in this environment, is there anything abnormal that you're needing to do with support of your trade customers in terms of on extending terms or anything like that? Or is there anything to call out there?

No, not really. I mean we work closely with those customers. If they're trade customers of ours in our retail stores in making sure that we manage the book very carefully. We've spoken in the past about insurance, but we don't want to have to rely on that. And in respect to our retailer customers, we work closely with them as well and making sure that their inventory levels are not out of line and that they continue to manage good businesses. And the culture of IHG, if you like, the operating model is that we've got independent retailers. We've got JV partners, and we've got 100% owned stores. And actually, when we engage with each of them, GMs in the case of our own stores, we really treat them much the same, and we have a very open and transparent relationship with them, and they will talk to us about pressures that they're feeling. And -- but we're not having to extend abnormal levels of credit to them, they are managing.

Next, we have Shaun Cousins from UBS.

Apologies, if this question has been asked, I've got on to the call late. But can you just talk a bit about the difference between the food ex tobacco of 18.5% and 9.8%, why it's such a big difference relative to supermarkets, which is a little narrower, please?

Sorry, Shaun. Can you say that again? I'm not sure I'm following the question. Are you asking me why there's such a big difference?

Yes. So your total sales are up by 18.5% and they're up 9.8%, including tobacco. Conscious with that Superior Foods acquisition issue. But what's driving such a wide gap there? In terms of the gap in your supermarket convenience business is quite a bit smaller. I'm just curious around why there's such a wide difference. I didn't realize -- sorry -- yes, pardon me, that was the question, if that helps.

Shaun, it's because -- I think this is the answer, if I'm understanding your question, it's because the 9.8% includes Superior.

Okay. Maybe -- sorry, does Superior sell any tobacco?

No.

Okay. All right. I might take that offline. And then secondly, just on Total Tools...

Sorry, I was going to say if I haven't understood or answered the question, happy to pick it up offline with you.

Great. And then my second question is around Total Tools. Just -- and again, apologies if this has been asked. Why are comps so weak? And maybe where are you at in the broader -- one of the boost to your reported revenue has been converting franchise stores to corporate. Is that slowing at the moment? Can you maybe address those 2 issues, please, on Total Tools?

Yes, sure. So comp sales are weak because there has been some product deflation, and that's really driven by -- sorry, slowing inflation, which is driven by the competitive market. And yes, to your second question, I think, you've seen that in the last couple of updates. There is definitely a slowing of conversions. I mean we give you pretty good visibility, I think, to that, and we'll continue to update you every time. But we're at circa, give or take, 50% of the revenue in JV stores of the total network revenue. And we expect that it will settle around that, and that's not guidance because it will go up and down sort of opportunistically. We're happy to open franchisee stores and JV stores as the opportunities present themselves.

I see no further questions at this time. I will now hand the call back to Doug.

Thanks, operator. And again, I'd just like to thank everybody for making time for the call at short notice. We're available through the day to answer any specific questions. And all that remains for me is to wish you a happy Friday. Thank you.