Coles Group Limited (COL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Coles Group Limited FY '20 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Steven Cain, CEO. Please go ahead.

Thanks, Travis, and good morning, everybody, and welcome to Coles 2020 full Year results announcement from a lockdown boardroom here in Melbourne, a sunny Melbourne, I might add, which looks more like an operating theater this morning. Joining me on the call today is Leah Weckert, our CFO; and Darren Blackhurst, the Chief Executive of Liquor, who will take us through the details of the refreshed liquor strategy. It goes without saying that this has been a year like no other. Some may say unprecedented, and the word resilience is also in the air. Just over a year ago, in June 2019, Coles set out a refreshed strategy to transform our business and laid the foundations to succeed in our second century. Since that time, we've been presented with a number of unforeseen challenges, including drought, the devastating bushfires and, of course, the ongoing COVID-19 global pandemic. This has provided the greatest test of our lifetime, and we are experiencing things we never thought we would see in a supermarket or, for that matter, Australia. Coles, for its part, has become a designated essential service, playing an important support role during these crisis, and it will play an important role as the nation recovers and returns to growth. We owe a huge thank you to our team members, supply partners and the communities we serve for the way that they have pulled together. I'd also like to thank the federal and state governments for their speed of response, including establishing the supermarket task force and unprecedented collaboration to help us to continue to feed Australian families safely. There has and will be much to learn from COVID-19. We're determined to emerge as a better, stronger business and team. Our purpose of sustainably feeding all Australians to help them lead healthier, happier lives is now more relevant than ever. The pace of change in the business is accelerating, particularly with our digital assets and capabilities, and we are demonstrating true agility on a week-to-week basis. For our many shareholders, we have successfully executed the first year of our strategic plan and restored group profit growth for the first time in 4 years, and we are on track to grow long-term shareholder value. The interim and final dividend payments, totaling $767 million, importantly benefit millions of our fellow Australians. So turning to Slide 3 in the deck for those who have it handy, the financial highlights. The FY '20 financial year marked the first full year of operations under our refreshed strategy. Our momentum in the business was strong, leading into Christmas as customers began to respond to the strategic initiatives being implemented. With regards to our financial results, sales increased roughly 7% to $37.4 billion. EBIT increased by 4.7% to $1.4 billion for the first time in 4 years that we had growth. Supermarkets comp sales grew by 6.9%, the 51st consecutive quarter of comparable supermarket sales growth. Our Smarter Selling initiatives saw us deliver in excess of $250 million in cost out, and I will discuss this in more detail shortly. As we invest for future growth, we incurred gross operating capital expenditure of $833 million, which included CapEx in relation to our store renewal program and the supply chain modernization project, in particular, Witron. We reported operating cash flow of $2.2 billion with strong cash realization of 111% and net debt of just $362 million pre the new AASB 16 leasing standard. For our shareholders, I am pleased to report a final dividend of $0.275 per share, fully franked, growing 14.6% from last year. This takes the total dividend for FY '20 to $0.575. Finally, the well-being and safety of our team members is always a priority and was brought even more into focus over the last year. Pleasingly, we saw a reduction in the total recordable injury frequency rate, or TRIFR, of 18% for the year. Also during the year, more than 85,000 team members participated in a safety refresher training and approximately 1,000 leaders also completed mental health first aid training, which provides leaders with skills to respond to a mental health crisis and also create a mentally healthy workplace, which we believe both contributed to the safety outcomes. Moving on to our strategy in more detail on Slide 4. As a company, we feel proud of the progress we've made to date in achieving our vision to become Australia's most trusted retailer and grow long-term shareholder value. I believe one of the biggest factors in our success has been how brilliantly we've worked together across Coles. During the bushfires and COVID, we truly worked as one Coles team to support our customers, communities and each other. We want this culture and way of working to build and grow, and that's why we launched our Coles group values, which you can see on the slide here. These values: customer obsession, passion and pace, responsibility and then health and happiness describe what is important to us here at Coles. There are various ways in which our experiences over the last few months have really brought our values to life and confirm that they are right for Coles. For example, customer obsession was brought to life through the introduction of community hour and Coles online priority service to support our vulnerable customers. A great example of passion and pace was setting up the pop-up distribution centers in a few days, ensuring high demand products were sent into stores to meet customer needs. Responsibility, very much about introducing purchase limits on products in short supply to improve availability for all of our customers. Health and happiness, the introduction of social distancing measures to protect customers and team members, the 1.5 rule that we're all familiar with now, limiting number of customers in-store at peak trading as well as enabling 3,000 of our store support team members to work remotely from home. During the year, we also had a big focus on mental health and well-being with 110,000 packs sent out to team members to support them and their families. Importantly, these values were developed by input from our team members and are supported by our lead behaviors of look ahead, energize and deliver with pride. They will guide the day-to-day decisions and actions of all team members shaping the way we work together to get things done. Moving on to Slide 5. We've strengthened the executive leadership team in the year with 5 new recruits. I'd also like to sort of thank the rest of the team that have contributed enormously to the year that we've had. In terms of new appointments, we've got Ian Bowring in Transformation; Sally Fielke, Corporate Affairs; Darren Blackhurst, to your list here shortly, in Liquor; George Saoud, Emerging Businesses, which is mostly financial services, but also helping us to integrate the Dual business that we acquired; and then Ben Hassing, who's joined us from Walmart in the States to lead our e-commerce charge. Each of the new executive members have already made a great contribution to their teams and Coles, and I look forward to continuing to work with them in the future. Moving on to the strategy, slide 6. Okay, while COVID created a great deal of incremental complexity, I am pleased to say that we have successfully executed the first year of our refreshed strategy. The most important thing for me was we're starting to see the fruits of the new strategy prior to COVID, and we'll be a better business coming out of COVID. I will take you through some of the proof points in each pillar, starting with inspiring customers. We continue to tailor our offer by using data-driven ranging tools. We saw one of the largest tailored range changes in Coles' history with more than 1,600 new SKUs introduced over the last year. We delivered trusted value through our helping lower the cost of breakfast, lunch and dinner campaigns and overall lowered the cost of living with 1,500 new products introduced on everyday low prices. We achieved more than $10 billion in Own Brand sales for the first time, growing by 10%. Own Brand now accounts for over 31% of supermarket sales, and 1,850 products were launched during the year, including Coles Asia and Coles Mexico ranges and the Daily Street premium range of Colombian and Kenyan arabica coffee beans blended locally here in Melbourne. We have now rolled out our dedicated convenience meal section across almost 150 supermarkets with 240 new lines launched, including the new Coles kitchen range from our dual manufacturing facility in Sydney. In online, we almost doubled capacity through the rollout of contactless Click&Collect to the boot of your car, which is now in 400 supermarkets. We also re-platformed the Coles website and all 3 liquor banner websites. During the year, we made a significant investment in flybuys to build a cloud-based data analytics and loyalty management platform that will benefit members through a seamless digital experience. We now have a refreshed liquor strategy focusing on being a simpler, more accessible, locally relevant drink specialist. Darren will take you through this shortly. Finally, we continue to deliver -- to drive our meat export business, which experienced double-digit revenue growth for the year with strong growth across Asia. These are all great initiatives. It was a very busy year, but one of the most pleasing aspects was that it translated to an improvement in customer satisfaction across supermarkets, liquor and express in the fourth quarter, so a great result. Moving on to Smarter Selling on Slide 7. I'm pleased to report we realized in excess of $250 million in cost efficiencies this year as we pivoted to greater use of technology. Some of the Smarter Selling initiatives driving the cost savings include a more streamlined store support center. In the store support center, we implemented new systems across finance and procurement, making it easier for our team members to do their jobs. We established transport hubs in Victoria and New South Wales, enabling us to optimize logistics and significantly increase backhaul and introduced new data and technology-led solutions in stores such as easy ordering in the deli and bakery production tools. Energy and waste management reductions have been achieved through retrofitting LED lights, which have delivered significant electricity savings as well as the installation of new refrigeration control systems leading to a reduction in NG consumption. We've also implemented measures to reduce stock loss in stores, such as glass panels at the front of the stores and anti-sweep shelving, which you may have seen. The Smarter Selling pillar of our strategy also includes an optimized store network and formats. This year, we renewed 3 Coles' local supermarkets, 10 Format A, 31 Format C stores. This was the biggest renewal program since 2012. Finally, on Smarter Selling, the technology-led optimization and automation of our supply chain to reduce costs and improve availability is continuing to accelerate. Structural work at the Witron automated distribution center in Queensland is progressing while the New South Wales distribution center is at the approval stage. We also entered into long-term leases for development of the Ocado sites in Sydney and Melbourne with construction commenced on the Melbourne site. It is worth highlighting that in line with the business case for both of these projects as project activities peak in F '22 and '23, we expect to incur incremental operating expenditure relating to project implementation costs. And in F '23, we also expect to incur double running costs. In FY '22, we expect these costs to be up to $75 million, and we'll provide further detail on these as the projects progress. Moving on to the final pillar of our strategy, winning together, Slide 8. As I said at the start, this pillar of our strategy has never been more relevant, and we remain focused on helping all Australians lead healthier and happier lives, including our team members, our suppliers and our communities. In addition to the group values, which I've already spoken to, we raised $5 million for FightMND to support research into treatments for Motor Neurone Disease. We delivered more than $7 million of additional contributions to SecondBite and Foodbank at their time in need during COVID. We increased diversity with more than 4,700 Aboriginal and Torres Strait Islander people employed across our stores, representing almost 4% of Coles team members and a significant step towards our target of employing 5,500 by 2023. We strive for Coles to be a great place to work. This was recognized during the year with the Coles being named the Most Popular Retail and FMCG Employer in the Top100 Graduates Awards. We also entered into a 5-year agreement to be the official supermarket to the Australian Football League and the ladies, which is now pleasingly back on our screens. We've partnered with Stephanie Alexander Kitchen Garden Foundation to promote healthy eating and, of course, we continue to support Master Chef, which recorded record ratings during the year. Finally, we are extending our model of buying milk directly from farmers into South Australia and West Australia for our own brand milk. We launched the direct sourcing model a year ago with the aim of building long-term relationships with Australian dairy farmers, and we're pleased to be able to provide them with certainty of income and the confidence they need to plan for the future with contracts up to 3 years. We measure success of this pillar by our team member engagement and safety scores. Pleasingly, both improved significantly. Okay, moving on to Slide 10, the strategy tracker. Many of you will be familiar with this now. It's had a couple of outings. I'm very pleased to say that we remain on track against each of the 8 metrics that you can see here, and we will continue to report on this scorecard as the years progress. With that, I will now hand over to Darren who joined us back in January, which seems like a long time ago, who will take you through the liquor review of operations. Darren?

Thanks, Steve, and good morning. Firstly, by way of introduction, I should start with a little bit about me. I've worked in retail for the past 30-odd years. Started out back in Tesco in 1988, worked there for the first 18 years of my career and was the Commercial Director of Tesco Lotus in Thailand for my final 5 years there before joining Asda where I was Group Trading Director for 4 or 5 years. And then lastly, I was the Group Commercial Director at Morrisons plc in the U.K. I am delighted to be with you today. It's good to be able to share the recent work that my new leadership team and I have undertaken over the past 7 months. Since joining in 2020, I was going to say, actually, that it's been a bit of a baptism of fire. It's actually probably more appropriate now to say that it's been a baptism of fire, storms, floods and a global pandemic. But thankfully, whilst charting a course through what has been an exceptional few months by any standard, I'm pleased that we've now completed a full end-to-end review of the liquor operations and reset our liquor strategy. You turn to page -- sorry, to Slide 12. In undertaking the review, we look through 4 key lenses: our customers, the markets, our suppliers and our business. And taking each of these in turn. From a customer perspective, as you can imagine, coming from the U.K., it was important for me to truly understand the Australian market, and most importantly, Australian customers and how they like to shop. As such, we spent 852 hours talking and listening to more than 1,000 customers to understand their thoughts on us, our offer, how they like to shop and how we compare to our competitors. And customers were really clear with us on a number of issues and opportunities. Overall, they want an easier shopping experience with less clutter, particularly in Liquorland. They expect friendly team members to be available and on hand to help them. They want our offer to be relevant for them and simple to understand with more local craft and boutique products being mentioned. And they told us that it's still essential to continue to offer good value for them every day. A number of customers echo the overall longer-term industry trend that health is important to them and said they were trying to reduce the amount of alcohol that they were consuming during the week, looking for more no- and low-alcohol alternatives. From a market perspective, it's important to recognize that our size, scale and banner portfolio means that we're large enough to make a difference nationally, yet agile enough to be relevant in the local market. It's also clear, online is becoming a much more important and relevant channel for more customers, especially during this COVID impacted period. And the omnichannel customer is becoming much more important to us. Our feedback from suppliers was also clear. They want us to simplify the way we work together, provide clear strategic direction and build longer-term plans and partnerships with them. And finally, we looked at key aspects of our business, have been visited around 140 shops across 4 states and the Northern Territory, all prior to the current lockdown in Victoria, I should add, I have to say I was really impressed with the team members that I met across the business at all levels, really. And as you know, our team members in shops and the store support teams work tirelessly every day to serve our customers and improve our business. And their commitment and dedication through the last few months has been an absolute inspiration. Our 3 distinct and complementary store formats means we're well placed nationally and locally to serve our customers. First Choice continues its successful transformation. Vintage Cellars is evolving with strong results in the Ashburton trial, and Liquorland has considerable potential to capitalize on its convenient locations around the country. Another clear positive is our developing and award-winning exclusive brand portfolio. The key challenge for us is that a lot of our systems and processes are quite manual, and we have a largely fixed cost base that now require the level of investment to lay the foundations for future growth, particularly online, where we have considerable opportunity to grow. Turning to Slide 13. Taking all this into account, we created a new strategic framework for growth to guide the business, our team and our supply base over the coming years. Reflecting on the 4 lenses, we set ourselves the vision going forward to be a simpler, more accessible, locally relevant drink specialist. This is driven by a focus on 6 key priorities that sit under the group's 3 strategic pillars. Under Smarter Selling, we will simplify the operating model and refocus the business; under Inspire Customers, we will differentiate our offer, serve our customers better and be more relevant and accessible; and under Winning Together, we will build our capability and engage safely, responsibly and sustainably. And these priorities are underpinned by 30 key deliverables across 3 time horizons that all started concurrently and are linked to our group values, guiding the way that we work and engage internally and externally with our suppliers. Turning to Slide 14. Looking at the 6 priorities in a little more detail. Our first priority is to simplify our operating model. And this is really all about good shopkeeping to ensure our offer, our communication, our pricing and the way our stores operate, it doesn't become too confused or cluttered. It's essentially making our smaller stores easy to shop and our offer more engaging for customers. Our second priority is to refocus everyone's efforts across the whole business on some retail fundamentals, being clear on where we can add value for customers whilst reducing and removing needless cost and wasted efforts in the process. Thirdly, we need to differentiate our product offer to enable us to serve our customers better. The development of our exclusive brands and our relationships with local suppliers across all channels and formats are key to this as is team member engagement with customers. Our fourth priority, that of being more relevant and accessible relates directly to the way we plan to optimize and evolve our shops, our estates and our online business. The latter is a big opportunity. And with regards to our estate, as we complete the First Choice Liquor Market renewal program, we will be turning our attention to Liquorland. And after considerable customer research, we've reimagined Liquorland and put a shovel in the ground in our Oakleigh store to refresh the look and feel of the shop. It's actually a relatively light touch change, but with a big overall impact. And whilst it's early days, and there's still a lot of refinement to come, it appears to be resonating with customers and with team members alike. Given this, we will be moving to a multi-store trial in the coming weeks and months. Our fifth and sixth priorities underpin the delivery of the first 4. It's important we continue to invest to build our capability, particularly in our team and our systems and our estate to enable us to deliver long-term growth, and we will always trade safely, responsibly and sustainably in the communities that we operate and serve. And given the time available, I'm going to stop there. But by way of summary, I'd leave you with 3 key points. Firstly, it's clear that there is considerable latent potential in all our liquor brands. Secondly, the market and our customers are evolving, and this is an opportunity for our business. And thirdly, our desire to be a simpler, more accessible, locally relevant drink specialist and the delivery of our 6 priorities will lead to sustained growth over the long term. Thank you. I look forward to updating you along the way, and I'll now hand over to Leah who will take us through the financial overview.

Thank you, Darren, and good morning, everyone. Great to be talking to you this morning. Before I get started, just a couple of housekeeping items. From FY '21, Coles will report its financial results on a post-AASB 16 basis. Therefore, this will be the last year that we'll present numbers on a pre-AASB 16 basis in these result presentation. As FY '19 comparatives have not been restated, any changes from FY '19 to the FY '20 post-AASB 16 position are not meaningful. And so my commentary in this presentation, with the exception of the balance sheet, will be on a pre-AASB 16 and significant items basis. Next year, and going forward, I am very glad to say that there will be alignment between the comparative results as we will have fully transitioned to a retail calendar and be reporting post-AASB 16. So let's get into the financial results. On Slide 16, you'll see that the group sales revenue increased by 6.9% to $37.4 billion. Group EBIT increased by 4.7% to $1.4 billion. This was despite a significant decline from express earnings and FY '20 being our first full year of corporate costs post demerger. Net profit after tax increased by 7.1% to $951 million and basic earnings per share increased by 7.1% to $0.713. The Board has declared a final dividend per share of $0.275, an increase of 14.6% versus last year, and this takes the total FY '20 dividend to $0.575 per share. Moving on to the segment financials now on Slide 17. It's very pleasing to be able to report sales revenue growth across all our segments and strong EBIT growth in supermarkets. In supermarkets, sales increased by 6.8%, driven by the implementation and execution of our strategy that Steven has just spoken to. This included increased penetration of Own Brand and the rollout of tailored ranges. In addition, sales benefited from increased at-home consumption and pantry stocking associated with COVID-19. Online growth, while strong relative to bricks-and-mortar, was meaningfully impacted by a temporary suspension in March and April as we pivoted the business to ensure that we could meet the needs of the most vulnerable in our community. Supermarkets EBIT increased by 10.7%, supported by the first year of our Smarter Selling program and strategic sourcing initiatives, which helped offset significant incremental costs related to COVID-19, which were approximately $170 million in quarter 4. Despite the additional COVID-19 costs, we delivered just under 18 basis points of operating leverage for the second half and 14 basis points of operating leverage for the full year. Turning now to liquor. Sales growth was a result of a strong performance across all 3 banners. As range changes in high-growth categories such as gin, were well received by customers and, in addition, the significant shift to at-home consumption. Liquor EBIT was stable at $120 million with higher sales offset by ongoing clearance activity associated with range changes, and some margin deterioration from mix changes as a result of COVID-19. Express C-store growth also benefited from COVID-19-related pantry stocking and strong basket size growth in the latter part of the year, which more than offset lower foot traffic in-store, following the government's stay-at-home directives across the country. While not included in sales revenue, fuel commissions were impacted by the stay-at-home restriction with lower fuel volumes in the latter part of the year. This material decline in fuel volumes resulted in express reporting a loss of $16 million. The other segment recorded net costs of $27 million for the year. Our underlying corporate costs were broadly in line with our previous guidance of $66 million, offset by the self-insurance provision release of $15 million in the first half. There was also approximately $10 million of additional COVID-19 related to corporate costs, including donations. Earnings from property operations were $37 million, and Coles' share of the flybuys JV result was a loss of $6 million. I'll turn now to the normalized cash flow on Slide 18. Operating cash flow, excluding interest and tax was $2.2 billion with strong cash realization of 111%. This reflects both a strong trading performance and disciplined working capital management, with inventory reducing faster than trade payables towards the end of the financial year. Higher provisions compared to last year is largely a result of the award covered salary team member review and the annual leave provision with less team members taking entitlement in the latter part of the year due to the COVID-19 restrictions across the nation. I'll turn now to capital expenditure on Slide '19. Gross operating capital expenditure on an accrued basis decreased by $60 million year-on-year to $833 million. This was a strong outcome during a year that presented many challenges with COVID-19 impacting project deliveries in the second half. While spend on store renewals was higher, lower CapEx was incurred on new store openings, which we categorize as growth CapEx. 5 openings have been moved into FY '21 as a result of COVID-19-related delays. Overall, there were 70 supermarket renewals and 30 liquor renewals. And from a new store perspective, there were 8 supermarkets and 20 liquor stores opened during the year. CapEx was also incurred in relation into the supply chain modernization program and a number of initiatives in the Smarter Selling program. Finally, we reported a net inflow of property CapEx of $167 million, in line with our previously communicated guidance as we took advantage of market conditions. Turning now to the balance sheet on Slide 20. The balance sheet as at 28th of June is provided on this slide on a post-AASB 16 basis. As at 28th of June, we reported working capital of negative $1.1 billion, capital employed of $3.5 billion and net assets of $2.6 billion. We continue to maintain a strong balance sheet, which will provide flexibility for future growth. If I talk to working capital first, working capital improved from the prior year with higher inventories being more than offset by an uplift in trade and other payables to support the high-item trading activity, particularly in supermarkets and liquor, during the fourth quarter. In capital employed, property, plant and equipment and equity investments remained relatively stable year-on-year with property acquisitions moderating. A net lease liability of $1.4 billion was also reported, following the adoption of AASB 16, which also largely drove the movement that we see in the net cash balances. Both inventory and payable days increased compared to FY '19, reflective of the legislative change to the recognition of duties and taxes on tobacco inventory and the exclusion of fuel inventory and payables for the full year in FY '20 from the implementation of the new Alliance agreement with Viva Energy in the second half of FY '19. Turning now to Slide 21 on capital management. As we have said in the past, we will continue to take a disciplined approach to capital management. The total dividend for the year of $0.575 per share represents a dividend payout ratio of 82% on a post-AASB 16 basis. We reported net debt of $362 million, and the weighted average debt maturity was 5.6 years, with undrawn facilities totaling $2.2 billion. During the year, Coles issued 600 million unsecured fixed-rate Australian dollar medium-term notes, comprising $300 million of 7-year notes and $300 million of 10-year notes. We remain committed to diversifying our funding sources and extending our maturity profile over time. On a like-for-like basis, leverage has decreased 0.1x, but as we have now transitioned to AASB 16, the comparable leverage ratio going forward is 3.1x, which better reflects how both rating agencies and debt investors have viewed our leverage for some time. Finally, on credit ratings, we remain committed to investment-grade credit ratings with S&P and Moody's. I'll now hand back to Steven who will make some concluding comments on outlook before we get into the Q&A.

Thanks, Leah. So COVID-19 continues to have a significant impact on our team members, suppliers and the communities we serve, and we believe the impact on the overall supermarket sector is likely to be ongoing well into calendar year 2021. Whilst the environment remains highly uncertain, we are in a strong position to take advantage of opportunities as they arrive. By way of a trading update, in the first 6 weeks of FY '21, supermarket comparable sales remained broadly in line with the levels achieved in the second half of FY '20. In online, following a significant increase of capacity in the second half, sales are up 60% in supermarkets in the first 6 weeks of FY '21, driven by Victoria. We have also continued to incur significant incremental COVID-19 costs in the early part of '21. Given these incremental costs, supermarket is achieving an EBIT margin consistent with the full year at the current time. The extent and duration of these incremental costs will depend upon a number of factors as we continue to proactively manage the unfolding COVID situation. In liquor, sales have remained elevated with any moderation of sales growth dependent on social distancing restrictions for hotels, pubs, clubs and licensed venue operators. Aside from incremental COVID-19 costs, liquor also expects to step up its investments in customer service in the coming 12 months as it implements its new strategy. In express, average weekly fuel volumes in the early parts of the quarter, first quarter, are broadly flat, with the Q4 exit rate with significant variation between states. In other, FY '21 corporate costs are also expected to be slightly above FY '20 driven by a market-wide increase in insurance costs whilst net earnings from property operations are expected to be more modest than FY '20 and weighted towards the first half due to lower anticipated disposal activity. Coles' 50% share of flybuys net result is also expected to be broadly in line with FY '20. We retain our $1 billion cost-out target for Smarter Selling to be achieved by FY '23. In FY '21, we will continue to focus on realizing opportunities. However, the timing will, in part, be dictated by COVID. Coles' optimized store network and formats is already transforming the makeup and performance of our extensive store network with plans to renew approximately 65 stores in the year and to open between 15 and 20 new supermarkets in FY '21, including 5 stores that were delayed in FY '20 due to COVID. Finally, gross operating capital expenditure is expected to be approximately $1 billion and includes increased investment on the Witron ambient automated distribution center as the project enters its third year. In addition, Coles also expects net property CapEx to be plus or minus $100 million in FY '21. Thank you for listening. I'll now hand back to Travis and open up the line for Q&A.

[Operator Instructions] The first question today comes from David Errington from Bank of America.

Steve, can I delve into your operating costs, notably in supermarkets? And now the first question, I understand the COVID costs, which you've called out, of $170 million in the quarter. But when you strip out the COVID costs in the second half, your underlying cost of doing business in supers increased by about 6%. And I'm assuming that's even with the benefits that you would have had through your Smarter Selling. Can you highlight some of the cost pressures that you would have -- excluding COVID costs, can you highlight some of the other costs that you would have incurred in that second half and being able to manage the very strong sales that you incurred? And whether those costs you can gain efficiencies on that going forward or whether that cost increase is what we need to expect?

Okay. David, I might hand that one over to Leah.

So there's a number of factors that play in there. So let me just talk you through those. So we've got the $170 million of COVID costs, which are for quarter 4. There were some COVID-related costs in Q3 as well, around about the $30 million mark, so about $200 million for the second half. In addition to that, as you would expect, there is quite a bit of increased cost in there related to increased sales volume. So the COVID costs that we called out that $170 million is what I would probably describe as sort of semi-fixed cost. So that things like we put a door greeter on every supermarket. Now that's completely independent to sales volume, so you need to add on what I would describe as the variable cost related with the sales volume. So that's going to couple of things like your store ren, your consumables, like your bags to put bakery items in bakery boxes, duo rolls, things like that as well as some additional tenancy, CODB as well. And you would expect those to be growing in line with sales. Then in addition to that, we did make a number of strategic investments in the half as well, so particularly in the IT and digital space to get things like Coles And Co stood up. And then you've got your underlying cost growth. And that's all offset then by the Smarter Selling. When I do the triangulation on that, and granted, I have the benefit of the detailed numbers, I get to an underlying cost growth in there of between 3% to 3.5%.

Right. So it's about 2.5% to 3% in that increased cost, excluding COVID that's increased because of effectively the strange conditions. Is that the right way of looking?

Well, it's the variable costs, which are really the biggest driver in there.

Yes. And the second question, the point that I'm trying to get in my head around is, your comment on the second bullet point in your outlook where you're basically calling out a flattish EBIT margin, but you expect to incur significant incremental COVID costs in that. Can you elaborate that -- that depends upon a number of factors? Can you elaborate more on what you mean by that second bullet point, what those factors are and whether we can actually expect to see operating leverage? Because, as you said, you're running at 10% sales growth at the moment, but you're calling out flattish margins. I suppose where I'm trying to go with it is when can we start to see some real leverage coming here? Or is that just an unrealistic expectation?

Yes. So I mean the statement that we've put in there is really based on the results that we're seeing in the first 6 weeks. And we felt it was important to give some transparency around that, given just the number of moving parts and the uncertainty. I mean when I sort of triangulate that, David, if I take the second half, as an example, if you were to assume an underlying sales growth rate, ex COVID, and a good estimate of that would probably be where we were at the early part of Q3 prior to COVID starting, you then can look at your incremental sales that you've got, which is really due to the shift to in-home consumption. You apply the GP rate to that. You apply that variable cost of doing business right there, which is what I just talked to around your store ren, your consumables and tenancies, and then you take off the costs. And basically, what we're indicating is we had about $170 million in Q4, $70 million of those we don't expect to recur. But there is a substantial amount there going into Q1 that we expect to continue. And that is things like the additional cleaning routines that we've got in-store, the additional door greeters that we've got, DC cleaning, things like that. Those additional costs once you take that off, by and large, broadly get back to the number that we've sort of indicated in terms of the EBIT margin. So while the COVID conditions continue, we do need those higher sales to maintain the EBIT margin, and it would need to increase above that for us to start to see rationalization.

The next question comes from Shaun Cousins from JPMorgan.

Maybe to continue that theme, Leah, further to David's question. In regards to the start of the year, has there been any change in the trajectory of gross margins, i.e., as promotional intensity become greater, given that, that was less of a factor in the second half where you were able to extract or achieve margin expansions? Or have you been unable to extract those Smarter Selling cost savings which, again, you were able to do in the second half '20? I'm just curious around, particularly gross margins and the Smarter Selling cost savings as factors that were present in the second half '20 and might not be present in the first half '21 to date, please?

Yes. Shaun, I might take that one. Hope you're well. The basic trend here was that we saw, obviously, in the early days of COVID, a higher GP because of the lower promotional intensity. And then that sort of gradually -- that promotional intensity gradually rose through the remainder of the quarter. And it's now sort of broadly stabilized. It has stabilized at a level which was slightly lower than last year, and we are seeing more everyday sales going through, but that's partly because we've got more products on everyday low pricing in any event. Just from a GP perspective, and the split between CODB and GP for Smarter Selling, we did say, I think, at the outset of Smarter Selling, that there was broadly going to be a 70-30 split between CODB and GP. So that's partly the rationale or the reasoning behind some of the improvement we saw in GP in F '20. Clearly, we're still working on more programs that are around logistics and other things that will come into that as well, but we are also investing -- continuing to invest in value as well.

I mean are you seeing -- are you extracting Smarter Selling cost savings or is what's going on in Melbourne making that very difficult to do right now?

Yes. Look, we've announced $250 million for the year. The program is marching on. There's a very exciting slate for '21, and we're working on what '22 and '23 looks like in more detail. Clearly, we're trying to get as much done as we can. The rules and regs change every week, as you probably know. And we're now sort of probably going a bit slower on some of the construction here in Melbourne, but that is just something I think we've all got to live with and accept that we're in a rapidly changing environment. When we do see panic buying or increased demand, the GP does increase, but that's only in the state that it happens in.

Great. Okay. And maybe my other question would just be around sort of convenience. Can you just remind us -- I believe when you announced the deal with Viva, it was broadly -- you were doing 60 million liters a week, you're breakeven and you needed to do 75 million liters a week to get to $50 million EBIT. This is all pre-AASB. So we should envisage, if June continued, which was around 53 million liters a week, you're actually losing money in convenience. Does that volume, EBIT trajectory and sort of alignment still hold on a pre-AASB basis, please?

Yes. That's approximately correct, yes.

Okay. And just finally, what was your online exit rate at the end of the half, please? Online as a portion of sales?

What we said was that excluding the pause that we did, we'd have been growing at about 30%. So you should be able to work that out. It's around about 4% of sales. And then what we also said on the call, the media call earlier, is that we're currently sort of trending towards that 6% mark in the first 6 weeks of the current year.

6% of supermarket sales, yes.

The next question is from Michael Simotas from Jefferies.

Can we talk a little bit more about the COVID-related costs in supermarkets? Just trying to understand exactly what's included. And just a couple of things that you've called out. So lower utilization of annual leaves which has led to an increased provision, whether that's included in your COVID costs. And also, there's a comment, unsurprisingly, that mix shifted away from mall and CBD stores as well as resort towns, whether there are incremental costs associated with that, that are included in that COVID cost bucket as well, please?

Yes. So in terms of what's in the $170 million, let me just talk through the big buckets for you. So far and away, the biggest bucket in there is store ren and expenses. So that covers things like the addition of door greeters to every store, additional service that we've put in, particularly into the self-service areas. And then the cleaning routine that we've put into store. So that is our biggest bucket. The second biggest bucket after that then is the thank you payments that we gave to all of our store team members and DC team members as well. And then we get into a number of other things. So the unused annual leave, which you raised, that is included in our COVID costs because we would typically see a certain run rate of annual leave, which draws down on the provision. When we're not drawing down on that provision, then we're paying it as salary costs. So it is a direct cost into the business. We would be thinking about that as more of a one-off because our hope is that, that could reverse as the restrictions start to leave -- lift, and people are more inclined to go for a holiday or here in Victoria, I should say, even able to take a holiday. The fourth bucket, I called out was the double team member discount that we provided over the period of a few months. Then we're down into things like logistics. So there is additional cleaning in the DCs. We did have some additional costs associated with the positive cases in Laverton, which resulted in increased agency costs and line haul in the latter part of the fourth quarter. And then there's a bit of stuff in there around the introduction of the sanitization stations, the Sneeze Guards, some ad hoc marketing that we've done and then some costs associated with actually managing the business continuity process that we run. So there's a lot of bits and pieces in there, but the biggest ones are the store ren and expenses, the thank you payment, the double team member discount and the unused annual live. So then moving to the second part of your question, which was around the different performance that we're seeing in the store network.

Yes. I might take that one. Hi, Michael. The variance is quite pronounced. I don't think I've ever seen anything quite like it. If you look at our top 50 stores versus our bottom 50 stores, the variance is extraordinary. You can be talking about a 50 -- a down 50 type thing at its peak. The broad dynamic is that CBD stores, as you'd expect, are trading down. Resort stores outside of Victoria are gradually recovering. Shopping centers are still soft and, obviously, in decline in parts of Victoria. And the best performing cohort is the neighborhood stores. And when you look at our mix of stores, we probably have, as a percentage, more shopping center stores than most. And so that's something to factor into your thinking.

Okay. Great. And then the second question is just on the debt. So debt's down to $362 million. At the time of the listing, we were sort of talking about a capital structure that would accommodate $1 billion. And there was a bit of criticism or concern at the time that there wouldn't be enough cash flow to support dividend payments. So well done for proving us all wrong on that. What's the right capital structure for this business going forward given the CapEx envelope that you've got coming?

Look, I mean at this stage, our focus is really on maintaining a strong balance sheet. We are at a point, I think, in our evolution where we're going to be talking about any form of capital management yet, and that would be a decision for the Board anyway.

The next question comes from Andrew McLennan from Goldman Sachs.

I just wanted to discuss the online sales trends in a bit more detail. I know that some -- I think it was around the timing of the third quarter update, you mentioned you're increasing capacity for Click&Collect versus delivery. I'm just wondering if you can talk about the relative performance particularly over June and July of both Click&Collect and delivery and just how you're going versus capacity, please?

Yes. Andrew, the -- both home delivery and Click&Collect are sort of working well. But Click&Collect is ahead of home delivery. And really, what we've done is sit on more drivers. We've managed to work with landlords to open up more concierges, which is contactless, Click&Collect, which is broadly to the boot of your car. And obviously, we've recruited more pickers in store. So we've seen quite a significant increase in capacity. Obviously, we're doing contactless delivery. But yes, the whole online piece has seen some extraordinary growth post the Stage 4 lockdowns in Victoria, albeit that we are seeing elevated demand in other states as well, but not big -- quite as big.

So the 60% trend, if you looked at -- on an ex Victoria basis, would it be similar to the 30% run rate you mentioned earlier?

No. I think a bit higher than that. And particularly in New South Wales.

Yes, yes, yes. Okay. Now I also wanted to just go back to the cost-out program. Obviously, you've beaten expectations with now the target being in excess of $250 million. So a great effort there that's giving you a strong tailwind on costs when there are so many other incremental costs coming through. Can you just clarify, though, I just wanted to make sure that you're not providing any guidance here, but just around '21, what expectations for incremental cost-out are anticipated for fiscal '21? And then secondly, you have also mentioned the sort of the duplication costs that start to play -- that come into play in '22 and '23. Just wondering how you're thinking about your cost-out versus those incremental costs to sort of give an idea of what the net impact could be?

Yes. Thanks, Andrew. So for FY '21, our plan is to do a level of cost out that's broadly in line with what we've delivered in FY '20. Now the one health warning I put on that is that, that is somewhat dependent on our ability to execute those initiatives in a COVID-19 environment. If we ended up with other states in a Stage 4 lockdown, that would start to provide some challenges on that front. But in terms of what we are planning, that is what we are planning. In terms of how that feeds into then the additional OpEx associated with the Witron and the Ocado build, which is I think the second part of your question. Is that right?

Yes, that's correct. Yes. Yes.

Yes. So we don't really think of those 2 as sort of interchangeable or related. So the Smarter Selling is about taking sustainable cost-out. Those OpEx charges are really sort of -- they're going to be relatively one-off in nature over a couple of years while we execute the project, and so they form part of that business case and will be an impact on our P&L in those years.

Yes. Got you. And so just in terms of the expectations for '21, you said in line with '20, you initially anticipate $150 million, you're now sort of talking $250 million. So is the plan to take an incremental $150 million out of the cost line or $250 million?

I think the FY '20 number that we announced sort of 12 months ago was in excess of $150 million and what we've delivered is in excess of $250 million. What I'm saying is for FY '21, our plan is to do a similar level to what we have achieved in FY '20.

The next question comes from Richard Barwick from CLSA.

I just want to go back again, looking at the sales growth, obviously, your -- it sounds like you've really accelerated with your like-for-like for the first 6 weeks, which would have been boosted somewhat by the strength in the online. Are you able to give a view as to what the like-for-like is looking like if you backed out Victoria? Because it does sound like if Victoria is spiking your online and then your online is really providing a material boost to the like-for-like. Yes, there's a big gap between Victoria and the rest of the country

Hi, Richard. Thanks. Thanks for that one. What you might recall from the last time we reported Q3 was that we'd said that we were experiencing a bit of a subdued Easter, and that was definitely the case. There wasn't very celebratory anywhere, I don't think. But what we saw post that was we saw a gradual improvement in sales throughout the rest of the quarter. And I think that was partly people getting back to shopping centers and so on. And you've seen that the overall comps for Q4 were around about 7%, which, at the time, was fairly evenly distributed across the country. So I think you can assume that what you're seeing now is broadly the contribution from mostly Victoria, but also a little bit more in New South Wales.

All right. That's helpful. I just want to pick up on another point. You mentioned before, Steven, you said that you thought you probably got more stores in shopping centers than most. And I'm just going to draw that back to your target where you -- obviously, you're targeting sales growth at least in line with the market. And so you got there across FY '20, you talked about the 6.8 versus the 6.7. I mean, I don't know, just I was, I guess, assuming that you might have done -- performed better than that relative to the market. And so I'm just -- I'm picking up on that point. Do you think that's a reflection of your location of stores, if you are over-indexing in supermarkets -- sorry, in shopping centers, and that's creating just a bit of a relative drag for you at the moment? Just be interested to hear your thoughts on how you might explain that.

Well, it's been a it's been a tale of 4 quarters and 2 halves, without wanting to state the obvious. And the first quarter was obviously cycling Little Shop, one. And you'll remember that was touch and go as to whether we could get over the line. And we managed to do that successfully, albeit not with a great deal of growth. And then what we saw is accelerating growth through to Christmas. We had a very good December and Christmas, and then we had a strong start to the new year in January and February. We then had, in my opinion, an outstanding March, and we took a view that we would focus on stores and try and serve as many customers as we possibly could do in the time of need, so to speak. And then what we saw, as restrictions kicked in, in Q4, was the move to local shopping, and that definitely impacted us vis-à-vis some of our competitors. But having said that, in other states, we've seen sales start to recover from where they were at that period in Easter. So if you stand back from the whole thing and say, what happened there then? Quarter-by-quarter, that's the running blow by blow account. If you looked at it in 2 halves, we gained, I think, a very small amount of market share in the second half, which was broadly up a bit in Q3 and then lost a bit in Q4 due to local -- the move to local shopping, which we expect to unravel over time. It's just a question of nobody knows what that over time is.

The next question comes from Grant Saligari from Crédit Suisse.

The outperformance on the Smarter Selling program was obviously very strong. I'm wondering whether you can actually elaborate on what you actually did additional to achieve the $250 million of cost saves and whether that was a bring-forward of activities? So basically, outline what was done in a little more detail. And what are the major cost save initiatives in FY '21 and FY '22 in terms of nature of activities that you need to change?

Yes. So I mean, one of the big things that we've obviously done in the last 12 months is to set up the central transformation offer. And that has got a lot more rigor and generated a lot more accountability and pace around the delivery of the program. And I think that, that, from a structural and cultural perspective, has definitely helped. In terms of the sort of significant buckets in there, the sort of the top 5 I'd probably call out is the streamlining of the SSC, the removal of 450 roles from the organization. The second would be the work that we've been doing with the logistics optimization. So the most significant component of that has been increasing the backhaul, which has really been facilitated by the establishment of the transport hubs. Bringing together our supply chain and ops under a single point of leadership is also enabling us to really drive quite a bit of end-to-end productivity benefits as well. So getting agreement to move to things like full pallet picks out of the DCs that are just delivered into store and then adjusting frequency of delivery of orders on ambient lines, but enabling us to offset with a little bit higher frequently on fresh, overall, gives us a better cost position. And then probably the other one I'd call out is some of the work that we've been doing in the energy space. So the replacement of a lot of the lighting with LEDs, looking at the way in which we purchase electricity and also some of the work that we've been doing in managing the energy load for refrigeration, which is obviously a very significant draw for us. So that's sort of the one for this year. And I think we called out last year that we expected the split to be about 30%, GDP; 70%, CODB, as Steven referred to earlier. In terms of what we've actually delivered this year, it's turned out -- it's around 35%, GP; 65%, CODB. So broadly in line with what we said, but a slight shift. In terms of the look forward, it's probably a bit facetious to say it's a little bit more of the same. But it is really looking at how do we continue to use technology to remove task in the business. So an example would be that's already entrained to be landed in this year is removing a lot of the paper receipting that we do at the DCs, for example, which require a person to be there, to meet the truck, take the paperwork, check the paperwork, automating all of that so that the truck just drives in and there's a scanning process, and they're on their way into the DC. That streamlines the operation substantially. And that would be a good example of we're using technology and automation to take out cost. We're continuing to do more work on energy and reduction of electricity. So this year, for example, we'll be looking to look at things like demand-based HVAC for the stores and things like that. And then a big focus, I think, as we go into this year, will be around the loss agenda. So rolling out to more stores, particularly as we, I guess, start to enter an environment that's a little more recessionary in nature. Things like the glass balustrades that we've put up in the front of stores that are particularly susceptible to high loss rates, security gates, anti-sweeping shelves, things like that. So there'd be some of the things that I would call out as the big initiatives over the next 12 months.

That's very helpful. Second question, if I could, just on online. It almost strikes me that you're trying to manage the rate of growth in your online. For example, your delivery saver option, which is the subscription option, is still not available. I wonder whether you can sort of comment on that, on the reason for that and whether you are actually somewhat capacity constrained in the delivery part of your online business and what can be done in the sort of near term to operate that?

Well, I think, Grant, it's fair to say that we are trying to manage these. So -- and online would be one of them. But clearly, the demand for online, at one level, is insatiable and it really depends on what the price and service proposition is. Clearly, in Victoria, you've got a slightly different situation at the moment where people or some customers are preferring not to go down to the shops and that's causing elevated demand. What we are trying to do is to lay on additional capacity in the most efficient way possible as we are on that journey now, as we've said before, on that 3-year journey into Ocado. And our main objective is to make sure that we have the right volume and quality of volume heading into that Ocado. And the Ocado world will be very different to the current one because you'll have almost perfect orders, and you'll have an extended range on offer. So the Ocado online shopping proposition is not the Coles online one that you get today. And obviously, we're clearly very cognizant of that, and we're trying to free up -- create a glide path in. With regards to the subscription piece, that is something that the existing customers are continuing to enjoy, but we haven't sort of rolled out anything further at the moment as we concentrate on the existing operations and trying to make that as good as possible for customers, and particularly new customers.

The next question comes from Ross Curran from Macquarie.

Two questions. Firstly, online. Are you able to give us a feel, in Victoria which seems to be hoping quite well at the moment, but the percentage of sales in Victoria that are online at the moment? And whether that can be used the reference point for where you can take capacity across the rest of the country?

Yes. Well, we've given you some facts and figures at the back of the release, I think, where we give you the number of stores or supermarkets across each of the states. And I think it works out that it's around 30% of -- just under 30% of the stores are in Victoria. So I think on the basis of everything we've told you, you might be able to work that out. But overall, we're heading towards 6%. And obviously, in Victoria, it's somewhere north of that. I don't expect that to stabilize at that level post-COVID. It will depend on how good the proposition is in terms of value and accuracy of pick and all of those type of things. But we do expect that it will also remain at levels beyond what we saw in FY '20. So hope that answers the question.

I might come back to it off-line. But maybe the second part, the $170 million of COVID spend, the $100 million of that is a recurring spend. If we're unlucky enough that the virus stays around for another twelve months, are you saying that we can expect $400 million worth of incremental costs over the full year? Is that the right way to read that from incremental virus measures?

Currently, we are at a run rate where it's about $100 million of extra costs in Q1 that we would expect. So let's -- we're going to have to all see what happens in terms of how the environment evolves from here.

But would that tail down? If what is -- if extra spend at the moment becomes normalized? Like, can that be offset over the course of the year?

Yes. I mean even throughout Q4, we were working very hard to optimize the costs. So we're using quite a bit of advanced analytics throughout the process to look at what numbers of the customers we were getting into the stores, so which stores needed additional staffing and additional cleaning and things like that. So it's going to be one of those things that we're going to have to manage very closely, and we are certainly paying a lot of attention to that. I mean, certainly, the variable costs associated with higher volumes, that will come down. But there is an element here, which is semi-fixed around -- we just need to have some of these in place while we're at a Stage 3 or Stage 4 lockdown. And so that's going to be dependent on where we get to nationally on that.

The next question comes from Bryan Raymond from Citi.

Just wanted to just unpack that 4% margin that you called out or similar to FY '20 margins, I should say, that you said. First of all, just the implied gross margin trajectory within that, are you still seeing about 30 basis points of gross margin expansion underpinning that? And then just secondly, within that question is, in the first half '20, you delivered 3.8% EBIT margin. So implicitly there, you've got about 20 basis points of expansion, if that's consistent for that same 6-week period. But obviously, I don't know visibility on what you generate in the first 6 weeks of FY '20. So I just want to understand how that -- how we should think about the year-on-year around that margin profile.

Yes. Well, I mean what I'd say is the GP at the moment is sort of fairly stable going into Q1. So as we've seen the promotional participation sort of recover from the period where there was lower availability within GP that's relatively flat. And then the key thing is the variable costs that we've got in terms of CODB, which would need to flow through at the higher rates of volume that we've got flowing through and then the additional sort of semi-fixed costs that we've called out related to COVID. And all of that is -- when we put that through the mix, that is getting us to an EBIT margin that we've observed in the first sort of 6 to 7 weeks, that it is broadly in line with what we've achieved for the full year.

Right. Okay. And then just on -- just a final question. Just so -- of your sort of cost that you called out, the $70 million -- so you have $100 million, which I totally understand; $70 million, you did call out, you've extended double discounts for the team through August -- or I just want to understand what that $70 million looks like into the first quarter. And I assume the $16 million is sort of rolled off now given that was sort of a bit of a one-off. So if you could just help me understand those 3 components.

So the double team member discount that we've put in place for Q1 or for the first part of the quarter is only for Victoria because that's the state that's operating under the Stage 4 restrictions and where we have higher amounts of COVID cases, which is approximately, as we've just sort of discussed on the previous question, just under 30% of stores. In terms of the $70 million, that's made up of things like the thank you payments, the team member discount, there's also some one-offs in there around, for example, some of the logistics costs associated with dealing with the cases that we had in Laverton, the OpEx that we had for things like the sanitizing stations, the sneeze guards, those types of things were all in that $70 million. So now that we've done that and spent that money, we won't be recurring it.

Okay. Great. And then just my second question, just on like-for-like. So you've seen -- I understand April was a softer month than, say, June probably that didn't look too different to what you're seeing in July and August. But just in terms of the composition of it, you've got inflation that slowed by about 150 basis points. And like-for-likes picked up from the full fourth quarter into the first quarter '21 by about 300. So you're seeing quite meaningfully better volume growth. I understand Victoria will be part of that. But just want to understand if there's anything else going on in that pickup in underlying volumes and how you think that compares to the broader market if you're taking share or is that sort of broadly in line with competitors?

Yes. It's probably a little bit too early to talk about market share in this current quarter. But we certainly did see a pickup from when the Stage 4 was announced in Victoria. We've seen a sort of improving position in New South Wales as well. Whether or not a supermarkets who offer online at the moment are gaining at the expense of other remains to be seen, but that's the other thing. Apart from that, I think we're all probably concentrating on trying to make sure that we've got back to where we want to get back to as far as availability and so on is concerned.

I guess mix is the other thing in that. Are you still -- is there much trading down occurring? Or are you seeing still pretty good mix effects coming through the business?

There's things happening at both ends of the spectrum, the tale of 2 cities, as we say. Our meat sales -- meat is the fastest-growing category and have been for quite some time as most people go to scratch cooking at home. If we look at the liquor business, as an example, spirits is the fastest-growing category by far. But across the piece, we're seeing also things like bulk packs. So big packs of beer in liquor. We're seeing everyday price products in supermarkets are growing. So I think it's difficult to sort of draw a conclusion from the average. It's really in the detail, which is -- there's a lot of things changing in consumer behavior, but that move to home cooking is still very evident. And it's also very evident that consumers are changing their repertoire of what they drink as well. So some -- a lot of interesting things happening in -- across Australia at the moment.

The next question comes from Phil Kimber from E&P.

Just first question was a clarification question. Earlier, I think Leah mentioned the way she triangulated the supermarket business. She got 3% to 3.5% underlying cost of doing business growth. I just wanted to check whether that was after the benefit of the cost savings or was that before the benefit of the simply -- simple selling (sic) [ Smarter Selling ] cost savings?

So the business that's Smarter Selling, that we put that in place is to offset the underlying cost savings -- the underlying cost increases that we have coming through in the business.

Yes. So that 3% to 3.5% is before any Smarter Selling cost savings? Because you said that when you backed out COVID and you're trying to do some adjustments, you got an underlying cost growth of 3% to 3.5%. I think that's what you said earlier in the call. And I just wanted to check that, that was before any Smarter Selling cost savings.

That's correct. Yes. It's the Smarter Selling [indiscernible] is having it in places to offset those costs that we got coming through.

Yes. I just wanted to double check that. And then the second question was just on the liquor outlook. Obviously, sales are incredibly strong at the moment, but your outlook commentary, you sort of alluded to some more price investment or investment in the offer? Sorry. I mean, is that really so that we should just be careful about applying the sort of flat margins on very strong sales growth numbers that actually you might reinvest some margin back into the business so profit growth won't be quite as strong as sales growth? Is that sort of where you're trying to direct us with those comments?

Yes. What we might do is hand over to Darren to talk about how he sees the next 6 months going in liquor in the various moving parts. Darren?

Yes. Hi, Phil. Yes, I think the first thing to say is it is a very volatile environment at the moment, so making any sort of outlook, I think, is difficult for all of us. The reality is our focus at the moment is going to be to listen to our customers and get on with this plan of delivering these 6 priorities, but we will be making the investments that we need to, to improve the business for the long term. I think it's probably important to remember that it's a multiyear plan. But we will be delivering -- or again, we're looking for sustained growth throughout that. But yes, we will have to make some investments in the short term.

The next question comes from Scott Ryall from Rimor Equity Research.

First of all, I wanted to say congratulations. You guys have done an extraordinary job, I think, in terms of keeping things stocked and selling during a very challenging period. I wonder -- I wanted to just ask a couple of things about that, particularly with the recent Victorian changes in restrictions. Have you seen any meat supply issues? You mentioned what an important category it is for you. Have you seen any issues with respect to supply and does that impact your export business?

Scott, thanks for the thanks. And yes, meat has been an interesting ride over the last 3 or 4 weeks. As we know from the Victorian government, there's a few hotspots out there of which care homes and meat facilities tend to be the hottest of the hotspots. We've worked with all of our suppliers over the last couple of months to sort of develop what are our best practice standards, as far as health and safety is concerned, and I think gone down pretty well with both the Victorian government, health department and our suppliers. But nonetheless, it is a higher-risk environment. And we've seen, I think, at any one time, 3 or 4 facilities go down in a similar period. And when they get closed down, they tend to get closed down for the full 2 weeks. The meat team is very agile, and we're mainly talking about -- in fact, we are talking about Victoria, not elsewhere here, although I think Victoria produces around 35% of the nation's meat supply. So it's one of the net exports, as I understand it. But what we have seen is patchy availability over the last few weeks. That's also extended into chicken from time to time. So certainly, the stores I've visited over the last few days are in the best position I've seen for probably 2 or 3 weeks. But there's no guarantees at the moment regarding COVID, and particularly COVID in Victoria. So it will be, I think, patchy. But at least if you go into store now, you'll be able to get meat. It might not be the exact thing you wanted, but it's gotten a lot better. And hopefully, all of the standards across meat production in Australia, and most notably in Victoria, are improving rapidly to minimize the chances of these outbreaks occurring.

Okay. Great. And then the second one is a little bit longer-term question. You've mentioned -- or you talked a fair bit about online today. And obviously, the Ocado stuff is well known, but I think you indicated that you've got a 3-year glide path on that front and, obviously, some near-term challenges. And 6 months ago, you probably didn't expect to be doing pop-up distribution centers and things like that. So I wonder if you could just comment on some observations and -- around what you had to do for online in the last 6 months that makes you change what you might think you require over the course of the next 3 years, if that makes sense.

Yes. No, it's a very good question. And obviously, we're in contact with other retailers around the world, most notably, the ones who are Ocado customers. Ocado now has a couple of sites up and running outside of the U.K. for the first time. So there's one Toronto, and there's one in Paris, and they've done a great job in getting those CFCs up and running. And it's fair to say that everybody is learning a lot. And if you speak to the Ocado team, they're learning a lot in the U.K. as well. They've simply not been able to keep up with demand in the U.K. and certainly thinking about which customers are the customer base that they would like to focus on going forward. As far as we're concerned, what we're looking at it is what investments do we need to make that are complementary to what Ocado does today and are not going to be regret costs going forward. And most of that is around the customer digital experience on things like the app and so on. So there's a lot of focus going into digital development, making the app easier to use from a store ops perspective. We're trying to make it an easier experience for the customer by moving to the boot as opposed to the customer service desk. So there's stuff happening everywhere, but we see it all as being complementary to whatever the Ocado experience is when it lands in 3 years' time.

At this time, we're showing no further questions. I'll hand the conference back to Mr. Cain.

Okay. Thank you very much, everybody, and thank you, Travis. I think if we were summing things up, it would be pretty much back to the headline that we've got, which is we're very happy that we've been able to deliver the first year of our strategy whilst also supporting team members, suppliers and community through droughts, bushfires and COVID. And we look forward to giving you further updates soon. Thank you. Take care.

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