Coles Group Limited (COL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Coles Group First Half 2021 Interim Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Steven Cain, CEO. Please go ahead.

Thank you, and good morning, everyone. It feels like Groundhog Day as we welcome again from a lockdown in sunny Melbourne, but I understand one that might be opening later today. Joining me on the call is Leah Weckert, our CFO; and Ben Hassing, our Chief Executive of e-Commerce, who will provide you with a strategic update as we promised last year. Before I get into the presentation, I'd like to make a few opening remarks. We've faced many challenges over the last 12 months, none more so than the second COVID-19 wave in Victoria. However, I continue to be amazed and I'm immensely proud of our team members, now classified as essential workers, our customers, suppliers and community partners who all pulled together to help us work through these volatile and unpredictable times. During the half, we saw many more Australians reunited and celebrating Christmas at home, and I'm pleased Coles was able to play its part through our Christmas ranges and summer entertaining barbecue range. While there are still challenges and uncertainties ahead, there are also opportunities for change. And I look forward to Coles and our team members serving the community and contributing as Australia continues its recovery. With that, I'll move on to the financial results. 18 months ago, we launched our refreshed strategy. Of course, no one then could have predicted what would happen with COVID 19. But despite the challenges, we've made significant progress on execution. With regards to the financial results in the first half, which were pleasing, total sales up 8%, EBIT up 12% and net profit after tax up 14.5%. We remain on track to deliver our $1 billion Smarter Selling program, and in FY '21, in excess of $250 million. And we'll talk more about that later. We invested gross CapEx of $532 million, which was up almost 40% on the prior half, despite the challenges of the extended Victorian lockdown. Operating cash flow of $1.7 billion, cash realization of 120% and a very strong balance sheet with net cash position of $38 million. For our shareholders, I'm also pleased to report a fully franked dividend of $0.33 per share, growing at 10% on the prior half. Finally, the safety of our team members and customers in-store is always a priority of ours. We measure this through our total recordable injury frequency rate, or TRIFR. And I'm pleased to say this reduced by 15% during the half following years of continuous improvement. In particular, we've been focusing on mental health programs with RUOK? Day; our GEM program, gratitude, empathy and mindfulness; and the support of Movember, which Coles customers and team members, we made Coles the largest-single contributor to Movember in November last year. I'll now go through the strategic pillars and talk about some of the progress that we've made there. So Slide 4, inspiring customers. As I've said, I'm delighted that we've managed to deliver so much for our customers over the last 6 months. Customer satisfaction up 3 percentage points -- or 3.9 percentage points, in fact. And in the second quarter, that reached 90.1%, which is a record for Coles, with significant improvements on most metrics. In terms of key initiatives, we celebrated 10 years of Down Down, one of the most famous value icons in Australia, lowering the cost of living for millions of Australians and still an important part of our program. We want to lead in e-commerce. We said that when we signed Ocado a couple of years ago. We call it "Anytime, Anywhere, Anyhow" shopping, and Ben will take you through the strategy shortly. It's pleasing in the half that we're able to see strong demand for online with B2C and Supermarkets rising by 61% and in Liquor by 90%. The Supermarkets number was especially pleasing given it was driven by underlying improvements in perfect order rate and customer satisfaction. We also led the industry in removing door-to-door catalogs and launched coles&co, which is resonating well with our customer base. We provided a tailored offers for customers with 340 range changes, including pet, paper and coffee. Trusted value was delivered by more than doubling the number of stores ranging Coles Best Buys to almost 200, allowing customers across Australia to access a broader range of great value, general merchandise products. Products such as the hibachi grill, fryer oven, leaf blower and fitness equipment all sold out within days. We also made significant progress in Own Brand with revenue growing by 10%, delivering $5.7 billion of sales. 11 Own Brand products won Product of the Year, including Coles Finest Chocolate & Hazelnut Mousse and Koi Jasmine & Sandalwood Hand Wash, which is very good, if you haven't tried it. We saw very high flybuys customer engagement, particularly in the second quarter with our MasterChef stainless-steel knives collectable campaign, which proved to be very popular with the many new home cooks out there. In Liquor, the refreshed strategy continues to be embedded with significant range change and 3 e-commerce dark stores opened to increase capacity, streamline order fulfillment and improve speed of delivery for our customers, supporting strong e-commerce growth, as we've said, of 90%. Finally, the rollout of our new self-serve coffee machines serving the award-winning Urban Coffee Culture blend has been completed to 99% of the Coles Express network, delivering strong sales results. Moving on to Slide 5. Smarter Selling. We're on track to deliver cost savings of $250 million in FY '21, and we remain committed to establishing a structural cost advantage. I won't go into the individual detail, but I will talk about the future. And we -- one of the changes of COVID is, obviously, customers started packing their own bags more during the year. And as a result of that, we've decided to change the packing benches in almost 300 stores to enable them to do that more effectively, which increases our team member productivity. In terms of our automation projects, the progress has been significant with the Witron projects under construction and Melbourne Ocado continuing and Sydney now underway. Supporting an efficient and agile workforce. We've mentioned this before, but we launched a new people and payroll system called myhub through our strategic partnership with SAP. myhub has replaced over 16 disparate people systems, providing a one-stop shop for all our team members. We also transitioned our Returnable Crates business to CHEP to drive increased penetration of reusable crates for Coles fresh suppliers, reducing cardboard packaging. Finally on Smarter Selling, our tailored store strategy continued with 30 supermarket renewals completed during the half, including 7 Format A, 10 Format Cs and 2 Coles Local, including Coles Chatswood, which has some great sustainability features that I'll talk about shortly as part of our final pillar, Winning Together. Moving on to Slide 6, Winning Together. The Coles Local Chatswood that opened during the half featured innovative sustainability initiatives, including trolleys made from recycled plastic milk bottles and RED recycled (sic) [ REDcycle ] plastics, free recycled carry boxes and team member uniforms featuring part-recycled materials. We entered a 10-year agreement with CleanCo to source more than 90% of Queensland's electricity requirements from renewable sources from July '22. We partnered with Victorian recycling organizations RED Group and Replas to pioneer a concrete slab carpark made partly out of recycled soft plastics that comes from the REDcycle bins available in all supermarkets. We collaborated directly with more Australian dairy farmers in WA to supply Coles with fresh milk for Coles brand. This brings the total number of Australian farms directly supplying milk to Coles to almost 60 across 4 states. This gives these farmers longer-term contracts and greater certainty so that they can invest in improving the sustainability and productivity of their farms. We also had our most successful Christmas fundraising campaign ever with $3.2 million raised for charity partners, SecondBite and Redkite, to help feed vulnerable Australians and support families impacted by childhood cancer, a fantastic result when we know so many Australians are going through hard times. We continued our support of Little Athletics with over $520,000 in grants donated to more than 150 little athletic clubs across Australia. And then finally, Prime Minister Scott Morrison included one of our team members, Gerren Lowe, in his annual Christmas card as an essential worker to celebrate those who'd helped during the pandemic. Gerren has worked for Coles for more than 15 years and is extremely popular in his home store of Coles Broadway in Sydney. Moving on to the next slide, our strategy tracker. We show this every 6 months, as you know. I've talked about most of the metrics that are in there. One of the ones we haven't discussed is team member engagement. That survey takes place later in the half, and we'll give you an update on that at the full year. The one metric that's worth calling out is around sales growth at least in line with market. As you can see, our relative growth has been impacted by the trend towards local shopping. And whilst there's much commentary about the impact of online, the trend to local shopping is by far a bigger impact on our business, and this is based on the fact that we have fewer stores than the competition and that our stores are more likely to be in shopping centers than the competition as well. We expect the situation to improve as COVID restrictions ease, and we have seen market share improving on the run into Christmas. We'll continue to report our progress at the next update at our full year results in August. With that, I will shortly hand over to Ben Hassing to take you through our e-commerce strategy. Just a little bit of background, Ben has been testing our remote working policy to the limit. He's been in San Francisco, and it's interesting that the Internet connection from San Francisco can often be better than the Internet connection in Melbourne. But anyway, a warm welcome to Ben. He's here now with his family in Melbourne, and he's making a big difference with the team. So Ben, over to you.

Thank you, Steven. It's great to be here today. Since joining Coles over 8 months ago, it's been an exciting time with so much change. I've learned about the business from our team members and customers, and that's been fed into our plan here. I've also been able to see Coles in action and our team members' amazing response to the challenges presented with COVID-19 in the first quarter. Prior to joining Coles, as you said, I was with Walmart for almost 17 years with my most recent post in China, leading their e-Commerce and Technology divisions. I'll move to Slide 9. Now Coles has had a rich history in online, and first, launching home delivery in 1999. As we enter our third decade, we expect to see more transformation than ever before. We will continue to enhance our offer and capabilities to deliver the best customer experience as Australians further embrace digital shopping. I'm now turning to Slide 10. Steven and the Coles leadership team have set a very clear strategic direction based on 3 key pillars: as Steven said, Inspiring Customers, Smarter Selling and Winning Together. Our e-commerce strategy at Coles builds on these 3 pillars and is very much a part of the overall strategy. We pride ourselves on being customer-obsessed and doing so in a way that also adds value to the Coles Group. We seek to inspire our customers to shop "Anytime, Anywhere, Anyhow." First, by creating a seamless and unified customer experience. To activate this, we are connecting e-commerce and content, and then we'll begin merging online and off-line into a unified experience. We're also focused on providing our customers with an offer that is uniquely Coles by launching new services that we will continue to evolve over time. All of this is enabled by delivering through speed, speed in design, speed in development and speed in delivery. We do this as One Coles team and not a separate silo within Coles. I'm now turning to Slide 11. Now the Australian customer behavior has been changing over the years, and COVID-19 has certainly accelerated the trend of digital and e-commerce being an important part of the grocery shopping experience. We see more and more customers engaging with us digitally, whether it's to explore [ various ] products and content on our apps and websites or to use online services in the form of Click&Collect, pickup or home delivery. These digitally engaged customers are very, very important to Coles. We find they're more loyal, they shop with Coles more frequently, and they have a higher participation rate in flybuys. Let me turn to Slide 12. The vast majority of Coles Online customers do not just shop online. But rather, we see these customers shopping both in-store and online. Omni-channel customers, customers that shop both in-store and through digital channels spend much more in total with Coles. In our most recent quarter, our omnichannel customer spent 2.1x more in total with Coles than did customers that only shop online or those that only shopped in Coles stores. This is a fast-growing customer segment for us. The year-over-year growth in total spend with Coles is much higher as well. That is why having an omnichannel approach is an important part of the strategy. And now on Slide 13. Recognizing this trend, we are working to build our digital capabilities to be more integrated and customer focused. For example, today, we have 2 separate websites: one for content and one for commerce. Our Coles app offers amazing content such as coles&co, our digital catalog and much more. But our customers are unable to make e-commerce transactions for home delivery or Click&Collect there. We are merging commerce and content onto coles.com.au and the Coles app in the second half of this year, and that's going to provide a seamless experience for the customer. We are also delivering omnichannel enterprise capabilities that give us 360-degree view of customer, of product, of order and more. Another critical capability is how we deliver and innovate at a fast pace. We've begun to structure our teams and our way of working differently that will allow us to move with more speed. Turning to Slide 14. The online grocery proposition has a number of unique characteristics that make it different from other retail categories. For example, the average basket size, it contains more than 50 items. So there are different problems we need to solve for than the ones you might find in a discretionary category in online. We've looked to remove friction from our customer experience in 6 key areas in what we call simply the [ 6 Its ]: Have It, Find It, Display It, Price It, Fulfill It and Support It. For Have It, we want to make sure the customer has access to the same product range that they would expect to find in-store. And we also want to make sure that, that is available and it's in stock for the customer when they shop online. For Find It, we want to ensure the customer can quickly build their basket, saving them time while they shop online. For Display It, we want to make sure that when the customer lands on a product page and they're making a decision whether or not to purchase the item, that they are well informed and also inspired by the product content. For Price It, we want to make sure that we are competitive in the market, first and foremost, but also that our prices are consistent with our brick-and-mortar stores. For Fulfill It, we want to make sure customers get exactly what they ordered in the time that they expect. We offer 2-hour, 4-hour, 6-hour windows, and it's really important to the customer we deliver in full and on time. It's also important for the Click&Collect customer that they don't wait a long time while getting their order placed into their car boot. Lastly, Support It. Some of our customers want to engage with us while they are shopping online or after the order has been fulfilled. Having a great customer care experience is extremely important, especially in this market. For each of these [ 6 Its ], we have built data capabilities to quickly identify the exceptions and solve them at pace. It's basic, it's operational, it's cross-functional, but it's improving the overall customer experience in a meaningful way. Let me show you an example on the next slide, Slide 15. We monitor customer Net Promoter Score, or NPS, for Coles Online as well as we do for Coles stores. Our focus on the fundamentals in the [ 6 Its ] has begun to pay off. This is while the business is ramping up at great pace, due to the additional demand that we came to in the second wave of COVID-19 in the first quarter. One of the [ 6 Its ] that we focused on was Fulfill It. And one of the key measures that we use for that is called perfect order rate. A perfect order is when we provide customers with all of the 50 or more items that they ordered without any substitutes, 0 damages and no returned items and that we deliver for them also within the time window that they expect. The bars represent the perfect order rate, which nearly quadrupled in the last 4 -- 3 quarters, again, in the context of the business ramping up in the first quarter from the second wave of COVID-19. As a result of this focus over the last 3 quarters, we've nearly tripled the Coles Online NPS. There's other examples that I could share across the [ 6 Its ], and we believe we can continue to improve the customer experience by being very, very focused here. I'm now on Slide 16. In this half, we've seen online liquor sales, as Steven mentioned, across all banners increase by 90% year-on-year. With support -- we support and Coles Online supports part of that growth, and we've integrated catalog, inventory and delivery into a single experience. The online shopping experience across all of the liquor online channels has been upgraded through the platform and through new personalization features. As Steven mentioned, supporting this growth was the opening of 3 dark stores in Victoria, Queensland and Western Australia. These changes to our network allow us to increase capacity, streamline order fulfillment and improve speed of delivery for customers. I'm now turning to Slide 17. And as I said earlier, we've begun to organize to deliver at a faster pace to our customer. Late last week, we announced the launch of Click&Collect Rapid to over 400 locations across Australia. For a $5 fee, a customer can place an order and have it available for pickup in less than 90 minutes with Click&Collect Rapid. We also offer new items to online assortment, including the very popular Hot Rotisserie Chicken, which, again, has been very, very popular with the customers. And we plan to add further convenience range with time. We've tested the proposition in late November, and we were very pleased with the results and the feedback that we got from customers. So we quickly scaled up. Our store operations team adapted very quickly and executed flawlessly. We recognize that immediacy in online grocery is occasionally desired by our customers. Previously, our Click&Collect proposition, as well as those of others in the market, offered at best a 4-hour order to pickup turnaround time. We now offer 90 minutes. We learned in Q1 that we can add flexible low-cost capacity as well as delivery, and we will be building this into the future for this proposition. I'm now on Slide 18, excuse me. I'm pleased to announce that today is the national launch of Coles Plus, our new membership subscription that we've been testing by invitation only since November. Coles Plus provides members with a number of benefits at Coles Supermarkets and Liquorland. We wanted to keep it simple, very simple. For a monthly fee, the member gets access to any delivery slot. It doesn't matter which day of the week, the delivery is free. The Coles Plus member also gets unlimited access to immediacy without any fee via Click&Collect Rapid, our 90-minute order to pickup offer, as I mentioned. The Coles Plus member also receives 5-star expedited customer care, front of the line that these members would expect. We also extend 2x flybuys points as a benefit and a reward for these members as well as free delivery from Liquorland. Coles Plus members will see even more benefits beginning in March and there will be a lot more to come. We're very excited about the early results here. On Slide 19, we will continue to innovate for the customer as we prepare to launch our partnership with Ocado. On my way to Australia, I was able to spend some time with Tim Steiner and the Ocado leadership team in London. And let me tell you, I'm really excited about what we will do together in Australia. The Ocado CFCs offer benefits a store-pick model can't match. First, the customer will have access to more selection as we carry more range in a central location. Second, the customer service, especially through perfect order is -- perfect order rate is significantly enhanced. Lastly, the CFCs allow us to optimize assets such as inventory, both the breadth and the depth as well as our overall network assets. We're also learning a lot from Ocado's retail partners across Europe, North America and Asia. And we look forward to bringing these differentiated capabilities to the Australian market together. As Steven will have mentioned, construction at the Melbourne CFC is continuing and construction at the Sydney site is underway. So in sum, we have good momentum today. It's resonating with our customers. It's also resonating with talent in the market as we continue to bring in diverse and experienced leaders to be part of this journey. Thank you for the opportunity to share a bit of what's happening with Coles Online. I'm happy to take questions at the end. But for now, I'll kick it back to Steven and Leah to close this out.

Thank you, Ben, and good morning, everyone. I'm now on Slide 21, which shows our group results. First of all, I'd just like to note that we have fully transitioned to AASB 16. So all of the figures in the presentation are now on a post-AASB 16 basis. For those of you who are interested, we have provided some pre-AASB 16 numbers as an appendix to the results release for comparative purposes. As you can see on the slide, sales revenue increased by 8.1% to $20.4 billion. Group EBIT grew by 12.1% to $1 billion, and group margin expanded by 18 basis points to 5%. Net profit after tax increased by 14.5% to $560 million, and basic earnings per share also increased by the same amount. As Steven mentioned, the Coles Board has declared a fully franked interim dividend of $0.33 per share, an increase on the interim dividend of the prior period of 10%. Moving now to Slide 22 and the segment financials. I'm pleased to report sales and EBIT growth across all segments. In Supermarkets, sales increased by 7.3%, driven by the successful execution of the Christmas campaign, range changes, strong growth in e-commerce and increased in-home consumption associated with COVID-19. Supermarkets EBIT grew by 14.4% to $903 million, on the back of higher sales and supported by the continued Smarter Selling program and strategic sourcing. Despite additional COVID-19 costs, 31 basis points of EBIT margin expansion was delivered for the half. In Liquor, revenue growth of 15.1% was driven by strong performance across all banners, channels and categories. But we saw particularly strong growth in e-commerce, spirits and RTDs and in the larger format stores. Liquor recorded EBIT growth of 36.8% to $104 million, with higher sales offset by margin deterioration from mix as a result of COVID-19. Express revenue growth was driven by tobacco, forecourt sales and the drinks category, which was supported by recent investments in fridges and targeted range reviews, bringing in healthier drink alternatives. Sales growth was also supported by improved momentum in Victoria following the easing of the government-imposed COVID-19 restrictions. Express reported EBIT growth of 14.3% to $32 million, which was supported by the strong convenience store sales and good cost control in the half. The Other segment recorded net costs of $19 million for the year. Corporate costs were $39 million with a year-on-year increase driven primarily from market-wide increases in insurance costs. Corporate costs were partially offset by earnings from property operations of $20 million which, as we said at the full year, are expected to be largely first weighted -- first half weighted in FY '21. Coles' 50% share of flybuys net result was 0 for the half. I'm now turning to the operating cash flow on Slide 23. Operating cash flow, excluding interest and tax, was $2.2 billion with strong cash realization of 120%. This reflects strong trading performance and a working capital inflow of $221 million, largely driven by the timing of the half year end, resulting in fewer payments in the first half of FY '21 compared to the prior corresponding period. This is expected to reverse in the second half. Despite the unwind, we are targeting cash realization of greater than 100% for the full year. The change in provisions that you can see on the slide is a result of higher employee entitlement provisions with fewer team members taking leave, both annual leave and long service leave, during COVID-19. I'll now take you through capital expenditure on Slide 24. Gross operating capital expenditure on an accrued basis increased by $216 million year-on-year to $532 million. The step-up in CapEx was driven by our renewal programs in both Supermarkets and Liquor as well as growth and efficiency initiatives. Within Supermarkets, capital expenditure was incurred in relation to 11 new stores that were opened during the half as well as investments in the store renewal program with 30 stores renewed. CapEx was also spent in relation to in-store investments, for example, on loss prevention measures as part of the Smarter Selling program as well as investments in the supply chain modernization project. Liquor capital expenditure focused on new store openings with 20 stores opened in the half, while investment in First Choice Liquor Market conversions continued. Finally, we reported a net property inflow of $24 million on an accrued basis. Divestment income reduced compared to the prior corresponding period, which, if you'll remember, was a particularly active half for us. Turning to the balance sheet on Slide 25. As at the 3rd of January, we reported negative working capital of $1.3 billion, capital employed of $11.1 billion and net assets of $2.8 billion. We maintained a strong balance sheet with investment-grade credit metrics, which will provide flexibility for future growth. If I start with working capital of negative $1.3 billion. Working capital improved by $496 million compared to the prior corresponding period. As I already mentioned, this was largely as a result of an increase in trade and other payables, which were impacted by the timing of month-end payments compared to the prior corresponding year. Capital employed remained relatively stable with higher right-of-use assets as a result of the recognition of reasonably certain lease options being offset by higher employee provisions, which I've already discussed. Inventory days decreased compared to the 5th of January 2020, with the change -- with the impact of the change in the recognition of duties and taxes on tobacco inventory and the removal of fuel inventory more than offset by the business being able to successfully manage inventory levels through the periods of heightened demand as a result of COVID-19. The above factors as well as the timing of the month end payments also impacted the trade payable days. Turning to Slide 26 on capital management. Coles retains its existing annual dividend payout ratio target of 80% to 90%, franked to the maximum extent. The Coles Board has declared a fully franked interim dividend of $0.33 per share, a 10% increase on the interim dividend of the prior period and with a payment date of the 26th of March 2021. We reported net cash of $38 million, and the weighted average drawn down debt maturity was 7.4 years as at 3rd of January, with undrawn facilities totaling $2.4 billion. In August 2020, Coles issued AUD 450 million medium-term notes, comprising $300 million 10-year fixed rate and $150 million 5-year floating rate notes. The 10-year notes were priced at a coupon of 2.1%, and the 5-year notes were priced at a margin of 0.97% over the 3-month BBSW. The proceeds of the notes were used to retire existing bank debt facilities. Coles continues to be committed to retaining diversified funding sources and to extending the debt maturity profile over time. And finally, on credit ratings, we remain committed to solid investment-grade credit ratings with S&P and Moody's. I'll now hand back to Steven, who will make some concluding comments.

Thank you, Leah. Regarding the outlook, over recent months, Australia successfully managed to avoid large-scale COVID-19 outbreaks. However, short-term outbreaks have impacted a number of cities and communities Australia -- across Australia, as is the case in Victoria this week. Depending on COVID-19, depending on vaccine rollout and its efficacy and a number of other factors, sales in the supermarket industry may well moderate significantly in -- or even decline in the second half of FY '21 and into FY '22. Coles will be cycling elevated sales from COVID-19 in Supermarkets late in the third quarter, for the remainder of the second half and indeed for most of FY '22. Obviously, what we saw was pantry stocking, people working and eating from home, customers shopping online and more Australians in Australia due to border closures. While the outlook remains uncertain, the following trends are likely. We'll see some reversal of the local shopping trend as customers become more confident in shopping in larger shopping centers and to some extent, CBDs. We'll see increased movement as COVID-19 restrictions ease, which will help restoration of fuel volumes closer to pre-COVID-19 levels. We'll also see benefits of recent improvements in both unemployment numbers and consumer confidence, maybe partly offset by a reduction in fiscal stimulus measures introduced during the height of the pandemic very successfully. Perhaps most importantly, we're going to see reduced immigration for quite some time. This reduced immigration has underpinned population growth for decades and has been a major contributor in driving Supermarket sales in that period. Supermarket comparable sales growth has continued to moderate and in the first 6 weeks of the third quarter was 3.3%. However, there continues to be significant variation in sales performance between states, store locations and week-to-week as a result of customer shopping trends as well as any short-term outbreaks that have occurred around the country. In Online, sales growth has moderated to 37%. As the business begins to cycle the COVID-19 impact in the second half of FY '21, Supermarket sales and EBIT growth are expected to face challenges relative to the prior corresponding period. Based on the current operating environment, Coles expects to incur COVID-19 costs of around $10 million per month, with the majority of costs to be related to store remuneration, cleaning and hygiene. In Liquor, sales remained elevated for the first 6 weeks of the third quarter, with comparable sales growth of 12.6%, cycling the impact of bushfires in the prior corresponding period. Consistent with Supermarkets, Liquor will also be cycling the elevated sales due to COVID-19, which will represent challenges given the fixed cost nature of the Liquor business. Investments in service and capability as part of Liquor's refreshed strategy will continue in the second half. In Other, as outlined in the FY '20 results, net earnings from property operations are expected to be weighted towards the first half. Gross operating capital expenditure for the full year is now expected to be approximately $1.1 billion, revising previous guidelines of approximately $1 billion. The additional funds will be used to invest in opportunities that have arisen out of COVID-19, including Coles local acceleration, e-commerce and operational efficiencies such as the customer packing benches, which we talked about before. Finally, Coles store network and format renewal program for FY '21 remains unchanged, with plans to renew approximately 65 stores and to open the range of 15 to 20 new stores over the course of the year. Thank you for listening. Before handing over to the operator for Q&A, I'd also like to mention that we look forward to providing you with an update on progress made on our strategy at our Strategy Day on Wednesday, the 9th of June, hopefully in Melbourne and hopefully in person, depending on COVID and so on, where you'll also get the opportunity to meet the executive leadership team. With that, I hand back to the operator. And Leah, Ben and myself, happy to take any of your questions. Thank you.

[Operator Instructions] Our first question is from David Errington of Bank of America.

Yes. Steve, straight into the sales numbers, I'm trying to work out to mine. Market growth was 10.6%. Your growth was 7.3%. I mean it's strong numbers, but you are behind the market. I'm trying to work out whether that is a red light or whether it's a green light of opportunity. Now you called out the fact that your store network is a little bit disadvantaged and that you should start winning that back. But you also had the benefit of online sales in that first half, which ALDI and the independents would have struggled to keep up with. I'm trying to get what the sense is. Is that a threat that something is not quite gelling in the stores, that you're under as the market? Or is this an opportunity for you to catch up once we start to normalize? And I'm sort of like scratching my head as to which one it is at this present time.

David, thanks for that. I think we sort of look at it, there's more of an opportunity, which is going into COVID, we were, I think, leading the market. And then what we've seen is as there's lockdowns, we lose share faster than anybody else. And then what we've also said in the results is that we show market share improving through to Christmas. Certainly, in our analysis, the majority of that delta is due to local shopping rather than anything to do with online.

Okay. Well, second question is, I mean, Ben gave a really good presentation. And the online fulfillment, the perfect order, you're really improving significantly. But I raise my eyebrows as to why the online growth fell to 37%. And I suppose that flows into your like-for-likes falling to 3.3 in those first 6 weeks. You seem to be doing a lot of things right, yet the drop-off in the sales in that first 6 weeks. What's happening out there that's caused that? Is that market? Or is there something there that's just not -- because Ben's presentation was excellent. That perfect order was really impressive, yet for the online growth to drop to 37% in the 6 weeks and your like-for-likes to drop, there must be something going on. Can you give us a little bit there that might unearth that as to what's happening? Is it market? Or is this something in Coles there?

Okay. Thanks, David. By the way, Ben is looking very pleased based on that feedback. So thank you for that. The -- look, there's a couple of things that we've picked up and probably need to discuss in more detail. I think first of all is that we were in bushfire season this time last year, and we did see through that first quarter an improving sales trend at Coles, which we've talked about before. And that impacted Supermarkets positively and Liquor negatively, as you might recall back then. What we've seen within the numbers is quite an interesting change in Victoria, in particular, where there is softness. And it looks as though during January and beyond, a number of Victorians have gone to Queensland, which is perhaps not surprising. We've also seen a shift from metro Victoria to rural Victoria. And then what we've also seen is the fact that Victoria was one of the biggest, if not the biggest, beneficiary of overseas immigration, and that's about to start being cycled as well. So in most of the country for the year, the positive impact of Australians being in Australia has offset the lack of tourists and immigration. But with Victoria, I think it's facing some real population headwinds from a number of factors. So Victoria is very soft. And we are -- more of our sales percentage comes from Victoria than any of the other major supermarkets. So that's one thing to bear in mind. The second important element is produce deflation. So we ran for most of last year with fairly high produce inflation. And you'll be aware of a number of factors driving that, not least of all the bushfires, the drought and COVID. What we've seen is that reverse, and we're expecting it to maintain and to be in deflation for quite some time. And that's driven by mostly double-digit sort of declines in a lot of vegetable categories. So I'd sort of pinpoint it as being softness in Victoria driven by population trends and a big shift in produce inflation moving to deflation.

Our next question is from Grant Saligari of Crédit Suisse.

Steven, it was a strong result in absolute terms, but just a follow-on from that market share point on Supermarkets. You're attributing the market share loss almost solely to store location, store network and the effect of lockdowns you're pointing to. But if you actually look at the December quarter, your relative growth rate, relative to the industry, was no better than the September quarter. In fact, it could even have been a little bit worse than the September quarter. And in the December quarter, most of Australia ex Victoria was out of lockdown. And you're downplaying the impact of online, but say, $100 million worth of additional online sales, which could easily be the differential between you and Woolworths, that's worth 50 basis points in terms of growth. So I'd just be keen to understand what -- and you have changed a lot of other things in the business. You've changed the catalog. You're changing the ranging. So I'd just be keen to -- if you could provide some more proof points around the likely recovery in that revenue sales growth rate, the market share point.

Yes. I don't think I've really got materials to add, Grant, other than what I've have said, which is -- I'm not sure what market data you're talking about, but we get the -- we use the ABS data. And based on the ABS data, we had an improving market share going into Christmas. So I don't think there's anything more I can really add to that. And then based on our internal information, where we've looked at every single store location -- and as I say, we've got neighborhood stores that are up double digit. We've got CBD stores that are down 25%. Based on our store-by-store analysis, the biggest impact on our performance relative to the market is the shift to local shopping. And the reason for -- the additional reason to believe that that's the case is that the customer metrics are the best they've ever been across all of Supermarkets. So I'm afraid that that's all I can offer you based on all the work we've done.

Well, I guess the customer metrics are going to be the key ones. How quickly do you think you can catch up with these online initiatives? Because I know you're downplaying it a little, but there are sort of material differences in growth rate impacting the top line.

I think there's a bit of confusion out there as to whether everyone's online strategy is the same. It isn't. We made the biggest investment in online in Australia 2 years ago by signing up to Ocado. That is being built as we speak. And I don't know whether you saw the Ocado results last week. Did you manage just see them?

No, I didn't have a close look, Steven.

Okay. Well, have a look at the Ocado results from last week and see who is doing the best job in online in the world, and it's them. And so that's coming to Australia in FY '23. We made the investment. We're building them, and we're looking forward to having that as part of our differentiated online offer. So there's nothing I can do about bringing that forward, unfortunately. They've got 17 in build around the world. They've delivered 2 this year to Canada and France. They're performing extraordinarily well by all accounts. And Ocado is the most profitable online and best customer metrics in the world. So that's coming. There's nothing I can do to change that. We made that decision. I think it's going to turn out to be a good decision. What we then have to do is decide on how to complement Ocado in the non-Sydney metro and Melbourne areas. And that's what Ben has been trying to articulate today, which is he's building a team. We're building a plan around that. The main thing to do first is to make sure you've got strong foundations on which to grow. And even in the last few months, we've done Click&Collect Rapid. We've got the membership services launching today. There's been huge improvement in the customer digital experience, and that will continue over the next few years in the runway to Ocado.

Our next question is from Michael Simotas of Jefferies.

Sorry to continue to harp on about this. But can we talk a little bit -- can you hear me? Sorry about that. Sorry to harp on about it, but can we talk a little bit more about the like-for-like sales trends that you're seeing through the second quarter? I know it was only 4 weeks, but you started the quarter stronger than you ended the quarter. And it looks from ABS data like November and December were fairly strong months. So I just want to understand, when you say market share improved, do you mean that you were losing market share at a slower rate? Or you were, in fact, growing market share through that period as you approached Christmas?

No. We're -- as I -- Michael, the -- as lockdown happens, we are impacted more than anyone else because of the 5-kilometer rule because we have fewer stores than anybody else. So what happens is our market share goes down more. And then each and every time that's happened, our share starts to recover. And so what we saw was consecutive months of improving market share going into Christmas.

Okay. All right. So it's more directional than the absolute number. Okay. And then you had quite a good margin outcome in the Supermarket business in the first half. I mean obviously, it's always a balancing act in retail. But do you think you may have done yourself a disservice from a sales perspective by taking as much margin as you did? And could you have had a better sales outcome if perhaps you had reinvested some of that profitability?

I think when we look at our price indices, we're very well positioned, and in fact, probably the best we've been positioned in years. So I'm not worried about that. And in fact, we invested quite a significant amount in pricing alongside those improvements that you've seen. And we'll continue to do so, and we have done through the first 6 weeks of this quarter as well. So I'm not concerned about our price position. I think it's very strong. And so do our customers, by the way.

Okay. And investments outside of price around service and online, et cetera?

Yes. As I said before, we've got the strongest Tell Coles customer metrics we've ever had. We've never been over 90% before. And that's on all attributes, whether it's to do with service, pricing and so on. So our customers are very happy. However, COVID has, for a number of customers, changed their shopping habits, and some of them are coming out of that faster than others.

Our next question is from Shaun Cousins of JPMorgan.

Just a question on Smarter Selling. Can you just quantify the benefit of Smarter Selling, please, in the first half '21?

Shaun, it's Leah. So if we took the amount that we achieved for the full year last year, we are modestly above half of that at the moment for the half.

Okay. So full year, you haven't quantified it. Last year, you said you were above $250 million.

Correct. And so we're modestly above the halfway point on that for the half.

Okay. All right. Perfect. That's very helpful. And maybe another one for you, Leah. Just in terms of that CapEx going forward, should we anticipate this $1.1 billion style CapEx number to continue? Because while you've highlighted some of these are COVID initiatives, the local format of Chatswood is really good, and you should be doing more of that anyway, COVID or not. I'm just curious, just -- I'm just curious around your CapEx profile not only just in '21, but should we anticipate that it actually stays at this $1.1 billion number going forward for the next few years, please?

Yes. So we're going through the planning process -- the annual planning process internally and with the Board at the moment. So we'll be able to give a much stronger level of guidance on this when we get to the June Strategy Day. What I would say is that the business is in a very strong position. We've got a very strong balance sheet. We've got a net cash position. And we've got opportunities that are becoming available to us, which have strong returns and, we think, good investments for our money. But we are going to continue to be disciplined on capital on the go-forward and really require quite strong hurdles for that. But in terms of guidance around the number, we'll be able to give you that in June at the Strategy Day.

Our next question is from Richard Barwick of CLSA.

Can I just -- I mean you've given a great explanation for the move to local and so on and that actually being the key driver of the relative market share moves. But can you give us a sense of what that looks like for your portfolio? So for example, are you able to give a sales growth number or a like-for-like number for what would be a local or a suburban store relative to a major shopping center store?

Yes. Richard, I'll give you -- let me just get the facts out. I think -- so in -- sorry to start driving -- yes. So in the half '21, the neighborhood and freestanding portfolio were both in excess of 10% comps, whereas the shopping centers and so on were sort of flat, and the city centers were minus 25. Is that what you're asking for?

Yes, absolutely. That, to me, just brings that to life. And so then, really, what you're emphasizing here is it's your mix of stores across the portfolio that gets you obviously to the actual number. And so you're under-indexing in these neighborhood and freestanding stores relative to Woolworths, for example, then that's why your like-for-likes is going to be lower?

Yes. We have fewer freestanding and neighborhood stores than anybody else. And if I look at -- take 3 of our biggest stores in Sydney, for example, which would be World Square, Broadway and Bondi, they're all trading down significantly.

Okay. That's helpful. And then just for a bit more color on online, and I agree with [ others' ] comments that there's a great sort of background presentation to see what you're doing and where you're taking it. But I'd love to get a bit of an updated sense of the profitability through online. We know the -- obviously, the omni-channel shopper is doing double the level in sales. What can you tell us in terms of home delivery profitability versus a Click&Collect versus an in-store? Just so again, we get some sort of sense of relativity across the 3 types.

Thanks, Richard. Great question. So I mean as Steven and Leah have said in the past, I mean, the online business, it is profitable and has been profitable for quite some time. And certainly, as you get the additional unexpected growth that we had in online in the first half, that just is great from a profit standpoint. We don't disclose the absolute number, but it's a really good trend. I think longer term, as Steven mentioned, with Ocado, I would really encourage everybody to review their latest results. I mean it's industry best in class in online grocery EBITDA. But what our team is focused on is order/cost economics. We think there's still a lot of efficiency that we can get. And when you're focused on order/cost economics, you're agnostic to what is the demand as well as what is your fixed cost. That's where the real opportunity is. And that's where we're seeing some pretty good progress, and we have more to come.

Our next question is from Ross Curran of Macquarie.

Actually, Ben, I've got another question for you. Can you talk us through what you think success looks like for Coles Plus? How many customers do you think will sign up to that? And how will you adjust the program to be success or not?

We have -- a great question, too. I mean we have our own internal OKR or key measure of success for the absolute number. We're not planning to share that externally. What we learned in the tests was a very good customer or member feedback. I mean they really appreciate the service. They're going to appreciate it more as we continue to add member benefits, and it's going to be important part of the proposition. So the team is really encouraged by it. Again, it spans across not just the Coles Supermarket business. It includes Liquor. And we're going to continue to add benefits that's agnostic to brand, that's agnostic to channel. But we're really, really encouraged by the early response of the members and the retention rates that we had.

Can I ask about the monthly fee, the $19? How important is that fee to the overall metrics of the whole project? Is that key? Is the $19 what makes this work?