Coles Group Limited (COL) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Coles Group FY '23 Full Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Leah Weckert, Coles' Chief Executive Officer. Please go ahead.

Good morning. It's great to be talking with you this morning. I'm joined here today by Charlie Elias, our CFO; Matt Swindells, our Chief Operations and Sustainability Officer; Ben Hassing, our Chief Digital Officer; and Michael Courtney, our Chief Executive of Liquor. So before I begin, I'd like to acknowledge the traditional custodians of this land on which we meet today, the Wurundjeri people of the Kulin Nation. We acknowledge their strengths and resilience and pay our respects to their elders past, present and emerging. So it's just been over 3 months since I came into the CEO role, and during that time we have made some organizational changes with the appointment of Amanda McVay as our Chief Customer Officer; Michael Courtney as Chief Executive of Liquor; Anna Croft as Chief Commercial Officer, commencing in January. And there's also been some portfolio changes with Matt Swindells taking on responsibility for the program delivery of Ocado and leadership of our manufacturing facilities, Charlie Elias taking on responsibility for transformation and procurement, and Ben Hassing taking on responsibility for financial services and payments. I've also been traveling around the country and listening to our team and customers. I've now been to every state and I've met with state leadership teams and store managers and walked more than 100 stores. I've also been doing some customer listening through customer focus groups. The other big focus over the last few months has been working through a refresh of our strategy with the board and the leadership team, and I'll be giving you an overview of that today. In advance of an Investor Day we will go into more detail on it later this year. Today, Charlie and I will cover the full year result first and, and then I will take you through it at a high level the overall strategy and then finish up with outlook before we go into Q&A. So there's a bit to get through. Moving now onto Slide 3. In FY '23, Coles delivered group sales revenue growth from continuing operations of 5.9%, group EBITDA growth of 3.8%, and EBIT growth of 1.8%. Every year, there are a number of one-off items impacting results and of particular relevance to our underlying performance in FY '23 is the implementation OpEx for our 4 automated DCs and CFCs, as well as the $25 million provision relating to the 2020 Award Covered Salary Team Member Review. If these are excluded, on an adjusted basis EBITDA grew by 5.3% and EBIT grew by 4.5%. We experienced strong growth in our exclusive brand portfolio with exclusive brand portfolio, with exclusive to Coles growth in supermarkets of 9.6% and exclusive to liquor brand growth of 8.5%. We are continuing to make investments for the future and during the year we accelerated investments in our retail media business, which was launched as Coles 360 in October and achieved media income growth of 27% year-on-year. Another significant milestone was the opening of our automated distribution center at Redbank in Queensland. From a portfolio perspective, we entered into an agreement to acquire 2 automated milk processing facilities [Audio Gap] and completed the sale of [Audio Gap] the business. We also achieved our smarter selling target of $1 billion in cumulative benefits. On Friday last week we provided an update on the progress of the Ocado project. The New South Wales CFC is broadly on track with ramp up expected at the end of this financial year. Victoria has been delayed by 12 months with ramp up now expected mid FY '25. This has impacted on the expected costs to completion. As many of you have probably seen in the media and any information shared by the Australian Retailers Association loss has emerged as an industry-wide headwind and within Coles we have seen an increase of 20% year-on-year. Now I'm going to let Charlie cover the financials in more detail, so let's move straight onto Slide 5. Over the last few months I've had the chance to listen to many of our customers talk about the challenges they're experiencing with cost of living. We know from our research that our customers have become more value-conscious, with many worried about their ability to cover costs, particularly young families and those under 34. They're telling us they're reducing spend on things like visits to the hairdresser and beauty services, entertainment and gifts. Eating out, takeaway and coffees from the cafe are increasingly being seen as treats for a special occasion. As the shift to in-home consumption occurs, they are looking to the supermarket to help them do more with their budget. Unsurprisingly, they are looking for more specials, more affordable brands and more affordable cuts of meat. Many of them are meal planning, stretching out the time between purchases of less urgent items such as cleaning and household items. And they're looking to catalogs, loyalty programs and in-store markdowns to make their budgets go further. We are well-placed to deliver on what the customer is looking for. With over 6,000 own-brand products, everyday trusted pricing on more than 4,000 lines, hundreds of products have DROPPED & LOCKED, thousands of weekly specials and a Flybuys loyalty program. Pleasingly, we are seeing 2 other trends which support supermarket sales growth, population growth, which is now expected to be around 1.7% in FY '24 and the stabilization in our supply chain, which is leading to improving availability metrics. Availability improved from the first half to the second half in FY '23, and we have seen further improvements since the start of the new financial year. Moving now on to the next slide. There is no doubt that there are a number of industry dynamics at play. Three of the most significant for us are cost price increases from suppliers driving price inflation for the customer, rising wage costs and loss. While inflation and the number of cost price increases are moderating, there are different experiences across categories. Fresh produce is in deflation, whereas bakery and dairy remain at elevated levels of inflation. Wage costs will increase into FY '24 with the increased payroll tax in Victoria, which is captured in our remuneration cost line, which represents an approximately $20 million increase year-on-year. And June 2023 Fair work Commission increase of 5.75% plus the additional 0.5% superannuation guarantee has been passed on to the supermarkets team in full. Stock loss is at levels that we have not seen for a very long time, increasing in FY '23 as a result of elevated levels of organized retail crime and theft driven by the cost of living pressures our customers are facing. Turning this around is a key focus and it also provides us with a significant opportunity going forward. Moving now on to Slide 7. Over the last few years we have been making significant investments into our digital business. We have unified and migrated all of our customers to a single website coles.com.au. We have expanded and optimized our network, in particular accelerating the rollout of immediacy options in both Click&Collect and home delivery across both supermarkets and liquor with added key features to the Coles app, including digital receipts and enhanced filter function where you can now filter by brand, dietary allergens and bought-before characteristics. And we have integrated Flybuys' offers into the app and customers can now select their shopping method upfront. We continue to innovate with online Best Buys and the QuiteLike meal kit business which delivers healthy meal options direct to our customers. Loyalty and personalization also play a key role for our customers. Exiting FY '23, Flybuys' had over 9 million active members and a 30% increase in points redemption supported by activities to improve customer experience. Our subscription service in Coles Plus has also seen a 30% increase in contribution to e-commerce sales. Coles 360, our Coles media business, which we launched in October last year, achieved growth of 27% in media income year-on-year and is [Audio Gap] future growth going forward. Moving now to Smarter Selling on Slide 8. Another key achievement this year has been the billion dollars in cost savings delivered through our Smarter Selling program since FY '20. This program has been important over the last 12 months as it has contributed to offsetting cost inflation we have seen in areas such as wage costs and fuel. Key initiatives which delivered benefits included service transformation at front of store, advanced analytics to optimize markdowns, energy saving initiatives and productivity improvements in online and in store. Moving to Slide 9, where I'll provide an update on our major transformation projects. A significant strategic milestone for FY '23 was the opening of our first Redbank ADC. As we've said in the past, it will transform our supply chain and provide us with a strategic cost advantage with the first full year of benefits in FY '26 following ramp-up across both sides. The ramp-up at Redbank is progressing. At the end of FY '23, it was servicing just over 100 stores. This has now stepped up another 50 and is now servicing around 150 stores. At our site in Kemps Creek, New South Wales, initial commissioning work commenced in line with schedule. You can see on the slide the implementation operating expenditure we incurred in FY '23, which was slightly below what we forecast at the automation day in May, largely due to lower-than-expected transition costs. We are also now providing some additional guidance on transformation OpEx for '24 and '25, which you can see on the slide. Moving on to the update on our automated CFCs on Slide 10. At our quarter 3 sales results briefing, we flagged that there were delays affecting construction at the CFCs. We now expect the New South Wales CFC to commence ramp-up at the end of the second half and the Victorian CFC to commence ramp-up in need FY '25. This is the result of additional works required to rectify construction issues with the grid identified during quality control processes. Outside of the construction elements of the project, progress has been made during the year on a number of fronts with new vans commissioned, technology foundations being put in place, including trial orders being successfully processed through the system, the first bots on the New South Wales grid and product ranging work, including the fresh produce and bakery rooms, equipment and operating procedures underway. Turning now to Slide 11. Before I hand over to Charlie, I'd just like to cover some of the highlights we have delivered from a sustainability perspective. We have maintained our focus on reducing emissions and waste, making significant progress towards our target of 100% renewable electricity across our operations by the end of FY '25 and remaining on track to achieve this. We set a Scope 3 supplier engagement target at 75% of suppliers by spend have science-based targets by the end of FY '27, and this has been validated by the science-based targets initiative. We also reached a significant milestone during the year of having donated the equivalent of 200 million meals since 2011 through our partnership with SecondBite. This is such an important partnership for us, not only to reduce our waste in the store, but to help support and feed thousands of Australian families in need, which has become increasingly important in the current environment. In June, we phased out soft plastic shopping bags in store and online, a move that will remove 230 million plastic bags from circulation in 1 year. Safety continues to be a focus, and we achieved a 9% reduction in TRIFR year-on-year. Diversity and inclusion are also focused, and we reached our target to have more than 40% of our leadership positions filled by women. We now have 3.5% indigenous employment, and we were proud to be the sponsor of Sydney WorldPride. Pleasingly, we recorded our highest ever mysay engagement score in May. This was 3 percentage points above the May survey in 2022 and ahead now of the industry average, and 10 percentage points higher than the survey we conducted in FY '19. Finally, we continue to support our Australian producers to drive innovation and sustainability, awarding more than $3.6 million through the Coles Nurture Fund. We also achieved the fifth consecutive year of improved engagement on the Advantage Supplier survey through collaborations and building strategic connections with our suppliers. And with that, I'll now hand over to Charlie, who will take you through the financial results in more detail.

Great. Thanks, Leah, and good morning, everyone. I'm now going to turn to Slide 13, which is the group results. I will firstly talk to the results as a continuing operations basis. Sales revenue increased by 5.9% to $40.5 billion. EBITDA increased by 3.8% and EBIT increased by 1.8%. Adjusted EBITDA and EBIT from continuing operations, which excludes the major project implementation OpEx relating to the automated facilities as well as an additional provision relating to the 2020 Award Covered Salary Team Member Review would have seen adjusted EBITDA and EBIT increased by 5.3% and 4.5% respectively. EBITDA and EBIT was supported by smarter selling benefits and a net reduction in direct COVID-19 costs compared to the prior period. Net profit after tax declined slightly by 0.3% and basic earnings per share declined by 0.4% to $0.781. On a continuing and discontinued operations basis, that is including the Express segment, net profit after tax increased by 4.8% and basic earnings per share increased by 4.4% to $0.823. The Board has declared a fully final dividend of $0.30 per share, bringing the total dividend for FY '23 to $0.66 share, a 4.8% increase compared to FY '22. Now if we move to the segment financials on Slide 14, we have presented the segment financials to separate continuing and discontinued operations again, to again to reflect the sale of the Express business. If I start with supermarkets. Sales increased by 6.1%, with growth in the second half up 7.7% compared to 4.6% in the first half. Comparable sales were 6.8% in the fourth quarter. Sales growth was delivered through DROPPED & LOCKED value campaigns and a successful execution of trade plans, including festive events such as Easter, Christmas and Mother's Day. More targeted and personalized customer experience and offers and the collectible and continuity campaigns also supported sales growth throughout the year. Our gross profit margin increased by 5 basis points year-on-year at the same time as continuing to invest in value, growing our exclusive to Coles revenue by close to 10%. The margin was supported by smarter selling initiatives, 1/3 of which worked their way into GP, reduced COVID costs, increased media income from Coles 360 and a decline in tobacco sales. And the margin would have been better had it not been for the increased logistics cost, particularly fuel and the 20% increase in stock loss that Leah mentioned earlier. At CODB as a percentage of sales increased by 20 basis points year-on-year to 21.6% as a result of underlying cost inflation and wage increases flowing from the June '22 Fair Work Commission annual wage increase. CODB was also impacted, particularly in the second half by increased depreciation and major project implementation OpEx as well as a number of other significant costs that arose at the back end of the year, such as the $25 million provision we referred to earlier, a reevaluation of employee liabilities with the increased Fair Work Commission wage increase and a larger-than-usual variation in bond rates, which also impacted liabilities. These were partially offset by the smarter selling benefits and lower direct costs in FY '23. Further strategic investments are also made in the year in digital, e-commerce and technology in areas such as 360 and the e-commerce platforms. Statutory EBITDA and EBIT increased 4.5% and 2.9%, respectively. However, after adjusting for the major project implementation OpEx and the $25 million provision, EBITDA and EBIT increased by 6.1% and 5.8% respectively, with an adjusted EBIT margin of 5% for supermarkets, in line with FY '22. In Liquor, revenue was flat, having returned to growth of 2.7% in the second half after declining in the first half by 2.4% as the business cycled COVID-19-related on-prem closures and restrictions. Comparable sales were 1% in the fourth quarter. Sales were driven by a strong performance in the Liquorland banner as well as growth in the ELB portfolio with ELB sales revenue increasing by 8.5% for the year and 13% in the second half. EBITDA was flat despite cycling on-prem closures in the prior year. EBIT decreased by 3.7%, reflecting increased D&A following investment in the portfolio as part of the liquor transformation program, most notably the Black & White Liquorland renewal program and the e-commerce investment funds. Pleasingly, EBITDA and EBIT increased by 13.2% and 19.5% respectively in the second half, benefiting from sales and margin growth across the fixed cost base of the business. Finally, the other segment, which comprises corporate costs, Coles' 50% share of Flybuys net result, the net gain or loss generated by Coles' property portfolio and the product supply agreement reported in total a negative of $63 million. Corporate costs of $90 million were incurred with an increase of $9 million largely as a result of higher insurance and store support costs. Coles 50% share of Flybuys net result was a $13 million loss and earnings from property operations were $39 million. The product supply agreement for the 2 months for May and June contributed $2 million of EBIT. You can see on the slide there [Audio Gap] the Express divestment and further information is also provided in the release appendix. I'll now turn to Slide 15 and cash flow. Operating cash flow, excluding interest and tax was $3.6 billion, with a cash realization of over 100% at 102%. This was driven by positive movements of working capital and provisions. The positive working capital improvement primarily reflects the higher trade payables offset by trade receivables in the PSA with Viva as well as increases in the GST receivables. The positive movement in provisions and other largely reflects the increase in the related provisions, including the $25 million provision related to the 2020 Award Covered Salary Team Member Review. The increase in average inventory days reflects the lower interest levels last year due to the availability challenges and a partial rebuild of inventory following low level over the last few years during COVID. I'll now take you to the capital expenditure slide on 16. Gross operating capital expenditure on an accrued basis was $1.356 billion, an increase of $157 million compared to the prior year. Capital expenditure continued to be focused on growth and efficiency initiatives. Within supermarkets, CapEx increased largely due to investments in new stores and renewals with 17 new supermarkets and 46 renewals completed during FY '23. Efficiency initiatives focused on the investments in the ADCs as well as service transformations in the store. In Liquor, capital expenditure was driven by new store openings and renewals, with 35 new liquor stores, 236 renewals completed as well as investments in core IT systems. Coles continued to optimize its property portfolio during the year with net property capital reducing by $60 million compared to the prior year, largely driven by higher property divestments during the year, resulting in net property inflow of $72 million. Now if we turn to the balance sheet on Page 17. As at 25th of June, we reported negative working capital of $1.5 billion, capital employed of $11 billion and net assets of $3.4 billion. We maintained a strong balance sheet with investment-grade credit metrics, which provide flexibility for future growth. Working capital improved by $89 million compared to the prior year as a result of the higher trade payables due to the timing of year-end payments and the increased trade and other receivables largely as a result of the product supply agreement. Inventory levels declined primarily driven by the Express divestment. Property, plant and equipment of $5 billion increased by $178 million compared to June '22, driven by the increased CapEx during the year, partially offset by inflation and property divestments. Right-of-use assets of $6.5 billion, again decreased by $692 million as a result of the Express divestment, which also saw lease liabilities of $7.8 million decreased by $832 million as a result of the divestment. Net debt, excluding lease liabilities at the end of the year was $521 million, a $159 million increase on the half year net debt position. I'll now take you to the capital management slide on 18. We've extended our debt maturity profile and continue to maintain access to diversified funding sources. We do not have any debt maturing until FY '26. At a full year end, Coles' average maturity of drawn debt was 5 years with undrawn facilities of $2.3 billion. The Coles Board declared a final dividend of $0.30 per share with a payment date of the 27th of September, bringing total dividends for the year to $0.66 per share, a 4.8% increase. We retained our existing annual dividend payout ratio target of 80% to 90% tracked to the maximum extent possible. Finally, before I turn it to Leah to take us through the strategy evolution and the converting marks on outlook, our current published credit ratings of BBB+ with Standard and Poor's and Baa1 with Moody's, we have retained headroom with our rating agency credit metrics and a strong balance sheet to support growth. Over to you, Leah.

Thanks, Charlie. I'm going to skip this forward a couple of slides. So I'm now on Slide 28, the one that says strategy evolution. The listening sessions and store visits all over the country have been a really fabulous way to start in role as they have enabled me to get a strong view on what's working well in the business that we should continue to foster and amplify as well as the opportunities we have to improve performance. Pleasingly, there is enormous pride in the teams to be working for Coles, and this is reflected in our mysay team engagement results. They value the culture that we now have as a business, which has been built since the merger and is characterized by wanting to deliver for the customer, care for each other, support for the community and wanting to build a stronger business for the future. Now the teams were also very generous with their feedback on what can be improved. Capability building of the team to drive productivity and customer experience was a key theme. There are some key areas of opportunity in our operating model and systems, particularly in Fresh, which will improve sales and store standards. We recognize that we have more to do on our digital engagement with the customer from the customer experience online through to how we personalize value and communicate. Value is top of mind for everyone, and our existing offer is strong, but the team have really challenged me on how we can communicate finding this value at Coles more simply and more powerfully. Consistency of execution capability, both in-store, but also on projects is important for future success. All of these insights have been taken into account as we have refreshed the strategy over the past few months. Our winning in our second century strategy, which was set shortly after the merger and had the focus areas of inspire customers, smarter selling and win together was always established with targets through until the end of FY '23. It has been a successful strategy and driven good results, particularly in the early years. But the last few years have been unusual with the pandemic and large amounts of supply chain disruption. Customer behaviors have changed, and we have become more aware of the challenges that the future may hold with weather events. In light of this, we have taken the opportunity to evolve our strategy and to focus our efforts on the areas that will create the most value. Our vision remains unchanged, to become the most trusted retailer in Australia and grow long-term shareholder value. We have reset our purpose to helping Australians eat and live better every day. Helping refers to the growing ask from consumers to help them solve problems. What's for dinner? How do I be more sustainable? How can I eat more healthily when life is so busy? And right now, supporting them to find value and making the budget balance is one of the biggest ways we can help. Eat and live refers to food as our core purpose, but surrounding that with adjacencies like liquor, health, beauty, home care, which are all high transaction frequency close to our core and convenient to buy alongside food. Better refers to our passion for more delicious, more healthy, more sustainable products. And every day is a very important concept because it points to the consistency that we need to deliver in our business to give every customer every day a great experience in our stores and online and with our products when they get them home. To support this purpose, our strategy is aligned around 3 pillars. These pillars create a flywheel where activity in one can accelerate value in another to create a virtuous cycle. In our destination for food and drink pillar, we will focus on a great customer offer. Value, quality, range and event execution will be improved and tailored across the fleet to ensure our customer value proposition in food is strong and complemented by other home needs. Accelerated by digital, we'll support higher levels of digital engagement with our customers through personalization, unification of our digital experience and our focus on being omnichannel. It is also about driving growth in different ways, such as through Coles 360 or an expanded offer from what you will find in stores. Delivered consistently for the future, will focus us on delivering today for our customers through improvements in our operating model and team capability whilst taking action that enables us to have success in the future, such as through a strong, simplified and safe to invest program, investment in our store network, modernization of our supply chain, resilience on the security and outsourcing arrangements and driving sustainability. Underpinning our 3 pillars are enablers that are critical to our success. Win Together, which focuses on safety, diversity, inclusion, team engagement and working productively and collaboratively with our community and supplier stakeholders. And Foundations, which focuses on financial discipline and the technology and data capabilities we need to deliver the strategy. We will look to share more detail on each area over the coming year as well as sharing our measures of success and progress. Turning now to Slide 29. Before I move to outlook, I'd just like to make some comments on some of the immediate areas of focus. The first area of focus is availability, loss and quality, which are all linked. Industry-wide, over the past few years we have let customers down with the number of gaps we have on shelves. Our North Star has to be restoring availability to pre-COVID levels. This will drive sales and improve customer satisfaction. As you have heard throughout the presentation today, loss has emerged as a cost to headwind through FY '23. Addressing this is a significant opportunity for us to drive performance in the P&L, and we are actively going after this. The second area of focus is continuing to deliver value for customers and maintaining competitiveness. We need to be focused on this to remain relevant to the customer at this time and to continue to grow market share. We will be focusing on launching our Simplify and Save to Invest program to find efficiencies of over $1 billion over the next 4 years, which with the current cost headwinds across areas like wages, fuel, loss and construction will be more important than ever. And finally, we are focused on improving customer experience. We have already rolled out the new training across the store fleet to lift team member capability, and we have an exciting road map of digital initiatives over the next year. I'll now move on to outlook on Slide 31. For FY '24, the value-conscious consumer and cost inflation across the P&L will be important factors for us to navigate. In the early part of FY '24, supermarket volumes have remained modestly positive compared to the prior corresponding period, and we have seen signs of customers shifting from out-of-home dining. Headline inflation has continued to moderate with the fresh produce category remaining in deflation. However, inflation in bakery, grocery and dairy remains consistent with the fourth quarter. As we enter the year, stock loss is a priority. And as I've already mentioned, we are taking immediate actions to address this. Availability has continued to improve in the early part of the financial year, with many measures, the strongest we have seen for over 2 years. Our new Simplify and Save to Invest program has kicked off and will be important in helping to offset the recent Fair Work Commission annual wage increase of 5.75% and the recent increase in Victorian payroll tax, which will impact our remuneration line by around $20 million. Consistent with our overall strategy, we're also looking to continue to invest in our physical and digital footprint. As the new CEO, I am energized by both the challenges and the opportunities which lie ahead, especially with our strengthened leadership team who are very focused on delivery to drive our success. There will of course be some speed bumps, but I am confident that with the support of the Board and our team, we will deliver our vision of building customer trust and long-term shareholder value. I'll now hand back to the operator for Q&A. Thank you.

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

Leah, I think the key issue that all of us in the investment world today are grappling with is the costs and what's happening in the business, particularly in that second half we probably shouldn't have, but we did get caught out a little bit at the magnitude of these cost increases. Now my question is, can you go through that, run through a little bit more in detail the source of these cost increases? Because we're talking big numbers, I mean, you're talking 6.5% nearly in wages. And the rule of thumb is if wages are 10% of sales, you're talking big numbers. And then you've got your other costs, your implementation costs. I'm trying to find out how much and then you got wastage as well. I mean it really does seem to be a pretty tough time in terms of cost management. Can you go through in a bit more detail how much of this is industry-based costs? How much is it is Coles embedded-type cost increases? And then going on that, what can you do other than smart selling to mitigate this? I mean can you work your rostering a bit harder? What can you do with wastage? What is it there that -- because obviously you're just not going to stand still, what is it that you can do? Because we're trying to understand this cost increase that we've seen in the second half. And obviously, going forward, how much of that you can mitigate? And how much of it is it we just have to withstand it and we have to adjust our expectations for the supermarket industry in terms of profit performance.

Thanks, David. So there's a bit in there. So I might break it up into some important parts. So I might make some high-level observations and then I'll get Charlie to maybe talk us a little bit through the bridge from an earnings perspective and some of the big contributors there. And then I think one of the areas that we've already highlighted that we've got a lot of focus on is the stock loss piece. And I might get Matt to give you a bit of insight into what we're working on there to really lean into that problem. So I mean, I think from a headline perspective, there are definitely a number of factors here which are industry factors at play. And we have sought to really call them out in the presentation. And the 2 most significant ones for us are the level of wage increases that we've seen going into FY '24. But actually, over the last year as well, where we saw a significant increase in the wage rate from the 2002 Fair Work Commission decision as well. And then the second one is loss. And I think we've seen the ARA talking about this one over the last month or so as a real industry-wide issue. And they've come out with some estimates. But as a retail industry across Australia, the estimate is it's impacting sales by sort of 2% to 3% as a rate to sales. And obviously we've seen a lot of commentary from our global peers on this as well. So if you have a look at some of the commentary out of the U.K. or the U.S., most of the grocery retailers have been calling out for the last 12 to 18 months, the headwinds that they've been facing into in terms of a stock loss issue. So I think those who are not unique to Coles, they are industry issues that we are leaning into. I'll get Charlie maybe to talk through the bridge which outlines a few of the other moving parts in there.

Right. Thanks, Leah. And David, what I'll do is -- what I'll do for everyone is actually take us on the bridge on the cost of doing business on a year-by-year basis and then actually talk a little bit about perhaps what was more skewed in the second half as we walk through that. So firstly, as you appreciate, there are lots of moving parts through this. So I'll first talk about on an earnings basis. So depreciation and amortization was up by $60 million. And at $60 million, clearly it relates to our capital investments that we've been making over the last few years and working our way through D&A. So if we then move to the sort of the cash CODB, I think the very first important point to really sort of highlight was really the smartest selling benefits and then the benefits from COVID online, when you put these together we're actually required to offset the higher inflation, right? So in terms of the inflationary pressures in the cost base. And when we look at the remaining costs through it, I'd like to think about it as 1/3, 1/3 and 1/3, 1/3 related to growth in -- growth for the year. So growth in relation to new stores, rent linked to the increase in sales and sales dollars, increases in things like the payment and credit card fees. 1/3 relating to some investments that we're making which include not only the Witron and Ocado project OpEx during the year, investments in the digital tech and e-com, but also we upweighted our spend, for example, in cyber security. And then the balance of the third was a range of factors: the $25 million provision that we spoke about, which are relating to the salary review of 2020. The REDcycle collapse, which again impacted the industry here in Australia. And the impact of that was really felt in the second half. And also if you think about the volatility in bond rates, we've seen bond rates being quite volatile now for the last -- at least the last 12 to 18 months. And in '22, there was a positive impact on bond rates in the second half, which didn't obviously repeat in the second half this year. So if I isolate some of these things for the second half, our project implementation spend was actually greater in the second half than it was in the first half. The REDcycle impact and the provision were a second half impact. And obviously, the first half benefited more from the COVID unwind than the second half. There was less COVID unwind in the second half. So those factors really that looked on the sort of the year-on-year and then the second half impacts on the CODB.

And obviously, the smarter selling and offsetting. Can you do stuff to offset it with like labor rostering and stuff like that. What are you looking to do to mitigate some of these cost increases, Charlie and Leah?

Yes. Well, I think as Leah announced, I mean we are -- we have -- as you know, the first program was for the 4 years ended the June 2023. Today we're announcing that we are targeting greater than $1 billion over the next 4 years in our program titled to Simplify and Save to Invest. And at $1 billion, we'll be looking at all aspects of our operations and not too dissimilar to the smarter selling type initiatives that we had in the first 4 years. But they are the sort of programs, David, that we're going to have to roll out to offset these pressures on inflation.

So that really helps us. So that covers up the CODB piece. There is the loss issue, that is in GP, David. And so in terms of the movements we saw in GP we had some tailwinds in there from smarter selling, a bit of COVID cost to unwind and importantly a tailwind from the growth that we've seen in Coles 360. But the headwinds we had in there were mainly wages, fuel and loss. And loss is definitely the most significant one in there. So like kind of when we look at that bridge, the one that we look at and say we need to lean in and get that number [ fixed ], but it is the loss number. So I might get Matt to talk to that a little bit in terms of, maybe to start with a bit of a 101 on what that is, and then we'll talk a little bit about what we do.

Thanks, Leah. David, I think it's important to, first of all, just to clarify, when we talk about total loss it's really in 2 parts. There is waste and mark down as we manage fresh quality and availability. And that was particularly disrupted in half 2 through some of the impacts in our supply chain with Scott's collapse and then Americold cyberattack. We had a bit of disruption that we cycled out. And pleasingly with some work on assortment within the category teams, that has improved. The second part though is stock loss, which you can think of as shrinkage of that, and that's continued to be a challenge. And just building on Leah's point about this not being a Coles or just an Australian retail or global issue. We have very close relations with a number of international retailers, both U.S. and in Europe. And we can confirm it's the same problem, it's the same magnitude. And when we do apples with apples, it's broadly the same drivers. And importantly, I think we're all facing the same challenges with a similar set of actions. And for us, they're really listed in 3 big buckets. So the first is a continuation of technology that's being deployed at pace. You would see that we were the first to implement smart gates. These are the gates that prevent a customer that hasn't paid for their goods from exiting the stores. The second one is trolley lock. That stops what our team members would describe as pushouts, where someone can fill a trolley and just try and exit the store, the wheels lock, and that's been very successful. So we pioneered both of those. And we are rapidly now rolling out Skip scan, which is the process of self-checkouts, AI and camera technology, which will prompt the customer back around the processes, in the stores by calendar year-end in that space. So that technology continues and we're looking at ways to accelerate. Second one is then an operational focus. And that covers all immediate aspects. It's been underway for a time. It's on things like team member training. It's on overservicing in our checkouts. It's on the use of store headsets. We've increased security guards and covert guards in our stores materially with great success, and we have additional collaboration in each of the states with the police to really drive that organized success that we've seen increase. But we've also got a whole piece around range optimization for high-risk SKUs in high-risk stores. So there's no stone being left [indiscernible]. And then finally, we are using data and analytics to try and identify trends in our operation where we may not be able to immediately see a problem, but the use of artificial intelligence and data can help flag up areas where the team can go and investigate both external and internal theft. And that's really using a more precise way of looking for problems within our operations. So they are the 3 areas. We've been underway already. And we continue to drive even harder to get ahead of this problem as we see it. But once again, this is an industry issue and one right around the world.

The next question comes from Shaun Cousins from UBS.

Just a question regarding stock loss. How much did that increase second half '23 on second half '22? Was it 100 basis points higher, 200 basis points higher? And I'm curious if Coles is more impacted because of the extended self-checkouts, those TACOs, which likely make theft a bit easier at Coles versus Woolworths. And will there be any effort on the part of Coles to add labor back into the store in terms of that checkout area? And could that effectively unwind some of these productivity initiatives to better manage this problem that Coles is facing, please?

Yes. So maybe if I start with that last one, which is around the degree of self-checkout. So when we look across the fleet, what we see is that stock losses are rising tide in all stores. So this is not something that is particular to stores that have a self-service front end. Every store has seen increases in stock loss. And as Matt said, in our self-checkout areas, we have made investments now in terms of the training for the members manning them. So we don't feel that, that is the mouth of the issue here. We actually need solutions that can go across the entire network to address the issue. In terms of the number, so it was more heavily weighted to the second half in terms of what I'd describe as the adversity of the rate versus a long-term sort of regular expectation around stock loss. So we have seen it step on Q1 to Q2, Q2 to Q3. And then Q3, Q4 was relatively constant.

And if I can just add to that, Shaun, I mean, what -- I mean, we didn't call out the full year results last year. It really wasn't an abnormal, if you like, a larger issuer or an abnormal issue. So really it was sort of weighted very much to the second half of '23. And I think stepping back a little bit, I mean, we would have seen gross profit growth more in the line of what you would have historically have seen but for the stock loss issue that we've called out. We're not going to give specific numbers, but it gives you directionally where we would have gone but for the stock loss.

Okay. Great. And then my second question is just around online. That enjoyed tremendous growth in the fourth quarter, up 17% after what was quite low growth in the third quarter. Can you just talk a little bit about should we expect an annualization as some of the initiatives that you've implemented in the fourth quarter play out? And did any of this high growth in online contribute to the lower EBIT margins in supermarkets in the second half, please?

I'll let Ben answer this one.

Thanks for the question. And also, thanks for your research and insights. I always love going through those when you send them out. Yes, to your point, the online trend has improved. And you can kind of see that as well through H2. We had double-digit growth in line in Q4, 17% growth. And actually the trend continues to improve. I think if we look back last year, a lot of this was our year where we were up against growth from the lockdowns, the 2 years previously. And so there was naturally for consumers, they went back to shopping in store. One of the behaviors though that did change pre and post lockdowns was that just more and more customers engaged with us digitally. So as they go in the shop in store, they're first engaging with Coles digitally and making better, more informed choices as they shop. I think also some of the benefit that our customers are getting, especially with online is just more convenience when they -- especially those that are value conscious. When they're shopping online, they can see how much money they're saving in real time. If they're working off of a fixed budget, they can better manage their budget through online shopping. And then in terms of the overall trend improvement, Leah talked about better every day, eating better and living better every day for our customers. And I think inside of Kohl's, this is broadly not just with my team, we just talk about getting better every day. And this past year we've talked about how we invest more in real-time analytics and getting feedback from our customer, responding from our customer quickly as well as from team members in shop. That's helped inform our road maps for both what we show customers but also for our picking and packing last mile solutions. All in all, our cycle time is down 48% year-on-year. So we're responding faster for our customer. So all of that said, we're pleased with the trend. We're pleased as well today with the trend in online. We've given a lot of great features for our customers. There's certainly a lot more to come. On the profitability standpoint, I would just call out, there is a positive contribution to both supermarkets and group EBIT as a result of online. And I might just leave it at that.

Thanks, Ben.

So it's not lower margin. It didn't weigh on margins? Ben or Leah or Charlie?

I think we'll leave it where Ben had sort of indicated, Shaun, that it's a positive contribution to us.

The next question comes from Ross Curran from Macquarie.

I was wondering if I can maybe get you to unpack in a little bit more detail that Simplify and Safe to Invest program. And does the fact that you've called it Save to Invest means that shareholders are unlikely to see much of the benefits that gets put back into the business?

So the Simplify and Save to Invest program, it's really the evolution, if you like, of our smarter selling programs going forward. One of the things that I definitely found when I've been out talking with the team was that smarter selling, it was a strategy pillar, it was also the cost-out program, encompassed with store renewal, the data strategy, things like that. So in terms of the evolution of the name, we feel that Simplify and Save is definitely is doing what is written on the tin. And that is really clear to the team that we need to take complexity out of the business. We need to take cost out of the business so that we do have the ability to continue to invest. And as we build out the target for that, one of the things we very much look to is what do we expect the cost inflation to be that we would need to offset to battle to continue to maintain margins and then also where have we got strategic initiatives that we want to be able to invest in going forward. So that is the primary 2 purposes of the program.

It doesn't necessarily expand EBIT margins, it more offsets the inbuilt inflation. That's the right way, right?

Ross, I think if you look at it, I mean, clearly inflation rates at the moment are elevated relative to historical rates. So I think we need to look at this as a 4-year program. It's calling out as a $1 billion plus over 4 years. So we look at this as a 4-year program. Yes, part of it, we offset inflation. Part of it will also would generate cost savings where not only will that sort of [ speak to our ] earnings, but also allow us to invest further. So it's not 100% investment, it's just indicating that it's part of releasing earnings to offset the cost pressures, offset and allow us to invest back in the business, and that includes also driving earnings growth.

And can I just ask secondly then on Ocado. Do you think you could just give us a little bit more color around what caused the delay? It looks like there might have been quality issues when they're putting the gradient that it wasn't built to the spec, millimeter accurate as it needed to be, when it's put together. Can you just help us understand how it slipped as much as it has?

Yes. Well, I might hand it to Matt, just to talk a little bit about the -- just the actual Ocado release that we put out last week.

So look, it's clearly not an ordinary building at CFC. And so you're right, the degree of tolerances are particularly high, not too dissimilar to our [indiscernible] facilities that, particularly Redbank that we opened recently on time and on budget. So it's -- and it's something that Ocado has done around the world with multiple vendors. And in this instance, there is some work that's been identified that needs to be rectified. The good news is that work is coming to completion in New South Wales. It's a process that Ocado has designed and deployed very successfully there. We got our very first robot on the grid in the ambient [ hide ], which is the bigger, more complex part of that, yesterday. So it's a requirement for some additional works that relates to the specificity of the quality and the standard and the team are working through that in a very tried and tested way.

Are you still happy with how it's progressing?

Yes. I think the New South Wales one yesterday, from what I've seen is broadly on schedule. There are a couple of operations that have occurred in the last week. We got the [indiscernible], which are the containers that are used for storing stock 5 weeks ahead of schedule, and the team are working very well together to the revised plan, and we're looking forward to being successful.

And if I just take a step back, Ross. I mean we've now got the benefit of we've got multiple CFCs that are live with other client partners around the world for the likes of Sobeys in Canada, we've got Aon in Japan, we've got Kroger in the U.S. And what we do know is when those CFCs go live, they get a really significant step-up in customer satisfaction and NPS and that's really driven by 3 key things. So the first one is just the world-class perfect order rate that you can achieve through the CFC that you just can't get through a store pick model. The second one is the freshness guarantee that many of the retailers have been able to offer on items in their fresh produce and meat categories. And then the third one is the extended range. So I think from a customer offer perspective, we now have multiple examples around the world that really kind of delivering the benefits that are expected, and we are working with all of those client partners to ensure that we're very well placed to deliver on that as well.

The next question comes from Michael Simotas from Jefferies.

I don't want to labor the point, but I was just hoping we could touch on costs again, and in particular get a bit more color and a bit more understanding of how costs will flow into FY '24 because I think it's in everyone's interest for the market to get a little bit closer than what we got this year. There are a lot of moving parts. But if I look at your headline costs, they grew by just under 10% in the second half, there actually should have been a number of tailwinds from smarter selling and lower COVID costs, et cetera. It looks like your underlying cost growth was maybe even double digit. You've got bigger underlying wage cost inflation into FY '24. You've got the payroll tax issue. How should we think about what your cost inflation is going to look like in '24 because it looks like it might even be higher than what it was in '23?

Yes. Look, Michael, great question. Look, I think we did call out a couple of things. So if we look at the sort of second half, second half. So we've specifically given you guidance now in relation to what the project implementation costs are going to be for FY '24. So we've actually outlined those. We've specifically called out, obviously, our wage increases, which are higher for FY '24 at 5.75% relative to FY 2023. But yes, we did have some starter selling benefits, which were in the second half. We didn't have the same COVID unwind. That was more a first half phenomenon, so we didn't get that offset through the second half. We did obviously, this half, that is we just exited, there was a timing where the implementation of some of the project spend was greater weighted into the second half than the first. And there were the things that we spoke about, which were sort of one-offs again, which was like a REDcycle collapse. We don't see that being a repeat going forward. The $25 million provision, which was an additional provision, which we put out a release in June in that regard. And that was, again, a one-off at the time of second half, which was impacted in the second half. So there were a number of phenomenas there that impacted. I think the other one, just to sort of highlight as well in terms of when you look at second half versus the second half growth. The second half '22 did have the benefit of bond rates, which meant that the costs were lower than perhaps they were. We did not get that benefit back in the second half of '23. How have bond rates manifested themselves. They're the rates that you use to discount employee entitlements and the costs, and therefore our costs in the second half of '23 were higher than that they were in second half of 2022. So there are some things there. Now I'm not going to give a forecast of what bond rates move, if I was, I'd be in a different role. And there are various things like inflation that continue to be through that cost base. I don't know if that's helped, Michael, address some of your questions.

Yes, it gives us a bit to work with. And then second question. When do you think we'll actually see some net benefits through the P&L from the Witron and Ocado implementation? Because the way it was originally articulated, it was quite a nice setup where the costs fall away and you start to get the benefits in FY '25. You've said that you'll get net benefits from Redbank starting to flow through in FY '25, but you've still got $255 million of implementation costs. When will we actually see some of those returns start to come through on a net basis?

Well, I think if we just step back a little bit, over the next 12 to 16 months, we've got 3 automated facilities that need to go live. So you have the ramp-up, you have the transition, you have the implementation of those 3 facilities are really ramping up. So things like Ocado, it really won't be into FY '26 is where you would start to see. In terms of Witron, Redbank in New South Wales, yes, clearly Redbank is ramping up at the moment. We've called out that it's delivering to 102 stores as at the end of June '23. That obviously continues to increase as it transitions. So we do expect a full year benefit from the ADC from FY '26 onwards.

Will that be enough to offset additional costs, though, particularly given Ocado has been delayed?

Well, I think we've given you what the Ocado implementation and the ADC implementation costs are. So that's the forecast I have given. I'm not going to give an inflation forecast out to '25 and '26. But more importantly, the benefits that we've called out from Witron and the 2 automated facilities are quite significant, and we do expect them to be at a full run rate in FY '26.

And then as we said, Michael, the Simplify and Save to Invest program will work to take efficiencies and productivity into the business to drive cost out, which will assist us with offsetting the cost inflation as well.

The next question comes from Adrian Lemme from Citi.

Just wanted to ask about the DROPPED & LOCKED campaign. And has the extension of that in the second half also contributed to the gross margin decline we've seen in the second half? Because from memory, it wasn't in the PCP?

So, we make investments in value every year, we've made it in previous years. We made them during FY '23. The biggest impact to the GP line is definitely the stock loss. It's not as a result of significant trading down or shifts in the shelf margin.

And Adrian, as I said earlier, I think, just if we step back a little bit, if we adjust for stock loss over the period, we would have seen gross profit growth more in line with historical growth.

Okay. And can I just ask another question related to Ocado. With the cost increases in the project, how are these being shared between Coles and Ocado? It just feels like Coles is having to wear all these increases, please?

Yes. I mean, obviously, we're not going to be discussing any contractual arrangements between Coles and Ocado on this call, what we're really focused on as a sort of partners at the moment is getting the facilities live.

The next question comes from Tom Kierath from Barrenjoey.

Just a question on the provision changes. On Slide 15, I think you've got a reconciliation there of the cash flow. This change in provisions is up $70 million. In the first half it was negative $51 million. So it kind of implies that provisions increased by about $120 million in the second half. I know you got the $25 million for the wage remediation stuff. I presume that's in there. But I'm just trying to understand what the other moving parts there are in that provision line.

Most of the provisions changes there relate to sort of self-insurance provisions and the employee entitlements effectively. So it's the sort of things that I was referring to earlier in relation to discounting the -- and appropriately reflecting the liability of both employee entitlements and insurance arrangements at the end of the financial year in the period.

Yes. Okay. So that's actually a pretty big impact on the second half then, yes? Sorry, sorry, Charlie. Am I right in assuming that?

Yes, sorry, was that a question or a statement?

[indiscernible] if you could repeat that.

It just looks like there's a pretty big increase then from the bond rate charge and the self-insurance that's come through in the second half. I'm just making sure if I calculate that right?

Yes, that is right. But what also impacts is when you -- and that is correct. So it's definitely skewed in the second half. The other impact is not just the rates, but also the fact that when you get a 5.75% plus 0.5% a super increase in terms of wages, you're discounting those at a much higher level as well. And so, the impact in the cycling through the provision is greater.

Got it. Appreciate it.

Yes. And I guess I probably should just add as well. What wasn't helpful was the $20 million call that we mentioned in relation to the Victorian payroll tax increase. That is also needs to be factored into the provision calculation as well, which actually lifts the employee entitlement type calculation and provisions, et cetera.

The next question comes from Ben Gilbert from Jarden.

So just in terms of just trying to put all this cost and GM trends together. So it sounds like sort of the shrink was probably over 40 bps run rate in the second half, and we've got to flow that through into the first half. Obviously costs are going to continue to run probably sort of at least high single-digits. Do you see a scenario whereby you think you guys can actually grow your EBIT in the Supermarket division next year? There is obviously lot of headwinds, albeit obviously some of these aging to '25 and '26, but it's looking like it's going to be a real challenge to grow EBIT growth rate unless you can sort of grow sales at 8% next year?

Thanks, Ben. I mean, obviously, we're not going to make a forecast on the EBIT for the year. What we've really tried to do through this call is share with you some of the headwinds and the tailwinds that we've got moving into the EBIT to next year. And the loss is definitely still elevated on the stock loss side. We've made some improvements over the last couple of months in terms of the waste and markdown components of loss. And that has come down to a level more in line with what we have seen in the past. We've then got the wages, costs which we will have to pass through and the transformation OpEx. They're probably the big 3 that we would call out. Within that mix we've also then got the Simplify and Save to Invest program that will be in place, and we have targets against that for this year as well.

Yes. Ben, I think it's really important to -- if we step back a little bit to FY '23 and you actually make the adjustments that we've heard, the one-off adjustments that we referred to, that actually deliver a Supermarkets EBIT percentage of 5% for the year, right, which is broadly in line, and in fact, in line with the FY '22 sort of numbers. So even with some of these headwinds, we've been able to do that. We are obviously calling out second half as a little bit more challenging because of the stock loss issue and some of the one-off impact. So really you need to look through some of those. And as Matt earlier said, there are programs to address stock loss. It won't be a quick fix. But that will be a program in place to address those. And yes, Simplify and Save to Invest program is going to continue into -- over the next period to help offset some of these inflationary pressures.

And the other tailwinds that we've got coming through, because we've talked a lot about some of the headwinds. But there's a set of tailwinds coming through to then. So, we are definitely seeing improvements in availability, and that's improved even further going into the new financial year. We've got some good tailwinds coming through from the growth that we're seeing through the Coles 360 program, which is a very nice kicker through to the gross profit margin. And the other one then is population growth, which is really healthy at the moment. And I don't have to tell you this, but population growth is one of the biggest stimulants that we have similar to consumption in Australia. So you can [indiscernible] that. And then I think the question then is what does the consumer do? And at the moment, we think that we're starting to see the shift to in-home consumption. And we think that the offer that we've got in place in terms of the value offer, but also what we can provide in terms of meal solutions is really strong.

[indiscernible] sorry, Charlie --

Yes. All I was going to add to that is if you follow the trend in volume growth, we started the fiscal year '23 in negative volume growth, and that obviously improved through the first quarter and continued through -- sorry, the second quarter and continued through the balance of FY '23 and in the early part of FY '24 trading. So that positive volume momentum is important for FY '24.

Yes. That was going to be my second question to end on a bit of a positive note from my side. It was just around the market growth and how you think about expectations. And could you give us any color around what you saw in terms of share trends in terms of through Q4 and how you feel you're tracking through the September quarter? And on that, given the momentum you've got, do you think you're pushing hard enough for terms in the market from your supply base? Because it seems like your competitor up north is probably going a bit harder than you guys. Do you think you're sort of getting your fair share of trade spend and margin out there in the market at the moment?

Well, let me start on the market observation. So I mean, from a market share perspective, the key measure that we will look to is the performance versus the ABS numbers that are published. And so from a year-on-year perspective, FY '22 to FY '23, we grew market share. And we think that that's a good indication of the value proposition that we do have for customers at the moment. Quite a bit of that growth that we saw actually did come through in Q4. So, we saw good resonance in terms of what we were doing with DROPPED & LOCKED, the MasterChef continuity program as well as the weekly specials program we have, the everyday low prices that we have in the Flybuys program. So Flybuys is obviously a really important part of that mix for us as well. So I think from that perspective, we feel we're well-placed in terms of the offer that we've got for customers. And it does appear to be resonating. In terms of the observations on terms, we'll appreciate the observation. Definitely we'll pass that back to the team. But our view would be we have really strong relationships with our suppliers right now. We have a well-established process for looking at cost price increases and validating those. So there's nothing in particular I would call out on that.

The next question comes from Craig Woolford from MST Marquee.

So you've given an updated table of the transformation costs, which is $255 million in FY '25. Is there any chance that there'll be any of those transformation costs in FY '26? And the reason to ask the question, I just want to be 100% clear that I'm interpreting it right. But once those costs drop out, there would be, in FY '26, if there is no other transformation costs, there'll be $255 million improvement in EBIT for that year. Is that the way to interpret these transformation costs?

Yes. Let me go through what those transformation costs are in the first instance, because I think that's important. That will help you in your understanding -- help you in looking at that. So firstly, those implementation costs, there are a couple of things. One is to complete the program, complete the project. So it's actually the project OpEx in relation to those programs. Secondly, as we ramp up and we talked about incremental ramp-up and the dates that relate to both the CFCs, for example, but also the New South Wales ADC. So when you wrap those up, there is an element of dual running costs. For example, if we simply, for the CFC, think about it as we transition some of the home delivery volume in the catchments in Victoria, for example, in New South Wales into the CFC. For a period of time, there'll be some dual running. There will be things like transition costs and things that we'll incur. So there'll be a number of those costs. I think from a ADC perspective, so from an overall facility perspective, they will largely be worked through for FY '25. When we work to in terms of Ocado, there will be some Ocado costs in FY '26. And that's as obviously, as we -- at the tail end of the ramp up of the Victorian facility.

Can I just add, Craig, because you put out a number there of $250 million, because I think you've added the 2 OpExs and the 2 depreciations. So the depreciation will be something that will be ongoing. That doesn't vanish when the -- they go live. So it's really the implementation OpEx as Charlie just outlined, which you see.

Yes. So, if I look at -- if you go to Slide 9 in relation to the ADCs, that is a full run rate of the depreciation of the 2 ADCs actually running. So that will be an ongoing depreciation expense. You can see that there's a small ramp-up there in terms of dual running and transition for FY '25, that should be pretty much the end of the 2 Witron facilities. And if you go to Slide 10, and specifically on Slide 10, we've got $100 million there for Ocado project implementation OpEx. So $100 million and so $55 million depreciation. Yes, depreciation will be something that continues. But more importantly, very clearly, FY '25 is the [Audio Gap] right? So by then, we would have had the 3 automated facilities go on live, right? With the Ocado facility in Victoria in the early stages of its ramp-up and transition.

Yes. And I mean, so, yes, the project implementation costs unwind and then there should be FY '26 a return on investment from more efficiencies from the ADC. So the depreciation is there, but hopefully, there's some cost per unit reductions in how you run the DCs and the CFC?

Correct.

Got it. And then the other one, obviously we think about the direction of the business and making the business more or the store more relevant to the shoppers. You did 46 renewals in FY '23 in supermarkets, and there's only 50 planned for FY '24, and that's running at about a 17-year cycle on renewals. Is that the run rate you expect going forward? Or is it just a bit low for some specific reason?

So the [indiscernible] for this year, which is a little bit of a step up year-on-year. I mean, there has been a number of challenges in terms of access to construction and resources to be able to do renewal and property work over the last period. So there's a bit of a degrade here, we need to bring the run rate back up to kind of what we were at a couple of years ago, which was around the 50 mark. It's one of the things that we will definitely be looking at from a store presentation perspective is what are the opportunities in the renewal space. So we would seek to manage all of that within the capital envelope that we've already announced today around the $1.2 billion to $1.4 billion.

The next question comes from Bryan Raymond from JPMorgan.

Just on to '24 costs again. Sorry to belabor the point. But just thinking about the incremental labor hours required in store in '24 versus '23, given the comments you made earlier around availability. And obviously some of these stock loss measures will require extra labor as well. Our feedback indicates execution could probably be improved at Coles as well at the moment. What are you seeing in terms of extra labor hours? And how much of that can be offset by the new cost-out program?

Thanks, Bryan. I mean I think the point on loss is really that this is a 3-prong approach. So technology investment gives us the added benefit that it's structural and ongoing. So once you've made that capital deployment, you get the benefits back. And clearly the whole concept of using data and artificial intelligence to identify issues in itself is a much more efficient way of tackling the problem. You're right, the pie in the middle has got the ability to improve, particularly service execution. And we've been running, as Leah said, some more training within our store teams around service and how we can dialogue that customer interaction. And there are obviously some carry-on flows from [indiscernible] Smarter Selling program in terms of operational efficiency on process with regard to shelf replenishment availability that continue to drive benefit. So net-net, at this stage, I wouldn't say that that's a further investment to tackle the problem in resources, more a prioritization of focus.

Okay. Sorry. So just to understand that. So you're saying you don't need to increase store hours next year because you've got enough -- or year-on-year given all that? Sorry, I just want to make sure I'm clear on --

Well, the store hours that we have are very much driven by our sales shape. So, the way in which our rostering system works is, it's based on what we expect the sales and volumes to be going into store. So, if we see good increases in terms of volume and sales as we shift to in-home consumption, then we'll see a proportionate increase in terms of the store hours, but we're definitely not calling out that there's significant investment above and beyond that sales-driven shape.

Okay. Okay. And just to understand the Ocado D&A component, it seems a bit bigger at $55 million in FY '25 than I expected. First part of the question is, is that the forever D&A line that we should be thinking about, the perpetual number there? And then secondly, given you state that online is profitable for you now, how do you think then about the net benefits of Ocado given the share of the economics that Ocado takes? So this feels like it's going to be a reasonably big EBITDA benefit you need to offset that D&A, which is pretty high relative to the CapEx you're spending in there. So just interested in the net benefits on Ocado long-term?

Okay. Well, why don't I start with that and then Charlie can cover off the depreciation question. So as I said earlier, there's definitely customer -- real customer benefits and differentiation here that is derived from the CFCs around perfect order rates, freshness guarantees and also the extended range that you can have in the offer. The extended range does also provide you with opportunities to drive a slightly different margin mix as well, because you can orient that around products, which are widely available elsewhere. And so typically will be higher margin than category average. The other thing from an operational perspective for us is that the CFCs are one overall piece of how we think about the overall network that we use to deliver online orders. So I mean, if you think about it, the CFCs are going to represent about $1.5 billion worth of sales out of $40 billion worth of sales from an omnichannel perspective. And we definitely think about our customers from an omnichannel perspective, which is most of our customers and our most valuable customers, shop in-store and online. And so, we will be continuing to use our stores for immediacy. We will continue to use our stores to Click&Collect. And outside of Melbourne and Sydney, we're going to continue to use those stores for home delivery as well. So, if you think about it, we're going to be taking out the picking that happens the next day home delivery out of the stores. And those stores that it's going to come out of, they are our most constrained in terms of capacity, and they're also our biggest and busiest. And so by taking those home delivery next-day orders out, you actually reduced congestion in those stores and you create capacity. So on the congestion point, what happens is you end up with a better experience for the bricks-and-mortar customers and you end up with a better experience for the home delivery next-day customer as well because they're getting the order out of the Ocado facility. And then from a capacity perspective, because we've taken out that peak from the stores, we can then have more room to expand into areas like the Click&Collect and the immediacy. So, we do definitely have to think about it in the overall context of how the network is put together. Ben, could I maybe just get you to talk a little bit about kind of how you think about like the cost curve as well.

Yes. Yes. It's a great point. And Leah, you mentioned we do spend a lot of time with Ocado's operational partners. I've been in almost every market myself, along with Matt, U.S., Canada, Sweden, France, team just got back from Japan. So, we're learning from the partners that are live. But there's something really unique in our context. One is we're not starting from scratch. So, we already have the demand. Ocado is the great fulfillment proposition and capability that we'll have to deliver on. So if you think about the cost curve, let's say, cost per unit, it's really driven by capacity within the CFCs. And so, we will be much further to the right on the cost curve. And so, we're going to have -- greater line of sight more quickly to overall profitability of the CFCs. The second thing that I'd add to, just unique to our context is amongst any other retail partner, we already have the operational capability for last-mile delivery through our own van network, which covers more than 95% of the population. I just want to make sure we call that out in the difference in our context. Charlie?

Yes. Look, specifically depreciation, let me talk about it in sort of in sort of 3 parts, okay? So firstly, working through depreciation, there'll be an element of -- even though the buildings are actually leased, obviously there's the right-of-use asset depreciation that works its way through the depreciation line. So that's not necessarily in the CapEx number that you'll see, but it works its way through depreciation. The other thing there is that clearly there's an element of IT and technology spend which is capitalized. And that's obviously typically capitalized and depreciated over a shorter life than, say, a building or some of the fixed assets. There are some other assets that actually do work their way on our balance sheet. So, we talked a little bit about the scope of the CFCs like the bakery, the industrial bakeries at the facilities, the fresh-cut produce rooms, that sort of machinery. So there are assets that we are depreciating. So it's sort of a blend of all those sort of 3 elements through our depreciation profile, which may, you're right, looks a little high relative to our CapEx guidance for the CFCs.

Right. Okay. So that $55 million should fade a little bit then as some of those shorter life assets get depreciated fairly quickly. That's not the sort of long-term number necessarily?

Correct. In relation to the returns. I mean, as we did with Witron, I mean closer to these facilities coming online, we'll continue, obviously, that dialogue with the market in terms of how to think about these returns with the respect of these assets. And we're really not going to sort of go into that here today.

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

That was a question I was going to ask, but maybe I'll do it in a slightly different way. If I look at the Witron, Ocado implementation operating expenditure, it's about $150 million over the course of the project on a $1 billion spend. Whereas for the automated CFCs it's $200 million on a $400 million CapEx. So I'm just wondering why are those implementation costs so high for Ocado? And then secondly, do they include the fees that you're paying to Ocado. And so therefore, I guess similar to Craig's question before, they're going to just keep continuing going forward until you, I guess, increase your market share in online enough to offset those fees? I guess I'm just trying to understand that, the costs look very high for Ocado relative to the CapEx, especially when you compare it to the ADCs?

Yes. Well, I think firstly, the contractual arise [indiscernible] in terms of the various assets and how they actually work their way on the balance sheet are 2 very different things, right? So, for example, in the Ocado arrangements, the fit-out things like the [ high ] for the grid and some of the smarts there that relate to that automated facility are actually the assets of Ocado and work this through. So when you do see, we're not really comparing like-for-like in terms of spends they are both projects that when you look in their totality are projects that over -- well over billions dollars in their totality. So I think it does reflect that. In terms of the project implementation OpEx, again it's just in relation to the nature of the work that we needed to as part of this. The OpEx includes things like our people who are -- and some of it capitalize, some of it's written off, includes our people who are obviously working on the technology component who are part of the integration. It includes members of the management team that we already have in place today. So it really is looking at those costs effectively. They are slightly different. But I think when you look at the Ocado ones. We've got 2 facilities effectively being ramped up within a 12-month period, a lapse period. Yes, that is going to be heavy on transition of store volume into the CFC, so back of house. It will be done in an orderly process in terms of how that sort of works their way through. And it really relates to the boots on the ground that we've had at our retail partners and our learnings there in terms of the time period it takes to ramp those up appropriately. But the good advantage that we have, as Ben spoke about earlier, given that we have existing orders, we set ourselves on that cost curve to come down much, much more quickly than a number of the retail partners overseas where they haven't had the benefit of transferring existing volume into CFCs.

[Operator Instructions] The next question comes from Scott Ryall from Rimor Equity Research.

Hopefully mine will be pretty quick. I just had a follow-up on the Victorian CFC delay and CapEx, OpEx increase. I was just wondering if you could comment if there's a reason for the difference in Victoria versus New South Wales? And also just to check why you're paying more, particularly on the CapEx side?

There's no difference in terms of the work to be done between the 2, it's just the staging and the timing of the work itself.

Look, in relation to CapEx, again, as I said, it's really spend, right? So spend to actually complete the projects. And these are our spends that we will incur. The areas that we look at is obviously there's some element of capitalized rent and interest costs through the build is the first thing. Secondly, yes, clearly, we have teams working who are [Audio Gap] work on tech, digital, data integration. And obviously retaining them for the period of the delay is really important. That IP that they have gathered and the work they've done to-date is really important for the successful integration and implementation costs. So they are capitalized people costs that are part of ensuring these projects are successful. As I mentioned in my previous answer, we do have some of the operational leadership team in place and that we'll be keeping those. Also reminding that we have -- really 12 months is the time between -- or there's an extended period between the New South Wales and Victoria go-live dates. So really through all that is pretty important. And I think probably one last point, and you'd expect us to do this and work this through. Given the status of the program, that is where 55% way through CapEx, there's obviously a contingency that we have reflected in our forecast, which is not unusual for a project at this point in time and relative to the completion status as well.

Okay. No, that's very clear. And then my second question is just on stock loss, and it's probably for Matt. Firstly, [ Sean ] with baseball caps, just in case you're tracking in when he goes in store to check out your online --

That's really good to know, Scott. If you could let us know the characteristics of everyone else on the call, that would be super.

No, no, no, just him. No, that's obviously a joke in case there's any press online. In terms of Matt's answer to an earlier question. Can I just clarify, are you -- in terms of the stock loss, so I understand a bit about waste and markdowns. But in terms of the stock loss itself, are you guys concerned that there is internal thefts going on as opposed to thefts from customers? We've heard a lot of stories obviously that tobacco and things like that developing a black market with the increase in factors. Are there any comments you can make on the type of stock loss that you're looking at most particular?

No. Well, look, Scott, I mean, obviously, the vast majority of our team members are great contributors and assets to the business. I'll start there. But with 110,000 team members across Coles, we do reflect the society and the community that we work in. So if this is a widespread challenge across all of our stores across multiple parts of the community, it's fair to assume that some of that does flow into our operation. So that's what I'll say first. I think Leah has already called out this is all stores in all categories. So it's a widespread problem. And it ranges from an increase in organized crime right the way through to what we would term petty shoplifting and the spectrum in between. So that gives you some idea. We are targeting all of it. And we are prioritized and focused on every single dollar of opportunity to come back into the business.

The next question comes from Lisa Deng from Goldman Sachs.

I have 2 questions. The first is actually on our digital strategy. It looks like we've actually unveiled a little bit more of a holistic end-to-end digital strategy here. I just wonder, if we look sort of in the medium term, next 3 years, how sizable or directionally how material would, say, an uplift to sales or GP margin would be? If you can just help us think a little bit through that? And then a follow-on is, I did a bit of maths when Charlie was talking about the 1/3, 1/3, 1/3. And if I took the 1/3 increase and then backed out the 80 for Witron and 13 for Ocado implementation, then I get roughly a $90 million uplift in the year past on digital investments. And so how do we think about that going forward as well alongside that uplift on sales or GP?

So I mean, Lisa, it's great to hear that you feel that the digital strategy is starting to hit the mark in terms of something that's very much omnichannel and end-to-end. Ben, did you want to make sort of any comments on that component a bit?

Yes. I think the only thing that I'd add, I think you see this part in the strategy today, there's further unveiling that we'll go through, I believe, later in this year. We've put the customer at the center. So it's less of an emphasis just simply on channel, but it's really around customer. And 3 things we hold to be true is, one, unify the experience. If we think of an example this past fiscal year, we unified the website. We've done things like bringing the Flybuys loyalty integration into the app. Certainly there's more to come with unifying the experience. And we're delivering at a faster pace. And that means you have to know what the customer wants. And you have to be able to pivot really quickly and let them inform what you're doing. I mentioned a 48% reduction in cycle time, which is a very significant increase in speed. And then you have to have optionality. We're talking about the great benefits that the CFC will provide. But we're also, as you can see in our network numbers, investing in propositions that are very fast delivery for the customer. So I'll just leave it at that, Lisa. More to come for sure in the future on digital strategy.

Yes. And I think, I'd probably say, Lisa, we won't be sharing any sort of forecast of what we think the impact on GP is going to be. I'm really conscious of time. And your second part of your question, we're starting to get into quite a bit of detail in and outs and numbers. So I might actually suggest we take that one off of the line and [indiscernible] could give you a call afterwards, Lisa, to just work through the counts you've done if that's okay.

Got it. Yes. And then just quickly on the second one. You mentioned that the overall strategy will include adjacencies as well. And we see, obviously, Liquor has been outperforming. And the -- there is a sizable sort of store rollout plan and renewal plan? And what is the ultimate sort of -- well, not the ultimate vision, but what's the medium-term vision in terms of Liquor? Like, what are we thinking in terms of market share gains or margin improvement? How sizable are we talking here?

Lisa, you've given Michael a chance to speak right at the last bit [indiscernible].

Yes.

Yes. Thank you for that, Lisa. Sorry, I'm obviously not going to give any forecast around market share growth or continuing performance. But the way that I would answer your question is to say that in terms of what has been driving the performance to-date. If we look across renewals, if we look across new store openings, we look across eCommerce and if we look across initiatives that have been going on in terms of range, such as ELB, I think that there's more headroom to run in each of those. And so, I think that the momentum that the business has at the moment is very positive. I think in terms of the strategy evolution for the group, pillars like accelerated by digital fit really well with what the next phase of the work is to do. And so, I think without giving a forecast, I think that there's certainly ample opportunity to continue evolving our customer proposition going forward, we should hopefully see us continuing growth.

But is the strategy here profitable growth or more market share at any cost?

No, it's certainly profitable growth.

At this time we're showing no further questions. I'll hand the conference back to Leah for any closing remarks.

Well, thank you all for attending the call this morning. I think we've managed to cover quite a wide range of topics. I just finish out by saying that, as we've headed into FY '24, we have some things which really give us hope around the tailwinds that the business has in front of us. So, we've seen further improvement in availability. We're showing signs of the consumer starting to move to in-home consumption. We've seen a customer that has responded really positively to the customer value proposition that we have in place. And we consider continuing to see population growth, which is a really positive trend for us as a business. In addition to that, we're really excited about the forward growth that we've got in the digital space and the early success that we've had on Coles 360. So, we're really excited to take forward the evolve strategy that we've got and start to see implementation of that in the business as we move forward, and we look forward to sharing some more with all of you on that in the coming year. Thank you.

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