Coles Group Limited (COL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Coles Group FY '24 results release. [Operator Instructions] I would now like to hand the conference over to Ms. Leah Weckert, CEO and Managing Director. Please go ahead.

Good morning. It's great to be taking you through our full year results this morning. Several members of our executive leadership team are in the room with me: Charlie Elias, our CFO; Matt Swindells, our Chief Operations and Sustainability Officer; Anna Croft, our Chief Commercial Officer; Ben Hassing, our Chief Digital Officer; Mike Courtney, our Chief Executive of Liquor; and Amanda McVay, our Chief Customer Officer. Before I begin, I would like to acknowledge the traditional custodians of this land on which we meet today, they are under people at the Kulin Nation. We acknowledge their strength and resilience and power respects to their Elders, past and present. Moving now on to Slide 3. It's been one year since we unveiled our refreshed strategy, and I am pleased with the significant progress we have made. Looking back on the year, we have had a focus on investing in our customer offer whilst navigating a challenging cost environment in the form of cost inflation and lost headwinds. Our value proposition led by our Great Value Hands Down Seasonal Value campaigns and own brands as well as our loyalty offers, has resonated with our customers. And we have delivered strong e-commerce sales growth by expanding the offer and improving customer experience. We have also managed our cost base with Simplify and Save to invest benefits of $238 million in addition to tackling loss and driving improvements in availability. Another significant highlight is the key milestones we have reached on our AVC and CFC projects. I'm pleased to say that operations at all 4 facilities have now commenced. We had the official opening of the Kemps Creek AVC earlier this month. The Red Bank AVC ramp-up is complete, and at both of our CFCs, we commenced operations in July. During the year, we made strategic investments with the acquisition of 2 automated milk processing facilities and 20 liquor retail stores in Tasmania, which are now all trading as Liquorland. And with all of this going on, we achieved our highest ever team member engagement score. So overall, I feel it's a very solid year in terms of execution, and I'll take you through a bit more of the detail shortly. But first, let's move on to the financial highlights on Slide 4. At a group level and on a normalized basis, which adjusts for the 53rd week, reported group EBIT from continuing operations increased by 5.7% to $2.1 billion, and reported NPAT from continuing operations increased by 2.1% to $1.1 billion. On an underlying basis, group EBIT from continuing operations increased by 7.3% to $2.2 billion, and underlying NPAT from continuing operations increased by 4.1% to $1.2 billion. Again, those growth rates are on a normalized basis. We reported operating cash flow of $3.6 billion with a cash realization ratio of 98%. The Board declared a final dividend of $0.32 per share fully franked, taking the total dividends declared for FY '24 to $0.68 per share, and this represents a 3% increase on FY '23. Moving now to Slide 5. As I said upfront, we have made significant progress against our strategy this year, particularly in the areas that I identified as my immediate areas of focus at our FY '23 results. And you can see these in the boxes on the right-hand side of the slide. Let's get into a bit more detail, though, starting on Slide 6 with value under our destination for food and drink pillar. Providing value to our customers has and always will be a key priority for us. There is no doubt that this has become more important to our customers over the last 12 to 18 months. We spend a lot of time talking to our customers and know that having great specials and competitive pricing is a key driver in where they choose to shop. We have also seen an increase in customers citing loyalty offers as a factor in Store Choice as well. The feedback we receive from our customers shapes our offering and how we communicate that offering to them. Pleasingly, we have seen customers respond positively to our overall value proposition. During the year, we invested in key seasonal campaigns with the price on hundreds of products dropped in-store and online through Great Value hands-down campaigns. Importantly, these price drops were in key categories that matter most to our customers. For example, in summer, we dropped the prices of more than 300 products, including 25% of [indiscernible] chops. So those wanting to enjoy a summer barbecue with family and friends. And during winter, we dropped the price on beef slow roast. In addition, we have everyday low prices as well as thousands of weekly specials, which we know our customers value. Last year, we also launched our value brand, Coles Simply. The distinctive yellow packaging allows customers to easily identify key [indiscernible] brand value items as they shop. We rebranded more than 100 products by year-end and there is more to come. Our Coles Finest range was also expanded to more than 70 products and caters for those customers seeking an alternative to eating out. We know price is important to our customers, but we also know that customers look for value through other means, including loyalty. During the year, we made it easier for customers to redeem their flybuys points. With instant redemption of flybuys points for $10 off a checkout rolled out nationally. And we saw over 2 million members redeem points for the first time at Coles. Finally, a key part of our strategy is to help all Australians come together for moments that matter, key events and special occasions. And whether that's Christmas, Easter or Mother's Day, we delivered value through providing a range that catered to all price points. Moving now to Slide 7. In addition to value, becoming a destination for food and drink is about delivering a high-quality fresh food offer. We improved quality controls in our DCs to ensure fresher product for our customers in store. And we also increased local sourcing such as in WA, where we have transitioned to 100% Western Australian sourcing of all of our Coles-owned brand fresh beef, poultry, pork and lamb for our WA stores. Moving the source of the product place the customer, ensures a fresher product on shelf. It also improves availability in areas of the country that are more susceptible to issues such as flooding causing rail outages. Our great lengths for quality campaign was also launched during the year, which showcases the great lengths our team members and suppliers go to, to deliver fresh food for our customers. And we've made great progress in our convenience offer helping customers who are short on time. We expanded our convenience range, including through our meal deals and the convenience sales themselves, and these are aimed at saving time, providing inspiration and providing budget-friendly options for busy households. Moving now to Slide 8. In supermarkets, exclusive to Coles sales revenue increased by 6.6% on a normalized basis, which is 2x that of proprietary brands. This was delivered through products at all price points, from Coles Simply to Coles Finest with more than 1,100 products added during the year. External recognition, especially from our customers, is always pleasing. So it was great to see our products recognized at the 2024 Product of the Year awards. Coles was the most awarded retailer for the fourth year running with awards across a range of categories, including fresh meat, bakery, pantry and pet food. In Liquor, our exclusive Liquor brand portfolio also received recognition with 538 awards, including Pure Origin Tasmanian Gin, awarded double gold at the Melbourne International Wine, beer and Spirit show and Tinnies Hazy Pale Ale, winning best in show by country at the London Beer show. Moving now to Slide 9 and our second pillar of accelerated by digital. We continue to invest in our digital assets during the year and saw strong growth with 13.1% growth in supermarkets and 9.2% growth in liquor on a normalized basis. Significant enhancements were rolled out of Coles [indiscernible] website to improve and personalize the customer experience. We integrated flybuys into the app and added features such as Trolley building, where customers are prompted to add personally recommended items. We also provided greater value through the launch of Coles [indiscernible]. Our monthly subscription offering customers 10% of one shop in-store online each month as well as additional benefits, including double flybuys points. All of this has led to strong growth in monthly active shoppers on the app and importantly, improvements in NPS across key metrics, including availability, range, click and collect, wait times and ease of checkout. Now we are also innovating with new ventures and adjacencies with the launch of Swaggle, our specialty pet offering, and we also continue to grow our online meal kit subscription service Quite Life, which is now offering customers 30 new recipes each week. Moving now to Slide 10. Our Retail Media business, Coles 360, has also continued to deliver strong results during the year, with media income increasing by 20.5% on a normalized basis with strong advertiser demand growth across our digital offerings including offerings in store and through Coles Online. During the year, we launched Coles 360 impact, expanded into liquor and continued to roll our digital screens. This is an exciting part of the business, and I look forward to sharing more details as the business grows. Moving now to Slide 11. As I said at the start of my presentation, we were excited to commence operations at both the Sydney and Melbourne CFCs in July. We have built the CFCs with inventory. We have completed a friends and family phase at both sites, and have now transitioned the first home delivery post codes to the site. This occurred a few weeks ago in Victoria and yesterday in New South Wales. We expect Metro Sydney and Melbourne next-day home delivery orders to be fully transitioned from stores by the end of December. The commencement of operations at the Sydney CFC was broadly in line with our guidance, whereas Melbourne is ahead of schedule. The CFCs are a part of our overall e-commerce proposition, and they are expected to deliver a significant improvement in customer experience and a differentiated next-day home delivery offer. We look forward to realizing the benefits, including industry-leading perfect order rates, improved freshness and expanded product range and increased agility in trailing new products. These facilities will also significantly expand network capacity in addition to reducing congestion at some of Sydney and Melbourne's highest trading stores, allowing for in-store growth and additional capacity for same-day immediacy and click and collect orders, which will continue to be fulfilled from these stores. We have also provided some additional financial metrics, which you'll see on the slide, and Charlie will touch more on this shortly. Moving now to Slide 12 and the third pillar of our strategy, deliver consistently for the future. Our Simplify and Save to Invest program has become even more important as cost inflation rises. Being able to deliver benefits of $238 million for the full year was a great achievement and helps us to offset the cost inflation we are seeing in the business. We delivered a wide range of initiatives during the year, including guided counts, store-specific ranging and in e-commerce peak efficiency. In terms of loss, I mentioned at the start, we addressed loss at pace during the year. The team worked hard to roll out loss technology solutions across stores with Skip Scan now in 546 stores. Smart Gates in 326 stores and Bottom of the Trolley technology in 455 stores. We reported a 44 basis point improvement in total loss in the second half, and while I'm pleased with the trajectory, we are not stopping. And loss will continue to be a focus for us. Finally, on availability, this has been another area of focus, and I'm pleased with the results. We've improved our supply chain resilience and our availability metrics. We delivered in full up 7 percentage points and deliver in full on time up 10 percentage points year-on-year. Moving now to the ADCs, which are discussed on Slide 13. Our ADC program is tracking well. In terms of Redbank, ramp-up has been completed, with the ADC now servicing 219 stores in Queensland and Northern New South Wales. We are already seeing results with availability across stores improving and the supply chain costs reducing in line with our business case. We also have the official opening at the Kemps Creek ADC earlier this month. First, inbound deliveries were received in March and first outbound deliveries to stores commenced in July. Ramp-up is expected to be completed by the third quarter of FY '25. The ADC program remains on track to deliver its first full year of benefits in FY '26. Moving now to Slide 14. Creating a more sustainable future is a key part of this pillar, and we have made progress in all 4 of our focus areas of emissions, packaging, waste and sourcing. We've also released our sustainability report today, and I encourage you to have a read of the progress and achievements over the past year. Moving now to Slide 15. Underpinning our strategic pillars are what we call the building blocks of Win Together and Foundations, which enable us to deliver on our purpose and strategy. I will talk to Win Together on this slide. Win Together recognizes the importance of our team members, community partners and suppliers. Increasing team member engagement continues to be a priority for us, and achieving our highest-ever team member engagement score, placing us in the top quartile relative to the Australian benchmark with great recognition for the work we're doing to develop and invest in our team members. We are focused on creating an inclusive environment. So I was particularly pleased that Coles was ranked #1 out of 40 organization in the Australian Disability Network Access and Inclusion Index for 2023. And Coles was also awarded Gold Employer status for the first -- for the third year, I should say in a row at the AWEI inclusion awards. We continue to invest in the communities in which we operate with $38.5 million in community support provided in FY '24. Our partnerships with SecondBite and Foodbank are even more important in the current economic environment. So I'm pleased that we were able to donate the equivalent of approximately 40 million meals across the course of the year to these important organizations. Finally, on suppliers. Through the Coles Nurture Fund since 2015, we have awarded $36 million in financial support to 107 small businesses across Australia to help Australian producers innovating growth including $3.7 million in FY '24. Moving now to foundations on Slide 16. The foundations of financial discipline, technology and data help us deliver on our strategy and drive value for our stakeholders. During the year, we delivered a new cloud and data platform with 90% of our data now stored in the cloud. We enhanced our master data management system and partnered with a leading global AI provider to drive operational improvements, including further optimizing rostering and enabling more team members to receive their desired hours. In Liquor, we commenced the rollout of liquor easy ordering, a demand forecasting and automated ordering system to improve availability. And finally, we developed an intelligent Edge backbone, which facilitated the lost technology implementation and is also enabling rapid deployment of computer vision solutions across our stores. These are all important foundational investments to help our teams work faster and smarter. Now before handing over to Charlie, I'd just like to briefly cover off on some of the strategic portfolio investments we've made over the past year. I'm now on Slide 17. These investments have been focused on our core business. In June, we completed the acquisition of 2 automated milk processing facilities from Saputo, improve the security of our milk supply and provide scope for future growth through product innovation. In Liquor and also in June, we completed the acquisition of 20 liquor retail stores in Tasmania. Prior to the acquisition, we only had 3 liquor stores in TAFE and now around 30% of the population have a liquorland within a 5-minute drive. And with that, I'll now hand over to Charlie, who will take you through the financial results in some more detail.

Thank you, Leah, and good morning, everyone. As many of you know, and I'm on Slide 18, FY '24 is a 53-week year for reporting purposes consistent with the retail calendar. When we refer to normalized growth rates, presentation slides and results release, we are removing the impact of the 53rd week to allow for comparability of a 52-week to FY '23. As we reminded you earlier in the year, the 53rd week contribute sales at a higher margin as a result of fixed cost operating leverage. But let me take you through the way we account for the 53rd week so you understand the impacts of the various line items in our P&L. Firstly, sales as well as direct trading costs are accounted for on a daily basis. There are a number of cost items, which are accounted for monthly. Examples of these are store support salaries, property costs and leases. In relation to D&A, the CapEx D&A is accounted for daily that AASB 16 leases in relation to D&A are accounted for monthly. In relation to interest, interest on bank debt, notes and loans are calculated daily, whereas interest on the leases, which is actually 80% of the interest within financing cost is accounted for monthly. This methodology remains consistent with our accounting practices since the merger in 2018. In addition to normalized growth rates, we also report underlying earnings. Our underlying earnings are adjusted for the following items: firstly, as we have done in the past, major project implementation costs in relation to the ADCs and the CFCs; secondly, the $25 million provision related to award covered salary team member review that was raised in FY '23; and thirdly, 2 small nonrecurring expenses recorded within the Liquor division this year. Details of these adjustments are clearly outlined in the presentation and results release, including a reconciliation in the appendix. We have provided normalized freight to sales figures in the appendix as well. Now turning to Slide 19, the results of the group. I'll firstly talk to the results on a continuing operations basis and the growth rates I'm referring to are normalized. Sales revenue increased by 5.7% to $43.6 billion. Underlying EBITDA increased by 5.6% and underlying EBIT increased by 7.3%. Underlying EBITDA and EBIT was supported by a strong value proposition delivering strong sales and successful execution of the strategic priorities. Reported net profit after tax increased by 2.1% while the basic earnings per share also increased by 2.1%, up to $0.846. The Board has declared a fully franked final dividend of $0.32 a share, an increase of 6.7% compared to prior year. Moving on to Supermarkets and Liquor segment financials on Slide 20. Starting with Supermarkets on a normalized basis. Sales revenue increased by 4.3%, underpinned by a positive customer response to our seasonal value caplines, well-executed trade events, strong growth in e-commerce and improved availability. Investments in value continue to resonate with customers with exclusive to Coles sales growth of 6.6%. This included a 20.4% increase in our Coles Finest range as customers sought quality alternatives to eating out. E-commerce sales increased by 30.1% with penetration at 9.4% driven by improvements in customer experience, availability and strong trade across key events including Black Friday, Christmas, Easter and the Coles Online 25th birthday celebration. Underlying EBIT increased by 10.5% with underlying gross margin increasing by 50 basis points supported by lower tobacco sales, growth in 360, OL360 range of promotional optimization and simplify safe to invest benefits. As Leah mentioned, the second half also benefited from a 44 basis point improvement in total loss compared to the prior year. Underlying CODB as a percentage of sales increased by 20 basis points however, remain broadly flat if you exclude D&A and one-off $20 million payment to team members following a successful vote in favor of the retail enterprise agreement. In Liquor, sales increased by 0.5% impacted by a challenging liquor market as customers reduced their discretionary spending due to economic pressures, coupled with the business transitioning away from less profitable bulk and affiliate sales. Delivering quality and value to customers through our exclusive liquor brands continues to be a key focus with sales outperforming the broad liquor portfolio and 244 new lines added. E-commerce sales increased by 9.2%, with penetration at 6.2%, underpinned by continued strength in the online delivery channel. Underlying EBIT declined by 38.9% as sales growth was offset by wage growth, fixed cost deleverage, investments in core IT systems and increased D&A in relation to new stores and renewals. Turning now to operating cash flow on Slide 21. Operating cash flow, excluding interest and tax was $3.6 billion. The timing of year-end and the impact on working capital and cash flow conversion as previously guided, resulting in a cash realization of 98%. The working capital movement reflects an increase in inventories to support availability, partially offset by lower receivables and increased payables driven by the timing of the year-end payments. And movement in provisions and other reflects higher employee benefits, provisions and major project implementation. Now let me take you through capital expenditure on Slide 22. Gross operating capital expenditure on an accrued basis was $1.4 billion, an increase of $43 million compared to prior year. Capital expenditure falls into 4 key areas: store renewals, growth initiatives, efficiency initiatives and maintenance. Within store renewals, we completed 147 store renewals across our network, consisting of 50 supermarkets and 97 liquor stores including 89 Black & White liquorland renewals. Within growth, we opened 12 new supermarkets and 45 new liquor stores, which includes conversion costs related to the 20 liquor stores acquired in Tasmania. Growth CapEx is also included in investments in our automated CFCs and other e-com initiatives. Efficiency initiatives include investments in stock loss technology in the ADCs. And maintenance CapEx includes refrigeration and electrical replacement programs and our life cycle replacement of store and technology assets. We continue to optimize our property portfolio, and net property capital expenditure increased by $91 million compared to the prior year resulting in a net investment of $19 million with fewer property divestments and higher acquisition and development investments compared to the prior year. Now turning to FY '25, we expect capital expenditure of approximately $1.2 billion. This is inclusive of approximately $100 million in relation to the finalization of the CFC and ADC programs. We have spent about $1.25 billion to date on the program and so well within our $1.4 billion previously guided with respect to these projects. This $100 million CapEx relates largely to a final milestone payment in relation to the ADCs, spend on the 2 spokes in [indiscernible] and Alexandria with respect to the CFCs as well as some IT and tax spend on both programs. We expect the remaining $1.3 billion to be split in terms of renewals, growth, efficiency and maintenance and a similar trend to recent years. Now turning to Slide 23, the balance sheet. As at 30th of June '24, we reported negative working capital of $1.4 billion, capital employed of $12.4 billion and net assets of $3.6 billion. We maintain a strong balance sheet with investment-grade credit metrics to provide flexibility for future growth. Working capital increased by $121 million compared to June '23, largely driven by an increase in receivables, increase in inventories to support availability as well as the impact of inflation on the cost of goods. Property, plant and equipment of $5.6 billion increased by $634 million compared to June '23 driven by increased capital expenditure, partly offset by depreciation and property divestments during the year. Cash and cash equivalents increased to $675 million and interest-bearing liabilities increased to $1.7 billion, largely a result of issuance of $600 million of Australian dollar medium-term notes in November '23. Now turning to Slide 24. We have extended our debt maturity profile and continue to make access to both diversified funding sources. We do not have any debt maturing until FY '26. At year-end, our weighted average drawn debt maturity was 5.5 years with undrawn facilities of $2.4 billion. As I said earlier, the Coles Board declared a fully franked final dividend of $0.32 per share with a payment date at the 25th of September 2024. This takes our total dividends declared for FY '24 to $0.68 per share as within our annual dividend payout ratio target of 80% to 90%. We maintain this payout ratio target franked to the maximum extent possible. Finally, we retained headroom within our rating agency credit metrics and a strong balance sheet to support growth with our current published credit ratings of BBB+ with S&P Global and Baa1 with Moody's. Now before I hand it back to Leah, I'll take you through our outlook and concluding comments. I will talk to you about the financial outlook for transformation program in FY '25, as are notices of particular interest. Firstly, our ADCs. As Leah mentioned, Kemps Creek ADC is in the process of ramping up, and it's expected to be fully wrapped up by the end of the third quarter. Therefore, the both ADCs will be operating as expected by Q4 this year. Implementation costs in the ADCs are expected to be approximately $60 million this year, reflecting the Kemps Creek ramp-up, dual running costs and remaining site closure costs, and depreciation is expected to be in line with previous guidance of $75 million. By the end of Q3, implementation costs will fall away and the program remains on track to deliver its full first year of benefits in FY '26. Then in terms of our CFCs, firstly, let me reiterate Leah's comments that we're excited that the CFCs have commenced operations and provide customers with best-in-class perfect order rates freshness and range. The CFC is a part of our omnichannel customer strategy and we will not be providing channel economics going forward, consistent with the way we disclose our e-com channel today. Having said that, let me step you through how I think about the earnings impact for the CFCs in FY '25. We previously guided implementation and transition costs of the CFCs in FY '25 would be around $110 million plus depreciation would be around $55 million. Today, we have stated in our release that we expect the EBITDA impact to still be around $110 million in FY '25, made up of 2 components: approximately $70 million of one-off implementation of transition costs, and the balance of around $40 million being the in-year earnings impact on the P&L. Depreciation guidance is unchanged at $55 million. Similar to the ADCs, implementation costs will fall away in FY '26, and we expect the CFC volumes and operation leverage to improve. As we look forward, I know a lot of you look to overseas, but I think it's worth noting as we have previously indicated, the experience of the international retail partners is shaped by very specific business model and market dynamics. Our proposition is different with a number of key benefits. Firstly, the facilities love volume, and we are transitioning significant volume day 1. We have an established and fast-growing e-com business and market. We are offering an expanded range day 1. We have the benefit of the partner learnings. All the above should assist in reducing our cost put order and realizing operational leverage. In addition, we have a track record of growing and investing in our e-com business at the same time of growing earnings and margin. Now I'll hand it over to Leah to take us through the outlook and concluding comments.

Thanks, Charlie. So I'm on Slide 32, the outlook. In the first 8 weeks of FY '25, Supermarket sales revenue grew by 3.7% with positive volume growth and increasing momentum as the quarter progressed, driven by both our value and our winter sports campaigns. In Liquor in the first 8 weeks, sales revenue declined by 1.4%. However, the CrowdStrike outage in July did have an impact on Liquor during the period given we had a number of liquor stores that were unable to trade during the outage. Excluding the impact of CrowdStrike, the Liquor sales revenue declined by 0.3%. You can also see on this slide, there's a number of pieces of commentary on store investments, CapEx, M&A and financing costs with more details in the release. And with that, I'm going to hand back to the operator, and we'll get Q&A underway. Thank you.

[Operator Instructions]. The first question comes from Ross Curran with Macquarie.

First, just want to say congratulations on a very strong result, particularly during a period of heightened scrutiny clearly, you're benefiting from management's ability to focus at the moment. Are you able to talk us through how you're able to get the Victorian CFCs open 6 months ahead of schedule? And how are you going to be marketing the Ocado benefits to consumers?

Thanks, Ross. I appreciate the confidence in the results. So look, we're really excited. As both Charlie and I have said that we've been able to get both of the CFCs open and commenced operations from July. It's been a year where about this time last year, we reset the program. And as part of that, I would say that we have had an absolute laser focus on executing against that plan. And we have looked for every opportunity as we've progressed through it to find opportunities to speed up the time frame because we knew that, that would reduce our implementation costs. We've also looked at every opportunity of how do we bring the cost of the implementation of them down. So the ability to bring that all together and get it going from July has just been very pleasing. And I do put it down to focus around execution in the program that we've had. And sorry, your second part was the marketing, wasn't it?

That's right.

I might get Ben to just briefly outline if it's worth making the point that whilst we transition the postcode over the course of the next 6 months through to Christmas. We won't be doing a lot of specific marketing at an above the line level around it because it will just be certain postcode increasing numbers, but certain postcode within each of Melbourne and Sydney that will have access. And so any of you who have jumped online this morning to see whether you can place Ocado CFC delivery may have found it was difficult to see that. It's because we've only transferred in so many postcode so far. And it won't be able to do that until we place the postcode. So we won't really ramp up specific marketing around it until we've got everyone into the program. But Ben, do you want to just cover off how we're thinking about it?

Yes, sure. Thanks, Leah. Thanks, Ross, for question too. I think as Charlie mentioned, our context is quite unique. And if we look at other partners, we're really emphasizing, we have an established e-commerce business, but it's ultimately an omnichannel business. So we won't get into the specifics, but I think we all know what are the key benefits for the customer, extended range, freshness, availability and some other benefits. So we're really excited and we're able to take that to market at mass once we complete the transition.

The next question comes from David Errington with Bank of America.

Leah, the thing that really surprised me today very positively was your cost savings efficiencies. Particularly, your wastage where my math, and correct me if I'm wrong, you basically had an $80 million tailwind. And I think that you were highlighting that you actually did $40 million -- or you were targeting $40 million at the end of the first half. And then the Simplify and Save, you did $238 million for the full year after only doing $90 million in that first half. So that's a very wonderful achievement from a financial perspective. Could you please bring to life some of the things that you did? Now I know the Smart Gates in that. And I want to put it into context with your sales I'm trying to get my head around your sales because in that -- I'm not a short-term type of guy, but your fourth quarter sales did drop off a little bit, but they've recovered in the first 8 weeks. I'm wondering and the cynic in me saying, did you push too hard in your cost-saving initiatives that may have lost you a little bit of sales in that fourth quarter? Or are you confident it was just pure productivity improvements and that the sales is just the normal function of cycling last year and a little bit of market weakness? So could you bring to life how you manage that business through that second half? Because the cost performance is quite outstanding. If you could bring to life some of the initiatives that you did. And then if there was a little bit of sales slippage because of that, that sort of would be really appreciated if you could go through that.

Yes. Thanks, David. Quite a bit in that question. So we're going to unpack it a bit. I'll start maybe by just talking a little bit about the sales and then I might ask Matt to just talk through some of the things that we did on both the loss and the Simplify and Save to invest front from an initiative perspective. So look, on Q4, I think if I take a step back, across the entirety of the year, we're pretty pleased with the sales performance that we add, particularly the continued volume growth that we're seeing. And actually, if I look across the entire year, overall, that sales performance has given us a market share gain. So across the course of the year, we're pretty pleased. The second point I'd make is the sales number is going to move around a bit, and it's going to be driven by the activity that we have loaded in, in any particular quarter, and what we're cycling versus the PCP. And we definitely saw that in Q1 where we had loaded in quite a bit more activity than we had the prior year, and you saw the benefits of that in terms of the differential year-on-year. If I look at Quarter 4, so we were cycling an 8% growth in FY '23. So if you look at the 2-year growth, it's at 10.8%, which I still think is a strong outcome across the 2 years. And I think positively, we did see the sales strengthen as we progressed through the quarter. And you've seen that trajectory then continue as we've gone into Q1 and put out in the outlook statement that, that too has seen a progression in terms of strength of trade as we've moved through those first 8 weeks. So I think that's the first piece on the sales. I would say there is nothing in there that is related to what we were doing in terms of the cost initiatives that we were driving. I actually think there are a number of cost initiatives, which were actually helping us to build strength in terms of our ability to deliver to sales. And Matt can talk to it a little bit, but actually, a lot of the loss initiatives, for example, have improved availability in the store. And so when customers now go to buy products that they may have struggled to find on our shelves because of blocked issues 12 months ago, we now have them there for them to buy. And a lot of the SSI initiatives we've done this year, there's been a number of them that are focused on rostering and getting the shape that we have in terms of the people we have in the store more aligned to our sales shape, which is also driving better outcomes in terms of customers and sales. So I would not put down any of the cost execution pieces into the sales mix that we had in Q4. And as I said, we're really pleased with the way Q1 has sort of kicked off for us. But Matt, do you want to talk a little bit about some of the initiative components for both loss and SSI?

David, if I start with loss, really think about in the 2 components. The first being tech where, as Leah has already mentioned, we've got Skip Scan, Smart Gates and [indiscernible] now rolled out really on mass. And that makes a material difference. It's a difference that's pleasingly in line with the business case associated by investment. And we will continue to roll that out where we see a return on our investment in more stores. The second part, though, is more on that back to basics focus upon process, and that's really end-to-end process, saving from range and assortment through space, into store process and store process, not just around loss but also service. And if you recall, David, we stood in also looking at that front end some time ago. And I think we could have done a better job of articulating that the service transformation has delivered almost 20% more throughput at the front end. So customers queue less, they have more flexibility. So not only does that give us a loss in premium, gives us a service benefit. And so we will continue to really focus upon both tech where it makes sense, and process where we continue to improve. The outlook and the environment is still challenging loss, and we will keep very much a focus there. The Simplify and Save program is probably in year -- I don't know, Year 5 or 6 now from our perspective. And I will start by saying 2 things. We do have stability in leadership here. So these are a great team of people, but they also work very much end to end. So we don't think about the cost of a shop or the cost of the DC or the cost of manufacturing. We really work as a team collectively around what's best for Coles and the customer on when we think about that end-to-end process. And there are a number of initiatives that have transpired in last year. We've got a pipeline in future years. So we're always on, and we're always looking for a quantum of efficiency. In supply chain in the year gone, we further optimized our transport and that's the team reviewing delivery frequencies, order volumes, focusing on availability, but also efficiency and costs. So we had fewer bigger fuller pilots go out through the network. And then in stores, our future store inventory and importantly, the use of data and analytics to target activity that really drives availability improvement. So that's the best scenario. You get more sales, better customer outcomes and more efficiency. That's in its third year and will continue. And again, I think I shared with you some of the really exciting opportunities in future data and AI in the space when we announced some work. And then finally, in online, really working closely with Ben's team around how do we optimize the pick pack in store, the last mile delivery fewer, fuller [indiscernible] to go out to customer catchments is a material shift in that cost, and also how we automated the customer call center. So it is all encompassing. It's all collective, it's all consistent and it's through stability of management, and it will continue. Of course, I would say the best sold for cost is sales. So as a retailer, I'll take sales every day and volume, but this underlying has to support both.

It's a great answer, and I really appreciate. And I can't wait to see what these automated DCs are going to do to your business, Leah. I think that, that should take your business to another level, hopefully, with these efficiencies that match driving. So let's hope we can have a really good end of second half -- end the second half of 2025 and then into '26. So, thank you for you answers and I really appreciate them.

Next question comes from Tom Kierath with Barrenjoey.

Just a question on the food gross margin, up 90 bps in the second half. I think about half is from loss and half is from kind of other initiatives. Can you just talk through the sustainability of those other initiatives media tobacco, like should we expect a similar sort of benefit on a go-forward basis there through the gross margin line, please?

Yes. Thanks, Tom. So I think there's probably 5 moving parts -- maybe 6 moving parts, I'd call out in this one. So we have, as you rightly said, the loss benefit in there in terms of H2, which was the 44 basis points that we will see the benefits of that continue into H1 where we were running at higher levels of loss. And as I said, we are intending to continue to focus on that and our plan as late would be to exit out of FY '25 at a lower rate year than FY '24. The second one is then the benefits that we get from simplify sales to invest. So about 30% of the benefits flowed through into [indiscernible] line. And it's just, as Matt just outlined, we do have a strong trajectory of initiatives that we're intending to load into that program going forward, and we wouldn't be calling out sort of any material change in terms of that split of 30% into GB 70% in CODB. You've got the tobacco impact, which is being about 20 bps. We've called that out before. It was about that again in the second half. We're continuing to see the declines on that. How long that goes for, I think, is harder to call. But I think at least for the short term, we would expect that trajectory to continue. And then we've got the Coles 360 program of activity, which we're really pleased with the growth that we've seen in that over the last 12 months, it's a big priority for us to continue to grow that because we certainly are looking at our peers overseas and seeing how they have managed to turn that into quite a significant business, and we would be looking to do the same. So you should expect to continue to see gains from that as we move forward. But then obviously, offsetting that, you've got the investments that we're continuing to make into value. And so we are being very, very conscious around our competitive position and making sure that we've got something very compelling for the customer. The customer right now is spending more time than I've seen for many years, researching where they want to buy a product, and so we want to make sure that our offer is very, very sharp. And so that will be continuing to be a focus for us going forward as it has been in FY '24. Does that help?

That's helpful. So is it -- are they ordered like I feel like you've kind of prepared this a little bit, but you've lost the biggest and then Coles 360 kind of the smallest contributor to gross margin like in '25? Is that the way we should think about the various impacts?

I hadn't ordered them specifically. Loss for at least for H2 was definitely the biggest of the numbers.

Your next question comes from Adrian Lemme with Citi.

My question really is about the Witron ADCs. They seem to be performing well. I would have thought Victoria maybe makes some sense down the track for it to do another one, given there are 2 ambient DCs there in Queensland and New South Wales, you removed to NBTC to put a Witron in. Can you talk to what you're thinking in this space over the next few years? Do you think it's likely you'll be doing any further investment with the Witron, please?

Well, I would say for right now, we're just delighted that we've got 4 transformational facilities that are open and operating, and we are very focused on the ramp-up of those. I mean I think it's fair to say that, obviously, as part of the strategy work that we do, we continue to look for the future. We've been very pleased with how the ADCs have first of all, been implemented from a delivery perspective of the program, but also the results that we've seen over the last 12 months from Queensland. And there we have no reason to believe that New South Wales is also going to deliver similar results. We've seen Queensland in a position where they actually have less gaps on shelves than Queensland -- sorry, the New South Wales and Victoria, which I cannot remember a time in my years at Coles where that has been the case. So it has made a significant impact in terms of the customer offer as well as the efficiency benefits that we're getting from a cost per carton basis. So I would say we're looking to the future, we are considering options, but nothing to report yet, Adrian.

The next question comes from Michael Simotas with Jefferies.

The first one for me is on stock loss. So well done on getting 44 basis points back in the second half. I think it was about a 75 basis point headwind in the second half of the prior year. I just want to confirm, it sounds like from one of the comments you made that it was the case that the run rate improved over the course of the half. And how much more do you think you can get back? Is that stock loss rate in the PCP attainable? Or was it artificially constrained?

So you're right. In H2 FY '23, we said it was 70 to 80 basis points of impact, so let's call it, 75. We've achieved 44 basis of improvement. And you're correct, we did see an improvement across H2 in terms of the run rate that we entered the half at and the run rate that we exited the half at. And our plan this year is to continue to focus so that we're exiting FY '25 at a better rate than we exited FY '24. So there's continuing work to do. I think there are a number of challenges in terms of the environment with the degree of organized crime that we are seeing. So we're not being complacent about what we're going to need to continue to put in place to get the number to shift, but that's definitely the plan that we have for the year.

Okay. No, that's really helpful. And the second one for me is on the Ocado CFCs, and I know you won't give us any disclosure on channel economics and that's fine. But just so we can sort of think through the ramp-up, the $40-odd million of operational costs that you'll have in the FY '25 year, should we just think of that as a payment for the capacity that you've effectively drawn? And how quickly do you think you can fully utilize the modules that you have drawn so we can start to think about a ramp-up and potentially some benefits coming through to the P&L in addition to the customer benefits?

Well, I'm glad you went to -- that we're not going to provide channel economics because we don't have an intention to disclose a separate P&L. But let me talk you through how I'm thinking about this. I wouldn't necessarily think about the $40 million as a payment. I would think about it that these facilities love volume. And it is going to take us time to ramp up to an optimum level so that we're getting fractionalization as a fixed cost, and we can take them to a level of profitability. So as we've given you the guidance in FY '25, we are expecting the implementation costs of $70 million, which is the reduction that we've had on the previous guidance of $110 million, and the differential you've called out there is the $40 million, is largely offsetting the sort of the earnings dilution that we see from operating these 2 facilities in FY '25. If we move forward to FY '26, what we're expecting to see is that we will see, the volumes will have fully ramped up in terms of the addition of home delivery orders that we're transitioning in over the course of the next few months. And we have expectations in terms of how we can expect to grow that, and that will improve our operating leverage. And so we should expect to see upside in the P&L from an earnings perspective in FY '26, plus we will see the implementation costs fall away. Now in terms of kind of as you go forward from that point, I'm not going to give out any guidance in terms of the number of years that we think to get to profitability. But I would say if you look overseas, there's been others of the operators that have the CFCs that have sort of talked about 5 years to breakeven and the like. As Charlie outlined, our situation is quite different to them. We're transferring significant volume from day 1. We've got an established e-commerce business that we have capability and experience in running. And we are able to expand our range, whereas a number of the other players overseas run supermarkets that already have 40,000 or 50,000 SKUs in them. So they don't have the benefit of being able to bring that in as a point of differentiation. So we would say our operating model here is different. And so we sort of would expect that we would be able to scale better than some of the peers that we've seen overseas, if that helps.

It does. And just a quick follow-up, if I can. Have you drawn the full $1 billion to $1.5 billion capacity across the 2 facilities? Or is there some flexibility to do it in stages?

Great question, Mike. Thank you for that. The facility is not modularized. So we will only draw on that sort of capacity as required and as needed as we ramp up. So certainly, we have not drawn on that full capacity day 1.

The next question comes from Ben Gilbert with Jarden.

Just the first question from me. Just around the GM [indiscernible] I had a few questions on this. But the delta into next year looks like it could still be quite material in terms of the step-up just based on the run rate. And I take your comment that you're investing in price, and I know you've done some big drops in cheese and a few other things more recently. But I believe you also got this sort of 7-pillar program versus other program going on around trying to get more out of suppliers. So I'm just wondering, the net of all that was through -- are you having to invest significantly more on that? Or do you think you're actually able to pull a lot of that back to returns in some of these initiatives at the moment?

Sorry, Ben. I missed the start, you're asking specifically about gross margin?

Yes, gross margin. When we put a lot of this together around the run rate for shrink, you can get some big numbers, and I appreciate the comment you said you're investing over and above more, but I believe you've also got a few initiatives to those programs behind trying to probably drive a bit more aligned term improvement as well?

Yes. Okay. So I mean, the big -- if I look forward on the sort of the margin, the GM margin outlook, the big element of that is, as I outlined before, SSI, Simply and Save to Invest, we would see 30% of the benefits going into that line. We also have the lost tailwind that will come through this year because we're cycling over the top of numbers that are sort of larger last year, and we've got a good exit rate as we've come into this year. We'll have the tobacco sales, which has about 20 bps of benefit to that GM line. We've got Coles 360. We'll start to see Witron coming through. And then Anna and the team are working with suppliers in terms of the offer that we've got to customers and really leaning in on that as you've outlined. And all of that is really offset by the focus on competitiveness and ensuring that we've got a really sharp offer for customers. So that's the key moving parts in that GM line.

Right. That's helpful. And just Charlie, just final one for me. Just to confirm, just so we're clear in terms of the step up to next year. So you're going to have about a $70 million lift in D&A from Witron and Ocado coming through. And then obviously, you should -- we should expect a little bit of a step-up just in base D&A from sort of normal movements around CapEx. Just in terms of the net interest, just getting an idea of that quantum. So obviously you look at the second half run rate, then we need to assume on the additional facility that you've taken slightly higher cost of debt, I would have thought. Plus obviously, you're now going to be generating interest expense on this expense or this D&A and also CapEx that was previously capitalized. So just in terms of the quantum of step up, how should we think about that into fiscal '25 in that interest?

Great question, Ben. Thank you for that. Look, firstly, if I go back to finance costs, we actually saw about a $50 million step up in FY '24 on finance costs. Now if you look at -- if we then work forward to FY '23, firstly, we'll get a full year of finance costs on the $600 million notes that we issued. If you recall, we issued those in November '23. So that will work its way into finance costs as well. But we also obviously have got the increased finance charges relating to leases and the ADCs and the CFCs and they will come through as well. So look, it wouldn't be unreasonable to expect an increase of at least the same amounts in FY '25 that we experienced in FY '24.

The next question comes from Lisa Deng with Goldman Sachs.

I have 2 questions. One is in relation to, I guess, in the store growth or maybe the growth outside Ocado. So if we think about the shift in volumes into Ocado from day 1, what should we be thinking about the store economics. Do we think about potential deleverage there? And then also if we think about the actual number of stores that you guys are guiding for '25, that's actually a significantly lower number. I think it's net 3 versus net 10 that we saw in '24. Maybe just talk us through the considerations there.

Okay. I'll take the Ocado store economics, and then I'll pass to Charlie to cover off the property piece. So as we transfer that volume, Lisa, as we sort of indicated, many of those stores are actually constrained. So we actually released capacity to be able to grow into more sales in those stores, and we will also make adjustments to the cost base in those stores as well for the fact that there is online activity that is coming out. So I wouldn't be raising sort of any concerns beside in terms of our store economics piece. And I think regardless of that the one you think is that the addition of Ocado into the network is that it's an omnichannel addition. And so we are really looking to optimize the whole of the network ecosystem, which is both through the way we do our cost management but also through the way that we're releasing capacity to grow into more sales.

Great. Thanks, Leah. And look, in relation to the stores, Lisa, let me just take you through the -- what we did in FY '24 and then how does FY '25 look? Because half this is -- part of it relates to timing, but part of it also relates to the fact that yes, it is taking longer for store developments and to come on board. So if I look at FY '24 for supers, we did about 50 renewals. We opened 12. So we opened 12 and closed 2. So we actually grew a net 10 stores in FY '24. And in FY '25, we're going to do about the same number of renewals, just around 50 and -- but we are going to open 8 new supermarkets. And at the moment, we have 5 that were slated to closure. So the way to think about, Lisa, it's hard just to focus on a 12-month period because things do change with timings. And we do note that as you're fully aware, the property industry is such that developments are taking a little bit longer than they otherwise did historically.

Okay. So the -- I guess, the lower number of store openings have nothing to do with potentially saving some capacity for the transfers into Ocado...

Lisa, we still have -- going back to -- we still have our objective of growing net space by over 1.5% year-on-year. And yes, we love growing new stores in growing regions around Australia and certainly supported by, as you know, the population growth and our growing business. So no, it's purely development related and we'd like to be opening new stores.

Got it. And then my second question is to Simplify and Save. So it's obviously a really good outcome that we did $238 million in year 1. How should we think about phasing then for the next 3 years most importantly for '25 as well.

Yes. So I would just say $1 billion and basically equally favored across the 4 years. It's going to be a little bit less or a little bit more every year.

Yes. And Lisa, you just have to look at the history of our first program. We sort of average where between sort of mid-220s to up to 320 and we've been in that range. So as Leah said, the best way to model this is around $0.25 billion.

The next question comes from Bryan Raymond with JPMorgan.

Just on Ocado. I just wanted to check on that $40 million of residual costs. And what's required -- first of all, actually, is there some offsetting benefits in the P&L more broadly in terms of costs avoided in store that we should be thinking about? Or is that $40 million kind of like a net cost that will only get unwound once you build more capacity within the CFC? Can you just help us understand the go forward there?

Yes. Look, Bryan, thanks for the question. Great question. The $40 million, what we're trying to guide there with effectively is as we go back to the level we expected, and as we've guided previously, the Ocado impact in -- or the CFC impact in FY '25, we've got $110 million with implementation and transition costs. Now pleasingly, that's reduced to $70 million. And what we've said is that $40 million is effectively the in-year impact on earnings or on EBITDA is the way to think about that for FY '25. And as we actually ramp up volumes and increase volumes, as Leah mentioned or I mentioned earlier, the FY '25 implementation costs all the way by FY '26, but we'd expect that $40 million if you like, to reduce as the operating leverage starts kicking in with more volume.

Right. But just to confirm, though, so you're going to be fully transitioned by the end of FY '25 based on what you're saying, I think, by Christmas, you expect to be transitioned. So in FY '26, if you, for example, are fully transitioned, but haven't built a lot of incremental volume in Ocado, would that $40 million still be there in '26?

Well, yes, so theoretically, if there's no extra volume that is theoretically correct, but that's not what our plan is. Our plan is the $70 million of implementation costs fall away. That would be upside to '26. and we expect volumes to grow from FY '25 into FY '26 and certainly into the second half of '25. And therefore, that $40 million earnings impact to actually reduce as we progress through the second half of '25 and into '26.

I mean, just practically speaking, Bryan, think about it as today in New South Wales, we're running 2 big facilities, which only have a few thousand orders going out of them each day at the moment. We are ramping that up over the course the next few months as we head towards Christmas. And every week, more volume comes into the CFC. And every time you bring more volume in, you're fractionalizing the cost of running the facility.

Yes. No, that's helpful, but Leah, just on that, isn't that in the $70 million and then the $40 million is sort of the post transition piece?

It is. That's right.

That's correct.

Yes. Okay. Great. All right. I just want to make sure I'm clear on that. We can make our own assumptions around incremental volume. Okay. And then just one comment you made starting earlier was the instant redemption of Flybuys points led to 2 million first-time redeemers at Flybuys points in store. That's a huge number. Obviously, there's been a bit of a step change in your -- in the loyalty piece for Coles, which is great to see. But just trying to sort of work that through the P&L in terms of what it might mean for sales and profitability because there's a lot of accumulated points over many years that got redeemed and may have influenced behavior. I'm just keen to understand how that might have helped in the period or whether it's all completed, and what we should be thinking about for next year once you're cycling that because there was obviously a huge amount of value that consumers essentially prepaid for in recent years with the buildup of those points without redeeming that they've now benefited from. And how does that look -- how do you think about that issue going forward?

Thanks, Bryan. I'll start and then I'll ask Charlie to talk just about the financial pieces. The first thing I would say is we've rolled this out progressively across the course of the year. So actually, the last tranche of stores went live with the instant redemption at POS at the beginning of June. And so we will, over the course of the year, sort of cycle over the top of that implementation. It's been really, really positive in terms of how it's been received by customers because it was quite a friction laden experience to previously redeem your Flybuys points. And now when you go into the point of sale, you just scan your groceries, and it prompts you whether you like the $10 off because you've got 3,000 points. It's just really easy for customers to do that. And we are seeing that, that is actually increasing their sentiment around the program and it's increasing loyalty from the perspective of those customers, the regularity that they shop with us and how much they spend with us. So we're really, really pleased with the way that the program has played out. In terms of how the financials work, I'll get Charlie just to run that through.

And the simplest way, Bryan, to think about it is basically, as a customer actually is at the POS and actually swipes and earns some points. We pay for that points at that point in time. So those points are actually -- those points costs are in the gross margin at the time of sale. But when points are redeemed, there's actually no impact on the P&L. They actually flow through the balance sheet and they'll work through cash and other elements on the balance sheet. So the P&L impact is simply at the point of sale.

Which I would make the point that actually year-on-year, the amount of money that we paid to issue points, it didn't really change much year-on-year. That was pretty constant.

Yes. I guess I was thinking more about the risk that people have -- in terms of the sales growth momentum you've had, which has been very strong over most of the financial year, but some of that was boosted by this issue, which was a bit of a one-off as people burn through years of accumulated points and got all that value. And then once they run out of those points, they don't have quite the same impetus to go to Coles because clearly, you've improved things. But you sort of matched Woolworths with that instant redemption. It's now a matter of going forward, they probably don't have that embedded value in their loyalty programs they had initially when you switched that on. So that's more the issue I'm trying to get to is what's the sales momentum impact from them cycling over the top of this and people not having that embedded in their -- those points waiting for them to redeem all the time.

Well, one of the wonderful things about working in grocery is you're constantly trying to cycle at the top of the initiatives that you ran in the prior year. So just like what we've had to do with collectibles and other campaigns that we've done. We will make sure that we've got a strong eye on as we go over the top of it, what's the right activity that we're putting in to effectively cycle it.

Your next question comes from Richard Barwick with CLSA.

I've got one question on Liquor and then another one on availability. Just on Liquor. I know you've called out there's basically a business transition, as you say, you're moving away from these bulk sales, which were very low margin. At what point will we see -- is that process actually complete? And so you've got a sort of a clean base from which to grow upon. And then captured within that, I'm just a little bit surprised, you've added in 20 stores, the Tasmanian stores just in June. And yet it doesn't seem to be any material impact on your sales momentum at least for these first 8 weeks. So are those stores really small? Or are there other things that are going on? So if you could just sort of talk to the revenue within Liquor, that would be great.

Richard, thanks for the question. Thanks for the interest in the Liquor business. So on your first question regarding pulp and affiliates, so we'll cycle out of those just prior to Christmas, so towards the back end of the second quarter, and that will improve our headline trajectory. And then in terms of the trading update that we provided for the first 7 weeks. So we are negative year-on-year we've called out an impact of the CrowdStrike issue. But what we haven't called out is the impact of the bulk and affiliates in those sales. So we did call it out for the fourth quarter. We may call it out at the first quarter, but that's something that you need to make an adjustment for. And then the rest of it in terms of sales just continues to be that we operate in a challenging market at the moment. The sales momentum in the market has weakened across the course of the year. But with what we've got coming in FY '25, we certainly believe that there's more reasons to be positive because, as you mentioned, we'll cycle out of the bulk and affiliates. The Tasmanian stores, to your second question, so the best way to think about that is that they represent 20 stores out of the network of 992. They are all Liquorland stores, so there's no big box stores in those 20, so maybe slightly less, but those will certainly be a positive contribution to our headline throughout this year. Does that answer your question?

Yes. Yes, that's helpful. Yes, that's great. And a question on availability. Just -- this is on Slide 12. I mean the levels, say, the delivered in full on time, are still well below the first half '20 or pre-COVID measure. So I mean there's a couple of questions here. Is first half '20, is that the right base to which to compare? What this low availability do you see this as still being an industry issue? Or are there any sort of Coles-specific issues at play? And part of that is Coles versus the industry, what would you say is costing you in sales? Because I guess if everyone is impacted, then arguably, maybe the cost of sales is very little. But if it's more of a Coles issue, then obviously, that's an argument to say that there is a drag on your sales potential. So I'd love to hear your thoughts there. I know there's a few questions wrapped up into it. But I'm just surprised to see those numbers still well south of the first half '20.

Yes. So look, I might take that one, if that's okay. It's Matt Swindells here. So first point, it is not a Coles-specific issue. And we track gaps on shelves across a number of different retailers, not just our own stores across grocery. And so we have a very, very good handle upon where the market is at. It's been a pleasing improvement though. I mean, our results, whilst they are still not quite to pre-COVID levels, we've got best gaps on shelf for a number of years, best fulfillment from suppliers for a number of years, inbound into our DC. But you're right, there is still more work to do and there's still more that we have to think about end-to-end on availability. We will continue to focus on two things really: planning, so better forward visibility for our suppliers of activity, particularly promotions and seasonal events. And then execution and point of the standards and process in a real back to basic sense from manufacturing through the supply chain into stores. So there is more to do, but it is an industry-wide issue.

And so from a sales impact, if it is industry-wide, is it fair to say that the sales impact would be relatively immaterial?

So Richard, we probably -- we wouldn't be willing to make an estimate around what the sales impact is. But needless to say, we continue to see this as an opportunity. And it's an opportunity not just because of the sales impact, but because of the customer satisfaction that it drives, particularly in the online space. So a lot of the improvements that we have seen in our NPS numbers within the e-com channel this year have been driven by the fact that better availability in store means that when a customer orders 100 products, they're more likely to get 100 products, and that's the biggest pain point there. So this really is a cornerstone of our omnichannel approach, which is we have to get this right in stores so that our e-com customers can have a really good offer.

Okay. And just to be clear, that benchmark being first half '20, you think that remains appropriate. And so your expectation is that you will get back to those levels?

It's an important part of the conversation that we have with suppliers, which is this is what we used to deliver to before all the supply chain disruption. Why should it be not possible for us to get back to that? And that is the North Star that we are working towards. We've got very big increases this last year. We're going to be relentless about closing the rest of that gap.

Next question comes from Craig Woolford with MST Marquee.

Can I ask a question about the inflation outlook you see in grocery. The first half ex tobacco and fresh was 4.8% and then it's dropped to 2% in the second half. Do you see further downward pressure on the inflation in the ex tobacco and fresh area?

So I might just start with a bit of an outlook and then I might get Anna to talk to some of the moving parts. But I think overall, what I would say, Craig, is my view is we're moving towards -- and we're converging on what I would describe as a more normalized inflation reposition, which is much more consistent with long-term trends. Now if you went back over the last few years, we had even as early as first quarter last year. We had really elevated levels of inflation in the package space and then you have your fresh areas in deflation. What we have seen in both of those lines really start to converge to what we would describe as more sort of the long-term inflationary trends consistent with CPI, which I think is positive for customers, but it's also, I think, provides a lot more stability in terms of how we think about the business going forward. And as we've seen inflation come off, we're definitely seeing that stimulate volume from a customer perspective as well. But Anna, do you want to just talk to some of the moving parts that we saw during Q4 and then maybe a couple that are coming up?

Yes, Craig, I think, look, context for Q4, we have seen inflation moderate in the quarter to 1.5. Tobacco does continue to have an impact and inflation excluding tobacco, did moderate to 1.2. We're seeing really moderate the inflation coming through our package business and fresh has moved into inflation, and that is predominantly in fresh produce. For the first time since Q3 2023, we've seen produce move into inflation, both across fruit and veg. We're still seeing deflation coming through in meat, dairy, seafood, and that's really due to lower livestock pricing, but also some of the activity and downturn that we have done. And then package inflation, as Leah said, has moderated in the quarter and that's mainly due to cycling higher CPIs from last year, and the normalization of the supplier CPIs that are coming through.

And I think if we look ahead, the 2 that we've sort of got on our radar is cocoa, which there's a lot of products in the store that have chocolate in them. So that is something we're going to have to work through. And then we have seen shipping sort of increase recently as well, so we're all just keeping an eye on that one.

Great. That's really helpful. And just on Liquor. Can I clarify the second half EBIT margin was well down on the first half. Is that indicative of the outlook for '25? It is a bit surprising that gross margins haven't improved much in that Liquor business despite reduced bulk sales.

Yes. Thanks, Craig. Thanks for the question. As you say, second half of '24 was the challenging outcome, but there's certainly reasons to be more positive. As we look towards '25, I think we've already spoken to the sales aspect of some of those. In terms of gross margin, as you correctly point out, we have been removing bulk and affiliates, which in themselves provide a positive to the gross margin. But what's driven the decline in the second half is the combination of a couple of factors. We've had higher sales growth from the on-demand channels and the commission related to those channels is captured within our gross margin. And then also, we've seen the promotional mix increase throughout second half '24. So those 2 things are probably the biggest difference from the first half result that we had. But as we look into FY '25, we certainly expect that gross margins will be back in growth in percentage terms.

Can I just double check. So the gross margin on bulk is that dilutive? The percentage gross margin on bulk is dilutive or accretive?

No, it's definitely dilutive.

Next question comes from Phil Kimber with E&P Capital.

Just first question on the Ocado. You talked there before on module-based system. Can you say how many modules you've started off with, just trying to get an understanding of how the economics have worked through.

I think, Phil, that would -- we would probably consider that to be commercially sensitive. So we've got sort of multiple points of expansion though, that we can move to going forward.

But is it correct to say that effectively, the fees that you pay are module-based. So I totally agree that as volumes improve within a module, there's leverage. But then when you roll over to the next module, you sort of start again from a leverage point of view. Is that sort of conceptually correct?

Phil, thank you. It's Charlie. Look, I'm not going to go into the specifics of the economics of how the modules and fees sort of work. I think if we step back in a bigger picture, we are adding the modules. As we said, it's a modularized element, which allows us to scale that with volume. Our focus is transitioning the volume of day 1 from the stores in the catchment and, obviously, grow the volume. So -- but we're not going to go into the specifics of the fees and how they relate to modules and the like.

Okay. And then can I ask one just on sales, which have been very strong, a lot of players, I think including yourself, if we went back, say, 6 to 12 months ago, were calling out everyday products, which assumes laundry, health and beauty, things like that, as being tough and there was strong competition from sort of other players in the market. Is that still the case? Or have you seen maybe your value positioning improve there. And so everyday products performance is improving.

So when you say everyday products, are you talking about sort of nonfood?

That's right. I think that's what everyone refers to it as everyday products, but I think it's things like laundry, pets, health and beauty, things like that, nonfood, yes.

Okay. Thank you for the clarification. That's helpful. Look, I think we would say we definitely have seen a step-up in competition in this space. You've got the likes of Amazon playing pretty significantly in the nonfood space. Bunnings has entered into a couple of categories this year. You've got quite a few of the pharmacies that play in that space as well. And if we look across that, each of those players have different pricing approaches to it. And so I think we said back at Q1, we had seen some impact on that, but we made a number of changes to kind of adjust our trajectory in the way we were doing some of the pricing on that, and we've seen sort of improvements over the course of the year. You may have seen, Phil, in August, we actually launched a big pack value campaign that really focused in on this that had things like 5 kilograms of [ BMO, ] 640 of Huggies wipes, 15 kilograms of Pedigree and the like, which is really starting to sort of change our offer in that space.

The next question comes from Zack Pontey, UBS. [Operator Instructions]

Operator, we might just move on to the next one.

Next question comes from Nicole Kenney with Rimor Equity Research.

My previous question has been addressed.

The next question is a follow-up from Adrian Lemme.

I guess thinking about the capital position. I just wanted to know what the Board is thinking about it at the moment, given that you've now cleared the major investments in Ocado and Witron. Is a lift in the payout ratio or other capital management being contemplated plated, please?

Look, great question. Look, our focus has clearly continue to maintain a really strong balance sheet and strong credit metrics. And obviously, we're very disciplined in the way we actually allocate capital because it starts with obviously realizing 100% of our earnings in cash. And that is a focus. I think we have a dividend payout ratio that the Board has put out there of 80% to 90%. And it wouldn't be appropriate for me to comment on any other changes to that policy or anything further in relation to capital management.

The next question is a follow-up from Michael Simotas.

Just a bit of a housekeeping question. The footnote on your sales trading update that you're going to look at comp sales effectively on a 1-week offset to make it more closely aligned. I think that sounds sensible. But when we think about the number that you've given us for the trading update, is there anything peculiar about the first week that's included in there that it will drop away that we need to think about?

No, there's nothing that we would call out as particularly significant there.

And Michael, I'll just add that this is exactly the same methodology that we used back in FY '20 as well.

We really do think -- we really included it so that you had a little bit of advanced warning on how we're going to do it, so you can start to think about that as we go into Q1 results.

The next question is a follow-up from Bryan Raymond.

I just wanted to be really clear on the outlook commentary around D&A and financing costs. And I know, Charlie, you addressed this earlier, but it's been an issue for a few other companies. We've seen -- is there a way to give us a bit more color into the actual dollars that we're talking about here for '25? You have given us dollar guidance for D&A in the past. It'd be great to have that as a bit -- a little bit more clarity around what that looks like in terms of FY '25, given the 53rd week and all the different timing issues there and how you accrue there. Is there any further detail you can provide?

Look so Bryan, let me just take you through just very quickly in terms of -- just remind everyone where we are with D&A. So there's really 2 components, right, that I mentioned earlier. One is the sort of CapEx D&A and then the lease D&A. On the lease D&A, the big moves there will be the full -- the transformation projects at the ADCs and CDCs. So we will see a depreciation step-up of about $80 million just from those, and they will step up to $130 million. So that's really consistent with our guidance that we've given there. In terms of the CapEx DNA, you can appreciate that over the last few years, if you take out those transformation programs, our CapEx has been about $1.1 billion. And I think the way to think about it is you would expect the step up in depreciation because of our capital expenditure over the last 2 or 3 years, which has been around that sort of $1 billion to $1.1 billion range. So that's what we would expect to model through. And clearly, we've obviously added supermarkets that continue to grow, and there will be elements there for AASB 16 for Supermarkets, which will go into D&A. But again, just to be clear, I wasn't -- while we have given our quantitative guidance a few times previously, our practice really is to give you directionally where we expect D&A to be.

Okay. And just on interest costs, you've called out this medium-term note. Is that -- the impact of that on your interest costs in -- I think you might have mentioned earlier, it's going to be at least as big a step up again as it was in '24 year-on-year. But is that -- should we just assume that sort of, I think it was $40 million to $50 million step-up. Is that fair?

Yes. Just to remind, Bryan, what we did say is, look, our finance cost in '24 grew by $50 million, right? And there were 2 elements. One was the medium term note. But we didn't have the full year of the medium term note that was issued in November '23. And the second element was clearly the AASB 16 sort of finance charges that work their way through in that interest line as well. So I think we've basically said that you can expect at least that same step up, that is the $50 million, at least that in FY '25.

Your next question comes from Zack Pontey with UBS.

It's Shaun here. Apologies, multiple calls at once. Maybe just to go back on to Ocado. Can you just confirm the $40 million, is that purely fixed cost only? Or is there any effectively implied loss on sales that are going on where your gross profit is not offsetting the variable cost, please?

So Shaun, Charlie. I'm going to go through individual elements of the P&L with respect to that. That is -- what we've called out is a $40 million EBITDA impact post the implementation period, the implementation costs, and that is the impact that we'd expect on earnings, predominantly in the second half. But as we said, that as our operation kicks in -- operational leverage kicks in with more volume, we expect that to improve not only through the course of the second half, but also into FY '26.

And sorry, just to be clear, is that -- I mean, is this a fixed cost for a full 12-month period or only a part period such that the fixed cost would actually be larger than that number?

Shaun, I'm not going to go into the elements of fixed and variable costs with respect to the CFCs. That is the earnings impact that we're guiding in terms of the FY '25 number and how we expect that to flow through into '26 and beyond.

And we've said that FY '26 that we should see improvements in relation to that earnings impact.

Understood. I guess, sorry, when we see it right now, it's actually -- there's not a lot of movement happening at the site there. And I guess it's been a big element of CapEx that's going on. And that's kind of the reason there's quite a lot of questions sort of about it. So okay. Maybe just on Witron, you're highlighting that, that's fully operational, I believe, at the end of the third quarter '25. Will it not take a little longer for that to sort of deliver a full year's worth of earnings? Or was it more that it took a bit of time with Redbank because it was the first ADC and then you sort of get going. I'm just curious around you and third quarter '25, you're up and running. And then the savings come through quite quickly then from July '25 onwards. That just seems quite a quick step up, but maybe you guys are really in a momentum there.

We've definitely taken learnings from Redbank. And so what we are guiding to is that we should see a full run rate of benefits in FY '26. If I can, too, I just don't mind that comment around Ocado to sale past. So both of the CFCs now have a fully operational team on them. Both of them have now got orders that are being delivered to customers. There are brands that are operational. All of us have been out and seen them. So I don't know what you're referring to in terms of a lack of activity. But from our perspective, they are a hive of activity in terms of getting ramped up and going, and we have a very excited team to take on that challenge.

Yes. I guess -- sorry, Leah, it's more around when I've sort of looked at it, there's not a lot of movement. There is -- there's certainly people there, it's operational, but it's not at pace. In terms of it's not at a high utilization, I would assume in terms of what you want to get to. So I guess that's a function of how you ramp up.

Yes. We're going to -- we are ramping up starting with transferring our existing next-day home delivery orders into the sites. That is occurring over the next few months through until December. And then we will look to expand and to grow sales from that point. Ramping up these as we did with the ADCs at a rate, which is sustainable, enables us to learn and to deliver a good customer experience is a real priority for us because we are focused on the execution of that. And that is what our focus will be going forward.

Great. And maybe just my question on just Coles Supermarkets in terms of in-store execution. We're getting significant -- or sorry, fairly consistent feedback that there's been a significant improvement in execution. Can you just talk a little bit about, I guess, how you're getting behind, be it promotions and potentially the degree to which your brand is resonating well with consumers as they're chasing -- as they're dealing with cost of living pressures?

Thanks, Sean. I might start and then hand across to Anna to close. I think similar to my commentary earlier on availability and also linked to loss. We've really been very, very clear and focused on back to basics and standards, partnering with our suppliers all the way through our supply chain into stores. So it's lots of small things that then come together consistently that results in a much better standard of execution. And importantly, we haven't just asked the stores to get better. We've understood that there are inputs and process to further upstream that will enable us to then execute to a much, much higher standard. But Anna, if you wanted to comment on that?

Yes, I'd say we're very focused on having a strong, simpler customer offer that is right for our customers and for stores. And I think we are working in partnership with our suppliers, but thinking really end to end to how we deliver that. And we believe we've got a significant amount of runway to continue to step change that, and that is what we are fixated on. Everything we do and how we execute that with excellence every day.

There are no further questions at this time. I'll now hand back for closing remarks.

Well, thank you again for your time today. I would like to say in closing that we are pleased with the solid financial results and the strategic achievements that we've delivered this year. As we look ahead now, we are going to continue to focus on value for customers through price investment Flybuys as an own brand. We will continue to proactively manage our costs through our Simplify and Save to Invest program, and availability and tackling loss by raising the bar on our operational performance will be 2 key executional priorities for FY '25. We're also looking to grow our new ventures, including Coles 360 over the course of the year and drive the performance of our 2 ADCs and CFCs, now that all are operational. I'm pretty excited about the year ahead. I believe we've got the right building blocks in place and the right thing to achieve the strategy that we've put forward. And I really look forward to speaking with you all at our first quarter results in October. Thank you.

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