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

Welcome to the Metcash 2021 Full Year Results Analyst Briefing Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Jeff Adams, CEO. Please go ahead.

Good morning, everyone, and thanks for taking time to join us today for the Metcash Group's financial year '21 results. I hope all of you, your families and friends are safe and healthy as we all live and work through these unprecedented times. I'm Jeff Adams, the Group CEO of Metcash. And with me this morning is our Group CFO, Alistair Bell, along with the business CEOs, so Scott Marshall from Food, Chris Baddock from Liquor, and joining us from Melbourne this morning, Annette Welsh from IHG, who will also be representing Total Tools today. I'll take you through our group and pillar results along with our outlook comments, and Alistair will cover the financials, including the off-market share buyback we announced this morning. The business CEOs will be available later at the end of the presentation to assist us during the Q&A session. Just as a note, as we move through the presentation today, I'm not going to spend too much time on the MFuture slides in the pack since our Investor Day in mid-March covered our MFuture progress and the changes in outlook for that program for the next 3 years. So turning over now to our purpose, vision and value slide. I'll just call out one change on this slide from what you've seen in the past, which is the last point on the vision column, where we have now added in creating a sustainable future to our group vision statements. This reflects the increased importance and focus that ESG has throughout our organization. The rest of this slide remains the same, and it has been another outstanding year from the Metcash team in living our purpose of championing the success of our independent retailers. Looking at the next slide. This is our refocused group strategic direction, which we discussed at the March Investor Day, so I'll skip over that one today and move to the ESG slide. As I just mentioned, we have significantly increased our focus and efforts in this area and are embedding this way of thinking into everything we do. This slide lists some of our achievements, which include improving our Dow Jones Sustainability Index from 46 in FY '20 to 29 in this financial year and reductions in our emissions and waste into landfill. We'll have much more information on ESG in our annual report this year, and we will break this out into a separate sustainability report. So I'll move on now to the group overview and pillar results slide, starting with the group highlights. We call out here it has been a standout year for the group, with record sales of over $16 billion for the first time, significant earnings growth and a record operating cash flow. Group revenue was up about 10% and group EBIT up almost 20%, underlying profit after-tax up 27%, with underlying earnings per share up over 13%. All pillars achieved strong sales growth in FY '21 driven by the shift in consumer behavior that started back in March of 2020, along with the success of our MFuture initiatives, and this has produced a record operating cash flow of over $475 million. Continuing with the group highlights now on the next slide. Our performance in the year results in a significant return of capital to shareholders, even as we balance continuing to invest into future growth opportunities. We have increased our target dividend payout ratio from 60% to 70%, resulting in a final dividend of $0.095 per share fully franked, and a full year dividend result up 40% to $0.175 per share. And today, we have announced the off-market share buyback of up to $175 million, which, together with the increased dividend, will result in about $354 million being returned to shareholders. Finally, on this slide, we have seen a strong start to FY '22, particularly when you compare to the more normalized sales numbers of FY '20, which you'll see from our outlook comments. So moving on now to the results overview by pillar slide. I'm not planning to go through the slide in detail as I will talk about each of the businesses individually, but would point out the pie charts there on the bottom right, which shows the underlying EBIT contribution from each of the pillars. Our continued investment into the Hardware business is really starting to move the contribution from that business now to our group earnings from 25% in FY '20 to 33% in FY '21, even with all of the pillars growing their earnings in the year. Turning over now to the Food sales slide. Total Food sales increased 3.1% to 4.9 -- to $9.4 billion and are up 11% if you exclude the Drakes and 7-Eleven impacts, with Supermarket sales up 10% and up 11.6%, excluding the Drakes impact. We've previously given you sales to the end of February and today provide the March and April trading, which would have been up against the peak COVID panic-buying period of FY '20. However, comparing that period to March and April from FY '19, which would have been a much more normalized sales period, you can see we were up significantly, 15.6%, excluding the Drakes impact. We continued to see the shift in consumer behavior in the second half of '21, even as some of the restrictions were eased or lifted and had strong growth across all the states, with VIC being particularly strong due to the extended lockdowns there. Our wholesale inflation in the year was about 1%. The overall IGA network had a very strong year, resulting in improved financial health of our independent retailers, with like-for-like sales up 10.5%, even with the impact of the panic-buying period in March and April last year. And when comparing against FY '19, sales were up nearly 19% for the year. Our teamwork score was flat at 74%, which was a good result, given all the supply chain challenges in the year, particularly in the first half of FY '21. And we ended up opening more stores than closings in the year, despite having to work around COVID lockdowns and almost daily changes to health regulations and border restrictions. Moving on now to Food EBIT on the next slide. Total Food EBIT increased by $9.7 million, up 5.3% to $192.4 million. If you adjust the FY '20 EBIT base for the loss of Drakes and 7-Eleven for the reduction in the benefits from the resolution of onerous lease obligations and remove the joint venture increases in this year's result, the year-on-year EBIT increase would be about $20 million or up about 11% on FY '20. Overall, the Food team did an excellent job of managing their operating costs, even with the pressures from inflation and COVID-related costs. The EBIT margin was maintained at 2%, despite an increase in the weighting of lower-margin charge-through and tobacco sales in the second half '21 sales mix. The next slide is the MFuture initiatives in Food, and Scott covered those in detail at the Investor Day in mid-March, so I'll skip over that slide today and move on to Liquor. Liquor sales, including charge-through, increased significantly, up 19.2% in the year to $4.4 billion, partly impacted by a reduction in the on-premise sales due to COVID restrictions, particularly in the first half of '21. Wholesale sales to the IBA banner group increased over 22%, with strong growth across all of the banners. Similar to Food, the strong demand was driven by the shift in consumer behavior, along with other market factors like reduced international travel and duty-free sales, which we have called out before and have listed again there. Retail like-for-like sales in the IBA banner groups were very strong, up almost 20%, and this continued in the second half of '21, despite a recovery in the on-premise sales. Looking at the Liquor EBIT slide now. The EBIT in Liquor has increased significantly, up $15.9 million or up almost 22% to $88.7 million, with the EBIT margin in line with last year at 2%, despite an increase in the sales mix of some lower-margin categories. I'll skip over the Liquor MFuture slide as, again, Chris covered those at the Investor Day and move on to the Hardware sales slide. Total Hardware sales, including charge-through, increased 24.7% to $2.6 billion, with significant growth in DIY and return to growth in trade sales. Total IHG sales, which exclude sales from Total Tools, increased 18.6%, with the sales to the end of February previously provided and then today, the sales for March and April. Retail like-for-like sales in IHG banner group increased 11.4%, with the DIY sales up 25% and trade sales up about 5%. DIY increased to 40% of our sales mix in the year versus 37% in FY '20. We have again listed there some of the reasons for the significant growth in DIY, which are consistent with our previous update. I would call out the line showing the online sales growth, which was again in triple digits, with over 120% growth. IHG, Total Tools and their retailers were earlier into online sales than our other pillars, but are proving that independents can win in digital as we develop this capability with our retailers and the other businesses as outlined at our March Investor Day. And just to wrap up this slide, we have seen a further 160,000 loyalty members added in the year, with the total number of loyalty members now over 1.2 million. Moving on to the Hardware EBIT slide. Hardware EBIT increased substantially in the year, up $51.8 million or 61.5% to $136 million with strong volume growth, particularly in DIY, increased earnings from company and joint venture stores and a continued strong focus on cost and a significant contribution of about $29 million from our recent acquisitions, with Total Tools being about $24 million of those acquisition earnings. IHG wholesale EBIT margin was 3.1%, and total IHG EBIT margin increased to 5.3%, reflecting the earnings improvement in our company and joint venture stores and the contribution from Total Tools. The next 2 slides are the IHG MFuture initiatives and the Total Tools growth plans, which were covered by Annette and Mark Laidlaw at the March Investor Day. So I'll stop there and hand over to Alistair to go through the financials and the capital management initiatives.

Thank you, Jeff, and good morning, everyone. As Jeff outlined, it has, in many ways, been a truly exceptional year for Metcash. I was a new starter last year, and I've had the pleasure of working with and witnessing the efforts of high-performing teams as they navigated some of -- some very challenging times that arose from the many demands relating to COVID. So there's been outstanding efforts by our people, which have contributed to the standout results you see today. Turning to the presentation, I will run through our financial performance for the year as well as the financial position and then cover off the capital management initiatives. I will then hand back to Jeff to talk about the outlook. So firstly, to the group P&L. Jeff has already spoken to the performance of the pillars. This covers down -- covers the results down to the group EBIT of $401 million, and you can see this on the slide there. As a reminder, in the earlier slides, the corporate cost of $15.7 million, this includes the increased burden of insurance cost and a higher provision for fiscal year '21 performance incentives. For fiscal year '22, any savings in incentives is likely to be offset by the full year insurance costs. Other points on the slide are, firstly, depreciation and amortization at $164 million. This is broadly in line with last year. In the past, we've commented that our maintenance CapEx should trend broadly in line with depreciation. However, like last year, due to the adoption of AASB 16, depreciation includes a $107 million charge relating to right of use assets, so this needs to be excluded when determining maintenance CapEx going forward. Net finance costs of $42.6 million is $9 million lower than last year as a result of lower average borrowings and lower interest rates in the year. As with depreciation, this line has been impacted by AASB 16, and you'll see this in the notes of the accounts. The biggest component of finance cost now relates to interest charge in respective leased assets. The group's effective tax rate was slightly lower this year at 28.9% mainly due to the higher equity reported profits, which are on a post-tax basis. And as you know, it's not included in the net cash tax number. The significant items of $13.7 million after tax, and this includes transaction costs and put option valuation movements relating to Total Tools as well as noncapitalized cost associated with Project Horizon. You'll recall, Project Horizon was one of the initiatives we shared at the Investor Day. These costs include such things as project management, legacy software, increasing license fees. These costs are consistent with earlier guidance. And you might recall that the prior year amount of $256 million included an impairment of goodwill and other assets of $237 million after tax. You see in the slide, there's been a big increase in underlying profit after-tax, which is up 27% to $253 million. Earnings per share increased 13.3% to $0.247 per share. And also at the bottom of the slide, you can see the group ROFE increased 370 basis points to 28.6%. So all up, it was clearly been a strong year for us. Now moving to the cash flow statement. The group generated significant cash during the year. Another way to present this slide shows $182 million of free cash flow. This includes record operating cash flow of $476 million comparing to $118 million in the prior year. So free cash flow also includes $220 million of CapEx and acquisitions, proceeds from the sale of assets and loan movements of just under $13 million. And the net payment, the net payment of lease obligations of $78 million. With operating cash flow, the cash realization ratio for the year was 114%. This is higher than our maintainable ratio target of circa 90%. The key reasons for the higher ratio is the reduction in working capital and timing of tax. Our overall working capital position reduced by $28 million. This is despite acquisitions in Hardware and Liquor pillars, which added to our working capital position as well as the need to build inventory to cater for supply chain disruptions and sustained higher sales levels. I will provide some further comments on inventory levels on the next slide. CapEx of $86 million is higher than the prior year due mainly to Project Horizon, $17 million, and the MFuture initiatives as outlined at the Investor Day. After adjusting for these, CapEx is broadly in line with our adjusted depreciation charge that is excluding the depreciation of right of use assets. We spent $143 million acquiring businesses during the year, the most significant being the acquisition of a 70% interest in Total Tools Holdings and Total Tools JV stores. In aggregate, this cost us $88 million as well as the acquisition of the Liquor pillar of the Kollaras private label brands for $26 million and other acquisitions in Hardware totaling $29 million. As mentioned, there was a net inflow from the sale of businesses and loan movements. A significant component relates to the repayment of loans by retailers. It was pleasing to see that a number of retailers repaid their loans earlier than expected as a result of their strong trading over the past year. So of the $182 million of free cash flow, $148 million was returned in the year as dividends. Or if factoring in the final dividend for fiscal year '21, $179 million is being distributed to shareholders. We ended the year in a net cash position of $125 million. This is reflected in the group balance sheet on the next slide. As an opening comment, we continue to have a strong balance sheet with financing flexibility. Key points to note on this slide are you'll recall, as we highlighted at the Investor Day, we have a continued focus on effective working capital management as well as ensuring a disciplined approach to capital allocation. Seasonal working capital fluctuations is the largest cash flow variable that we manage. As called out on the cash flow slide, we saw a $28 million decrease in working capital during the year. The right-hand side bottom chart shows that, whilst the average inventory dollar amount has increased year-on-year to accommodate elevated network sales, acquisitions and disruptions to supply chains, the average inventory days has decreased due to the sales velocity. The right-hand side top chart sets out the historical capital investment, being CapEx and acquisitions. In fiscal year '21, this amounted to $229 million, including $143 million for acquisitions, the most substantial related to the majority stake in Total Tools and a number of JVs as previously mentioned. And today, we are pleased to announce we have increased our stake in Total Tools by a further 15% at an acquisition cost of $59 million. Total Tools has continued to trade very well and contributed $24 million to the earnings for the 8 months we owned the business, and this includes 5 months contribution from the JV stores. The reduction in net assets, you can see at the bottom of the slide, arises from the accounting for Total Tools. This is whereby we have a put option over the minority interest in both Total Tools and JV stores. The estimated liability associated with these options are recognized upon acquisition, and we recorded as a reduction in retained earnings. We've provided some further guidance on the accounting for Total Tools in Appendix 4. As mentioned on the previous slide, we finished the year with net cash of $125 million. Now turning to the debt management on Slide 23. Based on a more stable outlook, we took the opportunity to rebalance elements of our debt book, including canceling $150 million of debt facilities, refinancing $225 million of debt that was due to mature in August of this year. And since year-end, we have completed a further $245 million of refinancing. As you can see on the slide, the group continues to have a well-balanced debt maturity profile and has available total undrawn facilities of $905 million. This structure provides flexibilities to help accommodate seasonal fluctuations in our working capital and other capital initiatives. Overall, the group is in strong financial position and now has significant funding capacity and financing flexibility. This is a good segue to providing an update on capital management initiatives. At the Investor Day in March, I provided an overview of our capital management framework and how Metcash is navigating through these times. Our objective has been to maximize returns for shareholders, maintaining financial strength and retaining flexibility. On that day, we announced an increase in target dividend payout ratio to 70% commencing in fiscal year '21, reflecting the strong financial performance and increased confidence over future cash flows. As a next step, today, we are launching a $175 million off-market buyback, which the Board considers the most tax efficient way to distribute excess capital and maximize returns to shareholders. In assessing the potential for distributing excess capital, the Board took into consideration a number of factors: that Metcash is continuing to trade strongly in these times, you'll hear more about this from Jeff in a moment; our near-term CapEx and working capital needs; opportunities to grow, like today's Total Tools announcement; and that we continue to maintain a strong balance sheet with low gearing. We concluded that the time is right to return capital to shareholders. And that, irrespective of whether shareholders participate in the buyback or not, all shareholders will benefit through earnings per share and return on equity accretive outcomes. In terms of maintaining financial strength, the pro forma fiscal year '21 gearing for the buyback is 4.3%. And after also including the final dividend and the Total Tools further acquisition, then the pro forma gearing is a respectable 16.9%. Moving now to key elements of the off-market buyback on Slide 25. The target size is $175 million, representing approximately 5.5% of shares on issue. The final amount depends on the tender. The discount range has been set at 8% to 14% of the market price, and the buyback price will be set based on the 5-day VWAP to 13th of August. On the buyback price, $0.85 is the capital component, and the balance is a fully franked dividend. The key dates are set out in Appendix 3, but it also includes that June 30 is the last day shares can be acquired to be eligible to participate in the off-market buyback and, secondly, qualify for franking credits. The tender opens on the 19th of July and closes on the 13th of August. Shareholders participating the buyback will also receive the final fiscal year '21 dividend paid on the 11th of August. Moving on to dividends. The Board has approved the final fully franked dividend of $0.095, giving a total fiscal year '21 dividend of $0.175 or $179 million. The final $0.095 includes a top-up to bring the full year dividend in line with our increased target dividend guidance of 70% of underlying earnings after tax. Our shares will go ex dividend on July 1, and the dividend, as I mentioned, will be paid on the 11th of August. These dates accommodate the off-market buyback. In summary, our strong performance has enabled us to be in a position to return approximately $354 million to shareholders since last year's final dividend, while continuing to maintain a strong balance sheet with capacity to fund our growth plans. I will now hand back to Jeff to go through the outlook statement, and then we'll take questions.

Okay. Thanks, Alistair. So moving to the outlook slides now. I'm not going to go through this line by line. I'm sure most of you have already been through this by now, so I will just pick up the highlights, and then we'll move on to the Q&A. From the group perspective, we have continued to benefit from the shift in consumer behavior, with strong sales in each of the pillars in the first 8 weeks of FY '22. We have provided comparisons against both FY '21 and FY '20 for Food and Hardware to help you better understand the numbers, with FY '20 being a more normalized sales period. Also as a reminder, our FY '22 will include a 53rd week of trading and a full year of Total Tools. Looking at Food, Supermarket sales in the first 8 weeks are up 10.1% versus the same period in FY '20 and up 14.2%, excluding the Drakes impact. Against FY '21, they are lower by 2.4%, with last year sales elevated due to pantry stocking, lockdowns and other COVID-related restrictions. The Food business has made significant progress on their MFuture initiatives in FY '21, despite the challenges of COVID restrictions, and we'll continue to be focused in FY '22 on those initiatives to help our retailers be more competitive. In Liquor, we've seen a very strong start to FY '22, with sales up 17.3% versus FY '21 and up 26% versus FY '20. And in Hardware, sales for the first 8 weeks have increased 29.1% compared to FY '20 and up 15.5% versus FY '21, with IHG being up 15.1% versus FY '20 and up 3.1% compared to FY '21. There does continue to be a solid pipeline of construction and renovation activity, and the supply chain remains under pressure from the continued strong demand, particularly in timber. So we'll stop there and start the Q&A.

[Operator Instructions] Your first question comes from Bryan Raymond of Citi.

My first one is just on Food and the operating leverage or lack thereof in the period. Understanding a few incremental costs coming in, but just wanting to sort of understand that 11% underlying growth in sales and in earnings. Exactly which costs offset the -- offset these? And are they one-off costs? Or is there something sort of fundamental in there driving a higher cost base within -- or should be able to pull a saving of operating leverage on that given the strong top line?

Yes. I think 2 things. And then, Scott, I don't know if you want to add some comments as well. Bryan, so first of all, we did roll over, obviously, March and April, which we called out before, and that was that heavy panic-buying period. And then also in the second half of the year, we did see a bit of a shift in the sales mix, where we still did see warehouse sales growing, but it was not at the same levels of what we saw tobacco and charge-through sales growing. So there was a bit of a mix change there in the second half of the year. And I think if you work back from the margins, GP margins on those 2, which we've said before, tobacco is about, say, 30% of our warehouse sales. And then the charge-through sales are broken out. You'll see that you'll get to about the same numbers as what -- you should get to about the same numbers as what we've reported.

Okay. Great. And then the other one I noticed was just provisions stepped up year-on-year, particularly in inventory. Just wanting to, again, understand what's driven that conservatism and whether that -- and also which pillar you're seeing those provisions get made in next.

I don't know, Scott, do you want to -- yes. So your question there is on total provisions, yes. So I'll comment first on the inventory provisions, and then I'll hand back to Scotty. We've obviously had elevated sales throughout the year, had some disruptions to the supply chain. So we have increased the inventory provisions a little bit across each of the pillars, but also in Food as well. So we've applied appropriate accounting standard for the higher level of inventory we carry.

Yes. So Bryan, just to build on that. The additional costs were called out insurance, and then others were one-off. We do need to remember, it was a very abnormal year right through. And including in the second half, we had to work hard to ensure we got the right inventory in the shed from suppliers, with global supply chains being impacted. The other thing I'd call out, too, is some of those inventory provisions were against some of the provisions like PPE that we bought very early in COVID and carried those into the second half.

Okay. That's interesting. And then just second just on the capital return. I mean, maybe I got the wrong idea, but I came away from the Strategy Day not really expecting any midterm capital returns given the increased CapEx and your dividend payout ratio stepping up. So I understand your business is going well. Cash flow is coming through, et cetera. I just wanted to understand the right level of gearing in this business long term, like where you see a through the cycle net debt to EBITDA and if that's equity-type gearing measure, just so we can think about these capital returns more fundamentally.

So yes, just I think the change from the March Investor Day, actually, we said at that time that the Board would continue to review the position, our capital position. And if we felt like we were in a place where we could return capital, then obviously, the Board would look at that. I think what changed was they got a little more comfortable around the future outlook for the economy and then also just the confidence in the performance of the business and future cash flows. But as far as gearing and stuff, do you want to pick that?

Yes. I'll just pick that up. Obviously, we'll still aim to carry modest gearing levels during -- even after the buyback. As I mentioned, the pro forma gearing will be about 17%, and that's probably up to 20% as a reasonable gearing at these sort of times. We're obviously keen to ensure we keep the flexibility to be able to keep our growth plans going and having the funding ability of those initiatives.

Your next question comes from Ben Gilbert of Jarden.

Just wanted to follow up on Bryan's question around the inventory because it just -- the magnitude of the provision, there's a [ $10 million ] increase in the provision against, obviously, sales that are up sort of high singles, low doubles now. It just seems like a big increase, the $10 million increase. Is there anything else that's missing in there or it is just that?

Hopefully that. Just remember, we've also had some COVID-specific stock, which is what Scotty was mentioning, and those may not repeat where as we come out of the pandemic. So we've taken some conservative views around those sort of lines.

So those could be things, like mask or sanitizer, that sort of stuff, which may not be selling us through. We can see as, I think...

Yes. And we bought up, Ben, at the time when it was very difficult to get that just to try to make sure we had enough supply for our retailers.

Okay. And then so that one makes sense beside [indiscernible] forward to external operating leverage. So Scott, you mentioned some one-off costs in last year. I'm just thinking as we move into this year and assuming some level of normality, what are those one-off costs we should be thinking about? And then also secondly, just on the operating leverage point, the DSA piece, in effect, you provide rebates over and above sales. Is that having a dilutionary impact to margin? Or is that just net washout?

So I won't call out any ongoing abnormal costs. And I think your question around DSA, it's a growth rebate fundamentally and how we invest in those stores. So it doesn't dilute the earnings.

And think of this charge-off though, then just keep in mind, we see what's happening here in New South Wales to try to predict what's going to happen with some of these unusual costs going forward. It's a little bit tricky. We had to work shifts over the weekend here in New South Wales, which is going to cost us a bit. So it's a bit tough to say whether some of those will repeat or they won't. The one that will absolutely repeat is insurance, and we've called up that before that insurance cost for everybody have been escalating, and that is now given, if not going to increase again this year.

Okay. And then just final one for me just on Hardware. It's obviously become quite a material part of the business now, particularly with full year Total Tools in for this year. Just interested in how you're seeing the dynamic between trade and DIY at the moment, and what level of visibility you've got looking forward on the trade order books because it's earning up -- sounding like out there at the moment, people got sort of 6 to 12 months type of visibility and growth up 15, 20-plus percent for quite a long time. So just interested in that sort of dynamic between trade versus DIY.

Yes. So we have seen a shift back to more trade in this start to the financial year. DIY is still okay, but we've started to see where we were 40% in the last financial year as we called out starting to shift back more to where we were prior to that big uplift in DIY.

Your next question comes from Richard Barwick of CLSA.

Just following on a little bit more around the capital management. I guess I'm with Bryan, I wasn't expecting that based on the comments that you'd made back at the Strategy Day, and you've answered that partially in saying that the Board is more confident in the economy. But is it a case also that -- or can we infer the Board has also got better visibility on the way that your businesses are trading as sort of cycles through that COVID peak from last year? Is there a bit more confidence within the business? Or on the other side, does the buyback actually reflect the absence of any value-accretive acquisition opportunities?

Look, I think as we called out, Richard, all of our MFuture plans are accounted for in that before we would have done that. And then, yes, I think your point is right, which is the Board is obviously looking at our current performance, but also as we expect the business to perform going forward and have more confidence over the future operating cash flows.

I'd also just add, in addition to the confidence of the outlook, we've always said that any major acquisition will be -- the appropriate funding structure will be determined at the time. So what we're -- what we do have confidence in is our pipeline of the growth initiatives we outlined at the Investor Day. And with that in mind, we're able to return the surplus capital back to shareholders now rather than down the track.

Okay. All right. That's helpful. And just another one follow-up in terms of the -- how -- what's the best way to think about this EBIT margin in Food? You've obviously talked there's a few moving parts there that's captured within this result. I know you're not going to give guidance on it, but what's -- I guess, what are the additional pieces we need to be considering and sort of the pluses and minuses on the 2% when we think forward into FY '22?

Well, no, I would say recent history, we've been right around those numbers. So I would think that you should keep considering that to be about the appropriate range. We may be up a little or down a little bit, but we're right around those numbers. Richard, that's an appropriate EBIT for our wholesale business.

Your next question comes from Grant Saligari of Crédit Suisse.

Just a couple of interrelated questions around Total Tools if I could, please. Just the first one, the $24 million of EBIT contribution, could you just confirm what's actually consolidated into that number? So for example, does it include the full consolidated EBIT of all the JV stores? Or are we just talking of Total Tools Holdings there, please?

I'll hand over to Alistair. I must have missed this accounting class when I went to university because this one is accounting form way I'm not familiar with. So I'll hand over to Alistair.

Yes, Grant, thank you for asking. We've outlined some of the accounting in Appendix 4 to the pack, but also when we did the acquisition of the half year results, we provided some accounting treatments. So yes, you're right. It's 100% of the JV stores and 100% of Total Tools Holdings. That's what gets consolidated through. The -- because of the nature of the put option, we've recorded that as a liability and adjusted against the opening retained earnings. So that's the decrease in our net assets that I highlighted in my speech.

Okay. All right. That makes sense. And then just -- so following on from that just on the total financial commitment into Total Tools at the moment. And maybe, we just stick with the balance sheet amounts at the close before talking about the additional 15%. So when you acquired the 70%, it was $57 million for Total Tools Holdings, and you recorded a liability of $122 million. And then there was $42 million, I think, for the JV stores and a liability of $69 million for put options that the JV owners have back to Total Tools. And there was debt of $40 million at acquisition. Is that -- sorry, can you just maybe visit and just confirm whether they're the right numbers? I'm just trying to look for what the total financial commitment for Total Tools Holdings is at the moment, please.

Grant, that's a good summary. I'll just break down a little bit. The facilities that we make available to Total Tools is to ensure that it's got the appropriate liquidity, whilst we've got a minority there. So we're carrying all of that 100%. It will just be in our debt levels or net cash position. But breaking down those other 2 components, you're right. You've got the original 70% interest, and we had a remaining 30%, which was, as you described. The -- of that, we've now acquired 50% of that amount. So if we were to record our ledgers today, we'd be halving that liability and converting it to the acquisition. The balance that you referred to on the JV stores does reflect the minority interest and the valuation at 30th of April. So that's the right way to think about it.

All right. So just to say double confirm, whichever way we cut it, whether we have the liability or not, we're looking at about $180 million approximately Total Tools Holdings, about $120 million for the JV stores, including the options. So we're up to $300 million there, plus the debt. So it's sort of 3 40 or 3 60, whichever way you look at it. Should we then -- and so we should compare that amount with the $24 million. Is that approximately right?

I'm trying to follow your maths, Grant. So I'll have to -- it may be easier to take it off and come back to you afterwards.

Okay. All right.

The key note that where it was set out the cost for the rest of the audience is on Page 63 of the financial statements and the business combination.

Okay. Well, I'm getting about $340 million if I had the equity investments and the outstanding liabilities. So it'd be useful just to confirm that on that page. That's it for me.

Your next question comes from Michael Simotas of Jefferies.

Sorry to harp on about this, but I've just got another question around the operating leverage and EBIT margin. Really, it was a very similar dynamic. If I look across all of the pillars, certainly, you had some margin expansion in the first half. Margins came down in the second half. And in Hardware, I'm adjusting for Total Tools to be broadly sort of flat on a full year basis. Jeff, you kind of touched on it earlier, but should we just think about Metcash effectively managing to a flat margin? And if there are some tailwinds, then they get reinvested into the business or into customers. And then potentially, we could assume the opposite if there's some headwind.

Yes. Look, Michael, I wouldn't say we've sort of pegged ourselves to that. I think, historically, we would say we should be earning somewhere in close to that range. It's going to be year-by-year, it could vary. But those old days of Metcash earning 4.5% or something EBIT margin in wholesale, we just became completely uncompetitive as did the retailers. So there'd be no thoughts of returning back to those sort of days, let's put it that way. So -- but could we vary up or down slightly from that? Sure. Yes, we can. And historically, over the last few years, as I said, you would find that. Liquor has been fairly consistent right around that number. And Hardware, again, on the wholesale part has been around 3%, again, from history. What's different on the Hardware business is the joint ventures and the company stores and now, of course, Total Tools. And so that's why you get to that total IHG EBIT margin of about 5.3%.

Yes, yes. Okay. And as an example, I mean, we've sort of known about it for a long time, but the tobacco stock profit headwind that will come through in the first half of '22, does that structurally make your margin lower? Or is that small enough that you might be able to offset with some other things?

That was part of the tobacco margin as we've called out before. So on tobacco margin, yes, it would be slightly down from what we've reported or what we've recorded before. But on the wholesale part of the warehouse sales, no, there wouldn't be a change in our GP in those sales.

Yes. Okay. All right. And then the second one from me on Total Tools. Just want to understand the rationale for the timing of taking another 15% of the equity. Was there any particular event that mandated or compelled either party to transact here? And can we -- obviously, it's difficult given the number of moving parts, but can we look at the implied transaction multiple of this 15% tranche and apply it to the remaining 15% tranche as well?

Yes. So look, I think it's discussions that we've been in to with them for a while now, and it really comes back to that growth plan that we put together and talked to you guys about in March. There's been no particular event that's taking place. As far as in the market, people announcing something that triggered that for us to try to increase that and go faster. It was really part of our strategy from the beginning about their growth plans. As far as the multiple is concerned, I don't know, Alistair, if there's any comment you want to...

Yes. I'll just pick up on the valuation question. Referring back to that note again in the accounts on Page 63, the -- we just paid $59 million, which is 50% of the Total Tools Holdings element. So if we're -- based on the current earnings run rate, we would pay similar for the remaining 15%. In terms of multiple, it was -- the way it was structured was always the last component. There was a step-up. We'd indicated, when we acquired the first amount, it was based on a 6.4x multiple on a normalized annual earnings of only $12.6 million EBITDA. So obviously, you can see from the 5 months -- 8 months of earnings, it has been substantially higher, and that's given rise to the increase in the valuation. There is a step-up in the final multiple, but it's not unusual in this sort of structure. And just to elaborate on what Jeff was saying and the rationale, there is no reason to do it now other than we're the #1 player in this marketplace. And it was an opportunity to ensure that we continue to capture the growth opportunities and make sure that there's liquidity back with our network to increase and ensure we're successfully increasing the stores.

Your next question comes from Andrew McLennan from Goldman Sachs.

Just to follow on from Michael's question there around Total Tools. I'm just wondering, obviously, over the longer term, you'd be very confident about earnings continuing to grow strongly in the business as you're rolling out further sites. I'm just wondering how you felt about the balance between short-term earnings given the pandemic impact and what that has meant to the transaction value versus what's a sustainable number. Are you comfortable with that earnings that you applied the multiple to?

Yes. Look, I think, Andrew, if you look back, the reason we were so interested in that business is it's done well for a long time. It's obviously stepped up here recently. But look, we're quite confident in the financials that we've seen for that business looking forward and the future for that business. So we think it's a fantastic deal. If you look at the multiples that we're talking about, if you get to the blended multiple, you'll still see that, that's a fantastic deal that's been done there.

No. I don't disagree with that. Okay. And just -- I know everyone has been harping on about the operating leverage in Food, but I just wanted to go back there again, particularly since during that period, you've been negotiating quite a lot of suppliers. Obviously, you've been able to demonstrate a huge amount of volume growth. I'm just wondering if you could just talk about the normalization of spending. That may be academic now given what's happening this week. But in terms of what you started to see over the last few months of the financial year '21 just from a trading perspective within the IHG retailers, it would be interesting just to get some insight into how the trading performance changed and whether or not your negotiations with suppliers was able to sustain a reasonable margin because it looks as though you're down about 25 basis points in Food in the second half.

Yes. Again, I think it's difficult to compare half 1 to half 2. I do believe if you guys factor in the March and April impact from the sales last year and then also this change in the weighting in the mix that we saw in the second half of the year, then you would see the numbers that we've reported are about right. There wasn't anything underlying there that was an issue. As far as how trading has gone, was that the question? Or...

Sorry. Yes, Jeff, within the IHG stores.

So we've -- the reason we've given you guys '20 and '21 is because '21 was just so volatile week by week. It's very difficult to take any sort of sense out of that. So if you say '20 was a more normalized sales base, then supermarkets being up 14.2% ex Drakes against that, I would say they're still trading again underlying quite well.

Sorry. If I could just go back to the supplier renegotiations as well.

Those are normal ongoing. I don't know, Scott, any comments you want to...

So I think, Andrew, we're going -- we are working closely with our suppliers. We're getting -- you can see the good growth that we're getting and building future plans to grow with those suppliers. So I think we're confident that they want to partner with us to grow and provide a real alternative in the marketplace.

Your next question comes from David Errington of Bank of America.

I want to ask a bit of a conceptual question on this capital management. Now look, I understand you desire to give money back to shareholders because we got to understand that you raised $330 million or whatever it was this time last year, [ 2 80 ]. And given the pandemic was very positive for Metcash, there is that need to give some back. I certainly understand that. But the key point is where I'm going. I know you've mentioned just to Andrew that you got to be careful second half and first half. But in the second half, your key business in EBIT was down second half on second half. Now I know that you've lost Drakes in that. But at the end of the day, that's what it is. It is what it is. You lost a couple of major customers here, and you have to cycle that you're not going to have tobacco excise benefits this year. So you're down from 94.3 to 89, and you're going to give up another 10 in not having excise from tobacco in Food. So my question is in the main Food area is that my concern in the industry is that there seems to be a step-up in capital intensity going on at the moment, where we've got Woolworths and we've got Coles both stepping up sizably their investments. Is it wise to -- because your maintenance CapEx, I think you're basically highlighting that your CapEx is not much above maintenance. So I think CapEx is about 80, and depreciation is about 60. So you're a little over that. I know you're doing MFuture and all the rest of it. But giving money back to shareholders at this point, and I know there's the desire to give it back because you did raise $330 million last year. So you got to give some back, I get that. But giving it back at like this, when the others are stepping up sizably their capital intensity, Woolworths announced last week $400 million in another automated DC. Coles are stepping up. They're investing in projects. Do you think that you might need to step up to remain competitive? Because I know that you're saying that you've got to look at sales excluding Drakes and all the rest of it. But at the end of the day, they are major customers that you lost. Are you at the position now that you can actually grow sales once we do go through the normalization period given what's happening in the industry right now?

Yes. Well, look, Dave, I wouldn't want to try to predict any further than what we've reported here on the first 8 weeks. But again, that's -- we're quite confident that we are still seeing -- again, if you go back to that FY '20 being a more normalized sales period, the growth that we're seeing against that is encouraging. As far as our plans, and do we have the capital that we need for those plans, we're absolutely sure that everything that we spoke about at the Investor Day, I don't want to comment on what other people are doing because I'm not familiar enough with their strategy and why they're spending that kind of money. But we feel quite comfortable that we're spending the right level that we need to spend to deliver the plans that we've outlined.

Is it fair, Jeff, to compare it to '20? Do you reckon right now we're in a normal period that you're comparing a normal period to a normal period? Because I don't know about you, but living in Melbourne in the last 2 months hasn't been normal. I've got to wear facemasks in supermarkets. I wouldn't -- I wasn't allowed to go more than 5K for about 2 or 3 weeks. So do you really think it's fair comparing the numbers today? Do you think we've normalized today? Do you think we've normalized that you can safely say and talk to us as the investment community compare yourself to '20 because, right now, it's normal versus normal? Do you think that's right? Do you think we're in normal conditions right now so that your trading is normalized?

Compared to FY '21, at that time, I think we probably are closer to normal. Maybe this is the new normal. The only reason we provided both of those, Dave, was so you could make that comparison to see versus FY '21, which was very volatile. We know, particularly at the start of the year. And then as we got more toward the end of the year, it was sort of what people are calling the new norm.

But do you think it's the new norm now? Do you don't think like we're still in that new normal period now?

Yes, I do. And until things change, as far as borders opening up and people getting further into the vaccination, I think we probably will be living the way we are now for some time to come.

Okay. And if I could just ask one quick question on the abnormal. There seems to be a sizable step-up in the second half, particularly Project Horizon implementation costs. I think it was 5.5 for the full year. It was only 1.2 for the first half. And then we had the Total Tools acquisition costs and put option valuation of 6.1. There seem to be about a $10 million step-up in that second half pretax of the abnormals, the significant items. Can I ask what they actually were and why they weren't charged to the operating businesses?

Yes, certainly. You've already flagged the key categories, and you'll recall I covered these off in my speech. But the main ones relate to the acquisition costs associated with Total Tools. We're not allowed to capitalize those, and that's pretty normal to be treated as a significant item. In terms of Project Horizon, we shared this with investors at our Investor Day. And the costs that are typically going through there are those that are not allowed to be capitalized under the accounting standard, so project management, legacy software, which is about accelerated live as well as duplication and license fees that often happen as you transition off one ERP on to another one. And you're allowed to capture those as a one-off cost. So that's the nature of the main items.

You don't have to capitalize it. My question is why treat it as a significant? Why not just put it through the operating line? Because that seems to be more -- because they're just operating costs, in my view, significant. I mean, you're talking about $8 million pretax. Why don't you just take it through the operating line?

For things like Horizon, David, because that's just being developed. And obviously, the business wouldn't have received any of the benefits yet. So in effect, we'd be charging that against the business before they've received any benefit.

And often, the costs are a duplication on costs. So if your ongoing business needs to support the earnings and sales, the accounting standards don't allow these to be capitalized. You would traditionally, in the old days, would have capitalized them as you've got the benefit after go-live of the new systems and technology platforms.

Yes. I understand why you don't capitalize it. I just don't like them treating this significant.

Your next question comes Craig Woolford of MST.

Just wanted to follow up on the operating leverage topic, which has been pretty common amongst the questions. I want to take it a different way. So your employee costs were up for FY '21 by about 12%, which is higher than sales growth of 10% over the same time period. Yes. At an absolute level, employee costs rising seems quite high. So what is driving such employee costs? Maybe there's a bit of a business mix impact there. And are there any one-off costs in employees just with regards to COVID, particularly from the first half that we might want to consider?

It's probably had -- yes. Some of that's going to be related because the business had performed well to some of the bonus schemes. That's probably what you're seeing going through there.

What about -- I guess, even versus 2019, it's still quite high growth. In other words, there's not any real evidence of productivity or leverage to what have been very good sales growth on a 2-year horizon to reducing wages relative to sales, which seem to be a surprise.

Yes. I should also remind, we -- in those employee costs, we had the acquisition of Total Tools and Kollaras, et cetera. So that also adds to the gross numbers. It's not a like-for-like.

Yes. Okay. I might take it offline. Just the ratios to sales have been picking up in employee costs, which obviously considers a new manner and [indiscernible] there. Just on the Australian -- on the Food business, particularly your Supermarket, with the strength versus 2 years ago, I'd be interested in any just high-level comments you can provide on how that performance versus 2 years ago, I guess, pans out across both the different banners that you've got and different states. Obviously, different states of Australia had varying degrees of lockdown. Has it been largely consistent in the growth versus 2 years ago across those different banners and states?

I'll comment and then hand over to maybe Scott. So as we said in the presentation, we've seen good growth across all of the states. You are right in that there was variances. So as we said, VIC, in particular, who suffered the most from all the lockdowns, we saw higher sales in VIC than the other states. But all of the states were in growth. I don't know, Scott, anything you want...

Yes. Look, I think it's a fair call out that VIC absolutely have been impacted the most, and we certainly feel for them down there that had to suffer through that. And I think, Craig, the way to look at it, we don't call out the sales individually by state. But what we have looked at is a state like WA who had the least lockdowns and the growth that we've had in that market, and that's given us confidence that we have held on to this shopper trend of shopping local. And we're obviously doing our best to try and normalize or plan what the new normal is. But we -- like I said, we're using some data points on -- in some areas that have given us a lot of confidence that what -- the changes we've made to improving the network through the better stores and the better value is getting sticky with our shoppers.

Okay. Great. And then just lastly, the second half Food inflation figure, obviously, fell back after what was a spike last year with pure promotions across the supermarket industry. On an underlying basis, what comments can you make on the outlook for inflation across the supermarket categories? Are you seeing any new price rises coming through? Or what's your expectations?

Scott, do you want to take that?

So again, the benchmark to the competitors isn't the same because we talk our wholesale sales, not retail. So it varies by category at the moment, but we're certainly seeing against last year. We're cycling droughts and floods. So we've seen some of the fresh categories come back. There's still some challenges in availability of some frozen product in certain categories, so it's very varied. We're not predicting that we're going to see significant inflation. Let's put it that way.

Your final question comes from Morana McGarrigle of Macquarie.

Just a quick one to follow up from David's earlier question. So on Liquor, we've endeavored talking about expansion. How should we thinking -- how should you be thinking about capital intensity? And maybe just should we expect to see a step-up in investment in this space?

Chris, do you want to...

Certainly.

Thank you for asking Chris the question. He sits here every time. He doesn't get any...

I don't, but I think the question is more about endeavor than it is. ALM, most definitely, we're investing in stores at the Investor Roadshow. We showed that we continue to do core room, refreshes and also store refreshes. We've -- the amount of growth that we've seen in our stores, we're seeing store owners invest in the stores and a good flow-on of reinvesting. We also said at the Investor Roadshow that we would look at acquiring stores if they were going to be lost to the network. We still stand by that comment.

That's clear. Maybe just one other quick one on Hardware. Just given your positioning in the trade market and given the fact that the market is very fragmented, how -- should we be seeing more consolidation? Or should we expect to see more consolidation in the industry in the near term?

Well, I'll comment, and then I'll maybe hand one over to Annette for her to comment. So we've said before, and we said again at the Investor Day in March that it does tend to still be quite a fragmented market in Hardware. Obviously, we've had a great opportunity to pick up Total Tools and in the past picked up HTH. There's still lots of people out there. It would depend now on what valuations they would be looking for because a lot of people have benefited significantly during the COVID times. So unless people are willing to talk about normalized earnings, we wouldn't be interested. But it is still one of the markets for us and businesses where it's still very, very fragmented and lots of opportunity. So I don't know, Annette, do you want to add to that one?

Jeff, I think you've answered it beautifully. I don't have anything further to add. Thank you.

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

So again, thanks, everybody, for joining this morning. I would say we'll see all of you as we make our way around, but we won't be doing that given the restrictions here in New South Wales. But I'm sure we either talk to you on teleconferences or on Teams and Zooms over the next few days. Thank you.