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

Good day, and thank you for standing by. Welcome to Metcash 2025 Half-Year Results Briefing. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Metcash CEO, Doug Jones. Please go ahead.

Thank you, operator, and good morning, everybody. Welcome to the Metcash Limited FY '25 first half results presentation. As the operator said, my name is Doug Jones, and I'm the Group CEO. I'm joined this morning by Deepa Sita, Group CFO; Grant Ramage, Food CEO; Kylie Wallbridge, Liquor CEO; Richard Murray, Total Tools CEO; and Scott Marshall, newly appointed IHG CEO; as well as Steve Ashe, EGM, Investor Relations. I'd like to begin by acknowledging the traditional custodians of the land on which we're all connecting today. I'm connecting from Wallumedegal country and pay my respect to elders across country past, present and emerging. So as you become used to, I won't talk to every slide. I'll make a few key points before I hand over to Deepa for the financial review, and then we'll both take some questions, as well as the team around the table. So I'm really pleased that our diversified portfolio strategy continues to deliver. As the leading wholesaler and service provider to independent businesses in Australia, we're guided in all that we do by our purpose of championing successful independents in support of thriving local communities. It informs our strategy, it defines our operating model, and it guides our culture and behaviors. Our flywheel is made up of unmatched logistics reach and capability, the retail models operated by our independent partners, and the support and services we provide them. The flywheel is reinforced by our enduring competitive advantages. And our strategies and initiatives are designed to support and deepen these. It's been a challenging environment, but I'm pleased to say that our portfolio strategy continues to deliver. And there are a number of very positive highlights I want to point you to. Firstly, each of our networks have held share, with Liquor delivering another fantastic performance leading to material market share growth. Food earnings performance is a highlight. And both pillars remain well placed for enduring structural growth. In Hardware, we're responding to the current environment, and I'll talk to this in some more detail in a few moments. And we remain well positioned for any improvement in market conditions. Acquisitions across both foodservice and building materials are performing as you would expect under their respective market conditions. As we've noted, we're confident in our ability to extract the committed synergies. Overall this half is characterized by strong sales performance with earnings maintained under challenging conditions. In the half, the Group achieved 6.3% sales growth and underlying earnings were flat with a solid 3-year cash conversion result. For the half, it was actually a very good result given the impact of the timing of the Superior acquisition and the temporary stock build for the move to Truganina, and Deepa will talk about this further in her presentation. Underlying earnings per share for the half were $0.123, and the Board has declared a dividend of $0.085. Looking at the pillars. Not including Superior, Food sales represent 54% of the Group's revenue and 45% of earnings, up from 39% last year. Overall pillar and Group earnings are flat on the prior year despite much tougher conditions. Turning to Food. As we note on the slide, and as I've said a number of times, our Food business is now, following the acquisition of Superior, not just a larger business; it's more diversified and more resilient than ever before. The customer proposition from independents and, in particular, from the IGA network, continues to resonate with customers in this highly value-conscious environment. As I've said before, the offer is underpinned not just by an improved quality of independent stores, but also highly competitive pricing positions. This has led to sales growth, excluding tobacco, and holding foot traffic in the half even as shoppers widen their repertoire of stores in their search for value. The trends that you'd expect continued, and this is highlighted by the strong growth in private label. Wholesale price inflation continues to moderate, just 1.8% for the half, down to 1.2% in October, and only just positive for the first 4 weeks of the second half. Contrast this to the first half of last year at 6.3%. Tobacco remains a significant drag on wholesale sales and also impacts our independent retailer partners. I remind you that we make relatively little profit from the sale of tobacco. Campbell's and Convenience delivered another strong result, supported by new customer wins as well as customers buying across a wider range. We expect that the Ampol contract will commence in the second half. You'll note there's been a bit of movement in store numbers, and it's really pleasing to open 15 new stores. I also want to remind you that stores that are moved out of the IGA banner group remain Metcash customers, so the warehouse house volume also remains. Our teamwork score is up, excluding tobacco, and flat including, which is a really pleasing result. Superior Foods continues to deliver strong growth, although that does moderate as they annualize large contract wins in the last 12 months. Craig and his team have a significant pipeline of potential new customers they are actively working towards, and it's exciting that there are a number of contracts we're bidding for that Superior on their own would not have had the capacity to tender for. We're on track with our integration and synergy realization projects, and Deepa will cover this further. The strong Food EBIT result reflects the sales performance as well as the mix shift away from tobacco. Despite the impact of lower wholesale price inflation and a decline in contributions from JVs, supported by strong cost management, margins are 15 basis points wider. As the food service market feels the pressure of customers looking to manage their own costs, they're more readily testing the market. We see our own customers more willing to negotiate and switch and competitors across the market more willing to discount. I remind you that the EBIT numbers in Food are 5 months of Superior, not 6. And it's -- Superior's results are seasonally weighted to the second half. In the current market and relative to competition, the Liquor pillar has delivered the standout sales performance for the half. You're probably tired of hearing me say that the localized, better quality and more competitive offer from independent store owners continues to resonate with our shoppers. As a result, we continue to see strong growth across all independent groups led by IBA. We're delighted to have concluded a new wholesale distribution agreement with Lion for the South Australian market. The slight decline in EBIT margins reflects the lower wholesale price inflation and increased cost pressures. As in all pillars and aligned to our purpose and strategy, we continue to prioritize volume through the network by ensuring our retailers remain competitive in the market. We do this by ensuring they have the products their shoppers want at competitive prices. To be clear, this is not about discounting. It's about not expanding our margins to the detriment of our customers' price competitiveness. As you're now well aware, this has been a challenging half for Hardware in the face of continued weakness in trade activity. This impacts our retail stores through lower volumes, which leads to profit compression as we experience deleverage. Even though costs have been well managed, the reduction in GP dollars results in a lower EBIT result. The decline in charge-through sales is primarily because those sales are in trade categories. Despite the tough market conditions, there are a number of real positives inside of IHG. These include strong online sales on the back of materially improved conversion and better loyalty results in DIY, with loyalty customers now representing almost half of total sales. Wholesale EBIT margins held steady at 2.8%. And in retail, I do want to point out that, on a like-for-like basis, the retail businesses' total costs are actually lower this year than last, despite the inflationary pressures and the inclusion of $2 million of site relocation costs. This represents real cost savings of nearly $10 million. In respect to our acquisitions, Bianco is performing particularly well in this market, while Alpine Frame & Truss has faced tougher conditions as you'd expect. As I've said, we're on track with our synergy realization program. We remain confident that we are, as the leading supplier of building materials to small and medium homebuilders, well positioned for an improvement in trading conditions. And I'll speak in a moment about our other responses to the current environment. So you've heard me say for a while now, there are 3 key forces acting on total tools. Firstly, a localized and now contained intense pricing pressures in the first quarter. Secondly, a general increase in market promotional activities. And finally, weaker market demand, exacerbated by cost-of-living pressures on our trade customers. And you've also heard me say that the second and third of those persist. Again, like IHG, there are some real positives. The recovery of the wholesale sales of exclusive brands, up 25%, along with retail sales growth of EV, up 6%, is reflective of the successful conclusion of the project to relocate our international consolidation centers to the IHG DC in Ravenhall in Victoria. Online sales, up 20%, and sales to commercial customers, up 22%, underpin my positivity. And you'll see there's an improving trend in the network sales from the first to the second quarter. On a net basis, this half, we added no new JVs, as compared to 5 in the corresponding half last year. In fact, the business sold 2 mature stores and opened 2 new ones, so there was a modest net reduction in sales and EBIT contribution as a result. As you know, the Total Tools EBIT is the product of 3 key income streams in that business, being franchise fee income, exclusive brand margins and retail store profits. You also know that, as the proportion of total profits from retail stores increases, the blended margin trends towards that of the retail stores, which is lower than the other 2, but still extremely healthy at more than 7%. So all of that is well and good, but I know you'll be interested in how we're responding to the conditions. In IHG, there are a number of very specific actions underway, including continued and aggressive cost management and the acceleration of the whole-of-half strategy, leveraging our investment, in particular, in our frame and truss capabilities. These are delivering the expected -- I beg your pardon, as well as delivering the expected benefits of recent acquisitions through performance and synergy realization. These are delivering pleasing results and include a strong expansion of our volume builder business, double-digit growth in online and commercial segment growth, and reductions in inventory and debtor days as well as a moderation in capital spend. As you'd expect, there's an equally strong focus on costs and Total Tools as well as specific initiatives to optimize margins. We expect to open more new stores in the second half and to continue the strong focus on the commercial segment, exclusive brands and online. I do want to point out the improvements in the EV on-shelf availability, up 4%, to a very pleasing 96%. And I expect this will continue to support the improvement in EV sales. We remain confident that the long-term market fundamentals remain positive. At its simplest, we need more homes built in Australia, and both IHG and Total Tools are perfectly placed to take advantage of this. I do note that the Housing Institute of Australia data is starting to indicate some positive signs, including an upward trend in finance and plan approvals. At some point, this must translate into starts. I'll now hand over to Deepa for the Group financials.

Thank you, Doug, and good morning, ladies and gentlemen. Building on Doug's update, I'm pleased to provide an overview of Metcash's financial performance for the first half of FY '25. Supported by strategic acquisitions, the company has continued to deliver sales growth despite challenging external conditions. The Superior Foods acquisition was finalized on 3 June and has contributed 5 months of earnings towards the half. At the Investor Day, we highlighted that the 3-year rolling CRR is a more reliable and meaningful measure as it averages performance over time and smooths out short-term volatility. In line with this, the 3-year CRR is reported at 85.5% and sits comfortably at the upper end of our guidance range of 75% to 85%. The underlying EPS is reported at $0.123 per share, which includes the dilutive impact of the equity raise. The company's DLR is at 1.26x, also within the target range of 1 to 1.75x. As Doug mentioned, the Board has declared an interim dividend of $0.085 per share, in line with the annual target payout ratio of approximately 70% of underlying net profit after tax. The DRP will also remain in place with no discount. The capital management framework remains focused on optimizing financial resources to drive sustainable growth, enhance shareholder value and maintain financial stability. And the outcomes on this slide highlight the consistent execution of this approach. I draw your attention to the operating cash flows of $164 million. This balance was impacted by the timing of the Superior Foods acquisition, which reduced the cash flows by approximately $19 million. This timing also impacted the CRR. Essentially, this occurred because the effective acquisition date was at a favorable point in Superior's monthly working capital cycle where, for example, debtors balances were low following recent payments from customers. Moving on to capital investments. Of the $471 million, $400 million relates to business acquisitions, with Superior Foods being the largest portion. Further details are outlined on the cash flow slide. Net debt has increased compared to the same period last year and is primarily driven by the acquisitions of Superior Foods, Alpine and Bianco, as well as additional ownership interest in Total Tools stores. ROFE at 23% reflects the impact of lower hardware earnings, the inclusion of only 5 months of earnings from Superior Foods, continued investments in technology, as well as the effects of multiyear investments in new distribution centers. This slide provides an overview of the P&L performance and other key financial highlights. The business delivered strong results, achieving a year-on-year growth in sales revenue as well as EBITDA. The EBITDA growth is supported by business acquisitions, effective cost management as well as operational efficiency strategies across the Group. The net financing costs for the half is reported at $57.7 million. Looking ahead, assuming the interest rates remain unchanged, net finance costs for the full year are expected to be in line with the previously guided range of $120 million to $125 million. Significant items for the period include those previously disclosed, together with a gain from the reversal of a previously impaired loan to Dramet. Full details are provided on the slide as well as in the financial report. The underlying EPS at $0.123 is mainly impacted by the increase in finance costs as well as the impact of the equity raise. As mentioned, disciplined execution has driven a strong cost and cash performance, resulting in a 3-year rolling CRR of 85.5%. Recognizing the challenging environment, we have reduced the FY '25 capital expenditure, excluding acquisitions, by approximately $30 million below guidance. The reconciliation of the cash outflow for the Superior acquisition compared to its enterprise value is detailed in Note 1 on this slide as well as in the financial report. We retain adequate flexibility with the balance sheet remaining well within our capital management framework. Net working capital at $558 million is driven by higher inventory, which is more than offset by the increase in payables. The inventory days are largely in line with the first half of FY '24. But more importantly, average working capital days have improved by 0.6 days, reflecting our continued focus on enhancing efficiencies and optimizing performance. Intangible assets have increased to $1.4 billion, primarily due to the Superior Foods acquisition. The purchase price acquisition for Superior is still under review and will be finalized within the 12-month time frame for completion in the second half. Once finalized, a low single-digit amortization charge for intangible assets is expected to be reflected in Superior's future results. We have a robust and balanced debt maturity profile, with total facilities amounting to $1.56 billion at the half year-end. You may recall from the pro forma debt position slide we shared in the appendix of the FY '24 results. The slide adjusted the year-end debt to reflect the payments for the Superior Foods acquisition and Total Tools put options as well as average intra-month and seasonal working capital requirements. On this basis, we reported the pro forma average gross debt at year-end at approximately $1.1 billion, with a DLR of 1.68x. Similarly, for this half year, we've provided an updated pro forma net debt position for your reference in the appendix. During this period, Metcash achieved an improved pro forma average net debt of approximately $878 million, equating to a lower DLR of 1.53x, which remains comfortably within our target range of 1 to 1.75x. As at the reporting date, actual net debt was $725 million with a DLR of 1.26x. The weighted average debt maturity has increased to approximately 2.9 years following the conclusion of 5- and 7-year of syndicated facilities post the FY '24 year-end. The increase in the weighted average cost of debt at 5.8% is reflective of the higher cash rate. $295 million, however, have been hedged at a favorable weighted average interest rate of 3.78%. This slide outlines the details of the dividend declared by the Board, and I draw your attention to the key dates outlined in respect of the dividend as well as the DRP. So a key priority this year has been the launch of a comprehensive cost out and cash optimization program across the Group. I'm pleased to report that this initiative is already delivering meaningful results, with the business on track to achieve the targeted $15 million in annualized cost savings, excluding the further tactical operations -- operational actions within the pillars, which Doug has just spoken about. Moving on to working capital. We've made good progress in refining our debt management strategies, enabling us to better manage aged debt. There's also ongoing collaboration with supplies to address slow-moving and obsolete SKUs through clearance sales, stock redistribution as well as returns we agreed. Optimizing working capital remains a key priority as we continue to explore further opportunities to enhance our financial resilience. As Doug mentioned, unlocking synergy benefits from the Superior acquisition remains a key focus for the business. Progress has already been made in supplier trading term negotiations and the business is actively exploring further additional opportunities for low-cost sourcing to drive value. The integration of Superior's operations into Metcash warehouses in Perth and Melbourne has reduced reliance on third-party logistics service providers, improving supply chain efficiency and achieving cost savings. As Doug mentioned, Superior is now also able to leverage the Metcash Group supply chain to tender for new business. Beyond the quantitative benefits, qualitative synergies have also been achieved, particularly in areas such as cybersecurity and safety. And on that note, I'll hand over back to Doug to talk to the outlook.

Thanks, Deepa. Turning our attention now to the first 4 weeks of the second half. I do want to point out that on the slide in front of you, we've used 4 weeks for all pillars and Group, with the exception of Total Tools where we've given you the 3-week number. The simple reason for that is that 4 weeks would have included the Black Friday week last year but not this year, and so that would have been unhelpful. So at a total level, really pleasing that the total Group sales have accelerated to 8% with strong growth in all pillars partly buoyed by acquisitions. In Food, revenue, as you would expect, is up significantly, including superior Foods. And despite the lower inflation, supermarket sales ex tobacco have continued to grow. Superior Foods continues to win new customers and is performing in line with our expectations. In Liquor, independents continue to win share from the chains, and this is led by the IBA network. In Hardware, the soft trade activity continues to place pressure on volumes and retail store margins. The strong focus in IHG on costs and accelerating growth initiatives that I spoke about is expected to provide benefits in the second half. In Total Tools, competition remains strong, but at a more normal level. And we expect, in Total Tools, the second half to be stronger than the second half in FY '24. So in summary then, we remain well positioned with good plans, the platform's capabilities and our diverse business model for future growth and strong returns through the cycle. I'd like to thank you for your time and attention, and I'll now open it up for questions.

[Operator Instructions] Our first question comes from the line of David Errington from Bank of America.

I'm trying to delve into the performance of Hardware. And there seems to be a lot of moving parts. It looks as though, as you say, this -- the Total Tools, there's 3 key things that drive your performance. It's franchises, franchisees, revenues, exclusive brands, and then there's the retail part of the business. Now clearly, it's the retail side that is really hurting you at the moment through the deleverage. I'm wondering if you could help us come to -- I'm trying to work out what number can we look at that's really driving that. And how do we measure as to how can we actually see the improvement? Is it the JV's sports sales, that minus 0.3%, that's doing the damage? I'm trying to really, if you could help me in a very simplistic way, unravel what's going on in that Hardware business that's causing the, at the moment, the earnings. And where can we believe that we're at the -- I'm trying to come at when do we see the trough, if you like. So what number do I look at to identify where you are in the cycle, particularly for the retail? Now I didn't know if I asked that question very well, but I'm hopeful that you understand where I'm going with that.

David, I think so. I'll do my best, but obviously, if I miss anything, feel free to follow up. Let's start with Total Tools. So you're right. Those are the 3 key value drivers. We've got a slide again in the deck, in the appendices, that I think gives you all of the information you need and It's a combination of those 3. When you think about the franchise fee income, that's very high margin because, basically, for every dollar of franchise income, we only recognize $1 of sales and $1 of income. Exclusive brands is a -- we're essentially the supplier, and then you -- as you correctly point out, the stores. To come to the second point that you made, you're right, the -- in any retail business, operating leverage is more variable. In other words, the leverage is higher in a retail business than it is in a wholesale business. And in both of IHG and Total Tools, this case, there's something really important that we mustn't miss out here is that, relative to, say, a food business, a supermarket, there are actually very few staff relative to the size of the business. And so it's hard to materially take them out. And you actually risk damaging the business if you take out too many. And so certainly, we're conscious of that. That doesn't mean that we're sitting with excess team members. It just means that we make sure that we serve our customers really well through the cycle and that we're well positioned as volumes lift. And as volumes lift, that is the primary driver of retail EBIT margins. So there are not that many moving parts across our business. I think we've given you all of them in Total Tools. In IHG, it's actually quite simple, there's a wholesale business, and we give you all the information there and then there's a retail business. And I've explained why retail margins are under pressure. Finally, your question -- I know you guys always want me to call the bottom. I'm just not going to do that. The timing is uncertain. I have given you some HIA data that's publicly available. And as I said right at the end of my presentation, at some point, those plan and finance approvals must translate into starts.

You must be reasonably confident though that you are approaching it, if you're talking that the second half the Total Tools is going to be better than the second half of last year. So you must be seeing something there that gives you a little bit of confidence. The retail sales volumes are picking up a little bit? Or is there something there?

Yes. Forgive me for the interruption. I want to remind you that the second half of last year included the bulk of the intense pricing pressure that we saw. So we're hurdling that, and provided we don't have a repeat of that, we can expect that we'll have a better result in Total Tools. One thing -- sorry, one thing I'm remiss if I don't say. We -- I'm not sure that I would quite use the expression green shoots. But we are starting to see in our frame and truss businesses a lengthening of the pipeline, which is pleasing. So certainly from 6 months ago, we have more prospective work in those businesses than we did before.

And just the question then on just to tone down on, what the retail sales are under pressure? Is it that negative 0.3% that we need to see improved and the Total Tools slump? Or is there something else there? Because I'm trying to work out the retail side of the business is obviously doing it tough, but what's the number that we need to see turn around on that debt? Because there's a lot of numbers there, I think it's Slide 14. What's the number that we really need to see move up before we start seeing the EBIT -- I mean, the leverage hopefully coming the other side, really accelerating up on the other side?

Yes. I mean there are a few numbers. I don't think that there are too many to understand. But I want to give Richard a chance to make a comment here.

Mate, it's all about like-for-like sales. We just got to -- and at good margins. So we want to grow our sales and gross profit dollars. And I guess on a like-for-like basis is the test we all use. So we had a few moving parts in the first half with the price war. We're cycling them in the second half. And then otherwise, we've got a great business model with a 7% EBIT margin, and we just need to sell more and get on with it.

Okay. Thank you. And hopefully, we are at the bottom of the cycle and we can look forward to the leverage going the other side on the up rather than on the down.

Next, we have Shaun Cousins from UBS.

Just a question on the broader hardware industry. And Doug, again, not seeing for you to call sort of a bottom or wherever we may be or talk about green shoot. But I'm just curious around, in your own business, has the decline in trading activity deteriorated. Is it falling at the same rate? Or is it falling at a lesser rate, I guess, in the sort of first 4 weeks? Just trying to get a flavor of where -- what you're seeing in your current business, is it getting incrementally worse? Or is it actually potentially getting incrementally better?

So Shaun, thanks for the question. I think you have to be quite careful about trying to call long-term trends based on 4 weeks. But what we said when we spoke to you on, I think it was October 25, was that there was an acceleration in the decline through September, October. And that has essentially continued. So the rates of decline has been steady since then. I'm cautious about talking too much about what we think is going to happen in the future. But I can say, as I did in response to David's question, that we are starting to see in our frame and truss plants more activity, more demand. And so our pipelines are slightly fuller than they were this time 6 months ago.

Jumping to food. Tobacco has obviously been a constraint there. One, have you seen sort of any weakness in your -- in the orders of your independent customers from a nontobacco sales perspective in that the tobacco customer that may have been going in was buying other products but they may no longer be visiting those IGA stores there? And again, similar to the question on Hardware, have you seen the rate of decline in tobacco sales stabilize or lessen? Or is it actually deteriorating at a greater rate? Just again, interested in what you are seeing in your own business, please?

Grant?

Yes. We are still seeing consistent declines in tobacco in excess of 20% in retail sales. There is an impact to adjacent items that would be bought with those transactions. And I think clearly that has some impact on our network, and we've been calling out that for a while, that the major impact is to our customers rather than to Metcash's profits. We've been working to advocate on behalf of the network. But I think when you look at the overall results of the network, and particularly comparing retail sales with other people's bricks-and-mortar sales, then I think despite that drag from tobacco and loss of those sales, I think we're doing okay.

Next, we have Tom Kierath from Barrenjoey.

I'm just trying to get a handle of how much the IHG business underlying has declined. So excluding the couple of acquisitions that you did. I think, at the time, you said that they would do $24 million in the full year. So if I assume $12.5 million, which I'd be keen to get some color on, it kind of means IHG underlying is down about 34%. Just be keen to maybe get some numbers around where do we sit there.

Tom, yes, I mean, I'm not going to give you the exact numbers. We see that the acquisitions are kind of part of BAU now. But no doubt, the -- you're right, the underlying IHG core performance is done more than the total business, obviously. I tried to give you some more detail on Bianco and Alpine and relative to the guidance we gave at the beginning of the year. So as I said, Bianco is actually performing really well in the market conditions and Alpine has been more affected. It's affected at a volume level and at a margin level. But that's what you would expect in these conditions. And I do want to point out, maybe in anticipation of a question, we -- when we valued these businesses, we did expect that market conditions would continue to be tough. And again, I've always been transparent with you and I said to you that they are tougher than we expected. So I don't think anybody saw the acceleration in that downturn. But again, we're confident and comfortable that we're managing it really well.

Great. And then just a second one. In Superior, were there any synergy benefits that you captured in the half, in the 14.3 million, I think it was? And can you maybe just quantify that just so that we can kind of model that out going forward?

Yes, sure, I'm happy to talk about Superior synergies. So the short answer to your question is very little in this half. We've owned the business for 5 months. It does take some time. I think we told you that we run weekly steering committees that I chair, Deepa, Grant, Craig and all our teams are there. There is no shortage of effort. In fact, the risk that I'm managing, to be honest with you, is that the business becomes too distracted. And so we really want to focus on the long-term meaningful synergies rather than chasing really small, short-term wins that perhaps put us under pressure. We're, I've said it 3 times this morning, and I'll say it a fourth, we're confident that we can deliver on the synergies that we committed. In the half, though, we have seen, as Deepa said, some, I think, sort of nonfinancial benefits. I'm really pleased with the way that both the old Metcash business and Superior have responded to the opportunities, and there are lots of people that are keen to help. We've had some great support coming out of our central capabilities like cyber and safety, Deepa called out. And we've had a couple of nonfinancial wins. Some of the benefits that we get in these synergies won't necessarily be avoided -- sorry, a reduction in existing costs. There will be avoided costs. So an example might be an insurance that wasn't in place before and that is now in place at little or no cost. So it reduces the risk, but it doesn't necessarily affect the bottom line. And we track all of those synergies really closely.

Our next question comes from the line of Michael Simotas from Jefferies.

My first question is on the associate earnings. So it's a fairly large drag. I think it was about $5 million, lower contribution in this half than in the PCP. Just wanted to understand whether that is reflective of the ongoing underlying trading conditions that perhaps deleverage from tobacco or whether there were any one-offs that informed that contribution down during the half.

Yes. No problem. Michael, thanks for the question. There's 3 things that affect it. The one is trading conditions and performance. And no doubt that tobacco would have had an effect, as Grant just outlined. The second is that in the prior period there was a positive true-up in the Ritchie's accounts as we wound up. And then the third item is that in the BMS associates, there's an impairment for one of the stores that they bought. So that's a one -- so the second one and the third one are one source.

Okay. That's helpful. And then the second question for me is on Superior Foods. And just in particular, the comment that there's some margin pressure emerging in the second quarter. Can you just elaborate on that please? And also relating to that, we've had some industry feedback that you're doing a lot of good work on trading terms and procurement, and I think Deepa touched on it quickly as well, just whether that's still to come and whether you expect that to offset the margin pressure that you've seen?

Yes. I think we've answered the second question when I spoke about it in response to Tom's question. So that's still to come. Certainly, we'd look for it to be -- to offset as much of the margin pressure as possible. We won't limit ourselves. And the margin pressure is -- I mean, it's pretty simple. When customers are under pressure, they are going to look to more aggressively manage their costs in the same way that we are and that every business around the country would be. And so they're going to lift up every site and look under it twice in an effort to manage their own costs. And cost of product is the biggest in many of their businesses. And so they're certainly expecting that we remain competitive and they're not shy to shop around. It's unsurprising and it's completely normal, and it happens every time. I saw a recent stat that a large proportion of businesses in VA are in the hospitality sector, and that just talks to that pressure. We expect that things will normalize. And certainly, we would look to take advantage of that. The other aspect is sector mix or customer mix between QSR corporates, independents. And as QSR grows, that's the lowest margin part of the business. And that has grown slightly faster than independent business in this half.

Our next question comes from the line of Craig Woolford from MST Marquee.

I know there's been a lot of questions on the Hardware. But I'd just like to clarify your comments on the focus on cost. You've made, I guess, an emphasis on the cost savings and try to be diligent on that front, but also highlighted there's a high degree of fixed costs inherent in the Hardware business. So if the second half sales trends pan out as we've seen in the trading update and what we experienced in September and October, will the margin pressure be as significant in the second half of FY '25 for Hardware as it was in the first?

Craig, so I mean, it's a function of mathematics. If volumes continue to decline, we will experience similar margin pressures. But as I've said, we're working hard on not just managing costs but also growing the top line. I do want to touch maybe and just to elaborate on my point around volume builders, because I'm expecting somebody to ask me whether that's a change in strategy. And I wanted to confirm it's not a change in strategy. It's looking for opportunities with well-capitalized, strong volume builders that we have long-term relationships with, and making sure that we maximize the opportunity in serving those customers. In terms of the margin pressures themselves, that is a function of volumes and relative to the cost. So you've characterized it as a high fixed cost base, and that's generally correct. The IHG business for a long time now has been a very, very lean business. It's -- I won't go into the detail, but discretionary costs have been eliminated. There is not a lot of fat, if I can call it that. There's no fat in that business, and it has been that way for a while now. And that's good. A healthy business shouldn't have any fat in it. And then the final point I'll make is the one I made in response to an earlier question, around remaining well-set and future-fit for the inevitable upturn.

Okay. That's clear. There was a comment from just around CapEx coming down $30 million versus earlier guidance. Is that just a timing issue and, therefore, that CapEx will be next fiscal year? Or is it a step away from some sort of the CapEx budget?

It's a function of both of those things. So some of them, given the current environment, we've made decisions to delay others where opportunities perhaps haven't manifested and others where we generally are looking to save so that we protect our cash position. So it's all of those things. And again, any healthy business is doing this all the time, and that's what we're doing.

Because the store count on Total stores or the JV stores, I think you said net down 2, is that likely to be the shape of things going forward on the Total Tools?

No. I also said that we expect to be opening more stores in the second half. So that's just a function of timing.

Next we have Ben Gilbert from Jarden.

So I'll ask a question [indiscernible] ask again. What's sort of the discussion around the Board in the moment, Doug, when you look at the valuation in terms of where you're trading? Because you look at Hardware in theory, sort of at or near bottom of the cycle, a lot of leverage on the way up, probably trading at less than our implied multiple versus your biggest competitor out there, is probably trading at a mid-single-digit multiple. It doesn't feel like you're getting value from a market standpoint at the moment for the aggregate. Do you sit there, and is there any sort of change in your willingness to look at the mergers you're exploring, anything around that to try and maximize value, the market is not going to pay for it from the structure today?

Ben, yes, look, I'm not going to comment on our share price, but there's a few things that I will say. We're confident that we have the right strategies and that we'll be able to grow our earnings. Secondly, you only have to look at the fact that the Board has decided to remove the discount from the DRP to get a view on what -- an understanding of what their view is. And in terms of corporate structure, a good Board is always considering all of their options. And our Board is a very good Board. But we believe -- and I said this last time in response to the questions, we believe that all parts of our business have value in our hands. And just at the risk of an off-the-cuff comment, now wouldn't be the time to be selling any parts of the business given where we are in the cycle.

Okay, all makes sense. And maybe the second one for me. Just historically, within Food, I think you've sort of talked to not looking to drive the margin above 2. Fully appreciate tobacco is lower margin business, or that category is going down into 20%. What is the baseline now? Is the baseline for that EBIT margin could be around that 2.3, 2.2, given the mix of capital with tobacco? I appreciate all the commentary made on cost out, but it feels like naturally it should just be higher owing to your tobacco mix moving forward.

Yes. I mean, firstly, we've never said we won't go above 2. We haven't put a hard limit in place. I think we've consistently said that we'll look to optimize our margins relative to the volume and that we'll always look to leverage volume as much as possible because that means that our retailers stay competitive and volume through the network is important. We can generate higher margins, but that's at the detriment of the network, and we won't do that. Maybe I'll throw it to Grant for some more detailed commentary on the things that they're doing and how he thinks about it.

Thanks, Doug. Yes, I think partly you've covered it in the sense that when we look at our network and their competitiveness, we're not going to compromise on that. We've done too much good work to get the independents of markets into the most competitive space ever. And in the current environment, that's really important. You can expect that EBIT margin to continue to drift up as tobacco unwinds as a share of the mix. And you can see that happening over the last few sets of results. Outside of that, we have to work hard to make sure that we are controlling our costs. We have sizable cost inflation every year built in, and we operate big DCs with -- that employ lots of people. So we have to keep working hard to offset that cost inflation to make sure that our margin is stable. And look, we -- as Doug says, we're not limiting ourselves to only ever making that margin, but it won't come through charging more for goods and services that we already provide. We may find new things that we can add in that are margin accretive. But it will always be with a lens on, whatever the services we provide, it has to be a benefit to our partners, our suppliers and our customers. And then that's what gets them to take it up. So hopefully, that gives you a view on how we see margin.

Yes, that's helpful. So I presume it's something like media where you obviously got some numbers in your strategy [indiscernible] in terms of aspirations would be additive because that's an incremental service, not necessarily trying to extract terms, it's an incremental service providing the share with the customers, it's obviously margin accretive.

It's a great example. And again, to reiterate, it really works if we deliver value to our partners, both suppliers, and also customers, and they need to participate in the benefits of that for them to want to drive it. I'm excited to see that they are good uptake on retail media, and the rollout of screen -- digital screens and stores is progressing really well. So that says that they see value in it, and we do too. So that's -- it's a great example you've given.

Next, we have Bryan Raymond from JPMorgan.

Just actually a follow-up on that last one around the Food margin. I mean that has been declining at a rapid pace for a while and your margins have been -- haven't reached 2.3 for some time. Just wanting to understand if there's any other margin mix drivers in there that could unwind going forward. It just was a bit of a positive surprise to see that the lift, particularly given operating leverage to be minimal given where cost growth is and where your overall sales ex tobacco is. So yes, if we could just get a bit more color around the other drivers of that 2.3% EBIT margin.

Okay. Thanks, Brian. I'll take that one and keep going. I think the obvious thing that we want to see continue to grow is volume. Volume is really healthy for our business. It drives the flywheel in logistics at the center of our business. And you can see, I think, as you look at the reduction in inflation through our business over the half versus the previous corresponding period, and then the exit point of the half, and then in the outlook, inflation has come off fairly significantly, and we've seen volume growth doing pretty well, and more of our growth is coming from volume now, which is good. And that obviously comes from a shift in the way shoppers are buying. They are trading into volume items, that helps it. It's also -- you look at our customer base, we're increasing our teamwork score a little bit. So we're growing their business and then we're growing our share of their business. All of that supports margin and supports the overall volume impact on our net EBIT. So I think I've already said, the other part of it is really focusing on our costs and making sure that we are being very careful in the current environment to look after the bottom line.

Good to see. Just back on trade quickly for the second question. We've obviously got some numbers there for the first half around the scanned sale, which I know it's not -- it's a read, but not holistic. But scanned sales point is negative 9.2% over the first half for trade. Can you help us just flesh out the comments that you made earlier, Doug, around the frame and truss, positive signals there on the outlook. Just how that might have progressed first quarter versus the second quarter. And then if you can give us a direction on the first 4 weeks, just to understand actually seeing any improvement there on the trade side at this stage.

Yes, absolutely. As I said, you've got to be careful calling trends on a couple of weeks, but certainly, it's pleasing that we've had the reports of what I'll call the pipeline. So the demand for new home builds, which start with the builders sharing their plans with us so that we can design the frame and truss, those pipelines are longer. I want to give you guys a chance to hear from Scott. He's been in the business 1.5 weeks, and I'm sure he's got most of it figured out anyway. So over to you, Scotty.

Thanks, everyone, and thanks, Doug. Yes, 1.5 weeks in. Yes, I mean, as you know, we are a majority trade business. What is pleasing, though, in the numbers is that we're holding market share. So we will be well positioned, as Doug said, to come out of the cycle in a good spot and come out strongly. I think the foundations of the business are very strong, and certainly credit to Annette, Mark for her and the team on where we are, but there are opportunities. Recently, I've been in trade, and I can assure you that there's no trade business out there in any category. I'm thinking times are easy at the moment. So our focus is absolutely on the core business and ensuring we're ready to come out strong. I'm really excited to be here and I'm really excited to leading the IHG business.

That's great. Just checking if, given you guys provided the 1Q versus 2Q for Total Tools, if that's possible for trade or IHG even more broadly, just to understand that sequencing?

Yes, we can have a look at that, Bryan, not as i sit here.

Next, we have Richard Barwick from CLSA.

Perhaps some more questions on this margin composition within Food as well. And as a part of that, you talked about the Superior Foods, I mean so you're way into the second half. Can you give us a steer on what is that normal first half, second half split for Superior? And I guess it's a little bit complicated with the timing as they cycle some of those acquisitions or contract wins they brought in, but any color there would be helpful.

Richard, I'm probably not going to be as helpful as you'd like me to be, purely because, as you've said, the historical results, and you only have to go back to the ERP that we shared with you in February, are in large part a function of winning new contracts as well as acquiring new businesses. But you can imagine the second half is the traditional festive season of Christmas in December, January. So it is always weighted to the second half. I don't want to obviously share our budgets and our forecasts with you, but we expect that the second half would be better from a profit perspective. Remember, you're going to have 6 months as well, not just 5.

Okay. And then within the tobacco, obviously, we know it's lower margin, something less than 1%. But just in terms of the way we're sort of back-solving here, is it fair to assume there's just a consistent margin that we apply to tobacco? Or with -- as tobacco sales fall the way they have been, is the effective EBIT margin you're making on those tobacco sales, has that been falling as well? Just again a little bit of color there, I think, would be helpful.

Grant?

Yes. I would say, no, it hasn't, in terms of the way we move tobacco through our network, it's the degree of automation. And I would say that what you're seeing is pretty stable margins in tobacco and pretty stable margins in nontobacco, and most of what you're seeing is in that mix as the share of tobacco unwinds. There's not much more to it than that.

Yes. I'd only add to that, that the Food team, like all of our pillar teams, have been really focused on making sure that they continue to remove costs and prepare themselves for the future. So whether that's through structuring, whether that's engagements with suppliers, customers. And it's pleasing to hear play it back to us today that the Food results was a surprise on the upside, and because it was a fantastic result, and real credit to the entire team, despite the distraction that we've had over the last 6 months of some of the -- all of these hearings. So I think a shout-out to Grant and his team for delivering in these conditions such a great result.

And can I just jump in -- can I just have one on Liquor, I haven't heard a question on that. But they've sort of almost reversed. The margin outcome there is the weakest in a number of years, so going back to first half '20. How much -- and I know you're only talking fairly small movements, but it's a pretty skinny margin for starters. How much of the decline, if any, should we be thinking about that as a one-off? Or is this the way we should be thinking about the Liquor margin going forward?

Yes. So I'm going to invite Kylie in a moment because it's important to hear from her, that, as I said, the standout sales results and significant market share gains have been delivered. This result is really a manifestation of the prioritization of volumes. As our margin pressures have come through, and those happen in costs as well as through lower inflation. So inflation manifests in Liquor twice a year through excise increases. And when that's lower, our margins are unavoidably slightly lower. But a really, really good results, and the business is in really good shape. I want to invite Kylie to add to that.

Thanks, Doug. Thank you for the question. I think the -- you would all be very familiar with the way that inflation has come off over the last 12 to 18 months and how that's likely to come going forward. And I think the fact that we've effectively managed to largely offset that gap in strategic buying through the strength of the network, the market share gains and the overall shopper performance, I think, speaks to the underlying strength of the network.

Next, we have Caleb Wheatley from Macquarie.

I just had a couple more questions on the Liquor business. So you've noted you've taken some share there. There's been some recent updates from [indiscernible], particularly in the discount space that have been losing share potentially in sales decline. Can you talk to the areas that strength relative to the market in the liquor business that we saw over the half please?

Go ahead, Kylie.

Thanks, Caleb. I think the key drivers of shopper traffic in Liquor consistently through the pandemic and post have been convenience, range and service. And frankly, there's nobody that does those 3 things better than your local independent. And we've seen that in the share growth that the independents have experienced. And I think when we met at Investor Day back in March, we shared that the share of independents had grown from 27% to 30% of packaged liquor from F '22 to F '24. And without getting into the specifics midyear, I can assure you that, that trajectory has continued up until October. So we're seeing that that offering, both that convenience predominantly, which is a trend globally in the liquor market, but particularly the -- effectively the localized range that our network puts a lot of effort and pride into making sure it's offered, and that personalized service is all coming through in the numbers and very consistently.

Caleb, when we were together in March, we spoke about the replication of strategies across the Group. And what Kylie's been talking about is a great example of that. Retail at the simplest is about giving the shopper what they want, about executing on behalf of suppliers and getting that virtuous circle running. And that's what Food have done successfully, and that's what Liquor are doing now. It's not a 6-month results. It's something that's been in the works for a long time. And it's really pleasing to see, as you give the customer what they want at the right prices in a respectful, friendly environment, in stores that are clean, well located and have a little local in them, we should be unsurprised that we're seeing good results.

Okay. Makes sense. And then my second question, are you able to maybe talk to the wholesale -- the new wholesale agreement with Lion in South Australia?

So is the question -- can you just repeat the question?

If you happen to talk through in a bit more detail how that distribution agreement and how we should think about it, I guess, from a financial standpoint.

Yes. Thank you. We've -- again, going back to Strategy Day, I think our -- one of our key strengths is our ability not only to enable our independents to be competitive and to support them, but also to be the preferred route-to-market partner for our suppliers in the liquor industry. Many of you, I think, have asked questions in the past around the brewers and our partnering with them. And I can tell you that we're really pleased to be partnering with Lion as a wholesale partner in SA. Our immediate focus is going to be making sure that we do a brilliant job of this and we make sure that they really see the benefits of partnering through our network and our sheds. For our network and our customers, it's a fantastic extension of our offering. And I think at this stage, our short-term focus is, of course, going to be on delivering South Australia, but we'll be continuing to knock on the door and present our case to all of our suppliers who aren't fully leveraging our route to market at the moment.

Our next question comes from Adrian Lemme from Citi.

Doug and team. I'll try to be brief. Just on the Hardware side. My read of the housing -- detached house approvals look like they're pretty much back around mid-cycle now. So it seems like we're just debating the timing of the recovery. Is it at the start that you think that that's where you see the demand pick up for the business overall in Hardware? Or is it sort of few months post that? And then secondly, should we also consider -- you mentioned cost of living pressures affecting some trades people. So should we also be conscious that it might also depend on rate cuts coming through, please?

Yes. Thanks, Adrian. So remember that housing approvals, when the plans are approved, it doesn't necessarily guarantee a start. And so you want to focus on starts. And that's obviously -- there's going to be a bit of a lag. Our involvement in the build program picks up almost from the beginning, although not quite at the foundation stage, in all parts of our business. And so we should see an increase there. I think interest rates are obviously by design impactful throughout the economy. Prospective new homeowners, homebuilders, and as I said, tradees, who are essentially individual businesses, will all be feeling the pressures of higher interest rates. And so the sooner we start to get some relief, the better. And I do think that just knowing that we're at the top of the interest rate cycle and that the next one will be down, and then having some certainty on when that is, will have a material impact in confidence.

That's helpful. Can I just ask one quick follow-up on the -- I think there was an earlier question about Superior Foods margin pressure. Can I just clarify whether new contracts are being tendered out at lower margins than existing contracts. I'm just wondering if there's like a front book versus back book issue, please.

No, not really. There's a few dynamics happening in the business. Obviously, you have to -- so-called sharpen your pencil and make sure that you're competitive. But in Superior, to quote Craig, we don't necessarily want to only win business on price. We want to win business because, when things go wrong, we want our customers to know that they can trust us. And so you win business and you retain business by doing that day in, day out. And that business is very focused on it. The second aspect is that, as I said, there is a mix element to this. So if you were pitching for a QSR business, it would be at lower margins than, say, a corporate business or an independent business. But like-for-like, we're not seeing a material change in those margins to win the businesses.

Next, we have a question from Lisa Deng from Goldman Sachs.

I have 2 questions. The first one is on IHG. We made the comment on the slide, market share held. Can we confirm is that some applies to DIY as well as trade?

Yes, it applies to both.

Okay. And then in terms of total tools trade in the second half '24 better than -- sorry, '25. The second half '25 better than '24. Is that also applying to the network like-for-like, or is that just the total revenue including the acquisitions? And also a question on that. The follow-up is, does that comment apply to IHG as well? Or if not, what are the considerations on not applying that same comment?

So no, I was specific it applies to Total Tools. And the reason being that last year, in Total Tools, we had that one-off event that I think we've now ventilated fully. Yes, maybe I'll invite Richard to make some comments about the network sales and how that comment's relevant.

So fundamentally, we own half of the stores in the joint venture program. So if it's happening in the network in a like-for-like sense, it's probably happening in the joint venture stores like-for-like. I appreciate at times, just depending on the timing of a JV acquisition, there could be some movement in the headline sales number. But underlyingly, if I think about what's happening in a store that might be the similar vintage be it like-for-like -- sorry, be it JV or franchise. I'd expect the sales to be not dissimilar.

Okay. If I can sneak 1 more, on Project Horizon. I think in the appendices we updated the FY '25 and '26 guide numbers. The CapEx, I think, and the -- the item. I appreciate it is a significant item, but maybe can we talk a little bit about what's happened there or changed?

Yes, sure. No problem. We've updated them as we learn more about the program. When you're planning large and complex programs like this, you have to make some assumptions about what will be capitalized versus significant items. And to be honest, Lisa, as we've progressed and we learn more, we provide an update. What's important is that the total remains the same.

Our last question comes from the line of Phil Kimber from E&P Capital.

Just a quick question on Liquor. Are you able to provide, like you do in the Food business, what your customers like-for-likes are doing? I'm just -- the 2.4% growth, some retail and contract customers is great, but just I'm not sure if that's being aided by teamwork scores or maybe some new contract wins. Can you shed any light on that?

To be honest, Phil, it's -- we can't. It's really difficult. And that's purely because we just don't have the data at the level of granularity that allows us to reliably provide you with like-for-like sales numbers. You're right, the IBA performance is driven by both their like-for-like performance as well as wins into the IBA network. I'm cautious around providing you data that I can't verify.

Okay. And just 2 more, if I can quickly. When you split out tobacco, which is great, in -- I think it's in Slide 9, is there any superior tobacco sold in Superior Foods? I guess I'm trying to understand the supermarkets and Campbell's and convenience numbers, including tobacco, and you've given 1 tobacco number. So I wasn't sure if there was some, within that $983 million of sales for tobacco, some actually relates to Superior Foods.

Almost nothing. It's tiny. It's only out of 1 of their distribution centers and it's immaterial.

Okay. And last one, and I don't know if you want to make a comment, on Total Tools. I mean Black Friday, I know you didn't give us the sales, which was thank you for doing that because it would have been a bit misleading otherwise. But any general comments on how the Black Friday weekend has gone, it's becoming a bigger event on the calendar now?

Richard?

Yes. No, look, we're really, really happy with how we executed. So in line with our expectations. Obviously, now you spend the next few months wondering how your other promotional periods all come together. And yes, you're right. Black Friday is more important every year. So we're just navigating that. But really pleased with that.

Thank you. I see no further questions at this time. I will now hand the conference back to Doug.

Thank you very much, operator. There's nothing left for me to do other than to thank everybody for your time and your interest in our company. I look forward to seeing many, if not all of you, over the next few days. And I wish you a great day further. Thank you.