Wesfarmers Limited (WES) Earnings Call Transcript & Summary

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Well, thanks very much for that, and good morning, everyone, and welcome. Thanks for joining us for our Strategy Briefing Day. I'm Rob Scott, the Managing Director. Now today is the last day of national reconciliation week, and it's the anniversary of the high court's historic decision in Mabo No. 2. For us, our Wesfarmers reconciliation is more than just a week, and we're working hard all year around to progress this through all of our businesses. And in that spirit, I'd like to acknowledge that we're meeting here today in Sydney on the lands of the Gadigal people of the eora nation, and I pay respect to their elders past and present. Now unfortunately, it hasn't been possible to get all of our executive team here in person today due to the lockdowns in Victoria, therefore, some of our teams, such as Mike from Bunnies, Sarah from Officeworks, Pete from Catch and Richard from Target will join us online. The rest of us are here in Sydney. Now a lot has happened at Wesfarmers and around the world since our last briefing day 2 years ago. We're really excited to share with you the progress that we're making across the group and for you to hear directly from the divisional managing directors about their businesses. We're proud of the performance that our teams and our businesses have delivered in recent years and especially how well they have risen to the challenges presented by COVID. But today is very much about the future. I'm happy with the quality of our businesses in the portfolio, the capability of our managers, the strength of our balance sheet and the opportunities for future growth. So I will start by making a few opening remarks on group strategy. Then our CFO, Anthony Gianotti, will talk to capital allocation and balance sheet, and then you'll hear from the divisional managing directors. And we'll make sure we allow plenty of time for questions. So moving on to a slide that should be very familiar with all of you. Since the listing of Wesfarmers in 1984, we've been guided by a consistent objective to provide satisfactory returns to shareholders. We define satisfactory as a top quartile TSR over the long term. And I emphasize the long-term focus. And hopefully, this will resonate with you as we talk through our strategies today. If our objective was to maximize total shareholder returns over the next year or 2, then our strategies would look very different. Our experience is that we can only achieve our corporate objective if we do a number of things. And this includes anticipating the needs of our customers. And over the last year, that has meant evolving our offer and providing a safe environment. Looking after our team members, giving them safe and fulfilling work, engaging fairly with our suppliers and ensuring that we source our products from those suppliers operating ethically and sustainably, supporting the communities in which we operate, taking care of the environment and acting with honesty and integrity in all of our dealings. Now if I look at this chart on the next slide, you can see that the Wesfarmers' operating model has delivered good returns for shareholders over the long term. And importantly, if we look at our total shareholder returns on a 5-year and a 10-year basis, they have both been strong. Now there are a few factors that I think are somewhat unique to Wesfarmers relative to other conglomerates that have supported our returns to date. And I think they are increasingly important in the future. Now these are our disciplined focus on long-term value creation, our divisional autonomy model that empowers and supports divisions to deliver outstanding performances in their businesses and active portfolio management to ensure that our capital is allocated to those businesses and industries that will deliver superior returns in the future. Now this last point is particularly important, especially given some of the disruptive changes we see across industries over time. Turning to the next slide. Building trust in the community is important -- very important to us, and it requires a long-term commitment and a focus on meaningful outcomes. Our efforts in the areas of decarbonization, ethical sourcing, workplace safety, diversity and well-being helps us to build more resilient businesses. And as I noted, all of these things go to helping us deliver on our corporate objective. And we've made some good progress in these areas in recent years. The retail divisions have all made significant commitments to achieving net zero scope 1 and 2 emissions by 2030, and our industrial businesses have the ambition to achieve net-zero emissions in 2050. Our commitment to reducing emissions continues to be shown with scope 1 and 2 emissions 8% lower in the first half of this financial year. This is the fourth year we'll report using TCFD standards. Wesfarmers continues to undertake significant work across our businesses to identify and minimize the risks of climate change and evaluate the associated business opportunities. Since 2015, we've used a shadow price of carbon in evaluating new investments, which informs our decisions. We take ethical sourcing responsibilities very seriously, and we have over 3,000 factories covered in our audit program, and we continue to work alongside global peers to improve standards for our supply chain. We're making further progress in our team's diversity with a proportion of aboriginal and torres strait Islander team members increasing from 1.8% to 2.6% over the last year. So we're moving much closer to parity there. And we've also increased the representation of women in senior executive positions from 28% to 34%. And now over the last year, we've seen team member engagement also improve across all of our businesses. And this is particularly pleasing given the challenges through COVID. Last year, we took the decision to start reporting our strategies, targets and outcomes in these areas in our annual report rather than separately in our sustainability report. And this reflects the fact that our sustainability strategies are now fully integrated into our broader group and business strategies and aligned with our corporate objective. So turning to the next slide, our value-creating strategies. As an active manager of a portfolio, our group strategies are very much focused on delivering shareholder value through operational excellence, securing growth opportunities, portfolio management and responsible long-term management. These are high-level strategies that guide our focus at a board level and for me as Managing Director of the group. And we expect the strategies of our operating divisions to be closely aligned with these value-creating strategies. Now each of our divisions will have their own strategies that are relevant to their business and their industry. And these are developed by our divisional teams and presented to our divisional boards and then the group Board for approval, and our divisional MDs will talk to these today. The Wesfarmers' model of divisional autonomy empowers and incentivizes our divisional teams to deliver best-in-class performance. With the support, obviously, of Wesfarmers' balance sheet and the corporate infrastructure and services we provide. Capital allocation is something that we control tightly at a group level. In Wesfarmers, we don't ration capital, and we generally take the perspective that capital is unlimited. And what is limited is the number of investment opportunities that will deliver a superior return for shareholders. And when divisional performance is not where it should be, we often say no to new capital investment unless we're confident of the capacity of the business to deliver a satisfactory return. Now the exception to this is when capital is required to support workplace safety or regulatory compliance. In other cases, we proactively encourage divisions to pursue investment to drive further business improvement and/or new growth opportunities. And as Anthony would discuss in a moment, our group business development team works very closely with our divisions on all major investment opportunities. Now back in 2018, shortly after Anthony and I moved into our new roles. I shared some of the areas that we thought required a sharper focus across the portfolio in order to set us up for future success. And we referred to these as some immediate or key priorities back in FY '18. These areas involved accelerating our data and digital capabilities, repositioning the portfolio for future growth and addressing some areas of underperformers. Now this slide, which has a long list of points on it, really shows some of the progress we've made in these areas. And it's been a particularly busy time at Wesfarmers in the last few years, and this could not have been achieved without the drive and the determination of our group leadership team. Firstly, on data and digital. In the last few years, we've built on the initial investment that we made with a 20-person team of data scientists and engineers in our advanced analytics center to now have more than 400 data and digital experts across the group. We've also developed a group data platform that integrates and provides data insights across all of our retail businesses. We have rapidly developed our e-commerce and digital capabilities. And following the investment in Catch, Wesfarmers is now the #2 nonfood e-commerce retailer in Australia by sales with over 100 million customer interactions across our digital platforms every month. We continue to build relationships with leaders in the digital space, both locally and offshore. And a recent example of this is an investment in collaboration that we have with Square Peg. We've also repositioned our portfolio for growth. The successful demerger of Coles, which has been a great outcome for shareholders, the exit of our investments in coal mining, and investment in new growth opportunities in e-commerce and lithium hydroxide. And then finally, with addressed areas of underperformance, which is critical in any portfolio, phasing into the issues with home base in the U.K., the restructuring of the Target network, the conversion of 81 Target stores to Kmart and K Hub stores in the last 12 months and also seeing improved performance in Blackwoods. Now whilst there is still more work to do, these areas are no longer a drain on our resources nor on shareholder value. Now it's important to note in talking to the progress we've made that this is not the end, it's really just the start of what we see as an exciting chapter in the future. It puts us in a position from which we can accelerate our progress and investment with an eye to long-term value creation. So turning to the next slide. This has led us to develop a renewed set of priorities across the group that are consistent with our value-creating strategies and will help set us up for the decade ahead. And you'll see on this slide the general alignment between our previous priorities and new priorities. Now I'll outline each of these in the coming slides, but you'll hear much more about them from our divisional managing directors. The first is to develop a market-leading data and digital ecosystem, which will enhance customer experience and create new growth opportunities across the group. And this is a very natural evolution of the recent developments across the group. Now the word ecosystem is a bit of a buzzword at present. Most companies are talking about ecosystems nowadays. So I'll endeavor to explain what this means in Wesfarmers and why our approach will be different and why it has the potential to be truly market leading. However, I do apologize in advance that we're not going to be sharing all of our future plans. The second priority relates to increasing our investments in platforms for long-term growth. And this follows from the repositioning of the portfolio that we've undertaken and also recent moves that enable us to scale up in areas with good growth prospects. And finally, we have an ambitious strategic agenda and our experience through COVID has showed us how quickly we can move when we have to. Our business model, the capability of our team and our culture has enabled us to deliver some quite exceptional outcomes in the last year. And we're, therefore, looking to accelerate the pace of continuous improvement across the group. So touching on the data and digital ecosystem. As I said, we've already developed some quite deep capabilities in the data and digital space. And this includes a group customer data platform that provides us with the ability to undertake cross-divisional analytics to better understand and serve our customers. And most of our customers understandably engage with multiple brands in our group every week. Now we expect to invest an additional $100 million to further build on these capabilities and also to invest in new growth platforms. And this will be spent, we expect, over the next 12 to 24 months. Now as I said, given commercial sensitivities, we're not going to be broadcasting in advance all of the specific initiatives that we'll be undertaking. But they will focus in a number of areas. So firstly, developing more personalized digital shopping experiences across our retail brands, significantly enhancing our capabilities in analytics and digital technologies through talent acquisition and development, leveraging our store network to provide differentiated experiences across brands in conjunction with our digital offer in areas such as click and collect and returns, and then also evaluating opportunities to further develop our partnership with Coles and flybuys. Now robust data governance and security will be managed by our advanced analytics center. Our approach to ecosystem development will ensure that our divisions retain their own customer data and digital capabilities that are critical for their success, consistent with our divisional autonomy model. We will continue to promote our core retail brands and networks that are deeply valued and trusted by customers. Now some of the differences, I guess, that we see around our ecosystem is that we currently have one of the largest digital in-store networks in Australia with a local presence in virtually every community in Australia. We have deeply trusted brands with leading market positions and with lowest price offers. And international experience shows that price matters most when you consider e-commerce at scale. And then we also have a marketplace platform that provides households with access to an extensive range of products and services that are not available in our core retail businesses. Now moving on to growth platforms. Now you'll recall in recent years, I've mentioned many times that some of the best opportunities we see for deploying capital is investing in our existing businesses and in adjacencies to our businesses. Now since we've repositioned the portfolio, we have an opportunity to accelerate our investment in platforms that we've worked hard to develop in recent years. Now I've highlighted 4 of those areas on this slide. And in each of these areas, we believe we have points of competitive advantage and a high degree of confidence that we can create meaningful shareholder value over the next 5 to 10 years. There are other opportunities that we have across the group at earlier stages of development, and I'd hope to share more about these in the future. If you reflect the way that Wesfarmers has created value in the past, it has very much been through investing for the long-term and building businesses. And this is evident through the expansion of activities in our WesCEF division and even the development of the Bunnings business over decades. Now I personally get more excited about these opportunities, and I do some large-scale and expensive M&A. Now there's been an enormous amount of work in recent recent years that's really set the foundation for investment in these areas. And I'll let our divisional managing directors talk more to them in their presentations. And then moving on to the third renewed priority, which is accelerating the pace of continuous improvement. As I said, last year, we learned a lot about how quickly Wesfarmers can move when we have to. Now our business model, as I said, I think, is a key source of competitive advantage. So when COVID hit, our divisional leaders, Mike, Ian Bailey, Sarah, Ian Hansen and Tim were able to focus all of their efforts on delivering the significant organizational change necessary to meet the changing needs of customers their teams and suppliers. And I could not be more proud of their response and the speed at which they mobilize their fantastic teams. Meanwhile, the corporate office ensured they had the support they required, the capital, the specialist advice, coordination of engagement with government and regulators and additional personnel when required. Now the areas that are top of mind for us when we focus on driving change and improvement really relate to these 3 areas of customer experience, operational excellence and sustainability. And once again, I won't go into detail on these because they'll be covered by our managing directors. But the point I'd like to make is that maintaining the pace of execution and focus on continuous improvement cannot happen without a couple of things. Firstly, providing support to our teams to deliver on this change. And this means giving them the tools and resources they need and respecting the safety, health and well-being of our team members that are at the front line of this change. And then secondly, respecting that not everything goes to plan when you try and innovate and change at pace. This means that mistakes will happen. This is where our key values at Wesfarmers of openness and accountability are so crucial. That is calling out and owning when things don't go to plan, learning and adjusting quickly. And to steal a quote because there is no effort without error. Now I'm sure you'll appreciate that this message I'm giving is probably more directed to our 100,000 team members than those of you sitting in the room here in Fullerton, but it is an important message. So then finally, looking forward, so the Australian economic recovery and employment growth that we've seen continues to lead the world. And I think there are a number of reasons to be positive about the outlook for household income and business activity. However, in the shorter term, there remains significant risks and uncertainties, the potential for future lockdowns, the speed of community vaccination, further cover mutations, and also, as we've seen, the risk of punitive taxes and regulations that may dampen job creation and investment. But the group's portfolio of cash-generative businesses remains well placed to deliver satisfactory returns over the long term under a range of future scenarios. Now while our future priorities signal the beginning of what we see as the next chapter of long-term value creation at Wesfarmers, we will continue to deliver growth through further enhancing our digital capabilities and leveraging our valuable store networks, meeting the changing needs of customers and continually putting -- continually providing better in-store experiences and expanding our addressable markets in ways that make sense for our customers. Also increasing the production and processing capabilities at our industrial businesses and importantly, attracting and retaining world-class talent. So on that note, I'll now hand over to Anthony Gianotti. And after Anthony's presentation, we'll take some questions.

Okay. Thanks, Rob, and good morning, everyone. It's great to be here in person. I want to take the opportunity today to give a brief overview of our approach to capital allocation and in the context of some of our key areas of investment as well as give an update on the group's cash flows and how we are thinking about our balance sheet position. Before I move on to this, I want to start on Slide 15 and provide a brief update on our -- sorry, on recent trading performance. As Rob's emphasized throughout his session, Wesfarmers has always taken a long-term perspective in managing our businesses. I think this has been particularly relevant as we've managed through the volatility of the COVID period. It has allowed our teams to maintain their focus on providing safe and trusted shopping and working environments while taking advantage of opportunities to deliver even stronger value and convenience to our customers. As you begin to cycle the impacts of COVID-19 in the prior year, recent monthly growth results across our retail businesses have been quite volatile. While not as significant as the interruptions in 2020, the restrictions over recent months include -- sorry, over recent months, including the current lockdown in Victoria, are creating additional volatility to trading results. Customer demand has remained resilient, but year-on-year growth in some divisions has been negative in those months where we saw unusually elevated sales activity in the prior year. Pleasingly, on a 2-year basis, all of the retail businesses have continued to record strong sales growth. As expected, online sales have moderated as customer traffic to stores has increased. And there has been fewer restrictions during -- fewer restrictions, sorry, in-store capacity, which has caused a significant shift to online channels during periods of peak COVID lockdown in the prior year. As a result, online penetration rates have declined from those that we reported at the half year, but they remain well above levels -- pre-COVID levels. Finally, in our industrial businesses, we've been pleased with the continuation of strong operating performances and good trading results across both businesses. Turning now to Slide 16. Talking a bit about our approach to delivering satisfactory returns. Consistent with our primary objective, we remain focused on providing a satisfactory return to our shareholders over the long term. From a financial perspective, the core elements to ensuring that we can continue to achieve our objective is through a focus on 2 core principles. The first is to ensure that we continue to deliver long-term earnings growth and strong cash flow generation from our existing businesses. And the second and importantly, is by maintaining an appropriately strong and flexible balance sheet to continue to support the investment in these businesses. These points of focus have been consistent for some time and is supported by strong commercial capabilities across our operating divisions as well as through our corporate office functions, including our business development team that work very closely with our divisions on evaluating investment opportunities. Across the portfolio, we will continue to invest for long-term growth in earnings and cash flows and apply an approach to investment decisions that is flexible, opportunistic and, of course, disciplined. The strong balance sheet allows us to support the long-term growth of our businesses, while also enabling the group to be flexible and opportunistic when value-accretive opportunities arise. As we've said over the past 18 months, maintaining a strong balance sheet has also provided the group with the capacity to manage the increased volatility and uncertainty associated with COVID-19, whilst at the same time investing significantly to support the long-term growth of our divisions. It's worth reiterating that despite the strength of our balance sheet, our capital allocation decisions are independent of our financing decisions. This means that we are no more likely to pursue investment opportunities just because we have a strong balance sheet nor is it less like -- we less likely to invest when the opposite is true. Turning now to group cash flow generation. We're really pleased to maintain a portfolio of highly cash-generative businesses that are delivering strong returns on our shareholders' capital. As Rob mentioned earlier, we've also taken a number of actions over the past few years to address some key areas of underperformance and taken steps to position the portfolio for growth. And we are confident that these steps, combined with the strength of the current portfolio, will support good long-term earnings growth and cash generation for the group. The group's current businesses have delivered, on average, just over 100% cash generation over the past few years. As illustrated on the chart on the right, divisional cash generation was amplified in 2020 due to a favorable but temporary working capital inflow, reflecting the impact of COVID on the closing inventory and payables balances across our retail businesses. In the 2021 financial year, we've seen an ongoing normalization of this working capital position, which is expected to result in a lower level of divisional cash generation for the full year. Despite increased trading volatility due to COVID, our businesses have continued to focus on maintaining good working capital disciplines. Having said that, our businesses have had to adapt their approach to inventory management by holding higher stock weights to accommodate demand fluctuations and prioritize stock availability. And you will have seen this through the targeted investment in Kmart to increase stock weights across everyday items to improve availability. Turning now to Slide 18. As we highlighted before, our approach to investment is focused on strengthening our core businesses and driving long-term returns. This includes all types of investments we make, whether that be CapEx or OpEx in nature. Our group maintains strong capital allocation disciplines, including the development of robust business cases to support each investment. As many of you will be aware, we also look at ESG considerations and risk when evaluating our investments, and we apply our shadow carbon price in decision-making processes where that's relevant. Since 2016, we have invested over $2.8 billion of growth CapEx across the group, which includes the acquisitions of Kidman, Catch, Geeks2U and Adelaide Tools as well as significant investment directed at growing our retail store network particularly in Bunnings and Kmart, which have consistently rolled out new stores and executed store refurbishment programs. In addition to our more traditional investments in recent years, we've accelerated our investment in data and digital across the group. In 2020 alone, we spent over $200 million on data and digital initiatives, including both the CapEx spend for projects such as the replatforming of our websites, as well as wide range of other OpEx investments. This spend has increased in FY '21, and we expect it to again grow in FY '22 as all divisions continue to step up their digital investment. While recent years have included a significant level of CapEx as we establish digital infrastructure systems and platforms, it is worth noting that an increasing proportion of our investment will be OpEx rather than CapEx in nature. This includes the growth in subscription-based software services as well as the OpEx investment in teams and capabilities as we continue to leverage the digital assets that we have built over the years. As Rob mentioned earlier, we also expect to invest around $100 million of capital and operating expenditure to support our digital ecosystem initiatives. The spend on these initiatives is incremental to the investment across the group's other data and digital projects. For the 2021 financial year, we expect net capital expenditure for the group to be between $650 million and $700 million, inclusive of store conversions in Kmart Group our continued investment in data and digital projects, as well as capital expenditure associated with the Mt Holland lithium project. Moving now to our balance sheet and debt management on Slide 19. As I've already mentioned, one of the key strengths of the Wesfarmers' approach to capital management is maintaining an appropriately strong balance sheet, which gives us the group -- sorry, gives the group the flexibility to invest for long-term growth in times of uncertainty. At the end of the half, the group recorded a net cash position of around $870 million, and we continue to maintain stable credit ratings with both S&P and Moody's. Over the years, we have access diverse funding markets and have well-established issuance capacity across European, U.S. and domestic bond markets, and we also manage our risk by limiting debt maturities in any given year. Our 2 current European bonds, which will mature in October this year and in August 2022, representing a total of around $1.6 billion. The maturity of these bonds will provide us with the opportunity to lower our borrowing costs, given the higher cost nature of these long-term bonds relative to current market rates. Our finance costs, excluding lease liabilities for this financial year are expected to fall further to between $115 million and $125 million for the year, reflecting the lower average debt balances through the year. We continue to manage our lease portfolio to balance network flexibility with security of tenure and maintain our focus on lease-adjusted return on capital as a key metric for making property decisions. Our average remaining lease tenure reduced to 4.7 years during the first half, which was supported by the recent store closures and conversions within target. Overall, we are pleased with the strength of our balance sheet which provides flexibility to respond to the uncertainty associated with COVID, whilst at the same time, allowing us to accelerate investment across the group, including our investment in data and digital and ecosystem initiatives. As we mentioned at the first half results, to the extent that we have capital that is surplus to these requirements, then we will continue to assess opportunities to return it to shareholders in a tax effective way. Finally, to shareholder distributions. The group's ability to generate strong free cash flows has supported significant shareholder distributions in recent years. And in fact, this has resulted in Wesfarmers distributing over $14 billion of fully franked cash distributions since 2016. Our dividend policy remains unchanged with our approach to maximize the value of franking credits to our shareholders whilst having regard to current year earnings, credit metrics and forecast cash flow requirements. And this has typically resulted in Wesfarmers maintaining a payout ratio of between 85% to 90% historically. In summary, our strong balance sheet and our approach to investment and capital management is deeply aligned with creating long-term value for our shareholders and importantly, provides us with the flexibility to continue to invest during times of significant volatility and market disruption. We will continue to look for opportunities to lower our cost of funding and rightsize our balance sheet in a manner that maximizes long-term returns to our shareholders. Thank you. And with that, Rob and I would be happy to take any of your questions.

Thanks, everyone. [Operator Instructions] Rob, the first question comes online from Grant Saligari at Crédit Suisse, who says, could you please expand on your comment on Slide 13 where you say increasing production and processing capabilities in the Industrials business? Does this mean you will be indicating new products beyond lithium? Or does the comment refer to potential capacity expansions in one of the existing products?

Thanks for the question, Grant. So the comment largely relates to the very significant investment we're making in lithium hydroxide, which, when you look at the size of the investment and what that does to the broader processing production capabilities at Kwinana, is a very significant step-change investment for the division. There are also other opportunities that I'll let Ian talk to later that are more just incremental investment opportunities within the existing complex. I'm not signaling any kind of broader step-out opportunities, albeit we're always evaluating opportunities over time, but I wouldn't say that any broader step-out production opportunities are imminent.

Rob, Bryan from Citi. Just on the $100 million of incremental digital investment. You highlighted that's increasingly more OpEx. But I'm just interested in which businesses you expect to see this really come through? And is this something that we should expect to continue to step up year after? You talked about '22, but even beyond that?

Yes, Bryan. So look, a lot of that cost is very much building out the capability. Now over time, we're quite confident that we'll get a good payback on that. But there is some foundational investment that is required. That foundational investment initially will relate to team and personnel. It will also relate to technology spend. A lot of that relates to the systems we're developing the various interfaces to improve the digital experience for customers shopping across our various brands and some of the additional functionality we're looking to build in there. I would say that the expenditure -- and the reason why we're calling this out is that there's initially a degree of setup expenditure, over time, we'd expect it to pay back for itself. But over the next year or so, I'd expect that a reasonable proportion of that will hold centrally as part of our overhead costs. And then the rest of it will flow through within our divisions. So it won't be material in terms of the impact on any one division, but it would flow through to the P&Ls of all of our divisions to some degree.

Okay. And then maybe just a quick follow-up just on how you're feeling about flybuys and the way that's being utilized at the moment in terms of data is such a battleground at the moment. Do you think current structure as a JV and the investment coming from both parties is sort of adequate? And how much -- is that $100 million really talking about flybys as well?

Well, look, we think that we've made some good progress with our partner, Coles and flybuys, over the last year. If I think about what we've done within flybuys is the team have launched a number of new business opportunities, the unpacked digital audiences' initiative. There's been a number of other initiatives that the team have launched. But importantly, for our businesses, we've introduced Catch to the program. So it's a new partner for the program. We've also built a much stronger engagement with Kmart and Target in terms of how they utilize the program. So I think the program is in much better shape than it was going back a year ago from our point of view. But as you rightly say, it's a very fast-moving area. And we're keen to continue to work with Coles and flybuys to look at ways in which we can continue to innovate and evolve the program to deliver more value to members and more value to our businesses.

It's Michael Simotas from Jefferies. I just wanted to pick up on a couple of the points around capital allocation. The first one around maintaining a flexible balance sheet to deal with volatility as well as be opportunistic. If I look at the capital structure right now, you've really got enough capacity to pursue a very large company transforming inorganic transaction. Do you need to maintain that sort of flexibility? Or is this something that if the opportunity doesn't arise, you'd look to return capital? And then to your point around capital not being rationed and effectively unlimited, you could always access that capital again.

Yes. Thanks, Michael. It's a good question. I think certainly, leading into COVID, I guess, none of us knew what -- quite what to expect. And I think we were preparing for the worst -- hoping for the best but preparing for the worst. And so I think we certainly strengthened our balance sheet through that period. And it was the right thing to do. So we will continue to maintain some flexibility in our balance sheet. We've highlighted that we are looking to right size our balance sheet. The question is how do we actually do that, and what's the best way. If we are looking to get capital back to shareholders, what's the best way of doing that. And as I've said before, we want to do that in the most tax-effective way we can. You're probably aware that we don't carry a lot of surplus franking credits. We tend to pay out franking credits to our shareholders, which has obviously flowed through in our high payout ratio over the years, which we've maintained. So I think we continue to evaluate options for rightsizing the balance sheet and getting capital back to shareholders.

Yes. Okay. And then just the second one. When you look to allocate capital, do you think about diversification across various industry verticals? Obviously, after exiting Coles, you're less exposed to retail, but still heavily overweight retail. Just sort of look at the long-term opportunities, lithium is a good opportunity, but relatively small compared to the retail exposure that you've got.

We don't necessarily think of diversification for the sake of diversification in investment decisions, we're more focused on absolute returns. But we do have regard to the risk return characteristics of an asset that we look to invest in and how that would or could impact the overall risk return characteristics of the Wesfarmers group. We think that we've got a phenomenal mix of businesses that represent both -- quite a unique balance between defensiveness, high cash generation, but also good growth perspectives. So when we think about capital allocation and particularly some of the larger capital allocation decisions, we do reflect on, well, what would that do to the overall risk return characteristics of the Wesfarmers group. But we're primarily focused on absolute returns rather than setting up to diversify for the sake of diversifying.

Robert, it's Ben from Jarden. You talked, Robert, about price being one of the most important things is online, but there's not really any mention, I think, through the presentation today with exception, something that came under our supply chain. And you've obviously got some pretty grand ambitions around pushing the marketplace. How are you thinking about supply chain and capabilities? And from a capital perspective, there's obviously some pretty significant costs that go with that. So should we be expecting to see a step-up in investment around supply chain across Bunnings and the group more broadly over the next few years?

Ben, you're absolutely right. Supply chain is a critical element of not just the e-commerce capability, but also to our broader growth aspirations across the retail businesses. I did call supply chain out as one of those areas of focus in terms of our desire to accelerate the pace of development. I deliberately didn't cover that because I know that our retail MDs will. So there's a -- we have signaled that there's a lot of investment required to build out the Catch supply chain capabilities. The supply chain investment and evolution going on in all of our retail businesses, but it's probably worth focusing on each one in isolation. The -- with -- I think an important point to note is that outside of Catch, which is obviously a pure online retailer, we still see our store networks as being a key source of competitive advantage for e-commerce. And if you look at trends around the world, you'll see that some of the strongest e-commerce providers are really leveraging the fact that they have stores located very closely to customers and leveraging those stores for e-commerce delivery. There will still always be some degree of centralized fulfillment that is required, particularly when you're trying to tap into a much broader range over and above what you can offer within store. So that doesn't necessarily require a lot of big CapEx to support, but it does put greater pressure on availability, on digitization of your supply chain. And I know that Ian will talk a bit about that in the context of what they're doing in Kmart.

Would you think about sharing that across the group? Because if you look at some of these big centralized shared, you can be spending many hundreds of millions, even billions of dollars when you put land and everything into it. Is there a case to have some shared services around centralized distribution dropship? You look at what Bunnings is doing in the marketplace, you obviously got Catch marketplace. Did you think about that? Or is that somewhere you wouldn't want to blur the lines, I suppose?

There's potentially areas where there are opportunities, but I think it would be a mistake to try and operate too deeply an integrated supply chain. I think you lose a lot of flexibility. But for example, and as Ian will talk about, if you think -- if you look at what we're doing within Catch at the moment, you can now buy all of -- virtually all of Target's product on Catch, and you can also buy a number of exclusive Anko Kmart products on Catch. So as we build out the Catch capability, they can play a fulfillment role for some of our businesses on some of the faster-moving lines. And then I guess there's the broader issue of extending range and dealing with slow-moving items, potential for synergies. But I wouldn't signal any deep integration of supply chain. I think the downside would outweigh the benefits.

And just final one for me, following up from Mark's question just around M&A and how you're thinking about it. Just interested over the last sort of 6 to 12 months when you've been sitting around the boardroom, always been focused on getting product to customers, keeping staff safe, keeping customers safe. To what extent has that maybe you sort of pushed out having a sort of robust discussions around M&A? And you starting to think about a lot more about that now because a lot of corporates are saying that they're actually starting to revisit now that they haven't had the chance for the last 6 to 12 months.

From our point of view, it hasn't really -- our activity levels haven't changed at all over the last couple of years. We're always very active in terms of evaluating opportunities. As I -- if I reflect back on the last 3 years and looking at what I just presented, I don't look back on the last 3 years with any sense of regret that we've missed out any major M&A transactions. And in fact, I'm really pleased that we've been quite disciplined in terms of how we've gone about investing through acquisitions and through further capital investment. And as I noted there, I think we've built out through a lot of hard work, some really interesting growth platforms that enable us to invest capital to build businesses over time. And the great thing about this is that we're not paying an enormous amount of goodwill. We're not paying someone else for the privilege. Where we're getting the returns on the capital that we're investing.

Rob, Anthony, I have a question from David Errington at Bank of America. He says I understand Wesfarmers' focus on long-term shareholder value, but it becomes clouded when there are perceptions that short-term shareholder value has to be lowered to achieve returns in the longer term. His question is, does there have to be an obvious conflict or trade-off between long-term value and short-term value in these times of disruption and fast-changing markets, long-term value focus can be considered more risky?

Yes. I think, David, that's a really good question. I'd answer it 2 ways. First of all, no, I don't think that you necessarily need to make a major sacrifice to your short-term returns in order to pursue long-term returns. And sometimes, I guess, if you're making really big bets for the long term, there can be a risk inherent there. I guess the way I think about that is that what we're finding today is we are adopting a far more agile approach to development. So if I think about the work that we're doing within Catch, the incremental investment and the work we're doing within Catch, the work I talked about in the ecosystem, we are rapidly iterating, adopting a highly agile approach there. But the reality is that the investment, I think the size of the prize for us is over a 5 to 10-year period. So the return profile is going to take time to flow those benefits through. I also think that you need to be careful about making really, really big bets, given the inherent risks of how much industries are changing and so forth. So if you go back to that slide where I was talking about investing for long-term value creation over a 5 to 10 year horizon, you'll see that we're not betting the farm on any of these, right? The investment in lithium hydroxide, I think, is a very measured investment where we have some deep capabilities, a really strong partner. Clearly, if our opportunity was to enhance returns over the next 2 years, we wouldn't do this investment because it will take 2 to 3 years to build. But over a 5 to 10-year period, it should pay back the same with the work on Catch. The same, you could argue with Bunnings. The work that Bunnings is doing, building out its commercial and trade capabilities, the initial steps with Adelaide Tools, Beaumont Tiles, I think, are really interesting opportunities if we only sought to maximize returns over the next 2 years, we wouldn't worry about it. But when you think about what we could achieve over 5 to 10 years, then I think there are some interesting opportunities.

Rob and Anthony, it's Andrew McLennan from Goldman. Just wondering, obviously, the divisional heads will speak to this type of question later. But just from a general perspective, and notwithstanding, Anthony, what you've already said on working capital normalizing this financial year, but can you just talk about how supply constraints have been a factor and how they're being managed and also how inflation due to potentially that supply constraint has been managed by the business and whether or not it's going to make an impact in areas like your working capital?

Thanks, Andrew. And as you said, our MDs will talk more about it because when -- I guess when we talk about any inflationary factors or supply constraints, they do tend to be quite category-specific, very much, I'd say, COIVD-induced. When I look across our businesses, the obvious areas where we have seen some inflationary pressures has been ocean freight, particularly on the container side. Now that is just simply a function of the fact that we've seen enormous dislocation, disruption to global shipping lines as a result of the wild swings of demand brought about by COVID. So I understand, and there's also been various port disruptions and COVID disruptions. So I'd see those as more short- to medium-term impacts rather than any overall structural change. We've seen some inflation flow through in categories such as timber, some raw material increases in areas like cotton that Ian and Mike can both talk to. But these are more category-specific areas. They're not issues that are across the board. So what we're doing across our business is we have a lot of capacity to try and absorb those costs. I think what's been really pleasing across our businesses is that we have kept our prices down, notwithstanding some of these inflationary pressures. We may not have achieved the financial benefit from doing that in the last 6 to 12 months, but customers do remember that. And customers do understand value very deeply. So I would hope over time that, that will start to benefit us.

Thanks, Rob and Anthony. If there are no further questions in the room, we might just take a 5-minute break and wait for Mike Schneider to join us from Bunnings.

Thanks very much, everyone.

Thanks. [Break]

Thanks, everyone. If you take your seat, we have Michael Schneider ready to go from Bunnings.

All right. I think I can see from the camera that's set up that most people are sat down. So thanks, Rob, and thanks, Anthony. Good morning, everyone. I'm so sorry that I can't be with you in person today. But I am really looking forward to sharing our plans with you on continuing to grow and evolve the Bunnings business. And today, I'm joined by our Director of Finance, Justin Williams, who is with you in Sydney, and he'll also assist with answering any questions at the end of this presentation. So we'll turn to Slide 23. The thing we've always been conscious of at Bunnings is the need and importance of focusing on long-term sustainable growth and financial performance. This focus informs so much about the strategic choices we make. And as always, we are focused on disciplined execution of our strategies around price, range and the experience our customers have with us. This ensures that we're making the right strategic choices and investments for our team, our customers and shareholders. Turning to Slide 24. It's clear that the market in which we operate continues to evolve over time. Looking over the last 4-or-so decades, the changes in the way our customers have lived in their homes or grown their businesses have changed significantly, and that's been reflected in the evolution of our business. However, the thing that's remained core at Bunnings is growing with our customers, making sure we're relevant, engaged and connected with them whenever they choose to shop, supporting their lifestyles and improvement of their homes. And equally, it's been about supporting small businesses, trades and builders out in the field through our commercial business. With over 1 million trades and small businesses in our trade account ecosystem, we understand the important role we play in the domestic economy, supplying to these trades and organizations. And when you reflect on the last 15-or-so months, at no time in recent memory have our homes been as important as they are today. Our customers have spent more time in their homes than ever before. For many, it's been the safest place to be, a place where they've worked, learned and lived. For many, it's also meant it's either started or rekindled a love of DIY and inspired them to take on new and varied projects, all with a whole new range of skills. Turning to Slide 25. As you can see, the market remains incredibly competitive, and we've seen this intensify over the last few years with a variety of formats competing. Everything from category specialists through to mass merchants, not to mention pure-play online retailers. Beyond this, there's multiple drivers at play, including disposable income within the household, the housing and renovation markets and at times, even the weather. The COVID-19 border closures and government housing incentives have seen Australian spending more in the domestic economy on home improvement, renovations and new housing. And whilst these elevated levels of demand won't last forever, we do believe that a lasting impact over the importance of the home in the consciousness of Australians, and New Zealand customers have, of course, been very similar. Turning to Slide 26. Our strategic agenda is clear, disciplined and focused, guiding how we're evolving and growing our business. Building the best team is all about strengthening our culture, investing in the skills we need now and for the future as well as looking after our team's safety and well-being. Our strategic pillars of price, range and experience remain as important as ever, and we continually search for ways to drive an even stronger offer for both our consumer and commercial customers. Our focus on and investment in data and digital is designed to better enable customer engagement and business efficiency through the development and expansion of our technology platforms. Our commercial strategy is all about accelerating growth in this part of our business, providing greater value, service and convenience to builders, organizations and the trades, which means we're working hard to earn the right to be chosen more often to service more of their business. Of course, underpinning everything we do is staying true to who we are and making a positive difference to our team, customers and suppliers as well as to the communities where we live and work and to the environment itself. And despite the challenges of operating in a global pandemic, we've executed strongly against our agenda, and I'd now like to take you through how our strategic agenda comes to life in shaping our plans for the next 12 months. We'll turn now to Slide 27. What's clear to us is we can only deliver for our customers if we have the best team. Central to this is that every one of our team members goes home safely every day. Safety data and insights, along with simplified reporting, are helping to further improve safety behaviors, and we continue to pilot, test and report on new measures to help our team understand and lead safety performance. Within our safety agenda, we have a significant and continuing focus on the physical and mental well-being of all our team with increased resources to support them during what has from a well-being point of view in a very challenging period. Importantly, we recently completed the rollout of 470 new counterbalanced forklifts to 355 sites in Australia and New Zealand, representing a $30 million investment in the safety of our team when they're moving products around in and around our sites. And of course, with COVID-related issues continuing to occur, our commitment to ensuring all COVID safety measures are in place remains top of mind to ensure the safety of our team and customers. Turning to Slide 28. Over the last year or so, we've been incredibly fortunate to have had thousands of talented people, many with incredible experience from across a broad range of industries join the Bunnings business. We're continuing to recruit a diverse team with the right skills, capabilities and background. One of the reasons our team choose to stay and build great careers is our unique culture. Our permanent team member retention rate at close to 90% is industry-leading and a significant cost of doing business benefit to us. We're focused on maintaining and further strengthening our team engagement and culture, helping our team develop and grow really matters, and we're delivering more training that is relevant to our team's roles across multiple channels. With a really good mix of hands on, virtual and face-to-face learning. Of course, making it easy as possible for our team to do their jobs is a priority. We're delivering technology and systems to do this. And examples of this include providing more Zebra handheld units, push-to-talk communication devices and improved apps to help team members locate and order inventory. Launching Workday, a one-stop shop for all teams HR needs has been well received and it's a good example of our broad focus on technology and enablement right across the business. Turning to Slide 29. We know delivering everyday low prices remains critical to earning trust and loyalty with our customers. Our team is constantly sourcing the lowest cost of goods possible, so we can reinvest in price. Behind the scenes, we have a relentless focus on removing unnecessary cost and complexity in the business, doing things more efficiently to support this investment in low prices. And we're always looking at how we can evolve our supply chain to support changes in customer preferences which allows us to generate greater volumes and scale to support our focus on low-cost and low prices. A good example of this is our upcoming trial of a rapid fulfillment center in the western suburbs of Melbourne to test and learn around more efficient online fulfillment for our customers. The site will also trial the central dispatch of items customers purchase in-store but decide to have home delivered. With expected benefits to include removing tasks from stores, freeing up space and reducing manual handling for our team. Overall, our supply chain model, along with support from our suppliers, has served us really well during the pandemic, handling unprecedented volumes and helping us to remain in stock for our customers. And as our business grows, we'll continue to invest to optimize efficiency for us and our suppliers. Turning to Slide 30. For all our customers, we continue to drive a relevant winning offer and looking what our customers need to get the job done. We're developing our product ranges in line with evolving customer needs and the latest product innovations, pretty much everything from the front gate to the back fence. Our focus is ensuring we have a true ranging diamond, entry good, better and best, introducing products in line with customer aspirations and needs, and we're upping our focus on stylish on trend products. Recognizing our customers' desire not only to access essential products for home repair or maintenance, but also to be inspired to undertake more diverse projects from the traditional back deck or garden to room makes makeovers or upcycling furniture. It's so important that products are in stock and available for our customers. So ensuring our inventory count are accurate and product flows through our supply chain efficiently is very important. To support this, we're continuing to invest in technology to optimize inventory and supply chain management, including order and delivery management systems as well as improved space planning technology. Our team is continuously reviewing how we display our products so we can get the best out of our store space and enhance the shopping experience for our customers through a more intuitive set of department adjacencies. And you can see an example of this on this slide where we've located all the products a customer needs to move their home business in 1 aisle. This space optimization work is enabling us to introduce inspiring new store layouts. Installing new showroom experiences in stores to provide customers with greater DIY inspiration for both inside the home and around the garden and making it easy for our customers to visualize projects and shop across the range, challenging our own ways of laying out stores to enhance the experience for our customers while retaining our unique warehouse look and feel. Turning to Slide 31. Today, our customers can experience our service through multiple platforms and channels. Spanning our physical and digital environments. This can be in store, online, in home or on-site and no matter which channel a customer chooses we want to be the easiest to shop with. Of course, this all starts with the product. We want to have a winning offer that showcases the widest range and best assortment of products for our customers. We aim to select these relevant to our customer needs, be they DIYs and renters, traders, builders or organizations, and through a variety of touch points that offer customers choice in when and how they serve. So when they get it and where they want it, is in line with their expectations. And of course, it needs a communications approach that includes communicating broadly and also individually in a personalized way. And when in store, we want our team members to spend more of their time with our customers to help them with the advice and materials they need. Turning now to Slide 32. At our last Strategy Day in June 2019, I spoke about the growing role of digital in improving customer experience and giving us a richer set of customer insights. And since then, we've rapidly accelerated our digital agenda and capabilities. Capturing the data our customers share with us is helping us to gain a more complete picture of our customers' preferences, and this remains a priority. To support this, we're increasing the ways that customer information is captured to personalize their experience, some of which you heard Rob speak about earlier. Beyond this, we continue to upgrade our core technology platforms. In April, we launched our new retail website in Australia and New Zealand, improving the look, feel and navigation for customers with our new trade website platform to follow in the next financial year. Pleasingly, we're also bringing in a new enterprise data platform that will help us analyze data and provide a new level of insight. Our technology, digital and analytics teams, who've done such amazing work in a short period of time, continue to grow, and we're using this talent and technology to understand areas where we can improve customer experience, drive operational efficiencies across all channels as well as make smarter business decisions. Turning to Slide 33. Our commercial business continues to be a significant growth opportunity. We take a segmented approach to the market, with our 3 primary commercial customer groups and regardless of the segment, we ensure we use a mix of leading brands and channels to serve our customers. Our builders are generally engaged in substantial private or residential construction. They have multiple employees and contractors, and we're working to better support them from the moment they receive their building plans. This means we're looking at much more of the whole of bill, helping our build of planned projects, making it easy to select the materials they need for the job and getting them to site at exactly the time that they need it. For organizations, it's about creating a partnership to help deliver a service or source relevant products. When we talk about organizations, we meant education providers, hospitality, government services and the rural sector. And this is a huge part of the economy. In this space, we're expanding our expertise to help these organizations carry out services like home modifications for older people or those with the disability. It means we can also offer organizations with multiple sites, for example, schools, access to specially curated ranges of products. At the core of our commercial customer base, other trades, who is such an important customer group. The evolution of our trade business, as evidenced by growth in PowerPass account holders has shown we have become more and more engaged with them over time. Beyond this, our store locations and extended trading hours make us a very convenient choice. We're doing even more to make it really easy for tradees to choose us, and I'll provide more detail on that shortly. We'll turn now to Slide 34. We know our commercial customers are busy. They're managing complex projects, often with tight time frames. And while each of our customer segments are unique, they share core needs that we're acting to me. We're working to be the easiest to deal with in our stores, online or out on site, turning products and services into solutions that help businesses grow and run better, and we're working harder than ever to be more consistent and reliable, ensuring we're a partner that our customers can count on to service more of their business. Turning to Slide 35. For our trade customers, it starts by driving the basics heart. That means creating more convenience in-store throughout the experiences that our trade customers have. Examples of this include the rollout of the new trade desk design, self-checkouts and the load-and-go program, stocking more of the brands and products [ trade ] customers' need and having specialists in every store available to help them get the materials they need in-store or delivered at the time they need it. As with many parts of the business, investments in technology are underpinning our program here. We're making improvements to our trade website so it's fully transactable and integrated with our PowerPass app. The app itself will continue to evolve, so it's even easy to use and provide those using it with a more personalized experience. Behind the scenes, we're in the process of rolling out a new customer relationship management platform through salesforce, which will help provide our team with a deeper understanding of our customers, allowing for a stronger level of connection and engagement including putting everything our sales teams need to know about our customer relationships on their mobile devices. Turning to Slide 36. Making strategic acquisitions is one way we can deepen our relationship with our builders and our trade customers. As you know, we completed the acquisition of South Australian retailer, Adelaide Tools last year. Adelaide Tools range of power tools, power gardening and heavy machinery, along with the expert team are helping us cater to more of the products our specialist trade customers need. We're really pleased with the performance of the business and the local team, which continues to be led by Adam Peach. In late March, we opened a new format store in power field, South Australia. The store is trading well, and it's allowing us to test new concepts, layouts and products as well as giving us insights needed to expand further. And we'll open our first stores outside of Adelaide later this calendar year. These will be in Western Australia, where we see strong prospects for growth with a new brand that will be announced in the next few months. A stage rollout across Australia and New Zealand will follow over the next 12 to 18 months. Further, as we recently announced, Bunnings has entered into an agreement to acquire Australian hard services retailer Beaumont Tiles, subject to the satisfaction of several conditions, including regulatory approval. Beaumont Tiles operates in a large competitive category that has the opportunity for strong growth, and this acquisition would allow us to build on the success of the Beaumont Tales business and invest in its future growth. It's also a great opportunity to better address the needs of our builder customers and flooring trades as we help them with more of their build. Beaumont has a great leadership team in place and will be run as a separate and distinct business, much like Adelaide Tools. Turning to Slide 37. At the heart of who we are and how we think about our business is the understanding that we live it to. Our teams live, work and raise their families in local communities right across Australia and New Zealand. We work closely with our incredible suppliers and in doing so, support their businesses to grow and teams to work. On the other side, as a partner and supply to our commercial customers, doing the right things in the right ways is so important, and these connections to what makes Bunnings, Bunnings. The deep connections to our communities are loved by our team and are a key reason people join and stay with the organization. And whilst COVID-19 has had a significant impact on Bunnings community activities, with sausage sizzles, hands on activities and in-store fundraising paused to periods last year. We worked hard to find other ways to support our local communities. They include working with share the dignity in Australia. I got you back pack in New Zealand, and as always, I'm really proud of how our teams get behind local community and natural disaster relief. For example, following the East and Western Australian flyers, New South Wales floods where our New Zealand team are doing right now around Christ church. We're also currently supporting fight M&D for the third consecutive year, with [indiscernible] for sale in all Australian stores and trade centers. Pleasingly, with restrictions easing in most of the places we serve, many of our team are thrilled to be backed out in the community, supporting local projects and welcoming customers back for in-store activities as restrictions allow. Turning to Slide 38. This same sentiment carries into our thinking on the environment, where we've made clear commitments to reduce our carbon emissions, boost energy efficiency and reduce waste. We hear from our team and communities about how important this is to them, and we know our suppliers have similar views. Last year, we announced we transitioned to 100% renewable energy for our entire operations by 2025. Across our network, we have solar PV systems on 74 of our sites, with an aim to grow this to more than 100 by the end of the next financial year. In store, we have energy-efficient LED lighting. This is now a standard inclusion in all new store builds, and our existing Bunnings store network is being upgraded. Importantly, these activities and more will help us achieve our target of net zero scope 1 and 2 emissions by 2030. In partnership with our suppliers, we're also looking at ways to tackle waste and minimize total packaging, swapping more recycled materials and ensure necessary packaging is recyclable. Whilst we have some way to go, our goal is to reach 100% sustainable packaging by 2025. Turning to Slide 39, and drawing this presentation to a close, it's hard not to be incredibly excited and energized by what's happening in the business today as well as the many opportunities that are ahead of us. We're investing in our product range to ensure it's relevant, better presented with even better service experiences across multiple channels, and at the same time, working to deepen the relationship with our commercial customers. The acceleration of our digital and technology agenda will enable us to better understand and service our customers, be more efficient and reduce complexity in the business. But as I just mentioned, staying true to who we are with our focus on team community. Executed in a disciplined manner, it will allow us to continue to drive sustainable growth, creating long-term value for our shareholders. I'm now going to invite my Director of Finance, Justin Williams to join me, and we very much look forward to taking your questions. Thanks so much.

Richard Barwick from CLSA. With regards to Adelaide Tools, is this -- is Adelaide Tools more about the rolling out that format and what that can mean in terms -- what it can deliver in revenue or earnings? Or is it about the capabilities, the buying power and so on that you can then bring into the inside the normal or the traditional Bunnings business?

It's a great question, Richard. It's very much about growing back format. The challenge that we've always sort of understood from a Bunnings point of view is that there's certain brands and certain types of trades, it probably wouldn't consider Bunnings warehouses the most or Bunnings as the most appropriate place to purchase their tools, and we see a very strong segment-based approach or category-based approach to the way that some brands sort of operate. So for us, it will be about scaling Adelaide Tools and what we name it outside of South Australia into a network across Australia and New Zealand. It's probably going to be somewhere in the vicinity of 75-or-so stores in the medium term, so in the next sort of 3 to 5 years. But it's clearly an opportunity for us to deepen the connection with specialist trades in those categories and provide a differentiated service experience as well as offer them the brands and products that are important in the segments that they work. And many of those don't have a natural home within the product architecture of the Bunnings format.

Okay. And does the same sort of thing apply for Beaumont Tiles, when you -- again, when you're thinking about what it offers and then the number of stores?

Yes. So Beaumont Tiles has got a much bigger store network, well over 100 shops across Australia. For us, it's really the differentiated service experience and deepening the amount of the build that we're able to offer and work with our builder and trade customers on. We also know that we've got a really low penetration with the flooring trades. They don't sort of see the Bunnings format as being as relevant for them as the specialist trade. So that ability to operate offer, I should say, a differentiated service experience is very much a part of it. And we in the sort of work we've been doing, understand that that's something that we think builders will really value.

And then a clarification question. On your market sizing, I think it's on Slide 24. There you're talking about the interconnected home and lifestyle commercial. You got talking about the market size, $79 billion in Australia, $15 billion in New Zealand. Is that is that everything? Or is that where you actually calling, that's the commercial element to it? Just wondering what you're [indiscernible].

That's everything. It's everything, households as well as commercial.

So that's what you see right now as your addressable market?

Yes.

It's Michael Simotas from Jefferies. Can I just follow-on from that conversation around Adelaide Tools? If you look at you guys as well as a couple of the other bigger players, there are plans to put a lot of professional tool stores on the ground over the next 3 to 5 years across the industry. Stores seem to be doing quite well at the moment. Where do you think the sales will come from? Or where do you model the sales to come from? Or is it expansion in the market, obviously, bearing in mind that the cycle is pretty favorable as well at the moment?

Yes. It's a good question, Michael. I think the way we've sort of thought about the business for a long time is grow the market and grow the opportunities that present within the market. It's really clear there's a very strong demand across Australia for trades. And clearly, a lot of pressure on different markets actually get trades into that. So we're seeing a lot more being done at the sort of apprentice level to sort of grow employment within the sector. And I think that's one of the elements. And then it is really clear that across housing and construction, there is real demand. And whilst from a Bunnings trade point of view, we don't play in the heavy construction trade market. The trades that are actually working on those sites are very professional operators, and they're looking for the sort of products and brands that specialist trade players are able to offer, and we're able to do that through Adelaide Tools. So brands like Milwaukee and Festool and things like that, aren't brands we see as having a natural home in the Bunnings environment, but they are very much a natural home in the specialist environment, so participating strongly in that given there's strong demand in the existing environment. And clearly, a pipeline of talent coming through if you sort of think about trade premises going into trades. That's where we sort of see that growth coming from.

Okay. And then just a second question on that thematic. So you've done, I guess, 2 adjacencies in fairly quick succession professional tools and tiles. There are probably a number of other categories that probably fit in that bucket of the trades people not necessarily thinking Bunnings is the right place to buy that product, things like plumbing and electrical come to mind. Is this a strategy of Bunnings now to pursue these adjacencies? Or do you need to take stock of what you've got and then see how that goes and potentially pursue other opportunities down the track?

Yes. It's probably a little bit of both, Michael. I think we've said for quite a long time that we're always interested in categories where we're not able to service customers effectively through the Bunnings format. And we do recognize that whilst it has broad appeal, it's not as relevant in some places. And some product brands themselves don't necessarily see that the Bunnings format is the right place for their brand to be showcased or sold. So we'll continue to sort of look. Obviously, we've been doing quite a lot of work on the Adelaide Tools business. Our commercial team has done a great amount of work alongside the Adelaide Tools team in bringing Parafield to life, and that's a really good step in the right direction with a little bit more to do when we open the stores later this year or throughout the next financial year in the West. And similarly, we'll all sort of take the same considerations with Beaumont Tiles. And if there's sensible opportunities that present themselves, and they sort of fit the criteria that we're looking for. We get fantastic support from Rob and Anthony and the Wesfarmers Board. But yes, we'll just we'll sort of buy our time and if there's an opportunity to present itself, we might look at it. But we'll certainly be focusing on the 2 that we've got -- or the 1 we've got and the 1 that we hope to have subject to regulatory approval and a couple more steps in our own process.

Mike and Justin, it's Ben from Jarden. Just interested in just supply chain and also right-to-play categories. And if you look at what Home Depot done in the U.S., I know you guys sort of spent a lot of time looking at some of these players. They've increased their SKU count to sort of a million-odd -- when they look at drop ship, these sorts of things. And as this engineer comment, you've launched that rapid deployment center. How are you thinking about supply chain investment and increasing range and moving more aggressively into these right-to-play categories?

Yes. Thanks, Ben. I'll start with supply chain. So for me, the thing that's sort of occupied, I think is what happens as online penetration grows. I think we talked at the half about online penetration sort of peaking at just over 3% of revenue. It's dropped back down under 2% at present, but that is going to grow. It's going to flow the global trends. And I think one of the things that lockdowns of any sort of measure do is push people to look to different channels, and you will eventually get some more stick from things like that as well. And we recognize that once we're sort of getting up above 5% of revenue coming from our online channel, fulfilling from store becomes much less efficient than it is today. So what we're looking at in the western suburbs of Melbourne is and what's that going to look like? And it really is in a very Bunnings way, a test-and-learn environment. We're also looking, as I said in my presentation, at are there opportunities to improve efficiency in-store by having products at customers want to have home delivered big bulky products, kitchens, barbecues and things like that, they're purchasing in store, delivered to their home in a more efficient way. So that forms one part of our thinking. We do know that we've still got opportunities from back dock to shelf, if you like, in terms of in-store logistics, we received product on pallet. I touched on the $30 million investment in our forklifts. We want to get that product on to shelf as quickly as possible. So we're looking now with our partners, our supplier partners that is there something we can do a little bit further upstream to perhaps cross stock some of that product to bring it in perhaps on roll cages, derisk inside the store, having as many forklift moves as we currently have and getting stock on the shelf more quickly. We've got good experience in cross stock from the work we do in green life. And clearly, ports can be a challenge as well on what we're doing with containers. So we are looking at the whole supply chain and efficiency, but it's certainly early days because the model we've had has really stood the test of time. But given some of the volume increases we've seen, it has given us the opportunity to look at, in some ways, what a future state looks like and what we'll need to think about as we go forward there. So that's sort of where our thoughts are on supply chain. And hopefully, that's covered that off. On right to play, one of the big opportunities we've got and digital is going to do this is really let us get the whole range that our suppliers have online. So when you go into Bunnings store at the moment and you go to that blue special oils counter, you see hundreds of brochures sitting behind the counter. And each of those brochures has got hundreds, if not thousands, of products in them, that we currently don't have, either on our Bunnings website or even in our special orders range. So working with our suppliers to get those ranges offered will certainly increase the SKU count significantly. And then we'll continue to sort of look at what other partners are out there to widen and broaden that. The way we sort of think about right to play is that front gate back fence sort of mindset and more around -- in the main, what's sort of fixed into the home. So a good example of that is a letterbox is fixed to your home, but a caravan isn't, goes in and out. So we don't sort of see caravans as a range, but we clearly would see letterboxes as a range. But that will evolve, and that will change over time. And what's clear from the time I've been in our business is that 5 or 10 years from now, we'll be selling things we didn't think we were going to sell, some of which maybe haven't even been invented yet, but customer demand will sort of drive and inform our thinking on that offer going forward.

So just following up and final one for me. So just on that, do we need to be thinking about the next 12, 24 months, there's going to have to be some firmer news around some larger centralized distribution points to then support these that allows you to push that range and bring more products in. Because it seems like given the nature of the model historically, you probably need some bigger centralized sheds some automation demo of the cross dock, et cetera.

Yes. Look, I think certainly over the next 12, 24 months, we'll have more to say based on the things that we're doing now to sort of learn from it. So yes, I think it's certainly going to be a stay tuned, there's more to come down the track.

Mike, Justin, I have a question from David Errington, who says: At the first half, Mike, you mentioned you added 6,000 new team members. Are they permanent? And how hard are you finding it to obtain and keep quality team members?

Yes. Great question, David. We peaked in November 2020 at 55,000, and I'm reading from my cheat sheet on that. Then at the moment, we're about 53,500. So we do always have a natural peak over the Christmas period with additional casual team. We've been converting more and more of the people who joined us to permanent. And I've been blown away by the number of people who have come to us from many and varied industries, particularly out of leisure and hospitality and transport, who are wanting to stay and build great careers. And that's been really advantageous for us, particularly in our digital and analytics team. The capability and the choices of coming to a business where there's a lot going on in that space, but a business that's got a really great, progressive, engaged and inclusive culture means that the stickability, if you like, of people wanting to put down roots and grow is good. So yes, it's certainly very strong. And in fact, our permanent retentions improved from the mid-80s up towards that 90% that I referenced just before, so absolutely.

It's Ross Curran from Macquarie. Just wondering if you'd help us understand the -- your early experience at Adelaide Tools and customer retention. Has there been any pushback on the customers? Have you seen any customers drop off since it's been part of the broader-based farms group?

No. No. In fact, actually seeing new customers starting to come through. And what we've not yet done is fully integrate PowerPass. So PowerPass, in time, will become an accepted payment method at Adelaide Tools as we would anticipate it would with Beaumont subject to us being able to complete the acquisition. And that will probably give us a slightly different lens. But yes, certainly, customers have been pleased with the offer. I think Adam and the team have done a great job in continuing to sort of drive the existing store network in Adelaide, albeit a reasonably modest 1 really well, and we're certainly seeing lots of new customers coming and shopping us out of Parafield.

And then secondly, can I just ask around, can you just help us understand the pricing strategy? So a lot of those raw ingredients, timber, you called out before, are seeing pretty sharp input cost increases. Can you help us understand how you're thinking around the ability to pass on to customer versus yourself? We're seeing a lot of inelasticity of demand in the U.S. around some others, but a lot more around others. So how do you think about it?

Yes. Look, the last thing we ever want to do is put our prices up. If we think about timber, we've probably got another 6 to 12 months of some challenge. If you sort of go back behind the mills, feedstock is in a really good space. But getting it through the mills and clearly, the strong demand is putting pressure on. We do a lot of work with our suppliers to look at ways that we can sort of offset costs through improved efficiencies in supply chain or volume purchases, which I touched on in my presentation. I think inevitably, you get to a point where the market itself is sort of defining where price is at. What we want to make sure is that the value proposition at Bunnings is the strongest in the market.

I'll just push on that. Could we expect some gross margin pressure there over the next 12 months? Or are you making it back on volume?

I think there's -- we always model gross margin going down, partly to sort of keep a really tight discipline on costs and partly recognition of just how competitive the market is. So we certainly focus on that. But volume is one offset. And as I touched on a couple of times in the presentation, there's a lot of things going on inside the business at the moment, which are really around reducing complexity and sort of pulling cost out. So any sort of gross margin pressure, we do everything we can to not have that sort of fall through to the bottom line. And in the scheme of the overall business, timber on its own is certainly not something that would have a material impact on us.

It's Bryan Raymond from Citi. Just on the presentation, I think there's a noticeable shift away from focus on the online opportunity. But I think last time you addressed the market, there was a big focus on that and now a bit more towards trade. I'd just be interested in a bit of an update on how you're seeing your online business, 12 or 18 months on from it being launched more broadly. How is penetration going and profitability and that side of the business, please?

Yes. Look, it's a good point you make, Bryan. I think in 2019, we were sort of at the starting line, trying to get where we needed to go. I think we've accelerated that, and the team have done an incredible job not only to launch our transactional website, but actually completely replatformed it as well and do that in the middle of a pandemic on time and on budget was a huge credit to the team. And it's still early days. It only about live in April, but now it's part of our business, right? So it's -- I guess, the way we sort of think about it is we move -- we want that to be as efficient as it can be and a great experience to our customers. But a lot of growth we're looking at coming out, as I touched on, from the commercial business, which obviously, you picked up on through the presentation. Revenue, as I said before, peaked in the first half at 3.1%, which was driven by the long lockdown in Victoria. That's back under 2% of revenue at the moment. We have a view that it will clearly grow over time. But from a profitability point of view or things like that, it's -- there's nothing in there that's concerning us at all. And the team are really doing a great job on getting product to customers' home. So they want to deliver or picked up in-store or dropped in the boot of their car through drive and collect and I was really interesting just in the last week here in Victoria, just how quickly the team could make that pivot and how well that's operating under what's quite a lot of pressure in this particular market.

Great. And so in terms of that getting to a bit more of a profitable position for you guys generally, if you're saying you're sort of not too worried about at the moment. But in order for that to become a bit less of a drag on margin. Do you think it's a scale game? Or is it an investment in your business that's going to make things more efficient on a unit basis?

Yes. Well -- yes, we certainly don't see it as a drag on margin. But if by any stretch of the origination, but what we are conscious of is that once it gets to a certain level of volume. There's a -- one of a better term, you end up with a bit of a distraction risk in your store because you got team members zipping around picking stock and they're being stopped by a customer or needing to help someone move something it will get efficiency lag there. So that's why we're starting to think about what can we do in a more centralized way, which is what the Western fulfillment center, which is what we're calling it for now, will do for us in Victoria in terms of providing a window into how -- is there another way to do this more efficiently based on the sort of products that we have the way customers are shopping and the sort of efficiency we can get from that. So yes, it's certainly test and learn, but no negatives at this stage.

We have a question from [ Brook Campbell-Crawford ], who says noted the earlier response to a question that some categories, for instance, tools, don't fit naturally within the Bunnings store format. What other categories would you look to penetrate through separate store networks either organically or through acquisition?

Yes. It's a good question, Brook. So it's not so much the product. It's more that some brands and brand owners choose to sort of channel manage, if you want, certain products. But we have interest right across that sort of broad-ranging lens. We're looking at -- and we're interested in, I should say, categories like electrical and plumbing, which I think one of your colleagues spoke to before, but that's more the back of wall, so what you don't see after the property is built. We're also interested in categories like appliances that are sort of fitted to the home. So we're not really thinking as much TVs and sound systems, but more in sort of fridges and dishwashers. We do have a small range of those, but clearly, there's opportunities to look for growth in those as we see our global peers do. So it is within that ranging lens. We're very focused on that. We're not sort of considering homewares or some of the soft for furnishings. So that's not what we'd sort of see in our purview. But in anything that is part of the build of a home from foundation through to final fit out. That's what we're interested in. I hope that answers the question.

Okay. Thanks, Mike. Thanks, Justin. If there's no further questions in the room, we'll take a break for coffee and morning tea. And for those online, we'll be back shortly.

Thank you. [Break]

Okay. Well, welcome back. It's time for us to get on to the Kmart Group part of the presentation. Well, first of all, good morning, everybody. I'm very much looking forward to sharing our thoughts on Kmart Group, and some of the unique assets that we have in each of the businesses as well as the way that we are bringing these together to create more value for our customers and for our shareholders. Now in a very, I guess, COVID-like presentation, you've got me in person, and then we've got a number of the team from Melbourne, who will be joining us via video. So we've got Richard Pearson from Target, Pete Sauerborn from Catch, who lead the Target and Catch businesses, respectively. And we've got Alex Paseka, the Kmart Group CFO, who will be joining me for questions on the way through. We'll run through a brief presentation on the various businesses, and then we'll have an opportunity for questions. We provided an extensive update on Kmart business at the strategic update in April. So the majority of the focus today, not surprisingly, will be on Catch and Target. Turning now to Slide 42. This slide demonstrates the significant scale of Kmart Group, which is a source of competitive advantage for all 3 businesses. Combined revenue in the last financial year was over $9.2 billion, with online sales of over $1.2 billion. We expect this to continue to grow as we complete the conversion of Target to Kmart stores, continue to improve store sales density across Kmart and Target and accelerate online sales across the 3 businesses. One advantage of this combined scale is the multiple customer touch points that we have, which help us continue to understand our customers better and create further opportunities to create more value for our customers. For example, customers now have the option to order online and collect at Kmart, Target or Catch products from the majority of our Kmart and Target Australian stores, providing convenience and faster and more economic fulfillment. Now we are completing this rollout in the coming months. Catch also plays an important role as an additional channel to market with the successful launch of Target on Catch marketplace last year, providing Target with the ability to acquire new customers that were previously not shopping either at Target stores or at target.com.au. Not only did Target quickly become the second largest marketplace seller on Catch, but the partnership was successful in generating incremental sales for both Catch and Target. Finally, with over 250 million transactions across the businesses, the ability to generate rich customer insights and offer an enhanced and personalized customer experience is greater than each of the businesses could achieve on their own. Turning now to Slide 43. The period of time since cover appeared has been an extraordinary one. And in Kmart Group, we have consistently focused on 3 things: firstly, being there for our customers, secondly, keep our customers and our team members safe; and third, focus on the long term. We have used this period of time to accelerate our strategic agenda and proactively invest in the future. The way we run the group is to ensure we have clear accountabilities across operational leadership teams for each business. We collaborate on shared initiatives where it makes sense for each business. And in a small number of areas, we make group decisions. Property is an excellent example of this, where Alex and I take accountability for those decisions. And this ensures we make the right commercial decisions for the group. Other areas are called out at the bottom of this slide. The main takeout is that there are dedicated teams at Kmart led by John Gualtieri, Target led by Richard Pearson and Catch led by Pete Sauerborn, who are 100% focused on the successful operation of their businesses. Turning now to Slide 44. Sustainability is important across the Kmart Group, and we are one of the highest volume retailers in the market. We sell a lot of products, and every product sold needs to be sourced from the earth made somewhere, transported and at the end of its product life disposed of. This equation is no different from any other retailer and the sustainability challenges, one faced by all. However, where we do differ is in the opportunity we have to do sustainability at scale, making it more effective and more affordable. We also see that if we can make this work, we can help lead the way for retail in Australia. And this is why we are working with the leading players globally to build and deliver our program. We have also recently committed to bringing forward our 100% renewal target through 2025, in line with a number of the other Wesfarmers businesses. Our full list of commitments right across the people and planet pillars of our program are available publicly on our website, and we're excited by both the momentum we've created in this space and the opportunity that lies ahead of us. Turning now to Slide 45. As I previously mentioned, I'll briefly touch on Kmart today to recap on the key messages from our presentation in April. Turning now to Slide 46. Many of you have seen our strategy slide before, and this has not changed. Our purpose of making everyday living brighter manifests itself in 2 ways for our customers. The first is a rational response to lowest price. People really appreciate low prices as most Australians are on a tight budget and low prices really help. The second is a more emotional response from making products which were previously out of reach for many but are affordable at Kmart. Our customers love this. It's no compromise. A key element of our model is bringing on-trend products to market at the same time as specialty players, but of course, at the lowest price. Our strategy of better products at even lower prices enables this and we have lots of opportunity to further improve our products and further reduce prices. Our second strategy as a great place to shop that is simple to run and plays to a great store or a great online experience whilst keeping it simple and low-cost to operate. Our business model is anchored on volume and economics of scale, focusing on families, lowest price and everyday items. Our values are very important to us as we strive to have a great place to work for our team. And when we deliver, all of the results follow, and we continue to aspire to 10 1 6. I do emphasize aspire. It's not a forecast, of course. It's $10 billion of sales, $1 billion of EBT and -- sorry, 6 stock turns. These numbers give our team a clear goal to go after and keep us grounded as we make progress towards that goal. Turning now to Slide 47. Kmart is categorized as a department store, and globally, department stores are in a challenging position. I do believe this is the wrong way to think about our business. Whilst Kmart is a multi-category retailer, the comparison with department stores stops there, in my view, as the fundamentals of this business are very different. At our Kmart Investor Day, we covered 5 topics that demonstrate how Kmart's unique attributes differ from other multi-category retailers, and I thought it would be worth summarizing them again briefly today. The core economic model is very simple, but not easy to replicate due to the scale advantage in the product development and sourcing capabilities Kmart has developed. 80% owned brand, which is direct sourced through our own team, enables us to acquire products at a very low cost. This enables low prices, and consistently, we pass those on as cost savings to our customers. Lower prices stimulate more demand and as volume grows, volume enables further sourcing benefits. And of course, we keep on repeating that process. Our stores are at the center of everything we do, and our store network has been an important driver of Kmart's success over the last 10 years. As retail evolves and data and technology become critical, we see these capabilities helping Kmart to enhance our lowest price positioning by improving our customer offer, whilst further reducing our operating costs. Finally, as one of the biggest volume retailers, we have a big role to play in reducing the impact we have on our planet. Turning now to Slide 48 (sic) [ Slide 49 ]. Kmart's strategic priorities over the medium to long term focus on leveraging its unique, competitive advantages by continuing to improve the customer offer while also increasing efficiency in our supply chains and store operations through a greater use of technology. The first priority is continue to focus on doing the things that have made Kmart so successful in recent years that is continuing to leverage its market-leading size and scale to expand market share in existing categories and leveraging our product development capability to enter new product categories. We are also making significant investments in our online offer, which will result in significant improvements in the online customer experience, while also realizing improved efficiencies. We continue to make progress on building a digitally enabled supply chain, focusing on increasing the resilience and efficiency of our sourcing and supply chain operations, and we expect to see significant benefits in this area over the next 2 to 3 years. The investment will be complemented by the technology investment we are making in the store, starting with RFID inventory tracking capability, which we demonstrated at our Kmart Investor Day. Over time, this investment will enable us to realize significant operational efficiencies in our store operations. We have also embarked on our efforts to increase the level of personalization that our customers experience, both in-store and online. This will help us to better anticipate the needs of our customers and to help them discover new products and experiences. Finally, we will continue to pursue our sustainability commitments and ambitions to ensure that Kmart remains a significant force for good in emissions and waste reduction and, of course, ethical sourcing. Turning now to Slide 49. And at this point, I'll hand over to Richard.

Thank you, Ian. Good morning, everybody. And for those I haven't met, I'm Richard Pearson. I've been the MD at Target since November last year. And it's my pleasure now to take you through the Target section. First, I'd like to start by thanking the Target team for their continued efforts and contribution during what has been a period of significant challenge and change. I feel very privileged and proud to be leading this business. And I'll now start on Slide 50, please. Our vision at Target is to inspire families to live better. We do that by making it easy to afford quality and style. We're very clear in our proposition and where we play as a destination for apparel and soft home. Within this, we see womenswear has been the category of primary importance, supported by strong offers in men's, kids and home. To deliver this proposition, we're clear on our strengths and how we will win. Firstly, we see the Target brand as our key asset. It's got very strong awareness and a real love for the brand, and we need to continue to build on this. Secondly, our product offer, centered around affordable quality is our real differentiator, where we'll deliver greater value to our customers by providing real quality at significantly lower prices than our specialty competitors. And I'll provide some examples of this later in my presentation. Thirdly, we're moving towards a digital-first offering. We have a really strong online foundation with good momentum, and we're increasing our investment to continue to improve our customer experience as we see online as being our key growth driver. And finally, we're able to leverage advantages from being part of the Kmart group and Wesfarmers in areas including sourcing, technology, data, digital and sustainability. Turning to Slide 51, please. As you're all aware, the last 12 months at Target has been focused on delivering a major business reset, and I'm really pleased to say that the significant actions we announced last May to restructure the business are almost complete. While Target is now a smaller and simpler business, we still have significant scale with a national footprint of 142 stores and annual sales in excess of $2 billion. We've reset the commercial model by significantly reducing fixed costs, and we're targeting a higher mix of the cost base to be flexible or rather than fixed. This derisks the business model to fluctuations in customer demand. The reduction in our cost base has been enabled by the simplification of our store network through a reduction in store numbers and the transition to a single, large store format. Furthermore, we've thought to simplify our ways of working across the business, including in merchandise, where we are leveraging partnerships with suppliers in categories where they can provide better expertise and commercial outcomes than us, and we're also automating many key processes. We've reduced our lease liability from $1.1 billion in FY '20 to $800 million, which provides us with much greater flexibility to adapt to changes in the external and internal environment. We'll continue to take a very commercial view of every store and only renew leases where there is a strong commercial rationale, supported by appropriate tenancy costs and short-term flexible lease arrangements. So we think we've got a really strong foundation and commercial model for the future. Turning to Slide 52, please. Our absolute priority for FY '22 is to maintain momentum and sustain profitability. While we've had some pleasing recent results from a combination of external factors and the underlying improvements in the quality of the product offer, there's still a lot of work for us to do. And our top priority is to achieve consistent and sustained financial performance. We'll continue to accelerate online as we see this as being the priority growth engine for the business, and I'll cover this in more detail later. While we're still early in our data strategy, a key focus for this year will be building a customer data asset. This includes growing and ingesting the customer data we have access to and then building the capabilities to leverage this through personalized customer experiences and a deeper relationship with our customers. There's still a lot of work for us to do to continue to differentiate our product offer as we know that customer perceptions of quality, value and style aren't yet where we want them to be across all our categories. But pleasingly, where we are delivering product in line with the strategy, we can see it's resonating really well with customers. We've seen this in our Children's Wear department, which has delivered strong comparable sales growth in the year-to-date. Within this area, we have a clear proposition, which is to provide affordable quality to our customers. We've taken steps to elevate product quality and style by introducing new and improved fabrics, and designing our products with increased functionality and comfort. The range architecture has been reset to provide value for all customers across our good, better and best product tiers. An example of this is within our leggings range where our entry product, the essential legging, is priced at $6 for younger children and is made from soft organic cotton, which offers superior quality relative to value speciality retailers and at a lower price. The customers who want something a little better, we have printed leggings priced at $8 for younger children, which offer fun and trend-focused prints. And in our best tier, we have a toasti legging product priced from $12, which is made from a heavier weight yarn, and provides superior warmth in the colder season and represents great value with quality on par with speciality retailers, but at a much lower price point. We're confident that we can repeat the success we've seen within our Children's Wear range by continuing to offer affordable quality, and through implementing and embedding a style guide across the business to ensure we maintain a consistency of product design aligned to our strategy. And we'll continue to have a relentless approach to trade to increase our customer transactions, including by optimizing our execution and promotional mechanics. Turning to Slide 53, please. We see our digital online platform has been the front door to the brand. We know that most of our journeys either in-store or online start on the site, which is why it's so important for us to showcase our brand credentials. We've got a bold plan for our online business, where we're increasing our investment and to acquire new customers, including through our relationship with Catch. We're also investing in an improved customer experience across both the site and the app, including through greater personalization. We'll invest in customer support by creating self-service portals for personalized preferences, implementing a faster online returns process and making it easier for customers to track the status of their order. We'll make our website easier to shop through quicker checkout solutions and an upgrade to our search platform to make it easier to search and buy product. And finally, we'll improve the reliability of our fulfillment proposition by leveraging our distribution centers to support consistent throughput and lead times and the optionality available to customers through launching an express next-day delivery service to all greater metro areas. We'll also have a stronger focus on apparel through improved photography, fit guides and product descriptions. Turning now to Slide 54. In summary, the key takeaways for the Target business are: The reset of our commercial model is now complete, and our near-term priority is to stabilize the business and achieve a consistent and sustainable return to profitability. We have an iconic brand with strong awareness that we need to continue to build. We have a clear proposition as a destination for apparel and soft home. Affordable quality will differentiate our product offer, and we'll continue to improve our product quality, style and range of architecture. Future growth will be supported by accelerating digital capability. And we're investing in data and digital skills to improve the customer journey and deliver personalized experiences, with plans in place to improve operational efficiency and the profitability of the channel. Thank you. I'll now hand over to Pete to take you through the cash plan.

Thank you, Richard, and good morning, everyone. As Richard said, my name is Pete Sauerborn, I'm the Managing Director of Catch. Very sorry that I couldn't be there in person, but happy to be here virtually to share an overview of the Catch business and our strategy with you. So we'll start out on Slide 56. Our vision for Catch is to be the trusted place where Australian start their shopping journey. This is an aspirational vision that we've set to guide the team, and we're confident that we have unique assets to leverage and investment plans in place to build towards this aspiration. To start out, I wanted to provide a brief overview of the Catch business. Catch is a general merchandise, e-commerce marketplace. We're category-agnostic, which means we operate in a very large addressable market providing significant opportunities for growth. While our product offer is rapidly evolving, today, we offer customers a range of over 2 million SKUs that can be purchased on our website or through our mobile apps. We have about 3 million active customers, but our brand awareness is relatively low compared to some more established competitors, and we see this as an opportunity. Our engaged customer base makes Catch one of the most preferred online channels for brands and sellers of all types to connect with Australian customers. In terms of fulfillment assets, we have a 62,000-square-meter fulfillment center in Melbourne, which has automated goods-to-person picking and automated packing machines. Like many other online businesses, we've seen significant volatility in demand over the last year as varying degrees of COVID restrictions have caused customers a shift between online and physical channels. We delivered $1 billion in gross transaction value in calendar 2020, reflecting strong demand and investments we've made in improving the offer and increasing brand awareness. So moving to Slide 57. Since its acquisition by Wesfarmers in 2019, Catch has been building the foundational elements of a differentiated customer proposition, which leverages its unique assets. The first element of our proposition is a wide and growing product range. Founded over 14 years ago as Catch of the Day, Catch is a heritage of a deals-based business model, bringing great value to customers. The reliance on this deal-based business model has been declining over recent years, and we're focused on adding more depth and breadth of our product range to serve customers on more and more shopping occasions. Today, there are over 2 million items available for sale on Catch. These items are sold through 2 different business models: first, our retail first parting business model, where we sell about 70,000 SKUs; and then our marketplace third-party model, where about 1,900 marketplace sellers sell items on our site and we charge a commission. These 2 business models work well side by side, allowing our retail teams to source top brands and high-volume SKUs while allowing the marketplace sellers to fill in the longer tail items to serve our customers. The retail offering generally sets a high bar for customer experience since we are in control of the listings, the pricing, the fulfillment experience. And for the marketplace, we set performance guardrails and ensure that sellers live up to those. Top brands ranging from Tommy Hilfiger to Calvin Klein to Apple, KitchenAid, Dyson, Carlton Brewing and many more are choosing Catch as their preferred online channel in Australia. Also the top Australian retailers such as Bing Lee, PETstock, Kathmandu, Utopia and more are choosing Catch. The second element is providing customers with flexible shopping and fulfillment options. We focus on providing simple shopping apps in iOS and Android to create convenience for our customers and around 45% of our orders come through these mobile apps. We're proud that our iOS app is the top rate and shopping app in Australia. To provide convenient and cost-effective shipping options, we leverage Target and Kmart store locations for click and collect delivery of cash purchases, and we're seeing strong uptake of these options by consumers. Finally, to encourage repeat purchase behavior, we offer a shopping subscription program called Club Catch. Subscribers have access to free shipping on all of their retail purchases and exclusive offers and special discounts. Club Catch subscribers are very loyal and shop multiple times more frequently than nonsubscribers. So moving to Slide 58. Catch's category-agnostic model enables it to -- the business that acts as a massive retail market in Australia, over $190 billion in addressable market. The online retail penetration continues to grow and we expect marketplace business models to grow even faster than the overall segment. Our plan is to aggressively grow share in this expanding market through 3 key levers: acquiring new customers and increasing the frequency of existing customers; expanding into new categories, ranges and brands; and making shopping easier by reducing customer friction points. I'll cover more on our strategies to achieve these objectives a bit later in the presentation. Importantly, we focus intensely on serving our customers each and every time they shop with us by creating strong relationships, insightful recommendations and great service will maximize the loyalty and customer lifetime value. On to Slide 59, please. We've previously announced that FY '21 has been a foundational year of investment for Catch, and these investments have been focused in 2 main areas. First, we've been focused on accelerating growth through several customer-facing initiatives. By improving our relatively low brand awareness is a key enabler for driving growth of new customer acquisition. During the year, we launched a new brand campaign showcasing the breadth of our product range. This is Catch's first major investment in brand marketing and we'll continue to build on this platform that we've established in future years. Expanding our product range and introducing exclusive brands has also been a key area of focus, which has yielded strong results in some areas and key earnings in other areas. Rapidly growing our range has not come without its challenges and it's highlighted several areas where investment in supporting technology and processes are required to support future growth. During the year, we also improved the value of our Club Catch subscription by eliminating the free shipping threshold. The second area of investment has been on building infrastructure and capabilities necessary to enable the future growth ambitions. The most significant areas have been in respect to our distribution center where we've invested in higher levels of automation to increase capacity and productivity and talent. We've increased the size of our headcount by over 65%. In FY '22, we will accelerate our investments in foundational capabilities and long-term growth initiatives to build capacity ahead of GTV growth. Slide 60. Our strategic priorities start with the customer to create a proposition that truly resonates with the Australian market. We do this by providing access to great value and a unique range of Australia's favorite brands and retailers, offering flexible delivery and return options and leveraging, in particular, Kmart and Target for click and collect, and by keeping our Australian personality central to our brand and customer touch points. To deliver on our customer promise, we're working hard to become the trusted online retailer that brands and sellers prefer by providing access to growing and dynamic customer base and also by providing rich data and insight to the brands. Accelerating subscription is our next priority. As I mentioned, customers that subscribe are more loyal and buy more frequently. The foundation of Club Catch is a free shipping offer where the more the customer buys, the greater they benefit. We are actively adding special offers and unique deals that are exclusive to our subscribers as well. To support this growth and improve the speed of customer delivery, we're investing to expand our fulfillment network into New South Wales in FY '22, when we plan to commission a 30,000 square meter automated fulfillment center, which, combined with our existing Melbourne facility, will provide sufficient capacity for growth for a number of years to come. And finally, we'll continue to drive leverage and synergies from Wesfarmers, including through ongoing expansion of Anko product selection on the site and continuing to utilize the Kmart Group store network to support click and collect. It's also exciting, as both Richard and Ian pointed out, to note that Target joined the Catch marketplace as a seller and became one of our top sellers in a matter of weeks. This is a notable win, win, win as it's delighted the Catch customers, it's extended the reach of the Target brand's new customer set and it's also contributed to the cash growth. So thank you. I'm going to pass it back to Ian.

Wonderful. Thanks, Pete, and thanks, Richard. Turning to Slide 62, where I'll take a moment to recap on the key messages from across Kmart Group and provide a summary of the outlook for each of the businesses. In total, we are confident that the strategic priorities outlined today will put the Kmart Group in a good position to deliver sustainable growth over the long term. In Kmart, the focus remains on leveraging our scale and product development capabilities, completing the store conversion program and delivering on our digital initiatives. In Target, we will embed and stabilize the Target operating model, whilst accelerating online and continuing to differentiate the product offer. Across the Kmart Group, we will continue to use our combined assets to deliver incremental value, particularly through fulfillment initiatives, including click and collect and developing an enhanced understanding of our customers and expanded channels to market. In Catch, we continue to develop a customer proposition that is truly designed for the Australian market. This will mean accelerated investment ahead of GTV growth to allow us to build a scalable model and to grow our customer base. In recent months, Catch has been experiencing negative GTV growth as the business has begun to cycle significant shift to online channels that occurred through 2020. On a 2-year basis, however, GTV growth remains strong. Following the ongoing progress of the Target store conversion and closure program, we have also been able to revise downwards the one-off nonoperating costs that we expect to incur in the 2021 financial year. These costs are now expected to be a total of $60 million to $70 million, a reduction from our previous estimate of $90 million to $100 million. That brings me to the close of the presentation. But before I finish, I would like to say a big thank you for the team members across Kmart, Target and Catch. I guess for all of us, it's been a really intense last 12 months with COVID. And particularly for those team members who are working in stores with our customers every day, I have a great deal of gratitude and thanks for the hard work that they've done over that period. We'd love to go to any questions that you now have.

And I'll go first with one from David Errington. He says the comment that Target has reduced its cost base to reduce its risk, is there any high -- is there a higher proportion of variable costs versus fixed cost? He says I can understand how leases and overhead costs have fallen, but other than just making the business smaller by reducing leases and head office costs, can you elaborate further on how the Target business is more efficient than before? And can you give us a guide as a proportion of cost of doing business is now variable now versus how much it was before?

Yes. Let me have a go. So a few questions embedded in there. So I'll try and sort of do them in total. The first thing is the business is much simpler than it was historically. So I think in Rich's slide, you saw a big reduction in store numbers. But within that, there was the elimination of Target Country within the Target model. So that simplicity in itself makes life a lot simpler for the business to operate. So if you think of it from a buying and a supply chain, trying to service a small store format in the Target model was quite complex. It was a different set of ranging and a different set of product principles that we needed to apply to those stores. And with the volume that we were pushing through, that was complex. So I think that was the first piece, simplicity really helps. We've also looked at simplicity through the lens of the product offer. So there's core areas of the business, and you've heard apparel and soft home really being called out strongly. And of course, we'll have a lot of our own brand products through categories. Where you get to other categories, which we see rounding out the offer, still being very important, we'll return to local supply on those, which is, again, a simpler model, which we can scale up and scale down based upon demand because we're obviously leveraging the supply base instead of doing the lead time ourselves through direct sourcing. In terms of the split of fixed versus variable, that's something that we're going to continue to work on. I don't have the number in front of me in of terms what that split is between the 2. But if you look at leases themselves, historically, leases have always been a very fixed cost basis and have generally only ratcheted up. We've been working very hard across Kmart and Target to move to a much more variable lease structure. And so we generally do have a component that's fixed as well below the revenue line. And as we renegotiate new leases, we have a variable component that then gives us the ability to adjust the cost of the leases as sales go up and down. Now in the Target business, we are focusing on really growing our online and we're being more opportunistic with our store portfolio. So we're not signing up long leases within Target. We're very much being focused on the short term with our lease portfolio. So that's resulting in increasingly percentage rent deals or deals with an increased proportion of percentage rent. So if you look at the variability versus fixed, what we have is an improving picture as time passes. And that's very much our focus on Target is to continue to make that cost base more and more variable as time passes.

From Jarden. I was wondering if I could ask Pete a question. I don't know if he's still on the line. Is that possible?

We just thought I'll try and tackle the questions just because it's easier with me in the room.

Well, I was interested in maybe sort of in your discussions with -- [ obviously interested from the outside as you ] in terms of obviously coming from Amazon in the U.S. looking into Australia and New Zealand and particularly around just how crowded the whole marketplace space is in Australia. You look at the slide there and sort main destination for people to start shopping, Amazon is about, what, 50% in the U.S. and the view in terms of the level of consolidation we need in the marketplace space in Australia, the extent to which you guys would look to lead that. And then following off from that, sorry one on this, is just -- is the comment around aggressively growing market share, what does that mean?

Yes. The way the way look at it is we see marketplaces being a disproportionate beneficiary of online growth. So that's the first core assumption. So as a sector, if you like, or a subset of online, we see it be seeing one of the biggest growth areas, which is one of the reasons why we were so enthusiastic to acquire Catch. So we think there's an opportunity to be a participant of that natural growth versus having to pull share necessarily from other marketplaces to achieve that. And then over course, over time, there's going to be a competition between the marketplaces based upon their relative propositions. And what you've seen from us is we have an asset within Wesfarmers of some really strong, powerful brands and we're trying to bring that to bear for the benefit of Catch as a differentiator. The second piece we have is, of course, we're part of Wesfarmers. And so we have good funding availability for us to be able to invest in this business and to think long term. And I'm sure that's come through in the presentation that we are thinking about this as a long-term play versus a near-term profit generator. And then, of course, yes, we're -- and we are focused 100% on the Australian market. So we're very keen to ensure that we get really close to our customers and leverage our customer data across our businesses, again, for the benefit of Catch.

And so just the aggressively growing share comment, just the biggest difference, I suppose, if we a have to look at you guys versus, say, the bigger marketplace in Australia, is your range is materially smaller. It's sort of probably less than 5% of what some of your bigger competitors are. How do you aggressively grow the range? And then how does price get into this as well?

Yes. I think the nature is there's always going to be some items, which are very price sensitive, particularly on the marketplace. So the highest volume lines, there's going to be very little price differentiation would my expectation across the key players. But of course, as you go increasingly wide, then there's an opportunity to have unique products within that range. And you look at the offer that we have across Kmart and Target in particular, and as we range those products on Catch, Catch will be the only marketplace that has those products on there. So that gives us an ability to product differentiate, again, in a way that would be difficult for others to achieve on the way through. So yes, the product expansion is one of them, I think Pete called that out as one of our strategic growth levers and will be important for us for the future. I think the nature is that the growth rate we expect to be very high as we go through, that's why we're investing in the [ miles ] that we are. So I think the word aggressive is probably just in the context relative to the growth rates that you'd expect to see maybe in a Kmart or a Target, which obviously a more mature businesses, we wouldn't expect to see quite the same growth rates from.

Sorry, just finally. So range, if you have 2 million-odd SKUs today, do you see that is moving to 20 million or 30 million or 40 million in the next 5 to 10 years? That just seems like the biggest difference between you guys to suddenly being the destination versus your peer set.

Yes. We haven't put a formal Target number of SKUs. But certainly our ambition is to carry more of our own SKUs, so our in-stock business that Pete called out. So we're sitting at roughly 70,000. Our desire is to continue to expand that number significantly over the years ahead and we would absolutely expect to grow the marketplace SKUs significantly as well. So absolutely, it is a big part of the growth, is adding more SKUs, so to give more reasons to shop for customers. And really, what we're trying to create here is the opportunity to be the place to go for many, many products. So Catch is very much designed to be much more category agnostic. And it gives us the ability to play in a whole number of categories, which you don't see in any of the other retail brands within Wesfarmers.

It's Michael Simotas from Jefferies. First one from me on Target. Clearly, you've made a lot of changes in the business. How confident are you that you do have a sustainable business now? And history would suggest it is quite difficult, and clearly the cyclical backdrop right now is favorable. So how confident are you on that? And if you did need to rationalize stores further, is that possible? Or do you then start to get to a position where you subscale?

Yes. Michael, it's a question that's always on our mind because we -- I'm acutely aware of the history of Target over the last decade. I think what Richard and team done this year has been pretty exceptional. The store closures have been undertaken incredibly well, equally good on the Kmart side through the conversions. The net result is the business has maintained good momentum through this period, which you could have easily lost. The conditions are favorable. So I completely agree with that summation that you have. And so when we look through the results, we're trying to look through to see, well, how much of the improved performance is the environment and how much of the improved performance is through the activities that we've undertaken. I think there's good evidence points within the data that they are -- that we should have some confidence around the future. But until we really demonstrate results over an extended period of time, I think we'd all want to see that play out before we say, "Yes, we've definitely made it." And if I look at it from the flip side, we have derisked the business enormously all the way through. The cost base is a lot, but a lot lower than it was historically. So we've talked about the variable cost and making sure that cost base is not only lower but we can't adjust it. And if you look at leases, yes, we can adjust. We can close stores in many cases if we wish to. Now if I look at the fleet that we have at the end of this year, I think we'll only a handful of stores that have negative contribution. So the current position is they're in a reasonably strong position and delivering value. Yes. And the last piece, of course, is when you look at it in the context of Kmart Group, it's a much, much smaller proportion. So again, the financial magnitude of the risk is always going to be smaller because it's a much smaller business than it was historically. So I think there's reasons to have optimism on the upside if we can deliver on the strategies that we've called out, continuing to differentiate on the product offer around affordable quality, continuing to really drive online and make online a much, much larger part of the business over time. And then, of course, I think if you look at it on the risk side, I think that's been derisked.

Okay. And then just on Catch. Clearly, it's a long-term opportunity. I don't want to be short term. But the investment that will be made in FY '22, the business sort of roughly breaks even. How should we think about that just to set expectations from an operating loss perspective for Catch?

Yes. Maybe if I can -- maybe if I sort of try and take this one step back and give the perspective. When we acquired Catch, it was a very good business that was run for a specific purpose. And the founders, who I've got a great deal of respect for, ran that business to be a profitable business every day. But in doing so, it meant it wasn't built for growth. And so when we acquired that business, and we spent $230 million on the acquisition, we knew that was not the cost to build what we needed to have a scalable, high-growth business. So if I give you a real basic analogy, and hopefully this works, it's a little bit like we bought a really nice house in a really nice street, but it really wasn't big enough for our family. And we knew we had to do the extension and the renovation to really get it to where we needed to, and that's what we're doing through this period. So if I try and bring that to life for you, we clearly got things like automation distribution centers which came through, which some of that is OpEx, a lot of that is CapEx. But if you look at some of the capabilities you need to run large SKU numbers, you need a lot of automation and the technology. So at the moment, we manually manage pricing. And we do -- and we're running relatively dynamic pricing relative to competitors. So the more SKUs we put on, the more people we need to manage that. So investment is sometimes in things like automation and transformation so that we have the ability to scale and grow in the future. The investments are also in things like marketing because we're now acquiring customers is important. And if you go back on a 2-year basis or back 20 months, 20-or-so months ago when we acquired the business, we had about 1.6 million customers at that time. We're now up to just under 3 million. So you can see we've had a big growth in customer numbers through that period. So there's multiple elements here which we'll continue to invest in. And I think you should think of that investment over a number of years. And if you think of it as cash versus EBIT, I think that might be an easier way to think through it. I think that when we bought this business, it wasn't really a scalable business at that point. And what we're now doing is we're layering in the investment to give us that ability to scale.

It's Ross Curran from Macquarie. Sorry to keep you going back at this point. The new rebased Target, are you now committed to that business? You've asked us to sort of look long term. On a 5- to 10-year view, is Target, with the store network as it is today, is that still part of Wesfarmers or is it not?

Yes. I mean it's probably a question for Rob, not me. But I think if Rob was up here, he'll probably say that every business is always up for sale if somebody offers a good enough price. Now for me running the business, I see a future for it with us. I think it's a great brand, as Richard called out. And we see that consistently. I think we've really returned to where Target was successful, around affordable quality, and we're really doubling down on that. And I think the new news is the acceleration of online and making it a smaller, simpler business, which I think gives it the potential for sustainability that we didn't have prior to the adjustments that we've made over the last 12 months. So I do see a future there. I don't underestimate that it's going to have some challenges along the way. But I think if we can successfully execute on the strategy we have, I think there's reasons for it to be optimistic.

Is Rob in the room, because it's a pretty appropriate time for someone here to tell us if this asset's part of business or not?

No, I'm sure he can pick it up right at the end of the day, I'll catch Rob in the break.

Then if it is then part of the business, it's pretty noticeable if you go into a Kmart versus going to a Target that one of them has been given life the last few years and CapEx on the stores and one really has been starved of money. Can we expect increased CapEx in the remaining Target network from here?

It's not the priority. The priority is to focus on the areas which we've called out through the strategic presentation today. So the investment will be in data. The investment will be in online as we continue to grow that out. And we see online being a really substantial part of this business over time. Now I think at the moment with the track record that we have, if we said -- if we came out and said we're going to go and invest in a whole bunch of refurbishments, I think that would be criticized and I think fairly so because I don't think we have the track record yet to justify the application of capital into those stores. That may change over time as we continue on this journey and we start to get a really clean read of performance as we come into a post-COVID world, whenever that may be. But I don't believe now is the right time to be putting more capital into Target stores.

Okay. And then on capital on the Kmart stores, again, it's noticeable if you go into Kmart store on the weekend and it's stacked floor to ceiling with inventory at the moment. Do you think you've overcorrected the other way with -- versus what you were 12 months ago?

Yes, it's -- we still have a number of volatile areas within the supply chain. If I take you through from product all the way -- from source through to shelf, what we see at the moment is that our factories are delivering to a very high level. So our delivery in full on time is at pre-COVID levels across all locations. So we're seeing good delivery from factories. It's still the freight forwarders. It's the ships. It's the containers. And of course, it's the Australian ports and, to a degree, the New Zealand ports as well where the slowdown is occurring. So we have taken more inventory into our system, and that's a deliberate act. It is -- if we had perfect conditions, it's more than we would need. But we have decided we were better off to carry that inventory so that we can manage those areas of volatility that we are still seeing. And the moment we think it's the right choice. Now with John Gualtieri, we're constantly looking at this question to say when is the right time to bring that inventory down and when do we have confidence that volatility is going to diminish, because in the long run we'll be carrying more inventory than we would like through this period. How much risk have we taken through that? Not a great deal because, of course, we put more inventory into the 365 ongoing lines, and we haven't really increased the inventory on seasonal lines on the way through. So we generally just changed the timing of when we brought seasonal lines in. So I think markdown perspective, the risk is minimal. But it just costs us a little bit more operationally to carry the inventory than we probably need.