Wesfarmers Limited (WES) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by -- for holding, and welcome to the Wesfarmers 2022 Half Year Results Briefing. [Operator Instructions]. This call is also being webcast live on the Wesfarmers' website and can be accessed from the homepage of wesfarmers.com.au. I would now like to hand the call over to the Managing Director of Wesfarmers Limited, Mr. Rob Scott. Please go ahead, Rob.

Thank you very much, and welcome, everyone, to the 2022 half year results briefing. I'm joined on the call today with our divisional managing directors and our CFO, Anthony Gianotti. Today, I'll provide an overview of the group's performance and progress on our strategic priorities. And then Anthony will talk to some of the details of the results. Then the divisional managing directors will talk to performance and outlook of their respective businesses. I'll finish up with some comments on the outlook for the group, and then we'll be happy to take your questions. So starting on Slide 3, our core objective. Now the first half of this financial year was the most disruptive period we have experienced through the pandemic with extended government-mandated lockdowns. And it was also a great opportunity for us to demonstrate our steadfast commitment to our core objective to deliver satisfactory returns to shareholders over the long term. And despite the complexity of the day-to-day operating environment, we were able to make very significant progress on foundations for future growth. To create long-term value requires you to anticipate the needs of customers, look after team members, treat suppliers fairly and ethically and to take care of the environment and also to contribute positively to the communities in which we operate. And on Slide 4, I just wanted to share some of the proof points around this in terms of what we delivered in the half. Now early on with COVID, we were one of the first to call out the unintended consequences of harsh and extended lockdowns and restrictions on mental health and well-being. And this is directly related to the financial health of households and small business. That is why we stepped up to support our team members and their families and the broader community through COVID. In addition to providing paid pandemic leave to team members, we provided payroll support to permanent and many casual team members through periods of prolonged lockdown. Now we view the cost of nearly $40 million in the first half as an investment in our team. Other programs such as our employee assistance program for team members and their families or Bunnings' fantastic effort partnering with governments to mobilize vaccination hubs were some of the ways in which we helped our teams and the community. I'm also proud that we regained indigenous employment parity for the half, a year ahead of our plan with the addition of 1,000 new Aboriginal and Torres Strait Islander team members. Our divisions achieved a 14% reduction in Scope 1 and 2 emissions or a 9.5% reduction after adjusting for the ammonia plant shutdown. The successful launch of our second sustainability-linked bond is further evidence of the alignment between our sustainability and capital management strategies. Now turning to the group financials on Slide 5. When you consider the extent of disruption and restrictions on trade for our retail businesses, we were pleased with the group's financial performance for the half. Nearly 20% of retail trading days were impacted by restrictions, and our shops were completely closed to customers for over 20,000 trading days. These were very clearly abnormal operating conditions. Throughout this, we continue to pay our teams, pay our rent and provide online solutions for customers. The resilience of the Wesfarmers' businesses in this environment highlights both the strength of our portfolio and the capacity of our teams to adjust to conditions quickly. The financial results from Bunnings and Chemicals, Energy and Fertilizers were pleasing, and it's also good to see continued improvement in industrial and safety. Relative to other divisions, Kmart Group and Officeworks were more significantly impacted by COVID-related disruptions. For example, Kmart and Target lost almost 25% of trading days in the half. The group's net profit after tax from continuing operations, excluding significant items, was $1.2 billion, a decline of 14% on the prior year. This includes direct COVID costs of around $80 million, of which half relates to providing additional support to team members with the remainder relating to additional cleaning, security and PP&E. I should note that in these COVID-related costs, we haven't included the additional costs around online fulfillment during the abnormal lockdown situations, those costs are very much incorporated within our divisional results. On dividends, our directors have determined to pay a fully franked ordinary interim dividend of $0.80 per share, reflecting solid NPAT result and Wesfarmers' dividend policy. Now turning to Slide 6. In June last year, I set out 3 strategic priorities for the group, consistent with our value-adding strategies and setting us up for sustainable long-term growth. We've accelerated our investment to establish a market-leading data and digital ecosystem during the half, continuing to build the foundations of this initiative, particularly investing in people and technology. We were excited for Bunnings and Officeworks to join Flybuys, and this has been really well received by customers. The group's partnership with Flybuys continues to complement the development of Wesfarmers' broader data and digital ecosystem and our subscription program, providing insights that enable the retail businesses to offer more relevant personalized customer experiences. To our second priority, we've continued to invest in platforms for long-term growth. This includes a ramp-up in the development of the Mt Holland lithium project, continued expansion of Bunnings' commercial offerings and our proposed acquisition of API, which will form the basis of a new health division of Wesfarmers. Finally, we have accelerated the pace of continuous improvement, further integrating sustainability into our strategies and investing further in technology and supply chain. Turning to Slide 7. I mentioned back in June that we would provide an update on our data and digital ecosystem work, and that's what I'll do today. In the half, we've made good progress building the capabilities and systems to support this initiative. A new division of the group, led by Nicole Sheffield, will take responsibility for group data and digital capabilities and businesses. This division will include our group customer data asset, the advanced analytics center and the OnePass subscription program. Earlier this month, Club Catch was rebranded and repositioned as OnePass, which will form the basis of a broader subscription program. Work is underway to develop additional benefits for OnePass members shopping across the group's retail businesses. I should note that the rebranding of Club Catch to OnePass is very much a soft launch, and we will be testing and trialing a number of broader benefits across group businesses with our team members prior to launching publicly the offer later in the year. We will provide additional information on this new division at our Strategy Briefing Day in June. Now on Slide 8, as you can see, the performance here is summarized of the group at a summary level, and I'll now hand over to Anthony to provide more detail.

Thanks, Rob, and hello, everyone. I'll start on Slide 10. Each of our divisional managing directors will provide a summary of the results shortly, but I will give a very brief overview of divisional financial performance. As Rob has mentioned, COVID-related restrictions significantly impacted trading conditions across our retail businesses between July and October and this was reflected in the retail sales growth results for the period, particularly in Kmart and Target, which were the most affected by store trading restrictions. You'll also recall that during the second half of the last financial year, Target closed around 60 stores as part of the repositioning of its network. Sales growth results from Bunnings and Officeworks were pleasing, both in the context of trading restrictions and as the businesses cycled abnormally high growth in the prior year. Our ongoing focus on strengthening digital and e-commerce capabilities over recent years continue to support strong online growth and higher levels of online penetration. Wesfarmers continued to be one of the largest online retailers in Australia and delivered online sales for the period of $2.5 billion, including the Catch marketplace. Turning to divisional earnings on Slide 11. As highlighted earlier, earnings growth across the retail businesses was impacted by government-mandated trading restrictions and other COVID-related disruptions. Lost sales associated with lockdowns led to some fixed cost deleveraging in the retailers, and this effect was amplified by the group's important commitments to continue to pay team members impacted by COVID. Our Industrial divisions delivered strong earnings growth for the half, with WesCEF delivering a record result that reflected strong customer demand, good operating performance and higher global commodity prices for LPG and ammonia-related products. Turning now to other businesses on Slide 12. In total, other businesses and corporate overheads reported earnings of $18 million for the half, which compared to a loss of $1 million in the prior corresponding period. This result includes expenses associated with the new data and digital division, with investment during the half of $44 million supporting our ecosystem initiatives. Profit from associates benefited from a significant contribution from property revaluations in the BWP Trust as well as higher earnings from the group's investments in Wespine and Gresham. In addition, other corporate earnings of $42 million reflected a favorable group insurance result, an increase in dividends received from Coles and API as well as the receipt of an equity distribution under the value-share mechanism we agreed on the sale of Homebase back in 2018. These benefits were partially offset by higher corporate overheads due to an increase in directors and offices liability insurance, fees associated with corporate transactions as well as higher team member incentive payments. Turning to working capital and cash flow on Slide 13. Divisional operating cash flows for the half declined 16.1% with divisional cash generation at 100%. The fall in operating cash flow reflected lower earnings reported for the half, lower cash flow -- cash inflows from working capital movements, which was principally related to higher investment in inventories, the payment of team member incentives relating to the 2021 financial year and higher employee leave payments following the easing of COVID travel restrictions. The working capital result was impacted by a higher ending inventory position, particularly in Kmart and WesCEF. Kmart's inventory balance was elevated due to purchasing decisions to prioritize availability during periods of COVID-related disruptions, compounded by domestic supply chain constraints, which reduced the flow of stock to stores. The elevated inventory position in WesCEF is due to higher global fertilizer prices reflected in the value of accumulated stock in readiness for the main growing season, which will occur in the second half. It's expected that inventory levels will moderate through the second half in line with the easing of COVID restrictions and peak fertilizer sales. At a group level, operating cash flows were also impacted by higher tax installments associated with an increase in the tax installment rate, which resulted in the group's cash realization ratio falling to 79% for the half. Lower free cash flows of $949 million for the half reflected higher net CapEx, including our investment in the development of the Mt Holland lithium project as well as the purchase of a 19.3% stake in API and completion of the Beaumont Tiles acquisition. Turning now to Slide 14. Gross capital expenditure of $583 million was $173 million or 42% higher than the corresponding period last year. This was largely driven by the ramp-up in development of the Mt Holland lithium project with WesCEF investing $139 million in this project during the half. For the 2022 financial year, we expect net capital expenditure for the group to be between $900 million and $1.1 billion. This estimate includes around $350 million to support the development of the Mt Holland lithium project as well as ongoing data and digital investment, including further establishment costs associated with OnePass. Turning to balance sheet and debt management on Slide 15. The group has continued to reposition the balance sheet to optimize the cost and maturity profile of our debt and maintain appropriate flexibility and capacity to support investment in growth initiatives. Of the back of the $2.3 billion return of capital to shareholders in December, net debt for the half increased to $2.6 billion, which compares to a net cash position of around $100 million, which we reported on the 30th of June last year. During the half, the group continued to replace its maturing euro bond with the issue of a 12-year EUR 600 million sustainability-linked bond at a rate of 3%. As a result of the repositioning of the group's debt program over the past 12 months, the weighted average term to maturity has been extended from 1.2 years to 6.5 years and our cost of funding has fallen from 5.27% to 3.15%. Other finance costs for the half fell 20% due to a lower average cost of borrowing and higher capitalized interest. The group continues to maintain its strong investment-grade credit ratings with both Standard & Poor's and Moody's. Turning now to Slide 16. As Rob mentioned, the Board has determined to pay a fully franked interim dividend of $0.80 per share. This is consistent with our dividend policy, which takes into account available franking credits, balance sheet position, credit metrics and cash flow generation. The group will again provide shareholders with the option to participate in the dividend investment plan, and we expect that shares for plan will again be purchased on market. I'll now hand over to Mike Schneider.

Thanks, Anthony, and hi, everyone. First off, I want to recognize the outstanding work of our team and suppliers. They've shown a huge amount of skill and resilience in adapting our operations in a really challenging operating environment and ensuring we consistently deliver for our customers. I'm incredibly grateful for their tireless work. Now starting on Slide 18 and looking at our overall performance. Operating revenue increased 1.7% to $9.2 billion for the half, with earnings slightly down 1.2% to $1.26 billion. The delta between revenue and earnings was driven by additional COVID-related costs, increased supply chain costs and investment in price to maintain customer trust. On a 2-year basis, earnings growth was strong at 34%. Disappointingly, our safety measure went backwards compared with the prior corresponding period. This was primarily due to changes in the store operating environment in regions that went into lockdown. Now turning to Slide 19. Despite the business cycling extraordinary growth from the year prior, total store sales grew 1% and store-on-store sales growth increased by 1.5%. On a 2-year basis, total store sales increased 26% and on a 2-year basis, all major trading regions and categories showed positive growth. Government-imposed lockdowns in Australia and New Zealand impacted quarter 1 trading and sales. Pleasingly, however, Bunnings was able to recover sales momentum in the second quarter, culminating in a strong Christmas supported by a good in-stock position. Commercial sales growth remained strong for the half, supported by robust housing construction and renovation activity and the execution of our strategy to better serve trades, builders and organizations. Online penetration rose to 4.3% driven by COVID-19 trading restrictions, particularly in Victoria, New South Wales and New Zealand. And as anticipated, this has fallen back to around 2% since our lockdowns have ended. Overall, we were really pleased with our earnings performance given we were cycling such a strong first half last year and the cost pressure that's been seen across the industry. We absorbed $40 million in costs to provide a COVID-safe environment for our team, suppliers and customers, including additional cleaning, security and protective equipment along with paid COVID leaves to support isolating team members. Supply chain costs also led to some additional freight and storage costs during the half, and we saw cost pressure through our supply chain impacting margin. Nevertheless, our return on capital was 79%, reflecting continued disciplined capital management and due to higher earnings on a rolling 12-month basis. Turning to Slide 20. During the half, the team continued to deliver on our long-term strategic agenda. Despite the cost and stock pressures faced by the retail sector, we worked hard to maintain our everyday low prices and strong product availability for customers. We refreshed a number of our product categories with our updated garden care and storage ranges well received and our new easy-to-shop layout for power tools proving popular. We boosted in-store service by equipping our team with push-to-talk communications. That's allowing us to open additional checkouts quickly when traffic suddenly builds and quickly locate expert team to assist our customers with specialist questions. We opened 3 new Bunnings warehouses to better serve our customers. As part of our ongoing digital investment, we launched a new e-commerce platform for trade customers. The new mobile-friendly website makes it easy for trade customers to shop our full range online with their PowerPass pricing and arrange delivery to site or collection at store. We further improved search performance and personalization on our new consumer web platform, and we now have over 110,000 product SKUs available to purchase online. Digital engagement grew with a number of transactions made through Bunnings' online store, 41% higher than the first half of 2021. In December, Bunnings launched Flybuys to reward its retail customers shopping in stores across Australia. Combined with Bunnings' new data and analytics capability, the program is allowing Bunnings to understand its customers better and deliver more value using insights. Bunnings continued to strengthen its relationships with commercial customers through investments in service, range and the development of its specialist brand strategy. A record 2.7 million transactions were completed through the PowerPass app over the last 12 months, and we're continuing to add features that will make it even more compelling for trading. In September, Bunnings announced Adelaide Tools would become Toolkit depot, positioning the professional tools business for expansion into Western Australia. The first 4 Toolkit Depot stores opening WA in the lead up to Christmas with 3 more stores set to open in this half. The acquisition of Beaumont Tiles was completed in November, further improving Bunnings' ability to meet the specialist needs of builders and trades. The business remains separate and distinct with the initial focus on making it easy for Bunnings' commercial customers to access Beaumont Tiles specialist design knowledge and extensive hard services range. Now turning to Slide 21. While Bunnings remains well positioned for long-term growth, the near-term trading environment does remain uncertain, with COVID continuing to add operational complexity and increased variability in trading patterns. In the second half, we expect the business to benefit from customers continuing to spend more time at home and a sustained pipeline of residential building activity. We also expect supply chain constraints and the elevated team absenteeism to continue creating operational complexity as well as cost pressures. Despite these factors, Bunnings remains committed to investing for long-term success with a focus on strengthening the commercial and consumer offer and expanding our data, digital and technological capabilities as well as investing in our stores with 2 Bunnings warehouses, 2 smaller format stores and 3 trade centers set to open this half. To finish, I'd once again like to thank our teams and suppliers for their outstanding work over the half. That's it for me, and I'll now hand over to Ian Bailey.

Thanks, Mike, and hi, everyone. I want to start by saying I'm exceptionally proud and grateful to our team members and the way they performed through the continued uncertainty and disruptions experienced in the first half. When our stores were open and customers felt confident to shop, our businesses performed well. However, as a high-volume retailer, periods of store closures or consumer uncertainty impacted results. Importantly, each business has made good progress on their long-term strategic agendas. Turning to Slide 23. Kmart Group's safety performance improved with a total recordable injury frequency rate decreasing 19% to 8.6%. Revenue of $4.9 billion was 9.6% below the prior comparable period, while online sales, including the cash marketplace, increased 22% to $1.4 billion. Earnings before significant items decreased 63.4% to $178 million. Turning to Slide 24. Kmart and Target delivered revenue of $4.6 billion for the half, which was 10% below the prior comparable period. This reflected the significant impact of government-mandated store closures with almost 25% of store trading days lost during the half. Ongoing global supply chain disruptions were well managed as a result of the investments made to hold additional inventory domestically. The high levels of COVID-related absenteeism across local distribution centers impacted the ability to deliver stock to stores in line with demand, resulting in lower levels of stock availability. Store closures and continued investments in our customer experience resulted in record levels of online penetration for Kmart and Target of 14.3% and 26.9%, respectively. Kmart and Target earnings for the half were impacted by costs associated with operating in this COVID environment. Additional team members to manage customer arrival and sign in, increased cleaning costs, commitments made to pay team members during lockdowns, additional support to team members were required to isolate rising international freight costs and costs associated with elevated levels of domestic stock holdings are all examples of costs which would not normally be incurred. In addition to this, the rapid acceleration of online resulted in short-term inefficiencies in fulfillment with a higher-than-normal proportion of the split shipments to customers. Turning now to Slide 25. Good progress was made replatforming the Kmart website, further increasing the Kmart Group customer data asset, delivering initiatives to build resilience and flexibility in supply chain and the simplification of in-store processes through the use of data and technology. The conversion of Target stores to Kmart has been completed and underlying performance has been in line with the business case. Target focused on embedding a simplified operating model and delivered continued improvements in the product offer while strengthening its digital and e-commerce capabilities. Turning now to Slide 26. Catch's gross transaction value increased 1% on the prior period with elevated GTV growth during periods of lockdown, offset by a decline in GTV, particularly within the in-stock business as restrictions eased. GTV growth was 97.5% on a 2-year basis. The core product offer has delivered mixed results with marketplace performing more strongly than in-stock with an associated increase in clearance levels. Investments in core teams and supply chain continue to support the building capability in the business and are seen as essential building blocks for the future. The construction of the Catch fulfillment center in New South Wales is progressing well, and commissioning is planned for the second half of this financial year. Turning now to Slide 27 and Kmart Group's outlook. Looking forward, we expect to navigate near-term trading environment that remains uncertain and volatile across both supply and demand and with the addition of increasing raw material costs. While we finished the first half with elevated stock levels, the overall quality of inventory is good, plans are in place to progressively reduce inventory levels over the second half. But relative to historical levels, incremental inventory investments will be maintained to mitigate the risk of ongoing global supply chain disruptions. Kmart will remain committed to delivering a great place to shop that is simple to run and offering better products at even lower prices. The focus will be on leveraging our scale, realizing the full benefit of the converted Target stores and delivering on our digital initiatives. Target will focus on improving the product offer in apparel and soft home while accelerating digital and e-commerce capabilities. Catch will continue to invest in building strategic capabilities across technology, data, subscription and fulfillment, while leveraging the Wesfarmers' retail assets. And finally, across Kmart Group, we will use our combined assets to deliver incremental value, particularly through an enhanced understanding of our customers and the delivery of more personalized experience. Thank you, and I'll now hand over to Sarah.

Thanks so much, Ian. Our ability to navigate the continued disruption and challenges caused by COVID-19 is only possible because of the commitment, agility and passion of our team and the support of our suppliers. So I wanted to thank them for all they have done to help Australians continue to work, learn, create and connect safely whilst keeping each other safe. Turning to Slide 29. Our ongoing focus on providing a safe and healthy workplace for all team members resulted in fewer team members being injured at work and our TRIFR improving from 7.3% to 5.5%. Officeworks delivered revenue of $1.6 million for the half, an increase of 3.7% on the prior year, with earnings declining to $82 million and return on capital of 19.6%. Turning to Slide 30. Sales growth was driven by strong demand for technology and furniture products. However, this was partially offset by a decline in office supplies and print and create categories, with these higher-margin categories impacted by the loss of 18% of store-trading days during the half. 2-year sales growth remained strong at 28.1%. [indiscernible] model was again evident with customers continuing to enjoy shopping safely in store when possible or utilizing our online offer, particularly during COVID-19 restrictions. This resulted in a material temporary increase year-on-year in our online sales penetration, which was 46% for the half. Whilst our ability to operate individual stores as customer fulfillment centers enabled us to fulfill this rapid increase in online sales as we quickly adapted to prolonged store closures, these sales attracted a higher cost to serve. We also incurred additional shipping and transport costs as a result of ongoing COVID-19 disruption. Temporary costs were incurred as we transition to our new automated Victorian CFC, and we continued to provide COVID-safe working and shopping environment for our team members and customers. We continued to invest for the long term in the half, accelerating our investment in data, digital and e-commerce capabilities, including the recruitment of additional digital roles. This resulted in earnings declining 18% to $82 million. Turning to Slide 31. Despite the disrupted operating environment, we've made positive progress delivering against our strategic agenda. We've continued to invest in supporting the mental health and well-being of our team members including providing employment certainty throughout lockdown. Our new partnership with Flybuys has been well received by customers, and it will accelerate our customer understanding and ability to deliver more personalized customer experiences. We completed the transition to our new automated Victorian CFC and have commenced developing a new Western Australian CFC as part of our modernization strategy, delivering more capacity and improved efficiency across the supply chain. And our renewal program continues at pace with 31 stores renewed in the half and is delivering really pleasing results. We're looking forward to integrating our refreshed brand progressively across our store network through the renewal program and new store property program to deliver an even more engaging and inspiring customer experience. Turning to the outlook on Slide 32. The back-to-school trading period was disappointing with COVID-19 creating uncertainties for parents, students and schools around when and how students would return to school for the new year. Whilst COVID-19 disruptions and uncertainty persist, higher operating costs are expected to continue, along with continued impacts to customer demand, transport, shipping and global supply shortages. However, Officeworks is well positioned to deliver long-term returns by executing our strategy, including leveraging our data and digital capabilities and refresh brand, modernizing our supply chain and launching our new business-to-business flexible work platform into the market. We will continue to help make bigger things happen for our team, our customers and our local communities in order to deliver a satisfactory return to shareholders over the long term. Thank you, and I'll now pass over to Ian.

Thank you, Sarah, and hello, everyone. I'd like to start by acknowledging and thanking all of the WesCEF team for their hard work over the last 6 months. We've continued to deliver on customer expectations. And as a result, I'm pleased to announce the strong earnings outcome today. Turning to Slide 34 for an overview of the financials. The division achieved a 29.8% increase in revenue and 36.3% increase in earnings over the half. These significant increases reflect higher commodity prices experienced across all business units, particularly in LPG, ammonia and ammonia-related products. The total recordable injury frequency rate has increased to 4.2%, following a busy period of planned maintenance work. WesCEF maintained its focus on safety during the period with particular attention to investigating high potential incidents and the introduction of new initiatives to improve safety performance. WesCEF's Scope 1 and 2 emissions decreased for the half driven by continued benefit from abatement catalysts and a temporary reduction from the planned ammonia plant shutdown. The first phase of our decarbonization journey began in 2012 with the installation of abatement catalysts. Ongoing investment and enhancement of these catalysts has delivered cumulative abatement of more than 6.7 million tonnes of carbon dioxide equivalent. These catalysts have abated more than 50% of our emissions in this half. Emissions reduction is a strong focus for WesCEF and details of our road map to achieve net 0 emissions by 2050 will be released in the near future. Turning to Slide 35. In the Chemicals businesses, earnings were up in ammonium nitrate benefiting from higher pricing during the period and robust demand from the Western Australian mining sector and agricultural customers. Sodium Cyanide earnings increased on the prior corresponding period, with strength in sales volumes and pricing in domestic markets. The ammonia business was impacted by a successful 5-yearly planned maintenance shutdown as well as the continued timing differences between ammonia import costs and sales price due to a lag in the pass-through mechanism in customer contracts. Now to energy. Earnings were significantly up on the prior corresponding period. This was driven by higher global energy prices, in particular, the Saudi Contract Price, which is a key international benchmark indicator for LPG pricing. The business also continued to benefit from the closure of BP's Kwinana refinery, with a continued shift in sales mix towards domestic LPG sales volumes. This was partially offset by higher Western Australian contracted domestic gas costs. While not as material as the second half due to seasonality, fertilizer revenue reflected higher input global commodity prices and earnings were up marginally on the prior period as a result. The business continued to leverage strong product availability and utilization of local manufacturing and distribution facilities as well as invest in data and digital to improve reliability, experience and advice for customers. Turning to the next slide for outlook. The Chemicals business is likely to benefit from a higher global ammonia price following the successful ammonia plant shutdown. Ammonium nitrate production and demand from the Western Australian mining sector is expected to remain robust. Sodium Cyanide earnings are expected to benefit from higher sales volumes as international gold mines recover from COVID-related disruptions. The energy business is expected to continue to benefit from higher Saudi CP, somewhat offset by higher WA contracted domestic gas costs. In fertilizers, a record 2021 harvest is expected to support customer sentiment for the 2022 season. The business continues to maintain focus on inventory given high commodity input prices. Demand will remain contingent on grower cost pressures in a highly -- in a high commodity price environment. Construction work at the Covalent Mt Holland lithium mine and concentrator and also the Kwinana refinery will significantly ramp up following the recent award of key contracts. With WesCEF share of forecast capital expenditure for the full year to be around $350 million. Work continues on evaluating expansion options for the project in parallel with the construction of the first phase. WesCEF's earnings will continue to be influenced by international commodity prices, currency exchange rates, competitive factors and seasonal weather outcomes. Thank you. I'll now hand over to Tim Bult.

Thank you, Ian, and hi, everyone. Before I begin on results, I would like to commend our team for the hard work that they've applied throughout the 6 months. We've really faced some tough times whether that be supply impacts from COVID, availability constraints on labor or more broadly, our teams have really showed commitment and resilience that's meant that we could continue reliable supply to our customers, and I thank them for that. Now turning to results on Slide 39. Industrial and Safety's revenue grew 5.1%, and our earnings grew from $37 million to $41 million or a 10.8% increase. Safety remains a key priority for us. The total recordable injury frequency rate, TRIFR, declined to 3.1% in this half, a positive result that reflects our safety culture, which focuses on all aspects of safety. Turning to Slide 39. In relation to the specific performance of businesses within Industrial and Safety, I'll start with Blackwoods. Blackwoods' revenues grew due to continued growth from strategic customers as well as solid demand in New Zealand and from customers in the mining and manufacturing sectors. This was partially offset by weakness in demand from the retail construction and government sectors, particularly in New South Wales and Victoria due to COVID-related lockdowns and restrictions on activity. Blackwoods' overall sales growth was achieved in light of last year's elevated demand for critical products such as the respiratory cleaning and hygiene products. Earnings were in line with the prior corresponding period, with the higher sales offset by continued investment in customer service and digital capabilities, including the enterprise resource planning system, or ERP, and the impact of COVID-related disruptions. The business continued to progress the implementation of the ERP system during the half and has now completed deployment in 3 of the 4 Blackwoods' operating regions. Turning to Workwear Group. Earnings increased with higher revenues from uniforms and the industrial workwear brands, including King-Gee and Hard Yakka. The business benefited from operational efficiencies, including the simplification of the uniform's business. The revenue and earnings growth in these areas was partially offset by the divestment of the U.K. business in the second half of the 2021 financial year. Turning to Coregas. It grew revenues and earnings and that was due to higher demand from industrial and health care customers. The business also benefited from the acquisition of a small gas and welding products business during the period. Looking now at our outlook on Slide 40. Market conditions are expected to remain uncertain and challenging for the remainder of the financial year as the Industrial and Safety businesses continue to manage the COVID-related disruptions to global supply chain and labor availability in some states. All of our businesses will maintain their focus on delivering improvements in performance and profitability. Blackwoods will continue to focus on improvements to its customer value proposition and core operational capabilities including in data and digital as well as completing the remaining implementation of the ERP system. Workwear Group remains focused on driving growth in its industrial brands and uniforms businesses, improving operational excellence and strengthening its digital offering. Coregas is expected to benefit from continued strong demand in the health care and industrial segments despite ongoing competitive pressure and rising input and distribution costs. Thank you, and I'll now pass back to Rob.

Thanks a lot, Tim, and we'll turn to Slide 42 for the outlook. So our divisions have focused over many years on building deeper engagement and trust with their team and customers, and this has set us up very well for the future. We will continue to invest in platforms for growth and progress will accelerate on the development of the group's data and digital ecosystem, including the expansion of the OnePass subscription program. We also look forward to concluding the acquisition of API. Economic conditions in Australia are favorable with strong employment and high levels of accumulated household savings but the group continues to actively monitor increasing inflationary pressures and the impact on households. Retail trading conditions were subdued in January as rising cases of the Omicron variant impacted both customer traffic and labor availability, but we've seen trading momentum improve in recent weeks. As inflationary pressure increases, we expect customers will become even more focused on price as they try to balance household budgets. And this presents an opportunity for our retail businesses to differentiate on value. Our scale and unique sourcing and merchandising capabilities give our retail businesses the ability to minimize the impact of rising costs and keep prices low. This is consistent with our focus on trusted pricing and long-term value creation. Not only is it good for our customers, but it will also be good for our shareholders over the long term. The performance of the group's industrial businesses will continue to be subject to international commodity prices, FX rates, competitive factors and seasonal outcomes. Global supply chain disruptions and constraints in domestic supply chains are expected to last for some time and lead to some additional costs. That then brings us to the end of the briefing, and we'd be very happy to take any questions.

[Operator Instructions] Our first telephone question in queue is from the line of Ben Gilbert from Jarden.

Just first question maybe -- it's just around the comments around price and being better positioned. Are you signaling there that you're going to go -- I'm just reading some of the quotes in the OFR, are you assuming that you guys are going to go harder on price, and we should expect margin contraction? And I suppose what I'm sort of thinking time with that is you're obviously putting lot more money behind data, it's a great example offshore. We guys like [indiscernible] in the U.K. being more targeted in their approach around promoting value and not seeing a big margin hit. So just trying to marry up how you're thinking about those 2 dynamics around pricing?

Yes. Thanks, Ben. Good question. And look, there's no in that as we enhance our data capabilities, we can be a lot smarter and a lot more targeted around a number of aspects of our customer offer. The point I was really trying to make there is we've just noticed in -- it's been a while since we've all faced inflation. And sometimes the very short-term perspective on inflation is how much -- who's got the greatest capacity to increase their prices. And we just feel a couple of things. First of all, that misses the point that inflation has a real impact on households. And it's not just the price of general consumer groups -- consumer goods, sorry, but it's also the impact of fuel prices that are also at very high levels. So what we're signaling is a continuation of the strategy that served our everyday low-price retailers very well over the years. And that is to have -- that is to remain very focused on being -- on having the lowest prices, the best value offer in the market. And because of our scale and unique sourcing and merchandising capabilities, we have ways in which we can mitigate price and ensure that we're continuing to offer great value. As we've also said over the years, we see ourselves as a growth business and we create value by growing margin dollars and improving return on capital. So we are very focused on growing margin dollars. We don't get fixated by trying to back solve to a margin percentage. In an environment over the next year or so where we think customers are going to be more focused on value, we see that that's an opportunity for us to drive volume and continue to grow margin dollars. And I think those comments, I'll let the other retail MD -- or the retail MDs talk in more detail, but I'd say that those comments are quite relevant across all of our businesses.

That's helpful. Just second one from me to Mike, just around supply chain for Bunnings. I know you guys launched that rapid deployment center down in [indiscernible] months ago. Interested in how that's going and just how you see the supply chain evolving? Because I think you said publicly before, as you move towards 5%, closer towards 10% online, you're probably going to do some more pieces around the back end of the supply chain. And I think Home Depot is probably the one that's put up globally, it's doing a really good job by moving to endless isles. How far through that project, are you -- do you expect that you're going to have to make some announcements or progression around that sort of strategy sometime in the foreseeable future?

Yes. Thanks, Ben. Laverton North is performing well for us. The team is doing a really good job out there, and it certainly was very helpful during very extended Victorian lockdowns that we've endured. So it certainly helped take some pressure out of some of the metro stores, it's still very much in a test-and-learn phase. And the supply chain that we've got has actually stood us in incredibly good stead through the pandemic. Obviously, the performance of our own import DCs has been excellent the way the teams have managed some of the complexities around workplace absenteeism and things like that as being first class, and I couldn't be more grateful to our suppliers for their confidence in our model and our approach in the way that they've sort of backed us with the inventory availability and really worked hard to sort of get us into the sort of position that I referenced when I was sort of talking about our Christmas trade. You're right, as we sort of move forward over the next 12 months, I think there is going to be opportunities to sort of share some of the thinking on supply chain. But we will rush slowly into this because we want to make sure we do it deeply in partnership with our suppliers, and we want to make sure that the transition makes sense, and they do an amazing job as do a number of others in our sector. So my sense is probably come Strategy Day, we'll be in a position to outline a little bit more, but it's not -- in terms of managing expectations, it's not -- it's not going to be sort of shock and ore, it's going to be more an iterative approach as we move forward.

Our next telephone question comes from the line of Grant Saligari from Credit Suisse.

So my question to Ian on the Kmart and Target earnings bridge, if I could first, please. The reduction in sales revenue is about $510 million, a reduction in EBIT was $280 million. So clearly, there's much more work there than simply a deleveraging I guess what I'm trying to understand is the magnitude of the different components in that region, particularly, whether a deliberate decision to maintain price and not to pass on some cost increases figures heavily in that earnings bridge, please.

Yes. Thanks, Grant. I'll go to the second piece first. The answer is, no, so we haven't experienced the cost price increases in our cost base of goods at this point. So we haven't seen any first-margin contraction as we come through the half. So that's certainly not the case. To explain the bridge. Normally, in a normal world, we have the ability to flex our cost in line with revenues. But when stores close, that's not the case. And of course, we also decided that we would look after our team members for a whole host of good reasons but, of course, that comes with a cost. And it effectively makes our stores fixed cost in our process with obviously no revenue outside of the online revenue. The second factor is that the converted stores of Target came up around with twice the number of team members on average. So Kmart stores twice a number of team members of a Target store. And of course, we've looked at for those team members as we've gone through this process. Now with no stores are trading, they've been trading really effectively, and they're certainly in line with our expectations in the business case and the rationale that we outlined previously. So the net result is we've got a significant deleverage through those store closures, and that's the biggest contributor on the way through. What are the other elements that have played out within there? We had a normalized level of clearance this year in half one. And if you could remember back a year ago, we called out that we had clearance levels at unusually low levels. So of course, we've got that normalization return as we went through half one this year. Lastly, I'll call out, and then I stop there is the split shipments are called out in the narrative, we really saw such an acceleration of online. We were pretty happy that we were able to service those through our in-store picking. But with many orders having 6, 7, 8 items, it's hard for us always to deliver those from one store. So we end up with 2 shipments going to customers. So of course, that second shipment is a significant incremental cost and that's embedded in our numbers. And then the last of those is COVID costs. which we've called out previously, but just some of the unusual expenses that we incurred during this period of time. So hopefully that helps, Grant.

Yes, it really does. That's helpful. If I could ask a second question just around Catch. It's probably the only business that really troubles me in terms of trying to understand the actual performance of that business. Can you give some sort of color as to the bridge there in terms of why being loss? And to the extent that some of those costs are reflecting sort of a permanent investment, I guess, and I hope for the business scales, but some color around that earnings bridge on Catch should be helpful, I think.

Yes. I'd say on the top line, the GTV would have been below our aspiration for the half, and it wasn't where we wanted it to be certainly below expectations, and that was primarily around the in-stock business. And so we've been making a number of changes to that business. We've been looking to extend the range. And as we've done that, it's underperformed in some areas. So some range extensions have worked while others haven't, which has resulted in, obviously, less GTV than we anticipated as well as the clearance costs that were associated with that. And we've been very productive in taking those clearance costs in the half so that we try and maintain as clean an inventory as possible. So that's certainly -- we would say that as a more temporary contributor to the loss that we incurred in the half. Equally though, we continue to invest in this business for the long-term potential that we see. So we are investing in the tech teams. We are investing in the fulfillment teams, the data teams and also customer acquisition and retention. So we see this as very much a strategic asset for the future. And so we're going to continue to invest whilst we work hard on improving the performance of the in-stock business.

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

My first question. Can I follow on from Ben's question around product inflation? Do you think there's a risk that the inflationary pressures are transitory and while the consumer is in a reasonably good place now and presumably could take some price increases if you do eventually need to start to lift price, the consumer is not in as good a place and elasticity would be bigger? And you spoke a bit about margins, but would you be willing to tolerate short-term earnings declines to maintain your value position across your retail businesses?

Michael, it's Rob here. I'll talk at a high level and probably there are slightly nuanced ounces across the different categories and so forth. I think the first point to note is that the cost pressures are coming through in different ways in different timings. And as Ian mentioned there, if you look at the result in the first half, there really wasn't -- given the very long lead time associated with a lot of Kmart products and the fact that we control the sourcing process, we didn't really see much in the way of pressure -- cost pressure. But we are seeing it as we look a year ahead, now we can't predict what's going to happen beyond the next 12 months. But we do know that there are raw material cost pressures coming through. In businesses like Bunnings, as Mike led in the past, there have been some very noticeable cost price pressures that have flown through for various reasons, such as timber's dealer, 2 very common ones that we've talked about. And then Sarah has also talked about the constraint -- supply constraints globally around semiconductors and some of the cost pressure on things like ink and toners and tech generally. So it's hard for us to predict what's going to happen beyond the next year or so. But we -- as I said, we think that this is going to -- inflation pressure will create some challenges for consumers. We are very confident in our ability across our businesses to deliver the best value possible in the market. And by doing that, we're confident that we'll be able to grow volume better than others perhaps would. And look, it's -- once again, it's really hard to predict what margin is. We don't run our business by trying to backsolve to a margin. We run our business trying to set our prices at a level that's really competitive for our customers. And then if we get that right, given the overall health of the economy, and the overall health of the Australian consumer, I think there is plenty of opportunity to grow margin dollars over the long term.

And if inflation was acute enough to put pressure on earnings, would you tolerate short-term earnings declines to improved market share and maintain your value position?

Look, it depends on a whole range of factors, Michael. I guess the point I'd just continue to emphasize is that there are 2 ways of approaching this in consumer-based business. One is to be really focused on short-term margin. And I think having looked at many everyday low-price retailers over multiple cycles all over the world, the companies that do that and try and artificially maintain a short-term margin outcome, it generally ends up very bad for them from a shareholder value point of view. So we'll continue to manage our businesses for the long term. We don't get overly hung up by monthly, quarterly, even half year margin percentage numbers. We're very much focused on growing margin dollars over the long term. So I'm sorry, I'm not answering your question, but it just -- that's not -- we don't think of it the way that you're saying it.

Yes. No, I think that makes sense. The second one for me, just around your digital division that will be disclosed separately from '23 and OnePass. Now I know you're planning to talk more about it at the Strategy Day. But should we assume that the $100 million investment in FY '22 is a peak? And how should we think about the value that you're looking to provide to customers as part of that program? Will that be costs taken through the retail businesses? Or will that all sit in that digital demand?

Yes. So Michael, you're right. We will talk a lot more about it at the Strategy Day. I guess what we're trying to do is we're trying to be really transparent with you around the cost that we're incurring this year. There will obviously be some ongoing costs that we would expect to sit within this division, and it will depend on the initiatives that we're investing in. But for this year, we're expecting that to be an additional $100 million of OpEx. A lot of that -- a lot of that will be very much foundational setup related costs that wouldn't be recurring. In terms of other costs, look, all of our businesses are investing really heavily in data, digital initiatives, and it's becoming increasingly different -- sorry, difficult to try and split that out because it's just becoming very much BAU. The same could be said in terms of how we think about the different channels, trying to distinguish too much between e-commerce versus in-store is kind of a 10-year-old approach to how you think about your business because we're increasingly thinking about the business from a customer point of view and most customers deal across both channels. So there will be costs within the divisions. There will be benefits, a lot of the benefits we expect will flow through the divisions over time. And then we'll continue to call out, I'd say, a modest level of costs within this division over the next couple of years as we keep building out our capability.

Our next telephone question comes from the line of Tom Kierath from Barrenjoey.

I just got a question on online. If I look at online sales growth across Kmart was up 57%, margins down 500 bps, Bunnings, 41% growth in online, down -- margin down 90 bps, Officeworks, 29% growth in online, margins down 140 bps. It kind of bets a question if this has been normal, and I'm not assuming that the COVID stays around, but if we have a higher level of online sales, do you think that means that the margins you generate your businesses will be lower?

Tom, I think it would be really good for Ian and Mike to talk to that. And probably the common theme we'd want to call out is that what we experienced, particularly in the first quarter this year is anything other than a normal operating environment. So if I kind of look at across the group in September, the online transactions in September increased from, say, a normal run rate at that time of year of, say, 1.6 million transactions. It went up to over 5.2 million transactions across the group. Now that is incredibly abnormal, and it was abnormal because the government said we weren't allowed to let customers into our stores. We don't set our businesses up to accommodate that level of demand and especially when you overlay all the other COVID-related challenges that we had to navigate. So I just want to emphasize the abnormality of the numbers in that first half. But maybe, Ian and Mike can provide a bit and then Sarah perhaps could provide a bit more color on those issues.

Yes. Thanks, Robert. It's Ian here, I'll go first and maybe hand over to Mike. Yes, I'd say the -- yes, Tom, I don't think we would see it that way. There's a lot of other things which are driving the profit outcome in the period, which is much more associated with the cost of stores not trading than the channel shift between stores and online on the way through. I think the great advances we all had, frankly, in the last 12 months and beyond and before that is, we've seen now online levels at probably 2 or 3 years ahead of where we expected and that's given us a great insight into the future and probably a great confidence that we're becoming increasingly knowledgeable about how to manage this in a very profitable way. So we don't see this as a profit dilution as part of our future business model. We see it as an avenue for us to be able to serve our customers to the best of our ability and convert that through the returns to shareholders. So I probably just part there, there's an efficiency in our model, probably I should say, which I called out as part of my narrative, which is really around just how we service such accelerated growth. We see a pathway to delivering improved outcomes over time there, which we would see give us improved performance. But even if we did that, anything that is listed in the last 6 months, we still would have seen a very different booking profit outcome because it's the impact of store closures.

Probably -- it's Mike, Tom, probably just to add to that, we've got trading regions that didn't experience a lockdown that we saw in Victoria, New Zealand and New South Wales. So in those jurisdictions, online sales were sort of in that 2% range that I sort of called out in my opening remarks. And certainly from a volume level at the moment, there's absolutely no impact to margin. I think Ian's point is really important that's given us a really important window into what future volumes look like. And even at 4%, it's still very low base for us. It's why we're thinking about things like our fulfillment center here in Melbourne to sort of test and learn ways to fulfill in a really cost-effective manner, and that's been really useful for us in understanding. So certainly, when you sort of think about the way you sort of frame out the question, it certainly hasn't sort of borne out from a margin impact point in reality certainly from a Bunnings point of view. I don't know, Sarah, if you want to add anything to that.

I think, Mike, yourself and Ian summarized it basically. The only thing I would add is that recognizing we had a pretty well-established online business before this temporary spike due to store closures that we experienced in the first half. The other thing to recognize is that we know, as Rob said earlier, that customers want the choice to shop how they want to shop, whether it be in-store or online. And we know from our business that cross-shopping customers who access every channel are our most profitable customers and most valuable customers. So it's definitely a core of our strategy. I think the real challenge is the temporary nature of the blips and restrictions that we saw coupled with store closures through COVID in the first half.

Great. I appreciate those thoughts. And then just second one, Mike, is it possible to give us the trade in DIY sales and where they are relative to pre-COVID levels? Just to give us a sense of I guess, the benefit in the DIY side and the cyclicality or the impact on the trade side?

What we've seen if you sort of look at that sort of 26-or-so percent, we've seen revenue over sort of a 3-year period, the split of 65/35 broadly remains the same, Tom. So what we see is people being at home or doing more at home, wanting to maintain the projects that they've done, taken all the new DIY skills that they've got alongside the fact that access to trade for small jobs is really difficult. The pipeline and what we've sort of got -- and what we can see in terms of preorders and things like that, gives us a lot of confidence, as I said in my comments before, about what the next period looks like in terms of not only housing starts but also adds but that percentage hasn't shifted materially at this point in time, although there is really good momentum from a commercial point of view in terms of the work that the teams are doing. And I think that's where the addition of TKD and Beaumont Tiles will build out for us in the next 24 months or so.

Next telephone question comes from the line of David Errington from Bank of America.

Rob, I have 2 questions that are probably very broad, but asking you as the CEO, and I'm coming at from an investor in Wesfarmers' point of view. If you go to Slide 11, it's sort of like -- it's very broad and simple question, but -- it's a -- my opinion, it's a game changer for investors in Wesfarmers one way or the other, that's only my opinion. But when I look at Slide 11 and I look at the 2-year stack, 2 things really shined for me, and that is the Kmart Group and Officeworks. Now Ian and Sarah and yourself have really articulated reasons. But when you look at that 2-year stack where Kmart EBIT down 50% Officeworks' 2-year EBIT is flat. Now a lot of other retailers have gone through the same conditions, store closures, paying staff. And guys like JB Hi-Fi, they're up 40% on a 2-year stack. A day's up 50%. Premier up 60%. They've all got very strong 2-year stacks, but Kmart is down 50% over a pre-COVID and Officeworks is flat. And JB Australia would be a good like-for-like on that, and they're up 40%. So my question to you as a CEO, have you got the right business models in those businesses? Because clearly, they have not been able to adapt to change conditions. Being too slow or whether it's just -- and they're clunky businesses. Now going forward, that's a worry as an investor is to -- because they're big chunky investments, there's been a lot of investment in Target and Kmart, rationalization, restructuring, write-downs, you name it, everything. You've got inventory sitting there now, a huge amount of inventory. It worries me that business, Rob. I mean, down $300 million and down $200 million before COVID and Officeworks is flat. As a shareholder or as an investor, that's a red flag on those 2 businesses. So can you, as a CEO, is it likely that we've just got to be patient and as soon as the world normalizes, they'll bounce back very quickly? Or are those businesses strategically disadvantaged now that we could have to go for a bit of pain in the next 2 or 3 years. That's a question at the very top end because it does worry me, Rob.

Yes. Sure, David. Look, I'll answer, and I'll answer that at a high level. And if Ian and Sarah have more context, they're welcome to chip-in. And I guess what I would disagree with your observations there, David, it's judging a new normal based on a most abnormal set of circumstances. And I think if you -- if we just judge Officeworks' performance based on the technical component of the business, it would be a fantastic result, right? But there's a lot of other things that we have in Officeworks across the range that have been very materially impacted by virtue of stores being closed. So I think it's unfair to consider the 6 months that we've talked to has been very abnormal. And these 2 businesses, both Officeworks and the Kmart Group do rely heavily on their store network. They have strong and emerging online capabilities. But the reality is in any other circumstance, other than a circumstance where the government shuts down our stores, customers want to come into our stores. The product resonates, the pricing is good. So I think the issue time will tell, I guess, but we don't have any serious concerns about the viability of the business model of those businesses going forward. When the government is not locking down our stores, they performed very well.

Well, going on to following asking you as the CEO, when I listen to Ian's outlook, and when I listen to Sarah's outlook, I mean, Sarah's outlook was particularly bearish, and your stores are now open. From my understanding, all stores are now open and operating, yet you're still going to have what looks to be a pretty tough second half. So when can we expect these businesses to bounce back, I suppose, is the question? Because that was a pretty tough first half that we have to absorb, Rob.

It was absolutely a tough first half. And look, I guess the comments about outlook, David, it reflects the fact that we still have COVID going through the community. We still have traffic levels -- traffic levels in the major shopping centers are still materially down. And when you think about the product mix of our business -- of the Kmart businesses and the Officeworks businesses, they do lend themselves -- some of the products lend themselves too online. And I'd let Sarah talk -- Sarah, for example, could talk to the phenomenal growth and success that Officeworks are having relative to competitors in the technology space. But there are a lot of other parts of their business that still are being impacted by the fact that many small businesses aren't open at the moment, many larger businesses are not buying what they used to. And the same could be said about Kmart in terms of the traffic levels to high-density stores. So that would be my high-level comments. But Sarah, it might be just to given David's comment on Officeworks and your outlook comments, maybe just talk about some of the category issues.

Yes. Thanks, Rob. So David, it's a good question. I think I was particularly conscious that back-to-school with our Christmas for a traditional retailer. So I thought it was important to recognize and call out the level of disruption that we've seen through this back-to-school recognizing the impact of COVID. We have seen very different staggered return to school from different states and territories. We've also seen self-imposed lockdowns in some states where people have been very reticent through the holiday period come out and shop their back to school. So really, my focus on the COVID disruption and back-to-school being disappointing with a reflection of what we've experienced in January and under that important trading time. I think to your point around the -- is it a blip or is it a long-term trend? I mean, absolutely. I echo Rob's point that when you look at the disruption to our business in the first half, it's nothing that we've seen before. I also echo Mike's point that when you look at the states that haven't seen that level of disruption, the growth is very positive and strong. But we are still living with COVID, and it would be -- I don't have a crystal ball as to how those disruptions will play out over the coming months. But I feel very confident that the choices we're making in the medium and the long term, invest in the business set up very well for success. To Rob's point about the categories, I mean, effectively, we run the 5 businesses, and office supplies and print and create, and I was quite deliberate in my comments in my script, were materially impacted and down year-on-year as a result of store closures. They are heavily driven important margin businesses for us. We saw good growth in technology and good growth in furniture. So that part of our portfolio performed strongly. But clearly, our B2B business particularly targeted, as you know, a small business is very challenged at the moment. We're doing everything we can to support our small business customers. But that is a real impact from print and creates as well, it really struggled with store closures. It's a predominantly store-based business, and a really important traffic driver for us and margin contributor. So equally, I would just call out gets to you our fifth business, not many people wanting someone to visit their house to fix their IT. And obviously, COVID safety was an absolute priority. And whilst we stood up an online help service and remote service, it definitely impacted that business as well.

Okay. No, good answers. I appreciate it. And Rob, just think very quickly, and they're really good answers. But as I said, you can see where I'm coming from other retailers are pretty strong at Kmart and Officeworks, but I really appreciate. But just quickly on the digital side. I know others have asked the question, but I'm just a bit worried when you look at like Catch's performance and you're investing a lot of cash here, is this going to be -- how are you going to monitor this? What's the KPIs here? But all of a sudden, it just doesn't become a heavy cash boon because that's -- I can see the long-term strategic benefits. But will it -- short-term cash boon, I suppose, is a big issue that I'm a little bit concerned about, and that's the second one that my eyebrows raised at.

David, I think Ian spoke to the Catch issues pretty well. And whilst there is an elevated level of investment there, we weren't -- we simply weren't happy with the result for the reasons that Ian mentioned. And that's not something we'd like to continue. But on the broader -- on that investment, we've called out at a group level, the $44 million, which was an increase from $5 million in the prior corresponding period. As I said, I think that's a fairly modest level of investment when you look at the group of our size. And a lot of that is set up foundational investment that won't continue. So we are monitoring it very closely. We -- both Anthony and I -- we look at those costs on a 2-weekly basis, monitor them very closely. So look, I'm quite confident that we've got good controls in place there.

Our next telephone question comes from the line of Shaun Cousins from UBS.

Maybe just a question for Mike on Bunnings. You've called out sort of strong stock levels and availability as having been maintained. Can you discuss, in particular, timber? Because it looks as though treated pines seem to be out stock at different times during the half, particularly how are you managing to source timber, domestic or international? What's your broader availability now? And I guess, how are you handling cost increases pass through? Or is this a category you're absorbing? I'm particularly interested given this is such a pivotal product for the build, please.

Yes. It's a great question, Shaun. Timber does remain a problem, particularly structural timber, engineered timber. One of the great strengths of our business is our commitment to sustainably long timber. So that does preclude a few sources that potentially open to some of our competitors, but I think it's 1 of the things that is really important to us in terms of customer trust. We've got fantastic relationships with mills right across Australia and globally as well. And we're doing things that are quite innovative to bring product in and sort of work around some of the supply chain challenges, one of the simple examples. Because I think we brought the only containers worth moving and taking out of P&G on open-end boats on to the East Coast of Australia, something we would traditionally do. So certainly, no lack of innovation from the team in trying to do things. But the structural timber challenge, I think, remains the sort of the next 6 to 8 months. We've seen a little bit of availability coming back into other markets, in particular, the U.S. from some of the things that deco we've reported on, there are some clear cost pressures in that area. And there's nothing in my sort of views on price that's differ from any of the remarks that have been made today, but we do look at a category and by category basis, and we work with our builders on contract to make sure that we've got things priced appropriately, and we're working really hard with the orders to make sure that we're understanding their sort of needs in terms of where builds are apt to be able to supply the timber that they need. And we certainly look forward to this easing, but it's a demand challenge and the supply challenge clotting it at the same time and not in the way that we'd like it to. So it will be one to watch this space on I think, Shaun.

Okay. Fantastic. And Rob, just a question for you just around your data and digital investments. In particularly, how the divisions are working together. Could you maybe just highlight why did Bunnings and Officeworks, and maybe Mike and Sarah could handle -- could address that, why did they decide to join Flybuys now where they would have had many chances to do so for some time? And I'm just curious around the $100 million sort of spend. What does the central division provide in terms of incremental revenue over and above what divisional management do? Because fundings is a business that's big enough to set up at some subscription model if it needed to. I'm just curious what the working together actually drives in terms of incremental revenue and earnings for the group that the divisions can't achieve on their own, please?

Yes, sure. So look, I'll talk to that at a high level, and Michael and Sarah can add to it. So first of all, with Flybuys, I think there's some really good reasons why now has been the right time for Bunnings and Officeworks to join. And a big part of that is we have also reset the framework that the shareholder partners are working with Flybuys such that we -- each of our businesses has greater rights around the use of data, which is highly complementary to all of our divisional strategies. We also believe when you think about loyalty programs and data insight programs. From a customer point of view, having the capacity to earn more points and get more value across a broader range of categories really matters. And if you think about consumer-based retail loyalty programs, there is no other program in Australia that provides a broader reach that value than Flybuys. So that's another good reason why our retail brands are keen to be a part of it. And then coming back to what's in it for our retailers getting the benefit of capturing -- cost effectively capturing customer transaction data in-store is a really key part of each of our division's growth initiatives. So it's very complementary. I think if you go back, say, 4 or 5 years, probably it's fair to say, and I'm sure Mike and Sarah wouldn't disagree. I don't think 5 -- 4 or 5 years ago, Bunnings and Officeworks, data and digital capabilities we're sophisticated enough to really leverage from the benefit of that data. Coming back to what the group team will do. each of our business -- each of our retail businesses is of a significant scale in its own right. But importantly, each of our divisions has a fairly narrow engagement with the customer in their particular subsector or category. And the real value of what we're seeing with subscription programs is the capacity to deliver more value to the household across a whole range of spend areas. What we've found through our data analytics is that we have some incredibly engaged customers in a particular brand. And based on what we know about those customers and knowing where they live and so forth, it gives us a lot of insight into what opportunities there are for that customer and for our businesses in other brands. And that's really a big part of the value opportunity. But I might add, so ultimately, what is going to differentiate our subscription approach to many others you might see in the market is a couple of things: Firstly, it is going to be led by the power of our brands and the power of the propositions across our individual retail businesses. That is going to be core to this offer. Secondly, it is not just a digital program, it's an in-store program as well. And we think that combination is a very unique combination in the market. And then ultimately, it is delivering more value and convenience to households. So anyway, that are a few comments, Shaun, but I might let maybe Mike initially and then Sarah might want to add some comments.

Yes, entirely in line with Rob to this shift in the sort of construct of Flybuys has been really helpful. And I've got to say it's something we're really excited about it, Bunnings to be a part of. We're seeing really good participation from customers, good engagement from our team in obviously reminding customers about scanning their Flybuys cards. But at the end of the day, what this comes down to for us is roughly accelerating the amount of customer information we have alongside the fact that the investments we've been making and talking about now for 18 months or so in terms of a data and analytics platform means that we've got the tools to use the information with, I think had we sort of looked at this a couple of years ago, one of the constructs probably wouldn't have worked for us firstly. And then secondly, if we had the data, to be honest we probably wouldn't have had anything really to do with it on a meaningful nature. So we're already into some really good activities around understanding ways to engage and connect and personalize message for customers. So this just really hit the accelerator for us. So it's a really positive one, and it's been really well received by customers. It's really well received by our team, and I'm excited about what it's going to deliver us over the next period of time in terms of being able to just deepen that connection and engagement and know a little bit more about customers and some of the newer shopping patterns that they have versus some of the broader trends that we've probably relied on in the past. I don't know, Sarah, do you want to add.

Yes. Look, I agree, Mike. I think accelerating our understanding of our customers and our capabilities has been a key focus with the opportunity with Flybuys, but also delivering great value to customers. We know from the research that was done that Bunnings and Officeworks were the 2 most looked for partners as part of the program, and we can also have the chance to learn from Flybuys, they've got huge sophistication in this space. So certainly, at Officeworks, it's genuinely a partnership, as I know it is with Bunnings, that we're looking to learn from each other. So I think it's very exciting. And once upon a time, Officeworks was part of Flybuys, and I was shocked to see how many of our customers actually were delighted to see it back and have been asking for it in store. So they love it, and it provides great value for them as well as really an exciting commercial opportunity for us.

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

I just wanted to start off with a question around inventory. It was a $1 billion increase in inventory year-on-year on my calcs. Sales were flat over that time. And obviously, you are gearing up for a more disruptive supply chain. But can you just clarify the inventory movement for each of the retail businesses and how much was non-retail related?

Yes. Thanks, Craig. I'm happy to take that question. So you're right. So inventory increased about $1 billion half-on-half. And as you'll probably recall, when we were going into COVID, we made a conscious decision, which we announced to the market around further investments in inventory to prioritize availability over, I guess, more fine-tuning the working capital management, and that's obviously resulted in higher levels of inventory investment that we've made. If you look at the increase -- the key increases which we highlighted were in Kmart and also in WesCEF. In WesCEF, obviously, which is very specifically related to the fertilizer build and the prices of urea at the moment. So that made up about $200 million of the increase. And then the rest was really across the retailers, but primarily Kmart and Bunnings. And in relation to Kmart, as we highlighted and talked about, we probably finished with higher inventories than we would have liked, which was also impacted by the fact that we had the store closures. We then also had labor availability issues in the DC, the domestic supply chains, which limited the stock flow at stores, which obviously exacerbated the ending inventory position. So hopefully, that gives you enough color on the composition there.

Yes, it does. And I guess related to that is just the -- would we expect a similar normalization in clearance activity for Kmart in the second half like Ian called out in the first half?

Perhaps I'll let Ian answer that question.

Yes. Thanks, Craig. Yes, we see clearance levels in the second half of this year being very much in line with historical norms and in line with last year as a percentage of revenue. So whilst we've got a lot of inventory, it's heavily weighted towards [ 365 ]. And probably we've been pretty prudent on seasonal inventory. And as we've been taking on seasonal inventory wherever we needed to. So that's why we believe we are able to manage that inventory and start to wind it down as we go through the second half.

Craig, it's Rob here. You might recall about a year -- over a year ago now when we started talking about inventory and creating a bit of a buffer. It wasn't just a matter of carrying more inventory across every aspect of the product range. It was a far more sophisticated approach at really looking at what lines was absolutely critical to be in stock at all times. So there was an orientation towards increasing inventory weights on [ 365 ] levels. So coming back and thinking about the health of inventory, we feel pretty good about that, notwithstanding the fact that the levels are elevated on what they would normally be.

Got it. I mean just -- hopefully, this is a quick one. Just wanted to understand what proportion of your online in each of the businesses is click and collect?

I might let maybe, Mike, Ian, and then Sarah.

Yes. It's -- the vast majority is a combination of drive and collect and click and collect. So what we found during the lockdown where customers were really keen to get products quickly. And obviously, there's been different challenges with delivery. We have and have had, for a very long time, a very substantial delivery business anyway, and well over 600,000 deliveries a year that are related to in-store purchases as opposed to online, but certainly through the lockdowns, the drive and collect model was probably 85% of the piece, which gave us access to product very, very quickly. And it gave some of the challenges we have in some categories with delivery of chemicals and other sort of goods that are a little bit harder to transport.

Ian here, I'll just go very quickly. Let me just do -- well more than half are time delivery items. That ratio does move around particularly through lockdowns and particularly when there are delays in delivery through the carriers, particularly Australia Post, and we see click and collect at a higher proportion. It's an important part of our offer because we see a lot of value from customers picking up door, and we know they appreciate it, both from convenience and a cost perspective on the way through. But majority is home delivery.

Yes. And from an Officeworks perspective, obviously, we saw with the lockdowns at peak in that but a more normalized level for us is click and collect, customers love it. We have the 2-hour offer. So it sits at around 20% of our total sales. And then obviously, we saw a peakiness to that with contactless click and collect to enable people to shop with us in the first half, even those stores were shut for customers to come in. So in a normalized environment, about 20% of sales.

And one of the obvious problems we had in the first half is although we saw higher levels of click and collect and in some brands -- in excess of 50% in some brands, the shops were shut. So customers weren't -- didn't have the benefit of going inside and picking up other items, which they would ordinarily -- many would ordinarily do when the shops are open.

And our next telephone question comes from the line of Bryan Raymond from JPMorgan.

Just like to go back to the inflation issue that we, I guess, started the Q&A session on. I'm just wanting to understand it more from a Bunnings perspective, specifically because I think that like the mix of business is quite different across Bunnings versus your other businesses given the branded component and the nature of the products and the strength of the brands you're selling. So I just want to get a feel for what sort of cost price inflation you've seen to date coming through from your suppliers. And what percentage of that is being passed on? And whether you think it's still a rational market out there, given you guys are the obviously a market leader across price set, keen to hear your thoughts on how rational the market is continuing to be?

Yes. Thanks, Bryan. That's a great question. Look, it's very much a category based. I think we've got almost businesses within businesses when you sort of think about the way that customers participate with us, be they trade or be they the DIY customer. So we certainly don't look at it as an overall position. We're very committed to the position we have on being an ELP retailer, but also our policy of lowest prices. So clearly, we want to continue to be a strong competitor with a winning offer in the market, making sure that we're investing in customer trust through that value proposition. It's not been a material challenge for us today. I think that is a little bit of the mix across the Board. The noticeable variance that's obviously timber and all sort of, hopefully, my answer a little bit earlier sort of unpack that a little bit. So certainly hasn't been something. We will continue to review it on a case-by-case basis, not only in terms of what we're putting forward for our customers, but also the challenges that our suppliers sort of may face along the way as well. So we'll sort of watch it closely, but we certainly don't anticipate any sort of sharp or sudden movements and any sort of adjustments will be sort of moved across on a category-by-category basis. So hopefully that answers it for you, Bryan.

It does help, absolutely. I guess just maybe more looking forward then. Do you -- if you do get a rush of price increases coming from supply, are you going to look at your price position relative to your competitors or relative to where you are currently in terms of trying to absorb the price rises as much as you can? Or is it a matter of still being just lowest in market relative to others who are also bearing the cost pressures that you guys are just going to understand if that absorption versus pass on if the market remains rational around you?

Yes. Look, I think the market is rational. It's a very competitive market. I think that's something that we go to great length to sort of illustrate it at any point in time when your policy as low as prices, that's your policy, right? So that's the position we want to own. We want to drive a very strong customer proposition. The focus is on outcomes. It's on gross margin dollar not around gross margin percentage. And that investment in long-term performance is absolutely what we have always been and will always be committed to.

Okay. Great. And then just quickly on -- sticking on Bunnings, just on the store rollout. You've got on the Bunnings warehouse side or the large format stores, you'd 2 in the first half and another 2 plants for the second half. It's about half-year level of store rollout that you had leading into COVID on an annualized basis. So just wondering sort of how you see that going forward. Do you feel like that's a bit going to be a slower rollout than what it was between FY '17, FY '19 or should it revert back to that sort of high single-digit warehouses per annum run rate that you saw prior to COVID?

Yes. Yes, we had 3 in the first half, and we've got a few more in a second, as I said. We've been talking now about net 5 to 6 for a few years now. That's obviously a moderation on the sort of rapid growth in the earlier parts of the Bunnings warehouse evolution and probably, again, off the back of the property challenges back in sort of '07, '08, '09. The different story there is square meterage growth. And I think that's the thing that's really important to look at here. So quite a lot of our warehouses now are replacing older or reducing warehouses with stronger broad offers. A good example was we used a couple of years back was carrying by, I think, it was something like 10,000 meters of increased space in the same site. So it's not just about a net number of these stores, but it's also space growth, clearly got fantastic opportunities to expand and make sure that our stores are appropriately sized for the markets that they're in, and we've taken markets like Wonthaggi in Regional Victoria, where we've got a small warehouse, and we'll open a larger warehouse as the market out there has grown. And in the open suburbs of Melbourne. We've got a huge new warehouse something in Preston, which will replace our fourth ever Bunnings warehouse at Northland and our small format store in Fairfield. So there's a lot more inside that sort of network development that is there and perhaps if it works, there's more detail we can give you offline to help you with that.

And our next telephone question is from Ross Curran from Macquarie Group.

Rob, just following on the topic of growth. If we go back to the platform for growth you put up on Slide 6, and you talked about the new health division. Can you just help us understand how big that could be? How quick you can be? And what sort of return hurdles you thinking about that business going forward?

Well, Ross, our core focus at the moment is trying to work through the API process. So shareholders will vote on the proposal next month. And then if that goes well, then we'd get ownership at the end of March, early April. So the first focus of the growth in the health care space has continued to invest in the growth and improvement of performance within API. And there are lots of different -- there are a number of different businesses within API, many of which we think all have good growth perspectives, both organic growth and also potentially bolt-on M&A growth. We'll continue to look at other areas of health care, but the approach we take for any acquisitions will be consistent with what it always is, which is we want to be sure that it was going to deliver a satisfactory return to our shareholders that there was a reason why we could add value to justify the price that we'd need to pay. The other point I'd like to make is that we really want to spend a bit of time once we get control of API to engage the team at API, learn more about the business and the opportunities before we get too far ahead on future growth investments.

And our next telephone question is from Adrian Lemme from Citi.

Look, just a question related to Kmart and Target. Picking up on Ian's comments earlier about orders of say, 6 to 7 items having to be shipped from various stores. Just thinking about whether there's an opportunity or there's a decision point at some point to start centralizing fulfillment like what Officeworks has done to make things more efficient, please?

Yes. Thanks, Adrian. In-store picking is very efficient, particularly when you have capacity in existing retail stores, and that's one of the reasons why we pick from stores, but it comes with the challenge of availability across all items. And of course, that availability has been under more pressure for all the reasons that we discussed on this call already through this half. We've also had a line of sight through to the future with much higher volumes, which obviously then further compounds that. So it is something we're looking at for the future is to probably more of a hybrid model where we still see in-store picking as the vast majority, but looking to supplement that, so that we can ensure single parcels or a rider customer store step, which is what they're looking for. And we're looking to see how we can leverage that across the group at the moment. So work in progress, but certainly something is what I want.

Excellent. And I'll just ask one other question, please. Just in relation to the COVID costs. I understand January has probably been the peak in terms of staff isolating. Obviously, with cases coming down, can you sort of gives a feel should we expect sort of first half $80 million to be down to where the second half might land? Or should we expect that to be higher, please?

It's Rob here. Look, it's too early to predict that. We are seeing things improve fairly significantly through this month. So we're seeing the level of COVID cases materially reduced. At this stage, we don't have any material trading restrictions. So that helps a lot, but we'll continue to see some ongoing costs around COVID-safe practices. So we can provide more insight on that in June.

And our next question comes from the line of Richard Barwick from CLSA.

First question for Ian, on Catch. You've made clear that you're obviously not happy with the outcome achieved in this half. And one of the reasons you gave is that the marketplace had outperformed the in-store base. What underpinned that do you think? Is there any sort of issues that are worth calling out? And then I'd love to hear your thoughts as well if this result was a disappointing one, what are your expectations over the next couple of years? And what's the at least the timetable of getting back to -- towards breakeven does that look like?

Yes. Thanks, Richard. I think on the first one, so I'm not disappointed in the marketplace, so I was more disappointed with in-store product. I know you probably picked up to on the way through. And effectively, we're looking to grow both of those parts of the business. And we don't see it as we want to grow one off the expenses of the other. But clearly, we'll be growing marketplace at a faster rate than in stock. And if you look at it, we've been adding layers and so therefore, we've been adding SKUs in significant numbers. And so the raw math would say that the quality of the offer is improving at a faster rate in marketplace than it has in-stock, and as that of the outcome that we're seeing. So probably encouraging signs on the marketplace, but still works still on the in-stock piece. I think you should expect to see us continue to invest. We've used that work consistently with Catch and we bought a business for $230 million, which was a deal based online business with the marketplace. And we knew there was a lot of internal infrastructure we needed to build from distribution centers, through to technology capability, through to team capability across many functions in order that we could achieve our longer-term aspiration. So I definitely think we're going to continue to see a focus on investment over the next period of time. And clearly, we're looking to improve the trading position through in-stock over the next 2 years. And so that we can see a greater level of growth in our overall GTV, which will obviously start to dilute those losses. But we're very focused on making sure we build the right capability at this point.

All right. And then, Rob, lots of chat -- lots of questions around the data capabilities. And I guess it's a little bit of a dark art in terms of trying to judge what your competitors are doing. But I'd love to hear your thoughts or any comments you might make in terms of how you think your businesses currently stack up relative to their key competitors in each category. And then if you think you're prepared to think a bit more broadly and how they might stack up relative to what you'd consider best-in-class?

Well, look, I think, Richard, we've come a long way in the last 4 years, and we continue to make really good progress. I'd say every one of our businesses would say that there's still a lot we can do better. I think the point at which we would claim that we've reached the end. We're probably missing the point here. So look, I think there's -- as I said earlier, a lot of what we're doing is just becoming so ingrained into the continuous improvement processes within our businesses, integrated into different aspects of our marketing, our customer communication, our merchandising, our operations, our supply chain. So it's becoming harder to separate out and talk about these things separately. I think the area that is new, that is evolving. And unfortunately, we will keep you a bit in the dark on this because of the commercial sensitivity of it is what we're proposing to do with OnePass and the group customer data asset. And look, you'll see more about that on the year ahead, and we hope we can deliver something that will resonate really well with customers and something that will be value accretive for our retail businesses.

Okay. And just 1 final quick one. You obviously talked about the -- forming the new health division. How broadly you're defining health would it include [indiscernible]?

Well, consistent with the way we think about opportunities, we define it as broadly as we think we can generate a satisfactory return on. So just to be really clear in Wesfarmers when we think about investment, it's very much guided by -- very much guided by our view on the ability to deliver returns to shareholders. So there are some areas that are very logical adjacencies to API that you could reflect on, the health beauty, wellness space is a very broad and rapidly evolving space. So we're sure we'll be able to find some opportunities to strengthen the business, capture some of that growth and deliver some good returns to shareholders. Yes, that's right. So look, thanks very much, everyone. I'm sorry, we went a bit over time. If you have any questions, please give Simon a call and look forward to seeing some of you in person in the weeks ahead. Thank you.

That concludes our conference for today. Thank you for participating. You may all just now disconnect. Have a great day and goodbye.