Wesfarmers Limited (WES) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for holding, and welcome to the Wesfarmers 2023 Half Year Results Briefing. [Operator Instructions] This call is also being webcast live onto the Wesfarmers website and can be accessed from the homepage of wesfarmers.com.au. I would now like to hand the conference over to the Managing Director of Wesfarmers Limited, Mr. Rob Scott.

Well, hello, everyone, and welcome to Wesfarmers 2023 Half Year Results Briefing. I'm joined here in Perth with our divisional Managing Directors and our CFO, Anthony Gianotti. This morning, I'll provide an overview of the group's performance and progress on strategic priorities, then Anthony will discuss the financial performance in more detail. I'll then conclude with the outlook for the group. And then Anthony and our divisional Managing Directors and I will be -- will welcome the opportunity to take your questions. So I'll start the presentation off on Slide 4, which is a slide that will be familiar to most of you. Our objective is to deliver a satisfactory return to shareholders over the long term. We try and achieve this through strengthening our existing businesses, securing growth opportunities through entrepreneurial initiative, renewing the portfolio and ensuring sustainability in everything we do. This means anticipating the needs of our customers, looking after our team members, treating suppliers fairly and ethically, contributing positively to the communities in which we operate, taking care of the environment and acting with integrity and honesty. Overall, we're making good progress in these areas. And as a group, we have exited the COVID pandemic in a much stronger position than where we entered it a few years ago. Now turning to Slide 5, which sets out the highlights for the half. I'd like to talk to 3 key takeaways from our results. Firstly, the pleasing financial results for the half highlight the strength of the Wesfarmers portfolio of businesses and operating model. The group's net profit after tax was $1.4 billion, an increase of 14.1%. Our largest divisions performed particularly well during the half, with Kmart Group earnings more than doubling, a near 50% increase in the earnings at WesCEF and another strong result at Bunnings. The businesses responded well to market conditions during the half and, in general, are benefiting from strong execution and operating results as they progress efficiency and productivity initiatives, continue to execute their strategies and begin to realize benefits from investments made in recent years. The second point is that the group's portfolio is well positioned to deliver returns to shareholders over the long term, with progress made on key strategic initiatives. And finally, as always, we've maintained our focus on long-term value creation, consistent with our core objective. Now turning to Slide 6. At a divisional level, our businesses continue to make good progress on their strategic agendas with strong results for the half. I'll use this slide to touch on some of the key points, and then Anthony will provide more detail on the financials. Bunnings delivered another strong performance, highlighting the strength and resilience of its operating model. Bunnings further strengthened its consumer offer during the half through refresh and expansion of product ranges and the trial of new store and store formats in some categories. On the commercial side, investments in CRM technology are providing greater flexibility and value to commercial customers, while recent expansions to Bunnings' frame and truss operations allow it to meet growing demand and support deeper engagement with customers at the commencement of a build. Bunnings has made significant progress on its digital agenda in recent years, and engagement through the PowerPass app, Flybuys scan rates and the strength of its educational and social content continues to improve. With Kmart, it's clear that their low-price positioning and differentiated offer are resonating with customers, and Kmart Group's performance this half reflected excellent operational execution in addition to the impact of cycling the lockdowns last year. Kmart's focus and investment on digitizing its operations, both in stores and through the supply chain, are delivering productivity and efficiency benefits and help to mitigate cost pressures faced during the half. Target continued to deliver improvements in its product offer, particularly in its focus categories of apparel and soft home. This half was also the first period of generally uninterrupted trading since the major network changes across Kmart and Target were completed, and it's pleasing to see the benefits of this significant program of work coming through in the results. With WesCEF, very strong operational performance meant that they were able to take advantage of the favorable commodity price environment, and the division delivered record earnings for the half. We continued to make good progress at the Mt Holland lithium project with first ore stockpiled at the mine in December, and we expect the first earnings from the sale of spodumene concentrate in 12 months' time. You would have seen in the release material that we've provided some updated timing and cost estimates for the project with these changes relating principally to the Kwinana refinery. The Covalent team have managed the COVID disruptions and inflationary challenges well, but there have been some increases in CapEx estimates that Anthony will touch on soon. Officeworks saw increased demand across key categories that were impacted by lockdowns in the prior period. Recent investments in modernizing its supply chain supported productivity improvements at their new Victorian customer fulfillment center and will further strengthen Officeworks' omnichannel proposition. Industrial and Safety again improved its performance, benefiting from a disciplined focus on meeting customer needs and driving productivity benefits, and a highlight was the final deployment of Blackwoods' ERP system. In the new Health division, transformation activities were accelerated with investment in supply chain capabilities and technology that will strengthen the competitive position of API and its pharmacy partners. We continue to make good progress with the key data and digital initiatives across the group. The focus and investment across our divisions is starting to pay off. And whilst there is still much to do, we have turned our focus over the last year on developing capabilities across the group that will drive deeper digital engagement with customers and leverage the best that our stores and digital platforms have to offer. An example of this is the OnePass membership program, which was further strengthened during the period with Bunnings joining the program in November and the announcement of a multiyear strategic partnership with Disney providing a unique bundled discount to OnePass and Disney+ members. The strong progress with our digital agenda makes the performance of Catch this half particularly disappointing. Catch was slow to adjust as online demand moderated post COVID, and this was compounded by some operational and executional challenges. We've taken decisive actions with restructuring activities commencing in the half and a new Managing Director, Brendan Sweeney, joining the business in October. Now moving to Slide 7. As mentioned earlier, we believe that the portfolio is well positioned to deliver returns to shareholders over the long term. The portfolio is comprised of strong businesses with clear competitive advantages. Across the major retail businesses, we expect to benefit from our trusted brands, strong value credentials and omnichannel offering with these businesses underpinned by large-scale, low-cost operating models and differentiated own brands and exclusive products. With WesCEF, they have a track record of operational excellence and also strategically positioned manufacturing and processing capabilities with access to key raw materials and close proximity to customers in critical industries. We've recently established new avenues for value creation in the areas of health care and in critical minerals. These are new sources of value for shareholders that are not reflected in current earnings. We're pleased with the progress at Mt Holland, and the team continues to explore capacity expansion opportunities to meet the strong demand for lithium produced in Australia. A little under a year ago, we invested in API. And whilst the transformation is only just accelerating, we believe this new division has the potential to deliver returns to shareholders over the long term and is a platform for value creation. In recent years, we've significantly expanded our data and digital capabilities, as I mentioned earlier. And today, we average over 210 million digital interactions with customers each month, nearly 3x greater than in the 2019 financial year. And we've shared some information on Slide 51 that I'd refer you to. We continue to accelerate the growth of our OnePass program, and whilst it's very early days, the program is already delivering valuable customer insights. From the early data to date, we see that OnePass members are generally a younger cohort of customers that shop with greater frequency and increase their spend across the group after joining. OnePass is complemented by our large-scale loyalty and membership programs in Flybuys, Sister Club and PowerPass at Bunnings, which all deliver value for customers and provide the group with unique insights across different customer cohorts and demographics. The quality of the group's data has materially improved in recent years. And during the half, over 55% of our retail sales were to known and contactable customers compared to about 34% a few years ago. Through better understanding our customers, we are better able to anticipate their needs and improve the efficiency of our businesses. We know our most valuable customers shop with us both in-store and online. And one factor that differentiates Wesfarmers' data and digital ecosystem is the group's extensive store network. Today, Click & Collect represents 30% of online sales, which drives foot traffic in store and improves profitability. Now turning to Slide 8. During the half, we continued to build better outcomes for the environment, our team and the communities in which we operate. Recognizing it's linked to long-term value creation, we continue to build climate resilience in our businesses. For the half, we achieved a 15% decrease in Scope 1 and Scope 2 emissions from our major retailing divisions. At a group level, emissions increased with this largely driven by higher ammonia production following the planned shutdown in the prior period and the addition of the new Health division. Adjusting for these 2 factors, the group's emissions declined for the half. The group's TRIFR result increased on the prior period with this change -- due to a change in reporting methodology at Bunnings as well as an increase in manual handling injuries in Bunnings. We remain firmly committed to improving our performance in this critical area. It was fantastic to see the group retain indigenous employment parity with Aboriginal and Torres Strait Islander team members representing 3.4% of our Australian workforce. Now turning to Slide 9. You can see the summarized performance for the group. I'll now hand over to Anthony, who will talk to this in more detail together with the group balance sheet and cash flow.

Thanks, Rob, and hello, everyone. On Slide 11 in the presentation, we provide some of the detail on sales and revenue growth across the group. But I'll start on Slide 12 and speak to sales and earnings together for each of our divisions. For Bunnings, sales growth of 6.3% for the half reflected growth across all major trading regions and in both the commercial and the consumer customer segments. It was pleasing to see customers' shopping frequency and foot traffic to stores increasing during the half. However, spring trading results were affected by the prolonged period of wet weather experienced on the East Coast with consumer sales in garden and outdoor living categories that most impacted. Bunnings continued to focus on delivering great value for customers with ongoing investment in price during the half. Inflationary cost pressures impacting cost of doing business were well managed through disciplined cost reductions and tech-enabled productivity improvements. Pleasingly, Bunnings continued to invest to support its strategic agenda across digital, supply chain and expanding the commercial offer. Overall, Bunnings earnings increased 1.5% to $1.3 billion for the half or an increase of 2.1% excluding the net contribution from property sales. Kmart Group delivered significant sales and earnings growth in the half with earnings increasing 114% to $475 million, underpinned by the strength of Kmart's lowest price position and strong execution during the period. Kmart Group's result reflects a strong rebound from the significant impact of COVID in the prior year. But importantly, comparable sales results demonstrated good underlying demand growth over and above the benefits of cycling lockdowns. Kmart's comparable sales increased 17.1% and was supported by growth in both comparable transactions and units sold in the half. Target's comparable sales increased 2.8%, reflecting continued improvements in its product offer. As Rob's already noted, a disciplined approach to cost and margin management were a feature of Kmart Group's performance this half in what was clearly a more challenging cost environment. Rapid changes in exchange rates, higher international freight costs, increased shrinkage and general cost inflation pressures all impacted earnings in the period, but Kmart was able to leverage its scale and sophisticated sourcing capabilities to defray some of these costs. WesCEF delivered record earnings of $324 million for the half. The strong result was supported by continued favorable prices for LPG, ammonia and related products as well as an increase in the production of ammonia following the significant planned shutdown that took place in the prior corresponding period. The WesCEF result also includes its share of operating costs associated with the development of the Mt Holland lithium project, which increased during the period as activity accelerated. Officeworks sales increased 4.6%, and earnings were up 3.7% in the half. Sales were supported by an increase in demand across key categories that were most affected by lockdowns in the prior half, including print and create, stationery and art and education. Sales growth also continued in technology categories despite cycling elevated levels in the prior corresponding period. Higher levels of promotional activity and technology, particularly across the highly competitive Cyber Week, impacted margins during the half. This higher promotional activity was partially offset by a shift in sales mix towards higher-margin products. Industrial and Safety delivered another pleasing improvement in performance with earnings growth of 14.6% supported by higher sales across the division, stronger margins in Workwear Group and Coregas, along with a modest gain from the sale of the Greencap consulting business during the half. These factors were partly offset by higher cost inflation in Blackwoods, which adversely impacted margins, as well as higher costs associated with further investment in digital capabilities, including the final deployment of the ERP system. In Wesfarmers Health, sales results were supported by both new customer acquisition and growth from existing trade partners in the wholesale business. Sales also benefited from elevated demand for COVID-related antiviral products. But as you would expect, sales of these products will moderate as community COVID infections decline. Health earnings of $27 million reflected continued progress on transformation activities with investment in supply chain capabilities, network changes and merchandise strategies accelerating during the half. Earnings in Health also included $7 million of noncash expenses associated with assets recognized as part of the acquisition. As Rob acknowledged earlier, the financial performance of Catch for the half was disappointing. And while some of the moderation in GTV was a product of broader market conditions, sales were also impacted by poor range selection and execution issues in the first-party business. As a result, Catch incurred elevated clearance costs during the half in order to address slow-moving stock. In addition, Catch incurred higher fulfillment and delivery costs associated with commissioning issues at the new Moorebank fulfillment center and elevated fuel costs during the half. Reflecting some of the actions taken to address recent underperformance, Catch's result also includes $33 million of restructuring costs relating to inventory provisions, team member redundancies and asset write-offs. Turning now to Slide 14 and our other businesses and corporate overheads, which reported a loss for the half of $75 million. The main driver of the loss was the reduced contribution from the BWP Property Trust, which saw a significant reduction in upward property revaluations compared to the prior corresponding period. This was partly offset by higher earnings from the group's interest in Wespine and Gresham during the half. As outlined at the full year results, we continue to invest in the development of the OnePass membership program and the group's customer and data insights capabilities with a net cost of $41 million for the half being broadly in line with the $40 million that we reported in the prior corresponding period. Corporate overheads were slightly higher at $78 million for the period. Turning now to working capital and cash flow on Slide 15. Divisional operating cash flows increased 13.4% for the half with divisional cash generation of 97%. While this result remained below what we would typically expect in the first half, we did see an improvement from the position at the full year as the business' working capital positions continue to normalize. The improved cash flow for the half was driven by growth in divisional earnings and strong cash generation in Kmart as supply chain conditions improved and the level of buffer stock held reduced. These benefits were partially offset by 3 factors: firstly, the continued normalization of inventory cover in Bunnings as well as higher levels of stock investment in direct-sourced products in line with business growth; secondly, lower payables at the end of the period across the retail businesses due to an earlier-than-normal stock build to avoid supply chain disruptions in the lead up to the busy Christmas trading period. This meant that payments typically made in January fell earlier in December; and finally, the impact of higher fertilizer prices on inventory in WesCEF as the business builds stock prior to the peak selling season in the second half. Barring any further COVID disruptions, we do expect to see further normalization of working capital balances through the second half. Group operating cash flows increased 26.7% to $1.97 billion, reflecting higher divisional operating cash flows as well as lower tax paid due to the timing of tax installments and lower installment rates during the half. Free cash flow for the half increased 43.8% to $1.36 billion, reflecting the impact of acquisitions in the prior corresponding period, partially offset by higher capital expenditure during the half. Moving now to capital expenditure on Slide 15. The group invested net CapEx of $676 million during the half, an increase of about 16% on the prior corresponding period. This was largely driven by $204 million of project CapEx and $21 million of capitalized interest in relation to the Mt Holland lithium project, along with the addition of the Health business and increased investment in data and digital projects across the group. Proceeds from the sale of PP&E declined for the half, largely reflecting the timing of Bunnings' property disposals. For the 2023 financial year, we expect net capital expenditure for the group to be between $1 billion and $1.2 billion. This estimate includes around $400 million to support the development of the Mt Holland lithium project and a further $40 million of associated capitalized interest. Estimates for WesCEF's share of total CapEx for the Mt Holland lithium project have been revised, and we now expect total development CapEx excluding capitalized interest of between $1.2 billion to $1.3 billion in nominal dollar terms. The updated estimate represents an increase of around 10% to 20% on the guidance that we provided at the time of FID of approximately $950 million in real 2021 dollars. This equates to approximately $1.1 billion in nominal dollar terms if escalated at actual and forecast CPI. The updated guidance has been provided in nominal dollar terms in order to provide greater clarity on the actual investment we are making and what will ultimately be recognized on our balance sheet. The expected increase in capital cost relates principally to the refinery and is largely due to COVID-related disruptions to key infrastructure items sourced from offshore and some engineering delays. Turning to the balance sheet and debt management on Slide 16. The strength of our balance sheet continues to provide significant flexibility and capacity to support investment in growth initiatives across the group and to take advantage of value-accretive opportunities as they arise. The group has benefited from actions taken over the past 2 years to reposition the balance sheet to optimize the cost and maturity profile of our debt. The average cost of funds for the half declined from 3.7% to 3.06% with a weighted average term to maturity of 4.6 years. As at the end of the first half, Wesfarmers had available unused bank financing facilities of approximately $2 billion. Our strong investment-grade credit ratings from Standard & Poor's and Moody's were maintained, and the group retains considerable headroom within its key credit metrics. And finally, the dividends on Slide 17. The Board has determined to pay a fully franked interim dividend of $0.88 per share, representing a 10% increase on the prior year. The dividend is in line with our historical interim payout ratio and consistent with our dividend policy, which takes into account available franking credits, balance sheet position, credit metrics and cash flow generation. Thank you, and I'll now hand back to Rob to cover outlook for the group.

Thanks, Anthony. Turn to page -- or Slide 19. So through the first 5 weeks of the second half, our retail divisions continued to trade well, and trading has been broadly in line with the divisional sales growth reported for the first half. As inflation remains elevated and high interest rates are impacting demand in parts of the economy, households are facing headwinds and becoming more value conscious. The group's retail businesses are well positioned for this environment with their strong value credentials and low-cost operating models. There are also increasing cost of doing business in Australia and New Zealand, such as rising cost of labor, labor shortages, higher energy and power prices and higher costs in domestic supply chains and transportation. Our businesses are well progressed with key productivity and efficiency initiatives across these areas that are -- where the costs are within our control. In summary, we continue to invest to strengthen our existing operations and develop our platforms for future growth. This includes WesCEF, Covalent lithium and our new Health division. And we believe that the actions we've taken in recent years, together with our strong balance sheet and high-quality businesses, make Wesfarmers well positioned to deliver satisfactory return to shareholders over the long term. That ends our presentation, and we're now happy to take your questions.

[Operator Instructions] Your first question comes from Shaun Cousins from UBS.

Maybe some questions on Bunnings, please. Can you maybe just address a few small issues, just the headcount cuts that occurred in the first half and any extra warehouse cost for inventory? And then more on the first half '23. What drove the group property [ NPAT ] margin compression? Costs are rising. You might have invested in price. And if there was any price investment or price rises occurring later, should that be seen as an enabler of ongoing market share gains and then, hence, a more resilient profile of the revenue line there, please?

Thanks, Sean. Well, I think ultimately, we have a really resilient business model. But I'll start with margins. We are very returns focused. And I think when you look at the long term, the margin is broadly in line. And we're really continuing to ensure that we have a really strong value proposition in the market for our customers and earn the right to be chosen every day by them. And obviously, we really want to stay focused on maintaining our low-cost operating model. The headcount changes you mentioned in the first half, they are very, very small. And they are really, from a practical point of view, some realignment of a couple of functions. In a post-COVID environment, we're able to actually get back out and spend time with our team rather than necessarily run things from more of a sort of a support center focus. And the change in margin from last year is really price investment. As you know from what I've said in the past, it does vary significantly category to category. We've got inflation in some categories, deflation in others and movement in COGS that sort of goes up and down. So we are very, very focused on that value proposition. So I think when you sort of think about going forward where we're positioned, we want to continue to invest for long-term growth. That's very much at the heart of what we do. We've got some really good leverage through our operating model in our stores and ability to flex labor up and down very, very quickly and also leverage some of the sort of tech investments we've made around point-of-sale registers trade desks, those sorts of things to be able to drive more productivity through the store network, which sets us up to be able to make the investments we need to make for long-term growth. And on the warehousing costs, I think that one's a bit of a [ fair fee ] to be honest. We always increase warehouse space over the summer. We've done that every year that I can remember in the 17 years I've been in Bunnings. It was really just an outcome of access to sites. We ended up with a couple of sites more than probably usual because we couldn't get the bigger sites. So really, it just normalize itself out and not much to say in that space.

Your next question comes from Adrian Lemme from Citi.

Just a follow-up question to Shaun's. The way I understand it, most of the margin [ acquired ] in Bunnings is price investment. So correct me if I'm wrong on that. But if I look at the COVID costs this half, I understand they're not material as [ we've seen ] they were in the order of [ $40 million ] for Bunnings. So that to me indicates about 100 basis point underlying decrease in margin. Now I understand that you want to invest in pricing to stay competitive. But I'm trying to understand as the market lead up why you wouldn't be putting -- passing on the price increases from suppliers. Is there increased competition in the market? Or are you concerned about volume impact to price increases, [ please ]?

Well, I think it's a fiercely competitive market, and we sort of go to great lengths every year to sort of point that out, and it does sort of swing around category to category. And for me, it's very much around the customer value proposition and having long-term trust. But it's a really rational approach we take. We're moving hundreds of prices every day. Some are going up. Some are coming down. We're now starting to see price decreases from some of our suppliers. We absolutely pass them on when we need to. But it is striking that balance, and it is also about investing in long-term growth. We've got very strong growth aspirations. And I think when you look at our sort of EBIT margin and you sort of model it over the last decade or so, there's a real consistency to that, which reflects the very long-term approach we have to growing the business in a really profitable and sustainable way.

And can I just ask one clarifying question on the price investment as it relates to growing to new market segments. Is part of that trying to push that further into trade? I know you're trying to increase the mix of sales and trade [indiscernible].

Yes, look, ultimately, when -- the sort of trade customer that we go after, Adrian, is very much the small to medium builders. So we're not chasing the really large volume builders where margins are really, really tight. We sort of see the customer margin mix between that sort of customer and the retail consumer as quite similar. And yes, we've got a stated position to grow commercial to a more significant part of our operating model, which I think gives us further resilience. But I don't think you should read into that, but there's a significant swing in margin between consumer and commercial. And the lift in commercial in the half, there was, but that's in line with our strategic ambitions, but it wasn't a material shift either.

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

Rob, look, I don't want to be focusing on the negative. I think this is a great result, and you're doing a great job across the board. But when you're losing $100 million from a business as peripheral as Catch, I think we need to discuss it. And look, I don't [ want to sound condescending ], but as you know better than anyone, growth is pretty hard to get. And to bleed $100 million of cash from Catch is, frankly, just unacceptable, as you've highlighted. My question is what can we, as investors or market followers, expect going forward? How much pain are you prepared to put up with? How much patience do you expect us to have? Because if this business doesn't improve, like if the consumer does weaken in the second half, which seems to be what most pundits are believing, one would have to expect that performance could get worse before it gets a little better. So can you give us a bit of an overview as just what to -- because the business is going well. But it's just a shame that you're just going to bleed so much money here and you're offsetting such a good performance across the other businesses. I mean your investments in Kidman is doing -- lithium is great. Bunnings is great, Kmart is coming back. But to bleed this on Catch, it's just ordinary. So what can we expect going forward here, Rob? Are we -- do we put $200 million loss in for the full year? Is it going to get worse next year? When are you going to cut it? Can you give us a bit of an overview as to what you're thinking going forward? Because it's pretty -- it's now in the 2 important basket, this one.

Yes. Well, David, firstly, look, I agree with you. It's not good enough. It's unacceptable. We're not satisfied with this at all. So what can you expect? You can expect that we are taking very serious action to improve the financial performance. So we would expect -- well, we would demand that the financial performance improves from here on. There are a number of things that are well within our control to improve the financial performance. There are other very deliberate decisions we're making around investment, such as the development of the Moorebank facility and the Fulfilled by Catch solution. We're still pleased about directionally where that's going and the opportunity to deliver value for the group there. Unfortunately, this year, we're incurring a net cost around that. But over time, we're confident that, that will deliver value. The other thing, David, with Catch is that we still see opportunity financially for Catch within the group, but not at any cost, right? Not at any cost. Now we have a lot of flexibility around how we scale up or scale down the investment. So that is within our control. So we'll make very commercial decisions going forward. So I would expect that the earnings loss will improve in the second half, and we'll make very deliberate decisions around the investment we're making. And if we're not seeing the value come through either at the Catch level or across the group, then we'll materially cut back on that investment. But I guess it's going to be a disappointing year for Catch, but it will need to improve. It will need to improve materially in the years ahead, or we just simply won't keep investing at the current level.

Look, partly not investing in it, that's [ okay ]. But how hard will it be to exit it? Is there barriers to exit this business? Is it too entwined with Kmart? Because I remember, the investment originally was under Ian Bailey. And I don't want Ian Bailey walking away from this one too easily because my understanding was that he was knee-deep in this acquisition as well. So is it implied in the businesses here that you can't get out? It seems to me that this is...

No, certainly not entwined, David. We made a very deliberate decision to keep the business quite -- with a separate management team. Obviously, there have been certain things that we've pursued around Fulfilled by Catch and some of the product-sharing capabilities but are very much on an arm's length basis. So no, look -- and I'm optimistic that we can improve the financial performance and create value for shareholders, but there are various options that we could consider. This is inherently a valuable business. We've made a few mistakes. We need to fix it up. And I guess I'd say just judge us by what we do over the next year or so. But clearly, I see the current level of losses is totally unsatisfactory. So we're not going to accept that over the longer term.

Your next question comes from Michael Simotas from Jefferies.

Can I just follow on with a little bit more detail on Catch? What -- can you quantify the benefits that you'll get from the 300 -- sorry, the $33 million spend on restructuring? And are you sort of comfortable with the shape of the business for now and you just need to execute better? Or are we likely to see more restructuring come through?

Michael, sorry, I might just make one quick comment on that, and then Anthony can provide the detail on the provision. Look, I think it's worth acknowledging that we made some very deliberate decisions around investing heavily in the business through COVID. We invested very heavily in range and inventory. We dramatically expanded the first-party retail business, which was not a core capability of the old Catch business. We invested heavily in supply chain capability, technology personnel. And then we saw the market adjust very dramatically faster than we expected around decrease in online transactions. So we clearly overinvested. The provision is really focused in on resetting some of that overinvestment, but I'll let Anthony talk to the specifics.

Yes, Michael, just in terms of your question around the $33 million, about 2/3 of that, so about $20 million, is related to further stock clearance activity that we have to undertake. So as we called out, there was a level of stock clearance that was undertaken during the first half, but there's more work to do to reset the first-party business. And so we expect some further clearance activity into the second half and $20 million is in relation to our stock provisions for that. The balance is partly to do with the redundancy program, which was announced at the end of January. And so that has largely been done, and we'll start to see some benefits of that from a cost perspective as we go through the half. And the other piece, it was some write-off of some plant and equipment at the Truganina DC as we restructure some of that, so it's just a component of that. So that pretty much makes up the $33 million restructuring provision that we took at the half.

Okay. Just a clarification. So just in terms of the business as it stands now in terms of the assets in it and the number of people. Do you think there's a weight or a path to value creation for the group in its current form? Or are you likely to need to make more adjustments?

No. Look, I think overall, the reset of the cost base, the headcount, the refocusing of the first-party retail business provide a basis from which Catch can move forward and develop a profitable and viable business. Like clearly, we are continuing to invest in a very deliberate way in the business. So we're confident that at least this reset is going to materially improve financial performance. I think it's also important, and while it's not diminishing the disappointment we have in the performance, we have made some very significant investments in data and digital across the group over the last 4 or 5 years. Overwhelmingly, those investments have added material value to our businesses and the group. Not everything has gone right as we've gone through that process, but more has gone right than has gone wrong. We are looking to learn from the disappointing result within Catch and adjust very quickly, and we'll continue to monitor it very closely.

Your next question comes from Craig Woolford from MST Marquee.

I think I'll continue on the Catch theme, but more about how it relates to the broader retail businesses. You've got the 2 automated DCs that can be used for delivery. And the sense that I got from the Strategy Day was that OnePass would allow you to use the DCs from Catch for deliveries. Is there much volume going through those Catch DCs for the Wesfarmers retail businesses? And does it impact your thinking around online delivery, which is, as you've called out, about 70% of your online orders?

Yes, Craig, I'll let -- look, I'll let Ian and Nicole can talk in more detail about this. But there are various strategies that we're pursuing to build more capacity and to improve the efficiency of e-commerce fulfillment across the group. And our Officeworks are obviously very well advanced in terms of the use of automated technology within their Melbourne CFC. We have adopted exactly the same technology and software within the Moorebank facility. So there's some obvious synergy there. And then the Moorebank facility is providing a solution that is expected to deliver better cost outcome than Kmart is currently able to deliver. So there are various strategies that we are pursuing. This will continue to evolve. We see Catch is providing some optionality around this, leveraging technology and capability across the group. But it's not the only solution that we can pursue. I'm happy to provide -- let perhaps Nicole or Ian provide more context if you'd like. Maybe Nicole?

Yes, sure. Yes, we're actually really happy with the performance of Moorebank now. We've invested in that heavily, working closely with the Kmart Group. We did a pilot for their online orders in New South Wales. And that has been successful, and we're looking to scale that. I think the other thing to call out is we introduced next-day delivery in Metro Sydney and Melbourne running into peak, and that was also very successful. So we're looking at expanding that. But fulfillment in all e-commerce business is a key focus, and we just need to keep improving. And if we can drive those efficiencies for not only Catch but also for the wider Wesfarmers and Kmart Group, then I think that's a really good outcome.

Your next question comes from Lisa Deng from Goldman Sachs.

Just wanted to understand the GP margin trend for some of the key retail businesses, especially Bunnings and Kmart. It looks like the raw material cost, if I'm just looking at the group, grew by 35% year-on-year. So I just wanted to understand how it sort of folds into each of the group's [ overall ] businesses.

Lisa, as you know, we don't provide specific details on gross profit margin. I think we could get -- I think Mike's already answered that question pretty well around how they have dealt with price investment, having regard to cost increases. The other point I think you need to recognize with Bunnings as well is that the margin differential between commercial and retail and the significant difference that we observed in the first half around sales growth. So mix has an impact on margin in short-term scenarios like that. Might let Ian provide some observations around how we're dealing with price and cost generically within Kmart and Target. And then if you like, Sarah can comment on Officeworks.

Yes, just briefly, Lisa, we -- very much like Bunnings, we try and figure out how do we maximize the EBIT dollars that we can generate in any given year. And so of course, we'll look to figure out what's the right margin, what's the right price point to hit and the resulting margin that flows from that in order that we can maximize that outcome. As you can see through the half, we did pretty well on turning the sales into profit dollars. So clearly, there hasn't been a major movement within that margin number. And certainly, I'm pretty happy with how it's currently trending as we manage pricing implications as well as cost movements. What we are seeing now, of course, is a reduction in costs, particularly in raw materials. Things like cotton and polyester and some of the other raw materials are starting to fall now relative to their peak through COVID. And so that starts to help us as we manage margin as we go forward.

Yes, and Lisa, from an Officeworks perspective, I think -- look, Mike kind of summarized how similarly, as EDLP retailers, we address price in our respective categories. As you know, we have a very broad business. We sell a lot of different products with over 40,000 SKUs. And so cost inflation and what we're seeing is very varied depending on what we are talking about. So technology hardware, we know, for example, there are -- there's a lot of monitors in the market right now. So the -- we're not seeing significant cost inflation, obviously, in that side of our business. But on the flip side, paper, where pulp and gas inputs are really growing, we are certainly seeing some inflationary pressures. We look at it category by category, and we just make sure that we continue to invest in maintaining our trusted EDLP position with customers to make sure that we are giving them the best value.

Lisa, it's Anthony. Just quickly to add to your question. I just want to be clear, when you're looking at cost of goods sold for the group, that includes all of the group. It includes WesCEF. So that will significantly distort the...

Exactly. Yes, that's what I was asking. Yes, I do understand that. Just I wanted to understand the trend potentially for the retail businesses...

Yes, look, well, I think the retail MDs have just covered that, but I just wanted to be clear. I don't think you're going to be able to draw any conclusions from looking at that COGS number because there's a lot going on in there.

Yes. So sorry, just to clarify, the Bunnings GP trend, right, or the GP margin trend, understand we won't talk about the specifics, is down, right, largely due to the price investment offsetting whatever different category mixes or pricing that we may have put through. Do I understand that correctly that GP margin trend is down?

No, I wouldn't -- it's Mike. Lisa, I wouldn't say that. I think if you look at our margins over time, they're broadly consistent, but we just don't dive into the detail. And as I said before, the mix between the type of B2B customer that we're servicing and the B2C customer is very similar from a profile point of view.

Lisa, when you have -- Rob here. When you have much stronger growth on the commercial side of the business than the retail side of the business in a short period of time, that will have a margin impact. When you have significant wet weather activity and that impacts certain outdoor products that generally trade at higher margins, then that's going to have an impact. So that's why -- we probably sound like a broken record, but we always caution around drawing too many conclusions from short-term trends in margin because they can be driven by very short-term factors.

Your next question comes from Ben Gilbert from Jarden.

Question for you, Mike, just on Bunnings. Just keen to understand how you guys are thinking about category expansion. So I think one of the things that Bunnings has done such a good job over the last [ 30-odd ] years has been expanding their sort of garden, kitchen, [indiscernible] kids play equipment, et cetera. [indiscernible] do you still see some -- outside of sort of pure commercial, do you still see some big legs or opportunities around categories? And would you go so far as to [ expand in markets that ] might be a little bit less obvious, such as things like pets or electronics? I know you play in electronics partially, but [indiscernible] a bigger push towards it?

Yes, it's a great question, Ben. It's probably one that I'll expand on come Strategy Day. But as I touched on the last Strategy Day, pets is something we see as an adjacent category. It's been a category that we've had a range in Bunnings for a really long time around sort of durables and dog houses and [ dog pens ] and all those exciting things. But I think you can expect to see quite a big expansion in that category over the next few months. I think we do see a big market opportunity, a lot of customer demand for the things we've been selling. And we've been testing and learning through some promotional drops of pet durables over the summer period, which had been really pleasing for us. So that's one. And I think you might remember, I sort of think about the Bunnings [ ranging lens ] being sort of everything from the front gate to the back fence of a property or a job site. So it does give us a lot of adjacent markets. We want profitable growth. We're not going to chase into categories where there's really low margin and really high service expectations without operating models that would support that. And online, our expanding online capability gives us more optionality in that space over time, and then there's a range of other categories. So I think we'll not only continue to grow the categories we're in. We're all about growing the market and growing our share. But we do see some exciting opportunities in some adjacent categories where we see good customer demand and opportunity to enhance competition and bring a new value proposition to the market.

And does that include marketplaces? I saw a report -- one industry report last week that has you guys as the third most engaged marketplace in Australia. Are you looking to put any more effort, more investment around that in terms of growing range and trying to sort of accelerate the GTV in that side?

I'll need you to send me that report so I can use it in my appraisal, Ben. That would be really helpful. But it's -- look, marketplace is all about bringing people into the Bunnings ecosystem and having them stay there. We know that customers are shopping for things for the home: make the home safer, make the home more secure, make the home more livable. And that's happening more and more as people work from home more often. But yes, they're also interested in the things that sit across a range of different categories that we don't think we've got capability in, either to have it in-store or have the merchandising capability today. So partnering up with some good, trusted partners across adjacent categories there allows us to provide our service to customers. It's good to know that it's resonating, and we certainly see that with some growth there. But it is really something that's nice to have within the ecosystem, and we'll keep tinkering and building away at that over the next little while. And I think it leans into some of the broader ecosystem aspirations we have as a broader Wesfarmers team as well.

Your next question comes from Bryan Raymond from JPMorgan.

Just on global sourcing. Obviously, it's a big part of the Kmart business. We've seen pretty steep reduction in global shipping costs. And as I understand it, factory costs in China have also come back a bit with less global demand coming through for production. So just keen to understand for Kmart but also for other businesses where it's relevant, I assume Bunnings and Officeworks should have some leverage to this, the lower shipping costs and other global supply chain costs. What sort of time line should we expect that to flow through? I assume it hasn't yet, but that's -- and how -- what sort of magnitude that is coming through at?

Thanks, Bryan. It's Ian here. I'll start off on this one. When you look at cost of goods, there's so many factors involved. Clearly, there's the raw materials. There's the production costs. There's the international shipping, as you called out. And there's FX. So there's a number of dimensions. Clearly, that all plays through into the price that we then charge to the end consumer, and we're constantly trying to figure out how do we keep that price as low as we possibly can. So therefore, we do move pricing around, both up and down, as we see those changes. So as we do see these costs coming through into our system, what you'll see us do is we'll adjust pricing so that we can capitalize on that and continue to grow market share. In terms of how quickly does that come through, some comes through very quickly. So if you've got seasonal categories where we're dropping product in which we're not currently carrying, then, of course, [ that ends almost ] immediate in terms of the raw materials. And frankly, the business model of Kmart, in particular, is super good at extracting that value earlier than most other businesses will be able to access it because of our pure line of sight through to the raw materials and the factories. When you've got other products, clearly, it goes into a rolling average cost. And so there's a period of time it takes to wind through the system as we sell-through the products that we have. But we're certainly talking in terms of months there, not halves or years.

Great. Is it meaningful for any other businesses, just before we move on?

From a Bunnings point of view, about 30% of our inventory is directly sourced and comes through. But there's nothing Ian -- what I'd answer that Ian hasn't already covered.

Yes. And I'd say from an Officeworks perspective, exactly the same.

Your next question comes from Grant Saligari from Crédit Suisse.

Wondering whether the directors would comment on shopping -- customer shopping behavior that they see in terms of just shopping frequency, value trends, basket size trends and just a brief comment on quality of inventory [indiscernible], please?

Yes, I might start, Grant. I think from a Bunnings point of view, if you look at the commercial side, that's really helpful for us because we can see more into the pipeline. The nature of the contracts and things like that suggests to us that there is a good pipeline. If you look at the numbers that have been called out on housing starts, they dropped a little bit, but it's not material. And you then see a reversion to what we've seen over a number of different housing cycles, which is moving to alteration and addition. You then sort of look at the sort of demand for trades and the shortage of trades and the shortage of apprentices. That pushes people to DIY things themselves. And I think they will -- my guess is you'll hear a bit about movement to value from my colleagues. But for us, when we sort of see this sort of market and you're not going out and doing things, you're not traveling as much because things are a bit tighter, you're spending more time at home, and I think for a business like Bunnings, with the assortment and the price mix and the value proposition, that positions us well to participate strongly in the consumer market and the commercial market.

Yes, on the Kmart side of the equation, everything we have within our box is at an incredible price, as you know. So we pretty much haven't seen too much price inflation that some businesses saw through the COVID period. Therefore, our basket size has moved around but to a much, much lesser extent than other retailers would have had through the last 3 years. If you look at it on a pre-COVID level, it is marginally higher than it was, and some of that is explained by a slight change in shopper behavior where they do put a little bit more in the basket now than they did pre-COVID. In the case of our business, we're still seeing transaction growth and [ comp ] transaction growth at the total customer level. Yes, I think a relatively modest change as we've gone through the last period of time.

Yes, and I think from an Officeworks perspective, we continue to see recognizing our channel mix with our every channel offer. We continue to see strong return to stores with really strong transaction growth in stores and a normalization of our online channel, albeit we will, as we saw in the first half, normalize at a level that's materially higher than pre-COVID levels. Similarly, in terms of customer behavior then in terms of basket as well as our B2B business, similar to Mike, we're seeing good growth in our B2B business as people continue to invest in how they work and continue to invest in their business, recognizing a lot of our business customers are small business and midsized business, and we expect that to continue in the second half. And we are seeing value in the baskets move around as prices move, so particularly recognizing the strong tech and a high level of ASP sitting in tech for us. But we did see good growth in tech in the first half.

And lastly, Grant, just on your question on inventory quality, I think we're in pretty good shape across the group. The only one which we've already called out is Catch. So we'll continue to have clearance activity in the second half. But across the rest of the businesses, we're in good shape. We have called out -- and as Ian said on a number of occasions, we're still holding some buffer stock in Kmart. And we will obviously monitor how supply chains normalize, and hopefully, disruptions are removed. And as that becomes clearer and we get more confidence, then we'll remove some of that buffer stock as we move forward. And as I said before, I think we're hoping that working capital will improve in the second half.

Your next question comes from Richard Barwick from CLSA.

My question is for Ian Bailey. Obviously, a big drop in the online penetration, evident in both Kmart and Target. To what extent did that reduction contribute to earnings and EBIT margin?

Yes, thanks, Richard. It's -- I think what you've got there is a material return of customers back to the stores. Now some of that is the fact that stores were closed in the previous half of the comparable period. And some of it is we've just seen a real shift back -- of consumers back into stores full stop, which I think has probably surprised everybody in the market. I think if you're comparing year-on-year, it's super hard to do that comparison because of those store closures on the way through. If I actually look at the dollar value we're doing online, I'm still pretty happy with where it's going. I'm pretty happy with the growth trajectory that we're delivering. We very much want to grow our share of wallet with customers full stop, and we're very happy to do that whether it's home delivery, Click & Collect or in stores. And then we manage the business model to ensure that we deliver the right value for shareholders as well as consumers.