Woolworths Group Limited (WOW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Woolworths Group F '20 Half Year Earnings Announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Brad Banducci, Managing Director and CEO of Woolworths Group. Please go ahead.

Good morning, everyone, and welcome to the Woolworths Group Half Year Results for the 2020 Financial Year. Stephen Harrison, our Chief Financial Officer, joins me today as a fellow presenter, and we'll cover our financial results a little later this morning. Also joining us in room are Woolworths Supermarkets Managing Director, Claire Peters; WooliesX Managing Director, Amanda Bardwell; BIG W Managing Director, David Walker; Endeavour Drinks Managing Director and recently appointed CEO-elect of our Endeavour Group, Steve Donohue; our Chief Operating Officer, David Marr; our Chief Legal Officer, Bill Reid; and joining us on the phone in New Zealand is Natalie Davis, Managing Director of Woolworths New Zealand. I will start the briefing today with an update on key issues followed by our progress against our key strategic priorities. Steve will then present our financials before turning back to me to provide an update on our outlook. Before getting into our results, I wanted to start today by acknowledging the devastating impact of the recent bushfires and the ongoing droughts and what it has done to many communities across the country. We have also been heartened and inspired by the selfless actions of our team and customers alike in terms of stepping in and lending their hand to support the recovery efforts across the country. I also wanted to express our gratitude to our customers for their generosity in supporting bushfire efforts for our donations to our S.T.A.N.D program, Standing Through Australian Natural Disasters, raising much needed funds in partnership with Woolworths for our charity partners, including the Salvation Army. And current fundraising stands at over $3.8 million as I speak. This is clearly only the beginning of what will be a long recovery effort, and we remain committed to making a difference where we can to assist the rebuilding of communities. We also shouldn't forget the team, our team, and supply partners that we have in Hong Kong and Shanghai who have also had to deal with significant adversity over the last while with the Hong Kong riots and, more recently, the outbreak of the coronavirus. I also wanted to take the time upfront to provide an update on our salaried team member pay review, which we announced on the 30th of October of last year, and the work that has been done since then to rectify the matter as quickly as possible for our team. We've now analyzed almost $80 million from attendance and roster records of salaried store team members and moved swiftly to start compensating those impacted. $69 million was repaid to impacted Woolworths Supermarket and Metro team members in the first half, covering the initial 2 years of our review, from September '17 to September '19. We have also expanded the scope of the review to include other GRIA-covered Woolworths Group businesses, such as BIG W, Dan Murphy's and BWS, and extended the analysis back as far as we have available data. On the basis of the latest available information, we have updated the estimate on the cost of remediation to impacted salaried store team members to be $315 million or $265 million before tax net of provisions recognized in F '19. We recognized the provision in F '19 for $50 million once we became aware of the issue. And we expect to incur a further $80 million in interest and other remediation costs. The primary component of that $80 million, I should add is interest, our assumed interest payments that we would add to any remedial action on the salary front. We remain fully committed to rectify all matters for our team as soon as possible and thank our team for their ongoing patience as we work through this detailed process. I will leave Steve to explain the finer details, but to say that the adoption of the new accounting lease standards has added some complexity to our results is generally an understatement. We have tried to simplify this as best we can by comparing our reported H '20 numbers to our normalized H '19 set of numbers, which have been normalized then to reflect the impact of AASB 16. In terms of the underlying results themselves, Woolworths Group had a strong half, with group sales growth of 6% and group EBIT from continuing operations before significant items of $1.89 million, up 11.4% on a normalized basis on the prior year. All businesses reported strong sales growth -- sales and EBIT growth over the half with the trading performance of Australian Food and Hotels as the highlights. Group online sales continued to grow to enjoy strong momentum, increasing by 31.6% on the prior year to $1.6 billion, and online penetration increased to 5.1% of group sales. All of our X businesses, WooliesX, CountdownX and EndeavourX delivered strong growth as we continue to invest in a number of digital initiatives and targeted customer promotions as well as leveraging customer shipping -- shopping patterns towards events like Black Friday and Cyber Monday. Our turnaround of BIG W remains on track, with continued strong sales resulting in a first half profit of $50 million or $21 million on a pre-AASB 16 basis, the first half yearly profit since 2016 -- or financial '16, I should say. Strong sales and, more importantly, improved category mix with strong improvements in apparel sales drove the EBIT improvements despite a challenging trading environment over the half. The restructure to form Endeavour Drink -- Endeavour Group and the ALH merger were completed earlier this month, following the formal approval from our shareholders at December's EGM. We were also pleased to announce the appointments of Steve Donohue and Colin Storrie as CEO-elect and CFO-elect, respectively, and joining our chairman-elect, Peter Hearl, that we appointed late last year. The final stage or stage 3 of the process being the separation of the newly formed group by way of a demerger or added value-accretive alternative is now well underway. We are not able to provide a specific update on the timetable at this stage but continue to target a separation in this calendar year. In terms of the Woolworths Group's priorities for F '20, as mentioned at our full year results, which feels like a while ago now, these largely remained unchanged but with adjustments as to specific targets in any one period. And what I wanted to do, and I think you'll see if you go to Slide 8 of the attached investor presentation, is just call out some of the highlights in terms of our progress against key priorities during the half. Critical to us, as always, is living our purpose in building a customer-first brand, team and culture, and this remains fundamental to our long-term success as a group. While there are many piercing examples of us living our purpose over the last 6 months, the way our teams from across the business have responded to the recent bushfires has been the real highlight, and we are truly better together in moments of crisis. We are also proud to be named Australia's top company and -- the top company in Asia Pacific in the 2019 Refinitiv Diversity and Inclusion Index. Being a very inclusive business, we think, is key to our future and not only in terms of diversity in terms of our team composition but diversity and inclusion in terms of thought processes. And this was quite an achievement to be proud about, and it was supported by the launch of our new Reconciliation Action Plan in July of last year, reaffirming our commitment to Australia's reconciliation with Aboriginal and Torres Strait Islander peoples. Brand metrics for Australian Food improved over the half with strong customer engagement during Christmas. And our customer satisfaction scores, while they softened on the prior year but, very importantly for us, improved in our run into Christmas and continuing to focus on these in the second half is a priority. A second major priority for us is creating connected and convenient ways to shop. And we made again good progress on this. As I called out, we had very strong growth in our X businesses. And we finished the half with online penetration running for the group at 5.1% on group sales. Also importantly though, the operational performance of e-commerce also improved as our business continued to scale. One of the key elements of a profitable online business is fulfillment and last mile. And during the half, we announced our partnership with Takeoff Technologies to deliver 4 eStores and micro fulfillment centers across Australia and New Zealand this calendar year. And also we have begun rolling out our new route optimization software, which is expected to deliver a material improvement in our home delivery efficiency. Also apart from actually driving efficiency in the core is continuing to innovate the range of services we provide our customers. And with that in mind, in Australian Food, in particular, I'd like to call out the expansion we have on Delivery Now, which was extended to further parts of the Eastern Seaboard, including the Gold Coast in the half. As of last week, Delivery Now, which is our on-demand delivery business, for those who haven't used it yet, has extended across all states and is available to over 8 million customers across the country. The rollout of Metro food stores continues to gain momentum during the half, including our first Metro in Auckland, New Zealand on Albert Street. In Sydney -- in Australia, sorry, there are now 52 Metro-branded stores. We still have a few supermarkets in the Metro business that we are progressively rebranding as renewal stores and 52 Metro-branded stores at the end of the half with a number of new stores expected by the end of F '20. Within the context of the Metro business, I should also call out that we launched our first 2 Caltex Metros, which were launched in Sydney in November. Good progress was also made on our third priority, which was to differentiate our food customer proposition in both Australia and New Zealand. Within that context, we continued to progress our renewal program, and we completed 36 renewals in Australian Food in the half, including 2 Smart Stores in Miller's Junction in Melbourne, Victoria and, more recently, in Surry in Sydney in New South Wales. We also opened 15 new stores during the period, including the latest evolution of our sustainable store strategy, which was at Burwood Brickworks in Victoria, which operates using 100% renewable energy amongst many other eco-friendly initiatives. The national rollout of phase 1 of Fresh Made Easy in Australia was completed, which involved updates to the store layout as well as fresh training for store team members. While the customer reaction has been positive, it will take some time for customers to familiarize themselves with the new products and layout. In the second half, we're rolling out phase 2 of Fresh Made Easy with a number of exciting new additions to the range based on customer feedback. FoodCo, our Own Brands business, had a strong half as well and delivered its largest own growth -- Own Brands seasonal lines to date, with strong sell-through over the Christmas period. New free from lines and plant-based options were also introduced to cater for customers' growing demand for healthier, eco-friendly options. If I just turn -- if you would like to turn, if you've got the documents of our investor presentation in front of you, to Slide 9 as we sort of then just dive down from food into drinks. Our drinks business continued to evolve, and we made, again, good progress in this regard during the half with sales growth of 4.7%. And this was despite a drinks market that remains challenging, particularly the wine category in Q2 in particular. Dan Murphy's really got itself back and focused on the topic of discovery. And within our broad discovery, moniker has delivered a number of very exciting initiatives in the half that will stand us in very good stead going forward. And I'd just like to call out a couple of those factors. So one, of course, was the relaunch of the My Dan Murphy's loyalty program. My Dan's now has over 4 million members and a scan rate of over 50% for the half, which was a real highlight, an increasing personalization -- discovery-based personalization within that program. We also initiated a number of Customer First Ranging reviews to embrace and localize our range by store and continue to innovate the format, in particular, with the launch of our first new small-format store, Dan Murphy's, in Elanora Heights that was opened in early December. If I go to BWS. On the BWS front, we have -- and I think I called it out last year, had really pleasing results from our renewal program, which have been done in partnership with Woolworths Supermarkets, and we've continued with that program with 73 renewals completed during the half as well as 7 new stores opened. I'd also like to call out that in parallel with that, between Smart Stores and Woolworths Supermarkets again, we've been trialing smart-based technology in [ 5 ] liquor, in particular, in BWS and in our Miller's Junction attached BWS store and in Paddington and Oxford Street in New South Wales. And EndeavourX online sales growth was 15.4% but decreased in penetration overall to 4.9 -- 6.9% of the business. And a very critically important driver of that is our focus on enhancing the mobile experience for our customers through launching new apps in the business. And that was true with the new BWS app launched in October and also the new Dan Murphy's app that we'll continue to work on and continue to evolve. Last, but not least, in the context of BWS, was us continuing to expand our on-demand delivery experience. And that is now available in 740 BWS stores. Turning to unlocking value in our portfolio. I've already spoken about the progress on the Endeavour Group separation and improved BIG W trading performance. Outside of that, we're also making very good progress in ramping up some of our new businesses and partnerships within the group, and I'll talk about that a little bit more later when I talk about the Woolworths Group ecosystem. If I then get to our last major priority, which is Better for Customers, simpler and safer for stores and support. Group safety, a real highlight, I think, in the last half, for the last 6 months improved on last year across all of our businesses as we continue to innovate and improve processes, not only to unlock efficiencies but also make it simpler and safer every day for our team. And this does not only include physical safety, although there was a particular highlight, but the increased focus that we continue to have on the topic of mental and financial well-being through our Allan Health platform and all the work we're doing, as I say, in financial well-being with Good Shepherd in their microfinance business. After a disappointing performance in F '19, we have also seen an improvement in total stock loss for the half, predominantly in grocery in Australian Food but also in New Zealand. And the initiatives we rolled out in the second half of last year and spoke to it at our full year results are pointing to deliver very positive results for us. In Australian Food, a number of material efficiency initiatives were underway during the half. These include the ramp-up of our Melbourne South Regional Distribution Centre, or MSRDC, as we call it, which is now fully operational and supports all of our stores in Victoria. Outside of the MSRDC, the other major initiative we had was the rollout of our new Customer Operating Model, which is now live nationwide, and we're very focused on embedding in our business and delivering great customer service through it and creating better team experiences as well. We are confident that the new Customer Operating Model will deliver better experience for our customers and is -- and for our team, as I say, embedding the priority. Finally, on Slide 10, for those who have it, I just wanted to conclude with a few comments on the Woolworths Group digital retail ecosystem. As we continue to think about the future of Woolworths Group following the planned separation of Endeavour Group, we have made early progress in building out our broader ecosystem. And this involves us really, in simple terms, nurturing new areas of growth that leverage or support the core business. And 2 that I particularly wanted to call out at this stage in our journey are our Cartology, our digital media business, which -- our media business, which continued to build its capabilities during the half. One of the key focuses for them in the half, not only scaling up their team, was rolling out our digital screen network, which was rolled out to over 500 supermarkets during the half and is now pivoting to the rollout in our drinks business. And we've seen very pleasing scale-up and performance from that business. The second business I just wanted to call out is Woolworths International, which is our export business, which we started a bit behind Cartology. That is now up and running, and we're making very good progress in that. Last but not least, in the context of the ecosystem, is when the demerger of Endeavour Group or other form of -- other accretive option takes place, what will be key is that we will move from ownership to partnership with Endeavour Group. And very pleasing progress has been made on the definition of our partnership agreements between the businesses. They still have a real critical partnership going forward to be successful. I will now turn to Steve Harrison who will present our financial results before returning to me to provide an update on our outlook. Over to you, Steve.

Thanks, Brad, and good morning, everyone. As Brad mentioned, there is some additional complexity in the result this half with the introduction of the new lease accounting standard, together with the significant items and the impact of the salaried store team member review on the financial statements. In terms of AASB 16, to help explain the underlying performance in the results, we've compared the half 1 F '20 results to a normalized half 1 F '19, adjusted for the impact of the new statement -- new standard, sorry. However, given many in the market haven't yet had the information to move to the new basis of accounting for leases, we've also shown half 1 F '20 on a pre-AASB 16 basis as if the new standard did not apply. This pre-AASB 16 numbers are prepared for the purpose of reporting comparison only. So let me turn to Page 13 on our slide pack, and I'll start with the F '20 half year group results summary. Starting with our statutory results, group sales from continuing operations were $32.4 billion, up 6% on the prior year, with all businesses contributing higher sales growth in the half. Highlights, as Brad mentioned, were Australian Food and Hotels. Group EBIT from continuing operations before significant items increased by 33.5% on a statutory basis, with the growth compared to the prior year benefiting from the introduction of AASB 16. NPAT on a similar basis increased by 8.5%. As previously mentioned at the beginning of my introduction, there were 2 significant items booked in the half, $51 million for costs associated with the Endeavour Group separation and $80 million for charges relating to interest and other remediation costs for the salaried team member review. Including significant items and discontinued operations from Petrol in the prior year, the group's half year statutory NPAT attributable to shareholders declined by 7.7%. I'll discuss the impact of the restatement of the financial statements and cover the dividend shortly. Turning to the normalized post-AASB 16 results before significant items, as outlined at the bottom of the page, underlying EBIT increased pleasingly by 11.4% and NPAT increased by 15.7%. Turning to Slide 14. It's worth noting that this page presents the results on a normalized basis post-AASB 16. EBIT in Australian Food was up 8% to $1.177 billion with growth driven by strong sales in Q1 and continued momentum in Q2. GP improved on the prior year primarily due to improvements in stock loss with benefits also from mix and inflation. The sales and GP improvement more than offset an increase in CODB, which was driven largely by higher team member costs associated with our new enterprise agreement and higher depreciation versus last year. New Zealand EBIT increased by 6.4% in New Zealand dollars driven by strong sales growth and higher GP also benefiting from stock loss improvements. Endeavour Drinks EBIT increased by 6.7%, reflecting strong sales growth and improved GP, benefiting from growth in the penetration of Pinnacle brands in particular. As Brad mentioned earlier, our BIG W delivered a strong improvement in EBIT and recorded the first profit since half 1 of F '16 of $50 million. While EBIT did benefit from AASB 16 impact, it would have been profitable on a pre-AASB 16 basis with EBIT of $21 million. Sales growth in the half remained strong, with the improved performance of apparel delivering positive mix benefits. Hotels also had a strong half with EBIT growth of 8.3%. Bars and food performed strongly through the half, including successful execution of Christmas events. Central Overheads was broadly in line with the prior year at $71 million on an underlying basis. However, Central Overheads in half 1 of F '19 were restated by $26 million to reflect the impact of salaried team member payment shortfalls in half 1 of F '19. The underlying Central Overheads expenses are still expected to be around $150 million for the full year. Now I'm not planning to talk to Slide 15, but it does show EBIT by business unit, assuming AASB 16 hadn't been in place in F '20. As mentioned earlier, we've provided this analysis to help with comparability to prior year results. Turning to Slide 16. I want to just talk through the impact on our accounts from the salaried store team member review, in particular, the restatement of our historical financial statements. Walking through the table, $263 million relates to years prior to F '18 and is adjusted against opening retained earnings in the F '19 balance sheet. $26 million has been recorded in the half 1 F '19 account and has been booked in Central Overheads. For the full year of F '19, the impact is $52 million. However, as Brad mentioned, a $50 million provision was booked in the second half of F '19, representing our best estimate at that time, resulting in a net impact over the whole of F '19 being a $2 million cost. $80 million of interest and other remediation costs have been booked in half 1 F '20 and is shown as a significant item. $61 million has been paid to impacted team members in Supermarkets and Metro in half 1. And then on an ongoing basis, we expect an impact across the group of $35 million to $45 million per annum before any possible mitigation. Turning to Slide 17 and over the next couple of pages, I'll just give a quick overview of the impact of the new lease accounting standard on the P&L and balance sheet. Page -- or Slide 17 highlights the impact on key P&L line items. As most of you would know by now, EBITDA does go up materially post the new standard due to fixed rent largely now split between lease D&A and interest. EBIT in half 1 increased by $289 million, which is very similar to the impact on the prior year, as shown in the table below. The impact on NPAT is in line with our previous guidance of a small reduction in NPAT and is broadly similar in half 1 F '20 and half 1 F '19. The reason for the reduction in NPAT is because lease D&A and interest -- lease interest is higher at this point in our lease curve than the fixed rent which it has replaced. Turning to Slide 18. There have also been some material changes on the balance sheet as a result of the new standard. We disclosed at a high level what the impact on our balance sheet was on the 1st of July in our F '19 full year results. And this slide highlights the key areas that have been impacted. Gross assets increased by $13 billion, a result of the recognition of the lease asset and net deferred tax assets. Group liabilities increased by $14.2 billion, reflecting the recognition of lease liabilities and other transition adjustments. And the difference between the 2 is reflected as a reduction to opening retained earnings, which was $1.4 billion. Like the rating agencies, we consider lease liabilities to be debt, which has materially increased our total net debt. And I'll comment on some of the key balance sheet metrics on the next slide. Turning to Slide 19. Average inventory days from continuing operations were 38.9 days, a 1.6-day improvement compared to the prior year. While the period end of 5 January did provide some benefit to closing inventory levels compared to the prior year, underlying inventory trends improved across all businesses as reflected in the reduction in average day stock on hand. Normalized return on funds employed from continuing operations increased by 134 basis points to 14.6% largely due to strong EBIT growth. The reduction in ROFE compared to the pre-AASB 16 half 1 F '19 reported numbers reflects the inclusion of lease assets in funds employed, and the outcome is largely consistent with the lease adjusted ROFE that we've historically reported prior to the introduction of the new standard. Turning to cash flows. Obviously, the introduction of the new lease accounting standard has a material impact on the presentation of the cash flows. But as you know, the accounting standard doesn't actually have an impact on cash -- I'm sorry, free cash flow is not, in aggregate, impacted by the new standard. Walking through the table, group EBITDA is up 42.4% and was positively impacted by AASB 16. Offsetting this somewhat were the Petrol earnings in the prior year and the significant items in the current year. Working capital and noncash movements were impacted by the timing of trade payables due to a fairly significant shift in the period end date, resulting in higher trade creditor payments in December compared to the prior year. Interest paid increased materially due to the recognition of lease interest of $414 million. I'll talk to CapEx on the next slide. The cash outflow associated with dividends declined on the prior year as half 1 F '19 included the payment of the F '18 special dividend. And turning to free cash flows, free cash flow was $49 million, which was below half 1 F '19 of $401 million, largely impacted by the timing of trade creditor payments that I discussed earlier. This also impacted the cash realization ratio, which was 95%. Cash realization is typically higher in the first half due to the working capital benefits of the Christmas period. However, if we normalize for the impact of trade payables timing, cash realization would have been in excess of 100%. Turning to Slide 21. Operating CapEx for the half was $683 million, $116 million down -- $117 million down below the prior year, largely due to supply chain and IT CapEx and the timing of renewal spend in Australian Food, which also impacted the mix of CapEx spend, as you'll see on the right-hand side of the page. I think it's important to note that we expect a similar or even slightly higher number of renewals in Australian Food in the full year, so this is really just a timing issue. Full year operating CapEx is expected to be around $1.7 billion, which is broadly in line with the prior year. Finally, on Slide 22, turning to capital management. The Board has today approved an interim dividend of $0.46, which is up 2.2% on the prior year. Our dividends, as you know, are based off NPAT, including discontinued operations. And the prior year included Petrol earnings for the entire half which, when normalized, is worth roughly $0.03 per share in F '19. The group's sources of funding and liquidity remained strong. And in November, the group refinanced $2 billion of syndicated bank facilities at very attractive rates, extending the group's weighted average maturity profile. The group remains committed to a solid investment-grade credit rating, and we have a BBB and Baa2 rating with both major agencies and a stable outlook. With that, I'll turn it back to you, Brad.

Thank you, Steve. So turning to the outlook, which is all the way at the back on Page 50 of the investor presentation. While -- but in summary, while we're pleased with our trading performance in the first half, we do continue to navigate an uncertain consumer and natural environment and expect this to continue. And this is shown through us having a slightly slower start to trading in Q3. Despite this, we remain confident of our plans in the second half. Higher food inflation is likely to continue in Australian and New Zealand Food, particularly given the impact of the ongoing drought in Australia. In the second half at Australian Food, CODB will be impacted by the annualization of the Woolworths Supermarkets and Metro enterprise agreement. However, we see further opportunities in total stock loss and in store productivity. MSRDC is on track, and we expect the benefits to begin to flow in F '21. New Zealand Food is focused on embedding its new price architecture, fresh experience and moving more -- and offering more convenience to our customers through new formats or ways to shop. In this business, wages will also continue to rise through our -- the impact of our new enterprise agreement there and our commitment to New Zealand to delivering a living wage. In terms of Endeavour, it will be an exciting -- it is an exciting and busy time for Endeavour Group as we progress the separation of the business. We expect a more subdued trading environment to continue in drinks, but the team are focused on areas of high-growth potential as the market continues to premiumize. We're encouraged by BIG W's trading performance in the first half, and we'll continue to focus on profitable sales growth in the second half and expect BIG W to report a profit for the full year even on a -- well, on a post-AASB 16 basis and a pre-AASB 16 basis, sorry, I should say. In summary, we had a good first half. We achieved a lot in that half, but it was not without its challenges. But what I would call out as the highlight is the way in which the team have risen to those challenges. Calling them out, addressing them and moving on, I think, is core to our culture. And we've done that. And as I look forward in the second half, I expect us to continue to make good progress over the remainder of the half and delivering against our expectations for all of our key stakeholders. And with that in mind, I'd like to, in particular, thank our customers for their ongoing efforts -- sorry, our team for their ongoing efforts and our customers for their ongoing support. I'll now hand back to the operator to open the line for questions.

[Operator Instructions] The first question today comes from Shaun Cousins from JPMorgan.

Just a question on food like-for-like. Can you just talk about the reasons for the slowdown in the momentum in food like-for-like sales growth, I guess both in the second quarter of '20, but especially the 2% you've delivered in the first 7 weeks to start third quarter '20? I'm not sure bushfires have been identified as a reason. So perhaps some disclosure on sales for that but just curious why you had a slowdown.

Yes, I'll start and then perhaps turn it to Claire to add a bit more color, Shaun. Thank you for the question and I think a very good question. Obviously, Q1 was one out of the box for us really, if you look at it, and with Lion King in particular. So it wasn't unexpected in our planning that we would see that happen as we came through the first half -- through the first quarter. If I then start looking at what happened -- in particular, let's call out a few things in Q2 and then Q3. As I mentioned in the media call, what really struck us was as we went through the last CPI increase for tobacco and then trail it through the forward buy that everyone does to ameliorate that cost increase in the short term, you do -- we did start to see a material slowdown in the tobacco business. And you will note in our results announcement, when you get to the Australian Food section, we called out the difference between our comp growth including tobacco, which was 3.8% including tobacco, and 4.2% excluding, so a material component of that. And if anything, in the first 7 weeks of the new -- in the new calendar year, Q3, we've seen that tobacco trend continued. So that certainly has been sitting in there for us. Secondly, as I sort of then talk specifically to the first 7 weeks of this calendar year, our resort business -- and Shaun, we do have a very material resort business, as you'd be aware, not only on the East Coast of New South Wales but actually down into Victoria as well and stretching up on the North Coast towards Queensland. It was just a very challenging time for that resort business, understandably, and it's something we really pride ourselves in excelling on and we really had to pivot to a very different strategy. So that was, I think, a key component for us and then more recently, just a little bit of exposure we're starting to see in some of our more Asian customer-indexed stores. So there are a couple of factors that sit behind it. It doesn't mean we're not actually focused on driving that uptick back into transaction volume, and that certainly is the priority in the second half. We think key to that is our customer experience. And I think what we would readily admit is with the number of changes we had in H1, plus some anticipated consequences like the salaried underpayment, we probably stretched ourselves a bit too much in terms of our ambition and the range of things we did. And our plan in the second half is to just knuckle down and just focus on customer and team experience in particular. I don't know, Claire, if there's anything you'd like to add or...

I think you covered the 3 key areas we've looked at, which would be the bushfire, resorts, store impact. As you said, we have over 130 of our stores would be affected in those areas, but also stores that weren't necessarily in the fire impacts but actually just in a resort area. I think you've touched on that actually for half 2, the focus back on some customer metrics we see as an opportunity for us. And very early days, we see some impacts in some of our 60 high Asian [indiscernible] stores.

Thanks, Claire. Does that make sense, Shaun?

Yes. It does. Just a question then -- my second question, I guess, is just on gross margin. Can you talk about the benefit of the 42 basis points in terms of the uplift there? How much of that came of -- out of stock loss and maybe where your stock loss is? And what do you -- there's some commentary around an improved inflationary environment. Can you maybe define what you mean by that, please?

So I'll talk to the high-level. And then Claire can jump in with the details. We did make good progress on stock loss, in particular in our long-life categories. We lost a little bit of that in -- as we rolled out Fresh Made Easy, and we learnt what are the right products in that fresh side of the business. But it was very good progress. But I would also call out, we also continue to progress, making sure we were much more disciplined in our promotional programs and what we call our winter promotions really that continued to look very pleasingly during the half. So actually, promotional count wasn't down, but that really was because we did -- there was slightly more promotional in health and beauty. But if you look at the rest of the categories, we trended down in number of promotions that were much more effective. So 2 factors that I think were key to our GP results, that was there. Anything you'd like to add on stock loss, I think.

All I would add on stock loss, so as we said in July, it was around the execution of the plan. The improvement in the half was around 20 bps. And it was on the back of the 4 key areas we called out in July, particularly around executing the waste-and-markdown process through all of the stores, giving stores more accurate time to when they would reduce key products. A significant piece of work done through Fresh Made Easy, where we got to save space and range right in every store for the fresh food for that particular community. We saw an improvement in stock takes across the year, which was supported by the tightening of our front end, particularly with what's going on our assisted checkouts and also a customer-friendly tightening of the front of our stores.

We do, by the way, Shaun, despite the progress we made in the first half, still believe there's material progress, of course, that we can, and that is a particular focus, as I called out in the outlook for the second half.

The next question comes from Michael Simotas from Jefferies.

The first question for me, just following on from Shaun's question about the Australian supermarket sales trends. Can you just give us some comments, please, on how you think you are performing in the context of the market? I mean there's a lot of data points out there, some more reliable than others, but your major competitor seems to have closed the gap fairly materially and perhaps even based on their commentary is now outperforming you in the third quarter. Based on what you're seeing, do you think you've maintained your relative position?

Michael, thank you. Good question. To be honest, right now, it -- the market reads are very noisy. I think that we would all agree, and we -- I think we're finding that a bit challenging. But when we look at Nielsen Homescan and we true everything up, we don't feel we're in a bad position market share-wise. It doesn't look like we are losing share. It doesn't mean we don't have more to do, and that is not -- that is a narrative that is always at a category level. But we're not feeling in a bad place right now from the numbers we're looking at, at a market share level. But it would be fair to say that we're getting quite large inconsistencies between what we've seen through Homescan, what we've seen through Quantium, what we've seen through AUSTRAC. So it is volatile, but we don't feel like we are badly placed when you look at the aggregates of our market share performance.

And then the second question for me is on the wage underpayment remediation.

I should add, Michael, what does make numbers messy for all of us, of course, is how you -- and we called out the tobacco and how that rolls back through the numbers, which also helped with both accounts for our export businesses and where that goes and how it's adjusted. And then thirdly, very importantly, how you think about online. The one place I can tell you we are growing share is online. Sorry, your next question.

Okay. Yes. No, that's helpful color, actually. Yes, on the wage remediation issue, just a couple of things on that. Firstly, if you could just sort of comment on how you think staff morale is on the back of this. And secondly, the first half numbers that we've got, did they include the ongoing wage cost on a go-forward basis? Or does that 35% to 45% also applied to the first half of '20?

I think -- good question there. Let me take the first, and then I might -- Steve, if you can correct me on the second, as I can see you're chomping at the bit to do it. The message has landed very well with our team, and we try to be very authentic with our team and address the issue. We've got to keep pace of our payments with our team because that's how we build trust with our team. We don't talk about it but we do it. And so we don't feel we're in a bad place, but we just need to keep doing it. And what we're really doing at a team member level, literally it's having one-on-one personal conversations, taking them back through the numbers and giving them comfort that we've calculated correctly. In these very limited cases, and they've been extremely limited, where there has been any question, we've actually personally linked them with the state manager, engaging directly with the team member. And now we've got [ Craig Harris ] in there as well. So I would say, with our team, so far, so good, but we simply need to continue to work on it and address this. It's great progress in supermarkets and Metro stores. But now, of course, we need to show the same intent to BIG W, Dan's and BWS. I would say that we are -- have a watching brief. We're not concerned, but we do have a watching brief on the customer side where this can be misinterpreted. And so we just got to make sure that our customers don't somehow think that we are -- and we've got one of these questions in the media call. Some are cutting hours in our stores to address this issue, whatever. That is absolutely not the case. But how these narratives can build, so we've just got to keep an authentic -- a watching brief to that. Now just specifically on the numbers we've called out. One of the challenges is how we talk about years, calendar years, financial years. Or in the case of our wage remediation issue, we've actually talked about pay cycle years, and I think this is very important. So what we called out was our remediation between September '17 to September '19 at the end of that. So any incremental cost post that period is just in our day-to-day trading. So I think it's very important. It's just a different time frame, but it is the right time frame for us to actually look at this particular issue. So everything from the end of September, and Steve, please stop me if I'm wrong...

Beginning of September.

Beginning of September is in our trading. We've called out what the number would be on an annualized basis. So you've seen a little bit of in-trading in truth. But as I said, on a go-forward basis, given it is materially about the intersection, interpretation of when various rates or penalty rates kick in through hours worked, gaps between shifts, consecutive days of number of hours in a calendar month, it actually is much easier to manage on a go-forward basis if we do sensible rostering practices than it is to address on a go-back basis. So when you see a difference in the numbers, you see actually the fundamental difference, which is just driven by the way some of these clauses intersect with what people have worked, theirs versus ours.

So basically, there's half the impact in first half, is what you're saying?

Yes. So it's sort of -- yes, probably about 4 months' worth of impact, Michael.

The next question comes from Bryan Raymond from Citi.

My first one is just on BIG W and your guidance to get back to profitability on a post-AASB 16 basis. Just trying to reconcile that versus a pre-AASB 16 basis.

Sorry, I mucked it up mainly because I told Paul to keep telling me to avoid to not make me say it both ways. On the pre- and the post-AASB 16 basis it's profitable, Bryan, we think based on where we are today, still lots of work as always in retail, but it's on both basis.

Sorry. Didn't want to assume, Brad. Is it that a -- so excluding lease accounting changes, do you still expect to be profitable in BIG W in full year '20?

So I'll take that, Bryan. So for the first half, we were profitable on both a pre and a post basis. Obviously, as you would understand, there's always a seasonal benefit in BIG W in this sector in the first half. So whilst we would expect to be profitable on a full year basis post-AASB 16, we're not necessarily forecasting to be profitable on a pre-AASB 16 basis on the full year.

Right. Okay. So I think consensus is circa $40 million to $50 million loss, excluding lease accounting. Is that a -- is there any sort of issues with that consensus number in your -- well, it is very early stage, obviously.

Look, Bryan, we're not giving guidance on that. But you should be able to have a look at the impact of the lease accounting pre and post for the half and sort of project that forward.

And then just on the EVA in both Australia and New Zealand actually. Just firstly, on Australia, can you just remind us how much is flowing into second half '20 that's like an incremental cost? And then also if you can sort of give us any quantum for New Zealand, whether there's any -- so for us, it's really whether you can continue to grow even in that environment, given you've got obviously higher wage costs still coming.

Yes. So first, just let me take the question on Australia. I think we've called out in the past that the impact of the enterprise agreement would be roughly 2x the normal level of inflation, which I think people in the market estimated in the $100 million to $150 million range, which we think is within that range. We would expect to see that impact -- we've seen it in the first half. We'd expect to continue to see it in the second half just in light of what we would have called out at the full year last year around the accrual impacting second half last year, not showing that impact in our results. So we will see that impact continue in the second half. In terms of New Zealand, we haven't specifically called out the quantum. It is fair to say, though, it is above the average level of inflation. Do we expect, though, that to impact the profitability of New Zealand? Obviously, it's a challenge that we need to overcome. But we're not saying we wouldn't expect to continue to grow profit. And we'll be focused very heavily on productivity initiatives and other initiatives to offset that.

You would have noticed, by the way, Bryan, our inflation -- a lot of inflation rates are running higher than Australia at the moment. So that also needs to be put into the considerations, which is a tailwind. But we've just got to make sure it's real inflation, of course, for our customers.

Right. And just to confirm, so is that -- sorry, 2x average wage costs in New Zealand would be a good proxy similarly to -- in Australia for the EVA? Or is it -- does it look a bit different to that?

There or thereabouts.

They have the habit of giving us numbers that you want us to correct. We haven't called it out, but...

The next question comes from David Errington from Merrill Lynch.

I'm going to apologize upfront for this being probably a very uncomfortable question. But when I look at the...

You don't normally apologize. Is this is a new technique?

It is a new technique. So -- but I probably will need to apologize after where I'm going with this because this underpayment just doesn't wash with me. When I looked at -- when the original number came out, none of us had any context to put it in. Now post, Coles have come out, and they said their underpayment is $20 million. Target is $9 million, and Industrial and Safety is $15 million. And Bunnings was 0, Kmart was 0. Yours is $315 million plus $80 million of interest. Now I know that previous management, previous CEOs, previous CFOs, the works, et cetera, of Woolworths, they all retired with superannuation that were defined benefits. And those defined benefit superannuations were in the tens of millions of dollars. Now where I'm going with this is you said that you've got to work to do to regain the trust of your team members. What about the trust of your shareholders here? Because what has happened here, that you have had such a systematic underpayment of staff for the magnitude of nearly 1/2 of $1 billion, Brad, over I don't know what period that is. But you owe us, as the shareholders, to explain how this happened. Is there any capability of dragging some money back from previous management that was overseeing this? The culture within Woolworths, forget about the staff on the floor, what about the culture of the management team in being allowed to systematically underpay your staff so that your profits have been overstated to the magnitude in previous years? And now we, as current shareholders, have to wear that. What is the outcome of this? What's Gordon's response to this? What's the Board outcome? Is it going to be resignations from the Board? Because this is a $0.5 billion, Brad, that you're expecting us to chew.

Thanks, David. I don't think it's an unreasonable question to be asking us. So I don't think you should apologize upfront. I can't comment on how everyone else's numbers are done, but I can assure you our numbers are done with extreme veracity.

Well, you've got to assume that their numbers are done with this. We've got to assume that theirs is fair. Coles is $20 million. Yours are $380 million.

I can't comment on theirs. David, I can just say we have full time-and-attendance records, and we've used that as the source of truth for analyzing our numbers. And we haven't debated what people have worked with. We've gotten to the truth of what they've worked in the time-and-attendance system when we've gone and pulled all the time-and-attendance data as far back as we could get it to calculate this issue. And we haven't lost trust with our team. But the reason we haven't lost trust with our team at this stage is because we haven't tried to do anything but address the issue head-on. And while we continue to do that, we will hold trust with our team. And to us, that's by far the most important metric, yes. So I can't comment on others, but I can assure you authenticity, data-driven results are what you're seeing us come to. The second, and this is certainly not an excuse, and I would just like to observe that in '19, we started accruing immediately to what we saw. So you see when we recorded that in our margin accounts. It did not change the result and very importantly, therefore, change where the bonus payments might have been placed to what the implication of management is. If you go back in the previous years, while it's a massive number, as you know, David, in the context of each individual year, that's not the case. And so it's not quite as clear to go back and say, "I would have changed our financial outcomes for senior management." We've run those scenarios. It doesn't in aggregate, that -- thirdly and very importantly, I would just like to make the point that while we have got a wage underpayment, and there's no such thing, I should add, as a wage overpayment, I think that disrespects a salaried team member when that narrative is run. While there have been these underpayments, we have paid our team and we've validated this in line with their contractual commitments. And we have done a full internal review, including by an external law firm, who've given us a report that has given us some comfort that what we did was not deliberate. It doesn't mean it was right. It was not. We need to fix it. There have to be consequences, but there's no deliberate action. And it has not materially distorted, as best we can tell, bonus payments, and we haven't lot trust with that team, but that's because we've gone big, and we've been honest about it and transparent about it. And that's the only way we feel we, as a culture, can work. And of course, I should add, last but not least, between announcement date and payment date, we've cracked along and we've really, as I said, addressed a material chunk of the payment. You have every right to be frustrated and disappointed. We have let our team down and shareholders down in this regard, but there is a more nuanced story, of course, in this issue.

So there's no problem with the culture of the management here. You're saying it's a good answer that you gave, but $0.5 billion, Brad, or it's not quite that but we're getting up there. I just...

David, there is an issue, let's agree on it. There's an issue to have found us, does draw a lot of focus for us on just how we manage our accountability as a business, how we set rules and guidelines and make sure we get the right capabilities. So there are lots of issues. But if there's one thing we try to do inside Woolworths, and we're working on it on a day-to-day basis, of doing the right thing, I would say we're on the right side at this stage of the ledger of doing the right thing. And if that wasn't the case, the ultimate consequence needs to be me and my role. I would -- and I judge it against that metric. But are we happy? No, by the way. So I understand your perspective.

Well, it's a good answer to the question, Brad. But you can understand that the disappointment in Woolworths from -- well, certainly, I can't speak for others. But from my perspective, just how this could happen and whatever other companies' numbers are will be what they are. But the magnitude of Woolworths is a huge outlier here. And it's just extremely disappointing, particularly -- I mean do you guys still have defined benefit superannuation schemes? That's part of my first question. I've got a second question on your CapEx. But do you guys still have a defined benefit scheme?

A very limited number of people, I would say there's less than a couple of hundred -- I'm sorry, Caryn is not in room. That's rolled off. No, Sorry.

A couple of hundreds are still on defined benefits?

Not senior, senior management, David. That's a real historical issue. No, I mean no one in the room that I'm sitting here with the group ex-co is on that. So...

On defined benefits. Okay. My second question, which is the perennial one, Brad. When are we going to start seeing CapEx come off? I mean you're basically saying that it's in line. The dividend per share is still only 65%. It's miles to, in my opinion, miles to go. We've had this discussion for a long time now. When are we going to start seeing CapEx come off? And when are we going to start seeing -- I mean Coles pays 80% to 90%. Wesfarmers pays 90%. Even TWE pays 65%. Now you're only paying 65%. I mean when are we -- when are you going to start looking after us a bit better?

This is a good question for our new CFO. But David, I think he will talk about it on the journey. What we're finding right now is we are getting great returns out of our capital. Our cost of debt is trending down. We feel not bad about the quantum we spend. Our real challenge at the moment, as always, is to make sure when we spend the money, we spend it well. And that's a bigger issue for us, I would argue, than the quantum. In particular -- and then I think you should be keeping the blowtorch on us on the Melbourne South distribution center and the quantum of money we spend there. So I don't think -- we don't believe as a collective that the money is not the right amount of money, but delivering against it is our challenge. And I'll say that would be a particular one, it's our biggest individual investment we've made in the last 5 years as a group is one that I think you should absolutely be holding us to account on. In terms of cash, I would call out actually a very good half on cash conversion. What you don't see in the numbers -- so one of the highlights to me and was messy with working capital, of course, was accounts payable. But all of our businesses did a really pleasing job on inventory. Our inventory days were materially down across the group. So we are trying to focus on cash generation, and we think there's more action in managing that part of our balance sheet than capital. But the challenge of capital should continue outside, of course, of MSRDC. Then it really comes down to our store renewal program. And we've just reviewed that with the Board. We feel we are still very comfortable. The day that doesn't return, I think it's a different matter. Steve, do you want to just talk to dividend policy going forward?

Yes. So I think probably my feel, David, would be in the -- for the interim dividend, we've always paid a smaller proportion. Our historic dividend, although we've had no stated policy, has been around 70%. So you should judge our dividend payout on the full year, not on the interim.

A little bit more than 70% would be nice, Steve.

Noted.

The next question comes from Grant Saligari from Crédit Suisse.

Can we just follow on from the CapEx question? Because the earnings growth is quite good, but you are putting a lot of capital into the business. Was your comment that more around cost of debt, so cost of funds being low, and that's providing additional opportunities to invest in the business? Or are we at a point in the investment cycle where there's just a lot of things, a lot of changes you can bring about in the business such as the automation, the store renewal programs? Maybe you can give us a perspective of where you actually feel you are in the investment cycle and what's actually driving that at the moment.

Yes. Sorry, Grant, the point I was trying to make is, if we looked at the value creation above our cost of capital, we are seeing attractive opportunities irrespective of their cost of capital but in particular, as our cost of debt comes down, and therefore, our WACC comes down. The narrative in the early years or certainly of my time in this role was what about catch-up. And when we were in the process of catch-up, and we had this litany, as you know, of catch-ups, whether it was in supply chain or particularly in IT or refrigeration in stores. So was it a catch-up narrative? We aren't in the catch-up narrative in aggregate today. There's still a few things we need to do, of course, but we're moving out of the catch-up narrative to being in a more sustainable momentum narrative as well as, of course, trying to find things that will help us drive, in general, more productivity into others. So we're really in a different space, which you rightly pointed out. Our renewal program, well, it's done and spend for the first half is -- at the moment, we started looking at renewals and new stores over -- not over a 12-month period but over a 24- to 30-month period. We started to get a much better rhythm and a much better quality result. So that's part of what I was talking about in capital. That said, there are some interesting things going on right now. And so we continue -- but it's not a material chunk of our capital. We continue to invest in those to test them, and I would call out in that regard both our smart fulfillment initiatives and our Smart Store initiatives. And those are really trials for us right now, more than being material changers of our cost structure. On the smart fulfillment, the 4 Takeoff units we've got, we will have operational by the end of the calendar year. They're not a trivial amount of capital, but they're not material in the context of Woolworths. But what we are very focused on is if these things work for us and how they work, what the broader plan for them will be. So right now, we don't call it out, but I can assure you it's not materially in our numbers, a key thing. And the same is true with Smart Stores. We've got a number of really exciting things there. But again, as with our smart fulfillment, the real issue for us is at what date is that production ready? Do we put them in every store? And it's something that we keep track, Claire and myself, [ Bob McCarthy ], analyze them. We continue to learn, but we're still -- we're in the right time frame to make them commercial as we are with these stores, but it might be a bit earlier. A lot of these technologies are about timing calls. So it's probably not a perfect answer, but we've got a lot of opportunities that give us a great return above our cost of capital. Most of it is in -- is not in catch-up phase. If we needed to dial down, if there was a [ next one ] event, we could quite easily. But then the pain of going down and going up, you just need to balance that against the quality. And then just at the edge, we are continuing to invest in innovation, but not in a mainstream production sense, but to move from it and figure out how we will productionize this. I would say, in general, in all the initiatives we've got in Smart, we're about 12 months away from true production on them.

No, that's a very helpful answer. Just secondly, just coronavirus and supply chain impacts. Could you maybe just give us an overview as to where you see -- sort of how well positioned your supply chains are from both equipment for refurbishments but also obviously goods for retail in food and nonfood businesses, please?