Woolworths Group Limited (WOW) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Woolworths Group Market Update Analyst Call. [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. Thank you for joining us on this analyst call today to cover the announcement of Woolworths Group released to the ASX this morning. Joining me in the room are our Chief Financial Officer, Stephen Harrison; and our Chief Supply Chain Officer, Paul Graham. I will begin with a few brief points from the announcement before handing over for Q&A. Today, we have announced plans to transform our grocery supply chain network in New South Wales with the construction of 2 new distribution centers at Moorebank Logistics Park in Sydney with the initial construction to be completed by the end of calendar year 2023. The payments received at Moorebank will support our growth, materially improve efficiency, advance our localized range in efforts and a little better and safer experiences for all of the stores, teams and customers. We expect the initial benefits of this investment to be realized in financial year '25. The Moorebank development will build on the automation technology that we have already deployed at MSRDC in Victoria and would include the construction of an automated regional distribution center and a semi-automated national distribution center. We have learned a lot from our MSRDC development, which is beginning to deliver against its business case, and this gives us the confidence that now is the right time to invest in our critically important New South Wales network. Woolworths Group will invest between $700 million to $780 million and the automation technology and fitout over the next 4 years and has signed an initial lease term of 20 years with Australian Logistics Company Qube Holdings. Subject to New South Wales CapEx approval, a new facility at -- the new facilities at Moorebank will replace existing ambient operations at Minchinbury and Yennora in Sydney as well as our Mulgrave facility in Melbourne. Woolworths Group is committed to supporting impacted team member at these DCs, and we will work with each individual on the options available to them looking into the group closer to the time of the site closures. However, the closure of the site will aggressively impact some roles. To reflect this, the group has booked -- will book a significant item of approximately $176 million in F '20 for the expected redundancy costs associated with the impact of team members. In addition to this, there will be further significant items in F '20 associated with the Endeavour Group transformation and salaried store team member remediation costs, which we also outlined in today's release. In addition to the $51 million booked in H1, Endeavour Group transformation costs of $179 million will be incurred in H2 for the work completed to date to enable the separation. Despite the deferral of the separation of Endeavor Group, the majority of these costs have been incurred in completing the merger and restructuring stages with the group now well positioned for future separation. These costs include stamp duty, external consultants and advisers, dedicated internal resources and IT-related costs. Despite the deferral of the separation, the total costs to complete the separation remains in line with the $275 million estimate we communicated in July 2019. A further $105 million will be booked in H2 related to ongoing team member remediation efforts. This includes additional historical time and attendance records, accrued interest on bank payments yet to be completed and the extension of the review to other awards applicable across the group. The original focus has been on the general retail industry award, which is our largest award by a long way. As part of this review, payment shortfalls have been identified for salary venue team members within ALH Hotels, employed over the Hospitality Industry General Award or HIGA. This review has identified salaried venue team members were not paid in full compliance with the group's obligations under the HIGA based on an analysis of F '18 and F '19 attendance data. We remain committed to fully rectifying these payments report as quickly as possible for our team, and I'd like to thank them for their patience throughout this process. Finally, before turning to our trading update, I wanted to reiterate how proud I am of our team and how they have come together to support our customers, the communities within which we operate and each other over the course of the last 6 months. We have [ true lived up therefore ] being better together. Trading has remained strong in Q4 with Australian improving in Endeavour Drinks, sales growth accelerating in May and June following a more subdued April, which is impacted by unusual trading patterns around both Easter and Anzac Day. New Zealand group sales remained strong throughout the quarter. However, sales growth has more recently reverted to high single digits as domestic restrictions has lifted across the country. BIG W reported very strong growth during the quarter across all major categories. Inventory levels are now running below where we ideally would like, but the team is responding quickly to address shortages where possible. We are currently in the middle of our annual toy sale, which is performing well. Incremental costs related to COVID-19 are tracking at the higher end of the $220 million to $275 million estimates we provided at Q3. As the trading environment continues to normalize, these higher operating costs are gradually and cautiously being wound back. ALH venues are beginning to reopen, but the conditions of reopening differ by state. As a result, sales remained materially below prior year levels, and the business is expected to continue to be loss-making until more venues operate with a full-service offer. Given the continued uncertainty around when this may be, it appears unlikely that the Endeavour Group separation can take place before the second half of calendar year 2021. However, we remain committed to pursuing the separation of the business at the appropriate time as we believe it remains value-accretive for shareholders. Turning to profit. We expect to report F '20 Group EBIT to post AASB 16 and before significant items of between $3.2 billion to $3.25 billion. Group EBIT, our hotel EBIT is expected to be $160 million to $170 million with all numbers still subject to year-end finalization, or to review and Board approval. Woolworths Group's full year results are scheduled for the 27th of August 2020. I will now turn the call over to questions.

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

Just a question regarding the food EBIT business, particularly in terms of the COVID costs. Can you just talk a little bit about, given what we're seeing in store, you don't have as many security guards, you don't have as many checkups sort of operating, I'm just curious why those COVID costs remain at the higher end? And will those COVID costs continue into July onwards? And overall, will your food EBIT margins expand in the second half, please?

Thank you, Shaun. You're right. We are slowly and cautiously winding back to a number of our COVID-related costs, in particular at a store level. We had some material ones in supply chain as we took additional warehouse capacity and those will wind up. It will take a bit longer to wind up, but we are cautiously and slowly and has been done at a store-specific level. So that depending on -- particularly on the high traders, we are being much more cautious about what we take out given the need to be particularly vigilant on social distancing. So they all be wound out. But you only have to look at what happened in Victoria over the weekend to realize, we just need to have a very cautious setting in this regard. So EBITDA wound up, we'll see how we go, and we're really looking at on a week-by-week basis and at a -- for specific basis in terms of our big traders versus our lower traders and then, of course, taking a state overlay. So we'll see how that all goes and, say, it does change. Last week, it would have been very positive or taking them out this week to see that the COVID sparking in Victoria, I think caution has to be the order of the day.

So it could extend into July, quite easily?

Absolutely, absolutely. So Shaun, I mean, I think in July at minimum, in July, a lot of our cleaning standards will continue. We are simply going to continue to be very focused on cleaning in-store and during the day in store. So that's going to continue. Security, actually, we've managed to wind back quite effectively, and I don't see that coming back. And we've seen our team and our customers also regulates around what are acceptable levels of behavior, which wasn't true at the peak of the crisis in Q3. Then the rest of the costs are the ones we want to be cautious about. In terms of counting team member -- customers in and out, that will still apply our big traders particularly on weekends. Store greeters will still be there, in particular on weekends, during the [indiscernible]. And then in terms of a greeter that helps flow things through the checkout, that will still be there, again, probably more on weekends than during the week given that's where the peak trade is. And those are the ones that will dynamically adjust as we go.

And so given that investment that's going to be at the higher end, I mean, your food EBIT margins, given you guys have guided to food to EBIT group. Are your EBIT margins in the second half likely to be down despite what is a tremendous sort of sales release so far in the fourth quarter and in third quarter?

It's a good question. Sure. I'll just give this -- turn to Steve to give a little bit of color.

Yes, Shaun. At this stage, we're not looking to give EBIT margins or speak to specific trading results outside of hotels. So we still got a couple of weeks of trading or another week of trading and [indiscernible] close to complete. So we'll provide that detail to you at the annual results announcement in August.

It wouldn't be fair to say that, Shaun, so just for Australian food, the biggest pressure in that business actually is in our metro stores, and particularly in our city metro stores and what we call the on the go stores. And that is really where the major challenge is for us in the group of the supermarket. The Supermarket part of the business, as you can see from the sales result, has pleasing sales momentum, and that is, of course, continuing.

Great. And my second question is around MSRDC. Is the MSRDC actually a business case because I thought business case was 2.5 million cartons a week? And maybe if you could talk about what return on capital you expect to get out of the Sydney DC by fiscal '25, please?

So there are 3 key components in related to MSRDC, as you know, Shaun. The key to that facility is the automation that we put into a actually to a single [indiscernible] of all the bespoke color for the stores. There's 2 other components, which are goods to person and bulk -- in bulk pallets. The first of those is the one that is the key to the performance of the site and is tracking in line with our business case. And the other 2 are trending very positively. Paul, I don't know if there's anything you'd like to add on that before we come back to return on investments.

Yes. Thank you, Brad. Shaun, as Brad says, there's complex pieces that are boding to pick and the load forming logic, which is working extremely well. We're on track with our ramp-up plan. Obviously, we took a little bit of a hit during COVID, where we prioritized purely robotic pick and nothing else. If you take COVID out, then we are on track with our plan. The site is performing as per expectations, and we continue to ramp it up, and we'll take all those learnings into the new site in Moorebank.

I'll just reinforce that end point, we'll come back to the ROI, Shaun, which has been a whole lot of learnings, which is invariably the case in any of these automations that we would apply into both of our facilities in Sydney. And those should really help us with this case certainly. But the key automation is tracking and given us the cost per carton that we expected. And that's key for us in making the announcement again today. In terms of the ROI on MSRDC or on again, Steve, I'll turn to you to give a bit of color.

Yes, sure. Shaun, I think probably the important thing to note, is on the -- facilities like this, it's largely a fixed cost around it. There's not a lot of incremental variable costs as you add volume -- the more volume you put through, the better the cost per cut, which is really the key measure for us in terms of assessing business case benefits. We're not at the volumes in excess of 2 million cartons, but yes, we do anticipate being at that level early in the first quarter of next financial year. And that's really what gives us confidence to make this investment and confidence that we will be able to deliver them to business case benefits. In terms of what ROI we're making, we don't call out the returns on capital other than to say, it is going to be well in excess of our hurdle rates and our cost of capital, and we're comfortable with that investment decision.

Thanks, Steve. I assure that the other thing which is worth adding is the return has been based on the cost efficiency end-to-end of what we do there, both in the warehousing and then, of course, efficiencies that we can get in the store. It does not include, at this stage, the incremental sales benefit, which we would hope to get not only at an availability level, but very importantly on the fact that we get a further more [indiscernible] in this facility and a lot more range than we can flow into a critically important New South Wales store network, which has also the most diversity in that and the most need for us to flex range. And what now, we have invested materially, as you'll be aware, in our JDA space tool, sort of an optimize and category generator. But those tools are only as good as the range that we should provide. And this will unlock, hopefully, an incremental material additional benefit in terms of range and sales, but that's not in the core return, which, as Steve has said, is certainly higher than all our required benchmarks.

Your next question comes from Michael Simotas from Jefferies.

I was just hoping you could help me understand the underlying trends across the business. So just pulling apart your guidance given the hotels are a fairly material drag, if I adjust the second half of last year, to put it on a 26-week basis, exclude hotels, it looks like your guidance implies earnings anywhere from down a couple of percent to up a couple of percent in this second half, excluding hotels. That surprises me given the strength of the sales growth across every business. Can you just talk us through a little bit more about what's going on? It doesn't look like the incremental costs that you've called out from COVID are enough to drive profit down that low?

Yes, Shaun -- sorry, Mike. Let me answer that one. The first thing is, as you look at last year's numbers, it is important to just go back and look at the commentary, we did call out in the second half of last year, about $83 million of one-off benefits going through our centralized cost. So a benefit from the Caltex arrangement of $50 million and the benefit associated with the property sale, I think it's over $30 million. So you do need to take those out in terms of looking at the underlying trading performance and earnings. I think excluding hotels, we've obviously got the hotel impacts, which you've backed out in your analysis, as we did call out the hotel -- sorry, the COVID-related costs are very much at the higher end. One of the other things that we haven't specifically referenced, but I wanted to just cover is our team recognition bonus. So we have included the costs associated with the team recognition bonus in that earnings guidance. We are planning to fund the majority of that by capping short-term incentives for those eligible to participate in our [fit] program across the group, but that doesn't cover all of the costs. So there are some additional costs associated with that, that's reflected in that guidance.

Okay. So just to be clear on that, are those team recognition costs over and above the COVID-19 costs of $275 million? Can you give us some idea of what the quantum of that is?

Yes, they are over and above, we haven't called out specifically at this stage what that cost is.

Even though they're not immaterial, though, Michael, as for a full-time wage team member at Norwest, [indiscernible] eligible team member, it is $1,000 -- $750 of share and the $250 for the gift card, and then that's scaled back for the part-time team member. And with the casuals who joined us pre-COVID getting $100. So it's not some immaterial cost, I think you can back solve what the cost is. It was something we signaled we were going to do in Q3, but it wasn't in the estimate of Q3 because we hadn't done it yet. We would have preferred to have done it in truth at the end of the fiscal, but we thought the real power in it for us to [indiscernible] to do a share back to our team members. And in order to do that, we've moved it forward and COVID also [indiscernible] that's another reason we moved forward earlier in the year, which is why you see us reflecting it in these numbers. As Steve pointed out, we still need to see where we land the year from a strict scorecard perspective anyway for us at the eligible team. What we've done in agreement with our team and support of our team is cap that, so we can do a material component of the funding for this payment. But it's -- the capping is not sufficient to fully fund this.

Okay. All right. So it sounds like a lot of the -- well, basically, all of the costs are going to end up in FY '20. I mean, none of us knows where sales are going to go. But if sales growth remains elevated, should we expect some fairly material operating leverage into next year? Or will there be more costs coming through to offset that?

As always, we don't really give a profit guidance. It would be fair to say we have tried to take a pretty tough line on making sure that the cost that incurred the share are in this year. That includes, of course, the recognition payment I just talked about and includes us trying to provide as much rigor and discipline as we can to accelerate the team members remediation. In terms of the cost inflation next year, it will depend on what happens with these more localized COVID updates -- outbreaks, but we certainly are very focused on winding back those incremental costs safely and cautiously to ensure that we hopefully can deliver against what our aspirations are.

Your next question is from David Errington from Bank of America.

Brad, I probably need to apologize again upfront for this question. And so please, but I don't mean to be rude if it comes across as being rude. But Steve, you said in answer to Shaun's question that you're comfortable with the extra returns that you're likely to get from this new supply chain initiative. It would be fair to say that over the last 10 years, I've been very uncomfortable with the return metrics that you have been generating -- Woolworths' have been generating on your capital expenditure requirements. I think given that you're going to be spending another $1 billion because you've got to put $1 billion because you've put upfront around $176 million of one-off costs to close down the old 2 DCs. So if we come at the upper end at $780 million plus $170 million and it's going to be more than that, it's going to be a -- you might say $1 billion. I think can you be a little bit more specific, please, in what returns you're going to be generating because it's not going to -- you're saying, the quote, I think, is that this is going to be over and above the existing capital expenditure framework because it says that it is not expected to materially increase, which is going to get an increase in CapEx. It's not -- we're not going to see a reduction in CapEx now for the next 4 years. And yet, over the last 4 years, 5 years, we haven't seen any return or any increase in EBIT from your CapEx and now you're going to spend another $1 billion. So can you be a little bit more specific, please, in what returns you're actually going to generate? So we can actually hold you to account because I think it's fair to say, Brad, Woolworths' management really hasn't been held to account for the CapEx that it's been spending in the last 5 to 10 years. And I think on another $1 billion you're putting upfront, we need to know what return this is going to be. And it's not really a good enough answer to say you're comfortable with the return metrics when it would be fair to say that you probably were feeling a bit uncomfortable with it. So can you give us a little bit more, please, in what returns are going to be given? Is it 15%? Is it 20%? How is it going to be? Is the MSRDC actually generating return? Because you've been doing that for 10 years now, and it's still not really there. I think you need to pay us a little bit more in terms of giving us a bit of numbers that we can hold you account to, please.

Thanks, David. You're right, we have been invested in our as I said the last time, certainly 4.5 years that I've been the CEO. We have actually last year, in our CapEx, as you still [indiscernible], made some material investments in supply chain outside of recommissioning on MSRDC. We've also materially upgraded our Adelaide regional distribution center, accounts for regional distribution center. And we recommissioned our new Melbourne fresh distribution center in September, October of this year. So there's been internal investments. This was always the big one that's set up there. It's the biggest individual investment decision I have been involved in, likely to be involved in at forwards. It's one we've deferred for [indiscernible] close to 2 years because of our advisors are making sure that we took all the learnings out of MSRDC, and we could flow the given the quantum that's required to be spent. And I -- and Steve will talk to the number. I think there are some material additional benefits on this from what you see in MSRDC that we just talked. And firstly, as you know, in this case, we're consolidating through distribution centers into 2. So it's not just a [indiscernible] swap for one for one. Secondly, and critically important for me at the intermodal points in Moorebank, it's on the rail line from Port Botany creates a lot of efficiency, leveraging rail, both into the intermodal side and then into the national rail network, it's ideally located into Sydney has taken us 4.5 years of searching to find the best possible for us we can -- I think this is not only the best site in Sydney, the best site in Australia If It is executed against plan. We have also then taken of earnings we've had out of the MSRDC into the site, not only how we would like the automation to work but more importantly, and Paul can talk to it, the flow through the site from [entering]. We have now also comfort that our suppliers can deliver at the quality of costs we wanted, which was the big issue going back in the day with the original plans around Project Mercury in the regional setting. So there are a lot of benefits we have to it. And then lastly, and most importantly, it is the core of our business, that is 40% of our business the growth is for us and where we need to do a better job of servicing our stores. So that's the logic of it and have it play out over the next couple of years. There will be, of course, additional investments in our supply chain going forward, but this is the big one. I'll let Steve talk to where we see the return falling and in the way we're assessing the return and also the way we're assessing MSRDC.

Thanks, Brad. So David, to your question, we do see a high confidence level in delivering a number of the savings as Brad talked about. So there will be clearly wage savings on moving from manual or semi-automated to the automation. We see transport benefits associated with being in the location we're in. We see in-store labor benefits in terms of just efficiency of the unloading of the pallet and pushing the product onto the shelf or the replenishment process just because of being able to leverage the technology to get the pallet configuration, matching the aisle to which the products need to go. The combination of all of those things give us confidence we will deliver a strong IRR. It is double digit. I'm not going to go into the detail, but well above our hurdle rates and our cost of capital.

But IRRs don't really tell us much, do they, Steve? I mean, you can make an IRR say anything you like, you can get 15, 20 years and it looks great an IRR. The return on capital at a point in time is the most appropriate for an investor. Now in 4 to 5 years' time, because it's not going to be operational to '25, what sort of earnings uplift is this likely to get from a return on capital? You would have put $1 billion down, can we expect $200 million or so of cost savings? That's the bottom line. Because an IRR just tells us nothing really. So what's the return on capital going to look like in, say, 5 years' time? Because then we can factor that into our earnings to then understand. But I just think that you've been very evasive in basically saying, ah, we're going to spend another $1 billion and trust us, it's going to give a good uplift in earnings, but we don't really know.

Look, David, as you know, I don't want to get into the details of the specifics... [indiscernible]

If you're asking for $1 billion, Steve -- it's 1$ billion, Steve that you're asking us to commit to, we understand the context, but you need to understand that we need to know what the numbers are going to look like, and it needs to be a little bit more just on concept.

[indiscernible] As we think we cut, it's about 10% and I think you can backfill from there for its impact on the earnings stream of our business. In the interim years, what we've got to do is come back and prove to you the benefits we get out of our MSRDC next year and then critically importantly the year after in F '21 and F '22, that gives us some glide path together with the other investments we made that we can start getting benefits out of our supply chain in interim while we invest in the next step.

One final question is, I suppose this is just following on. The 70% payout ratio is going to be maintained, while you're doing this, I suppose. There's no chance of giving that, so you're just going to be accumulating more and more franking credits. Is that a fair assumption? Or is there a way that you might be able to increase the dividend payout, utilizing those franking credits at the same time it's going on this growth venture?

David, at this stage, the Board hasn't reviewed or changed our dividend payout policy, but that is they probably need to do that at this stage. We don't see any change certainly for the current financial year.

One of our benefits have been, David, and I can say with Endeavour is delayed. That's something we were really thinking about factoring into that conversation. It's something we've had to defer for reasons, which is all them are until the back end of 2021, but it is on the top of our minds.

Your next question comes from Andrew McLennan from Goldman Sachs.

Just to follow on, obviously, the environment from a supply chain perspective is going to be quite dynamic. You've got Coles effectively doing a very similar thing in both New South Wales and Queensland. I'm just wondering if you could talk about how, firstly, the fact Coles is upgrading their supply chain has influenced your decision-making here. Secondly, how -- whether you're going to use the same technology partners as you have in the MSRDC? I assume it's a case, but just want to confirm. And then thirdly, whether or not the significant expectations, I guess, that we all have for online penetration, how that's factoring into how you're evolving your supply chain strategy here?

Thanks, Andrew. I'll take a first crack, and then I'll turn over to Paul to comment on the technology side. The Coles decision hasn't influenced us at all. To be honest, the regional work on what was Mercury II [indiscernible] Mercury I started in 2014, 2015. The big issue we've had is making sure that we're comfortable with MSRDC before we do another one, given the size of investment required, then never mind the one we're talking about in Moorebank. And then critically importantly, finding the right size for the future and which has not a trivial exercise in Sydney, and it's taken a lot of patience and a lot of time to work through to find and say what, I think, what we think is possibly the best logistics sites in Australia. So that really has been what's laid us to confidence in the tech and then [indiscernible]. Paul will talk to the 2 technologies that are different between the RDC and the NDC between both [indiscernible] and domestic [indiscernible] And I'll let Paul talk to that, and he'll also talk to how what we're doing in these should complement what we're doing in online. As you know, in online, 82% right now of our online business is serviced by stores. And so it's fulfilled in store. But in parallel, we are looking to commission our 4 takeoff units by the end of 2020. This is all -- actually, everything is ready to go -- subject to the team being able to travel down the other commission at which we're hoping is done quickly. We were well on track to actually commission the first one by July. But anyway, we'll hopefully get there by the end of the year. Then Paul can talk to how the use of the technologies and why we feel the same technology [indiscernible] in the RDC is Paul will talk about what will change in the process going forward. So over to you, Paul.

Thanks, Brad. Yes. As Brad mentioned, we are going to continue working with Vanderlande on the RBC in Sydney. We have an LOI in place for that. We have gone through the journey with them and MSRDC, which has been a learning journey in a number of ways, but we will take 5 years of that experience into the new site in Sydney. We have built a strong capability, both in our internal teams as well as the Vanderlande team in the Australian marketplace, and that's going to hold us in good stead. The thematic solution in the NDC, a different solution, given the different nature of the product that we move there, it is much more slowly moving. It is bulkier. And therefore, that fits a semi-automatic solution as opposed to an automatic solution, but they will be connected, so we will be able to merge, for example, a delivery to store with both an NDC and RDC, where today, it gets 2 deliveries from 2 separate locations. The location and the use of rail will take 26,000 truck movements off the road a year that we currently have from the Port of Botany into our NDC and RDC. But the key benefit in the solution is an integrated site, the use of rail. And I think, as Brad alluded to, whilst there are significant supply chain benefits, the benefits in-store are also significant. These pallets are robotically picked. They produce 100% order accuracy every single time. They are very, very safe in terms of the way they are built. And as Steve mentioned, they are built not only to the store planogram uniquely, but indeed to the isle and the bay of that store, which means that we can change the store planogram with a flick of a switch and with the flick of the switch, MSRDC, for example, is then building to that new store planogram. A new order accuracy means that we have 100% on-shelf availability and then the expanded range. So we're very comfortable with the solution providers that we have, say we've built significant experience with their team and our own team. All of that will go into [indiscernible]. It is a simpler design. And to give you context of the size, we've got currently 175,000 square meters in the 3 sheds. We'll be reducing that footprint by 100,000 meters to 75 with the 2 new sets. So that shows the efficiency that the automation provides from a footprint perspective and obviously, in relation to the cost of building an operation that pays out in the returns. And just in terms of online, the expanded range capability, again, 100% order accuracy, the way that we're able to build and deliver the pallets to our stores, enable them to pick online more efficiently or if it goes into our e-stores or indeed our online hubs, again, they get all the efficiency that robotic picking with technology delivers. So it makes that more efficient, which then flows through to the cost of operating our online network.

Got you. And just in relation to the site. So you've got the 2 DCs connected. What proportion of your sort of national volumes will be going through that one site? And also I think there's somewhat of a delay to Moorebank, I don't know enough about it. But are you confident you'll be able to open up on time?

We remain confident. We're obviously engaged with Qube, who is the master [indiscernible] on that side, as you know, it is a Commonwealth state initiative. The planning approval has already been granted for the site. We have to go through an application process to get our individual footprint and approved, that the actual site has already got plan approval both at a federal state and local council levels. So we remain confident in the time lines to deliver the site. In relation to the percentage, the NBC will produce 100% of our national distribution. Currently, we have 2 sites, 1 in Melbourne, 1 in Sydney, and the New South Wales site will take about 34% of our overall volume, which is proportionally represented by, obviously, our sales and network in New South Wales. But also it's important to note that obviously, we have a large number of stores and our main competitor, and therefore, have a broader distribution network to cater to.

Your next question comes from Grant Saligari from Credit Suisse.

The sales growth in Big W, not only was a particularly strong in Q4, but you've commented that it was very, very strong across, so very strong across pretty all product categories. Can you elaborate on that sales growth and why it's being achieved across all categories? And perhaps any comments on the runway through June, whether that's changed at all?

Thanks, Grant. Look, we -- it's been a very consistent line of improvement really in Big W until actually sort of towards the end of Q3 when we just saw this real pop. And so that's what we saw early -- when COVID started, obviously, everyone's was in a lot of home leisure, but actually, the real highlight for us has been apparel, and particular winter apparel and where our issues right now is potentially, we are very, very light in winter apparel or cold and so that -- it's been strong, but that's really been the highlight categories. We were back in with that would come back and talked about the fact that we couldn't get that category to grow. So the big mover has been apparel, although all the categories have been strong. When you look at it at a customer behavioral sense, our existing customers are buying more from us, but we've also been fortunate to attract a number of new or old customers back to the business, and they seem to be sticking with us, which is terrific. And our Everyday Rewards program has played a very material role in doing that for us as we continue to enhance it. And we're actually, right now, we've commissioned our own personalization engine for Everyday Rewards in the context of Big W. So very strong and very strong also as with every other general merch business in online. Nothing else I call out of just the share consistency of it, that's been the delight. The issues we've had in June actually are us running low right now [ of lines, ] in particular, the, which is just very hard to go and replenish or to go and commit to future volumes and you get of [indiscernible] if I've been absolutely honest. But total sale started like weekend is our best toy sale ever. So still early days, but certainly, the start of the best numbers we've had in the toy sale as far back to our records going. So very pleasing. The real issue, though, is making sure we maintain that momentum in Q1. And of course, that's where our real anxiety and focus is right now.

Okay. That's helpful. Secondly, just on the shape of the Australian food sales growth. Can you comment at all on the rate of growth in online that's in that number? And I guess, the other phenomena is being more local shopping versus people going into big centers? Is there anything you can tell us about the sort of the composition of that Australian food sales growth?

Yes. I mean, both excellent questions and both works in progress. Online has continued to be very strong since we turned it back on. We had put into it during the crisis to really be focused on supporting vulnerable customers, priority assist. And they actually turned it off to most of our regular customers. We've turned it back on for them, and in essence, we found ourselves in some ways, simplistically with 2 databases, people who got [indiscernible] to our services and people who traditionally had wanted the service. And both are continuing to use all the bundle customers are slowly starting to ease back on it. But it's continued to be incredibly strong through May and June. But the real highlights has not been e-commerce, it's been digital growth. So e-commerce has been growing in the 40s, but digital is growing in 80s or 90s. So that's what you see. Still very low levels, but very strong growth. And that growth has been true not only as for Australian food, but true across, particularly at Dan Murphy's, but also, to some extent, BIG W in New Zealand, which was very strong during the crisis because we don't need to turn it off as we did in Australia. So that's continued on. In terms of people shopping locally, that is slowly easing and it's still certainly true, but it's not quite as true as it was 8 weeks ago. And really since early May, we're slowly starting to see that rebalance. To what extent does it fully ever rebalances, I can't tell you. But you only have to go Bondi lunch on a weekend year, you'll see that the traffic and the flows have started to come back. So that certainly seems to be rebalancing for us. The real issue we've quite at the moment, and I'll call it out to Shaun's question, is on the go metro stores in the city, which are just, while people might be going back from shopping groceries to some extent shop in a regional center. At this stage, still very, very challenging in the city or in [regions].

Our next question comes from Bryan Raymond from Citi.

Brad. My first question is just to follow-on, on food around the profile of sales growth in June, I think you addressed elements of this question, but just trying to get a feel for May versus June and particularly about consumption at home piece, whether we're seeing people start to eat out at restaurants, cafes, et cetera, a bit more? And if you're seeing any slowdown into June? Or if you've seen a pretty consistent trend across that fourth quarter-to-date so far?

It's one of these scenarios, Bryan, when we came and announced Q3 sales, we sort of said mid- to high single digits. So if I get a doctor, you start panicking because I hate doing forecast. But since that date, we've just seen very consistent trading across our supermarkets business. So metro has been very challenged over 2 cities, but in Woolworths Supermarket has been very consistent and pleasingly consistent. There's been some movements in categories as we go back-to-school and therefore, breakfast at home somewhat winds back, but that's been more than compensated for by [ any categories, ] which we been exist for us in April coming back we didn't really feel like we had an e-store, or Anzac or we didn't have an Anzac, we kept it that Anzac day. So we've seen that being the growth will return to growth in more entertaining [indiscernible] categories. So a very consistent would be [indiscernible].

Okay. And then just on the CapEx and the DCs. Am I right to be thinking about this DC CapEx as somewhat maintenance CapEx? I know that it's a big project, and it wouldn't be typically considered that way. But if you don't continually refresh your fleet of DCs, that would deteriorate, may become less competitive. So I'm just trying to think about whether an ROI is actually the way we should all be thinking about it given you guys sort of need to do this progressively over the long term, and you're likely to reinvest a fair bit of that ROI back into the customer offer. Can you help us understand just sort of thematically how you guys think about it? Because I'm looking at it and saying, well, this is a long-term project, maybe you generated double-digit ROI. There's an element of reinvestment. And then just the second part of that question, just in case I get cut off is, where is the CapEx rolling off in order to fund that $750 million over 2.5 years within your current CapEx envelope?

Thanks, Bryan. If you were aware of meeting the Woolworths' where [indiscernible] business capital finishes their growing capital start, so you would find it interesting [indiscernible] or we've quoted is a fully blended one. So it's got both elements in it. Just to give you a sense, by the way, Minchinbury was originally opened in 1998, Yennora in 1981 and Mulgrave it actually was built in 1974, but the current form was commissioned in 1999. So all more than 20 years old and always capacity constraints of some description. So there's no doubt they needed to be replaced in the next couple of years. And so we are constraining not only sheer growth in New South Wales but range. So that is clearly true. However, that's not the basis on which we've talked about the [Yennora] not the way we've approached it, which is an enormous opportunity to improve our end-to-end operations around it. I'll turn to Steve really to sort of further elaborate on your next question.

Yes. I mean, my build on that, one of the things we're trying to move away from you talked about SIB capital and talked about sustaining capital. So [indiscernible] actually, what's the capital that you need to invest to sustain your business long term, and you rightly point out, but a number of these with old and need to be replaced as Brad has elaborated on. That said, and Paul won't mind me saying, we're still required to get a return on that investment. And so -- because you could replace like-for-like, but actually, we are investing in automation. It's not just a like-for-like replacement we are upgrading in some ways the technology and therefore, the expectations associated with that, and that's why we're looking to drive not just an SIB outcome but an improvement in the cost of running our supply chain. In terms of where we're working through the roll-off of capital to fund it, it's part of our ongoing planning cycles. We review that on a year-by-year basis. We do know we've made these commitments. And so -- and there may be years where actually we have sort of a spike in CapEx just particularly around the peak construction years. That said, we will balance that and make trade-off decisions as we go through it, and we'll walk you through our 3-year planning process right now, a little bit delayed just given the COVID.

It will be refurbishments with it, will it not, that would be the primary source given what you've already said way through that program, and they're quite a bit chunk of your CapEx budget normally. Would that be the logical place that, that reason you roll off the supply chain ramps up? Is that the thinking?

Yes, we sort of try -- we've a pretty sustainable version of capital over the years. And it would be fair to say if we chose to, we could materially slow down our renewal program. At this stage, they're still delivering good returns for us. So we continue to evaluate it on a case-by-case basis. But that is an option we have. The real issue for us is actually, we have a number of major IT investments, and there will be, of course, invariably further IT investments required but actually how we think about those is a critically important part of this overall balance as well, I would just call out.

Okay. And final one, if I can sneak it in, is just the net headcount reduction that you'd expect across the decommissioning of 3 DCs or larger manual and bringing into automated debt the way we can sort of get a feel for the staffing costs improvement out of that?

Yes. Look, let me just say, we're committed to not only supporting the transition of the [indiscernible] at but actually leaning into the whole issue of the future of work and how we train team with the right skills in the future. We've got time to do. But essentially, there are about 1,350 roles that would be made redundant in this process. And we've got a net 650 roles that would go into the new warehouses. And given the fact that they're quite far from the existing ones we've taken, we think a very prudent approach to the size and the redundancy provision. And it's based on our learnings between Hume and South Hampton in Melbourne. But those are the reported numbers.

Your next question comes from Ross Curran from Macquarie.

I was just wondering, and this might be a bit hard to separate out. But to what extent do you think government stimulus packages have helped to underwrite demand in some of your more discretionary items? And how do you see demand for that playing out after the packages start to get back up a bit?

Thanks, Ross. In all honesty, we're not very leveraged as a group to discretionary items, I suppose, you could say a BIG W, a lot of our consumer electronics there would have been some benefit there, but it's not a big part of our business. And I think you can also and probably there's some discretion in Dan Murphy's, but it really is to the affluent segment, sort of, trading up in a more premium products. So I would say, certainly, government support has benefited us materially. What has benefited us clearly has been the various forms of restrictions, and therefore, people are staying at home. They just eat more at home. They're looking after their homes a little bit more. And so we've seen some benefit there. In the heart of the crisis, we also saw some ASP lift where customers, who come in extra value product, was not available, they would trade up. So there was an ASP benefit in the height of the crisis. That ASP benefit is fallen away but the rest of the benefit of people just stay a bit more at home, entertaining, sensibly hopefully, in safety at home and so on. So that's really where we've got our benefits.

And I guess, to follow up that point, if you look at your average customer basket this year versus last year, is the mix of items in it roughly the same? Are you seeing customers change their shopping habits and buying more individual items as opposed to semi-processed items? Or how have things moved around?

They reduced the number of trips they were making. So 2.3 has become by 1.6, and Steve can correct me. So it's coming back now, the people went less often. They chose 1 store, did all the shopping at the store. That didn't help us in the height of the crisis where they would have chosen their local neighborhood store. And often, they wore some hoodies and they went from all their shopping in that store. So that's what we've seen. You choose one store and try and just turn once a week, that's slowly changing, but that's really the big issue we saw. In terms of the basket composition, I think it's -- I mean, there's all -- as we go into the next phase, we think our customers want a little bit more fresh and a little bit more health. Everyone's starting to talk a little bit about fresh and health as we sort of go through getting this entertaining phase out of our systems. So we see that as quite an important longer-term trend. We have thought that our [ dairies ] would be negatively affected by the crisis and people want a more packaged product versus product that was picked for them, but actually, to my surprise, that really was mispronounced as not important and might be and I thought people might revert to a lot of packaged produce as well. But it was there for a while, in, so I wouldn't call that out. The 1 category that has been a real challenge for us, and all has been, is tobacco, although even in the last couple of months, that has gone from a major negative drag on us to slight sales growth, not volume growth. So that's probably the one thing that's changed a little bit. But the rest of it is relatively consistent on what I would have to say, but it jumps around during the period, right. I'm just talking in a very macro level over 3 months.

Your next question comes from Richard Barwick from CLSA.

Can I just go back -- you've talked a bit about the metro stores in the city is obviously creating a bit of a problem for you in a sales sense. And you said, I think a couple of times that they've been the biggest issue. I'm just trying to marry up the shape of your sales and then the sort of flow through for earnings. Because I would have thought that if you've seen some real strength in online, you'd be getting a little bit of margin dilution flowing through from there. So if we're giving a bit of a pecking order of impact, are you saying that the weakness in these metro stores has been more material on the bottom line than has the margin dilution from online?

Well, that's a tough one. I'm going to turn to my colleague, Mr. Harrison to help me on this one. It's just such a dynamic period. So it's not to be disingenuous honest. Our on the go stores, which is sort of -- whether it's a foot street mall or whether it's a Southern Cross kind of whatever, the turnover has gone down so much that they are unprofitable. And when you look like-for-like cash, there were very strong drivers for us last year. It's the fact that you've gone from profits to no profit to unprofitable, that's the big issue. You have that inflection point. So that's why I just called it out. Our neighborhood metro stores, we sort of will compete with the [indiscernible], I suppose, on what has been called very strong as a counterbalance, but those stores have been a real drag on us. In terms of online, there's margin dilution, but it's not something that should have been an unprofitable site at it goes to a lower margin side. That was a particularly challenging price in Q3 where we read very heavy on home delivery. But now in Q4, we started to get some balance back in between home delivery and pickup. And so that's not quite as big a challenge, but it does sit there in the mix. I don't know if you can talk about that.

I think a comment would be, by far and away the biggest impact on flow-through is the COVID costs by 10x, right, in terms of type of impact, I would estimate. Metro stores are certainly a drag. We -- those on the go stores, we are losing money. With the sales levels where they are, we do expect that to come back -- customers come back into the city. I don't have now the exact numbers off the top of my head, but the similar type of magnitude would be my estimate to the margin impact from the growth of e-commerce. But we'll clarify that. Don't hope it that it sort of the [indiscernible] the full year.

Yes, the call this question on the media call, should you put all the cost you put into your business. And as I think we talked about it at the end of Q3 sales alone, given everything we knew and given everything we knew from overseas, it didn't feel like it was the right time to not be very, very conservative in terms of what we did. In terms of assumed [ here in-store ] and therefore, adding additional casual in terms of the overflow warehousing capacity that was put in, in terms of having security in every store, given the early on we saw elevating the cleaning standards, having to manage the checkouts, having a greeter to [indiscernible]. So all of those costs are not hit the warehouse where we've had certain [indiscernible] associated with by the most short term. None of those are actually that complex to unwind. And we started to unwind that we're trying to get to nice momentum for July. But as I said, last week can make us just a little bit nervous.

And just 2 sort of questions to round off that. When you're talking about these metro stores, how many stores in total are you talking? And then for online, I think you're tracking at about more or less 4% of sales, what would you be expecting that number to show up to be for the full quarter?

Yes. I mean, I don't have the specific numbers of probably around 20 or 25 metro stores. But part of the -- I don't have the number at hand. But that's the material impact of the turnaround, that is you [indiscernible] profit [indiscernible]. In online, it's certainly tracking a bit higher than exit rate will be in the half. That might even be further, I couldn't tell you [indiscernible].

Doubles your number of delivery slots in [indiscernible], So it might even seem stronger growth than that?

Yes. So the exit rate, which we only look at it at a month end, yes. Steve, can you...

Yes, I think in Australian Food will probably get [ 6 ] as an exit rate.

Okay. And just the last one is the staff remediation costs. I mean, that number seems to be growing every update you give. I think we were talking $315 million back at the half year, up to $390 million now. Do -- when -- how soon do we have an endpoint here? It just seems like -- because I remember, when you first identified it, the sense you gave then was you gave an all-encompassing number that you thought you'd capture everything, but that hasn't proven to play out at all, not even close.

Well, I think this is going to be an issue for every major corporate in Australia. I actually think you don't know until you've actually added and you've analyzed every shift time for every team member, whether they work for your store, don't work for you and you've applied [indiscernible] is against the award. And so you have to do that. What we have done is, the March 4 off the numbers you see now, they're based on 4.5 years of individual -- and attendance records for individuals across all of our retail businesses and 2 years of equivalent analysis for the HIGA, Steve and myself were talking earlier, it's probably between 2/3 and 70% of all data has been analyzed in the group, and then we've grossed up for the other $30 million. And all the numbers you saw before, we sort of started at 20%. We first called that out at the end of October was based on 2 years of analysis. Inside Woolworths supermarkets, not including the rest of our banner group. So that is the 4th March. And so that's what you've seen today. And I said it's based on between 2/3 and 70% of all records have been analyzed in some detail inside the group, and then we've grossed up for the assumption on the other 30. So accuracy should be materially higher. But I honestly believe for anyone in our position and [indiscernible] analyze all the records, you do not know the odds of [indiscernible] comes down to the individual. There is no potential in this process is the problem. You settle those time frames, but you don't need to set off between individuals. It's a better off test for each individual applied to what they won't, but they said they would work on what people thought them out work, what they would work, what day works in, whether they put the shifts [indiscernible] when they work and how it interfaces with awards that are inherently incredibly complex in the interpretations. I wish I had a better answer. It's not something we feel particularly good about. Haven't felt good about it for a year. But I can assure you only of 1 thing, which is the veracity with which it has been done. And the fact that it's -- we quoted it the way it is.

Your next question comes from Scott Ryall from Rimor Equity Research.

Hopefully mine will be quick to answer. I just wanted to ask about your national distribution center, which shows the consolidation of your 2 sites. Could you just give us a sense of what is received from local suppliers versus what is imported there? And how will you look to shift goods around the country given the -- this will be your primary site. So those of goods, is the rail extremely important for outgoing, not just for your incoming from port?

Thanks, Scott. It's a very tricky question, which I'm going to get Paul Brown to talk to, except for 1 issue, I wanted to call out, which is one of our range issues out of fall is that we don't have any fixed lots. And therefore, we do a lot of direct store deliveries till today. And it's just a very inefficient process for both the supply and for the store because you can't always predict when the delivery is going to come in and for how you manage your backlog and also how you manage your flow-through of information back to the supplier. And I think, Paul, correct me, I think we still have -- the average store in New South Wales somewhere around 180 DSD deliveries a week, which are enormously inefficient. And these -- most of these deliveries will be able to be taken away and flow through a DC, which should be good supplier and the store. But Paul, in terms of mix between national and international and/or trying to put up your expertise?

Yes. And Scott. It does depend, obviously, on the season, but we have about a 35% international inbound in terms of the actual shipment numbers, but by volume, it is greater. Obviously, a lot of our own branded food code products are sourcing locally or overseas. A lot of our general merchandise that is stored in the NDC is international import. Whether that be homewear or other items. So those vary by SKU, but it will be the 1 NBC. We will be using rail where it's appropriate. Obviously, being on a railhead, we'll be able to take the competitors directly from the port. Qube, as we know, runs the port side logistics as well. So we'll be able to actually prioritize unloading from the vessels straight into our NDC with no hands touching that product until it actually gets into the store, which is a main feature. We will use rail as a predominant mode because it's obviously the most efficient. But we'll also use road where it makes sense. So it will be a combination. Obviously, there is infrastructure upgrades being undertaken current nationally to ensure that we have efficient -- more efficient rail links into Brisbane and into Melbourne, and we'll take advantage of those as they continue to be invested in. But rail is an important part, I think, of our landscape. And as Brad said, when we looked at the location and the features that we wanted, Moorebank not only provides a relocation for semi-metro delivery but also gives us that unique ability to remove 26,000 vehicles off the road from the port and then use rail as a much more regular option than we currently do in our current NDC setup.

There are no further questions at this time. I'll now hand back to Mr. Banducci for closing remarks.

Thanks, as always, for your questions and appropriate challenge. We look forward to talking to you on the 27th of August when we will present our full year results. And obviously, all the numbers you've seen here are caveats the need for us to go through various reviews. So thank you, everyone. Have a good day, and look forward to speaking to you.