Woolworths Group Limited (WOW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Woolworths Group FY '21 Full Year Earnings Analyst Announcement. [Operator Instructions] I would now like to hand over to Brad Banducci, Managing Director and CEO of Woolworths Group. Please go ahead.

Good morning, everyone, and welcome to the Woolworths Group full year results for the F '21 financial year. Given the current circumstances, we are conducting this call completely virtually today. So I apologize in advance for any technical difficulties we may experience. Stephen Harrison, our Chief Financial Officer, will be joining me in presenting our financial results a little later, and our other business heads are joining us on the phone. Today's briefing will include an update from me on our financial results for the year and our progress against our strategic priorities in F '21. Steve will then present our financials in more detail before handing back to me to finish with an update on our current trading and outlook for F '22. Thereafter, we will be happy to answer any questions you have. Just focusing then on Slide 4. Before I reflect on F '21, I would like to recognize the Woolies team and express my gratitude for their extraordinary efforts as we continue to be challenged by COVID and the more recent Delta outbreak. As I talked this morning, we have over 3,300 team members in isolation and 3 in hospital. Our team continues to work tirelessly to ensure we're providing a stable supply of food and everyday needs to the communities which we serve and continues to demonstrate real care for each other and our customers. I also wanted to thank our customers for their support and patience as we navigate an ever-changing set of challenges and for continuing to shop COVIDSafe. As a group, we remain firmly committed to operating COVIDSafe and ensuring we are doing the right thing for our team, customers and communities and by leading the way to make shopping safe. We know how critically important vaccination is, and I'm proud of the work we're doing to partner with the federal state governments and other food retailers to establish pop-up vaccination centers at our DCs as well as increasing access to vaccines for our store teams. We've also revised our vaccination leave policy to ensure all of our team members can get vaccinated. We are clear that vaccination, supported by both PCR and rapid antigen testing and other COVIDSafe protocols, are essential to ensuring a secure supply of food and everyday essentials. Moving on to Slide 5 and a summary of the F '21 financial year, which I must confess feels like a lifetime ago. F '21 was, however, a year of significant achievement for our business. And in addition to continuing to navigate COVID, we achieved a great deal during the year, with the most significant being the successful demerger of Endeavour Group in late June. We are now entering into a new era for Woolworths Group and with the caveat of the challenges of Delta in the next few months, I couldn't be more excited about all the opportunities we have in front of us. In F '20, we outlined plans to transfer Woolworths Group into a more focused food and everyday needs ecosystem, by building partnerships and delivering adjacent services and products for our customers. We've continued to make good progress in this plan, which I will talk about in more detail later on. The group's trading performance in F '21 was strong, with group sales growth of 5.7% and group EBIT growth of 13.7%. F '21 was a tale of 2 halves or more accurately, a tale of 3 thirds, as we cycle the impact of COVID from late '20 last year. As true sales growth slowed as expected in our retail businesses, but all businesses reported sales growth in H2 and contributed to EBIT growth with the exception of New Zealand Food, which was impacted by subdued market growth. eCommerce was again a highlight in F '21 with continued operations, eCommerce sales growth of 63%. Sales penetration increased over 3% during the year to 8.5% of sales, driven by material investments in capacity and capability during the year. Moving to Slide 6. Operating sustainably is not only important to our customers and shareholders, but it is increasingly intrinsic to our business. We launched our Group Sustainability Plan 2025, with ambitious targets across the 3 pillars of people, planet and product, focusing on areas where we believe we can make the biggest difference. There are too many things to call out individually, but I am particularly pleased in the progress we have made on diversity and inclusion during the year, including being voted the most diverse and inclusive company in Australia according to Refinitiv. We have reduced Scope 1 and 2 carbon emissions by 27% since 2015 and removed over 2,500 tonnes of plastic from our products in F '21 alone. We recognize that there is much more to do, and we aspire to act like a leader and speaker of issues that matter on the topic of sustainability. Moving to Slide 7 on progress against our 3 key strategic priorities. I'll talk to Slide 7 and 8 in parallel in tandem, which detail the progress against our key strategic priorities for F '21. I will call out some highlights which I think are important to reference. As we looked at our purpose of being better together for a better tomorrow, we were pleased to be recognized as Australia's most valuable brand according to Brand Finance and Australia's most trusted brand according to Roy Morgan in F '21. We also continued to support the community through direct investment of $35 million, including support for the Salvation Army, Rural Aid, OzHarvest, Foodbank and Lifeline. In F '21, eCommerce and digital accelerated at an unprecedented rate as our connected customers increasingly took advantage of our eCommerce services. I have already mentioned our strong eCommerce growth and increase in sales penetration, but another highlight was the increase in average weekly visits to the group's digital platforms. On average, 17.2 million customers visited our website and apps, up over 40% on the prior year, with most of the growth coming from app usage. As we continue to increase eCommerce capacity, we announced the new automated performance center to be opened in 2024 in Auburn, New South Wales in partnership with KNAPP and now have 4 operational Takeoff micro-fulfillment operating, 2 in Australia and 2 in New Zealand. Despite the COVID interruptions, we worked hard to differentiate our food customer propositions and completed 75 renewals in Australia and New Zealand in F '21. We also continued to make progress in tailoring ranges for our customers with a tailored premium or UP range, as we call it, rolled out to 31 supermarkets and a new community range launched in Cabramatta in Sydney based on the needs of that area's diverse Asian community. I have touched on the successful demerger of Endeavour Group in late June, but again, wanted to thank all the team across both businesses that worked so hard to bring this together. We look forward to working in partnership with Endeavour Group for many years to come. Turning to Priority 5. The performance of BIG W was one of the highlights of the year in F '21 with strong sales growth and an increase in EBIT of over 300%. Unfortunately, F '22 is shaping up to be a much more challenging year for BIG W but I'm incredibly proud of the BIG W team and what we have been able to achieve. Finally, to conclude on our strategic priorities. I've prioritized the safety of our team and customers this year and will do so in F '22. We have made progress in the rollout of our new workforce management solution and continue to progress the modernization of our supply chain during the year with work now underway at the Moorebank Intermodal. Just moving to Slide 9 and the Woolworths Group's food and everyday needs ecosystem. Slide 9 is a summary of how we think about our ecosystem, and it is organized into 4 areas. Those being, of course, our cornerstone retail or B2C food businesses; our growing B2B food businesses; More Everyday, where we want to deliver additional value and services for our customers; and our platforms and partners, where we add value to our customers and partners through building scalable retail platforms. I will touch on some of the highlights on various aspects of our ecosystem on Slide 10. As you all know, when we come to B2B food, we completed the acquisition of a 65% strategic investment from PFD Food Services on the 28th of June following ACCC approval. This investment and partnership with the Smith family will provide us with exposure to the growing food service sector in Australia and form an important part of our growing B2B food segment. We also established a new business called Greenstock, our upstream meat business and launched Wpay as a stand-alone retail payments business. In May, we increased our stake in Quantium to 75% and are establishing Q-Retail, combining Quantium and Woolworths Group's retail advanced analytics capabilities. Cartology, our retail media business also continued to perform strongly with growth across all advertising channels. And by year-end, we had digital advertising screens rolled out to over 1,200 stores. Moving to Slide 11 and the F '22 group priorities. While we like to ensure that our group priorities remain broadly consistent, we refine them annually to make sure they continue to evolve in line with market trends and customer expectations. All of our F '22 priorities were initiated in F '21, and our focus in F '22 is to scale them effectively. I will now turn to Steve Harrison, who will present our financial results, and I will then conclude the presentation with an update on our outlook for F '22. Over to you, Steve.

Thanks, Brad, and good morning, everyone. I'll start today with the F '21 full year group results summary on Slide 14. Group sales increased 5.7% on the prior year to $67.3 billion, with group EBIT before significant items increasing 13.7% on the prior year to $3.7 billion. NPAT before significant items increased by 22.9% to approximately $2 billion. Group NPAT after significant items was $2.1 billion. On 23rd of June, we updated the market on a number of significant items to be incurred in F '21, which resulted in a post-tax gain of $102 million. These included estimated redundancy costs associated with the planned closure of our temperature-controlled facility at Minchinbury, the impairment costs for 13 Metro stores, transaction costs related to the demerger of Endeavour Group and the acquisition of PFD Food Services and a net gain on Quantium with our previously held equity interest remeasured to its acquisition date fair value. I'll discuss our dividend later in the capital management section. Turning to half 2 sales on Slide 15. Before we get into the financial performance by business, it's worth recapping on the significant volatility in trading that we experienced in F '21, largely reflecting the ongoing impact of COVID and the cycling impact in our F '21 results compared to the prior year. In Q4, New Zealand Food, BIG W and Endeavour Drinks all reported negative or lower comparable sales than the prior year, given the elevated sales in Q4 of F '20. Australian Food comp sales increased by 0.1% in Q4 due to stronger sales growth in June as lockdowns again began to have an impact. Two-year average growth rates remained strong across all businesses. And this is an important context for the next slide, which shows our EBIT by business. Turning to Slide 16. In Australian Food, F '21 sales increased by 5.4% and EBIT increased by 9%, following a strong first half with 10.6% sales growth and 13% EBIT growth. In half 2, EBIT increased by 4.5% to $1.1 billion on flat sales, reflecting the impact of cycling COVID in the prior year. Growth was driven by gross margin improvement and lower COVID costs, despite material growth in the eCommerce and ongoing investment in digital initiatives in the half. New Zealand sales were negatively impacted by low market growth and cycling a strict lockdown in half 2 last year. EBIT decreased by 4.6% in New Zealand dollars for the year, impacted by negative sales with half-year EBIT down 13.3%. BIG W performance was a key highlight of F '21 with EBIT more than quadrupling to $172 million. Half 2 EBIT of $39 million was equivalent to the full year EBITDA in F '20. Group costs for F '21 $176 million, up 23.6% from $144 million the previous year. This included COVID-related costs of $28 million, additional risk and payroll remediation resources and higher insurance costs. While we have presented Endeavour Group as a discontinued operation, it was part of the Woolworths Group for the entire financial year of F '21. A strong increase in Endeavour Group EBIT for F '21 and half 2 reflected the continuation of in-home consumption trends in drinks and cycling a period of closures in hotels in half 2 of F '20. Turning to Slide 17 and covering off Endeavour Group demerger accounting implications. While we're pleased with the success to date of the demerger of Endeavour Group, unfortunately, the demerger has led to some complex accounting at year-end. As mentioned, Endeavour Group is now recognized as a discontinued operation and its assets and liabilities are now classified as separately held for distribution in the presentation of the June '21 balance sheet. Following the shareholder approval of the demerger in June, we were also required to recognize a demerger distribution liability of $7.9 billion in the year-end balance sheet based on the estimated fair value of Endeavour Group shares calculated using the VWAP for its first 5 days of trading. While the demerger distribution liability resulted in a material reduction in net assets and equity at the end of F '21, we will book a gain on distribution of approximately $6.4 billion in Q1 of FY '22, as the demerger was implemented on the first day of the new financial year. Turning to Slide 18 and covering off some of our key balance sheet metrics. Average inventory days for continuing operations improved by 0.5 days from the prior year due to strong sales growth through the year and normalizing inventory levels. Group normalized ROFE increased by 143 basis points to 15.1% and was driven by increases in all business units aside from New Zealand Food, which was impacted by lower EBIT in F '21. Moving to Slide 19 and our capital management framework. On this slide, we've included a recap of our capital management framework and called out some of the key highlights. As you can see on this slide, we've continued to generate strong operating cash flow in F '21. This cash flow has been allocated primarily to dividends and investments in the current year. We have also announced today an off-market buyback of $2 billion to return excess capital and franking credits to shareholders, which I'll cover shortly. Moving to Slide 20 and our cash flows. Cash flow from operating activities before interest and tax increased 1.7% to $6.2 billion. Growth in EBITDA was somewhat offset by working capital movements, reflecting a normalization of inventories and payables relative to the prior year and the reduction of provisions following significant salaried team member remediation payments made in F '21. Lower interest paid was due to lower average net debt and lower borrowing costs. Tax paid increased due to higher installments, reflecting higher profit and stamp duty associated with the Endeavour Group demerger. Cash flow on investing activities increased 13.1% to $2.2 billion, and I'll talk about the increase in CapEx on the following slide. The increase in repayment of lease liabilities reflects the commencement of new leases and lease remeasurement. Our cash realization ratio was 97% and below F '20, largely driven by a reduction in provisions from the payment of salaried team remediation costs during F '21. Moving to Slide 21 and covering off on our CapEx. As a reminder of our capital classifications, sustaining CapEx includes areas of spend, including maintenance, safety, store renewals, IT and supply chain spend and investments in productivity initiatives to sustain and improve the efficiency of the business. Growth CapEx refers to spend in areas like new stores, eCommerce, digital and other projects that are expected to drive higher sales growth and increased gross margins over time. Operating CapEx for the year was at $2 billion, a little above the $1.8 billion to $1.9 billion we forecast in F '21. This was due to increases in sustaining CapEx, particularly in IT supply chain and renewals, as well as growth CapEx driven by our increased focus on unlocking eCom capacity during the year and driving digital traffic. We've also worked to identify how much we're spending on our sustainability initiatives to highlight our commitment to driving a better tomorrow. In F '21, we spent approximately $170 million on capital projects with strong sustainability benefits, including areas such as refrigeration, lighting, solar and HVAC. F '22 operating CapEx is expected to be approximately $2 billion despite savings related to the Endeavour Group. The increase will be driven by investments in supply chain, in particular, our New South Wales supply chain project, increasing eCom capacity, including the commencement of our automated customer fulfillment center in Auburn, New South Wales, together with ongoing investments in digital initiatives as we look to support long-term growth of the business and drive sustainable long-term value for shareholders. Moving to Slide 22. Today, the Board has approved a final dividend of $0.55 with the F '21 full year dividend of $1.08, up 14.9% compared to F '20. Endeavour Group is also expected to pay a dividend of $0.07 per share, reflecting its earnings for half 2. Including the Endeavour Group half 2 dividend, the payout ratio represents approximately 74% of group NPAT before significant items. It should be noted that one of our goals in determining the F '21 dividend was to ensure that shareholders receive dividend from Woolworths and Endeavour Group that are broadly equal to the dividend that would have been expected if the demerger has not gone ahead. The Woolworths Group final dividend included approximately $0.04 per share to achieve this. Turning to Slide 23 and our off-market buyback. As mentioned earlier, the group today has announced an off-market buyback of $2 billion. 1 September will be the last day that shares can be acquired on market to be eligible to participate and qualify for franking credit entitlement. The buyback is expected to release approximately $840 million of franking credits for our shareholders. Further information is available in the buyback booklet also released today. Moving to Slide 24, covering funding and debt. The group's sources of funding and liquidity remain strong with good access to both bank and capital markets debt. We ended F '21 with net debt, excluding lease liabilities, of $1.4 billion. On the 28th of June, the first day of the new financial year, Endeavour Group repaid $1.7 billion of intercompany borrowings to the group, and Woolworths also deconsolidated Endeavour Group's cash of approximately $440 million. We remain committed to a solid investment-grade credit rating and a significant headroom above the thresholds for our current ratings of BBB from S&P and Baa2 from Moody's. We intend to launch a debt capital markets transaction shortly with an estimated size of approximately $1.5 billion to secure long-term funding for the investments in Quantium and the acquisition of PFD and to lock in long-term debt at attractive interest rates. Turning to Slide 25 and closing with a brief update on Primary Connect. MSRDC continues to increase throughput despite COVID disruptions over the past year, averaging 2.1 million cartons per week in Q4 with further increases in volumes expected in F '22. Melbourne Fresh DC opened ahead of schedule in August 2020. The development of a new 20,000-square meter Fresh distribution center in Auckland is progressing well, with completion expected in 2022. In June, we announced a new 76,000-square meter Fresh distribution center to be built at Wetherill Park in Sydney to consolidate the currently fragmented temperature control network in New South Wales. We also began work on our new Moorebank national distribution center, which is part of our overall ambient network project in New South Wales, with the 2 DCs opening in '24 and '25, respectively. Thanks, everyone, and I'll now hand it back to Brad.

Thanks, Steve. Turning to outlook. We know that COVID will continue to have a profound impact in F '22, especially in the next few months. and making any predictions about the year ahead is very difficult. What we do know is that our commitment to operating COVIDSafe remains our #1 priority, and our ability to respond quickly and effectively to disruptions is now just part of the way we operate. The ongoing impact of COVID has led to strong sales growth of approximately 4.5% in the first 8 weeks of F '22 in Australian Food as in-home consumption has increased, particularly in New South Wales. Two-year growth in New Zealand has continued to improve, with some sales benefits from recent lockdowns included in those results. COVID costs have also increased with $41 million of COVID costs in the first 8 weeks of F '22, equivalent to 0.5% of sales. BIG W has been negatively impacted with a number of stores impacted by some form of restriction and sales declining by 15% for the first 8 weeks. As a result, and given the outlook in the next few months, BIG W's EBIT is likely to be materially low H1 of F '21. As Steve already mentioned, CapEx will be approximately $2 billion in F '22, predominantly driven by supply chain and eCommerce investments. In summary, we are excited to be embarking on the new era for Woolworths Group and remain focused on our key strategic priorities in F '22. We are also focused on leveraging our core capabilities and platforms to grow our food and everyday needs ecosystem by expanding into complementary areas that deliver more value for our customers. While we are excited about what the future holds, we are realistic about the challenges that lie ahead in the next few months as we work through driving vaccination rates and responding to the challenges and volatility of the Delta strain. I will now turn the call over to questions.

[Operator Instructions] The first question today comes from Michael Simotas from Jefferies.

The first question for me is on the outlook for CapEx. I guess, $2 billion is a big number, given it doesn't include Endeavour Drinks, and it's almost twice your asset depreciation. Should we think about FY '22 as a peak year for CapEx or is the investment likely to continue at a similar rate for the next few years?

Thanks, Michael, and a very good question. I'm sure Mr. Errington was hoping to hear we get that before you. So you're ahead on that one. I might turn to Steve to elaborate on where we are on capital. So we can sort of preempt a few other questions that might come on this front. Over to you, Steve, to talk through what we see the capital profile looking like in F '22. And any thoughts you might have on the outlook more broadly.

Yes, thanks, Brad. And nice to chat -- or thanks for the question, Michael. Look, it's something that we think a lot about in terms of balance sheet settings and how we manage our capital and particularly how we allocate our capital. And we -- as we lay out in our capital allocation framework, we look at both how do we sustain our business and how do we grow our business. The next couple of years, and F '22 we've called out specifically, but we have some specific investments that are really about enabling the long-term growth of the business and also maintaining and, hopefully, growing our advantage. And that's in 2 areas specifically. Firstly, in supply chain. So as we announced this time a year ago, our investment in Moorebank, that is expected to drive increased spend both next year and potentially in the couple of years thereafter, with the opening in '24 and '25. We've also announced that consolidation of our fragmented temperature control network in New South Wales into a new facility we built at Wetherill Park. So the way I think about that supply chain investment is, really, we're at that point in the cycle where New South Wales, our most important state where we have our biggest market share, we need to reinvest back into the capacity for the next stage of growth. And we think that those are investments that won't necessarily pay back in the next 1 to 2 years, but will set us up for the next stage of growth. So certainly, they are multiyear investments that we are making in the next 2 to 3 years. When it comes to eCom, that's the other place we'll be continuing to invest. And you would have seen in our CapEx slide that we did step up our investment in eCommerce as we have been doing for a number of years. And actually, that's holding in pretty good stead right now if you think about the demand for eCommerce in this Delta world that we're living in. But we'll continue to invest in eCommerce capacity, both in putting more drives into our stores, enabling capacity in the stores to allow them to cater for when eCommerce represents up to 20% of our penetration, which we think will happen at some point in the future, and we want to make sure that our store network is an advantage and future-proof. And then the other thing we're doing is we're making that next investment in our capacity for eCommerce and our sort of next step up in terms of automation. We've obviously got the Takeoff units. We're now going and building an automated CFC in Auburn. So ultimately, the areas where we've chosen to step up the investment, it's a conscious choice, are things that we think will give us both capacity for long-term growth but also give us advantage and protect the advantage that we have in eCommerce.

Okay. So it sounds like we shouldn't necessarily expect it to drop materially beyond FY '22 is what I take away from that?

No, I wouldn't have thought so, given the supply chain pipeline we have for the next couple of years.

Yes. Okay. And then a question for me is around your margins in the Australian supermarket business. I know it's problematic trying to separate cost of goods sold from CODB. But if we sort of look at the CODB line and CODB margin, even with pretty healthy sales growth and COVID costs falling, there was a little bit of deleverage and the margin expansion came from gross margin. So I'd just be interested in whether you can continue to grow gross margin fast enough to offset that deleverage, particularly in the context of my previous question in that I would expect D&A to start to tick up through the Australian Food business as well.

Thanks, Michael. And I think I may have expressed this before. My view on the efficacy of GP and CODB, the way it's currently defined for our business, I think, is questionable on a go-forward basis. And one of the reasons actually our CODB has gone up in certainly in the second half, was related to the eCommerce costs and us picking for eCommerce orders in our store, which is in the CODB. Actually the net delivery cost sits in the GP. So you sort of -- as our business sort of changes, the way we measure things is something we're going to have to turn our minds to in the next couple of months. But again, let me expand on sort of what happened in the P&L just to provide context to what you've had to say, and I might also then get Natalie Davis to elaborate more on my comment. On the GP line, it was a pleasing year really primarily driven by our continued progress and improvement on the topic of stock loss. And we've been working hard, as you know, on this for many years and have continued to progress very pleasingly through a whole range of initiatives, and there was a material benefit in the GP line for us. And also then some changes in mix of business. And it's actually a frozen category, in particular in the second half, has started to grow quite strongly as has the chilled category. And we can come back and talk about the reasons there. One then in the CODB, the material growth in eCommerce has put a lot of pressure on to the business and making sure we pick and pack and dispatch the orders. And you see that in the CODB line. The highest growth volume side within the last year was our personal shoppers, and we have in the order of 25,000 personal shoppers in the business as I speak today. And it's become a material part of our business. There's lots of things we're learning and working on there to improve efficiency of the way we route our teams through the store. We've got pick-to-light and a whole range of very exciting initiatives, but it's still a work in progress. So a large investment there. Also in addition, a slowdown in some of our productivity improvements. One of our anxieties right now is a team that's tired and fatigued and a number of those understandably we had to slow down through the year and that was a very conscious choice and decision. And then, of course, just in wage rates going up. So that sort of gives you a sense of where we're at. On the go forward, we do think, of course, and our aspiration is to continue to improve the overall performance of the business. And we see ranges of opportunities, material opportunities, in our GP line as well as in how we improve using technology to improve the things we do in CODB. But Natalie, is there anything you would specifically like to call out? In particular, in the second half, Michael, where we're lapping whatever material COVID costs in F '20, as you would know.

Thanks, Brad. Yes, I'd just like to emphasize that I do think we're constantly looking at our profit flow-through and trying to make the right trade-off. We do have a very good year on stock costs, and we now have stock costs underneath 2.5%, and we're really focused on maintaining that going forward. And we see further GP upside in areas like tailored ranging that Brad called out, also really using data. So we're working on what we're calling next-generation promos but really using data to help target our investments in promotions for maximum impact for our customers. And we continue to see upside in CODB. We've called out some of the initiatives we're putting into store to leverage technology to make the process as much simpler for our support team. And I think action center was a really good example of this where we effectively have created a number of different algorithms but our team just gets 1 set of alerts prioritized around what they need to do, whether it's a wasted markdown, whether it's replenishing the shelf, it's all in the 1 place. So we've got a, I think, a long programmatic approach there to really try to remove paper from our stores, automate things and make things simpler, while we also invest in the future. And clearly, eCom growth is a priority in leveraging our stores to provide that convenience that our customers are seeking is incredibly important for us. So there are definitely opportunities there, and we're just very conscious at the moment around the pressure in our stores, on our team and just making sure that in the short term, we're looking after our team, which might mean that some of these productivity opportunities really are more of a focus in half 2.

[Operator Instructions] The next question comes from David Errington from Bank of America.

Natalie, can I follow up on the cost question? When I look at the first half, your first half cost of doing business on first half increased, excluding COVID costs by, 5%. But when you look at the second half on second half, your cost of doing business, excluding COVID costs, increased by nearly 9%. Now I know that the -- you just explained well about eCommerce and the accelerator, but there was a huge jump in eCommerce sales growth first half on first half. I think you went from about 4.4% sales penetration. Yet you sizably stepped up in that first half up to that 7.7. And the second half step-up was there, but it wasn't as big a step-up in that second half. I'm just wondering, are you investing ahead of the curve with your eCommerce because it just looks to me to be I understand there's responsive costs, but there's get ahead costs, if you know what I mean. Have you invested ahead of the curve for further acceleration in eCommerce in the second half relative to first half? Because there is a significant jump in that second half cost of doing business relative to the first half.

Thanks, David. A really good and important question. Firstly, I think if you just look at the second half and look at our basically flat sales profile for the second half, it's clear that all of our growth came through eCommerce. And essentially, there was some negative operating leverage in the stores if you look at store originated sales. And this is not uncommon to us, what it means, something that was true across most retailers. So the issue making eCommerce as profitable as it should be is also the issue as Natalie talked to on making sure that we use technology to simplify our stores to deal with the challenges of negative operating leverage at the store level and it will be an ongoing conversation, I think, with Woolworths and virtually every other retailer in Australia in the next couple of years. Secondly, to your point, David. We have continued to materially invest in eCommerce capability and capacity. And this has still got some very good stead in the last 8 weeks, in particular in New South Wales given the lockdown. So you can see the numbers. And we are committed to continue to invest ahead of the curve with our belief set that actually the more supply we add, the more it's taken up, so we supply constraints more than consumer demand constraints, particularly in the time, of course, of COVID. And so there's a whole range of investments there that we've been upskilling the team, building more capabilities into WooliesX banner that Amanda can talk to, making our stores more eCommerce enabled in every case and so on. So clearly -- and a very important part of what's going on there as well. And what I'd say about eCommerce right now for us is -- and this will change on the go forward again. Getting capacity out there has been our key. Actually making it efficient and effective is something that we still need to do a lot more work on. We're aware of the opportunities. But when you're in the middle of these COVID challenges, the number 1 thing is getting the customer served, getting the product to the customer and there's quite a lot of engineering work that can be done on the back. As I say, how we route personal shoppers through store and get the right algorithm in place, how we [ cube out totes ]. We swore to leave a lot of -- we took a lot of extra air in our [ totes ] and so on. But Steve -- I'll turn to Steve first, if that's okay, David, just to give you sort of a financial explanation of what happened in H2. And then perhaps back to Amanda first on eCommerce and then Natalie, anything you would like to add at the back end. But Steve, I know it's just useful for us to lay it out for everyone on the call, if that's okay. If we first start on the financial side with you, Steve.

Thanks, Brad, and thanks, David, for the question. Yes, We looked at exact same analysis you've been looking at in terms of that cost growth in the second half. And I think there's a couple or a number of elements to it. The biggest one that we've called out is the costs associated with eCommerce and the [ peaking ] and the mix impact that, that has. There is a degree of additional cost that goes into our existing store network. So if you think about we have flat growth in the second half, but we had -- all of our growth came from our eCommerce, in effect, therefore, the stores -- the store originated sale, albeit a lot of the eCommerce is picked in store effectively went backwards. But at the same time, we continue to open new stores. We continue to see some inflation on things like rent where we get turnover rent that links to elevated sales in the prior year, interestingly enough. We continue to have some depreciation and timing impacts. If you think about the lockdown in Victoria that you personally have to live through, we weren't able to execute things like training or some of our productivity initiatives that then fell into the second half. So there is some timing that we would probably have distributed across the year. And I think probably the other one that's worth calling out, and Amanda may want to add some color on this, we have continued and consciously to invest in some of our digital capabilities and some of our ecosystem. So we've continued to add functionality to our apps and our websites and enhancing those. We've continued to invest in digital traffic generation, which has supported both sales into our stores, sales into eCommerce as well as supporting some of the growth that we've seen in Cartology. And we're also standing up some new businesses in our ecosystem that are embedded in those costs. I think like HealthyLife, Woolies at Work, Wpay. And I think probably just the other point, and it ties back to what Brad said right upfront. We do have a tight team. The reality is our team didn't take the levels of lead that we would typically have done. And so there is a burden on our cost base throughout the year in terms of slightly higher levels of increasing our annual leave and long service leave provisions than what we would typically see.

But Amanda -- thanks Steve. Anything you would like to add by way of color? And I'm sure hopefully everyone knows Amanda is the Managing Director of our WooliesX business, which has the digital and eCommerce partnerships with Woolworths Supermarkets.

Thanks, Brad. Look, I think it's been really well covered. I'd just add a couple of key points, if I could. Just on eCommerce, in particular, we are seeing, when we compare H1 to H2, an ever-improving performance when it comes to what we call out as directly attributable profit. And so we are pleased with some of the productivity measures that are starting to flow through in terms of both logistics and the drop costs that we saw in certainly H2, which were an improvement on H1. Also, in terms of our labor rate and just looking at the productivity and as Brad spoke to. We've got a number of initiatives underway around picking efficiency, particularly in our store, which is absolutely critical given the important role that our store network plays. Other comparison, just when we think about H1 to H2 is important, and that is that in H2, we were carrying some additional costs from some of the 2 CFCs that actually really didn't land until very late in the first half. So you'll see that as a distinct difference between the 2 and those CFCs are playing an absolutely critical role right now for us. And we've been really, really pleased with those investments, and frankly, those facilities are now running at almost full utilization, as you could imagine, in New South Wales in particular. So overall, I think we're very pleased with the ever-improving productivity out of eCom. There is more work to do, of course, but I think that that's the key comparison, of course, When you look at H2 last year, eCommerce, particularly in that March and April period, was deeply disrupted in terms of offering our services because of the supply chain challenges we had. And so those costs won't have been as overt in the base for the previous year when you compare it. So yes, a lot more work to do, but I'd say we're very pleased with the current trajectory in terms of ever-improving profitability coming out of eCom.

Thanks, Amanda. Hopefully, David, that at least provided some color to the question you asked.

The next question comes from Grant Saligari from Credit Suisse.

I'd just like to have another shot at the investment profile question, if I could. I mean I can understand you've unashamedly taken the business on a growth strategy and that sort of comes through in a number of the initiatives. And I think we all understand with that sort of growth strategy, I mean, investment upfront is required and there's some impact on free cash flow. But if I look sort of fairly simply at the numbers, your sort of, after dividends, your sort of free cash flow slightly negative this year. Next year, about $1.4 billion of EBITDA drops out with Endeavour not being present. The CapEx profile doesn't change a lot. So the implication is probably, unless something else changes a lot on the profitability side, that the business does go pretty significantly free cash flow negative. And that could continue for a couple of years with the investment profile that you've got in mind. So I just wanted to sort of cross check with you to see that, that is the sort of financial shape that we should be thinking about as you invest upfront and set this business on a growth trajectory. So I'd be interested in comments on that, please.

Thanks, Grant. And again, I'll let Steve talk to it. I mean I think the big difference in previous years is not actually invest in the eCommerce and store renewals, and we've been doing that for a while. As you know, we might be changing the balance there. But we're getting to that peak period in what is more our long-dated capital investments around supply chain. And for reasons everyone on this call, I think, would understand, we've been trying to make sure we were comfortable with the performance trajectory, which we'll come back to an MSRDC before we move. But just given our capacity constraints in Sydney was just essential that we announced and started activating our Moorebank dual facilities, our national DC as well as our RDC. And then our new Fresh DC in Sydney as well in Werribee. So that's what you're seeing come through on top of that normal profile. So -- but Steve, do you want to just talk to the details of what it means in a cash flow sense with, of course, the usual sensitivities around providing guidance?

Yes. Thanks, Brad. Will do. So Grant, just you sort of have an implied question on cash realization in the current year. Let me just quickly cover that off. As you know, we typically target to have a cash realization ratio of 100% or better. This year, we're slightly below at 97%. The key driver there is actually the timing of payments against the salary remediation activities from the prior year. So we had over $250 million of payments in the current year. But if you looked at our cash realization ratio across the 2-year, I think we did 124% last year and 97% this year. So we typically target at 100% or better. Just picking up Brad's point. We don't want to give guidance on cash flow as we do on earnings. But we will typically target that 100% cash rate -- cash realization ratio from operating activities there. That step-up investment will put pressure on that in F '22. It is something that we need to manage. That said, we also look at it in the context of the long term, and our goal is to create long-term shareholder value. And we think some of these investments are very much around creating long-term value. And we believe that we do have the capacity on our balance sheet, and we're well positioned against our credit metrics even after the buyback to be able to fund a little bit of additional capital, not a little but a fair amount of additional capital, around what are strategically important investments for us. And we do believe that, that will deliver long-term value.

The next question comes from Shaun Cousins from UBS.

Just a question on the first 8 weeks trading, obviously, very strong given what you're cycling in first half -- first quarter '21 and even first quarter '20 with issues. I was just curious around online as a share of sales. How does that compare to the 8.5%? And maybe if you could quantify that? And any impact on availability? I'm just concerned around you've got 3.5 -- sorry, 3,300 staff in isolation. I assume because they're in exposure stores, and we understand merchandisers are struggling to get into store. I'm just curious around are you even, dare I say, missing out on sales because availability and gaps on shelf might become a problem, please?

Shaun, thanks for the question. Look, when you look at our growth in Australian Food of the 4.5% for the first 8 weeks, 8.5%, as you rightly point out, on a 2-year basis, it is materially driven by eCommerce. And we've literally doubled our eCommerce capacity in New South Wales in the last probably 12 weeks. So just an extraordinary effort by the team to put the capacity into the field, so to speak, and leveraging on the investments we just talked about with -- in particular, our Lidcombe CFC, which we commissioned in December last year, which has proven to be incredibly important in doing, I think, somewhere in the order of 17,000 orders a week, as I speak. So it really has been, for understandable, logical reasons, an eCommerce story, but a very good mix actually interestingly enough between home delivery and direct-to-boot services. So it's got nice balance which we think is important. On availability, actually, product availability has been not bad for us to date, but there are a lot of stresses and strains, as you rightly point out, in the supply chain as we speak today. And these are partly driven by the fact that we have a number of our -- in our DCs in isolation. Actually, we've got a material number of them coming back to work today, thank goodness. And we're working very closely with New South Wales Health to adjust how we treat close casual contacts with a vaccinated workforce and also where we're doing antigen testing and then we've got a very detailed track and trace process in our DCs. So we're hoping we can address the issue. But there are some challenges right now, and I would expect those challenges to continue probably for the next 7 to 14 days. What it means right now, we're probably running an out of stock rate in eCommerce on average of 5%, and we can easily substitute against that. But how things play out, in particular, how we engage and how New South Wales Health engages with us in the next week or so will dictate whether that goes up somewhat. Are we potentially losing sales? I would say so. Based on actually eCommerce capacity more than availability, our customers at this point in time are willing to substitute product. But it can take 3 days or 4 days in some areas to get a delivery window right now. And one of the things I'm always conscious of when speaking to media or analysts is we all have personal experiences with Woolworths. And I'm sure all of you, either directly or indirectly, know what our delivery window performance is. A very important thing to reference for everyone on this call, either media or on the analyst side, is we are saving capacity for our priority assist customers. And this is critically important for us to make sure people who really need home delivery, get it first and get it in a predictable way. And we've got 900,000 customers on our priority assist schedule. So we are actively adjusting and balancing as you might expect as we go forward.

Brad, you said you doubled capacity in online. It's just is -- would it be fair to say that you've got eCommerce double the share of where it was in the fourth quarter? Or is it in the teens? Maybe if you could just sort of provide some [ color ].

You look at -- so we had -- it's not to be disingenuous, but it is constantly changing. Our eCommerce penetration in New South Wales has gone up materially, Shaun, to be honest. On average across the country, it hasn't gone up quite as dramatically, but certainly, New South Wales, it's probably, if not double, gone up very close to double just based on what I've just been saying. And we will continue and working very hard between Natalie's team and Amanda's team to add more eCommerce capacity in the upcoming weeks into the field.

The next question comes from Bryan Raymond from JPMorgan.

Mine's just on inflation and the outlook from here. Obviously, you're cycling some pretty strong inflation. So I can understand the numbers sort of remaining pretty negative at the moment. But in terms of the outlook. There's a lot of price increases coming from suppliers. There's challenges around global supply chain. And at the same time, we're seeing promotional activity bouncing back excluding fruit and veg and tobacco, how are you seeing the basket -- the overall cost of the basket or the overall deflation measures looking over the next year or 2? Do you think there's a lot of pressure on those metrics at the moment?

Bryan, thank you for the question. I'll provide some context and ask Natalie to add additional color. And it will sort of be quite extensive in the answer here because I think this is a really important question to provide a full context. Obviously, you see in Q4 deflation, and that really is as much product to what we're cycling in the previous year as anything else. We'll come back to some elements of it. So it's been incredibly challenging year to unpick all the moving pieces, but in Q4, in F '20, was period where we had to stop our promotional program, and then we put it back in first online and then slowly back into a more full catalog program. So you are seeing the cycling impact in Q4. The question then to the one you rightly point out, what is the outlook going forward? And as always, at Woolworths, we sort of look at the long life categories, which is the one you were asking about specifically separate to our fresh categories and then tobacco, which has generally been inflationary but will become less inflationary with the changes in the application of CPR to excise in September. So firstly, just on the fresh side. It has continued to be a tale of 2 halves there with meat prices continue to go up. But we've had deflation in fruit and veg, particularly in fruit as sort of banana prices coming down. And we expect -- while we -- we'll see where meat goes. It'll probably continue to be slightly inflationary. It looks like, at least for the next half, fruit and veg will be deflationary. Call out the great value sitting there in avocados for those of you who are interested in super fruits, and there's a material oversupply of avocado. So we'll continue to see deflation. On the long life side, Natalie will talk in more detail. But obviously, just on the Indian side of our business, hopefully, everyone is aware of the material pressure right now in international freight rates, and they've gone up in the order of between 25% and 30%, depending on what ports we're looking at and what time frame we're looking at. This has been somewhat offset by exchange rate movements, but not totally. And the outlook on international freight rates is -- it doesn't look like it will be coming down -- potentially going up. So there is pressure in international freight rates. Never mind all the other pressures on input costs as well as the disruption a number of our suppliers are finding in their own supply chains and manufacturing assets and what it does to cost there. And so we are starting to see more cost increases come forward, and we'll work through those on an individual case basis. So you are starting to see certainly a lot more understandable engagement in that area. And on that issue, specifically, Nat, I'll ask you to provide a little bit more color, if you don't mind.

Thanks, Brad. I think you've laid out the dynamics very clearly. We are cycling the reduced number of promos probably for the next couple of months and if that impact will begin to moderate. We are seeing a step-up in long life in terms of cost to us by suppliers, and that's being driven by freight costs in some instances, but also by commodity prices in other instances. So as an example, vegetable oil prices have gone up, and that's been reflected market-wide in terms of vegetable canola oils, but also in products that rely on those imports, such as frozen chips. So we do expect to see moderate inflation emerging over the course of the year. Continued ongoing pressure on red meat prices in the short term. And as Brad said, fruit and veg business, there's a number of different dynamics in play there, but certainly, the avocado season has been a bumper one, and I'm sure Australians are enjoying their avocado for as low as $1.50 or $1 in some instances.

That's great. And if I could just follow up very quickly. The -- is it still rational in terms of the market reflecting these genuine price increases? And do you think that -- do you think other players in the market are seeing similar pressures? And if so, is everyone passing these costs on as you would expect them to?

Bryan, I think if I, again, just start broadly because I think a key question for us on this matter is, yes, we have seen it has been relatively rational. And one of the big issues for us has been making sure our price indices continue to track where we want them to be. And that's been true for the whole of the second half of last year and then into this year. So we are seeing a relatively rational industry, and our price indices against our key competitors continue to be where we want them to be. But Natalie, again, I'd pass over to you to add more color as you see fit.

Yes. I think we are seeing a rational market. And for us, it's very important that we balance the genuine cost to us of our suppliers with also the need of our customers to have value for their groceries. So we continue to balance those 2 dynamics out. And we're very pleased with our overall price index and the value we're providing for customers.

The next question comes from Tom Kierath from Barrenjoey.

Yes, just following up on Bryan's question on inflation. How long do you think it will take for the input costs to be reflected in pricing? I know the grocery code has kind of 30 days that you need to respond to suppliers. But for how long do you think it will take for it to be reflected?