Woolworths Group Limited (WOW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Woolworths Group Limited F '22 Half Year Earnings Announcement Analyst Call. [Operator Instructions] I would now like to hand the conference over to Brad Banducci, Chief Executive Officer and Managing Director. Please go ahead.

Good morning, everyone, and welcome to the Woolworths Group's F '22 Half Year Results Briefing. Joining me today are Stephen Harrison, our Chief Financial Officer; who will present our H1 '22 financial results a little later on. Amanda Bardwell, Managing Director of WooliesX; and on the line from New Zealand, Spencer Sonn, Managing Director of Woolworths New Zealand; Natalie Davis, Managing Director of Woolworths Supermarkets; Pejman Okhovat, Managed Director of BIG W; Claire Peters, Managing Director of B2B and Everyday Need; and last but not least, Bill Reid, our Chief Legal Officer. I will provide an update on the half in our progress in F '22 strategic priorities. Steve will then present our financials for the half and before handing back to me to finish with current trading after 7 weeks and outlook. Thereafter, we will take any questions you may have. Hopefully, everyone has a copy of our investor presentation. I was going to start on Page 4, for those of you who are following through the presentation. H '22 was a half dominated by COVID. It was bookended by the outbreak of the Delta strain in July, and most of you hopefully will remember in Sydney and in Fairfield. And then later in December, somewhere between Christmas and new year by the outbreak of Omicron. All together, this is one of the most challenging hearts we have experienced as a business. While the COVID outbreaks led to increased in-home consumption, which benefited sales the impact of direct and indirect COVID-related costs and the BIG W store closures had a material impact on our earnings for the half. Pleasingly, we ended the half the year strongly with a good Christmas, helping our customers enjoy a much needed best of holiday season. Despite the disruption and our primary focus on our team and customers, we made good progress on our strategic agenda during the half. While it feels like a lifetime ago, we completed the demerger of Endeavour Group at the beginning of the financial year and began our partnership in PFD, with the Smith family on the same day. We have also established Q-Retail in partnership with Quantium to deliver on the group's advanced analytics ambitions, following the increase in our shareholder in Quantium to 75% higher. I will touch on some more strategic highlights shortly. I will also come back to our performance in H '22 outlook in the outlook section. However, despite the challenges posed by Omicron we are confident we can deliver improved financial performance in H '22. For those following, I was just going to turn into Slide 5. And what we've just laid out there for those of you are interested a very colorful pallet, which we're still working to refine, you'll see a simple summary of all the challenges that we faced between July and January. July saw the introduction of strict trading restrictions in New South Wales, as I alluded to, are the largest state. And as opposed to previously by most BIG W's with close to in-store customers with 91 BIG W's stores impacted by mandated closures. All this for a large number of our team across the group impacted by isolation requirements and strict lockdowns in the 12 LGAs in New South Wales. BIG W's eCommerce penetration reached over 30% and peaked at 15%, while Australian food sales in Q1 in New South Wales, facing enormous pressure on our online team. In terms of our DCs, we introduced split shifts and smart badges and decisions to try to minimize the impact of stock flow and ensure a steady supply of food and Everyday Needs. And in September, we stood up Australia's largest rapid antigen testing program in DCs signed in the New South Wales and Victoria. Our supply chain moved over 26 million cartons moved in Australian Food in September alone higher than the market cartons we moved in December 2020 before COVID. We continued to rebalance our DC network across the country to ensure all states where appropriate. While our customer scores were impacted by the various interruptions, as a result of COVID a real highlight is that we maintained strong scores in our customer care metric across all retail businesses. This reflects the extraordinary efforts of our team to care for our customers during this challenging time and sales growth began to moderate in October, in line with the ease restrictions in New South Wales and Victoria. Carbon-related costs remained high as we kept COVIDSafe settings in place and broader supply chain disruptions continued. And then in late December, just before we have seen it in during COVID, Primary Connect led to a unpresented level of team absenteeism, not only within our own stores and DCTs, but also in our supply and transportation. As an aside, I am pleased to say that we have seen some stabilization in the operating environment in recent weeks, and I'll show we have questions on that when we go forward. Just moving on to Slide 6. You'll just see a summary on Slide 6 of just how all the impacts came through on our supply chain. And I'll let you read that if you measure Slide 7 is our outbound service level. Just at the last moment, just to give you a sense of disruption, it's just a way of looking at it. It's really a report to you our outbound service level even if you look at it for different years. And what this does, it's not a perfect measure of what happens in the business. But essentially, what is the store order and what do they get from the DC. It doesn't measure whether a load was late or whatever the case it doesn't attribute to why the order wasn't able to be fulfilled. But what you see, if you look at that slide, is a material full reduction in our upgrade service level, which went down below 70% in January, but really materially below what we used to, which is mid-90%. We actually would always want 100%, as you might imagine. And we also want to always on time. If you look at this in a perfect order type of logic as you wouldn't come as we look at whether you've got a full basket and whether it's a farm, the number would have gone probably below 50% in [indiscernible]. It just gives you a sense of a challenge. Certainly, not to make excuses, and I'm sure we will come back and talk about our CODB certainly hope we do in the half, but it just gives you a sense of the volatility that went through [indiscernible]. Moving to Slide 8. I think very important for us, and this was always our focus for the half was to ensure we've got great stock flow to our stores and made sure that we gave everyone every customer in Australia, an inspirational Christmas and we did achieve that. So we ended the half with good momentum, a strong Christmas trade across the group, strong customer advocacy across the group despite issues in our stores, which the customers gave us appropriate feedback on. I'm just looking at brand NPS for reputation, and we maintained a strong market share. Some highlights to call out would be the total sales up 3.6% in Sydney Australian Food, where I say we did focus on stock install, a good trade plan, our Woolworths Food Company seasonal ranges performed really well. And actually, just amazing performance by our Primary connected with 2 million more cartons than December '20 despite the interruption. Importantly to also call out the digital traffic remains strong across all banners of around 54 million with statistical customer in December and a record number of every rewards us strength. But a number of the team would know our ways of interested in the digital business versus physical business inside the group. And in December, for the first time in certain weeks, we had more digital business than physical. And I thought there was a really important inflection point, which happy to talk about later. In terms of Slide 9, I'm pleased to say that while we will talk about it, we have work to do on our financial performance and we made good progress on our strategic priorities. And Slides 9, 10 and 11 provide some achievements, but also some areas where we have more work to do. And that's why we all like working in retail because we've got more to do. But it was a half where we didn't really continue to advance our strategic agenda, and that will stand us particularly this as we embed in the [indiscernible] initiatives in F '22 in the second half and then into F '23 [indiscernible]. I touched on some of the areas really we'd like to focus on a few more. As you would have seen in our materials this morning, we have provided an update on our team members pay remediation. In F '21, we launched an end-to-end payroll review to ensure compliance with our -- all of our obligations, ensuring we pay our team appropriately. The awards enterprise agreements and so on. As part of our review, we also identified certain areas of mill compliance in relation to early paid team members employed under 3 Woolworths Group enterprise agreement with our retail enterprise agreements amongst other team members, and we apologize to those impacted. And we are committed to rectifying any payment shortfalls and we will continue to fix issues identified and as our review progresses. We are committed at Woolworths Group at a high water benchmark in terms of payments and ensuring we do the right thing by our team. And our view is ongoing. We hope to have it completed by the end of the calendar year. At this stage, we've reviewed more than 85% of our team members and more than 70% of our total payroll cost. We booked a provision of $144 million to reflect cost of remediating what is our biggest individual group of team both employed under our retail enterprise agreement. Just moving on to priority 2 and sort of calling out another strong part in eCommerce with sales across the group increased by 48% or 69% of the 2-year compound annual growth basis, the right way to look at growth, if you want to look at it over many. Our direct-to-boot service continues to transform our store pickup experience a team effort between Woolworths Supermarkets and WooliesX, and we now have 653 Supermarkets offering service and have also increased the capacity of existing stores to provide the service to [indiscernible]. Over 80% of all pick up orders on our Direct to boot but rather than at a service desk at the front of the store and our highest-rated customer Net Promoter Score experience inside eCommerce [indiscernible] -- it's amazing efforts by our team and loss to continue to grow that business. New Zealand is also making progress in convenience with eLockers and Drives rolled out to 56 stores in New Zealand by the end of the half. And I would be remiss not to mention the continued progress across eCommerce and digital at BIG W, which is critical, especially during when our stores were closed. Just keeping us moving, on Slide 10, if we look to our food retail proposition. Our created CORE VALUE UP range and space has been rolled out across supermarkets nationally in 30 major categories. And we're continuing to make sure we have the right range in the right stores for our customers. It's still early days, but we are seeing this range, really resonate with our customers. We've also expanded our multicultural range are available in the 180 markets. I'm particularly pleased with the progress we've made increasing customer engagement the Everyday Rewards at an ability to provide more value for our customers. This will be central to us going forward as we look to the topic and leading to the topic of price increases inflation. We achieved record membership up 4.5% to 13.3 million members compared to Q2 last year with scan rates also increased. Our Everyday Rewards Wool's program continues to resonate with our customers. Around 39,000 new customers use Food Services in December and over 100 supplier partners participated in the program, buying personalized offers to our customers. Moving on to Slide 11. As we disclosed in Q1, we have a new reporting segment called Australian B2B, which includes PFD and other B2B food businesses as well as B2B supply chain which has our Primary connected third-party business and Statewide Independent Wholesalers Tasmania. We're all getting used to reporting to the segments, and I have no doubt and would encourage questions on the go forward on a center. Of course, it will settle down as we get into the quarterly and [indiscernible]. Just in terms of PFD specific, PFD has had a solid half despite the impact on its customers of the many COVID shutdowns and pleasing to all B2B businesses order sales growth on the prior year. I mentioned the successful as of Q-retail, bringing together the best of Woolworths Group Quantium's retail analytics into one cohesive team. And we're already seeing results from initiatives to optimize promotional activity and further our range localization strategy. And we look forward to seeing the benefits of this, of course, delivered to the bottom line in H2 of F '22. Moving on to Slide 12. Moving to our sustainability progress. One of the things that actually, and I looked at our point, I don't think we celebrated enough is a 6% decrease in Scope 1 and Scope 2 emissions across the group in H1, which is terrific. We still have a long way to go, but it's driven really by us continuing to focus on improving our electricity and refrigeration consumption is an amazing effort [indiscernible] team. And finally, on Slide 13, before I close Slide 13 is a reminder of our Woolworths Group's ecosystem or adjacency strategy for those of you that depends on what your -- how you like to describe anything. I have received some feedback that it was too cool. So thank you for those who provided us, and we've tried to simplify it. During the half, we have made good progress in all quadrants to transform our business, food and Everyday Needs ecosystem. But we clearly have more work to do to build a better business for the future. I will now hand over to Steve to present our H '22 financial results and come back to close on current trading outlook. Over to you, Steve.

Thanks, Brad, and good morning, everyone. Now let me give you a quick recap starting on Slide 16. In mid-December, we provided an update on our expected half year trading performance due to the impact of COVID-related costs and the moderation in sales following the easing of lockdown in New South Wales and Victoria in Q2. Pleasingly, trading momentum improved in late December, we had a good Christmas trading period results for Australian Food and BIG W in line with the earnings guidance provided in December. Turning to the specific numbers on Slide 16, due to the demerger of Endeavour Group on the 28th of June, I'll focus my commentary on continued operations in items, which adjusts for Endeavour Group in the prior year and the merger accounting. Group sales growth for the first half was strong at 8% with sales of $31.9 billion. Sales benefited from the first-time inclusion of PFD and the acquisition of Quantium in May. Excluding PFD and Quantium sales increased by 4.2%. Group EBIT declined by 11% to $1.4 billion, reflecting the challenging operating environment in Australia, which adversely impacted Australian Food earnings and also Big W through store closes. Group NPAT declined by 6.5% to $795 million, is a smaller reduction relative to EBIT due to lower financing costs and tax compared to the prior year. We also booked significant items from continuing operations of $119 million after tax, primarily due to the increased provisions team member pay remediation. Discontinued operations in the current year reflects the noncash gain on the merger of Endeavor Group of $6.4 billion. And I'll discuss our dividend later in the capital management section. On Slide 17, I want to quickly touch on sales performance in stream. This page highlights the ongoing volatility we've seen due to COVID restrictions and prior recycling impacting the comparability of 1 year growth numbers. Growth slowed in Q2 in both Australian Food and New Zealand food on a 1-year basis as the benefit from hiring in-home consumption reduced constriction fees. BIG W sales momentum improved generally in Q2 following a period of store closures in the New South Wales and Victoria, predominantly in Q1. The average growth for all businesses remain solid. Moving to Slide 18, where we show group EBIT and EBIT by business for the half. In Australian Food, EBIT declined by 7.6% to $1.217 billion due to material disruption to our store, DC and team due to higher volume, COVID impact and an increase in economy, which runs at a higher wage sales ratio. So that also impacted our ability to offset CODB inflation in the half due to delays in implementing productivity initiatives, and we continue to invest selectively where appropriate. However, given the strong finish to the half, EBIT was at the higher end of our previously disclosed range of $1.19 billion to $1.22 billion. EBIT grew 2.6% on a 2-year basis. As disclosed in Q1 and as Brad just distort, we created a new operating segment for Australian B2B in half 1 of F '22, which include the addition of PFD to the group. The first time contribution from PFD at an EBITDA level was somewhat offset by the amortization of intangibles on the acquisition as well as selective investments across the portfolio of our B2B businesses. This result also reflects the impact of reduced mobility on out-of-home [indiscernible] consumption, which impacted both PFD and work in the half. New Zealand Food EBIT increased 3.3% to NZD 200 million, while sales growth in half 2 was strong -- sorry, in half 1 was strong due to COVID restrictions inflation and higher inflation. So related costs increased materially on the prior year and impacted the flow-through fees. Big W's EBIT declined 81% to $25 million due to the material impact to sales from sales of store process in Q1 in particular. For the half, total other costs were $69 million. Other now includes our share of Endeavour Group impact and also includes Christmas Thank You bonus $34 million in the half. Excluding Endeavour Group's contribution, we expect group costs to be $190 million approximately for the full year. Turning to Slide 19 to cover COVID costs. In half 1, group COVID direct costs of $239 million or 0.7% sales. While this was below the $257 million, excluding Endeavour Group in the prior year. Direct costs only capture the cost that would be directly distributable to COVID such as health ambassadors in our stores, the cost of cleaning and PPE, rapid antigen testing and additional warehousing as required. Due to the profound impact Delta had on the intent supply chain in the half, there were a number of additional impacts, including increased team apps and team and incremental over time now to ensure we keep our stores in DCs running and lower efficiency and productivity levels due to ongoing disruption. We have had direct -- sorry, we have had indirect COVID costs in the live business, but the impact was largest in Australian Food, the indirect COVID costs of $69 million in the half. Moving to Slide 20 to cover key balance sheet metrics. Average inventory days from continuing operations declined by 0.4 days compared to prior year to 30.2 days. This was due to strong sales in food and was partially offset by higher inventory deals in BIG W due to the impact of store closures on sales in the half. For ROFE, we've normalized to remove the Endeavor Group from EBIT and funds employed. However, ROFE includes our 14.6% investment in Endeavor Group and its contribution to earnings in the half. The online ROFE from continuing operations declined by 290 basis points to 14.1%, largely driven by lower group EBIT in the half. On Slide 21, we've included a recap of our capital management framework and call out and key highlights. Despite lower EBITDA from continuing operations, we generated operating cash flow of $1.7 billion in the half. This was due to sustain our assets and fund growth during half 1, and I'll touch on some of the other capital management highlights in later slides. Moving to Slide 22 and let me talk about cash flow. Cash flow from operating activities before interest and tax was $2.6 billion, which is broadly in line with the prior year, which we excluding Endeavour Group. Lower EBITDA from continuing operations was somewhat offset by working capital benefits, which we've laid out on the following slide. Lower interest paid reflects the demerger of Endeavour Group and the refinancing of borrowings and favorable interest rates during the period. Adjusting the impact of the Endeavor Group demerger, the cash realization ratio was 91%, largely due to higher cash tax installments paid related to financial year '21 in the half relative to the tax in the P&L. Adjusting for this one-off cash tax installment in December, the cash realization ratio was over 100%. Investing activities increased compared to the prior year largely due to the acquisition of PFD and the increase in CapEx in the half and I'll cover that in more detail on the late slide. Finally, the financing activities in Endeavour Group have had an intercompany loan of $1.7 billion of Woolworths following the demerger. This was used largely to fund the buyback of $2 billion completed in October this year. In total, there was a net cash outflow of $1 billion in the half, reflecting a $0.6 billion increase in investing activities and a step up in cash returns to shareholders in the half. Moving quickly to Slide 23, to cover working capital and noncash movements. On this page, we've separated working capital move into continuing operations and discontinued operations. Increase in inventory from continuing operations reflected higher inventory levels due to strong trading and efforts to minimize supply chain increase in trade payables was due to increased purchases somewhat offset by reduced payment days for small suppliers and the timing of payment. In total, continued operations, working capital and noncash increased to $122 million, largely due to an increase in provisions reflecting the team member pay remediation provision and self-insurance. Discontinued operations reflect the noncash gain on the demerger of Endeavour Group of approximately $6.4 billion. Turning to Slide 24 and CapEx. As a reminder of our capital allocation classifications, sustaining CapEx includes being in areas like maintenance, safety, renewals, IT and supply chain and investment in productivity needs. Growth CapEx referred to spend in areas like new stores, eCommerce and other projects that are expected to drive higher sales and higher sales growth and increased gross margins over time. Operating CapEx for the half was $822 million, up from $730 million in the prior year. This includes $126 million on projects with strong sustainability benefits in areas such as refrigeration and solar. And the increase in spend year-on-year reflects higher investment in supply chain and eCommerce that we flagged in August. F '22 operating CapEx is still expected to be approximately $2 billion. Moving to Slide 25. The Board today has approved an interim dividend of $0.39. Important to note that while the half 1 F '21 dividend was $0.53. This includes the $0.13 related to Endeavor Group's earnings. Excluding this impact, the interim dividend was marginally below half 1 of F '21, which when adjusted for the $0.13 would be $0.40. While we've maintained a typical NPAT ratio for the half, the reduction in the dividend is less than the reduction in NPAT due to the lower shares on issue resulting from the buyback. Together with the interim dividend, the F '21 final dividend paid in half 1 has a $2 billion buyback. $3.2 billion will be returned to shareholders in F '22. Moving to debt and funding on Slide 26. The group's sources of funding and liquidity remained strong with good assets for both banks and debt capital markets. Having total undrawn facilities -- sorry, total submitted undrawn facilities of $2.6 billion in addition to cash. In September, the Group successfully completed a $1.6 billion of sustainability linked bonds with direct link to our standard commitments regarding the reduction in carbon emissions. We remain committed to a solid investment-grade credit rating and add significant headroom to our current rating of BBB from S&P and Baa2 from Moody's. And finally, on Slide 27, I'll give you a brief update on Primary Connect. While it was a very difficult half for our Primary Connect team, given the disruption in COVID, we continue to make good progress on our supply chain transformation. In MSRDC continues to increase throughput despite cover disruption averaging 2.2 million cartons per week in half 1, with increases in volumes expected in half 2. The Heathwood's Children Frozen DC Queensland over the schedule in the half, He'll manage COVID disruption, and we also opened the Palmerston North Distribution Center in New Zealand in September. We have begun construction on our first automated CFC in Auburn, and we expect to [indiscernible] NDC at Moorebank this month. With that, let me just say thank you, and I'll hand back over to Brad.

Thanks, Steve. I've heard the line fill at I'm going to talk up a little bit more. And apologies myself a even been lie to hear apologies to my colleagues in the room charting. Australian Food sales turned to the current trading and outlook. Australian food sales have increased by 5% -- approximately 5% over the first 7 weeks of the year with a 2-year CAGR of around 6%. Sales growth has been driven by a return to in-home consumption by customers due to Omicron and in some cases, of course, within that self-imposed isolation. We're also seeing inflation continued to trend upward, with shelf prices increasing by 2% to 3% in the half to date compared to the prior year. COVID costs have remained elevated in the first 7 weeks of Q3 with direct COVID costs of $34 million or 0.4% of sales, but we expect to see a normalization over the course of this half. We are starting to see some slight stabilization in the operating environment, and we're confident we restore a more predictable operating rhythm across the group. For BIG W, sales declined by 4% in the first 7 weeks remained up 6% on a 3-year CAGR basis. We expect a challenging half, but equally expect the business still to be profitable in H2. In New Zealand sales growth of 5% in the first 7 weeks or 3% on 2-year CAGR basis has benefited from higher inflation and lower sales growth in the prior year with Omicron not yet having a material impact. We are doing what we can to prepare for Omicron to minimize disruption to our team and customers. Despite the many challenges experienced in the first half of '22, I am confident that we are well positioned to deliver for our customers, our team and our shareholders in the second half and in the years ahead. I'd like to finish by thanking our team and partners for their extraordinary efforts during an extremely challenging half and, of course, also our customers for their patience, understanding and support. I will now turn the call over to the operator for questions.

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

Can I ask the first question on your COVID cost performance on a year-to-date basis. The COVID cost as a percent of sales moderated quite significantly, notwithstanding Omicron. What did you do differently in January to be able to achieve that? And can you make some comments on what the indirect COVID cost trend has been as well, please?

Thanks, Michael. I'll make some high-level comments and then turn the call over to Steve to talk to some of the detail. In many ways, when we look at the first half and all the challenges we had, we really were committed to the play safe Christmas. And so we put a lot of effort into -- in fact, in many cases, over recruited into our DCs in our stores with an expectation that we would see some level of absenteeism or isolation or whatever the case may be. And so we really were focused on stock flow and having a great Christmas the momentum that, that gives us into the second half. When Omicron hit, actually we're very thankful that we have done this because it helped us materially to adjust to the world of Omicron. In addition, we were the biggest use of RAT test in the country when they were extremely central and we had nesting else to do with it. But again, when we transition from PCR to RAT, we felt ourselves in a very good place to be quite forensic how we dealt with this. So I would say when you looked at the first half, we took a lot of learning lessons and some of the settings we put really helped us as we come into the second half. And you see that in our sales number as well as in our direct COVID costs that Steve has talked to and hopefully also ultimately, we'll see it flow through our bottom line. I'll let Steve now talk to how we disaggregated, but the one thing which we've tried to do, which I should just be clear on is we've tried to use a similar methodology for calculating direct COVID costs for the last couple of years. We haven't changed definitions as we went. So our version of direct COVID cost is the one we set up for our business in F '21. So when we allude to the second order ones, those are everything that wasn't the way we measured in F '21. And the reason we did that was just to create some, I suppose, robustness in the way we measure. But Steve, over to you to talk about H1 plays 7 weeks on and there is a material step down and then also the second order impact.

Yes. Thanks, Brad. Thanks for the question, Mike. Just on the direct costs, and we layout the profit announcement. I think the thing that I would reflect on is -- you saw in the move from Q1 to Q2, the step down in team costs. And I think that Q2 number, we came out to $51 million to $34 million, that actually is a blended number across the quarter. So has the settings and restrictions changed in the different states, we're able to reduce our fee costs. And that's the vast majority of why direct COVID costs have come down over Q2 and then into Q3. And I think you see, when you look back at the second half of last year when the studies allow we are looking to remove those costs as quickly as we can. I think it's fair to say that the indirect costs have continued to be impacted, particularly in January. I think the slides that Brad referenced, Slide 7 in the pack showing some of the disruption in service levels, which reflects disruption in our DCs and our stores. We give you the passion of why we can see that some of those indirect costs continuing. But as things start to stabilize, we'll obviously be very focused on trying to manage those costs down over the course of the quarter and the half.

Okay. And my second question is regarding the comments on inflation in the second half as well as shelf prices. I mean we can certainly see a lot of price increases on your shelves and those and your competitors. What success have you had so far in recovering the input costs that you're facing in terms of realizing those shelf price increases?

Michael, because you were so polite, we're going to let you ask the second question, it's one every one and then back into the queue. We started to see -- so we've got pressure across our interim value chain on cost increases. And we can come back and talk about, obviously, the ones from our suppliers to ourselves everywhere. Our biggest individual cost increase that we've seen, by the way, is commissioning either our new DCs or new stores. And while it's been a very painful half having so much work underway in Primary Connect. Actually, if you look at on a replacement cost basis, actually, I'm quite thankful that it works on the way given the material inflation we've seen in infrastructure right now for very obvious reasons to do it. Have faith with the rural international freight plays in that. If I come to supplier cost increases to Wales, we started to see the pressure starting in late November in terms of increases that we have been requested to process. Now passing us through December, we were really trying to use judgment we had to pass through some meat cost increases or red meat ones but we're trying to be very sensible and very focused on delivering a great, affordable, informational customers for our team that then has continued in January and into February. And that's why we called out the number we did there. And the reason we called that shelf, Michael, is it is quite high at the moment given us our need to dynamically adjust promotions depending on how the stock levels to actually give you a amended rate. So to me, I'm quite focused on shelf because it's a good early indicator of where things will go. We've only at the stage engaged with about half of our suppliers on the various cost increases, and so we still have a lot of ways to go though this is very early in the journey. But in terms of what we've seen at this stage, we've seen a very rational process. The cost increases from our suppliers have flowed through, and we're obviously testing them, stress test them and get them to validate it, as you might imagine. So we don't accept everything we are asked to accept. But the ones that we have except that have flowed through to shelf prices at the stage of the game. So it's all been very rational. I don't know Nat, there's anything you wanted to call out specifically.

I just say, just to give a flavor of the rationale behind some of the freight cost requests, international freight costs increasing clearly something everyone is staring into. Commodity costs are increasing sugar, coffee, dairy products and manufacturing costs. So that's playing through at the moment across our long-life categories in the store. On the flip side, as Brad mentioned earlier, we've had significant inflation in fruit continuing -- now we expect that to continue for a few more months. And we're very conscious about when we stare into these cost asks. Looking at the whole relationship and seeing what we can optimize that we use as an opportunity to also review things like promotional funding and make sure that we're getting the best investment there for our customers and really balancing our value equation that's very important to us.

Just to get ahead of a question on why fruit is deflationary. It really comes down to avocados and apple, which we can talk about later, but they are all huge supply benefits that in their and that can lead to pressure more prices which are fabulous...

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

Brad, I'm wondering if you could help me add a lot because I'm as confused as an analyst, as I've probably ever been. I'm trying to work out why your cost performance is so much poorer in cost of doing business in supermarkets than your major competitor in Coles. And if I could call out some numbers, Coles' cost of doing business only increased $100 million, 2.6% pay at a headwind of COVID of that $50 million. Your cost of doing business increased by $520 million with a COVID cost tailwind because your COVID costs were $20 million to $40 million below. So the disparity in your operating performance is really stark. Now I know that you look at Coles' performance, I don't expect you to comment on Coles, but I certainly expect you to, if you could, please, give us an explanation as to why your operating performance in cost of doing business grew by 10% when Coles had exactly the same challenges in terms of supply disruptions, et cetera, et cetera. So where I'm going to, I'm starting to wonder have you got a financial control problem -- are your numbers -- now we had a downgrade in December that was really late, and it was a surprise. I'm worried about whether you're on top of these control issues. Are they -- because the costs just seem to blow out. I mean we've gone through the CapEx issue a lot. We won't do that now. But the costs just seem to be uncontrolled at the moment, Brad. And we're having this discussion today because of what Coles delivered yesterday. Coles seem to be in control of their cost. They gave a very good explanation that they have weekly meetings and they really control every cost that goes in. I'm not sure that you guys do the same. So can you give us a bit of an explanation because we're, as investors, are trying to work out whether there's an opportunity here for these costs to come out or whether there's something systematic in your business that we just continue to see cost blowouts. So if you could help us there, that would be terrific.

Thank you, David, and we did follow your complimentary messages to our colleagues in Endeavor, and we do think it was a great result as a shareholder there, and obviously, the narrative yet. We can't talk to our competitors. We may talk to our own numbers and see and give you a breakdown. But if you look at the half and all the disruptions that happened, then we also show and we pay lip service to frontline teams and doing it hard and doing the right thing by them. It would seem actually us investing in our store team to get the right experience for our customers, was the right thing to do and the right thing to do in our stock flow through our DC that is validated in our sales number and our reputation number that sets us up for the second half. So it's very hard to sit here and not to say we didn't. We're focused on doing the right thing, and we did the right thing for our team. That included the thank you bonus to our team and included actually making sure the store management team as they work on a half were paid appropriate step for the half and insured to make sure there was enough safety team in those DCs and in the stores. So that's what you're seeing, David, and I won't walk away from that. We need a little for the half, and we look forward to doing it for the full year. And we look forward to, of course, making sure we're doing the second half. But we'll go through the numbers. But when you add up the additional cost we put into store teams and into DCs, that's $350 million or somewhere thereabouts out of the total net line on anything else. I think, by the way, we should talk to cash CODB and just park depreciation moment. You'll see how it's having gone up, of course, in amortization, but just park it so we get a clearer message. And back to this and recognize, as you should well know, our DC costs are in CODB they're in GP for most of the retailers, which I think we should also just make sure we're looking at the right apples-to-apples. But Steve, if you can just talk to the high-level numbers, and I'm happy to take for you to come back, David, and take accountability for us. I think, doing the right thing to do for our team in an environment that was as hard as it gets. And if you track any metric around how a team is feeling mental fatigue, physical fatigue, uncertainty, we think these were investments that put us in a good position on the go forward. But over to you, Steve.

Thanks, Brad. So look, I'll give you the high level rate, but I think the key is the color to it. So as you rightly point out, there's over $500 million increase in CODB but if you back out D&A, about $450 million as Brad said, roughly $350 million of that is the cost of our teams in our stores and the cost in our supply chain. There's another $50 million across conscious decisions and investments we've made on our people system and some of the costs associated with the remediation in cyber. And there's a range of other things we're doing, but we've made some conscious decisions to continue invest to grow our business. So we're investing in driving digital traffic to our digital assets. Before driving sales in our stores, it's also important in driving the strong growth in digital advertising in Cartology that you see going through our GP line. We do have general inflation in our business, and I think we would be the first to acknowledge that we made conscious decisions to fold our productivity initiatives going into stores and the realization of benefits because of the material disruption that has brought in and our DC team state businesses that have a drain on the P&L in the first half. And we think are long-term investments that build capability in the businesses over time, be it investments in e-commerce or adapt analysts or something which we started. But at the end of the day, what drove this ultimately is the disruption that we've had from COVID. It's true the sales dropped away much more quickly in the second quarter than we would have liked. We could have made choices to reduce some of those costs and cut wages in stores in December. We've made a very clear decision not to do that. We've done that in the past and we've seen how that's gone and that's not the way we run these days. We do set ourselves an ambition to offset inflation productivity. We want to get back to that agenda in the second half of this year once we see stability in our operating rhythm start to improve. So I think we agree with the sentiment, costs are higher than we wanted them to be, and we need to get that balance right in the future. We can get that balance right in the half as you see in our earnings results. But at the end of the day, we are focused on delivering for our customers and for our team and for making the business a better business long term and more sustainable. So happy to take any questions, but we take the feedback on. We do manage costs very carefully. The strong DNA in the retailers in all of the people who are sitting around the table and been in our stores or in our DC. We have a very disciplined cadence to look at cost on a weaker basis as do our colleagues down South. And so we will be very focused on that in the second half.

I just would also like to log, David. I don't -- retaining a density at the right time when we have the information needed to call our earnings downgrade. That was not a thing we wanted to do in early December, but it is in line with our values and our purpose. We are open, transparent to authentic and if we have an issue we call it when we call it, so that was called then. You've seen the consequences of it in the numbers. Now it's not new as that news played through. However, you do see the market share across our various businesses, you do the reputation and advocacy we have, and you do see the good start to H2.

The next question comes from Grant Saligari from Credit Suisse.

A question just around, I guess, price perceptions and the reality of price in a number of cases, what seems to be leading shelf price increases across the industry. And as you've noted, price is up average 3% to 4% in the first 7 weeks. Just be keen to hear -- and we're also seeing promotional intensity down year-to-date from supply funded promotions. So just keen to hear about any feedback you're getting or what you're thinking about in terms of price perceptions at the moment with Woolworths. And how you're thinking about managing the reality of price comparisons, given that we all recognize prices are going up, but they're going up at different rates amongst different retailers, please?

Thank you, Grant, and what a hard question, so I can just give you some comment and first, we said 2% to 3% not 3% to 4%. But be that as it may, and I quoted shelf. Actually, our promotional programs are actually relatively back to what they're on year-on-year in number of items or range that we provide and depth of promotions. So we're not really promoting less. And then we have historically, although Nat alluded to it and certainly with our colleagues Q-Retail, we want to be much more thoughtful on making sure we drive up the number of winning promotions in our business, but that's all we've invested materially on building the capabilities to do it in the first half. Hopefully, we'll see some of those benefits to come through the second half. So our promotional program is relatively stable. What you'll see in some weeks, reduce promotions where they're just stock flow issues. So if you've got a stock flow supply issue on toilet paper or whatever the case may be, you have to sometimes pull those promotions just because you're going to disappoint the customer. So I don't think we've seen a less promotionally active period. And we have historically, although we do want to be much more forensic and get the percentage up, but you are to see this movement in shelf prices. Our customers are seeing. We're tracking our customers. We can see the focus on pricing and value for money. And so that's really how we see it. In terms of relative price position, again, we have, as you know, through our history, very anxious on this topic, and we do track it against LD, Coles, Discount Chemist for those who are registered, and we do look at it within the context of branded and unbranded and we look at the shelf and the promotional mix attached. And we're in the guide rails. We have been for the last couple of years. Now, if you go to the go forward, I think, Grant, clearly, this issue is not going to get smaller. It's going to get bigger and how we manage it through the business is 1 of the top 3 things we're focused on inside the group and how we make sure all of our customers get their Woolworths, and there's no one simple solution to this, as you know. Our store segmentation is continuing to proceed and how we think about that and displaying and delivering value within core value enough is important to us, and they are slightly different mechanics and things we should be doing there. Everyday Rewards is really starting to deliver and again how we do much more through that in our one-to-one promotional platform which is now live. Again, an investment in H1, but actually live and we started to doing the demand after the first week of January, where we can actually deliver real-time, one-to-one offers to our customers. So we need to be much more thoughtful of that expectation of that program becomes key. And then a third, as I said, we've done a lot of work in one of our biggest investments in the CODB line, David, in H1 was around Q-Retail and be much better at building promotional forecasting engine so that the [indiscernible] ratio goes up inside the group. So that's where we're at. We're not uncomfortable with where we're at. We would, of course, prefer that shelf price increases we're expecting in each and every retailer on the same day or other retailers before us. It will depend on the product, I think, right, because we actually do look at that, by the way, just like we do every other number on a weekly basis. We do certainly look at that weekly. So it will depend on the product really. You've seen us probably just because of a slightly bigger red meat business, you might see us lead a little bit more in other categories, but we are very sensitive to that issue.

The next question comes from Adrian Lemme from Citi.

I just wanted to understand how the economics of direct-to-boot work. I'm not surprised that you're saying the customers love it. I mean, I use it myself and it's a fantastic service, saves an hour or more of my time. But I'm just wondering how do the economics make sense for worse? How can you improve them down the track? And it just appears to me this is a great deal for customers, but perhaps quite costly for Woolworths.

Yes. Thanks, Adrian. Look, we can improve every part of our business. And so that is just a given for us. What has surprised us in an economic sense -- and I'll let Amanda sort of talk to specifics of areas for improvement. But what has surprised us is the percentage mix we can hold through direct-to-boot with someone picking up versus home delivery. No matter how you cut it, home delivery is the most expensive thing that you end up doing for a customer, as you might imagine, primarily through the cost of our call. And actually, we're getting much more efficient as we go and build the right density. One of the highlights in the half was that, but still the cost to put it in the boot versus right next to home, even post a fee you may charge the customer's material. So actually to see direct-to-boot to grow close to 40% is really exciting, and that trade-off is -- makes a big difference to the overall blended economics of our e-commerce business. But in terms of improving this, Amanda, there are many ways I think we can improve it.

Yes, Brad, it's a hot topic. We talk a lot about with the WooliesX team and the Seaford team as well. So I just want to start with customer, if I can because yes, we're focused on direct-to-boot in terms of what a customer spends with us in that channel. But we also are looking at the holistic spend of that customer, both in-store and online, and it's really important in terms of then looking at the choices that we make. And we take that all the way through the line down to look at the individual contribution at a profit level of those individual channels and make sure that we're making the right choices in terms of how we're encouraging and rewarding our customers to shop with us. So I think that's a really important pinnacle of our strategy, which is all about customer loyalty. When it comes to direct-to-boot, there's a lot that we can do as Brad rightly points out. And we have done a number of things in the last 6 months to actually really improve our ability to pick the orders in-store. And so over the last 6 months, together with supermarkets, we've rolled out a new picking up, which actually optimizes the half in which a team member walks around the supermarket to pick orders. And we're seeing some really encouraging and very positive reductions in that walk time, which is great to see. Also continued to improve the user interface for our team just to make it a whole easy. It's actually a really hard job being a personal shopper in our stores. And so as much as we can do to help it -- help those team members operate in a faster and more efficient way to give them some great tips on the way through. We've also just improved actually our product substitutions, which is always a hot topic, and you can imagine for our team as they're standing in front of the shelf, and we may have a product that's not available, particularly over the last 6 months. It's really hard for them to decide what product to substitute. And actually, we've just launched, in the last 3 months, a substitution engine, which helps our team to actually look at a recommendation quickly and select that product. Lots more that we can also do on the experience for our customers as they're coming up to the direct-to-boot experience in our car parks in terms of notifications and the like, and we're continuing to try and improve that. So I think we're really excited about direct-to-boot, which is a massive driver of growth for eCommerce in the first half. We see that continuing on. And we can only just continue to focus to make it better.

I mean one of our biggest capital investments in the half was actually building our drives and supersized me I guess, has surprised us. But the more convenient you make a drive and therefore they retribute, the more resonant you get to the customer and our new drive is a sixth line drive, and that really does resonate with the company. To actually demand those drives takes probably a year's training before we could even execute against it. So it's sort of been a couple of years in the making. But actually, if you want to do direct-to-boot, you need 4 to 6 lanes, we call them our platinum service, and you need to be directly from ideally from a door and staging area that takes from the store into car park. So we're learning a lot. We continue to evolve, to perform in our strategy. But I said, personally, I always worry that we would be a 70% time delivery, 30% pick-up business. We're running 40-60 and everything we do to pick up and make it better resonates with customers, which may be higher than that, that materially changes the blended economics of what you do.

The next question from Ben Gilbert from Jarden.

Second, just a question for me, sorry, just around cost, just following on from Panero. Pre-COVID, I think you guys were still running probably heavier than your peers in terms of store-level labor as a percentage of sales, group overheads, et cetera. I'm just trying to think about when you guys sit around the management sort of team and when you sort of sit at the Board level, do you feel that given the CapEx you put in and where you're going, you're going to start pushing costs more harder? And I know you don't want to get back in the old days, we just target the business for margin. But is there going to be, do you think, a more concerted focus around trying to drive costs and bring that percentage cost down over the next few years?

Yes. Thanks, Ben. Look, I think we'd make no bones that the first half, we felt like we really drove our strategic agenda very successfully but we didn't kind of get that balance back for our shareholders. So we make no bones about that. We sort of kind of like a weird duality of all the things we achieved, but then goes to nothing if you don't also do the same for the shareholders. So yes, we didn't get the balance right, and we do intend to put the focus on getting this balance right in the second half. In terms of costs, we should be very precise on how we talk about these issues. There are investments that you're making in new businesses or new capabilities. And then there's the cost of actually running your DCs or your stores which were the majority for us of about $8 billion wage bill. It is in there. And in those cost areas, we were very deliberate in making decisions -- not carelessly making assistance, we very deliberately making decisions around the challenges in our supply chain, admittedly, commissioning the DC we did in the half year, probably have preferred to done it in a different time in new DC and Brisbane and so on, not the ideal half to commission a whole lot of new supply chain assets. As I said, I think the replacement cost for latency were a lot better in other year. But we were very deliberate see the crisis come in on the hike to be a lot more thoughtful of making sure that we supported our store teams in DCs. And those costs weren't a surprise. That's why we called them out in early December. And we kind of hope that we get through the worst of the crisis, but it still kept building and that's why they sat them. Now if you look on the go forward, do we feel positive about our various performance improvement plans inside the group? Yes, that we -- do we intend to be getting much more focused on implementing than in the second half? Yes. Do we expect to see some benefits in the second half? Yes, and even more inside F '23. So we're not kidding ourselves although this is the halfway mark in a year, maybe 7 months in the year. We are trying to make sure we land the year correctly and of course, the early years.

If I can build on some of the uses we have continued to focus on these stores and Amanda alluded to the work we're doing in eCom to improve picking. And so we're really trying to use technology to make tasks simpler for our store team rather than just constrained cost. And we've tried to, as much as possible, keep that word going even throughout lockdown. So the online picking algorithm, I think is a great example where we're getting improvements in our peak rate and making things much easier for our team, the walking distance in the store, it decreased for the most of the customer orders. After the lockdown eased in the half, we also launched simpler planogram. So that's replacing lots of black and white pieces of paper which the store teams are doing new category reviews. So they now have a tablet where they can see what the shelves would look like, where to merchandise the product. We're scaling up a room temperature system called Monica, which removed all our manual temperature checks, particularly around products like of chicken. So again, making it easier for the team. And we just started rolling out electronic shelf labels, which again is a really significant improvement for our store team. You can imagine the amount of work that goes into ticketing, we changed over the catalog every week. The electronic shelf labels now do that automatically and the team really loves them. So we're building a lot of that technology into our renewals. And as we're confident on this technology, we're also beginning to sell at the cost of the fleet. There definitely were delays to many of those programs, particularly productivity initiatives that we rely on our supply chain colleagues to help us with, but we are continuing to progress them to make sure that we continue simplify our stores and that takes productivity to do it in the right way.

The next question comes from Tom Kierath from Barrenjoey.

My question is on online home delivery. This year on a Delivery Unlimited customer $130. You guys delivered to me over 100x. I think I say $2,000. It's a great deal for me. I guess the question is, it's probably not a great deal for shareholders? Just interested to know how in the future you're going to price for this and whether there are ways that you can -- other than becoming more efficient with the ways you can actually charge more to reflect the higher cost of home delivery?

Thanks, Tom, and it's great to have you as a very regular customer. We did enjoy the note you sent out. And so we think it's a great question, and I'll let Amanda talk specifically to, the investment we made in Delivery Unlimited, which was a very conscious investment and why we saw the benefits there. Just one point that behooves me to point out is the cost for using Prime in Australia is materially lower in Australia than the U.S. And it hasn't gone up as the U.S. has -- and in addition, in Australia, not only is the $6.99, I think $8, but you also get free deliveries from the U.S. So we are seeing a very aggressive investment by Amazon, even today in Prime in Australia. So as everyone is doing the benchmarks, please use the Australian benchmark. And you'll see the same benchmarks if you actually look at the take rates on the marketplace. And so we're seeing Amazon invest materially into this market at the moment, which is in sharp contrast to the announcement we saw last week. But if I then come back to delivery Unlimited, This is obviously as you will have seen from our various competitors talking about their program. I'll just give you -- I'll let Amanda talk to logic and where we're at.

Yes. Thanks, Brad. So look, I think with Delivery Unlimited, it is a really important part of our overall strategy. And again, it comes back to the same point I made earlier, which is we're really focused on the total value of our customers and how we can grow their loyalty, grow their engagement with us overall and ultimately, of course, increase their overall share of wallet. And so what we see when a customer signs up to delivery unlimited is, firstly, they're still continuing to shop in stores. And yes, they spend more with us online. And over time, what happens is actually, and we've been monitoring this for many years now, those customers increasingly spend more with us in terms of their total share of wallet. And we look at that, not just in terms of the spend line, but all the way down to the profit and look to monitor whether or not at a holistic level, both at the sales and profit, we're in a better position, and our customers are in a better position as well. So I can only just say, yes, we have adjusted some of the offers for our Delivery Unlimited customers. It's been incredibly well received. And what we're seeing is significant increases in share of wallet. I think we're really satisfied with where that program currently is, I think, 60% increase in paid subscriptions. And a really important way of us really locking in the loyalty of those customers for the future.

I mean, I'd also finish -- sort of most of the things we've try at Woolworths, we don't need new ideas. We need to implement everything we've got, whether it's productivity and full schedules that which is all reflected in what we displayed in the first half. It's a central issue, I think, for every major retailer or retail ecosystem, how they provide a more cohesive, better experience for the customer across all the channels, invariably some form of delivery saver, delivery plus, whatever you want, whatever you choose to put to us. And actually, so far, so good, and we've been looking at it for a long time and -- it actually has moved the dial in a good way for us and it'll be very positive in the next few months. Tom, if you're brave enough and I'm brave enough, if you send me your details and give approval to use your card, we'll come back and tell you our economics on your card, so why don't we do that separately? And I hope we made some money.

The next question comes from Craig Woolford from MST Marquee.

Just wanted to ask a question around the cash cost of doing business. I think in response to that earlier question, you mentioned that staffing and supply chain costs were up $350 million, I assume that relates to the Food segment. And on my math, that's about 7.5% cost growth. So rather than going about COVID and some of the indirect costs, so I'm just interested in what's driving such a level of, let's call it, underlying cost growth. And just as importantly, what does that look like in the second half? Is it going to be that level of growth in underlying costs?

Yes, Craig, I mean, all these numbers are becoming so complex with the environment we're in. So I think just looking year-on-year when we look at the increase, then just looking at that level, has a lot of merit as we've talked to. If I look at what drove a lot of the supply chain costs for us in the half, it was partly driven by -- we were in the process of activating a whole 2 of the new sites. And so we ended up with some split sides because it was smart to do full activation. We ended up with a drawing on from more than one site, which caused some inefficiency in the DC as well as it actually led to split loans through transportation. So particularly true for us in Victoria, where we were transitioning chilled and frozen from Americold to manage and with a lot of benefits and we'll finish that now. We were in the process of commissioning our new Melbourne fresh DC and then we were scaling up, which has gone well in DC. So there are a lot of issues around using tertiary sites, primary sites and inefficiencies there as well as putting loads and putting transportation. The benefit in that, of course, was if the DC were down, you had backup. And so there was a benefit of a safety factor. Then there was the rebalancing up and down the Eastern Seaboard as we have various issues in almost constant all the way out to Brisbane at certain points. We have the Brisbane DC service in New South Wales and then we have Wodonga Service in Victoria and so on. So you have this concertina up and down the coast. And then related to that was what range you put in order, you put your fast movers into your regional DCs and your slow movers within your NDC sort of get that a bit out of things. There was a whole range of those issues. And then you overlay on that foot, which means that you start before someone comes in and you lay on that rapid antigen testing, which essentially takes somewhere around 30 minutes before you go into a DC. For a team member to have it and you have a nurse, you have a test and cost you -- was costing us around $50 to actually execute any rapid testers in the process. And so that's how you get all those issues inside the DCs as well as we've been working hard on our new warehouse management systems and fortification management system, don't kind of get the right benefit. If you then get to the stores, you have the same issue of just your productivity benefits as they still have to come through. We had to slow down or pause those because our stores were getting under pressure not only through absentees and recruiting new team members, but then through the lows being late or come in the next day. And so just the whole way you fill the shelf had become very unpredictable and you have your team members around the whole time. And then actually just in -- particularly in Delta, but even when we got to Omicron, you have all this absentees at a store level, and so you start shuffling 10 members from other stores into your stores. I think we had to onboard, there was a remarkable number, 50,000 team members in the first half of the year, the training and the inefficiency that comes through on that just as they reduce our business, set into what they do, whether it's in store or in eCommerce. You can't do that in primary check-in the same way. So it was all those issues that sort of kind of led us to do that. And we can see that we measure, of course, as we should, our sales per labor, our scan rates per minute, cartons moves per hour and so on, but you just saw that all kind of come through and actually just sort of flat line for us, which was the issue that you saw. Is all of that stuff addressable? Absolutely, none of that stuff is structural. That just has to do with the stable operating rhythm. Once you get into some predictable rhythm, a lot of those costs come out and that way we're going to be is quite thoughtful in how we wind them out. I mean in DCs, you kind of take out, okay, we'll talk a antigen test in 1 day and then something happens the next day you're back into. So you just need to be careful on the way that you can let out. But our focus in Q3 is just sliding out of that. And that slide out is underway, which is why you sworn of percentage of spend. And it continues to unwind as it should. We'll be very thoughtful on the unwind. And if we get the unwind done by Easter, which is an aspiration that puts us in a great position to trade a strong Easter and not be back in stock for Easter, but actually have a great Easter and that sets us up for Q4. So that's where the focus is. Steve, any numbers?

The only build I'd add, Brad, the growth of eCommerce and the mix impact on our cost now. If you look at it as an end-to-end profitability level, actually, we had excellent improvement in profitability in eCommerce in the half, but it is a higher cost sort of channel for us, it runs at higher than a traditional sales through the store. And so that mix impact is feeding into so that high cost in store, if you just look at the cost line.

Yes. No, I think that's fair. The balance between eCommerce growth and store growth has been out of WACC, as you might imagine, during the half that I think is a very, very important factor. As has been a lot of the new team members we've recruited and planning to install picking and it just is hard to get into the group of doing that system. By the way, the same issue that I've just described in Food, just looking at clearer page, with that on steroids inside just kind just so you know. We don't call it out as much, but it was as big an issue there as it was in food. And actually, we had similar versions of this. Unfortunately, we had a strike out into December that really put even more pressure into that. And we haven't quantified, but even the cost of commission in our new meat plant in Melbourne alone stand as a great step in our CODB pull it out, and we haven't pulled out the commissioning cost of the fee through in Brisbane either, they are all completed the standup of Balboa Fresh, but all of these costs are in what I'm talking.

The next question comes from Ross Curran from Macquarie.

I just got a question around inflation. So New Zealand seems to be a bit ahead of Australia in the inflation journey. Can you talk us through what -- how customers are reacting to inflation over there? Are you seeing adjustments in the basket? Are people preferring to shop say, own brand to try and reduce the cost of grossers for themselves? Or how is it playing through?

Ross, it's a great question. My sense is it's early days, in particular, as the new team really prepared for the Omicron spike, which is sort of well documented in the way in New Zealand. But Spencer Sonn never gets a question. So I hope you're still online hasn't fallen asleep. And I can just give you a sense of Spencer to having me in our team because he's looked in a high inflation environment. We looked around our team we all can remember it, but it sure was a long time ago that we've operated in it. We need to challenge all of our assumptions, actually, promotional models are a massive issue because you assume things. But I'll let Spencer see if there's any color that he can give to the slide if there's a concern.

Yes. I absolutely am Brad, and wonderful to get a question. Thanks very much for that. Maybe just a little bit of background. We saw inflation heading up or starting to edge up a little bit before Australia. So round about September, October, we started to see inflation moving up to sort of 3%. But December was at 4.3% period to date, we had 3.3%. Currently, as I think you'll know, CPI in New Zealand is at 5.9% and on a year-to-date basis, our inflation is at about 3.8%. So all the factors are the same ones you would have heard on the call today being driven by cost pressures or material wages, adverse, whether our particular reliance on supply chain. So all of those playing through. And of course, we, therefore, as a team, have to be acutely aware of how we're offering value in this market. And so it's the same focuses that you've heard, in particular, just the guard sales we apply to our pricing relative to our competition. So a very rational process in terms of how we're working with our suppliers, how we flowing those price increases through to shelf. Of course, where they are justifiable, we have to flow them through for our customers. But it's making sure that we're keeping a good balance between all of the metrics that offer our customers or all of the mechanics that offer our customers good value our great price program, of which we've got about 3,000 SKUs on our promotional program and our rewards program. So I think from a customer dynamic and behavior perspective, we certainly are seeing more and more through our customer scores, customers focusing on value for money being a challenge for them in amongst all of the other cost pressures that they face not only the price of food. And so it's something that we're going to stay acutely aware of. And having a competitor in this market, as many of you will know that singularly focused on price as their sort of single-minded proposition in the marketplace is -- keeps us honest. And that's a good thing because that means we will have to stay very focused on offering the customer the best value that we can.

Thanks, Spencer. Ross, in Australia, in line it's still too early really to call a particular trend at this stage in food. I would say, by the way, there's many more mechanics. And if you look at protein, affordable protein, while we've got beef and lamb records that we thought we would see. We've actually seen a softening on price increases are on pork and certainly white protein as well priced and actually depending on supply issues, actually, we think proteins becoming more affordable as well. So if you look at the protein, for example, it's not only the price inside those categories at the ability to customers to trade across protein categories, which is -- which we think is an important way of delivering value for the customer, not necessarily margin dilutive for us. So we've got to think very thoughtfully and carefully by segment, by how we want to define the category and what the consumer is looking for and what solution they're looking for. But I think that work all right ahead of us.

The next question comes from Bryan Raymond from JPMorgan.

One just on the gross margin line. Just noticed the comment in there around better buying. I just tend to hear how you are managing the current inflationary environment with price increases. Are there opportunities for Woolworths to take some products along with the -- alongside suppliers? Or is there other factors that are contributing to that comment in there that's driving margins up quite a lot on the gross margin line, also sustainability of that pace of gross margin increase.

Thanks, Bryan. I know you didn't mean to give me the permission to talk about tobacco. I think it's very important to log that one of the reasons our GP percentage went up was the 22% decline in tobacco sales inside the group, which actually cost us in the order of $80 million of somewhere between EBITDA and GP depending on how you assign cost to tobacco. So some of our percentage increase in the GP line is actually a change in mix with tobacco decline so materially. It naturally makes the percentage mix go up inside the business. So I just think that's worth mentioning, and we don't call it out enough, but there won't be $80 million hit which we talked about because of our earnings downgrade in December. Actually, we're starting to see that stabilize now, which is, I think, a positive inside our business, but it was a material change when the CPI adjustments that will flow through in September and quite a painful reset growth. So part of our GP increase has been based on that. In terms of better buying, look, we're always engaging with our suppliers, and you know this world, Bryan, of any increase and trying to look at the absolute number and see what we can get it down to creating a more efficient business and agreement with the supplier. And so for every dollar of increase that we get it well, we tend to take somewhere between $0.50 to $0.70 of it is accepted and hopefully, where it does. We try and work where we can to pass it through to the consumer. We predict that's the right thing in that context. So we're always working through that process to engage and get the right thing done. And invariably, one of the things we're always interested in is whether the promotional program that we're running with the supplier is actually delivering what we needed to and whether we can repurchase some of the promotional monies into just better everyday prices in the context of the supplier. So those comments would allude to those kinds of tough things that are day-to-day things that we do continuing to do. I'm always very worried about all of the Woolworths scores, but actually, I'm pleased to report that at the end of January, we just saw our best score and voice of the supplier from our supplier partners. So it feels like our team has did a good balance on managing that set. It's a very serious, a very delicate issue that Natalie, Paige, Claire were all involved in obviously.

I would also add, I think the work we're doing with Q-Retail and really use the data insights is really helping here. So segmenting our stores value core up and making sure we get the right range into our up stores. So our customers are finding the products they want. And if I use coffee, as an example, more space on the shelf and more range in ground coffee, local coffee capsules. And then in a value store, we are waiting the space and arrange much more towards instant coffee, and that's true as well of how we're thinking about the promotional end. So we're really moving to 10% to 15% range differentiation from our value and up stores. And that means that the premium customers are finding the products that they're looking for. But we're also managing stock loss in our value stores. and really providing those products that our value customers are looking for. So that's definitely helping as is a next-generation promotional insight to really make sure that we're optimizing the money that ourselves and suppliers are investing.

A lot of -- some that Nat alluded to -- we invested materially with the partnership with Quantium in H1 to create an analytics road map. We've been lucky enough to have Amitabh Mall join us as our Chief Analytics Officer and Managing Director of Q-Retail. And the #1 use case that, that team has been working with has been rebuilding our promotional program in partnership with all the supermarkets that are now leading in to support BW and New Zealand. But obviously, that was the key use case. And we're really fussed by the learnings there by [indiscernible] and hoping we'll see some of those soft landing in H2 and a lot to be positive about. But when you look at the percentage mix, don't forget about the tobacco -- sorry to come back to it. I wish I wasn't, but it's a major issue that we don't talk to, but should we ever confuse ourselves we should look at the GP metrics.

Tobacco as well as some COVID mix benefits to customers switching for into category like frozen foods as well.

The next question is from Shaun Cousins from UBS.

Just regarding sort of gross margin again. Can you just talk a little bit about where stock loss was in Australian Food? And I think you highlighted at the full year result, it was less than 2.5%. Where do you expect stock loss to get to, particularly given some of the technology initiatives that you've got in place to optimize that? Could we be looking at 2% or possibly even a sub-2% stock loss once the operating environment turns to something a little bit more normal, please?

Yes. Thanks, Shaun. One of the things I worry about our stock loss performance, which has been impressive that has not just been driven by the elevated sales we had through store and therefore, it pops back up when sales go back to normal. So I mean, particularly, I think it sees an amazing job and anxious about not kidding ourselves to what drives stock loss. As best we can tell, our performance at this stage has been driven actually on a very good process and all the controls we've put in place across the business. So I'm hopeful that, that's not our risk. But to your point, there are still improvement opportunities. And we're thinking about fresh and long life, very different fresh is still running may be 4.6, long loss [indiscernible] 1.15. And so we'll continue to work through those as we go forward and improve them. And there's a lot of great initiatives underway. Again, using -- we've done some things with our welcome gates how we think about the store, but increasingly using technology, how you think about markdowns in fresh, how you think about flowing fresh and there's other ways we can use technology around with -- at our front end and image recognition and so on. So yes, we don't want to over plan. We feel like we're in a good spot. The key thing is to make sure we continue to improve and don't find a spike in when sales may be sort of normalize to some degree.

Rate was broadly flat in the half and state sub-2.5%. Yes.

Yes, which is good. I mean, we see still much better than that. So of course, we want every store to be above quarter -- no workplace.

The next question comes from Phil Kimber from E&P.

Just a quick one for me. The P&L tax rate look low at sort of around 25%. Was there -- I wasn't sure if you commented on that somewhere in the release? Or if you didn't, if you could just explain...

Thank you for hitting that question, Phil. We've been waiting for it for the last 3 hours. Steve?

No, Phil, it really just relates to tax provisioning decision last year, we've taken some conservative settings on deductibility cost on the demerger and providers if they wouldn't be deductible, it turned out as we work through that process, but they were. And so we effectively just have a tax over provision from the prior year reversing. It's not a permanent difference just the timing issue between years.

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

I was wondering in terms of the out of stock items, I think, Brad, you spoke about this a little bit, but I was wondering if there was a meaningful difference in performance between New South Wales and Victoria, given the very different supporting infrastructure. I was wondering if you could make some comments and if you're not seeing big differences why not?

That's a great question, Scott. And I actually pride myself when I look into all the numbers that I've got along call so mainly because the first half of H1 was challenges in New South Wales, and it actually had flipped into challenges in Victoria. So we've got to -- as we felt we've got New South Wales in a better place than that's when we started to see the challenge in Victoria and the thing that strikes us on out of stocks by the way, has been the variability. So I remember at the heart of the crisis of October, I think Food out to Victoria, had to look in the stores. And you can go to one store and it was great. And if you go to the next one, it was pointed it all had to do with what warehouse services and whether the load was late on that particular day or not. So it is -- it is very noisy. I would say when we get Victoria into the right rhythm, it really works for us, but we're still back to get into that right rhythm. We have one of our most experienced operators and all actually managing into end-stock phone coordinating across our supply chain and our stores in Victoria. And when it works, but it's still -- we still kind of -- we've got a few more hoops to go through that. But I don't know, Natalie, if you've got better answer?

Look, I think it's changed over time depending on the circumstances and even thinking back to January, certainly, the Omicron wave hit in Sydney and now Sydney our DC first. And before they're moving into Victoria impacting our Victorian shed. Brad mentioned to Andrew for our state team, in general were having twice a day for call to really react to what's happening every day, different dynamics in different states. In Victoria, we had issued people recruitment on truck drivers availability, which we worked through. So I would say, in general, though, now, if I look at New South Wales or Victoria, both states are very similar in terms of their recovery and heading back towards normal levels of stock in the store with a recovery in certain categories like toilet paper and protein to come over the course of March. Queensland is beginning to catch up as well and end up all the way...

But Scott, I was in Victoria last week and I visited some stores that changed over time and I chose a bad time anyway. Some of the loads were late and I thought the stores -- just there are opportunities there. So it is patchy, and that's why we've just want this predictability. When we get it to our business works, we will get the efficiencies we want, we will deliver the outcomes we want for our shareholders. Still a little bit patchy. It's getting better, but these things are still happening.

Unfortunately, we've run out of time for further questions. I'll now hand back to Mr. Banducci for closing remarks.

Thank you, everyone, for your questions today. We get the issue of not delivering what we want to aspire for our shareholders. We talked about in December. We accept it. We understand the work we need to do in the second half. However, I sit here with confidence with my colleagues, the momentum we had in January, the momentum we've got, I mean, in December and January, the customer resonance we continue to have as I look through, I see us doing the right thing. And actually, the trust and support of our team, I know we're trying to do the right thing as well and we're looking at the demand and making sure we do the right thing for them, it's central to who we are, and we look forward to coming back and reporting Q3 and, of course, full year all to soon. Thanks very much.