Woolworths Group Limited (WOW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Woolworths Group Limited FY '22 Full Year Earnings Announcement. [Operator Instructions] I would now like to hand the conference over to Brad Banducci, CEO and Managing Director of Woolworths Group. Please go ahead.

Good morning, everyone, and welcome to the Woolworths Group F '22 Full Year Results Briefing. Joining me today are our Chief Financial Officer, Stephen Harrison, who will present our F '22 financial results a little later; Natalie Davis, Managing Director of Woolworths Supermarkets; Amanda Bardwell, Managing Director of WooliesX; Spencer Sonn from New Zealand, looking after our New Zealand business; Pejman Okhovat, Managing Director of BIG W; Claire Peters, Managing Director of B2B and Everyday Needs; and Bill Reid, our Chief Legal Officer. Before I start the presentation, I would like to acknowledge the traditional custodians of the land on which we meet today, the Dharug people of the [indiscernible] nation, and I'd like to pay my respects to Elders past, presence and future. I will start today's presentation with an update on the group performance and our progress on our strategic agenda including the activation of our Food and Everyday Needs ecosystem. Steve will then present our financials before handing back to me to finish with current trading and outlook before handing over for questions. And for those of you who are following via our management presentation, I'll just call out that I'm going to start on Slide 4. But let me go into the high-level summary of the year and fill in to some of the detail. F '22 marked the third year of navigating COVID-related challenges, as I'm sure you're all aware. We started the year with the Delta outbreak with Q2 particularly impacted by disruption and inefficiencies across our supply chain and stores and rising levels of team COVID-related absenteeism. At the beginning of H2, Omicron began to take hold, with the half made even more challenging due to inclement weather and flooding events. Combined, this led to an inconsistent customer experience and financial performance below our aspirations, particularly in H1. Importantly, we had a strong Christmas trading period, and the group's operating performance, financial performance improved over H2, with a gradual return to a more stable operating rhythm. On a continuing operations before significant item basis, H2 group sales increased by 10.5%, with improved momentum in all segments other than New Zealand Food. Excluding PFD and Quantium, group sales increased by 6.2%, and group sales for the full year grew by 9.2% to $60.8 million or 5.1% excluding PFD and Quantium. Group EBIT in H2 increased 8.1%, driven by 9.7% growth in Australian Food, and this resulted in a full year EBIT decline of 2.7%, much improved on the 11% decline in H1. Just moving on to Slide 5. We presented these charts, if you're looking at Slide 5, which just shows you our outbound service level and absenteeism just as a way of contextualizing the operating challenges that we have had and still, to some extent, continue to have. On the left-hand side, you see our DC outbound service levels, which have improved somewhat relative to the low point in February and March, but remains well below pre-COVID levels and even F '21. As hopefully everyone understands, this doesn't equate to 20% of the products have been available to customers in our stores, but it does give you a sense of the impact to our suppliers and supply chain from COVID-related disruptions. Team absenteeism remains an issue throughout H2 in store above last year pre-COVID baselines. We expect to see improving trends in F '23, but we're not yet back at a normal operating environment. Just on Slide 6, this gives you a sense of our customer experience. And invariably, given what I showed you on Slide 5, our customer experience was not as good as we would have liked during the year. And this was reflected in our F '22 customer advocacy scores, with all businesses down in the prior year with the notable exception of BIG W. Despite this, the effort and commitment of our team cannot be questioned. They have shown remarkable resilience over the last 3 years and have responded and adapted quickly as each new challenge has presented itself. I and the group ExCo are particularly proud of the fact that our customer metric measure whether our customers felt cared for remains strong for all group businesses. And I'd like to thank our team for their efforts and for continuing to put customers first. On Slide 7, F '22 was another record year for digital and eCommerce, with group eCommerce sales increasing 39% compared to F '21, with eCommerce penetration of 11%. Since 2017, group eCommerce sales have increased at a CAGR of 42%. Customers were also engaging with our websites and apps more frequently, with an average of over 19 million customer visits per week across our group digital platforms during the year, up 24% on the prior year. Growth rate slowed a little in H2 as customer behaviors began to normalize, but sales and penetration rates remain well above pre-COVID levels. Pleasingly, we delivered good profit leverage in our Australian Food and BIG W eCommerce businesses, and while New Zealand was impacted by higher team costs due to COVID, it remained profitable at an eCommerce level with a good underlying run rate. Across all of our eCommerce businesses, we are becoming ever more efficient as our scale increases and as we continue to optimize our processes. Slides 8 and 9, just to give a sense of our progress against our strategic priorities. And I won't go to them in detail, but a few highlights for me. The launch of our new group brand in February to better reflect our purpose of creating a better tomorrow was a very important moment for us. We are very committed to being a purpose-led organization, and it gave us the opportunity to reengage with our team on our purpose of working better together to create better experiences for a better tomorrow. Another one that I think is very important has been the reimagination of our supermarkets and our latest concept stores in Port Macquarie, which is a Core store, Miller, a Value store and Double Bay UP store, have given us enormous learnings on how we take our Core, Value and UP segmentation forward. And then the rollout of RT3, which is a fundamental change to rostering and task management in our business, and it's a key foundation both for a better team experience, but also our productivity agenda in the years ahead. On Slide 10 is just a reminder of our Food and Everyday Needs ecosystem, with each segment working to reinforce the other, with the customer first, team first focus at the core. And we've made pleasing progress on activating our ecosystem, which I just wanted to briefly talk through in the next few slides. Firstly, just going into retail platforms, Primary Connect, of course, is our key retail platform, and we materially progressed our multiyear supply chain transformation during the year. This despite the disruptions I talked about earlier. Amazingly, we commissioned 6 new facilities during the year, including Heathwood Chilled & Frozen DC in Queensland, which opened ahead of schedule in H1, and a new state-of-the-art Auckland Fresh DC, which opened at the end of the year in June. In addition, MSRDC is starting to deliver for us, our automated regional DC down in Melbourne, delivering 2.2 million cartons per week in H2. In July of this year, we opened a new CFC, customer performance center, in Rochedale, Queensland, which is the first in our network with attached direct to boot. And just this week, we are opening our latest CFC in Caringbah, Sydney, which will also have an attached direct to boots, and I can't wait to go and see it, hopefully on the weekend. Construction is underway on our Automated CFC in Auburn together with our partner, Knapp, a new regional and national distribution center in Moorebank, Sydney. On Slide 12, we just wanted to show you our increased scale across digital, eCommerce, loyalty and media. And so this just gives you a sense of where we're at. Now the slightest focus on Australia, but we are making good progress in all of the same areas in New Zealand. Industry benchmark in all of these areas is very difficult. But hopefully, this gives you a sense of relativity in where we're at on each one of the things. Just to call out a few highlights on this page. We are increasingly one of Australia's leading digital platforms, as more and more customers use our websites and apps every week, whether to purchase groceries, preplan what they're going to shop in store, prepare a shopping list or search for a recipe or weekly meal inspiration. In terms of eCommerce, we are the largest 1P eCommerce retailer in Australia today. And of course, our aspirations have grown our 3P marketplace presence, and we try to do that both through Everyday Market, which we have been incubating inside our business, and more recently, the deal we've announced with MyDeal. As value has become increasingly important to our customers, we recognize the imperative to continue to evolve our Everyday Rewards program, and we've added over 620,000 new members in F '22, with 13.7 million members at year-end and are increasingly personalized, relevant and timely customer offers have led to about 2.5 million customers activating boosts per week in our stores in the month of June. Just in terms of retail media, there's a slide on the next page, Slide 13, which just gives you a bit of context to where we are with our retail media business, Cartology. And we see this as obviously a critically important platform for our group. And we've had very strong growth from Cartology since its inception with revenue doubling since F '22. And if you look at the slide, if you have it near you, you'll see that it's -- we've grown retail media across the board, but in particular, in the context of digital. And in F '22, Cartology revenue increased 29%, supported by higher traffic, in particular, as I say, to our digital properties and the launch of new Cartology media products. The team also delivered over 8,000 campaigns in the year across all channels and expanded across the group, including completing its first full year in New Zealand and preparing for the launch of BIG W in F '23. In July, we announced a proposal to acquire 100% of out-of-home media specialists, Shopper Media Group. Shopper currently operates over 2,000 screens in over 400 shopping centers, which will be highly complementary to our current in-store screen network, subject to ACCC approval. We anticipate completion to occur by the end of this calendar year. Just on Slide 14, keeping on the thematical platforms, and this -- in June of this year, we formalized and strengthened our partnership with Quantium and lifted our shareholding to 75%. At the same time, wiq, called Q-Retail was originally known, was established, and wiq brings together the best of Quantium and Woolworths Group's collective data science and advanced analytics capabilities to deliver on our aspirations in this area. The team brings together more than 600 professionals, and they're working on over 20 high-priority use cases across the group with early progress already being made on optimizing promotional effectiveness and personalizing customer offers. In addition to this, we are also working on tailored ranging at a store level and enhancing operational efficiencies, both in-store and online. On Slide 15, as I've talked about earlier, we announced our intention to acquire 80% of online marketplace MyDeal. MyDeal is an established marketplace platform, with approximately 1 million customers, over 1,900 sellers and more than 6 million products on the site. And those includes a range as of last week of BIG W products, which we officially launched. The share of nonfood retail sales via marketplaces in Australia is well down than other mature countries, and the addition of MyDeal to the group expands our marketplace ambition, in particular, in furniture, homewares and an extended range of everyday needs. On Slide 16, actually, a real epiphany for us and the highlights in the challenges of COVID was that our customers told us that in addition to being kept COVID safe and us delivering great value for money, they wanted us to remain focused on creating a better tomorrow, and we were able to make good progress on our sustainability agenda during the year. Remained our gold Tier status as part of the AWEI, Australian LGBTI Inclusion Awards for the fourth consecutive year, and we also made really pleasing progress in particular on team safety with our total recordable injury frequency rates down 9% compared to the prior year. We'll continue, of course, our focus on the planet with our Scope 1 and 2 emissions up 31% since 2015. And on the product side, we spent a lot of time working to improve the quality of data and working on plastics and how we can take plastic out of our business with over 10,000 tonnes of virgin plastic removed in Australia through targeted reduction initiatives, equivalent to a 22% reduction relative to the 2018 baseline. A lot of work still to be done here, as you know, and we will be releasing our sustainability report later next week. I'd now like to turn over to Steve to talk about our financials, and then I'll come back to talking about our priorities given we are now in the ninth week of the new financial year. So over to you, Steve.

Thanks, Brad, and good morning, everyone. I'll start today with the F '22 group results summary on Slide 19. And I'll focus my commentary on continuing operations before significant items, which adjust for the Endeavour Group in the prior year and the impact of the demerger. Group sales increased by 9.2% on the prior year to $60.8 billion, benefiting from the first time inclusion of PFD and the acquisition of Quantium in June '21. Excluding PFD and Quantium, F '22 sales growth was still strong at 5.1%. Group EBIT was down 2.7% to $2.69 billion, reflecting the extremely challenging operating environment in F '22, given the significant impact of the supply chain disruptions, product shortages and absenteeism. I'll talk further about this on the next slide, but half 2 performance was a strong improvement on half 1, with H2 group EBIT up 8.1%. Group NPAT for the year was up 0.7% to $1.514 million due to lower interest and tax compared to the prior year, and I'll discuss our dividend later in the capital management section. Turning to Slide 20. On this slide, we've laid out our full year and half 2 performance by business unit. Half 2 performance improved significantly compared to half 1, and I'll focus primarily on the second half as we discuss the first half performance extensively in February. In half 2 of F '22, Australian Food's operating performance improved materially, sales increased 5.6%, with EBIT up 9.27% -- sorry, 9.7% to $1.203 million. H2 benefited from higher inflation, a recovery in store originated sales, as well as a gradual improvement in our operating rhythm over the second half. The strong second half EBIT growth resulted in a small improvement in Australian Food EBIT of 0.3% for the year. Growth in Australian B2B is distorted somewhat by the acquisition of PFD and the first-time inclusion of Endeavour Group's partnership revenue. PFD had a successful first year as part of the Woolworths Group, with momentum improving over the course of F '22 as restrictions eased. Our other B2B businesses grew sales on the prior year. New Zealand Food had a challenging second half as Omicron resulted in significant supply chain disruption, team absenteeism and low stock availability. Despite half 2 sales increasing by 3.1%, sales momentum slowed over the half, with item growth below the prior year, and EBIT declined 30.8% to $116 million, slightly below the guidance we provided at our Q3 sales announcement. BIG W sales rebounded strongly from February, with Q4 sales growth of 11.9% after an extended period of store closures in half 1. Half 2 EBIT increased relative to half 1, but was 23.5% below half 2 of F '21 due to COVID-related costs, particularly in early Q3 when the impact of Omicron were most significant. And then finally, other net costs, which includes the group -- sorry, includes group costs and our share in the Endeavour Group earnings was $123 million, broadly in line with our guidance of $190 million, excluding the Endeavour Group contribution. The reduction in other compared to the prior year was due to our share of Endeavour Group's NPAT and the full year contribution from Quantium somewhat offset by higher COVID costs, including the team's thank you bonus. For F '23, excluding Endeavour Group, we expect other costs to be approximately $220 million, reflecting increased investment in advanced analytics in F '23, with the benefits from these costs largely accruing to the business units for initiatives such as next-gen promotions. On Slide 21, we've outlined comparable sales by business unit and the impact of COVID restrictions. We've included this slide in our recent presentations to help provide some context on what we're cycling on a quarterly basis. Given the varying impact of COVID over the past 3 financial years, we're now showing 3-year average growth rates for Q3 and Q4 to better reflect a pre-COVID baseline. In Q4, 3-year growth rates increased in each of Australian Food, New Zealand Food and BIG W as we ended the year with good momentum. Looking forward, consistent with our current trading numbers provided, Australia and New Zealand Food are cycling very strong growth in Q1 due to COVID restrictions in Q1 of F '22, whereas Big W was cycling a less challenging base due to the impact of store closures in the prior year. Moving to COVID costs on Slide 22. In F '22, group COVID cost were $323 million or 0.5% of sales and were broadly in line with COVID cost of $332 million in the prior year. Following the peak in Q2 at 0.9% of sales, COVID costs moderated over the remainder of the year, with COVID costs of $18 million or 1% -- sorry, 0.1% of sales in Q4. COVID costs also shifted progressively from the Eastern Seaboard of Australia to Western Australia and New Zealand over the half, where the impact of Omicron was felt later, with the majority of the COVID costs in Q4 incurred in New Zealand Food. We've consistently stated that subject to the health and safety of our customers and team, we do not expect COVID cost to be permanent. So we're pleased to see the reduction in COVID costs in Q4, and we would expect direct COVID costs to continue to reduce in half 1 of F '23 assuming no further COVID outbreaks or requirements to return to strict COVID restrictions. Moving to our balance sheet metrics on Slide 23. Average inventory days from continuing operations declined by 1 day compared to the prior year. This was due to higher sales during the year in our Food businesses despite the increase in inventory over half 2 to mitigate supply chain disruptions. Group average inventory days benefited from mix following the demerger of Endeavour Group, which typically carries higher inventory days in our Food businesses. The calculation of ROFE has been impacted by the demerger of Endeavour Group. The continued operations ROFE has also been normalized to remove Endeavour Group in the prior year, but ROFE now includes our 14.6% investment in Endeavour and its NPAT contribution for the year, together with the first full year impact of PFD and Quantium. F '22 ROFE was 13.7%, a decline of 3.1 points, reflecting higher fund employed from our acquisitions and longer-dated capital investment profile and largely flat EBIT given the impact of COVID across the group in F '22. Moving to Slide 24 and our capital management framework, we've included a recap of our capital management framework and called out some highlights. In F '22, we generated operating cash flow before interest and tax of $4.8 billion, which was up 4.2% on a continuing operations basis. This was largely allocated to $3.2 billion of dividends and capital returns to shareholders, together with growth in CapEx and investments in new businesses. I will touch on some of our other capital management highlights on a later slide. Moving to our cash flow on Slide 25. EBITDA from continuing operations increased by 3.1% to $5.052 million, driven by Australian Foods EBITDA growth. Cash flow from operating activities before interest and tax was up 4.2% to $4.8 billion when we exclude Endeavour Group in the prior year. Investing activities in the current year primarily relates to CapEx, with the increase versus F '21 driven by the acquisition of the 65% interest in PFD Food service. Interest payments were below the prior year due to the demerger of the Endeavour Group, together with the benefits from refinancing borrowings at lower interest rates during the year. As a reminder, following the demerger in June last year, Endeavour Group repaid its intercompany loan of $1.7 billion to the Woolworths Group, which was used to fund the majority of the $2 billion off-market buyback we completed in October. Our cash realization ratio, after adjusting for the noncash gain on the Endeavour Group demerger, was 86%, which is below our target of 100%. This was impacted by a decision to invest in inventory, resulting in higher working capital and noncash outflows of $235 million and higher cash tax paid relative to the P&L charge due to F '22 tax payments, including Endeavour Group earnings from F '21. On tax, our effective tax rate was unusually low this year due to some one-off factors. And going forward, we would expect it to be approximately 29% or things being equal. Moving on to Slide 26 and a quick overview of CapEx. Operating CapEx for the year was $1.9 billion. This was marginally below our $2 billion guidance, but up on an underlying basis compared to F '21 after excluding the Endeavour Group. The increase in sustaining CapEx compared to the prior year largely reflected supply chain investments and renewals, with the increase in growth CapEx largely reflecting CapEx related to supporting our growth in eCommerce. In F '22, CapEx also included $150 million of projects with strong sustainability benefits such as refrigeration and solar. Moving to Slide 27. Today, the Board has approved a final dividend of $0.53 per share, which is up $0.02 per share on F '21 when the Endeavour Group contribution is excluded. This brings the full year dividend to $0.92 per share, up 1.1% versus last year, excluding the Endeavour Group. This equates to a full year dividend payout ratio of 74%, which is within our 70% to 75% target payout ratio. And moving to Slide 28, our debt and funding. The group's sources of funding and liquidity remained strong, with total committed undrawn facilities of $2.5 billion in addition to cash. We successfully completed the issuance of $1.6 billion of sustainability-linked bonds in the first half, and in Q4, refinanced $1.25 billion of bilateral resolve -- revolving bank facilities. We remain committed to solid investment-grade credit ratings and a significant headroom under our current ratings of BBB from S&P and Baa2 from Moody's, with a leverage ratio at the end of F '22 of 3.1x when measuring net debt to EBITDA. Thank you, and let me hand it back to Brad.

Thanks, Steve, and moving all the way to back of the document to Slide 46 and just talking about the first 8 weeks. Sales in the first 8 weeks of F '23 for Australian Food were down 0.5% as we cycled 2 consecutive years of elevated sales growth. However, 3-year CAGR remains strong at approximately 5%. Team absenteeism, supply chain disruptions continue to be above pre-COVID levels, and we're seeing cost pressures in other areas as well. But subject to no further material COVID restrictions, COVID-related costs should decline substantially in F '23 compared to F '22 as customer behaviors continue to normalize and the operating rhythm of our business continues to improve. Inflation is beginning to impact all aspects of our customer shop, and we've seen a gradual change in customer shopping behavior. We recognize the cost of delivering pressures being experienced by our customers, and our commitment is for every Woolworths customer and team member to be able to Get Their Woolies Worth. We're continuing to work hard on tailoring store ranging, including own brand, as well as our prices dropped low price and low price freeze and promotional programs, both in-store and buy everyday awards to deliver value for all of our customers. Operating conditions in New Zealand remained challenging. Sales growth declined by 1% in the first 8 weeks, but was up 4% on a 3-year CAGR basis. Due to inflation, materially higher costs and a very competitive trading environment, EBIT for FY '23 is currently expected to be materially below the prior year, and we will provide a further update on this at our Q1 sales. BIG W sales on the other hand, have been very strong in the first 8 weeks, increasing by just under 30% with a 3-year CAGR of 10%. We believe that the value, quality and convenience that BIG W offers will be a strength in the current environment. Balancing the needs of our stakeholders is more important than ever in this environment, and we remain committed to offering great value to our customers, at the same time, recognizing the cost pressures being felt by our suppliers, rewarding our team fairly and delivering an improved financial performance in F '23 for our shareholders. We'll now turn the call over to the operator for questions.

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

The first question for me is on the productivity benefits that you are looking to achieve in FY '23 after 3 years of delay. Can you talk a little bit more about the source of these? And how should we think about the FY '23 year? Is it just sort of going back to where you would have been and kind of starting again? Or do you think you'll get a little bit of a catch-up? And any help you could give us on the potential quantity of these would be helpful.

Sure, Michael, and I expect quite a few questions on CODB. So I'll dive into the specifics. But just, I guess, the one thing I just wanted to reference as you look at our CODB for '22, it really is an all-in CODB. I think there's become a bit of a fine arts on classifying COVID costs, and first order, second or third order, the investment required in digital or eCommerce supply disruption of productivity. You've seen a very all-in cost of doing business, which we think we're working very hard, of course, to improve on the go forward. Then if I come into productivity, the #1 priority for us is to be consistently good on the item-based productivity in our business and to get ourselves to or ahead of where we were pre-COVID. And the name of the game in F '23 is item-based productivity because what we're going to start seeing is a scenario where the top line will be somewhat driven or more driven than not by inflation, but with items flat or declining. And then you started to see that in Q4. if you look to the New Zealand Food and Australian Food. So item productivity is key. We always talk about our business being driven by items, but we need to ensure that we get and are consistently good on that in every aspect in our business. And that hasn't been the case in the last couple of years for good reason with all the disruptions we've had, whether it's our cartons per hour in our DCs and [indiscernible] full rates in our stores, scan rate at the front end of our stores or whatever the case maybe, pick rate for our eCommerce business per hour and so on. So that is the biggest opportunity. And when we look at our underlying item productivity metrics in '22 and '21 for that matter, there's enormous upside that sits there for us. On top of that, then you get into the more traditional programs of how we improve our underlying processes and bank the benefits of that. And of course, there is a lot of work underway there. As I think we were quite advert in the middle of COVID, it was hard to progress those. With all the disruption we had, you just didn't have a stable foundation on which to do those. And again, there are active programs, as you might imagine, across all aspects of our business. In our supply chain, really we have commissioned a number of new sites. We just need to now effectively ramp those up and achieve what we would like to achieve. We had have made good progress on MSRDC, but it has still been patchy. We just want to be consistent on the 2.2 million to 2.4 million cartons a week there. We want to lift our Melbourne Fresh DC to a consistent 1.5 million to 1.7 million. We want to start seeing the benefits that we know are available to us in Heathwood. The same is going to be true in Auckland Fresh, our new Hilton facility in New Zealand. At the 2 facilities, we just transitioned back into Woolworths to Primary Connect and BIG W and so on. So we can just see enormous opportunity and benefits there. We're also working very hard in collaboration between Woolworths Supermarkets and Primary Connect to think through the number of deliveries we do to store. There's enormous pressure in the transportation side of the business, not only fuel, but driver availability. And so we are just being very thoughtful on rosters, and we have reduced the number of rosters very successfully in Victoria, which leads to better low building logic for the pallets and can create productivity in both DCs and stores, and we're looking to roll that out across the country. In Woolworths Supermarkets, and we can come back and talk about this more specifically later if someone wants another question, and Natalie will talk to it. Our focus at the moment is land in RT3, which is really -- we've rebuilt all of our standards in our stores around how we want productivity to work and then how we would like to roster. The priority in H1 is to land that. We're well on track to do that. That will then give us a very firm platform, and we'll make sure we've got a better right time -- right person, right time, right task in this half, but it will give us good foundations to drive a more ambitious agenda into the second half. Very pleased on our smart series of initiatives. ESLs has been the story of donkey and Shrek of are we there yet? Are they ever going to work? They do work now for us. We're very pleased with them. They started to become base just part of what we roll out. We can see the efficiencies that are there. If I move into WooliesX, a lot of work has been done in combination between WooliesX and wiq on improving process for picking algorithms of ECF, as we call it, on what sequence we pick items in the store has had material improvement done with our new refresh program, 15% less steps on average to pick the same basket of items. So a lot of work going into process efficiency. Another big opportunity there. One of our big costs actually has been when we have to do a substitution. We've had a lot of out-of-stocks, as you know. We do a substitution. That was a second process we run through the store to substitute items for customers. We're now doing that in line with the first pick. So a lot of work going on there. In our home delivery business, we are very successfully complementing route efficiency, which we are starting to get, which is very exciting, with point-to-point deliveries from our stores. So we believe routes and point-to-point actually together give you a better outcome than either one or the other, and a lot going on in that side of the business. So I think it's a very comprehensive program. It is all based on though, if I come back, item-based productivity is the key because we aren't uncomfortable on the sales headline number, but we need to be realistic on, as we normalize through COVID, item growth will be muted at best, probably slightly negative, and therefore, it all needs to come back to that foundation. If there's a bright spot in that it is that with a more muted item growth, it gives us the ability to really focus and land these productivity agenda that I've just talked through. So happy to come back, happy for Natalie to talk to BIG W. There's a lot of question for Natalie, the WooliesX question or Pej or Claire in other parts of our portfolio. But hopefully, that gives you some color of what we've got going on. And one of the key things for me, and we'll talk about all aspects of F '23 for Woolies is everything that we need to achieve in F '23, we started in F '22. There's nothing we want to add to our agenda in F '23. We just want to do a better job of scaling and executing all the things that we started either in '21 or '22.

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

Michael, I think you didn't ask 2 questions, but I have a very long answer. So I think I should apologize. I'll try to be a little bit more brief on the go forward. But over to you, David.

Brad, look. But I sort of like to reask the question. We're all trying to work out the latency of what you've got in your business when you get back to what you call normal operating rhythm. Now the slide that you gave, on Slide 5, is really interesting. But it raises a couple of issues, absenteeism is running at very high levels, which is obviously going to cause operating rhythm disharmony. You've also got other cost challenges there where your DCs have coming on stream, but they're not running at the levels that you want them to. So I absolutely understand everything that you said, but we're trying to work out, I'm trying to work out, the latency of operating efficiencies in your business in terms of how much costs can we expect to come out when you do get back to that operating rhythm of normality. And really, this absenteeism is a productivity issue now. A staff is taking the, you know what, where they can take a sick leave whenever and it's accepted now. Is this the new norm? So we're trying to get an understanding to elaborate on the previous question is, what does normal now look like when you get back to operating rhythm and what is the latency in your business? Because listening to Coles yesterday, you do seem to be 2 or 3 years ahead of them, they've got to go through their DCs. You've got yours on the ground. Now you've just got to get them to run. So if you could go and talk about the future a little bit more and give us an understanding of the earnings latency, that would be really appreciated.

Thanks, David. And I've got more gray hair, of course, correlated with us commissioning a lot of these sites. So one goes with the other.

At least you've got hair on it, Brad. I've lost a lot on it.

I think on all of these things, if you look at -- if we showed you the first half numbers versus the numbers now, we're in a much better position. We've been working hard really since our very painful moments in early December when we came to you and talked about our earnings challenges of trying to get into the right operating rhythm. And on average, the trend lines have all improved. There are just moments when you still have challenges and it reminds you of the fragility that's out there. And so when I look at that absenteeism, David, which sort of sits there at 5.3 versus 4 before, in the first half, we had peaks inside our stores where it was 10 to 15, in Sydney was 20. If you look to the first half of F '22, we hired over 60,000 people into Woolworths. We're normally high at 30,000. This year, we're hoping to hire 20,000. The cost of actually training that team, getting them up to speed, it's hard to quantify, but is very material. So I look and said, it's a much better number than we had before. We had warehouses with absenteeism of 30. We're down at maybe 15 right now. The difference in that and having an experienced team in the store, I couldn't actually calculate it because it's hard to, but our contractor absenteeism turnover was running close to 40, it's now under 20. So we're working hard to get it better, David. It is, on average, getting better. I just want to be realistic. I hope we would have where we wanted it by June, but now we are sort of looking for October, so we can really lock and load for Christmas. But I wouldn't want to overplay it. It is getting better. The peaks that you've seen in June on absenteeism really do correlate with the peak of winter with flu, influenza and then COVID BA, AA2 or whatever it was. And so there is a lot of noise there in a sense. So we're not unconfident we'll get to the right place. And actually, one of the key things for RT3, which Natalie can talk to later is we want to hire these people and give more hours to our casual and our part-time team. And so that's a big flex for us, which will really help us because it will just help us address the underlying efficiency of our team members. So our issue is not absenteeism. Our issue is someone who doesn't know our business. It does take them a while to get up to speed, and that's why you see it in the item productivity numbers in my mind. If I come back to our DCs, and I think we said this in December, I know we said it in February, you wouldn't have wanted to commission what we commissioned if you knew what lay ahead with the disruptions that we were going to go through. Thank goodness, we did it because we did it. And now our focus is on the ramp-up. Again, on average, we've seen a really positive ramp up into those DCs, and they have the capacity we need on the go forward. One of our biggest issues historically has been, and we've had to use overflow facilities going into Christmas, causing us enormous issues, in particular, in Melbourne, and that caused a whole lot of transportation fragmentation. We're now working very hard to get all of our products into our DCs, stopping to use or reducing our reliance on overflow facilities and be ready to actually have a great service level to our stores, hopefully for Christmas, great on-shelf availability for Christmas, which we didn't have last year. And we think that can make a big difference. When we look at our first half sales, we feel we lost a lot of sales through not being in stock. And so we see a lot there. I can tell you, our Primary Connect for the first time in maybe 24 months hit its all its productivity objectives for us in July, and I think that's a great testament to the team. And it says something about stability now. July doesn't make a year, like 8 months -- 8 weeks don't make a year, but we are starting to see the momentum come through. So David, as you know, the virtuous move in retail is based on actually getting good item-based productivity in a world where there's a slight bit of inflation. That is what we are hopefully planning for. There is no doubt there are going to be challenges during the year. We're experiencing them right now in New Zealand, but we remain optimistic that we can slowly see these things come together. If our team is stable, which they increasingly are, if we get predictability into our customer shopping patterns, which we're increasingly seeing, we start seeing the benefits. And that is true even in the 8 weeks of this year. But if you and I walk to a store right now, or Natalie walk a store with you, we'd be going up and down the toilet paper aisle full, somewhat disparaging will be in the cat food section, wondering what's going on there, there will still be bad days in frozen vegetables in our stores and so on. So we don't want to kid ourselves that there's still some work to do.

The next question comes from Shaun Cousins from UBS.

Great. Maybe just talk about gross margins in Australian Food, please. Can you just -- with that -- where you're at with stock loss and maybe the burden of sort of higher meat costs, if that's easing at all? And then maybe just how you're getting a benefit in dry grocery because there appears a policy almost based on trade feedback of seeking higher margins to accept a price rise, maybe it's to equalize margins within a category. But can you just talk a bit about some of the components of your gross margin, particularly in the second half, please?

Thanks. Thank you, Shaun. And as -- the reason we're in retail is it's always positive or tailwinds and the headwinds, and that's the way I would think about '23, and that's the same case here. Stock loss, first, Shaun, we had a very strong year in stock loss, in particular, in the first half of '22. Stock loss running at about 2.5%, feel free to correct me, Steve, in Australian Food. And there are some risk in stock loss in '23, in particular with, Shaun, what we call stock adjustments, which often are missing items. And we know that there is going to be some risk sitting in that part of our overall loss. We continue to work hard to make good progress, which we are on our fresh loss, which is a product, as you know, that we need to dump, because it doesn't hit our fresh expectations. But the stock adjustments, which are in long life, there is a risk of more stock adjustments in our business. We're realistic about that. We're closely monitoring that. We're not seeing it yet in a macro sense. But it is a risk for us, and we need to keep right on top of it. So we see some negative there. If I look at margins in general, and I said this in the media call, and it is true in a macro sense. In the second half of this year, and to some extent, we might see it in '23, the expansion in margin in the second half, first half was stock loss, the second half is really about mix, Shaun, and a mixed benefit that we are seeing. It's not through us putting our prices. We're in a good place in a price sense and delivering value for our customers. But it is actually just mix. And so logically, as you would expect, as we've seen vegetable prices increase for fresh vegetables and we've seen beef prices hit extraordinary highs, we've seen our customers shopping more of our long life in our frozen and chilled business, and it is a slightly higher-margin business, and you see it come through. Importantly, you're also seeing come through there, the early benefits from us in our investments in collaboration between Woolworths Supermarkets and Woolworths promotional effectiveness. Our biggest use case, as you would know, given we spend $3 billion on promotions is to improve the operational effectiveness of what we do to make sure we deliver for our customers, but also make sure we are investing fourthly, and we made really good progress on that in the second half, which was a big -- one the highlights for us and there's a massive opportunity and a massive area of focus, as you might imagine going into this year. The third part of 1 question, this is how you get 3 questions in 1, I guess, Shaun, is coming back to, do we have some policy where we ask or we somehow pass on more on shelf than we set from suppliers, we don't have their policy. On average, our cost increases from suppliers are reflected on shelf. That is not going to be true for individual products or individual categories or individual suppliers. I think 50% of the cost increases we've had in '22 came from 20 suppliers. Most of those are global consumer goods companies, most of those are in long-life sections, most of those are or some of those would be where the product that demand increases on is below our category average margin. So you will see adjustments pricing matters and so on, given the prevalence has been, I'd say, on a very small number of global CPGs, where that is the situation. But there is no policy on that. What we're trying to do is navigate that very vexatious balance between doing the right thing for our suppliers, accepting legitimate cost increases, but also trying to deliver value for our customers. And that's what you're seeing go through in the in the mall there. I think your last was really was on meat. Every 6 months in my time, we've talked about, hopefully, we're going to do a better job on meat economics and never quite get there. And that was no less true in the first half. Beef prices continue to go up and up. That slowly started to trend down in the last couple of weeks given how long it takes to flow through, which is sort of somewhere between 90 and 120 days. I don't want to ever talk, but it was incredibly challenged half for red meat in particular. And the margin pressure we're feeling there is material. There comes a point where you can't actually pass it on to customers. So we are, in effect, having to, I guess, just take a low margin there because of our worry for our customers. But hopefully, they will slowly rebalance over the year. I just don't want to be too optimistic on it. But hopefully, that gives you some color, Shaun, and some sense of where the positives and negatives are and what we're up to at the moment.

The next question comes from Bryan Raymond from JPMorgan.

My question is just around the change in customer behavior that you called out earlier in terms of the timing and magnitude of it, whether that came through much in the fourth quarter, or whether that's predominantly come through in July and August? And then just a follow-up to that is how you plan to respond to this changing customer behavior and really try to capture that value shopper, which I'd expect to become more prominent over the course of FY '23.

Yes. Thanks, Bryan. It is a very discombobulated, as you know, right now. And actually, the major driver of our very low sales number for the first 8 weeks really is the normalization of the world in New South Wales. We are very indexed to New South Wales. We have a strong position there. But if you look at New South Wales and Queensland are really driving the muted sales number because of what recycling from last year, and it's very clear to us and slightly different scenario than you would see in Queensland or in the South Australia or WA, I mean they're massive state, and so we indexed to them. So the headline reduction is based on what we cycled from this period a year ago. And it's amazing. We've all lost track of time. When I was in Berala, which is a value store, and I'll come back to it, Bryan, on Saturday. But Berala was at the epicenter of Fairfield, and what happened during the Delta outbreak this time a year ago, the extreme lockdown we had in Sydney, I think we saw eCommerce go up to 20%, Amanda, of penetration of our stores in Sydney. And it was just an amazing time. And of course, it was sadly in the context of Victoria continuation of what we've seen there. So I don't want to get caught up in that, the headline doesn't show what we're seeing. This is just a normalization you're seeing going through. But we are seeing customers normalize. The good news in what you see in our numbers, we are seeing the normalization between stand-alone and malls. That has been going on, in fact, through Q4 and into the first 8 weeks. So we've seen a rebalance where people are going back to malls. We're starting to see the growth more in the malls than the neighborhood. So we've seen that normalize in our business. We've seen the normalization come through of Delta is the same at that the 2 big states. And then we always look at normalization is a Saturday bigger than a Sunday. I know it sounds crazy, but it is, and it's back to where the normal shape was, and kids sport has started to happen again on a Saturday, which I think most families are hopefully happy with. And we started to see people starting to change and change the shape of their shopping. And we're starting to see the same happen in eCommerce. So normalization is taking place. Then coming to your question, we'll only know in the next couple of months what normalization means in terms of customers shopping. And I don't know if I even like these words trading down, trading across or trading down. But anyway, the words, I guess, we will use them on what's happening. On average, what we've seen today, Bryan, is there are slightly less items either in the eCommerce or a physical shoppers' basket. And sure, they're shopping a bit more frequently now that we're through COVID, but that is not off sorting the decline in items in their basket. And what we see on average is it would appear that our value shoppers, or what we call our traditional and saver customers, are shopping to budgets versus items. So that makes logical sense to us. We see them shopping to a total and so some items are falling out of the basket. The items that have falling out of the basket tend to be the more expensive items in our and so it's unsurprising. It is red meats or beef. It is some of our expenses -- well, relatively expensive vegetables as they move into the frozen or canned categories as we talk. And actually a material step down in our business in tobacco or smoking. So we started to see those categories, which are fresh categories reduce. So our hypothesis is and has been, continues to be that our value in traditional customers will shop to dollar numbers and look for value within the dollar number, and so we see that happen in the items. We also see that happen in the way people start to use shopping lists in our business. We'll start using online as a way of -- a disciplined way of budgeting what they do. If you then move to our business, we are very focused on segmenting as our core value in our stores and delivering different experiences in those. And value has different meanings in each one of those stores. Value in [indiscernible] Emerton, Berala where I was, Blacktown where we had our executive meeting a week before last of value stores, right? So if I look at that, you're going to see a very different scenario than you're going to see in enough store in a Double Bay or Neutral Bay, whatever the case may be. If you look in those stores, we are starting to see our customers being a little bit more thoughtful on value. Now they still will spoil themselves. So I wouldn't like to underplay that. You'll see impulse categories are strong. People are -- a lot of [ eating ] away-from-home is distorted by material inflation. Hopefully, you're aware. So the headline number is big, but the physical occasions is not quite as big as the headline number. But we're starting to see snacking is still very big, people are still doing a lot of treating themselves in those categories. But in other categories, they are making conscious choices. And that might be the move from beef into pork or into chicken, which would make sense to us, or the move from fresh to frozen vegetables, which I know has talked about yesterday, all make sense. So we started to see those cues and it will depend on the store and what's happening. What I'm excited about is we have less value that we can deliver through that, and it does not necessarily need to be less at the detriment of our underlying economics. We can thread the needle if we are thoughtful and careful of delivering value for our customers and making sure we get the right balance in our economics. So as you would know, our long-life categories, our canned categories are a strong part of our business. We can deliver the value we want there. So I think we can thread that needle. As I said, I'd come back to the point we made today that we've got to be realistic on the item count that goes through the store and the item productivity because it won't be at the GP line that will be exposed. It will be at this item and making sure we do the right thing and do the right forecasting at that level, if you know what I mean.

The next question comes from Tom Kierath from Barrenjoey.

Maybe just to change tack on New Zealand. Just be interested if you think that business is kind of recoverable and you can get back to maybe where you used to be from a margin sense? Obviously, there's some short-term impacts that you got the regulator making some decisions there. So just be interested in how you look at that business maybe on a 3- or 4-year view rather than kind of the next 6 or 12 months?

Yes. Thank you, Tom. And I think it's a great question. The impact you see on our economics are not based on the regulator or any of the other announcements that we're seeing, although we're engaging constructively. We understand the issues at a government or a political level. They're based on just the challenging economics we've had, and our New Zealand economics, and we talked about what happened in Australia, as you get into a smaller environment, you get a more extreme whipsaw in the economics. And that's really what we're seeing in New Zealand. The impact of COVID on our supply chain into our stores has just been -- it was big in Australia, it's double that in New Zealand, and that's what we've seen, with much more import or indent driven in New Zealand on long-life category. So when the shipping gets condense -- is populated into Sydney or Auckland Harbour has a software glitch and the ships don't want to go there because they're going to get stuck on a 24-day wait and they're divert into LAE, you just end up with huge exposures. And so we've seen just this massive challenge having flown through our New Zealand business. And then in that market value is even more important. We actually do sit against one of the best value competitors in the world in Pak'nSave. It is just a fabulous business. It's very competitive. And so we need to be very focused on executing relative to them. And so you start seeing the pinch a lot more and a lot more acutely there. So that's what you're seeing. And again, we're commissioning DCs and so on. We are slightly underinvested though, to your point, and this has been our issue for the last couple of years. And we are changing that. We have been underinvested in New Zealand. We haven't done the same renewal program we did in Australia. We haven't invested enough in our supply chain. We have actually funded up in our digital assets is the 1 place I call out, we have done that. And so that's caught us out. And if we continue to be thoughtful and execute against our investments, I'm confident we will have a good business in New Zealand in the medium term. But we need to be thoughtful, continue to deliver value, continue to constructively engage with the government, continue to constructively show them the reality and the facts of what we can deliver for New Zealand, which is our commitment. I think we can get there. And I'd call out this positives. There are many negatives we've got here. But if there's positives, our last 5 store openings, both new and renewals have been fabulous in New Zealand. They're delivering for the community. They're delivering value. Our Melbourne fresh DC, which is collided with our Hilton multi-protein meat plants that does all forms of protein and has the ability to deliver outstanding fresh in New Zealand. It has not been done very well to date in New Zealand, but we have the ability to really lift the bar there and drive huge value for Kiwis through giving freshness at home for long periods. And we are very committed on the digital front to continue to lead them and we have enough opportunity. So we're trying to be very transparent. We see it as a tough year. We're not trying to gild the lily on this one. But do I think if we look into the midterm we have a good franchise in New Zealand and [indiscernible] even better one? Yes.

The next question comes from Adrian Lemme from Citi.

Look, I just wanted to explore the cost inflation a bit. So we understand the install wage inflation quite well. But can you talk about the cost inflation you're seeing in other areas like digital? What are your hiring tensions there? And what are the unit costs going up there? And then also just, I guess, insurance and utilities, I imagine, they might be up double digits this year? Just some overall comments, please.

Yes. Thank you, Adrian. I'll talk broad, and then I'll get Steve Harrison to give a little more color. I guess, if you looked at our second half CODB results, the point I made at the beginning remains true to me. You see an all-in kind of number with a whole range of different cost issues in there. Those include, from our perspective, having to invest in talent retention, in particular, in digital, advanced analytics, and eCommerce. So it has been a real challenge in those areas. There's been a fresh war for talent, and we have that to be proactive and invest in there and continue to do that. That also impacted materially Quantium by the way, which is probably most exposed, everyone searching for analytical talent in Australia. I said to the Board, it was a great achievement for us to be rated #2 on [ LinkedIn ] as the second best place to work in Australia. But it cuts both ways, we, all of a sudden, to the great irony I think of the circumstances have been targeted by a whole range of institutions who wouldn't have historically targeted us. And so you are seeing an all-in cost, I think, on our digital side there. We're very happy with the signs of change capacity we have in digital and e-commerce. We don't have great plans to step that up. We've already invested materially as many on this call would know, but we need to hold our fabulous team and keep them focused on delivering against the use cases that we've outlined. So you've seen that there. On the energy side, actually, I'll get Steve to talk about it. We've been quite privileged to date. I'll talk energy and we'll come back to fuel, transportation, fuel costs separately. We've been quite privileged to date that all the hard work we've done on reducing our intake of energy has offset the cost increases we've had. We need to continue very much on that line and our move to the Internet of Things, shutting down and managing energy consumption at the store level. Our solar programs have positioned us very well. But we need to continue to work on that, I think we'll talk about that in the second half. The fuel cost is a big one for all of us in transportation, and I don't think I had avoided. We are fortunate it's not our biggest cost, but Steve will come back to give you some context. I think I was thinking very judiciously though about the number of rosters, 2 stores consolidating our DCs to stop split loads will materially help us there. But yes, lots to do, but I think pretty decent plans. The biggest individual cost we have is an increase is construction, just to be clear. And so it's nice to be well underway in a number of our store renewal programs or DC construction because cost of retendering right now is material and we're in a fortunate position to have got those tenders in place, but Steve, but more color from you.

Yes, I think you've covered the majority, particularly on the digital and talent front. I mean if I think about cost inflation, clearly, the biggest cost in our business is our team costs. And so Adrian, you referenced you're very well aware of the inflation we have on our store teams and our teams at DCs. That is by far our biggest area of cost inflation. We do have inflation across the board. We've got a procurement team very focused on how do we mitigate that by looking at contracts, but also the volume of things that we use in our stores or across our business sort of specification to try to offset some of those cost increases. You mentioned and referenced energy, and we're all seeing our energy bills right now. I think one of the things we've tried to do as an organization is have a degree of staggered contracts on energy at a state level. And so we try not to have anyone or any more than 1 or 2 states coming up in any one, particularly a year or so we typically get a grip smoothing on some of those energy impacts. But I think it's fair to say, we will see some exposure. But as Brad said, we've had a lot of focus on productivity initiatives. And have we invested capital actually really for a number of years on energy reduction initiatives, be it solar or refrigeration or HVAC or LED lighting. And so I think insurance is really not a material number for us. So overall, we're conscious of it. We set our teams the ambition of trying to cover product -- cover inflation with productivity to the extent that we can. That will be difficult on the wages front just given the size of the inflation next year. But we'll be working hard to offset it.

The next question comes from Grant Saligari from Credit Suisse.

Maybe just a quick question on BIG W. I mean, a while ago, a year or so ago, or even longer you closed some of the DCs, but I think at the time, you said you hadn't reaped the sort of the productivity benefits from that. So maybe just a quick update on where you're at in terms of resetting the cost base for BIG W and whether what we're seeing at the moment in the second half is the cost base we should take forward or whether there's more productivity to come through that business.