Woolworths Group Limited (WOW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Woolworths Group market update. [Operator Instructions] I would now like to turn the conference over to Mr. Brad Banducci, Managing Director and CEO of Woolworths Group. Please go ahead.

Good morning, everyone. Before we start the call today, I would like to acknowledge the traditional custodians of the land on which we meet today, the Gadigal people of the Eora Nation. I'd like to pay my respects to Elders past, present and future. Thank you for joining us today at such short notice to discuss this morning's announcement. Joining me in the room this morning are Stephen Harrison, our Chief Financial Officer; and Bill Reid, our Chief Legal Officer. I would assume you all have had a chance to look through the materials, so I will keep this brief, so we can jump straight into questions. Today, we announced that we had entered into an agreement to acquire a 55% equity interest in Petspiration Group for a cash consideration of $586 million. This strategic partnership will provide entry to the fast-growing specialty pet segment, which will be highly complementary to our existing Food and Everyday Needs offer and over time can strengthen all aspects of our retail ecosystem. Petspiration is a leading Australian and New Zealand specialty pet food and accessories and service retailer and includes brands such as PETstock, Best Friend Pets and Pet.co.nz. It is the #2 player in a fragmented market segment with a store network of 276 stores and an established e-commerce presence and service offering, including pets grooming and doggy daycare. Approximately 3/4 of Petspiration's revenue comes from the PETstock retail business. The group's investments in Petspiration will enhance our customer offer with its own wide range of pet products and services in store and online, strengthen our loyalty program with the addition of $2.4 million Petspiration loyalty members and lock opportunities for material value creation across both businesses. Shane and Dave Young and existing Petspiration shareholders will retain a 45% equity investments in the business. Shane and David founded the business in Ballarat almost 30 years ago. And Shane will continue as CEO and Dave as Managing Director with Petspiration being run as a stand-alone business within Woolworths Group. We will continue to support Petspiration's growth through access to our retail capabilities in areas such as digital media and e-commerce, supply chain and retail operations. While Petspiration is already a strong, profitable business, areas such as retail media through Cartology, access to our data analytics capability through wiq and harnessing the power of Everyday Rewards presents growth opportunities. Following the period of organic growth supplemented by our regional acquisitions, Petspiration's revenue for the last 12 months to September was $979 million. EBITDA for the same period was approximately $158 million. We expect medium-term growth rates in the sector to remain strong but will likely moderate in the short term in a post-COVID environment. Assuming net debt including leases of $670 million, the purchase price equates to an enterprise value of $1.7 billion. On an LTM September '22 EBITDA basis, this equates to a multiple of 11x. The purchase price will be funded from the proceeds of our sale of 5.5% of Endeavour Group announced yesterday. We are confident that this transaction will deliver a strong return on investment for Woolworths Group shareholders with the investments expected to deliver mid-teens IRR with identified value-creation opportunities to support strong earnings growth. The transaction remains subject to customary closing conditions including ACCC approval with completion expected in mid-calendar 2023. I'll now hand back to the operator for questions. [Operator Instructions]

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

Can you talk a little bit about the earnings trajectory of the business that you bought through COVID given it's clearly a category that has benefited from COVID and you touched on it a little bit? But how can you be confident that the earnings base that you're buying is the sustainable underlying earnings base of the business in the category?

Yes. Thank you, Michael. Great question. Firstly, if you look at this group, it's actually had an impressive growth trajectory on the top and the bottom line going all the way back to way before COVID, so it has a great growth story behind it. And it hasn't been the business talked about much mainly because it's been held very privately, and outside of some access to third-party capital has really been funded by the farmers. So the growth story has been remarkably consistent over the last 10 years, and that continued, of course, through COVID. And then very importantly to us, while it has this amazing, impressive performance trajectory, if you look at third-party benchmarks, it's on the lower side of what you will see in specialty pet. So we can see material opportunities. And in fact, the founders have material opportunities to not only improve the top line but continue to drive margin accretion. And we spent a lot of time looking at it at all the right benchmarks, which actually in the sector you're lucky enough to be able to do, whether it's onshore through Greencross and then look through offshore through PetSmart. So we can see demonstrable opportunities to lift margin. And as said, the founders have strong plans in place to continue to do that. One of the questions that we got in the media section was, we sort of at a peak with -- through COVID pet -- everyone sort of with COVID get into pet. We would say, "And therefore, you're going to see pet ownership trend down." That is not apparent in any Western country that we've looked at. And when you look at the benchmarks, pet ownership is not going down. It may have been pulled forward somewhat during COVID, but it's not going down. And then importantly actually and, in fact, not talked nearly enough about is pets are living a lot longer as people -- nutrition is looked act, exercise regimes are looked at and so on. You've seen a dog can actually age close to 10, 12 [indiscernible] at the moment. But it is true on the cats as well. It is through better nutrition and better health care. So you've got a number of other megatrends that are coming in the back end of this that I think are very important.

Okay. So we shouldn't expect earnings to decline on an organic basis from the 12 months to September?

Yes, that's certainly not a Petspiration plan. That's certainly not the momentum we've seen in the business in the first quarter of this fiscal year and certainly not based on the agreed set of opportunities that we can see between Petspiration and Woolworths Group.

Your next question comes from Shaun Cousins with UBS.

Brad, maybe just a question just on the broader changes you've made with the group. You've been fairly acquisitive over the last year or so in terms of building out this ecosystem, be it across MyDeal, Shopper, PFD before that. And other than Cartology, it's difficult for us to see and conscious that COVID plays a role here, but difficult to see how that ecosystem is delivering. How will you convince the investment community that these incremental investments are not a distraction but actually are sort of meaningful and actually delivering good returns for shareholders in that it seems that you're kind of rebuilding somewhat of the retail conglomerate that Woolworths was some time ago?

Yes, thanks. Thanks, Shaun. I hear the narrative on the number of deals. But if you look at the value we've created through exiting businesses or selling down Endeavour or the demerger of Endeavour relative to the amount we propose to invest in new businesses, there's a pretty large gap between the 2. Let me just log that. Second point, just to be clear on -- and I'll come back to the point, of course, we need to be accountable for shareholder returns of the [indiscernible]. I'll come back to it. There's quite a big difference between the deals we've done, which break into 2 groups, either finding great founders where we back their vision and we try to help them accelerate their growth or realization of that vision through leveraging our capabilities, which is clearly PFD Food Services and PETstock, both founder-driven businesses with a strong history of performance, a lot of upside still sitting in them given they're relatively small part of an important sector that we know something about it can add value to, but it's behind the founders that we really do this. So PFD Food Services and PETstock really are a growth into adjacencies through supporting farmers and their vision for what their business' full potential could look like. It's very different to the other deals we've done, which are to strengthen the capabilities of our existing business. Quantium is one you didn't talk to, Shaun, but is in there as well, is really trying to drive our data analytics capability through the group. And we will come back to the full year, and we will talk to it specifically. But it is clearly materially changing not only the performance of Woolworths but actually the culture of Woolworth Woolworths in terms of our leveraging of advanced analytics. Shopper, which was ready to drive capability build for Cartology through not only the screen network but how to do with agencies, and so really an acceleration plan. The same trend MyDeal have, a very tough sector to understand. If you use a traditional retailer, how do you build seller-driven businesses and how do you complement a traditional retail business with a seller-driven business. Those are the deals we're talking to. They're all fitting different parts of the ecosystem. We will come back and show you how they're performing at the end of the year. And none of them are designed to distract from our very strong food retail business. Or what, I guess, everyone talks about is our supermarket business. Shopper has gone into Cartology. Marketplacer has been managed in partnership with BIG W, which is where the biggest short-term opportunity is. Quantium we're managing through our advanced analytics team under Amitabh Mall. PFD has now been managed up through The Woolworths Food Company as a good logical path with adjacency. And PETstock will become part of a broader group built around BIG W, which would include BIG W, MyDeal and PETstock. And we've normally called that group W Living. And that would be led by Von Ingram with Dan Hake, our new Managing Director of BIG W. So we've been trying to be pretty deliberate and thoughtful with Quantium, which we should come back and talk about a lot today. I do understand some of the questions and challenges. We're trying not to distract anything we do inside the group but to build around our vision for what we need to be to vibrant and successful in the 21st century, which is a highly relevant food and everyday needs retailer that sells first party, third party, physically, digitally and meet the full needs of the customers in those segments, which, in the case of PETstock, you can't realistically do because specialty pet is very different to the brands that can be sold, the services that can be provided and, most importantly, the customers' definition of mission. But I do understand it all, and I think it's the right question to keep asking us. And we will come back and show you a lot more transparency. And we're working on some background of how we want to report the group, not the conglomerate.

Fantastic. We look forward to the transparency.

Improved transparency, if you don't mind me saying, we're on a journey of -- of course, of evolving as we go.

Your next question comes from Tom Kierath with Barrenjoey.

Just wanted to check on the 45% that you don't own, what the put-and-call, I guess, arrangement is there. I couldn't see anything written there. Just would love to understand how that might work in the future.

Tom, I'll let Steve get into the detail. I will just talk about the caveat that Dave and Shane Young [indiscernible], pretty young guys, they started the business very young. So -- and so they have a lot of great plans, which we are committed to help them realize. So the way we've designed all of the exit mechanics, which Steve will talk to, are designed around the fact they've got a great vest to continue to build this business. We have a great interest in them continuing to build it. And therefore, we needed to be very thoughtful on how we designed those mechanics. But over to you, Steve.

Thanks, Brad. So Tom, the reason you haven't seen any reference to put and call is because we don't have any. When we started the conversations with Shane and David, it was very much around they wanted an evergreen partnership. And they wanted to partnership -- partner with Woolworths given the capabilities they see that we have that we can add to accelerate their growth. And so we've consciously not put, put and calls into the structure but rather created the mechanics that down the path some years, let's say, without a shadow of doubt, they're very keen to be involved in the business for a number of years. And we came to partner with them, yes, for many years to come. We've got the appropriate mechanisms at that point in time, but we would not expect any change in that shareholding in the medium term.

Your next question comes from Bryan Raymond with JPMorgan.

Just on the recent acquisitions that -- the businesses you acquired in May, Best Friends Retail and Petcity, just wanting to understand, it looks -- those a bit better. It looks like it's about 20% of enterprise value that sits in those based on what they paid for them. I'm just interested in how you see them in terms of contributions to the $158 million of EBITDA and also how they're being integrated. Do you see any risks or opportunities within those recent acquisitions?

Yes. Thanks, Bryan. I mean what you've seen is PETstock really going national. It's had lots of gaps in its national network, and so you've seen the business nationalize really at a broad level. So that's really what's happening. And the plan of record is it would all become PETstock retail because of the fact this is filling the gaps in major geographies. So they will all become PETstock stores, although there are 3 formats inside PETstock, which I think are very important and quite unique. They are the city or CBD stores, the sort of more regional stores and then the country stores. So the -- and the rebranding is underway at the moment. And the same loyalty programming gets rolled out across all of them. In fact, the way it's working in sequence, the loyalty program is rolled out first. And then the site is rebranded, second. And the rebranding of the loyalty program will be Petspiration versus PETstock. So a very organized structure process from nationalizing the business. And you don't see -- Steve can talk to the numbers. The synergies that we expect that Petspiration would generate through the growth and the integration aren't in those LTM numbers, and therefore, they're somewhat in the multiple. And so if you looked at it, you'd see the multiple reflecting the synergies we would expect to see going forward of actually nationalizing the platform, bringing all of these businesses up to PETstock operating levels given all of these businesses' access to the PETstock very strong private brands and, most importantly of all, getting them more -- making them more part of the PETstock or Petspiration loyalty program.

So just to build on it, they're just under 20% of earnings, Bryan, if that gives you some indication, but, as Brad said, with synergy opportunities ahead of us. .

Right. So just to confirm then, so are they lower earnings, that we're generating sort of under-earning versus the PETstock group given you've acquired those businesses? And -- or they acquired them and you're converting to PETstock? Are you really just buying a footprint rather than buying the brands? Are you buying the people, inventory? Just trying to work out...

Yes, exactly, Bryan. Yes. I mean we're talking on behalf of the PETstock management team, so with that as the caveat and as I hope in due course you'll get to meet them. They are sizable, some strong capabilities and really learning how they want to drive their business, that we expect to apply these to these businesses, which the performance has underperformed relative to PETstock. Also, recent experience will show that a rebranding to PETstock gives the natural balance as people really resonate with that brand. That said, from Dave's perspective or Shane's perspective, in speaking to him, all of them seem to have a really good in-store culture in terms of customer engagement. And we have visited actually 88 of the total stores in the group, and we can validate that. So good cultural alignment but able to apply group capabilities and, very importantly, access to own brands, which is really hard in the space because they tend to be specialty own brands. Very hard, therefore, to develop and maybe put the one in if you can see them scale up.

Your next question comes from Adrian Lemme with Citi.

Brad and Stephen and team, just a follow-up question to Shaun's. Since the business is being separately run, are we right to expect that we'll get visibility on the results of the business? Or will it be grouped and reported within, say, the W Living segment, please?

Adrian, that's something that we'll work through close to completion of the transaction. So -- but it is something that we're considering. I mean, obviously, some of that segment disclosure is driven by accounting standards, and so we'll just work through that at the appropriate time.

Your next question comes from Grant Saligari with Crédit Suisse.

Brad, could you talk to what you think the competitive advantages of the PETstock business itself vis-à-vis other competitors in that segment, of which there are numerous? And I guess also, what, if any, synergies you see with the rest of the Woolworths business as opposed to anything that could be sort of commercially obtained by PETstock at arm's length?

Yes. Thanks, Grant. I mean it's very good. And then you guys who cover the business, I think we all would agree that Greencross and Petbarn is a very strong, high-performing business. So it's good to have a competitor like that, and we can see where the performance gaps are for PETstock relative to Petbarn or Petspiration relative to Greencross. And so it gives us some really good foundation markers of the kind of things that can be done with these businesses. And hats off to the Greencross team. There's also, I think, very good learnings you can look at out of the U.S. And the transformation that's happening with PetSmart, I think, is very interesting. The challenges that have set in with Chewy, I think, are very instructive as well. So there are lots of learnings that we think we can apply back into Petspiration together with the founders. What we liked about this business, Grant, was we're very focused on culture. Fundamentally, it's got a great culture. It's got quite ethereal culture itself. The in-store culture with the team is very highly engaged. People love working in this business. They love working with pets. And so it's a very authentic culture that's been built up over 30 years. That's very, very real. And so we like the culture. We can see all the opportunities. And as importantly, we agree with the [indiscernible] those opportunities. What we can do inside Woolworths Group is help them, hopefully, support them to execute on the opportunities they have. So in no particular order, if I can, firstly, the -- someone -- sorry, back noise there, if someone doesn't mind turning that down. I think the PETstock, Petspiration team would say supply chain has not been one of their core capabilities. There's a lot of work that they think that they need an opportunity and help their need in supply chain, which we would. We feel this, increasing their capability we can help them with, so we see that as important. For those of you who remember in history, that was actually one of the first opportunities that we undertook with Dan Murphy's. It was to actually go from DSD to a central warehouse model and actually was one of the key accelerations of Dan's. We do see some modest analogies between these 2 groups. There are many times that there is not a PETstock. We have a very good property team. We can help them figure out where to go in an organic sense. So there are many opportunities. And in fact, PETstock can offer very comfortably with a BIG W or a Woolworths Supermarket. So we can see how we can help them accelerate that. We do have a format and network team that can not only help there. But just in the format itself, one of the things we really like about the founders, they do great things. They're very intuitive, but they're open to a little bit of science. And so founders like where there's magic. And we look forward to engaging on that. They would acknowledge they're very early in their digital journey. They have a very material eCommerce business, but true enough, this is to my surprise, eCommerce in pet is more economically challenged than it is in food. This was not something I would have expected. And so we do intend to lean in and make sure we can help them digitally and just in the underlying economic model for eCommerce to change that. So you got a $90 million eCommerce business, and I can, I think, acknowledge that it's negative in aggregate EBIT performance. So we do see an opportunity to, we think, help them there. Commodity sourcing, anything we can do on the back end, we think, will be good for them. But we do subscribe to the brands they're building in the way that they're building it. So a lot of things. They're not really analytical. I think they've got an amazing loyalty program. They have a 2.4 million member loyalty business, where they've built it is nothing sort of extraordinary. There probably can be a little bit of personalization or data science that we can apply there. If you look at it, they're kind of factual. We do know that in their 2.4 million database, there are going to be a lot of pet families that perhaps don't shop at Woolies, and we'd like to give them the opportunity to do that. And hopefully, we can see that, that happens. By simple math, it's going to be well over 1 million of their core customers on our core customers of our Everyday Rewards program. We need to be very thoughtful and careful with privacy restrictions, but we can see how that could help us. We see our Everyday Rewards can help them. So that will be the key value-accretion part to the rest of the group. So hopefully, that gives you a sense. We can just see opportunities all across the spectrum. We're getting better at learning how to apply those capabilities. I think in the merger with Endeavour we've had to work very hard to reformat our capabilities to service Endeavour. And then we've had to do likewise for PFD, I think. It's kind of good to be the third in the rank, I would say, for PETstock because we can apply the learnings or things that haven't worked as well to make sure we do that in the right [ capital ] sense. But hopefully that gives you a sense. And Steve, did I miss something? There'll be many other small ones that we get excited about.

No, I mean, yes, the only other one would be Cartology, Brad.

Yes, the media side. Yes.

And obviously, the media side.

Yes.

But I think you've covered all the others.

Yes, we do get very excited by a retail media impact just given the nature of the category and the importance of the category and just the nature of the supply base of the category. And we also like the fact -- by the way, the fact is Australia and New Zealand, it's really good to be in the captive side. Yes, we see -- whatever opportunities we see in Australia, we see similar opportunities in New Zealand.

Your next question comes from David Errington with Bank of America.

Brad, can I get straight to the chase? What you've paid today, you've only told us 11x EBITDA. And effectively, that assumes net debt including leases and whatnot. So if I like to do a calculation roughly, I mean, please confirm if I'm wrong or right, but you're paying roughly about 25 to 30x PE for this business. Bits and pieces of a business, 55% of the business, that's going to be run outside of Woolies. Now your current stock price, you're probably on a PE of 22, 23. And with all the franking credits that you've got, you could probably buy back your own stock at about 18x. So can you explain to the shareholders why doing these bits-and-piece acquisitions is actually value accretive for shareholders as opposed to buying back your own stock, please?

Thanks, David, and I'll come back and hope to confirm you're a pet owner, so we can meet more of your needs as well. But firstly, there are pathways to full ownership in this business as they are in PFD and any other business we've been involved in. We just would like to be very thoughtful and slow in that process given the value-creation potential of the founders. Secondly, you have very few opportunities which we have been lucky enough to do to be able to co-invest and have the opportunity to own the #1 or 2 player in a really important segment that is adjacent to everything else we're doing. We've had an opportunity with PFD Food Services, with the [indiscernible], very close or you'll be neck and neck with the best. And we're having the same opportunity in Petspiration, which is behind Greencross. But I'd say there's lots of reasons to be excited about the fact that it is. So you don't get many opportunities like this in these adjacencies to have the quality of assets and the partnerships that we can build with partnership, with pathways to ownership in the future as we build the right capabilities, which I would argue in some of the things were at the exit, we underestimated and thought we could build them through just using internal teams, which is one of the great learnings I think we would all agree on [ more stuff ]. And we think that this just strengthens the group. And it is the seventh biggest loyalty program in the country, David. I think we would argue, and we'll talk about it at our full year, the critical importance of loyalty, to have another 2.4 million members, admittedly, there will be overlap but high relevancy into that. So we think it strengthens our group in ways that I can't calculate. The number you've seen is a backward-looking PE ratio -- EBITDA multiple. It's a trailing multiple on the business that's just had a series of very bold moves that has material momentum. And of course, when you start looking at the forward multiple and -- hopefully, and we'll have to prove this to you, is very different to this. So we see this feasible in the Woolworths of the future. It's not about a 55% shareholding, it will be managed as a discrete business within Woolworths Group as part of the business that will go and say hello to once a quarter there in Ballarat, although a very nice regional town I would strongly recommend visited. So Steve, do you want to talk to the specifics around the fee?

Yes. I wasn't -- the only build I would have Brad is the one -- the point you made. A PE and the EBITDA model is a point-in-time estimate based on where it is today. David, we look at this on the forward trajectory of the business and the growth potential that we think this business has, both its organic growth opportunities and the value-creation opportunities that we see in front of us and have, yes, actually talked a lot to the Young family about -- that Brad talked to on Grant's last question. So yes, moving forward, we're very confident this will be accretive to earnings that it will deliver strong shareholder returns well above our cost of capital. And so it's through those lenses that we assess. But when we have available capital, what do we do with it, we have to pay down debt, we'll return it to shareholders or we invest it in growth opportunities. Through that lens that we made this investment, yes, conscious that we need to meet those return expectations to our shareholders.

Yes. Just the confidence that this ancillary isn't as great as from the shareholders, the feedback I get is that they prefer you to buy back stock using your franking credits because then that's locked in rather than you pursuing this ancillary buying these bits-and-piece businesses for $600 million here and $600 million there. That's the feedback that I received, and I'm just interested to hear what your view is so as that you got the shareholders on the call, to justify why you're doing that rather than buying shares back. That's all. That's the -- that's your platform to do it.

Yes. So we've just got through challenges of COVID. We're the second strongest player in specialty pet, which is at least a $10 billion if not a $20 billion segment, just like we've got the opportunity to do with PFD in a $20 billion segment. There are not many $20 billion segments that we can invest in alongside proven entrepreneurs in Australia. Actually, I don't know how many others actually are out there. So those are the opportunities. And those opportunities, if well executed, these opportunities will make for a stronger Woolworths Group. Our most successful venture we've done this with, as you would know, is with BMG and actually the original acquisition of Dan Murphy's back in 1998. There are very few differences in what we're trying to do here today actually. And that was driven by Tony Leon, [indiscernible] first iteration on building it, very similar, in our view, to been sitting there talking to the Youngs and where the business is and where the business is in the tradition and in the journey. So we don't see it as different. We see it's a different segment that sits more comfortably with what we're trying to do in our second century, which is around health, wellness and families, but it's got a lot of analogs back to us.

Your next question comes from Ben Gilbert with Jarden.

Brad and team, just following on from a question a couple ago, just around the synergies and how you think about them. I appreciate it's going to be run as a separate business, but will you be combining things like buying from the get-go and pulling a bunch of these together? And also, things like insurance, will that be able to be cross-sold into this business pretty quickly as well?

Yes. Thanks, Ben. Really -- a really good question. We will take our time in terms of how we nestle Petspiration as part of our group. So we're going to hasten very slowly on that. One of the key things we will look to engage and we've already communicated with our team is that our PetCulture, which is our specialty start-up business, which is the only asset in the space, we would expect that to integrate into the space to strengthen the capabilities of the group. So we do expect to see that, but that's the one major thing we would expect to see in the short term. And in terms of insurance, you raised a very good point. Actually, we are -- interesting enough, I wasn't aware of this until we started looking at the issue. We are the second biggest pet insurance company in Australia today through Woolworths Pet Insurance. We do intend to be rebranding Woolworths Pet Insurance as Everyday pet insurance. And we will be engaging with Petspiration on our opportunity to extend this across their group as well and, in particular, give the members of their loyalty program the option to hopefully sign into the best-value pet insurance program in the country. So we are hopeful that, that will take place. And that's one of the conversations and pieces of the planning we'll do in next few months. So those are the 2 big things we're looking at in the short term. The rest will be to hasten slowly. They've got great plans, it's how we help them deliver on their plan. So it's sort of less synergy and value assurance that we -- again, we're -- in the next 12 to 24 months, how do we help them deliver what they need to do, what are the capabilities do they need, how do we support them today is really the orientation for the next months.

Your next question comes from Lisa Deng with Goldman Sachs.

Just a question on this mid-teens IRR to justify the purchase. So we've kind of touched on it through the call today, but can we just wrap it up in terms of the key assumptions that we would need to arrive to that mid-teens IRR? Is that the 5.6% industry growth that we will be gaining market share? Is it the margin improvement? Is it including some of the synergies that we've talked about? What are the key assumptions? And capital deployment as well, any additional capital deployment in order to sustain this IRR target that we've talked about?

Thanks, Lisa. Steve, if you don't mind taking this one.

Yes, I'd be happy to. So Lisa, I think you've referenced a number of the things that we think will ultimately drive earnings growth in this business, which is what will justify the shareholder returns and the IRR for us. We think the sector has attractive growth profile, and so it's just natural organic growth that will come with sector growth. Yes, I think Brad referenced it earlier, we do see greenfield opportunities as to the Youngs in terms of rolling out the format both in new locations and, potentially down the track, co-location with the group. We do see a lot of synergies, and I think we've spent a lot of time talking about what those value-creation opportunities are. And I should note, some of those value-creation opportunities will be realized in the Petspiration Group, and some of them will be realized in Woolworths. But collectively, they form part of our investment appraisal. And ultimately, you look at the EBITDA margins of this business relative to both domestic and international peers. And there's clearly a margin opportunity. And there's a range of things that we think that we can help the business with. And there's actually already a number of things that they've already been doing within their organization. Brad talked about the development. If Shane and David do -- they'd be talking about the 3 years they've been getting their own brand, food, rice, the Glow or the Billie's Bowl brands, which they're very proud of. But they've been very clear that they'll only launch those brands when the quality is what it needs to be. And so we do see margin accretion opportunities across the business and through the things that we can contribute as well as through that expansion of exclusive and own sourced product. So we see a whole range of opportunities. There will be some capital deployment in the future particularly around supply chain. And in fact, they've got some in-flight projects that will require some capital over the next couple of years in particular. And obviously, with greenfield and new store opportunities does come some capital. And probably with [ needs ], while we're talking about IRR, there are a couple of things that I suspect maybe on the minds of some of the people on the call in terms of information we didn't put into the release but is worth just clarifying. So D&A for the business, both lease and asset D&A is about $50 million. And so if you were to do a pre-AASB 16 multiple, I saw this -- some commentary out of the markets, but it's around 12.5 on a pre-AASB 16 and 11 on a post. And we think that sustaining or maintenance capital sort of in that $20 million to $25 million capital range, the amount of investment we put into growth capital obviously come down to what are those opportunities and the time horizons for those.

Your next question comes from Ross Curran with Macquarie.

Sorry, can I just come back to PetCulture? So how does this business interact with that business? That's a JV as well, right, and then similar -- selling similar products online. Does this transaction trigger any buyout of the remaining PetCulture business?

We're going to work through that in parallel, Ross. So that's different. Yes, we're certainly engaging with PetSure or Hollard Group on how we now think about the joint venture in the context of what we've just done. What we've learned through PetCulture is we learned a lot about the segment, which is -- was very valuable to us, 2 years ago -- 2.5 years ago in the journey. It's amazing how the world's changed. Can I just say -- if I could use this as the opportunity, 5 years ago, the conversation around the Chewys of this world and how we were going to respond and what we're going to do, our response was PetCulture. What we found in PetCulture is we've done something is really well. We love those capabilities to be leveraged by PETstock. Our order-ship type capabilities have been very, very good. Our ability to personalize [indiscernible] pets and so on is also a great capability. But we found that pure-play food retailer is just as hard to operate as a pure-play pet food retailer as a pure-play food retailer. They're very hard businesses. The future for ours, and we're very clear on this, is a combination of stores and an overlay of e-commerce on those stores. And that's what we found. It's one of the reasons we start to engage with PETstock. And so it's how you bring those 2 together. And if you look at what's going on in the U.S., you'll see the same trend lines taking place right now. So it's a really good learning experience. We found that you're not going to get there in a pure play, the scale, but it gave us enough learnings to be able to get into these conversations. And now we're going to engage with our partners in Hollard to make sure that we get something out of the partnership between the 3 organizations that works for all 3.

Sorry, just wondering, is it fair to say it's more capital you need to invest into PetCulture from here?

I wouldn't -- it's not material in the context of what we're doing now, Ross. Just call that we had really made our investments with how hard we'd like the growth of it. And obviously, we're going to think that in the context of [indiscernible].

Your next question comes from Phil Kimber with E&P.

I was just going to follow up on the leases. What's the average tenure of the leases? I think that you said there's $380 million of lease liability. And is there a material finance component to the leases? So you gave us the D&A, but what about the finance lease part?

Phil, the tenure on the lease...

As an interest expense.

Yes, I don't have the interest expense number to hand, but the lease tenures are going to vary. I mean, in some cases, the short-term lease is 5 years. In others, they've got them up to 15. It is something that we'll work through with the Young family. We spend a lot of time with our own property team looking at what are the appropriate tenures. But I think on average, both of them would be at the shorter end of that range.

It's -- maybe just a useful fact to share, but Home Consortium is the biggest landlord for PETstock, which is in the world moves in strange ways. So it sort of does fit in those more big-box type of environment, more industrial park type environment. So it's a very different location. We will help them, I think, as we've read, on getting the right lease standardization. But interesting to find one of our partners through the exit of Masters is now one of our -- is our biggest landlord in the context of PETstock.

Your next question comes from Craig Woolford with MST Marquee.

Sure most of the questions have been answered. Just with respect to this IRR and probably more the multiple that has been paid, just to be clear there, what do you expect to achieve midterm including synergies you get to a bit with IRR? It just seems a little bit [ on this ] where any margin for safety given how strong the pet care market has been. And only my question, there was a transaction for PETstock, not Petspiration, that looked to be done at about 10x on a AASB 16 basis about 12 months ago. It was only for 11%. But just wondering how you derive the most suitable multiple for the transaction here.

Yes. I mean, Craig, a couple of things in there. With forward projections for any business you look at a range of scenarios, right? And so we've got a -- I think what would be our base case that we took to our Board, but we also have a view on what we think the full potential is. And so what we're quoting there is our base case. We think actually the full potential opportunity is greater than that. In terms of the multiple, as you know, in any M&A transaction, it's a negotiation between 2 parties. And the quoting, as we talked about earlier, of a point-in-time multiple is exactly that. It's based on the LTM to September is what we're quoting. But what we think about the forward trajectory and growth profile is obviously what will determine the returns. I think you're referencing the -- I think there's some commentary in the market about one of the investors who has exited as part of this transaction. They did enter in at a lower multiple than we paid. And they've -- yes, I think the credit got a good return as they got in before a lot of the growth profile of the business. So there's been quite a rapid acceleration in both new store rollout as well as the acquisitions of the Petcity and Best Friends Pet Groups. And so they have got the benefit of that growth profile. So overall, I think the question for us is, ultimately, are we confident that we can deliver strong shareholder returns from this investment. And yes, we wouldn't be doing it if we didn't have that confidence. So hopefully, that addresses your question.

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

I just want to talk about Slide 6, if that's okay. You've put it quite a good way, and I'm hoping that the way I ask this question will help Brad in answering in a succinct manner. The 2 pillars on the right-hand side, retail platforms, loyalty and personalization, you could presumably do through a contract, much the same as what you did with Endeavour on the merger. So did the discussion start with those? And then you actually -- as you got into the discussions with them about purchasing a stake, it became clear that you could actually do exactly what Brad's pointed out that you've done already at Dan Murphy's, which is the retail capabilities, store network, supply chain and eCommerce? And there was an opportunity for Woolworths to actually add value through ownership. Is that a reasonable way of thinking about, I guess, the structure of some of the benefits and also some of the discussions that took place, please? And I guess what I'm trying to get to here is the specific value that Woolworths bring to this business as opposed to just it's a really attractive segment of the market to be investing in.

Scott, so 18 months ago, when we started to see the limitations of our pure-play online pet -- specialty pet business, but we could see the benefits inside the group. To be honest, I asked a lot of people, including the suppliers, who they thought was the most interesting partner in the segment. And all roads led me into Ballarat. So we started with culture alignment and whether we could actually work together, and then we tried to figure out whether there was enough value on the table for both parties to do that. And the real issue for us was the plan that Shane and David showed us was the plan that we fully subscribe to. And then everything you see on this page was how we were hoping we could contribute to them executing the plan. Using our retail platforms, which are increasingly very compelling, just to get a fee for service is not the name of the game for us. There's not enough leverage in it. And that's where we are at risk of distracting ourselves from the main game of driving value inside our existing businesses. It was very much in that sort of lineal sequence. We could see the value in being in the segment. We could see that we weren't going to get there through just an online disruption, which looks very -- it sounds very 2022, let's agree. But 4 years ago, that was the issue. And then we felt really strong alignment with a group of people. And then the timing became when they were comfortable, actually, and it became a question of when it works for them. And this was the moment that worked for them, and that's why we can't delay.

Your next question comes from Lisa Deng with Goldman Sachs.

Just a really fast follow-up. In terms of the EPS accretion, I know in the longer term we've definitely planned for good EPS accretion. But in the near term, just summarizing everything that we've talked about today, it would be minimal EPS accretion within the next, call it, 1 to 2 years post transaction. Is that the way that we should think about it?

Lisa, I think there'll be some EPS accretion. We've not quoted the number, but we hope that we've given you enough information in terms of the disclosure to that. You should be able to capitalize that.

Your next question comes from Michael Simotas with Jefferies.

I just wanted to better understand the timing of the sell-down of the 5.5% stake in Endeavour given they'll report a result in February and it's not a particularly good time of the year for liquidity in markets. It doesn't look like you would have needed the cash to settle this transaction given it's not likely to settle until midway through next calendar year, so I just wanted to understand the sense of urgency there.

Michael, you had the first question, and now you're having the last question. So look...

Just the way I like it.

Look, we always felt that bundling the 2 together, where there was a legitimate and logical connection between us, recycling our investment out of Endeavour into an investment in Petspiration. And the date we sold out of Endeavour was never going to be a convenient date in truth. So we didn't let the timing disrupt that thinking of the logic of what we were trying to do, which was reduce our exposure to one segment and invest in what we thought was the key segment for the group. And so it fitted together as a narrative. As I say, with the size of the block we had, to be honest, every time the results, everyone's watching us to see whether we're going to do something. So timing -- we decided we couldn't let timing be the driver of this. But the logic of what was the right thing to do, recognizing Endeavour as a key partner for us, and we had to do the right thing by them in terms of how we manage this through as well. I don't know if there's anything you'd want to add, Steve.

No, I don't think so. I mean ultimately, it's the strategy of capital recycling from one asset into another. And so that symmetry and alignment of doing it concurrently we felt was appropriate rather than creating uncertainty and overhang of what might we do in the future.

Yes, once we announce that, everyone is going to stop worrying about that as well, Michael, was one of the considerations.

Which was sort of the logic of going sort of 24, 48 hours ahead, yes.

Thank you, everyone. I'm conscious of the hour. We're all invested. Instead of getting out and shopping inside our various stores, particularly in our food stores, so 8 days to Christmas, please shop at us. We would like the sales. And hopefully, you'll see a fabulous team highly motivated and good stock flow. It's some amazing deals. I look forward to speaking to you then.

That does conclude our conference for today. Thank you for participating. You may now disconnect.