Woolworths Holdings Limited (WHL) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the WHL Investor Call. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Jeanine Womersley. Please go ahead, ma'am.

Thanks, Claudia. Good morning, everyone, and thank you for joining us at such short notice. I'm joined today by our group CEO, Roy Bagattini and our group's CFO Reeza Isaacs. I'm sure you've seen our voluntary announcement this morning out on [indiscernible] and on WHL sale of David Jones. And we really just want to take the opportunity to answer any questions that you may have. So I'm going to hand straight over to Roy for some opening remarks, and then we'll go straight into Q&A. Thanks. Roy. Over to you.

Yes. Thank you, Jeanine. And yes, so good morning to all of you, and welcome from me. And again, just thank you for joining us on relatively short notice. But yes, I mean, you've seen the announcement. We're very pleased that we've been able to go out with this announcement today. This follows, obviously, a very comprehensive strategic review that we've undertaken over the last several months. And you'll know that for some time now, we've been saying that we didn't really see David Jones as being a core part of the group longer term. We did run a very thorough process in evaluating different options and permutations for what we call value creation here. But ultimately, we made the decision to sell the business to Anchorage Capital partners down in Australia, a Sydney-based private equity business. We had a number of conversations, discussions, et cetera, with several credible parties over the past 12 months. But in the end, the criteria we have set for this decision, we felt that Anchorage basically delivered the most compelling outcome for us and that we're able to secure the value we were looking for deal certainty, which is important and the net-net a clean exit. So overall, we're very happy with the outcome. The transaction itself, the detailed terms and so on are still confidential. I'm now obviously subject to various closing adjustments that we also work through between now and the end of March, which is the timing of when this is expected to sort of close out. But I certainly can tell you that the value that we will realize through this process will be in excess of the carrying value of David Jones on the WHL balance sheet. So a really positive outcome here, no further write-ons required from David Jones and certainly accretive to our shareholders overall. Importantly, I think in addition to that, the opportunity that we now have to take around ZAR 17 billion worth of lease liabilities off our balance sheet is quite transformational for us and certainly sets us on a different trajectory from the returns perspective. And then needless to say, the extensive amount of management focus and time that we've been putting into this business, particularly over the last 2 years, we can now really reallocate, we deploy against businesses that are more interesting for us are more strategically relevant and certainly yield better returns. So that's really what I wanted to say in terms of opening remarks, but very happy to sort of dive straight into any questions that either myself, Jeanine or Reeza will be very happy to respond to you. Thank you.

[Operator Instructions] The first question comes from Shamil Ismail from Primaresearch.

Apologies for my voice from the game yesterday. Congrats on the transaction. Just one question. A lot of effort has been spent on integrating David Jones with Country Road in the Melbourne campus, including moving David Jones head office from the central distribution et cetera. So how will this integration be unwound? And secondly, how will that lead Country Road Group in terms of the comments of scale because I assume that the systems and distribution setup was sufficient for both businesses, now with one business only, will it still be optimal?

Yes. Thank you. Yes, Shamil. I mean I think we all share the voices. I mean I know for a very few friends it's probably not the happiest day in the world. But for the rest of us, I think we're quite ecstatic with the outcome. But to your question, the separation, certainly, the initial strategic intent was to integrate these businesses which, obviously, in hindsight, has demonstrated that, that was not necessarily the best and the most optimum approach. These are very different businesses and they operate very differently. Yes, there are certain processes that one can leverage and get certain synergies out of back-end processes and so on. But over the last 2 years, in fact, to me, we've been sort of progressively undoing a lot of that integration. So you mentioned distribution, for example, the distribution system back in supply chain, et cetera, of David Jones and Country Roads are totally independent of each other now. So there's no sort of issue there. But to your point, there are certain operational processes and certainly, certain IT systems, which remain somewhat integrated. The non-IT stuff is quite simple and straightforward. And there's very little left there for us to do in terms of putting them apart, and we'll get on to that fairly quickly. It is a little bit more complicated when it comes to some of the IT, some of the shared services around data and call centers and the like. So we've already begun a process of mapping that out, and there will be a transition period post-closing that we'll work through, and we have a committed plan that ourselves and Anchorage have aligned on, that we will go forward and execute with. But we don't expect that to have any detrimental impacts certainly on Country Road Group or either for that matter on David Jones, as they stand up their own respective capabilities from those that were currently shared to then be sort of self-sufficient in the process.

The next question comes from Gary Tigre Davis from [indiscernible] .

I just wanted to know management's thoughts on where you're going to be focusing a bit more now. I can't say the numbers off the top of my head, but I remember you gave us the CapEx outlook for Country growth. I just want to know, like, where is the focus going to be there? Is it still going to be mostly focused on Australia or you now work more towards bringing that brand to SA?

Thank you, Gary, for the question. Yes, we did communicate at our last results presentation, a level of CapEx investment, we're looking at deploying across the group. And we were talking in the regional around ZAR 8 billion to ZAR 10 billion over the next 3 years. Certainly, as we go forward and we look at the balance sheet of the company as it is today, and the potential impact these proceeds would have on that balance sheet and the offloading of David Jones, it does put us in a great position, frankly, to look at what we do. We did put out quite a bit of information last year around our approach to capital allocation. It's been something that we've been very, very centrally focused on doing a major refresh in terms of our approach process, parameters, et cetera, et cetera. And we've identified 3 board areas you may recall from that capital allocation presentation that we did whereby we'll be looking at, first and foremost, obviously, our own balance sheet and how further to optimize that. We'll be looking at investing back in the businesses where we earn the highest returns, which is obviously our South African businesses and the CRG business. And then we're going to be looking at returning excess cash to shareholders through ordinary dividends and share buybacks when feasible. So we'll be applying the proceeds from here against all 3 of those particular areas, and we'll provide more detail on that a little further down the line. But absolutely, we would. In terms of overall focus, to be very candid, David Jones has been an extremely intensive sort of process focus management time commitment over the last -- certainly since I joined the company, disproportionate amount of effort and energy going into this business. We have turned it around. It was teetering at one point in time. We've sort of restructured the business. We executed a capital plan. We've got the business profitable. We've got it cash generative and self-funding. So it's taken an ordinate amount of time and effort and energy from us, that dealing now goes away. And that capacity will be redeployed against Country Road Group, against the Fashion, Beauty and Home business and obviously, our food business in South Africa. But the center of gravity does shift to the SA businesses going forward.

The next question comes from Junaid Bray from Laurium Capital.

Roy and Jeanine, can you hear me?

Yes, we can, Junaid.

Maybe just a follow-up from a strategic perspective. Without David Jones, would the focus remain on the 3 core businesses? Or does that open up the opportunity to look at something else.

Yes. I mean, we've spoken about this before as well, Junaid. I mean, for us, we see the inorganic growth opportunities across our group with our existing businesses to be fair, particularly compelling for all of our businesses, the Fashion, Beauty and Home business as well as the food business in SA. And then there's a really interesting trajectory for our Country Road business in Australia. So that's going to be where the vast majority of our focus goes. The point I guess you're asking about is potentially other investments or other inorganic opportunities. We're not particularly on the lookout for doing deals or having to do deals. We do have 3 really compelling investment thesis here across these businesses that we have in terms of FBH, food and CRG, and they are going to be where we focus the vast majority of our energy, investment and time and attention.

And then maybe just the value of the Bourke Street property that's excluded from the transaction, what is that roughly?

Yes. I mean we've sort of put some numbers out on this before. I mean it's certainly north of $200 million, so more or less $2 billion plus. We see it certainly in the range of $200 million to $250 million. And it's not something that we feel sort of compelled to sell immediately. We are going to be earning a healthy revenue stream of that investment. And we'll obviously optimize the opportunity to offload it based on time, where the market's at and other opportunities. There are various interested parties, but again, as our focus has been on the operating company, so to speak, David Jones, and getting that away. And in time, we will look at what we do with the Bourke Street building, but it's a great asset. It's well located. As you know, it's in the Bourke Street Mall. It's a high-end downtown Melbourne. So we feel very good about the asset. But certainly, it's not necessarily part of our longer-term play, but my point was just that we're not going to rush off and try and sell it and maximize value here. We'll do that when the time is right.

[Operator Instructions] The next question comes from Jonathan du Toit from OysterCatcher Investments.

Can you hear me?

Yes, Jonathan, please go ahead.

Just on Country Road and the distribution through the David Jones stores, I mean, is there any agreement that, that will continue? Or the new owners, could they potentially pull the brands out?

Yes. So I mean, that's a good question because obviously, these have been really closely partnered businesses up until now. The matter of fact here is that the relationship between the selling of the Country Road brand and David Jones is in fact an on link commercial relationship. And those processes have been put in place for some time. And the terms of those particular sales plans, there are joint business plans that the teams have created and are sort of supporting. But we expect that to continue is the short answer. We don't expect any particular change. But the Country Road brands are quite an important component of the David Jones offering and then we had a benefit to the David Jones business. But at the same time, there is a -- David Jones is also an important component of the Country Road business. So it's a great relationship, a positive for both parties, and we absolutely expect that to continue.

Okay. But there is no agreement where the new owners must distribute Country Road for, let's say, a 10-year period or something like that.

Jonathan, there's no specific agreement, but there are contracts in place between the brands and Country Road Group and David Jones, and those run for multiple years. And so we expect those contracts to be honored. But beyond that, I mean, as I said, it would be somewhat been advised for them to not want to do that. But [indiscernible], I mean, we've had several conversations around this particular point. And all parties are very comfortable with where we are in that relationship. But as I said, is -- it is ultimately govern by a contract that we expect would obviously continue.

Jonathan, if I could just add further to that. So there is a preexisting only concession agreement in place between DJs and CRG. So legally, it's not something that can be [indiscernible] the investment.

But I think besides that, it's a highly country design sought after brand here. And certainly, it wouldn't be in their interest to terminate that concession arrangement. And it's highly sought off by other distributors as well.

I mean could you give me any indication of the length of one of those concession agreements?

They typically run in 3 to 5 years.

Between 3 and 5 years.

They typically run in 3 and 5 years, and each brand has its own sort of arrangement. But I mean, I really wouldn't be too concerned that this is going to have any sort of decremental effect on CRG and its growth plans. As I say, these agreements have been in place for some time. There are contracts that are legally sort of defensible and not something that we are concerned about on our end at all actually.

The next question comes from Damon Buss from M&G Investments.

Can you maybe just give us some insight into what the cash generation of David Jones has been in the first half of this year? Has the trend continued to improve? Or did it stabilize from where it was on the second half of last year?

No, it's a great question, and I wish I could answer that, Damon. I think we're in a close period now. But we've sort of -- prior to us coming into close period and certainly to our results announced that we gave an indication of where the businesses were at. We released a bit of a trading statement 20 weeks in which would have told you, would have given you a sense that there's a pretty strong positive momentum in that business.

The next question comes from Murray Moore from Aylett & Co. Managers.

Can you hear me?

Yes, we can, Murray.

Perfect. Guys, just on your call, you mentioned that you're going to get in excess of the carrying value of the assets of David Jones. Is -- are we talking NAV? Or are we talking the carrying value of the assets with the same thing?

Jeanine?

I can jump in. Murray, it's the same thing. So if we look at the value reflected on the WHL balance sheet, we would all expect to realize proceeds in excess of that current value or that book value at NAV.

Okay. So you've got -- at FY '22 annual financial statements, it's about ZAR 3.6 billion of NAV. And the store is about ZAR 2.5 billion. So you're expecting to get in excess of ZAR 1.1 billion.

Look, I mean, we don't want to be on the specific numbers at this point in time. There are a number of moving parts, as you can imagine, that go into this. And obviously, when we close, we'll firm up and provide you with all of these details. I mean from a carrying value perspective, it's obviously been impacted by the sale of buildings, the various cash repatriations that we've done. And also importantly, the profit we generated currently through the ongoing trade. So yes, I mean, I think the key takeout really is that the value realized here will be comfortably in excess of what we're talking about is carrying value.

And Murray, you could rest assured that post completion of the transaction, we will obviously provide the necessary disclosure to the market.

Yes, sure. Understood. And then maybe just if you can give us a sense of the intangibles in your segmentals, you guys put property, plant and equipment and intangibles. How much more intangibles is on that David Jones balance sheet? Just a sense would be helpful.

We've written everything off from intangibles perspective, goodwill and trademarks.

Nothing, nothing on balance sheet?

Nothing.

All right. And then just the last one on, on the amount of cash still sitting in David Jones. You obviously repatriated quite a bit of that. At the AFS, it was ZAR 2.5 billion. I'm assuming I think there was, what was it, AUD 90 million that was repatriated?

That was in February, and we've since repatriated another AUD 50 million in November.

Sorry. One point to note as well is that if you look at our June and in the balance sheet a couple of periods, it is typically a..

What Jeanine, I think, was saying was -- she's not in the same venue as us, but it was typically a low point in the -- were that what you are saying Jeanine, low point in the capital time.

Apologies. Roy, yes. So the June and December balance sheet a couple of periods are typically a low point for us in the working capital cycle.

The next question comes from at Sa'ad Chothia from Citi.

Congrats on the deal. Just quickly, are there -- is any competition commission or regulatory approvals still required for this? Or is that all done? Is that included in that May 2023 deadline or guidance that you've given us?

Yes, it's March '23 -- 27 March...

March, sorry.

Yes. And this transaction doesn't require that at all. So no issues from that perspective. I did mention to you that for us, one of the attractions around the transaction, apart from optimizing value, has been the sort of durability of the deal, the ability to get it done, the certainty that comes with the way we set up this transaction and the opportunity to have a clean exit. So those are all big considerations for us. We don't want to have anything really lingering. So this was an important factor for us.

Cool. And then just one more question on the cash. So you obviously receive the cash. The immediate plans, you mentioned those 3 core areas. But just with regards to the dividend, I didn't hear you correctly. Was that a special dividend or just normal dividend, obviously, increasing it to what it was before David Jones acquisition and when you cut it. And then obviously, share buybacks with that. So I just wonder, can you just clarify that sort of...

Yes. I mean what I was saying was that across those 3 broad buckets, we'll obviously apply these proceeds in the most optimum way. But specifically, regarding dividends, I mean we did -- and we have communicated we're looking at resuming dividends back to what we call our normal position, the 70% of SA and Country Road Group earnings basically level. So that we're looking to step back up to and sustain. The opportunity of buybacks remains on the table and it's something that we always consider if compelling and feasible for us. We're unlikely to go down the route of declaring a special dividend at this point.

The next question comes from Mark Wade from CLSA.

Congratulations on getting the deal [indiscernible] before your time this original purchase decision to buy David James in the first place. But with the review that's just been conducted, I mean, was there any kind of assessment that revealed on why the decision wasn't as successful as you like? The business is doing -- hasn't been as successful as you would have liked. Is there something in the original thesis or just -- or did just the market changed over the period that you owned it, that meant it wasn't as successful as you would have measured originally?

Yes. And Mark, thanks for the question. I mean it's obviously been a very topical point for us. It's not something that we just reassessed and validate it as we've concluded this transaction. It's been something certainly I did very early on, in coming on board. It was understanding why and what we did and where we went wrong and why the assumptions that underpin value at that point in time that we're seeing materialize or didn't materialize. We've shared some of that in the past. But I mean, one of the important things certainly I've heard throughout my career is people make decisions with best intent at the time, and I can certainly be super critical if one wants to of decisions that were made. But our role when you come on board is to take what you have and really make more of it and improve it and make it better. And that's really what we've been closed on. And so we did inherit a situation where the outcomes of what was contemplated hadn't materialized for a whole bunch of reasons and not necessarily market shifts per se. There are a number of other reasons why. But we haven't really wanted any -- sort of spent a lot of time cementing the past here. It is a very painful experience to be very candid with you. It's disappointing to say the least. But our shareholders, in particular, and us as a group, I mean, we've taken a lot of pain for that. And we've committed not to ever let that be the case again. We really have dialed up our focus on capital allocation. And you can expect to see very different decisions around capital continue to be made going forward now. But yes, I mean, we can -- we might write a book on that, Mark, and then we'll share that. But there -- it's been a bit of a business case for us in terms of what not to potentially do and how things happen with unintended consequences, et cetera. But we prefer not to really get into all that.

Fair enough. And do you think like with your vast experience the group has had, when you think about next what could Anchorage do differently and how that might impact the retail environment here in Australia and as it relates to Country Road. Any thoughts on how that might play out?

I mean, I think one of the sort of, I guess, criteria around Anchorage for us was where they stood on David Jones per se. And I mean they're very enthusiastic acquirers of this business from a brand perspective. It is -- I mean, it is the icon of retail in Australia, so much part of the fabric of the country, 185 years of heritage and history, and they're very enthusiastic about that, very passionate about that. They've spent some time with our key leaders at the management team level, very impressed with what we've coupled together, I'd say, coupled together, but pulled and installed as a really competent leadership team, our strategy that the team are executing, they remain -- they are very committed to and it's delivering. It's delivering value. So they are squarely behind what we call our Vision 2025 plus in David Jones, it is the turnaround strategy, and they've committed to ensuring the execution of that. To your specific question, what they may do differently, I think that's -- they've done their own assessment. We haven't had much discussion with them on that, frankly. So it's probably something you could ask them.

The next question comes from Andrew Moses from MIBFA.

Can you just remind me what your total capital that you actually have ended up putting into David Jones has been? And what's sort of come out? It's been a little complicated with some of the property stuff and -- so just to sort of say what's the -- I know there's been some big write-offs in the past, but what's the total capital that we put in? And then what was the profit when you bought David Jones and what's happened over the what's it 2014, I don't know, 9 years of Willis's ownership of David Jones to its profitability. If you can just give me a sort of just put things in context.

Yes. Yes. Andrew, I think we could probably take this offline. It's a really interesting series of questions there and could make for a lot of good conversation. I mean the history, I don't want to sort of regurgitate and repeat. And I mean it was not a great experience, the investment, the price that was paid, the strategy, the initial strategy, et cetera, et cetera. It didn't really pan out the way that it was envisioned to pan out. I mean all I can really talk to is me coming on board and what the plan was at that point in time and how we took that forward and what we've done with the business over the last 2.5 years, which has enabled us to get to what we're talking about today which is the transaction, which I think is, as I say, a really positive outcome for WHL and the group overall. And clearly, for our investors being what I've said before about the value we'll be realizing here. There's a lot one can go into and talk about in terms of the past but it's, I think, isn't in interest of today's session. I mean I think we can pick that up separately. I mean you'll know I think of...

I think compared to 2 years ago, you...

I mean, from what -- go ahead.

I think you are doing reasonably well to get out of the stage compared to 2 years ago. But yes, I was just trying to -- I was trying to cobble together all the numbers, and then I'm just a little bit -- there's a couple of moving parts there that are more than -- that I've got in my history. So I'd love sort of just the price would be great.

Yes -- no. Okay. We can certainly get back on that. I mean I do think that, obviously, beyond the 2 big write-downs and what we originally paid for the business, there was a range of various investments that we've made that we can provide you the details on, of course. And we can come back to you on that, absolutely.

Andrew, does that conclude your questions?

Thank you very much, yes.

And I think whilst we're waiting for the next -- just while we're on that point, Mark around, Henry, around, we've done reasonably well to sort of get up now. I'd say we've done very well to basically find a transaction or craft a transaction that delivers against the sort of criteria I mentioned earlier on. So we're really pleased that we've got to this point and obviously, looking forward to the next phase for the group beyond David Jones image.

The next question is a follow-up question from Murray Moore from Aylett & Co. Fund Managers.

Just quickly, I know we've hashed through kind of the 3- to 5-year contract with Country Road and David Jones and kind of concession agreement in place. Can you just quantify for us how big Country Road sales through David Jones is as a percentage of total Country Road sales, just so we can kind of frame the risks.

Murray, sure, I'm happy to take that question. So CRG's concession sales account for roughly 15% of the CRG business. And roughly half of that in terms of the DJ business.

Sorry, Jeanine, you were just breaking up, is it 15?

Correct. 15%, roughly, of Country Road...

Yes, 15% of Country Road and about 7% -- 7%, 8% of the David Jones business.

Correct.

Sorry, guys you are breaking up. So 15% of Country Road and 7% to 8% of David Jones sales.

Yes. So 15% of Country Road, that's correct.

Okay, 15%, cool. And then I just wanted to say, I'm very pleased to hear that you guys are looking at reinvesting all the proceeds if you do get this over the line,, that you're reinvesting the proceeds in the current businesses looking to pay dividends out, maybe some buybacks. I'm very glad to hear that you as with potentially your peers doing many, many M&A transactions. I'm glad to hear you are investing in the businesses you know really, really well. So well done.

Thank you for that, Murray. We genuinely see a lot of upside in our own businesses, and we know them well, and they are actually pretty interesting businesses from an investment perspective. So absolutely, that's where we stay focused.

Thank you. At this time, we have no further questions. Mr. Bagattini, I'd like to hand over to you for closing remarks. Thank you, sir.

Thank you very much, and again, just thank you very much for joining the call and your interest in our business, the interest in this transaction. It is really a very positive day us at WHL. I know it's been a long journey and tough journey, and I refer to it as very painful. But we certainly come at the other end. I think in -- it was something that I think is beyond what we had expected to even a couple of short years ago. So very pleased that we've been able to conclude on this transaction, looking forward to the couple of next months, [indiscernible] months to get it closed out. And then to shift focus back to our businesses where we do see Fashion, Beauty and Home and food, particularly in South Africa, with significant potential and the opportunity to invest our wherewithal there and then at the same time, keep our focus on the Country Road Group. So a bit of a transformational moment for us across a number of different elements from a number of different respects, but really bodes very well for us going forward. We're very excited about that. Let me wrap up there. And thank you again. And I also invite you that if you do have any specific questions, follow-up questions, please follow-up me and send them over to Jeanine who is on standby to receive them and Reeza or myself. We'd love to keep you engaged on this to the extent that you need any further information that we can provide. But thank you very much again, and we look forward to checking in with you in the not-too-distant future. Thank you.

Thank you very much, sir. Ladies and gentlemen, that does conclude today's teleconference. Thank you very much for joining us. You may now disconnect your lines.