Thank you for standing by, and welcome to the Coles Group Limited half-year FY20 results conference. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Steven Cain, CEO. Please go ahead.
Thank you, and good morning, everyone, and welcome to the Coles 2020 half-year results announcement. Joining me today on the call is Leah Weckert, our Chief Financial Officer, and we'll be hearing more from her later. We'll open up for Q&A after a short presentation, and I'll kick off. What we're about to say complements the ASX trading update that we made on the 6th of February. So these half-year results covering the first six months since we did our strategy refresh back in June show solid progress that we're making on our winning in our second century strategy execution. Three things to call out financially. First is that sales grew 3.3% in the half to AUD 18.8 billion, with growth pleasingly across all of the segments. EBIT increased by 0.4% to AUD 725 million, partially due to strong demand for Coles properties at the current time.
We've now achieved 49 consecutive quarters of comparable sales growth, which is in line again with what we said at the time of the merger about Coles being a very resilient business. From a strategic point of view, Smarter Selling initiatives saw $95 million of savings. Leah will discuss these in more detail, but the team is very focused on becoming more efficient, more agile, and delivering at pace. We incurred gross operating capital expenditure of $316 million in the half, which included the start of the supply chain modernization project with Witron in Queensland. We have a strong balance sheet with operating cash flow of $607 million, a cash realization ratio of 87%, and net debt of $566 million. I'm also pleased to report an interim dividend of $0.30 per share, fully franked.
This is in line with the guidance we provided at the time of our demerger from Wesfarmers. Safety and well-being at Coles is a key component of our Winning Together strategy, and I'm pleased that we were able to deliver a reduction in TRIFR of 10%. With regards to the announcement released this morning on our website around our ongoing award-covered salary team member review, we have identified that for less than 1% of our total team members, there were some differences between their remuneration and the general retail industry award or GRIA. We have taken provisions totaling AUD 20 million for the estimated salary-related payments, interest, and on-costs covering the past six years, and have implemented steps to improve our systems and processes.
Moving on to slide four, our strategy slide, we're making good progress, as I've already said, inspiring customers through best value food and drink solutions, smarter selling through efficiency and pace of change, and winning together with our team members, suppliers, and communities. I'll go through some of each of these pillars in a bit more detail. So moving on to slide five, we've had a very busy six months, as you can see. In own brand, we've had great success, and we achieved sales of more than AUD 1 billion for the first time in December, which was up 7% for the month and 6% for the half. We launched more than 3,000 new products, that's own brand and branded, in the half as part of our tailored range review. This is the most extensive range change period in supermarkets for many years, and the customer response has been very positive.
Our dedicated convenience space featuring our Food for Now and Food for Later range was also successfully delivered to 114 stores, and a pet treat bar was also introduced at Coles Local in St Kilda. We also provided more alternatives for our vegan, vegetarian, and flexitarian customers via Nature's Kitchen and the introduction of products like our first plant-based roast at Christmas, which we had at our house, incidentally. Successful marketing campaigns in the half included Little Shop 2 and Spiegelau Glassware, which were both well received by our customers. We saw an improvement in customer satisfaction, with investment in service driving a better checkout experience. In Coles Online, sales growth increased 24%, and Delivery Plus was introduced. Delivery Plus is a good option for customers who regularly shop online to manage their family budget by knowing exactly how much they were paying for online delivery each month.
Overall, 55 new exclusive liquor brand lines were introduced in the half, and a total of 248 medals and awards were received. Our growth areas saw export and active Flybuys members both increasing in the half. Moving on to slide six, this is Good Things, Great Value, part of what it's all about, and lowering the cost of meal occasions. That's been across breakfast, lunch, dinner, the cost of Christmas entertaining, and also lowering the cost of kids' lunchboxes for school. Slide seven is Smarter Selling. 95, as we've said, two main areas of savings have been the store support center, which was flagged last year, and also supply chain efficiencies. Leah will talk a little bit more about that. We've changed some of the decision-making processes in the support center to change things faster, and we've improved the work environment, including hot desking.
We've also implemented the Ariba IT system, enabling procurement savings and streamlining processes. We've now connected more than 1,000 of our stores to high-speed broadband, improving productivity, and solar power has been rolled out to 42 supermarkets, reducing energy costs. As far as the tailored store strategy is concerned, we renewed two Format As, 13 Format Cs, and a second Coles Local store at St Kilda. As I've mentioned already, we've started building the Queensland Witron Distribution Center, and we've also identified two sites for Ocado fulfillment centers in Sydney and Melbourne. These will help deliver a long-term structural cost advantage. Moving on to the final pillar of our strategy, Winning Together. This is about winning with all of our stakeholders: team, suppliers, and community. Things that we did during the half were very much around improving the health and well-being of our team members.
3,000 of them trained in mental health resilience, some support for Movember as well, which raised more than AUD 200,000. And then indigenous team member employment, which is one of our big programs, has increased to 4,464 as we move towards our target of 5,500, including 500 in trade and leadership positions by 2023. From a dairy point of view, we now source milk directly in Victoria and southern and central New South Wales from farmers for our Coles brand two and three-liter milk, providing more certainty for future incomes for our dairy farmers. Other support for communities includes AUD 430,000 donated to REDcycle to increase plastic recycling, more than a million provided in sports equipment to little athletic centers across Australia, and delighted to report that we've delivered our 100 million meal equivalent to Second Bite since 2011.
We've also raised more than nine million with our customers for Country Women's Association drought relief since July 2018. During the half, we also signed a power purchase agreement to source the equivalent of 10% of our national electricity demand from three new solar plants, which are being built currently in New South Wales. Moving on to slide nine, I'd like to take some time to acknowledge our team members, suppliers, and communities across Australia who've been devastated by some of the worst drought and bushfires on record. In December and January, I traveled around New South Wales and South Australia, visiting badly affected drought and bushfire-affected communities. I'm extremely proud of the way that Coles has rallied to help with these emergencies.
With many of our fresh produce suppliers, they're facing some of the toughest growing conditions on record, and we vary product specifications by accepting produce that would otherwise be rejected based on size, shape, or cosmetic blemishes, but not taste. As a result, we can maintain supply for customers and, importantly, income for farmers dealing with the impact of drought and bushfires. In total, Coles has contributed more than AUD 6 million to drought and fire relief, including three million in gift cards to more than 6,000 rural fire brigades. We've also donated animal feed to a number of centers, including Mogo Zoo in New South Wales. I know I speak on behalf of everyone at Coles when I say that we are so incredibly grateful to our firefighters and emergency services for their bravery and commitment, and also to our team members who donate their time to the CFA.
Thank you once again. Moving on to slide 10, the strategy tracker. I won't go into detail here because most of the points have been covered, but we will be reporting every six months on this, and I'm delighted to say that we're making progress with all of the eight KPIs that we presented in June. I'll now hand over to Leah to take you through the group financials in more detail. Leah.
Thank you, Steven, and good morning, everyone. I'm now on slide 12, which shows our group results on a retail basis. As Steven mentioned in his presentation, sales revenue increased by 3.3% to AUD 18.8 billion. Going forward, Coles will report, including the change to AASB 16 lease accounting. On a reported basis, post AASB 16, we reported EBIT of AUD 910 million. As prior year comparatives have not been restated, the change is not meaningful, and so my commentary in this presentation, with the exception of the balance sheet, will be on a pre-AASB 16 basis. EBIT pre-AASB 16 and significant items increased by 0.4% to AUD 725 million, assisted by strong profits in our property operations.
This number includes a provision of AUD 20 million, comprising AUD 16 million in supermarkets and AUD 4 million in liquor, for estimated salary-related payments, interest, and on-costs for the prior six years, associated with the ongoing award-covered salary team member review. Net profit after tax pre-AASB 16 and significant items increased by 1.7% to AUD 498 million, and earnings per share increased by 1.7% to AUD 0.373. I will note in the prior year, the corporate costs were not at a full run rate, as some corporate functions were only established partway during the reporting period as we move through the demerger. As Steven has already mentioned, we're also pleased to announce the board has declared a AUD 0.30 per share fully franked dividend. Moving now on to the segment financials on slide 13. It is pleasing to report satisfactory sales revenue growth across each of supermarkets, liquor, and express.
In supermarkets, sales revenue growth was driven by the Wellness breakfast, lunch, and dinner campaign and a successful Christmas. Little Shop 2 and the Spiegelau Glassware campaign also had a positive impact. In liquor, revenue growth was the result of continued solid contribution from First Choice Liquor Market and online sales, while express revenue was also supported by the Little Shop 2 campaign and improving fuel volumes. This slide also provides you with a reconciliation of the segments on a pre- and post-AASB 16 basis. You will see that the group impact to EBIT of AUD 185 million from the adoption of the lease accounting standard. This movement is effectively due to the removing of lease operating costs and replacing them with depreciation on the right-of-use assets and interest on the lease liabilities, and I'll cover that in more detail shortly.
Supermarkets' EBIT increased by 5.7% to AUD 637 million, driven by higher sales and gross margin, but also from cycling incremental costs incurred in the first half of FY19 relating to the removal of plastic bags and increased buy-back promotions. These were not repeated in this period. Liquor EBIT was down by 9.9% to AUD 67 million. The result benefited from no softening within the half compared to last year. However, this was more than offset by clearance costs and promotional activity associated with the tailored range change that commenced during the half. Express EBIT was AUD 4 million, as the business now operates under the new alliance agreement announced in March 2019, but we are pleased that the business has seen a return to pure volume growth, the first consecutive quarters of growth in six years. The other segment recorded EBIT of AUD 17 million.
As we announced in our trading update on the 6th of February, EBIT in other was favorably impacted by a AUD 15 million relief to the workers' compensation self-insurance provision, largely as a result of improved safety performance and earnings from our property operations of AUD 33 million, including net gains from property disposals. We note that corporate costs remain broadly consistent with the AUD 66 million of annualized costs noted in the demerger booklet, although this is offset by the AUD 15 million self-insurance provision release I've already mentioned. I'll now turn to the normalized cash flow on slide 14. This slide shows cash flows normalized for demerger-related items. Operating cash flow, excluding interest and tax, was AUD 920 million, a reduction of AUD 407 million compared to the first half of FY 2019, primarily due to the timing of half-year end, which impacted working capital.
To expand on that point, with the first half of FY20 ending on the 5th of January compared to the first half of FY19 ending on the 30th of December, the first half of this financial year included seven monthly pay runs to our suppliers compared to six monthly pay runs in the first half of FY19. So this short-term working capital impact is expected to unwind in the second half. Cash realization of 87% was impacted by the adverse movement in working capital, but this is expected to reverse in the second half, and we are still targeting greater than 100% cash realization for the full year. I'll now take you through capital expenditure on slide 15. Gross operating capital expenditure on an accrued basis decreased by AUD 44 million- AUD 316 million in the half.
The majority of the decline relates to reduced CapEx spend on net new space and fewer click-and-collect locations rolled out compared to the prior corresponding period. This was partially offset by higher efficiency initiatives with investments made in the store operating model in relation to loss prevention measures and CapEx in relation to the supply chain modernization project, with the Witron Queensland Distribution Center build commencing during the half. Store renewal CapEx was driven by 32 supermarket renewals and 23 renewals across liquor. Gross CapEx was driven by five new supermarkets and 13 liquor stores opened during the half, in addition to the rollout of our dedicated convenience space featuring our Food for Now and Food for Later ranges. Before moving to the next slide, I'm just going to make a couple of comments on property CapEx. We reported net property CapEx as negative AUD 174 million for the half.
This means there was a capital inflow as we took advantage of the strong property market. For the full year, due to the supermarket property conditions, we expect a net property Capex inflow, i.e., divestments will exceed purchases, and we expect that to be between AUD 130 million and AUD 180 million, noting that we had previously guided to plus/minus AUD 100 million. We expect full-year gross operating Capex guidance to remain within our previously guided range of AUD 700 million- AUD 900 million, with further progress payments on the supply chain modernization program and still targeting approximately 75 renewals for the full year. However, it is worth noting that there is uncertainty about the coronavirus delaying some renewal equipment being shipped out of China, which may impact the renewal program, and we will be able to provide a further update on this at the Q3 sales result.
Turning now to the balance sheet on slide 16. The balance sheet provided on this slide is on a post-AASB 16 basis. As you can see, as of 5th of January, on a post-AASB 16 basis, we reported working capital of negative AUD 839 million, capital employed of AUD 3.7 billion, and net assets of AUD 2.5 billion. The movement in inventory days and creditor days is largely due to Coles no longer holding fuel inventory under the new alliance agreement and a change to the tobacco excise treatment. The change in tobacco excise came into effect from the 1st of July 2019, whereby the excise value is now recognized from the point of acquisition rather than when the stock is delivered to stores.
Seasonality also had an impact on inventories and payables balances and, therefore, the working capital movement, as we hold more stock in supermarkets and liquor over the Christmas and New Year trading period. Net debt as of 5th of January 2020 was AUD 566 million, an increase of AUD 46 million with the payment of the FY19 ordinary and special dividends in the half. Coles also refinanced some of its debt facilities, which I'll talk to in a moment. The leverage ratio pre-AASB 16 was 0.6 times, which provides significant balance sheet flexibility going forward. I'd now like to just talk through some of the impacts of AASB 16, which Coles has applied from the 1st of July 2019, so turning to slide 17.
Upfront, I would like to say that this has been a very significant accounting change for a business like ours, which has over 2,000 leases in our business. This is a set of non-cash accounting adjustments, and they have not changed the way in which we run the business or our ability to access capital. The credit rating agencies and our banks have already taken into account our lease profile since the inception of our credit ratings and debt facilities. On adoption, Coles recognized a right-of-use asset of AUD 7.5 billion, a lease liability of AUD 8.9 billion, a deferred tax asset of AUD 356 million, and the elimination of lease-related provisions of AUD 188 million. The difference of AUD 831 million is taken to retained earnings, and you can see on the slide what the corresponding balances were at the 5th of January.
The impact on our P&L is on the right-hand side of the slide. The unfavorable impact on profit after tax of AUD 9 million was due to the elimination of the operating lease expenses being more than offset by the recognition of depreciation and interest expenses associated with the lease portfolio. The bottom part of this slide provides a reconciliation from operating lease commitments, which were disclosed at 30 June, to the AUD 8.9 billion of lease liabilities we recognized on adoption on the 1st of July. As I said, this is a significant change, but hopefully this gives you some clarity on the impacts. Turning now to slide 18 on capital management. As I've said in the past, we will continue to take a disciplined approach to capital management. As Steven already mentioned, the Coles Board has determined a fully franked interim dividend of AUD 0.30 per share.
The dividend reinvestment plan has been activated from this dividend. No discount will be offered, and this will be neutralized with on-market purchases. In October, Coles issued new AUD 300 million seven-year and AUD 300 million 10-year senior unsecured fixed-rate medium-term notes, and I am pleased that the transaction was strongly supported by debt investors being significantly oversubscribed with strong pricing outcomes. Following this, in terms of funding and liquidity, our weighted average drawn-down debt maturity is 5.2 years compared to 3.7 years prior to the bond issuance. This provides funding stability. Undrawn facilities of AUD 2.2 billion and cash at bank and on deposit of AUD 242 million provide sufficient headroom. Over time, we will look to refinance additional debt facilities and further smooth our debt maturity profile. Finally, on credit ratings, we remain committed to solid investment-grade credit ratings with Standard & Poor's to Moody's.
Importantly, we do not expect any impacts on rating outcomes from the introduction of AASB 16. Before finishing up, I'll just spend a little bit of time on smarter selling on slide 19. Firstly, I just want to point out this slide is illustrative, and it's not meant to provide a view as to the phasing of smarter selling benefits we expect to realize over the four years of the program. It's our attempt to conceptually demonstrate how the AUD 1 billion in cost savings is constructed. As we've previously communicated, a big part of the role of smarter selling is to largely offset inflationary cost headwinds in the business. So starting with the dark blue blocks, these represent new initiatives commenced each year. For FY 20, that number will be in excess of AUD 150 million, as we've previously communicated.
The pale blue blocks represent the actual sustainable cost savings achieved and then annualized for the prior year. For example, in FY20, if we achieve an actual cost out of AUD 150 million, this amount will annualize to an amount in excess of AUD 150 million as new initiatives commence at various points throughout the financial year, which is why the pale blue block looks slightly larger than the dark blue block in the previous year. Now, for the first half, we reported cost out of AUD 95 million in relation to Smarter Selling initiatives. It is important to note that these initiatives relate only to the FY20 year, and there are no annualization benefits from any initiatives which began prior to this. The most significant contributors to the AUD 95 million were supply chain initiatives and streamlining of our store support center.
The transport hubs in Victoria and Western Australia are now fully operational, which is leading to an improvement in the utilization of our fleet through increased backhaul. We are also seeing an improved operational alignment between our store and distribution teams, facilitating delivery frequency and cartons per pallet optimization. We won't be going through the detail of the segment slides, so with that, I'll hand back to Steven, who will make some concluding comments on Outlook.
Okay, thank you, Leah. So by way of a trading update for the remainder of the quarter and FY20, comparable supermarkets have remained broadly consistent with the levels achieved in the second quarter, which is pleasing.
Incremental costs associated with the removal of plastic bags and increased Flybuys promotions, which were a benefit to supermarket EBIT growth in the first half of FY20, will not occur in the second half of FY20. However, supermarkets' EBIT growth in the second half of FY20 will benefit from a Smarter Selling provision of AUD 19 million, which impacted supermarkets' EBIT in the second half of FY19 last year, which is not expected to reoccur. In liquor, it is expected that earnings will remain under pressure in the second half as a result of the Tailored Range Reviews and clearance activity, which commenced in the first half. The bushfires have also had an impact on volumes in Q3. The new leadership team under Darren Blackhurst, who joined in January, is undertaking a review of operations, and an update will be provided at the full-year results in August.
In other, as previously communicated, the first half FY20 earnings from property operations are expected to represent the vast majority of FY20 property earnings. Corporate costs are expected to be broadly in line with the AUD 66 million annualized costs noted in the merger scheme booklet, offset by the AUD 15 million in workers' compensation due to an improved safety performance. Gross operating Capex continues to be on track for between AUD 700 million- AUD 900 million full-year spend, although the coronavirus is delaying renewal refrigeration, as we've already mentioned. Some impact is expected also on export sales. Finally, due to strong supermarket property conditions, a net property inflow is expected to be AUD 130 million to AUD 180 million and not the plus or minus AUD 100 million, as previously communicated. So that concludes our presentation, and with that, I'll hand back to the operator and open up for Q&A. Thank you.
Thank you. If you wish to ask a question, please press Star 1 on your phone and wait for your name to be announced. If you wish to cancel your request, please press Star then 2. If you are using a speakerphone, please pick up the handset to ask your question. We ask that questions be limited to two per person. The first question today comes from Bryan Raymond from Citigroup. Please go ahead.
Good morning. My first one's on the cost basis in supermarkets. We've seen underlying cash CODB growth of a bit over 3% in the half, and that's excluding the provision that you raised, and it's also including at least a portion of that AUD 95 million of Smarter Selling benefits.
So I just want to understand the underlying run rate of cost growth in the business and how that is expected to look basically over the second half and into FY21, and also how much of that Smarter Selling benefit has fallen to the CODB line within supermarkets, please.
Hi, Brian. Thanks for that. I think what we've always said about underlying cost inflation is that it's around about 3%, and then obviously we then decide what initiatives like Smarter Selling there are to take cost out, and we also make decisions around what costs to add in. And I think we did call out in this particular half that we have invested in service in particular, which has improved on our Tell Coles results for customer satisfaction.
Okay, so we could put that most of it down, most of that increase to increase staff levels.
And then how much of that AUD 95 million in Smarter Selling benefit in the half would have flowed to supermarkets overall? And then I assume some is in gross margin versus CODB. Can you give us a bit of a breakdown there?
Yeah, I mean, it's split. So as we've called out, two of the big contributors to the 95 were the streamlining of the store support costs. They're going to be in CODB, and then a lot of your logistics benefits will go into GP, and we see that that 95 is actually what we've taken out in the half, so it's fully in the numbers.
Okay, great. My second question then is just on the gross margin in supermarkets. So we saw a bit of a mixed shift to private label, which would have helped.
Obviously, it's pretty rational out there, in my view at least, so I'm not surprised to see it up, although it was up more than I thought. The one piece that I haven't seen mentioned is stock loss and how that has progressed. I know you've put in some anti-theft measures, and you've had better sales momentum, so I would expect your markdown for sales also moderated. So it'd be great just to hear sort of what sort of basis point contribution stock loss added to that 31 basis points of supermarket gross margin expansion, please. Yeah, stock loss was broadly flat, Brian, so it wasn't really a contributor one way or the other to the GP change. Okay, was there anything else in there that I'm missing then in terms of the driver? The driver's that 31 basis points?
Was it just sourcing and so on that you called out?
Yeah, so it's that strategic sourcing, and also we've talked about supply chain, and I think in particular on supply chain, we've made fairly big strides on the backhaul operations, which is working well.
Right, so you haven't seen any return on that CapEx investment on reducing theft levels, or has there been some offset within stock loss?
So as Steven said, the stock loss is broadly flat. Stock loss is one of those things that it actually takes time to come through after you roll out an initiative. So we have started rolling out some loss prevention and CapEx initiatives, but they were largely weighted towards the back end of the half. We wouldn't expect to start to see benefits from that coming through probably for a few more months.
Yeah, I need a third thing to add to that, Leah, is things like the convenience rollout where we've put the modules into 114 stores and so on. That sort of in the whole stock loss waste area, then obviously that sort of drives your waste numbers up a little bit, and then obviously we've got initiatives to offset some of that as well. So I think we're reasonably pleased with the stock loss results in the half.
That makes sense, yeah. Thanks, folks.
All right, thanks. Thank you.
The next question comes from David Errington from Merrill Lynch. Please go ahead.
Morning, Steve. Morning, Leah. Hi, David. Hi, Steve. I've got two questions.
One's on the CapEx and the balance between what you're looking at in terms of efficiency initiatives and maintenance and balancing that CapEx to cost efficiencies, because as you're saying, you're facing cost increases at the moment. How do you look at that CapEx? Because this half was quite low in CapEx, and I've been critical toward Woolworths in spending too much forever, and they've got big increases in depreciation. I noticed your depreciation's fairly flat, so it shows that you're not spending overs, but are you—I mean, this may sound a silly question—but are you spending enough in terms of efficiency and maintenance so that you can keep a handle on this cost inflation, which does appear to be coming through in supers in the last year or two at a fairly accelerating rate by the looks of it?
Yeah, it's a good question, David.
So the maintenance number is a little bit around phasing, which we are expecting more coming through in the second half around that, and that just relates to the planning cycle, so that should go up more in line with what we saw for the full year last year on maintenance in the second half. In terms of the efficiency initiatives, I mean, there's a lot of work underway in developing out the Smarter Selling program, some of which requires CapEx, for example, those loss prevention initiatives that we just spoke about, and obviously the supply chain modernization capital costs will fall into that bucket as well, and we are expecting some additional costs and payments related to that going through in the second half. We've been prudent with the way in which we're using our capital.
We feel at the moment that we've got a good balance between choosing to invest where we're seeing it work and then trialing new things to make sure we're comfortable and then putting the money behind it.
Sounds sensible. I don't want to dwell on the negative of the result because it was pretty solid, but the liquor group did stand out to me as something in that business isn't quite working. I mean, your sales growth looked pretty tidy, 3.3%, but your EBIT down 10%. Can you go into some of the things that you've got a new CEO there, I believe, starting? I mean, it's not significant yet, but you wouldn't want to be continuing this down 10% in a reasonable sales environment, I would have thought.
So can you give us a bit, Steven, Leah, as to what you're looking to potentially turn this business around so it can actually be a profit support rather than potentially a bit of a drag?
Yeah, well, as you can see from the results, the liquor business is less than 10% of the overall group profits, and in the half, we started what we've been talking about, which is the tailored range reviews. When you go through significant range change in liquor, it can be costly because you've got to delete the old lines, and the rate of stock turn in liquor isn't as high as it is in fresh food, as an example.
Darren and then what we've seen in January is certainly some subdued sales as a result of bushfires, which is not only the bushfires themselves, but obviously the smog and so on that's impacted areas of Sydney and Melbourne, as we've all seen. As you mentioned, Darren joined the business in January. He's made a bit of a running start, and we'll hopefully update you with what any changes to strategy might be in August. I think the things that we can say about the strategy is the range does need to be more tailored, and clearly we need to move to a situation where the business over time becomes less promotional and also a drive towards continuing to improve our own brand, exclusive brand proposition, and also deliver a better online solution to customers as well.
I suppose the question I was getting at, what I'm more worried about is, I'm okay, the day-to-day trading, as you say, may not be significant, but what I'd be worried about is if the new CEO comes in and looks at your property and says, "Look, our stores are just in the wrong place. We need to take a major cut and repair," and that could be quite costly to get out of some sites. Is that potentially—is the property in the liquor? Because from what I'm hearing, the liquor business overall, or the liquor industry, is going quite well, and this result did include New Year, so you're down 10% with that New Year included, which is a big part for liquor, which is—it was a pretty poor result in liquor, and I'm just worried about the structure of the business.
Could it be more material in terms of a major cut and repair that you may need to make? Well, I think we should wait to see what the outcome is. I mean, he's been here four weeks, I think, so he's getting around the country and. But you should have a good look at it. You should know what the business looks like. You should have an opinion on that, so it's really your decision as well. We'll all be involved in any decisions, that's for sure.
Just the other thing to bear in mind about the half-year result, David, is it does include in liquor AUD 4 million for the wages that we called out earlier as well.
Yes. Okay. Well, thanks, Steve. Thanks, Leah. All right. Thanks.
Thank you. The next question comes from Shaun Cousins from JP Morgan. Please go ahead.
Hi, thanks. Good morning.
Maybe just on Food Like- for- Like. To start, third quarter 2020, you've highlighted that it's been broadly consistent with the second quarter 2020 at 3.6%. Was the start of third quarter 2019 in line with the 2.2% that you reported for that quarter, or was it worse? I'm just curious now that given you've talked about the start of third quarter 2020, I just want to get an understanding of what you're actually cycling during that period, please.
We're not. I don't think we're going to be sort of breaking down quarters, Sean. I definitely don't want to start that trend. The only reason we've actually given you an update is just to sort of, obviously, the Q2 performance was significantly better than Q1, and it was just to say that the momentum is still there in the business, pleasingly.
Okay, but Fresh Stikeez was a positive, and that came in in the third quarter, came in probably around the start of February, I recall. Is that right? Yeah, it's similar sort of timings, and we launched Stikeez 2 last Wednesday.
Yep. Okay, and my second question is just around cost savings, the AUD 95 million. Obviously, that was a very strong sort of result. How do you see the likelihood that cost savings actually support food EBIT growing? Because if you back out the AUD 95 million and the AUD 16 million provision in food, your EBIT in the first half actually fell 7%, and then also the PCP had some costs in there as well.
I'm just curious around. I mean, does this AUD 1 billion cost savings—is that all of that just a design to offset cost inflation as we've seen in the first half 2020, or do you actually think that some of that can be retained and go to shareholders, please?
Well, I think what we've tried to do is to set out as best we can what the phasing of the AUD 1-billion-dollar cost out is, and we always said it was to mitigate potential inflationary cost increases. The way we think about it is that we have to simplify our existing business to enable us to have funds to invest in all of the new things we're doing, whether that's technology investment in Witron or Ocado, or whether it's additional service in stores.
So we took the view this half to invest in additional service in stores, and we've seen the benefit of that in the Tell Coles customer satisfaction results which you've got in the deck there.
Okay. Great. Thanks, Steve. Thanks.
Thank you. The next question comes from Michael Simotas from Jefferies. Please go ahead.
Good morning, everyone. First question for me is on the provision you've taken around the wage cost review and credit for taking it above the line. Are you confident that you've provided enough given that the review is ongoing, or will there potentially be more costs to come through there?
It is an ongoing review, albeit there's a majority of. Sorry, there's just a bit of background noise from somebody's phone, I think. Yeah, so we've obviously covered the vast majority of our team members.
We've said that this applies to less than 1%, but we've also said that the review is sort of ongoing. So as it stands today, that's our best view of what the provision looks like. Presumably, the provision factors in a little bit more than what you've already found, or does it only factor in what you've already found?
I don't think we're going to get into the detail of the provision. As you can see, from a group point of view, it's not a material number. It probably, as a percentage, impacts liquor a bit more than supermarkets, but obviously, we've made the provision to make sure that there is sufficient there to pay over the six years based on the legal advice that we've received. Okay. Great. Thank you.
And then the second question from me, you've called out a couple of weeks ago and again today that the second half won't benefit from cycling the increased Flybuys costs and costs around plastic bags that you cycled in the first half. Can you give us some idea of what the quantum of that was and also to what degree that was in CODB versus cost of goods sold?
Yeah, we won't be going into specifics, but obviously, for it to be called out, you can assume that it's tens of millions, not single-digit millions.
I'd probably say, Michael, that it was the majority of the underlying growth we saw in the EBIT for supermarkets.
Okay. No, that's helpful. Thank you.
Thank you. The next question comes from Grant Saligari from Credit Suisse. Please go ahead.
Oh, good morning. Thanks.
interested just understanding the sales growth in supermarkets better because it's just a bit vague on your comments around market share, and I wondered whether you could sort of elaborate a little on what was actually driving the sales growth improvement in the second quarter because you put a lot of extra range in, for example. You indicated you had a successful promotional program. So if you could elaborate on that a little bit around the market share comment, please.
Yeah. So the market share numbers are a bit variable at the moment in terms of what the market reads are. I think we've put in the deck somewhere, maybe slide 10 or something, that the ABS number is around 3% growth, but the Nielsen number is higher.
We think that the Nielsen number might be higher because it relates to home consumption, and I think the general hypothesis is that the bushfires have caused more people to eat at home than eat out, and that's led to some growth. We've seen strong transaction growth in the business. In fact, the strongest we've seen, I think, since Little Shop. And we've also seen some improvements in average selling price emanating from the range review, so that's things like kombucha, the healthy products that are going in as well. And then that's all been complemented by the program we referred to in the presentation, which is Good Things, Great Value, and the lowering the cost of the various meal occasions. And then, of course, we've had a fairly successful, in terms of engagement, Little Shop 2 and Glassware promotion as well, which I think has helped.
So a number of factors in short, right?
Yep. Okay. Thank you. And secondly, on the, I'm probably being a little obtuse here, but on the AUD 95 million cost out program in the first half, my understanding from what you said on the call was that this reflected only initiatives that were undertaken in the first half, so it wasn't annualizing initiatives that were commenced in the prior period, for example, in the second half of 2019. So presumably, some of the effect or the benefit of those initiatives in the first half carries through into the second half 2020. So I'm just trying to reconcile that with your full-year guidance of AUD 150 million of benefits, which obviously implies a lower contribution in the second half.
No, you're right.
We've maintained the guidance at greater than AUD 150 million, and I think where you're going mathematically on this is probably the right direction, Grant, which is we've had a very strong start.
Okay. All right. Thank you.
Thank you. The next question comes from Ben Gilbert from UBS. Please go ahead.
Morning, Steven. Just the first question for me, Hi, Ben. How's it going? Just the first question for me, Leah, just around the EBAs, is there another one coming up in the second half of this calendar year, and do you envisage any impact or headwind around that into fiscal 2021?
There's nothing major as far as I'm aware, but obviously, you'll get the annual increases.
Okay. So there's nothing to be renegotiated in the second half of this year?
Not to the best of our knowledge, no.
Okay. Cool.
And just a second one from me, and it's probably sort of a bit of a bigger picture one. I'm just interested in—and just following up from David's point, just around the CapEx—just how you're thinking about long-term versus short-term initiatives within the business at the moment because it's a great first-half result and obviously cost out tracking ahead. Just how you then weigh up CapEx and, again, to David's point, that all of us are obviously spending a lot more and probably putting some more into areas like data and these sorts of things. I'm just interested in whether you think there's a need to sort of put more money into some of these growth CapEx initiatives at the moment and just how you see some of the people within the business taking a bit of a longer-term lens and how you're sort of trading that off.
Yeah.
I mean, we have quite a comprehensive suite of capital projects that we have sort of visibility of, and some of them are quite low. You take the supply chain modernization project or the Ocado project, even things like some of the SAP implementations with the implementation of SuccessFactors and the like. They're initiatives where we know we have additional CapEx coming, and so we are planning for that in terms of the profile that we have. But equally, as part of the Smarter Selling program of work, we're very conscious of having good momentum around the cost out, and so there are more what I describe as sort of tactical in-year investments that we are making.
As I said to David, what we are trying to walk the balance of at the moment, particularly around things like the store renewals and growth initiatives, is being aggressive and forward-thinking around the trials that we are putting in place, but actually taking the time to make sure that they're working before we then put money behind them to invest in broader rollouts. And so you will have seen we've got quite comfortable with the rollout of the convenience ranges, for example. That's been a significant capital investment that we've had in the first half. And then, as we're starting to get more comfort around things like the performance of our Format C and Coles Local, we'll start to see more of those stores come into the mix as well.
Do you think that means that going forward, to your point around Smarter Selling, we should probably be looking not just as explicitly as CapEx as we have in the past and maybe focusing a bit more around CODB because a lot of these maybe growth projects are going to be running through the P&L?
I think we have to continue to have a focus on both, to be honest. I mean, CODB is one of the things we focus on every budgeting season around how we're working to offset increases that we're seeing coming through in that line. But we're also very conscious that from a capital perspective, we want to make sure that we've got really good and growing returns.
Okay. Thanks very much.
Thank you. The next question comes from Andrew McLennan from Goldman Sachs. Please go ahead.
Good morning, everyone, and congratulations on the results.
Just wanted to talk to you about the sales performance on an inflation-adjusted basis, so volume basis. It looks to be one of the strongest quarters you've had. You've spoken to just recently the potential impact of the Nielsen data, etc., suggesting people are eating at home a bit more. I know also there was a very weak period in second quarter of the prior year. But I'm just wondering if you could just speak to the categories that have performed well here from a volume perspective. You mentioned transactions were good, but if you could just speak through some of those areas of strength because there's also ongoing feedback from suppliers around continuing execution issues within Coles. And I'd just want to hear where the positives are coming from, but also what areas of improvement you've still got on the shop floor.
Yeah. Yeah. Thanks, Andrew.
I think what we would say is there has definitely been good performance across the board. The couple of areas that I'd probably call out sort of most significantly where we're seeing increases are really in the fresh and convenience spaces. So the rollout of convenience into those 100 stores is definitely helping us to get a bit of momentum in that space. And a lot of that for us is actually what we would view as incremental sales. And then in fresh, actually, some of the work that we've been doing to improve quality processes, particularly in fresh produce and the like, is helping us to get a bit of momentum in that business as well. But to be quite honest, it has been an across-the-board shift upwards in the business, which is really driven almost half-half by transactions and growth in basket size.
And the basket size is actually units as well as price. So we are seeing people put more into their basket, some of which we're attributing to their more eating at home over the last little while. But we also believe some of that is because of the new ranges that we've got in stores and that really resonating with customers.
You had indicated previously you're a bit disappointed in the sort of share that Coles has been picking up or, in fact, losing in that small basket convenience area. Obviously, with the convenience rollout, you're starting to see a response there. Are you happy with what you've seen, and are you seeing a much better impact from a small basket customer?
Yeah. I think we're seeing improvement across the board. It's not just around the convenience.
I think we're seeing better Flybuys numbers, and Flybuys customers tend to be bigger shoppers as well. So I think we're happy with what we've seen so far from the convenience rollout. Obviously, there's still a lot of work to do in that regard, but most probably the highlight of the supermarkets result was the increase in transactions that we saw in the quarter, which we've managed to maintain in the third quarter.
Okay. And just on supply, have you spoken with your suppliers around assuring future supply, whether it be private label or branded, in relation to Chinese sourcing? I know it's very much an evolving piece, but how are you feeling about supply over the next few months?
Well, most of the supply obviously comes from Australia, and the extent to which it will hit the food business is mostly around things like packaging.
Clearly, what we've said so far is that it's mainly impacting refrigeration, and obviously, our export meat sales to China, which we're obviously trying to sell to some of the other 40 countries that we sell to as well. I'd imagine our best view at the moment is that things will start to improve towards the end of March, but if it doesn't, then clearly we'll need a plan B for products coming out of there.
Okay. Thank you. Thanks.
Thank you. The next question comes from Niraj Shah from Morgan Stanley. Please go ahead. Good morning. Just a quick question on the moving parts within supermarkets margins. I was just wondering if you could comment firstly on, I guess, promotional intensity in the first half versus the PCP. Sorry. Could you just repeat that question, please? Sorry.
Just coming back to the moving parts for supermarket margins, I was just hoping for some color or some comments on promotional intensity in the first half versus the prior year. Yeah. It was broadly flat. So it doesn't mean the promotions are the same, which we're trying to do more profitable promotions, obviously, which will help the gross profit, but the overall promotional participation was broadly flat.
Okay. And just secondly, and sorry to belabor the point, but I think previously, in terms of Smarter Selling, you said that it would roughly be 30% to COGS and 70% to CODB. It sounds like in the first half it was more evenly balanced. Is that fair?
Well, the 30%-70%, we took the view over the life of the program. So there's going to be ups and downs on that within any particular year.
Got it. Okay. Thank you.
Thank you. The next question comes from Richard Barwick from CLSA. Please go ahead.
All right. Thank you. I've just got one question on the supers and one on the liquor. Obviously, you've talked about you're happy with transaction growth within supers and fresh and convenience. But I mean, essentially what you're saying here, though, if you're talking about a market where you're saying the average of the two indices is growing at 4.7%, you've only grown at 3.3%. Doesn't that mean or doesn't that imply that you've actually lost market share across the half?
I think you've got to break it down quarter by quarter. So you'll recall that in the first quarter of 2019, we had a Little Shop, and I think we reported comp sales of about 5.1%.
So, as we cycled Q1 in this quarter, which we did successfully, you might recall, the combined number was around about 5.2 or something as a two-year stack. In the second quarter, we obviously improved to 3.6% as a comp sales growth. If you look at the Nielsen numbers as well, they don't include things like tobacco or general merchandise, which obviously have an impact as well. So there's no perfect measure for market share, which is why we've given you both numbers. But if you look at the average of the numbers for Q2, then we're there or thereabouts.
Right. So the Nielsen number that you've given is a Q2 number, is it?
No, both numbers are for the half.
Okay. All right. So the point is, but once you sort of take into account the cycling and the Little Shop, etc., then much stronger growth in the second quarter.
Okay. And if you're thinking about the liquor sales, we've talked a lot on the call already around the earnings impact, but from a sales side of things, obviously, there's a lot of promo activity. Did that actually boost the sales growth coming through from liquor?
Well, liquor is a more promotional business than supermarkets. So more than half the sales in liquor come through from promotions, whereas in supermarkets, it's much more like a third. Obviously, what we're trying to do over time is to make the liquor business less promotional and more everyday, and that's where things like the exclusive liquor brands come into play.
But the point being, with this range sort of reset that's going on, did that deliver more sales growth or contribute to sales growth more so than normal?
Well, when we cycle through this and we look at the second quarter this coming year, are we going to get a situation where we go, "Okay. Well, actually, that was an inflated sales number because of the unusual level of promotional activity"? I'm certainly not going to be forecasting sales for Christmas next year, but the key point here is that we've got sales coming through from clearance events that happened through to Christmas, and those were deleted lines. And what we've said for the third quarter is that certainly around the fresh buyer time when it was most intense, we did see that sales were impacted in liquor.
Okay. And this is the last one on liquor.
Are you confident with this range review or range reset that's going on that it'll be limited to FY20? Should this be the base from which we can get growth into FY21, or do you think the effects will flow through into FY21 as well?
As we've said, it'll certainly flow into the second half, the half that we're currently in. Obviously, we'll be sitting down with Darren and his team to look at what the picture looks like over the next three years. I want to give them the time to have a good look at the business and decide what the right approach is going forward. There's a lot of things that are going well. The First Choice Liquor Market conversions are producing good sales results. The online business is growing significantly, and ELB is doing well as well.
So there's a lot of good things happening in liquor. But as I say, we should wait until August to find out what we are going to do in more detail over the next three years.
Okay. Thank you for that. Thank you. The next question comes from Phil Kimber from Evans & Partners. Please go ahead .
Hi. Just had a question on inventory. It's up a little bit year on year. Are you able to sort of talk to how much the fuel inventory, what sort of reduction there was because of the new alliance agreement, what the tobacco excise did, the fact that you finished five days later or six days later in the half, just to get a bit of an understanding of the various movements in the inventory levels?
Yeah. Sure. So you've rightly identified the two biggest contributors to the change in number.
I'll probably talk to an inventory days number if that's okay. The removal of fuel has obviously had a pretty big impact there, but expressed in the overall inventory days is small. Then the second biggest impact is the tobacco excise. If I looked at normalizing the supermarket inventory days for the tobacco excise, it would have been flat. That is driving the majority of the increase that you're seeing there, and you're seeing the offset of that in the trade payables.
Right. It was almost five-day impact, the tobacco excise.
You're getting a combination of the across the group, you're getting the combination of the fuel and the tobacco excise. If I just took supermarkets, the increase in your inventory days is pretty much 100% driven by the tobacco excise. Okay.
But the chart you gave there, the five-day increase is obviously for the whole group, not just supermarkets. That is the whole group. That's correct. Yeah. Yep. And then my second question was just around pricing in the supermarkets business, pricing relativity to your competitors. Did you see much of a change over the period in relation to how competitive prices were and where your average basket sits versus your competitors in a price sense?
We have made quite some quite significant investments in price in the first six months, and competitors responded in different ways. From our point of view, we're pleased with where we are on the value index, and obviously, we've got plans to continue to invest for the remainder of the year.
Okay.
But haven't you improved your competitive position, so to speak, against, I guess, your biggest competitor, or has it basically all the investments just basically been matched by everyone, and everyone's just as competitive as they are now as they were six months ago?
Yeah. No. I think what's happening generally is that as we do some of the range changes, we are starting to get sort of differentiated products at a differentiated price. I think it's fair to say that if you have an undifferentiated range and you reduce the price, then competitors can and do respond.
Okay. Thanks, guys. Thanks.
Thank you. The next question comes from Ross Curran from Macquarie Group. Please go ahead.
Hi, Steven. Leah. Just two quick questions. First on dividend.
Can you give us a feel for how we should think about the dividend going forward, the first half, second half split, and sort of the payout ratios that you're thinking about?
I'd just point you back to the policy that we announced at the point of demerger, which is the 80%-90%. The board has made no change to that policy, so that continues to stand.
And the first half, second half split?
Again, I'd point you back to the policy.
Okay. And then secondly, early wins from Ocado. Online sales are up nearly 24% in supermarkets. Are you getting any benefits from that Ocado relationship there?
Yes. I think is the short answer. So we've identified a couple of sites, as we've said already, in Sydney and Melbourne.
Obviously, we've spent a lot of time with them looking at how their model works and how that might apply to us in the future, which is sort of three years away, but also what short-term things we might look at to improve the way we trade online. So yeah, it's been a very encouraging start. I think the other thing about Ocado that often gets overlooked is that it's not just about CFCs. They're trialing smaller centers as well in London. So I think the relationship will be a very advantageous one to us over the course of time.
Yeah. Sorry. Is there anything specific in this period in that 23.8% online sales growth? Have you done anything different from your Ocado learnings? I wouldn't say anything in the 23%. I think it'll take a little bit longer than that.
I think we signed the contract earlier in the year. So yeah, we're spending a lot of time thinking about the future with them, and it won't be we certainly won't be waiting for three years to start implementing things if we can do it a little bit earlier.
Okay. Thank you.
Thank you. The next question comes from Scott Ryall from Rimor Equity Research . Please go ahead.
Hello. Thank you very much for your time today. I wanted to ask you about your Tailored Range Review. 3,000 new products seems to me like a lot. Can you just tell me what would be your average over the last couple of years of introduction of new products and how many products were taken off the shelves? If you've got that number as well, please. Yeah.
We don't sort of, we haven't always called it out in previous years as the number of products deleted or introduced. I mean, certainly, we've had a range reduction program over a long period of time in supermarkets. I'd look at this and say that the range change activity and the number of range reviews we're doing is up by well north of 30% in terms of what's going on. And then we've got specific ranges like the convenience range where that's gone from being an average of one bay across the network to 14 or more in some cases. So we've seen some massive increases in the convenience business. In particular, overall range has increased. It's fair to say, but not everywhere. So we're trying to tailor what we're doing in the process.
You certainly won't see this level of range change forever, but we did have a flat range, which is why the tailored strategy was introduced.
Yes. Okay. All right. No, that gives me a sec. And then I wonder if you could comment. We've also had some pretty variable weather conditions, particularly on the east and south coasts where a lot of the growing is done. The best you can see at the moment in 2020, how are you thinking about fresh product inflation, and how do you ensure stability of supply, please?
Yeah. It's very variable by product. So we ran a promotion on bananas recently where I think we were selling for AUD 2 or 1.99 or something, which is one of the lowest prices we've had on bananas for quite some time. Having said that, overall, there is price inflation going through fresh food businesses.
We are up against some higher inflation in produce last year. Dairy is consistently higher, and then as far as supply is concerned, it tends to be quite spasmodic by product, so we'll be able to get avocados one week, but not the next, and so we are trying to help as many of our farmer suppliers as we possibly can do, but it's certainly a bit more difficult for the produce trading team to track down the right quantity of product in all categories, and just on that, though, have you made any changes strategically in terms of thinking about your sourcing at this stage or not? Well, we've been changing strategically for quite some time on fresh food. If you go back 10 years and look at the supply chain then versus now, it's very different, and what you're broadly seeing is longer-term relationships with key suppliers.
You're seeing the emergence of bigger farms and more efficient farms over time. And over time, we're finding out where is the right place to do things. And so, for example, Queensland, the best grown in sorry, bananas best grown in Queensland, and Victoria is turning out to be the most productive place to have dairy farms. So there are some things that are emerging over time, but this has been going on for 10 years in Coles, and the supply chain is far better today than it was back then.
No, sure. So yeah, but you haven't done anything specific apart from incrementally change as the markets change in the last 12 months or so?
Sorry, could you repeat that question?
Yeah. I'm aware of the 10-year changes are quite dramatic, as you say.
So I'm just wondering if there's been anything that you specifically have identified the need to change in the last 12 months or so?
Well, as we've said in the presentation, we've changed our arrangements with the dairy farmers in Victoria and then southern and central New South Wales. That's quite a significant change where that was going through processes, and we're now dealing direct. And that's, again, something that's spread throughout the fresh areas where we used to buy a lot of our produce from central markets, and we now deal direct with farmers both in produce and meat. And obviously, that's been extended to some parts of milk as well. So yes, there are some quite significant changes going on generally. And obviously, the dairy one is something that we're keeping a close eye on.
Thank you. The last question today comes from Johannes Faul from Morningstar.
Please go ahead.
Hi, Steven. Thanks for taking my question. I was wondering if you could talk a bit around the trading performance of the refurbished stores and maybe a bit around what actually happens when a B-grade store turns into a C-grade store. What exactly decides the impact on ranging obviously happens there? I'm sorry. I didn't hear that one very clearly. Did you? I think if I understand you right, you're asking what happens when we convert a store to a format C?
Yeah. Exactly. And also if you could maybe talk a bit around the trading performance, for instance, the average sales uptake on those stores that have been refurbished. Okay. So I'll take that one then, if that's okay.
So on Format C, we've got two tailored formats in the core operation, which is A, which is more higher demographic, high-volume stores where we're putting in extended convenience ranges. And then we've got Format C where that's striving towards greater efficiency. And what we've tended to do in those stores is we've moved to a self-service deli, and we've tended to sort of team the store up with a local Coles bakery so that they get fresh baked bread every day.
Gotcha.
Okay. And I guess in terms of ranging, that strong uplift in private label that you've seen during the half, is that partially driven through, I guess, the conversion of stores into C-stores or C-grade stores?
Most of the Format Cs tend to be in lower volume, lower demographic stores.
So they will see an improvement in their convenience range over time, but they won't be getting the sort of treatment that an Eastgardens would get, for example. Well, were you referring to the whole of the own brand growth that we're continuing to see? Yes.
Yeah. No. The own brand growth is primarily driven out of the core fleet, and it's primarily driven through the introduction of a lot of new ranges in own brand that we're bringing in through the half.
Okay. Thank you.
Thank you. We're showing no further questions at this time. I'll hand the conference back to Mr. Cain for closing remarks.
Yeah. Thank you, everybody. As we said, a very busy half.
Hopefully, we've been able to demonstrate to you that the strategy is taking shape and being delivered upon and that we look forward to seeing you in August, which will include an update on progress in liquor. Thank you.
Thank you. That does conclude our conference today. Thank you for your participation. You may now disconnect your lines.