Good day, and thank you for standing by. Welcome to Metcash 2025 half-year results briefing. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Metcash CEO, Doug Jones. Please go ahead.
Thank you, Operator, and good morning, everybody. Welcome to the Metcash Limited FY25 first half results presentation. As Operator said, my name is Doug Jones, and I'm the Group CEO. I'm joined this morning by Deepa Sita, Group CFO; Grant Ramage, Food CEO; Kylie Wallbridge, Liquor CEO; Richard Murray, Total Tools CEO; and Scott Marshall, newly appointed IHG CEO, as well as Steve Ash, EGM Investor Relations. I'd like to begin by acknowledging the traditional custodians of the land on which we're all connecting today. I'm connecting from Wallumedegal Country and pay my respect to elders across country, past, present, and emerging. So, as you've become used to, I won't talk to every slide. I'll make a few key points before I hand over to Deepa for the financial review, and then we'll both take some questions as well as the team around the table.
I'm really pleased that our diversified portfolio strategy continues to deliver. As the leading wholesaler and service provider to independent businesses in Australia, we're guided in all that we do by our purpose of championing successful independence in support of thriving local communities. It informs our strategy, it defines our operating model, and it guides our culture and behaviors. Our flywheel is made up of unmatched logistics reach and capability, the retail models operated by our independent partners, and the support and services we provide them. The flywheel is reinforced by our enduring competitive advantages, and our strategies and initiatives are designed to support and deepen these. It's been a challenging environment, but I'm pleased to say that our portfolio strategy continues to deliver, and there are a number of very positive highlights I want to point you to.
Firstly, each of our networks have held share, with Liquor delivering another fantastic performance leading to material market share growth. Food earnings performance is a highlight, and both pillars remain well placed for enduring structural growth. In Hardware, we're responding to the current environment, and I'll talk to this in some more detail in a few moments. And we remain well positioned for any improvement in market conditions. Acquisitions across both food service and building materials are performing as you would expect under their respective market conditions. As we've noted, we're confident in our ability to extract the committed synergies. Overall, this half is characterized by strong sales performance, with earnings maintained under challenging conditions. In the half, the group achieved 6.3% sales growth, and underlying earnings were flat with a solid three-year cash conversion result.
For the half, it was actually a very good result given the impact of the timing of the Superior acquisition and the temporary stock build for the move to Truganina, and Deepa will talk about this further in her presentation. Underlying earnings per share for the half were AUD 0.123, and the board has declared a dividend of AUD 0.085. Looking at the pillars, now including Superior, food sales represent 54% of the group's revenue and 45% of earnings, up from 39% last year. Overall, pillar and group earnings are flat on the prior year despite much tougher conditions. Turning to food, as we note on the slide and as I've said a number of times, our food business is now, following the acquisition of Superior, not just a larger business. It's more diversified and more resilient than ever before.
The customer proposition from independents, and in particular from the IGA network, continues to resonate with customers in this highly value-conscious environment. As I've said before, the offer is underpinned not just by an improved quality of the independent stores, but also highly competitive pricing positions. This has led to sales growth, excluding tobacco, and holding foot traffic in the half, even as shoppers widen their repertoire of stores in their search for value. The trends that you'd expect continued, and this is highlighted by the strong growth in private label. Wholesale price inflation continues to moderate, just 1.8% for the half, down to 1.2% in October, and only just positive for the first four weeks of the second half. Contrast this to the first half of last year at 6.3%. Tobacco remains a significant drag on wholesale sales and also impacts our independent retailer partners.
I remind you that we make relatively little profit from the sale of tobacco. Campbells and Convenience delivered another strong result, supported by new customer wins as well as customers buying across a wider range. We expect that the Ampol contract will commence in the second half. You'll note there's been a bit of movement in store numbers, and it's really pleasing to open 15 new stores. I also want to remind you that stores that are moved out of the IGA banner group remain Metcash customers, so the warehouse volume also remains. Our network score is up, excluding tobacco, and flat including, which is a really pleasing result. Superior Foods continues to deliver strong growth, although that does moderate as they annualize large contract wins in the last 12 months. Craig and his team have a significant pipeline of potential new customers they're actively working towards. Excuse me.
It's exciting that there are a number of contracts we're bidding for that Superior on their own would not have had the capacity to tender for. We're on track with our integration and synergy realization projects, and Deepa will cover this further. The strong food EBIT result reflects the sales performance as well as the mix shift away from tobacco. Despite the impact of lower wholesale price inflation and a decline in contributions from JVs, supported by strong cost management, margins are 15 basis points wider. As the food service market feels the pressure of customers looking to manage their own costs, they're more readily testing the market. We see our own customers more willing to negotiate and switch, and competitors across the market more willing to discount.
I remind you that the EBIT numbers in food are five months of Superior and not six, and that Superior's results are seasonally weighted to the second half. In the current market and relative to competition, the liquor pillar has delivered the standout sales performance for the half. You're probably tired of hearing me say that the localized, better quality, and more competitive offer from independent store owners continues to resonate with our shoppers. As a result, we continue to see strong growth across all independent groups led by IBA. We're delighted to have concluded a new wholesale distribution agreement with Lion for the South Australian market. The slight decline in EBIT margins reflects the lower wholesale price inflation and increased cost pressures.
As in all pillars, and aligned to our purpose and strategy, we continue to prioritize volume through the network by ensuring our retailers remain competitive in the market. We do this by ensuring they have the products their shoppers want at competitive prices. To be clear, this is not about discounting. It's about not expanding our margins to the detriment of our customers' price competitiveness. As you're now well aware, this has been a challenging half for hardware in the face of continued weakness in trade activity. This impacts our retail stores through lower volumes, which leads to profit compression as we experience deleverage. Even though costs have been well managed, the reduction in GP dollars results in a lower EBIT result. The decline in charge results is primarily because those sales are in trade categories.
Despite the tough market conditions, there are a number of real positives inside of IHG. These include strong online sales on the back of materially improved conversion and better loyalty results in DIY, with loyalty customers now representing almost half of total sales. Wholesale EBIT margins have held steady at 2.8%, and in retail, I do want to point out that on a like-for-like basis, the retail business's total costs are actually lower this year than last, despite the inflationary pressures and the inclusion of AUD 2 million of site relocation costs. This represents real cost savings of nearly AUD 10 million. In respect to our acquisitions, Bianco is performing particularly well in this market, while Alpine Truss has faced tougher conditions as you'd expect. As I've said, we're on track with our synergy realization program.
We remain confident that we are, as the leading supplier of building materials to small and medium home builders, well positioned for an improvement in trading conditions. And I'll speak in a moment about our other responses to the current environment. So you've heard me say for a while now, there are three key forces acting on Total Tools. Firstly, a localized and now contained intense pricing pressures in the first quarter. Secondly, a general increase in market promotional activities, and finally, weaker market demand exacerbated by cost of living pressures on our trade customers. And you've also heard me say that the second and third of those persist. Again, like IHG, there are some real positives.
The recovery of the wholesale sales of exclusive brands up 25%, along with retail sales growth of EB of 6%, is reflective of the successful conclusion of the project to relocate our international consolidation centers to the IHG DC in Ravenhall in Victoria. Online sales up 20% and sales to commercial customers up 22% underpin my positivity, and you'll see there's an improving trend in the network sales from the first to the second quarter. On a net basis, this half, we added no new JVs as compared to five in the corresponding half last year. In fact, the business sold two mature stores and opened two new ones, so there was a modest net reduction in sales and EBIT contribution as a result.
As you know, the Total Tools EBIT is the product of three key income streams in that business, being franchise fee income, exclusive brand margins, and retail store profits. You also know that as the proportion of total profits from retail stores increases, the blended margin trends towards that of the retail stores, which is lower than the other two, but is still extremely healthy at more than 7%. So all of that is well and good, but I know you'll be interested in how we're responding to the conditions. In IHG, there are a number of very specific actions underway, including continued aggressive cost management and the acceleration of the whole of house strategy, leveraging our investment, in particular in our frame and truss capabilities. These are delivering the expected, as well as delivering the expected benefits of recent acquisitions through performance and synergy realization.
These are delivering pleasing results and include a strong expansion of our volume builder business, double-digit growth in online and commercial segment growth, and reductions in inventory and debtor days, as well as a moderation in capital spend. As you'd expect, there's an equally strong focus on costs in Total Tools as well as specific initiatives to optimize margins. We expect to open more new stores in the second half and to continue the strong focus on the commercial segment, exclusive brands, and online. I do want to point out the improvement in the EB on-shelf availability, up 4% to a very pleasing 96%. And I expect this will continue to support the improvement in EB sales. We remain confident that the long-term market fundamentals remain positive.
At its simplest, we need more homes built in Australia, and both IHG and Total Tools are perfectly placed to take advantage of this. I do note that the Housing Industry Association data is starting to indicate some positive signs, including an upward trend in finance and plan approvals. At some point, this must translate into starts. I'll now hand over to Deepa for the group financials.
Thank you, Doug, and good morning, ladies and gentlemen. Building on Doug's update, I'm pleased to provide an overview of Metcash's financial performance for the first half of FY25. Supported by strategic acquisitions, the company has continued to deliver sales growth despite challenging external conditions. The Superior Foods acquisition was finalized on the 3rd of June and has contributed five months of earnings towards the half.
At the Investor Day, we highlighted that the three-year rolling CRR is a more reliable and meaningful measure as it averages performance over time and smooths out short-term volatility. In line with this, the three-year CRR is reported at 85.5% and sits comfortably at the upper end of our guidance range of 75%-85%. The underlying EPS is reported at AUD 0.123 per share, which includes the dilutive impact of the equity raise. The company's DLR is at 1.26 times, also within the target range of 1-1.75 times. As Doug mentioned, the board has declared an interim dividend of AUD 0.085 per share, in line with the annual target payout ratio of approximately 70% of underlying net profit after tax. The DRP will also remain in place with no discount.
The capital management framework remains focused on optimizing financial resources to drive sustainable growth, enhance shareholder value, and maintain financial stability. The outcomes on this slide highlight the consistent execution of this approach. I draw your attention to the operating cash flows of AUD 164 million. This balance was impacted by the timing of the Superior Foods acquisition, which reduced the cash flows by approximately AUD 19 million. This timing also impacted the CRR. Essentially, this occurred because the effective acquisition date was at a favorable point in Superior's monthly working capital cycle, where, for example, debtors' balances were low following recent payments from customers. Moving on to capital investments, of the AUD 471 million, AUD 400 million relates to business acquisitions, with Superior Foods being the largest portion. Further details are outlined on the cash flow slide.
Net debt has increased compared to the same period last year and is primarily driven by the acquisitions of Superior Foods, Alpine, and Bianco, as well as additional ownership interests in Total Tools stores. Growth here at 23% reflects the impact of lower hardware earnings, the inclusion of only five months of earnings from Superior Foods, continued investments in technology, as well as the effects of multi-year investments in new distribution centers. This slide provides an overview of the P&L performance and other key financial highlights. The business delivered strong results, achieving a year-on-year growth in sales revenue as well as EBITDA. The EBITDA growth is supported by business acquisitions, effective cost management, as well as operational efficiency strategies across the group. The net financing cost for the half is reported at AUD 57.7 million.
Looking ahead, assuming the interest rates remain unchanged, net finance costs for the full year are expected to be in line with the previously guided range of AUD 120 million-AUD 125 million. Significant items for the period include those previously disclosed, together with a gain from the reversal of a previously impaired loan to Dramet. Full details are provided on the slide as well as in the financial report. The underlying EPS at AUD 0.123 is mainly impacted by the increase in finance costs as well as the impact of the equity raise. As mentioned, discipline execution has driven a strong cost and cash performance, resulting in a three-year rolling CRR of 85.5%. Recognizing the challenging environment, we have reduced the FY25 capital expenditure, excluding acquisitions, by approximately AUD 30 million below guidance.
The reconciliation of the cash outflow for the Superior Foods acquisition compared to its enterprise value is detailed in note one on this slide as well as in the financial report. We retain adequate flexibility with the balance sheet remaining well within our capital management framework. Net working capital at AUD 558 million is driven by higher inventory, which is more than offset by the increase in payables. The inventory days are largely in line with the first half of FY24. But more importantly, average working capital days have improved by 0.6 days, reflecting our continued focus on enhancing efficiencies and optimizing performance. Intangible assets have increased to AUD 1.4 billion, primarily due to the Superior Foods acquisition. The purchase price allocation for Superior Foods is still under review and will be finalized within the 12-month timeframe for completion in the second half.
Once finalized, a low single-digit amortization charge for intangible assets is expected to be reflected in Superior's future results. We have a robust and balanced debt maturity profile with total facilities amounting to AUD 1.56 billion at the half-year end. You may recall from the pro forma debt position slide we shared in the appendix of the FY24 results. The slide adjusted the year-end debt to reflect the payments for the Superior Foods acquisition and Total Tools put options, as well as average interim month and seasonal working capital requirements. On this basis, we reported the pro forma average gross debt at year-end at approximately AUD 1.1 billion, with a DLR of 1.68 times. Similarly, for this half-year, we've provided an updated pro forma net debt position for your reference in the appendix.
During this period, Metcash achieved an improved pro forma average net debt of approximately AUD 878 million, equating to a lower DLR of 1.53 times, which remains comfortably within our target range of 1 to 1.75. As at the reporting date, actual net debt was AUD 725 million, with a DLR of 1.26 times. The weighted average debt maturity has increased to approximately 2.9 years following the conclusion of five and seven-year syndicated facilities post the FY24 year-end. The increase in the weighted average cost of debt at 5.8% is reflective of the higher cash rate. AUD 295 million, however, has been hedged at a favorable weighted average interest rate of 3.78%. This slide outlines the details of the dividend declared by the board, and I draw your attention to the key dates outlined in respect of the dividend as well as the DRP.
A key priority this year has been the launch of a comprehensive cost-out and cash optimization program across the group. I'm pleased to report that this initiative is already delivering meaningful results, with the business on track to achieve the targeted AUD 15 million in annualized cost savings, excluding the further tactical operational actions within the pillars which Doug has just spoken about. Moving on to working capital, we've made good progress in refining our debt management strategies, enabling us to better manage aged debt. There's also ongoing collaboration with suppliers to address slow-moving and obsolete SKUs through clearance sales, stock redistribution, as well as returns we agreed. Optimizing working capital remains a key priority as we continue to explore further opportunities to enhance our financial resilience. As Doug mentioned, unlocking synergy benefits from the Superior acquisition remains a key focus for the business.
Progress has already been made in supplier trading term negotiations, and the business is actively exploring further additional opportunities for low-cost sourcing to drive value. The integration of Superior's operations into Metcash warehouses in Perth and Melbourne has reduced reliance on third-party logistics service providers, improving supply chain efficiency and achieving cost savings. As Doug mentioned, Superior is now also able to leverage the Metcash Group supply chain to tender for new business. Beyond the quantitative benefits, qualitative synergies have also been achieved, particularly in areas such as cybersecurity and safety, and on that note, I'll hand over back to Doug to talk to the outlook.
Thanks, Deepa. Turning our attention now to the first four weeks of the second half. I do want to point out that on the slide in front of you, we've used four weeks for all pillars and group, with the exception of Total Tools where we've given you the three-week number. The simple reason for that is that four weeks would have included the Black Friday week last year, but not this year, and so that would have been unhelpful. So at a total level, really pleasing that the total group sales have accelerated to 8% with strong growth in all pillars, partly buoyed by acquisitions. In food revenue, as you would expect, is up significantly, including Superior Foods. And despite the lower inflation, supermarket sales ex-tobacco have continued to grow. Superior Foods continues to win new customers and is performing in line with our expectations.
In liquor, independents continue to win share from the chains, and this is led by the IBA network. In hardware, the soft trade activity continues to place pressure on volumes and retail store margins. The strong focus in IHG on costs and accelerating growth initiatives that I spoke about is expected to provide benefits in the second half. In Total Tools, competition remains strong, but at a more normal level. And we expect in Total Tools, the second half to be stronger than the second half in FY24. So in summary then, we remain well positioned with good plans, the platform's capabilities, and our diverse business model for future growth and strong returns through the cycle. I'd like to thank you for your time and attention, and I'll now open it up for questions.
Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by as we compile the Q&A roster. Our first question comes from the line of David Errington from Bank of America. Please go ahead.
Morning, Doug. I'm trying to delve into the performance of hardware, and there seems to be a lot of moving parts. It looks as though, as you say, for Total Tools, there's three key things that drive your performance. It's franchisees, revenues, exclusive brands, and then there's the retail part of the business. Now, clearly, it's the retail side that is really hurting you at the moment through the deleverage. I'm wondering if you could help us come to, I'm trying to work out what number can we look at that's really driving that, and how do we measure as to how can we
actually see the improvement? Is it the LFL store sales, that minus 0.3 that's doing the damage? I'm trying to really, if you could help me in a very simplistic way, unravel what's going on in that hardware business that's causing, at the moment, the earnings. And where can we believe that we're at the trough? I'm trying to come out, when do we see the trough, if you like. So what number do I look at to identify where you are in the cycle, particularly for the retail? Now, I didn't ask that question very well, but I'm hopeful that you understand where I'm going with that.
Hey, David. I think so. I'll do my best, but obviously, if I miss anything, feel free to follow up. Let's start with Total Tools. You're right. Those are the three key value drivers. We've got a slide again in the deck, in the appendices, that I think gives you all of the information you need. It's a combination of those three. When you think about the franchise fee income, that's very high margin because basically for every dollar of franchise income, we only recognize AUD 1 of sales and AUD 1 of income. Exclusive Brands is a, we're essentially the supplier, and then, as you correctly point out, the stores. To come to the second point that you made, you're right. In any retail business, operating leverage is more variable. In other words, the leverage is higher in a retail business than it is in a wholesale business.
In both of IHG and Total Tools' case, something really important that we mustn't miss out here is that relative to, say, a food business, a supermarket, there are actually very few staff relative to the size of the business. It's hard to materially take them out. You actually risk damaging the business if you take out too many. Certainly, we're conscious of that. That doesn't mean that we're sitting with excess team members. It just means that we make sure that we serve our customers really well through the cycle and that we're well positioned as volumes lift. As volumes lift, that is the primary driver of retail EBIT margins. There are not that many moving parts across our business. I think we've given you all of them in Total Tools. In IHG, it's actually quite simple.
There's a wholesale business, and we give you all the information there. And then there's a retail business. And I've explained why retail margins are under pressure. Finally, your question, I know you guys always want me to call the bottom. I'm just not going to do that. The timing is uncertain. I have given you some HIA data that's publicly available. And as I said right at the end of my presentation, at some point, those planning and finance approvals must translate into starts.
You must be reasonably confident, though, that you are approaching it if you're talking that the second half for Total Tools is going to be better than the second half of last year. So you must be seeing something there that gives you a little bit of confidence.
Yeah, Doug.
That the retail sales volumes are picking up a little bit, or is there something there?
Yeah. Forgive me for the interruption. I want to remind you that the second half of last year included the bulk of the intense pricing pressure that we saw. So we're hurdling that, and provided we don't have a repeat of that, we can expect that we'll have a better result in Total Tools.
You mentioned in.
Sorry, one thing I'm remiss if I don't say. I'm not sure that I would quite use the expression green shoots, but we are starting to see in our frame and truss businesses a lengthening of the pipeline, which is pleasing. So certainly, from six months ago, we have more prospective work in those businesses than we did before.
Just the question I'm just about to touch on, what the retail sales are under pressure, is it that -0.3 that we need to see improve on the Total Tools slide, or is there something else there? Because I'm trying to work out the retail side of the business is obviously doing it tough, but what's the number that we need to see turn around on that front? Because there's a lot of numbers there. I think it's slide 14. What's the number that we really need to see move up before we start seeing the EBIT coming, the leverage hopefully coming the other side and really accelerating up on the other side?
Yeah. I mean, there are a few numbers. I don't think that there are too many to understand, but I want to give Richard a chance to make a comment here.
Hey, David. Mate, it's all about like-for-like sales. We just got to, and at good margins, so we want to grow sales. We want to grow gross profit dollars, and I guess on a like-for-like basis is the test we all use, so we had a few moving parts in the first half with the price war. We're cycling them in the second half, and then otherwise, we've got a great business model with a 7% EBIT margin, and we just need to sell more and get on with it.
Yeah. Okay. Thank you. And hopefully, we are at the bottom of the cycle, and we can look forward to the leverage going the other side on the up rather than on the down. So thanks, Doug. And thanks, Richard.
No worries, mate.
Thank you. Just a moment for our next question, please. Next, we have Shaun Cousins from UBS. Please go ahead.
Thank you. Good morning. Just a question on the broader hardware industry, and Doug, again, not seeking for you to call sort of a bottom or wherever we may be or talk about green shoots, but I'm just curious around, in your own business, has the decline in trading activity deteriorated? Is it falling at the same rate, or is it falling at a lesser rate, I guess, in this sort of first four weeks? Just trying to get a flavor of what you're seeing in your current business. Is it getting incrementally worse, or is it actually potentially getting incrementally better?
So Shaun, thanks for the question. I think you have to be quite careful about trying to call long-term trends based on four weeks. But what we said when we spoke to you on, I think it was October 25th, was that there was an acceleration in the decline through September, October, and that has essentially continued. So the rate of decline has been steady since then. I'm cautious about talking too much about what we think is going to happen in the future, but I can say, as I did in response to David's question, that we are starting to see in our frame and truss plans more activity, more demand, and so our pipelines are slightly fuller than they were this time six months ago.
Jumping to food, tobacco has obviously been a constraint there. One, have you seen sort of any weakness in the orders of your independent customers from a non-tobacco sales perspective in that the tobacco customer that may have been going in was buying other products, but they may no longer be visiting those IGA stores there? And again, similar to the question on hardware, have you seen the rate of decline in tobacco sales stabilize or lessen, or is it actually deteriorating at a greater rate? Just getting interested in what you are seeing in your own business, please.
Grant.
Yeah. We are still seeing consistent declines in tobacco in excess of 20% in retail sales. There is an impact to adjacent items that would be bought with those transactions, and I think clearly that has some impact on our network, and we've been calling out that for a while, that the major impact is to our customers rather than to Metcash's profits. We've been working to advocate on behalf of the network, but I think when you look at the overall results for the network, and particularly comparing retail sales with other people's bricks and mortar sales, then I think despite that drag from tobacco and loss of those sales, I think we're doing okay.
Fantastic. Great. Thanks, Grant. Thanks, Doug.
Thank you.
Thank you. Just a moment for our next question, please. Next, we have Tom Kierath from Barrenjoey. Please go ahead.
Oh, morning, guys. I'm just trying to get a handle on how much the IHG business underlying has declined. So excluding the couple of acquisitions that you did, I think at the time you said that they would do 24 million in the full year. So if I assume 12.5, which I'll be keen to get some color on, it kind of means IHG underlying's down about 34%. Just be keen to maybe get some numbers around what I've just said there. Thanks.
Hey, Tom. Yeah. I mean, I'm not going to give you the exact numbers. We see that the acquisitions are kind of part of BAU now, but no doubt, you're right, the underlying IHG core performance is down more than the total business, obviously. I tried to give you some more detail on Bianco and Alpine relative to the guidance we gave at the beginning of the year. So as I said, Bianco is actually performing really well in the market conditions. Alpine has been more affected. It's affected at a volume level and at a margin level. But that's what you would
expect in these conditions. And I do want to point out, maybe in anticipation of a question, when we valued these businesses, we did expect that market conditions would continue to be tough. And again, I've always been transparent with you, and I said to you that they are tougher than we expected. So I don't think anybody saw the acceleration in that downturn. But again, we're confident and comfortable that we're managing it really well.
Great. Great. Thanks. And then just a second one. In Superior, were there any synergy benefits that you captured in the half, like in the AUD 14.3 million, I think it was? And can you maybe just quantify that just so that we can kind of model that out going forward?
Yeah, sure. I'm happy to talk about Superior synergies. So the short answer to your question is very little in this half. We've owned the business for five months. It does take some time. I think we told you that we run weekly steering committees that I chair. Deepa, Grant, Craig, and all our teams are there. There is no shortage of effort. In fact, the risk that I'm managing, to be honest with you, is that the business becomes too distracted. And so we really want to focus on the long-term, meaningful synergies rather than chasing really small short-term wins that perhaps put us under pressure. I've said it three times this morning, and I'll say it a fourth. We're confident that we can deliver on the synergies that we committed. In the half, though, we have seen, as Deepa said, some, I think, sort of non-financial benefits.
I'm really pleased with the way that both the old Metcash business and Superior have responded to the opportunities, and there are lots of people that are keen to help. We've had some great support coming out of our central capabilities like cyber and safety. Deepa called out, and we've had a couple of non-financial wins. Some of the benefits that we get in these synergies won't necessarily be avoided - sorry, a reduction in existing costs. There'll be avoided costs. So an example might be an insurance that wasn't in place before that is now in place at little or no cost. So it reduces the risk, but it doesn't necessarily affect the bottom line, and we track all of those synergies really closely.
Great. That's helpful. Thank you.
Thank you. Our next question comes from a line of Michael Simotas from Jefferies. Please go ahead.
Good morning. My first question is on the associate earnings. So the fairly large drag, I think it was about AUD 5 million, lower contribution in this half than in the PCP. Just wanted to understand whether that is reflective of ongoing underlying trading conditions and perhaps the leverage from tobacco, or whether there were any one-offs that had pulled that contribution down during the half?
Yeah. No problem. Hey, Michael. Thanks for the question. There's three things that affect it. One is trading conditions and performance. And no doubt, the tobacco would have had an effect, as Grant's just outlined. The second is that in the prior period, there was a positive true-up in the Ritchies accounts as we wound up. And then the third item is that in the BMS associate, there's an impairment for one of the stores that they bought. So that's—so the second one and the third one are one source.
Okay. That's helpful. Thank you. And then the second question for me is on Superior Foods and just in particular, the comment that there's some margin pressure emerging in the Q2 . Can you just elaborate on that, please? And also relating to that, we've had some industry feedback that you're doing a lot of good work on trading terms and procurement. And I think Deepa touched on it quickly as well, just whether that's still to come and whether you expect that to offset the margin pressure that you've seen.
Yeah. I think we've answered the second question when I spoke about it in response to Tom's question. So that's still to come. Certainly, we'd look for it to be to offset as much of the margin pressure as possible. We won't limit ourselves. And the margin pressure, I mean, it's pretty simple. When customers are under pressure, they are going to look to more aggressively manage their costs in the same way that we are and that every business around the country would be. And so they're going to lift up every stone and look under it twice in an effort to manage their own costs. And cost of product is the biggest in many of their businesses. And so they're certainly expecting that we remain competitive, and they're not shy to shop around. It's unsurprising, and it's completely normal, and it happens every time.
I saw a recent stat that a large proportion of businesses in VA are in the hospitality sector, and that just talks to that pressure. We expect that things will normalize, and certainly, we would look to take advantage of that. The other aspect is sector mix or customer mix between QSR, corporates, independents, and as QSR grows, that's the lowest margin part of the business, and that has grown slightly faster than independent business in this half.
Okay. All makes sense. Thank you.
Thank you. Our next question comes from a line of Craig Woolford from MST Marquee. Please go ahead.
Good morning, Doug. I know there's been a lot of questions on hardware, but I'd just like to clarify your comments on the focus on cost. You've made, I guess, an emphasis on the cost savings and trying to be diligent on that front, but also highlighted there's a high degree of fixed costs inherent in the hardware business. So if the second half sales trends pan out as we've seen in the trading update and what you experienced in September and October, will the margin pressure be as significant in the second half of FY25 for hardware as it was in the first?
Yeah, Craig. So I mean, it's a function of mathematics. If volumes continue to decline, we will experience similar margin pressures. But as I've said, we're working hard on not just managing costs, but also growing the top line. I do want to touch maybe and just elaborate on my point around volume builders because I'm expecting somebody to ask me whether that's a change in strategy, and I want to confirm it's not a change in strategy. It's looking for opportunities with well-capitalized, strong volume builders that we have long-term relationships with and making sure that we maximize the opportunity in serving those customers. In terms of the margin pressures themselves, that is a function of volumes and relative to the cost. So you've characterized it as a high fixed cost base, and that's generally correct.
The IHG business for a long time now has been a very, very lean business. I won't go into the detail, but discretionary costs have been eliminated. There is not a lot of fat, if I can call it that. There's no fat in that business, and it has been that way for a while now. And that's good. A healthy business shouldn't have any fat in it. And then the final point I'll make is the one I made in response to an earlier question around remaining well-set and future-fit for the inevitable upturn.
Okay. That's clear. There was a comment from just around CapEx coming down AUD 30 million versus earlier guidance. Is that just a timing issue and therefore that CapEx will be next fiscal year, or is it a step away from some sort of part of the CapEx budget?
It's a function of both of those things. So some of them, given the current environment, we've made decisions to delay. Others where opportunities perhaps haven't manifested, and others where we genuinely are looking to save so that we protect our cash position. So it's all of those things. And again, any healthy business is doing this all the time, and that's what we're doing.
Could we still count on Total Tools at the JB store that you said you'd map down to? Is that likely to be the shape of things going forward on the Total Tools?
No. I also said that we expect to be opening more stores in the second half. So that's just a function of timing.
Okay. Thanks, Doug.
Thank you.
Thank you. Just a moment for our next question, please. Next, we have Ben Gilbert from Jarden. Please go ahead.
Morning, Doug and team. Sorry, I'll ask this question before I ask it again. What's sort of the discussion around the board around Doug when you look at the valuation in terms of where you're trading? Because you look at hardware, in theory, sort of out on the bottom of the cycle, a lot of leverage on the way out. You're probably trading at less than half. Implied multiple versus your biggest competitor out there. Foods probably trading on a mid-single-digit multiple. It doesn't feel like you're getting value from a market standpoint at the moment for the aggregate. Do you sit there and is there any sort of change in view around willingness to look at mergers or exploring anything around that to try and maximize value if the market's not going to pay for it in the structure it sits at?
Hey, Ben. Yeah, look, I'm not going to comment on our share price, but there's a few things that I will say. We're confident that we have the right strategies and that we'll be able to grow our earnings. Secondly, you only have to look at the fact that the board has decided to remove the discount from the DRP to get a view on what an understanding of what their view is. And in terms of corporate structure, a good board is always considering all of their options, and our board is a very good board. But we believe, and I said this last time in response to the questions, we believe that all parts of our business have value in our hands. Just at the risk of an off-the-cuff comment, now wouldn't be the time to be selling any parts of the business given where we are in the cycle.
Okay. That all makes sense. Now, maybe just a second one from me. Just historically within food, I think you've sort of talked to not looking to drive a margin above 2%. Now, fully appreciate tobacco's low margin in businesses or that category is running down over 20%. What is the baseline now? Is the baseline for that food margin going to be around sort of that 2.3%-2.2% given the mix of tobacco? Appreciate all the commentary matter and cost out, but it feels like naturally it should just be higher owing to your tobacco mix moving forward.
Yeah. I mean, firstly, we've never said we won't go above two. We haven't put a hard limit in place. I think we've consistently said that we'll look to optimize our margins relative to the volume and that we'll always look to leverage volume as much as possible because that means that our retailers stay competitive and volume through the network is important. We can generate higher margins, but that's at the detriment of the network, and we won't do that. Maybe I'll throw it to Grant for some more detailed commentary on the things that they're doing and how he thinks about it.
Thanks, Doug. Yeah, I think partly you've covered it in the sense that when we look at our network and their competitiveness, we're not going to compromise on that. We've done too much good work to get the independent markets into the most competitive space ever. And in the current environment, that's really important. You can expect that EBIT margin to continue to drift up as tobacco unwinds as a share of the mix, and you can see that happening over the last few sets of results. Outside of that, we have to work hard to make sure that we are controlling our costs. We have sizable cost inflation every year built in, and we operate big DCs that employ lots of people. So we have to keep working hard to offset that cost inflation to make sure that our margin is stable.
Look, as Doug says, we're not limiting ourselves to only ever making that margin, but it won't come through charging more for goods and services that we already provide. We may find new things that we can add in that are margin accretive, but it'll always be with a lens on whatever those services we provide. It has to be of benefit to our partners, our suppliers, and our customers. Then that's what gets them to take it up. Hopefully that gives you a view on how we see margin.
Yeah, that's helpful. So it's appreciated with something like media where you obviously get some numbers at your strategy now in terms of aspirations would be additive because that's an incremental service, not necessarily trying to extract terms. It's an incremental service you're providing in the share with the customers. It's obviously margin accretive.
It's a great example. And again, to reiterate, it really works if we deliver value to our partners, both suppliers and also customers. And they need to participate in the benefits of that for them to want to drive it. I'm excited to see that they are.
That's good.
Good uptake on retail media and the rollout of digital screens in stores is progressing really well. So that says that they see value in it, and we do too. So it's a great example you've given.
That's great. Thanks.
Thank you. Next, we have Bryan Raymond from JPMorgan. Please go ahead.
Oh, thanks. Second question. Just actually a follow-up on that last one around the food margin. I mean, tobacco has been declining at a rapid pace for a while, and your margins haven't reached 2.3 for some time. Just wanting to understand if there's any other margin mix drivers in there that could unwind going forward. It just was a bit of a positive surprise to see that lift, particularly given operating leverage should be minimal given where cost growth is and where your overall sales tobacco is. So yeah, it'd be good to just get a bit more color around the other drivers of that 2.3% EBIT margin. Thanks.
Okay. Thanks, Brian. I'll take that one and keep going. I think the obvious thing that we want to see continue to grow is volume. Volume's really healthy for our business. It drives the flywheel in logistics at the center of our business. And you can see, I think, as you look at the reduction in inflation through our business over the half versus the previous corresponding period, and then the exit point of the half, and then in the outlook, inflation's come off fairly significantly. And we've seen volume growth doing pretty well. And more of our growth is
coming from volume now, which is good. And that obviously comes from a shift in the way shoppers are buying that they're trading into volume items. That helps it. It's also you look at our customer base. We're increasing our Teamwork Score a little bit. So we're growing their business, and then we're growing our share of their business. All of that supports margin and supports the overall volume impact on our net EBIT. So I think I've already said the other part of it is really focusing on our costs and making sure that we are being very careful in the current environment to look after the bottom line.
Okay. Okay. No, that's good to see. Just back on trade quickly from a second question. We've obviously got some numbers there for the first half around the scan sales, which I know is not a great read, but not holistic. But the scan sales point is negative 9.2% over the first half for trade. Can you help us just to flesh out the comments that you made earlier, Doug, around the frame and truss positive signals there on the outlook, just how that might have progressed Q1 , the Q2 ? And then if you can give us a direction on the first four weeks, just to understand if we're actually seeing any improvement there on the trade side at this stage.
Yeah. Absolutely. As I said, you've got to be careful calling trends on a couple of weeks, but certainly it's pleasing that we've had the reports of what I'll call the pipeline. So the demand for new home builds, which start with the builder sharing their plans with us so that we can design the frame and truss, those pipelines are longer. I want to give you guys a chance to hear from Scott. He's been in the business a week and a half, and I'm sure he's got most of it figured out anyway. So over to you, Scotty.
Thanks. Thanks, everyone, and thanks, Doug. Yeah, a week and a half in. I mean, as you know, we are a majority trade business. What is pleasing, though, in the numbers is that we're holding market share, so we will be well positioned, as Doug said, to come out of the cycle in a good spot and come out strongly. I think the foundations of the business are very strong and certainly credit to Annette, Mark before her and the team on where we are, but there are opportunities. Recently, I've been in trade, and I can assure you that there's no trade business out there in any category thinking times are easy at the moment, so our focus is absolutely on the core business and ensuring we're ready to come out strong. I'm really excited to be here, and I'm really excited to be leading the IHG business.
That's great. Just checking if given you guys provided the 1Q versus 2Q for Total Tools, if that's possible for trade or IHG even more broadly, just to understand that sequencing.
Yeah, we can have a look at that, Bryan, not as I said to you.
Okay. Great. Thanks.
Thank you. Just a moment for our next question, please. Next, we have Richard Barwick from CLSA. Please go ahead.
Good morning, team. I've got some more questions on this margin composition within food as well. And as a part of that, you talk about the Superior Foods having, so you're weighting to the second half. Can you give us a steer on what is that normal first half, second half split for Superior Foods? And I guess it's a little bit complicated with the timing as they cycle some of those acquisitions or contract wins that they've brought in, but any color there would be helpful.
Yeah. Hey, Richard, I'm probably not going to be as helpful as you'd like me to be purely because, as you've said, the historical results, and you only have to go back to the ERP that we shared with you in February, are in large part a function of winning new contracts as well as acquiring new businesses. But you can imagine the second half has the traditional festive season of Christmas, December, January. So it is always weighted to the second half. I don't want to obviously share our budgets and our forecast with you, but we expect that the second half would be better from a profit perspective, remembering you're going to have six months as well, not just five.
Yeah. Okay. And then within the tobacco, obviously, we know it's low amount, something less than 1%. But just in terms of the way we're sort of back-solving here, is it fair to assume there's just a consistent margin that we apply to tobacco? Or as tobacco sales fall the way they have been, is the effective EBIT margin you're making on those tobacco sales, has that been falling as well? Just again, a little bit of color there I think would be helpful.
Grant?
Yeah, I would say no, it hasn't. In terms of the way we move tobacco through our network, it's a degree of automation. And I would say that what you're seeing is pretty stable margins in tobacco and pretty stable margins in non-tobacco. And most of what you're seeing is in that mix as the share of tobacco unwinds. There's not much more to it than that.
Yeah. I'd only add to that that the food team, like all of our pillar teams, have been really focused on making sure that they continue to remove costs and prepare themselves for the future, so whether that's through structuring, whether that's engagements with suppliers, customers, and it's pleasing to hear played back to us today that the food result was a surprise on the upside because it was a fantastic result and real credit to the entire team, despite the distraction that we've had over the last six months of some of all of these hearings, so I think a shout-out to Grant and his team for delivering in these conditions such a great result.
Can I just jump in? Thank you for that. Can I just jump in? One on liquor, haven't had a question on that, but sort of almost the reverse there. The margin outcome there is the weakest in a number of years, so going back to first half 2020, how much, and I know you're only talking fairly small movements, but it's a pretty skinny margin for starters. How much of that decline, if any, should we be thinking about that as a one-off? Or is this the way we should be thinking about the liquor margin going forward?
Yeah, so I'm going to invite Kylie in in a moment because it's important to hear from her. As I said, the standout sales result and significant market share gains have been delivered. This result is really a manifestation of the prioritization of volumes. As our margin pressures have come through, and those happen in costs as well as through lower inflation, so inflation manifests in liquor twice a year through excise increases, and when that's lower, our margins are unavoidably slightly lower, but a really, really good result, and the business is in really good shape. I want to invite Kylie to add to that.
Thanks, Doug. And thank you for the question. I think you would all be very familiar with the way that inflation has come off over the last 12-18 months and how that's likely to come going forward. And I think the fact that we've effectively managed to largely offset that gap in strategic buying through the strength of the network, the market share gains, and the overall shopper performance, I think, speaks to the underlying strength of the network.
Okay. Let's go to the next question. Thank you.
Yep. Yeah. Thank you.
Yes. No worries. Just a moment for our next question, please. Next, we have Caleb Wei from Macquarie. Please go ahead.
Good morning, Doug and team. Thanks for your time. I just had a couple more questions on the liquor business. So we've noticed you've taken some share there. We've seen some recent updates from listed peers , particularly in the discount space that have been losing share and potentially seeing sales decline. Can you just talk to really the areas of strength relative to the market and the liquor business that we saw over the half space?
Go ahead, Kylie.
Thanks, Caleb. I think the key drivers of shopper traffic in liquor consistently through the pandemic and post have been convenience, range, and service. And frankly, there's nobody that does those three things better than your local independent. And we've seen that in the share growth that the independents have experienced. And I think when we met at Investor Day back in March, we shared that the share of independents had grown from 27% to 30% of packaged liquor from F22 to F24. And without getting into
the specifics mid-year, I can assure you that that trajectory has continued up until October. We're seeing that offering, both that convenience predominantly, which is a trend globally in the liquor market, but particularly effectively the localized range that our network puts a lot of effort and pride into making sure is offered, and that personalized service is all coming through in the numbers and very consistently.
Caleb, when we were together in March, we spoke about the replication of strategies across the group. And what Kylie's been talking about is a great example of that. Retail, at its simplest, is about giving the shopper what they want, about executing on behalf of suppliers and getting that virtuous circle running. And that's what food have done successfully, and that's what liquor are doing now. It's not a six-month result. It's something that's been in the works for a long time. And it's really pleasing to see as you give the customer what they want at the right prices in a respectful, friendly environment in stores that are clean, well-located, and have a little local in them, we should be unsurprised that we're seeing good results.
Okay. Makes sense. Thank you. And then my second question, do you have time maybe to talk to the new wholesale agreement with Lion in South Australia?
So, is the question? Can you just repeat the question?
Are you able to talk to it a bit more detailed, how that distribution agreement works and how we should think about it, I guess, from a financial standpoint?
Yeah. Thank you. Again, going back to strategy Day I think one of our key strengths is our ability not only to enable our independents to be competitive and to support them, but also to be the preferred route-to-market partner for our suppliers in the liquor industry. Many of you, I think, have asked questions in the past around the brewers and our partnering with them. And I can tell you that we're really pleased to be partnering with Lion as a wholesale partner in SA. Our immediate focus is going to be making sure that
we do a brilliant job of this and we make sure that they really see the benefits of partnering through our network and our sheds for our network and our customers. It's a fantastic extension of our offering. I think at this stage, our short-term focus is, of course, going to be on delivering South Australia, but we'll be continuing to knock on the door and present our case to all of our suppliers who aren't fully leveraging our route-to-market at the moment.
Great. That's all from me. Thank you.
Thanks.
Thank you. Our next question comes from Adrian Lemme from Citi. Please go ahead.
Good morning, Doug and team. I'll try to be brief. Just on the hardware side, my read of the detached housing approvals look like they're pretty much back around mid-cycle now. So it seems like we're just debating the timing of the recovery. Is it at the start that you think that that's where you see the demand pick up for the business overall in hardware, or is it sort of a few months post that? And then secondly, should we also consider you mentioned cost of living pressures affecting some tradespeople? So should we also be conscious that it might also depend on rate cuts coming through, please?
Yeah. Thanks, Adrian. So remember that housing approvals, when the plans are approved, it doesn't necessarily guarantee a start. And so you want to focus on starts. And that's obviously there's going to be a bit of a lag. Our involvement in the build program picks up almost from the beginning, although not quite at the foundation stage in all parts of our business. And so we should see an increase there. I think interest rates are obviously, by design, impactful throughout the economy. New prospective new
homeowners, home builders, and, as I said, tradies who are essentially individual businesses will all be feeling the pressures of high interest rates. And so the sooner we start to get some relief, the better. I do think that just knowing that we're at the top of the interest rate cycle and that the next one will be down and then having some certainty on when that is will have a material impact in confidence.
That's helpful. Thanks for that, Doug. Can I just ask one quick follow-up on the. I think there was an earlier question about Superior Foods margin pressure. Can I just clarify whether new contracts are being handed out at lower margins than existing contracts? I'm just wondering if there's a front book versus back book issue, please.
No, not really. There's a few dynamics happening in the business. Obviously, you have to so-called sharpen your pencil and make sure that you're competitive. But in Superior, to quote Craig, we don't necessarily want to only win business on price. We want to win business because when things go wrong, we want our customers to know that they can trust us. And so you win business and you retain business by doing that day in, day out. And that business is very focused on it. The second aspect is that, as I said, there is a mixed element to this. So if you were pitching for a QSR business, it would be at lower margins than, say, a corporate business or an independent business. But like for like, we're not seeing a material change in those margins to win the businesses.
Great. Thank you, Doug.
Thank you.
Thank you. Next, we have a question from Lisa Ding from Goldman Sachs. Please go ahead.
Hi. I have two questions. The first one is on IHG. We made the comment on the slide, market share held. Can we confirm if that applies to DIY as well as trade?
Yes. It applies to both.
Okay. And then in terms of the Total Tools trade in the second half 2024 better than 2020 sorry, 2025, second half 2025 better than 2024, is that also applying to the network like for like, or is that just the total revenue including the acquisitions? And also a question on that, the follow-up is, does that comment apply to IHG as well? Or if not, what are the considerations on not applying that same comment? Thanks.
So no, I was specific. It applies to Total Tools. And the reason being that last year in Total Tools, we had that one-off event that I think we've now ventilated fully. Maybe I'll invite Richard to make some comments about the network sales and how that comment's relevant.
So fundamentally, we own half the stores in the joint venture program. So if it's happening in the network in a like-for-like sense, it's probably happening in the joint venture stores like-for-like. I appreciate at times, just depending on the timing of a JV acquisition, there could be some movement in the headline sales number. But underlyingly, if I think about what's happening in a store that might be the similar vintage, be it like-for-like sorry, be it JV or franchise, I'd expect the sales to be not dissimilar.
Okay. If I can speak one more on Project Horizon. I think in the appendices, we updated the FY25 and '26 guide numbers, the CapEx, I think, and the significant item. Appreciate it is a significant item, but maybe can we talk a little bit about what's happened there or changed there? Thanks.
Yeah. Sure. No problem. We've updated them as we learn more about the program. When you're planning large and complex programs like this, you have to make some assumptions about what will be capitalized versus significant items. And to be honest, Lisa, as we've progressed and we learn more, we provide an update. What's important is that the total remains the same.
Okay. Thank you.
Thank you.
Thank you. Our last question comes from the line of Phil Kimber from E&P Capital. Please go ahead.
Hi, Doug. Just a quick question on liquor. Are you able to provide, like you do in the food business, what your customers like-for-likes are doing? The 2.4% growth to retail and contract customers is great, but I'm not sure if that's being aided by teamwork scores or maybe some new contract wins. Can you shed any light on that?
To be honest, Phil, we can't. It's really difficult, and that's purely because we just don't have the data at the level of granularity that allows us to reliably provide you with like-for-like sales numbers. You're right. The IBA performance is driven by both their like-for-like performance as well as wins into the IBA network. I'm cautious around providing you data that I can't verify.
Okay. And two more, if I can quickly. When you split out tobacco, which is great in the I think it's in slide nine, is there any superior tobacco sold in Superior Foods? I guess I'm trying to understand supermarkets and c-store and convenience numbers, including tobacco, and you've given one tobacco number. So I just wasn't sure if there was some within that AUD 983 million of sales for tobacco, some actually relates to Superior Foods.
Almost nothing. It's tiny. It's only out of one of the distribution centers, and it's immaterial.
Okay. And last one, and I don't know if you want to make a comment. On Total Tools, I mean, Black Friday, I know you didn't give us the sales, which was thank you for doing that because it would have been a bit misleading otherwise. But any general comments on how the Black Friday weekend's gone? It's becoming a bigger event on the calendar now.
Richard? Yeah. No, look, we're really, really happy with how we executed. So in line with our expectations, obviously. Now you spend the next few months wondering how your other promotional periods all come together. And yes, you're right. Black Friday is more important every year. So we're just navigating that. But really pleased with how we delivered.
That's great. Thanks, Richard. Thanks, Doug.
Thank you.
Thank you. I see no further questions at this time. I will now hand the conference back to Doug.
Thank you very much, operator. There's nothing left for me to do other than to thank everybody for your time and your interest in our company. I look forward to seeing many, if not all of you, over the next few days, and I wish you a great day further. Thank you.