Ladies and gentlemen, thank you for holding and welcome to the Wesfarmers 2023 half year results briefing. Your lines will be muted during the briefing. You will have an opportunity to ask questions immediately afterward, and instructions will be provided on how to do this at that time. This call is also being webcast live onto the Wesfarmers website and can be accessed from the homepage of wesfarmers.com.au. I would now like to hand the conference over to the Managing Director of Wesfarmers Limited, Mr Rob Scott.
Well, hello everyone, welcome to Wesfarmers 2023 half year results briefing. I'm joined here in Perth with our Divisional Managing Directors and our CFO, Anthony Gianotti. This morning I'll provide an overview of the group's performance and progress on strategic priorities. Anthony will discuss the financial performance in more detail. I'll then conclude with the outlook for the group, and then Anthony and our Divisional Managing Directors and I will welcome the opportunity to take your questions. I'll start the presentation off on slide , which is a slide that will be familiar to most of you. Our objective is to deliver a satisfactory return to shareholders over the long term. We try and achieve this through strengthening our existing businesses, securing growth opportunities through entrepreneurial initiative, renewing the portfolio, and ensuring sustainability in everything we do.
This means anticipating the needs of our customers, looking after our team members, treating suppliers fairly and ethically, contributing positively to the communities in which we operate, taking care of the environment, and acting with integrity and honesty. Overall, we're making good progress in these areas, and as a group, we have exited the COVID pandemic in a much stronger position than when we entered it a few years ago. Turning to slide 5, which sets out the highlights for the half. I'd like to talk to 3 key takeaways from our results. Firstly, the pleasing financial results for the half highlight the strength of the Wesfarmers portfolio of businesses and operating model. The group's net profit after tax was AUD 1.4 billion, an increase of 14.1%.
Our largest divisions performed particularly well during the half, with Kmart Group earnings more than doubling, a near 50% increase in the earnings at WesCEF, another strong result at Bunnings. The businesses responded well to market conditions during the half and in general are benefiting from strong execution and operating results as they progress efficiency and productivity initiatives, continue to execute their strategies, and begin to realize benefits from investments made in recent years. The second point is that the group's portfolio is well-positioned to deliver returns to shareholders over the long term with progress made on key strategic initiatives. Finally, as always, we've maintained our focus on long-term value creation consistent with our core objective. Now turning to slide 6. At a divisional level, our businesses continue to make good progress on their strategic agendas with strong results for the half.
I'll use this slide to touch on some of the key points, and then Anthony will provide more detail on the financials. Bunnings delivered another strong performance, highlighting the strength and resilience of its operating model. Bunnings further strengthened its consumer offer during the half through refresh and expansion of product ranges and the trial of new store-in-store formats in some categories. On the commercial side, investments in CRM technology are providing greater flexibility and value to commercial customers, while recent expansions to Bunnings' frame and truss operations allow it to meet growing demand and support deeper engagement with customers at the commencement of a build. Engagement through the PowerPass app, Flybuys scan rates, and the strength of its educational and social content continues to improve.
With Kmart, it's clear that their low price positioning and differentiated offer are resonating with customers. Kmart Group's performance this half reflected excellent operational execution in addition to the impact of cycling the lockdowns last year. Kmart's focus and investment on digitizing its operations, both in stores and through the supply chain, are delivering productivity and efficiency benefits and help to mitigate cost pressures faced during the half. Target continued to deliver improvements in its product offer, particularly in its focus categories of apparel and soft home. This half was also the first period of generally uninterrupted trading since the major network changes across Kmart and Target were completed. It's pleasing to see the benefits of this significant program of work coming through in the results.
With WesCEF, very strong operational performance meant that they were able to take advantage of the favorable commodity price environment, the division delivered record earnings for the half. We continued to make good progress at the Mt Holland lithium project with first ore stockpiled at the mine in December, we expect the first earnings from the sale of spodumene concentrate in 12 months' time. You would have seen in the release material that we've provided some updated timing and cost estimates for the project, with these changes relating principally to the Kwinana Refinery. The Covalent team have managed the COVID disruptions and inflationary challenges well, there have been some increases in CapEx estimates that Anthony will touch on soon. Officeworks saw increased demand across key categories that were impacted by lockdowns in the prior period.
Recent investments in modernizing its supply chain supported productivity improvements at their new Victorian customer fulfillment center and will further strengthen Officeworks' omni-channel proposition. Industrial and Safety again improved its performance, benefiting from a disciplined focus on meeting customer needs and driving productivity benefits. A highlight was the final deployment of Blackwoods' ERP system. In the new health division, transformation activities were accelerated with investment in supply chain capabilities and technology that will strengthen the competitive position of API and its pharmacy partners. We continue to make good progress with the key data and digital initiatives across the group.
The focus and investment across our divisions is starting to pay off, and whilst there is still much to do, we've turned our focus over the last year on developing capabilities across the group that will drive deeper digital engagement with customers and leverage the best that our stores and digital platforms have to offer. An example of this is the OnePass membership program, which was further strengthened during the period with Bunnings joining the program in November and the announcement of a multi-year strategic partnership with Disney, providing a unique bundled discount to OnePass and Disney+ members. The strong progress with our digital agenda makes the performance of Catch this half particularly disappointing. Catch was slow to adjust as online demand moderated post-COVID, and this was compounded by some operational and executional challenges.
We've taken decisive actions with restructuring activities commencing in the half and a new managing director, Brendan Sweeney, joining the business in October. Moving to slide 7. As mentioned earlier, we believe that the portfolio is well-positioned to deliver returns to shareholders over the long term. The portfolio is comprised of strong businesses with clear competitive advantages. Across the major retail businesses, we expect to benefit from our trusted brands, strong value credentials, and omni-channel offering. With these businesses underpinned by large scale, low-cost operating models and differentiated own brands and exclusive products. With WesCEF, they have a track record of operational excellence and also strategically positioned manufacturing and processing capabilities with access to key raw materials and close proximity to customers in critical industries. We've recently established new avenues for value creation in the areas of healthcare and in critical minerals.
These are new sources of value for shareholders that are not reflected in current earnings. We're pleased with the progress at Mount Holland, and the team continues to explore capacity expansion opportunities to meet the strong demand for lithium produced in Australia. A little under a year ago, we invested in API, and whilst the transformation is only just accelerating, we believe this new division has the potential to deliver returns to shareholders over the long term and is a platform for value creation. In recent years, we've significantly expanded our data and digital capabilities, as I mentioned earlier. Today, we average over 210 million digital interactions with customers each month, nearly 3 times greater than in the 2019 financial year. We've shared some information on slide 51 that I'd refer you to.
We continue to accelerate the growth of our OnePass program. Whilst it's very early days, the program is already delivering valuable customer insights. From the early data to date, we see that OnePass members are generally younger, a younger cohort of customers that shop with greater frequency and increase their spend across the group after joining. OnePass is complemented by our large-scale loyalty and membership programs in Flybuys, Sister Club, and PowerPass at Bunnings, which all deliver value for customers and provide the group with unique insights across different customer cohorts and demographics. The quality of the group's data has materially improved in recent years. During the half, over 55% of our retail sales were to known and contactable customers, compared to about 34% a few years ago.
Through better understanding our customers, we are better able to anticipate their needs and improve the efficiency of our businesses. We know our most valuable customers shop with us both in-store and online. One factor that differentiates Wesfarmers' data and digital ecosystem is the group's extensive store network. Today, Click & Collect represents 30% of online sales, which drives foot traffic in store and improves profitability. Turning to slide 8. During the half, we continued to build better outcomes for the environment, our team, and the communities in which we operate. Recognizing it's linked to long-term value creation, we continued to build climate resilience in our businesses. For the half, we achieved a 15% decrease in Scope 1 and Scope 2 emissions from our major retailing divisions.
At a group level, emissions increased, with this largely driven by higher ammonia production following the planned shutdown in the prior period and the addition of the new health division. Adjusting for these two factors, the group's emissions declined for the half. The group's TRIFR result increased on the prior period, with this change due to a change in reporting methodology at Bunnings, as well as an increase in manual handling injuries in Bunnings. We remain firmly committed to improving our performance in this critical area. It was fantastic to see the group retain Indigenous employment parity with Aboriginal and Torres Strait Islander team members representing 3.4% of our Australian workforce. Turning to slide 9, you can see the summarized performance for the group.
I'll now hand over to Anthony, who will talk to this in more detail together with the group balance sheet and cash flow.
Thanks, Rob. Hello, everyone. On slide 11 in the presentation, we provide some of the detail on sales and revenue growth across the group. I'll start on slide 12 and speak to sales and earnings together for each of our divisions. For Bunnings, sales growth of 6.3% for the half reflected growth across all major trading regions and in both the commercial and the consumer customer segments. It was pleasing to see customers' shopping frequency and foot traffic to stores increasing during the half. Spring trading results were affected by the prolonged period of wet weather experienced on the East Coast, with consumer sales in garden and outdoor living categories the most impacted. Bunnings continued to focus on delivering great value for customers with ongoing investment in price during the half.
Inflationary cost pressures impacting cost of doing business were well managed through disciplined cost reductions and tech-enabled productivity improvements. Pleasingly, Bunnings continued to invest to support its strategic agenda across digital, supply chain, and expanding the commercial offer. Overall, Bunnings' earnings increased 1.5% to AUD 1.3 billion for the half, or an increase of 2.1% excluding the net contribution from property sales. Kmart Group delivered significant sales and earnings growth in the half, with earnings increasing 114% to AUD 475 million, underpinned by the strength of Kmart's lowest price position and strong execution during the period. Kmart Group's result reflects a strong rebound from the significant impact of COVID in the prior year. Importantly, comparable sales results demonstrated good underlying demand growth over and above the benefits of cycling lockdowns.
Kmart's comparable sales increased 17.1% and were supported by growth in both comparable transactions and units sold in the half. Target's comparable sales increased 2.8%, reflecting continued improvements in its product offer. As Rob's already noted, a disciplined approach to cost and margin management were a feature of Kmart Group's performance this half in what was clearly a more challenging cost environment. Rapid changes in exchange rates, higher inter-international freight costs, increased shrinkage, and general cost inflation pressures all impacted earnings in the period. Kmart was able to leverage its scale and sophisticated sourcing capabilities to defray some of these costs. WesCEF delivered record earnings of AUD 324 million for the half.
The strong result was supported by continued favorable prices for LPG, ammonia, and related products, as well as an increase in the production of ammonia following the significant planned shutdown that took place in the prior corresponding period. The WesCEF result also includes its share of operating costs associated with the development of the Mt Holland lithium project, which increased during the period as activity accelerated. Officeworks sales increased 4.6%, and earnings were up 3.7% in the half. Sales were supported by an increase in demand across key categories that were most affected by lockdowns in the prior half, including Print and Create, Stationery, and Art & Education. Sales growth also continued in technology categories despite cycling elevated levels in the prior corresponding period. Higher levels of promotional activity in technology, particularly across the highly competitive Cyber Week, impacted margins during the half.
This higher promotional activity was partially offset by a shift in sales mix towards higher margin products. Industrial and Safety delivered another pleasing improvement in performance, with earnings growth of 14.6%, supported by higher sales across the division, stronger margins in Workwear Group and Coregas, along with a modest gain from the sale of the Greencap Consulting business during the half. These factors were partly offset by higher cost inflation in Blackwoods, which adversely impacted margins, as well as higher costs associated with further investment in digital capabilities, including the final deployment of the ERP system. In Wesfarmers Health, sales results were supported by both new customer acquisition and growth from existing trade partners in the wholesale business.
Sales also benefited from elevated demand for COVID-related antiviral products, as you would expect, sales of these products will moderate as community COVID infections decline. Health earnings of AUD 27 million reflected continued progress on transformation activities with investment in supply chain capabilities, network changes, and merchandise strategies accelerating during the half. Earnings in Health also included AUD 7 million of non-cash expenses associated with assets recognized as part of the acquisition. As Rob acknowledged earlier, the financial performance of Catch for the half was disappointing. While some of the moderation in GTV was a product of broader market conditions, sales were also impacted by poor range selection and execution issues in the first-party business. As a result, Catch incurred elevated clearance costs during the half in order to address slow-moving stock.
In addition, Catch incurred higher fulfillment and delivery costs associated with commissioning issues at the new Moorebank fulfillment center and elevated fuel costs during the half. Reflecting some of the actions taken to address recent underperformance, Catch's result also includes AUD 33 million of restructuring costs relating to inventory provisions, team member redundancies, and asset write-offs. Turning now to Slide 14 and our other businesses and corporate overheads, which reported a loss for the half of AUD 75 million. The main driver of the loss was the reduced contribution from the BWP Property Trust, which saw a significant reduction in upward property revaluations compared to the prior corresponding period. This was partly offset by higher earnings from the group's interest in Wespine and Gresham during the half.
As outlined at the full year results, we continue to invest in the development of the OnePass membership program and the group's customer and data insights capabilities, with a net cost of $41 million for the half being broadly in line with the $40 million that we reported in the prior corresponding period. Corporate overheads were slightly higher at $78 million for the period. Turning now to working capital and cash flow on slide 15. Divisional operating cash flows increased 13.4% for the half, with divisional cash generation of 97%. While this result remained below what we would typically expect in the first half, we did see an improvement from the position at the full year as the business's working capital positions continued to normalize.
The improved cash flow for the half was driven by growth in divisional earnings and strong cash generation in Kmart as supply chain conditions improved and the level of buffer stock held reduced. These benefits were partially offset by three factors. Firstly, the continued normalization of inventory cover in Bunnings, as well as higher levels of stock investment in direct sourced products in line with business growth. Secondly, lower payables at the end of the period across the retail businesses due to an earlier than normal stock build to avoid supply chain disruptions in the lead-up to the busy Christmas trading period. This meant that payments typically made in January fell earlier in December. Finally, the impact of higher fertilizer prices on inventory in WesCEF as the business build stock prior to the peak selling season in the second half.
Barring any further COVID disruptions, we do expect to see further normalization of working capital balances through the second half. Group operating cash flows increased 26.7% to AUD 1.97 billion, reflecting higher divisional operating cash flows as well as lower tax paid due to the timing of tax installments and lower installment rates during the half. Free cash flow for the half increased 43.8% to AUD 1.36 billion, reflecting the impact of acquisitions in the prior corresponding period, partially offset by higher capital expenditure during the half. Moving now to capital expenditure on slide 15. The group invested net CapEx of AUD 676 million during the half, an increase of about 16% on the prior corresponding period.
This was largely driven by AUD 204 million of project CapEx and AUD 21 million of capitalized inter-interest in relation to the Mount Holland Lithium Project, along with the addition of the health business and increased investment in data and digital projects across the group. Proceeds from the sale of PP&E declined for the half, largely reflecting the timing of Bunnings property disposals. For the 2023 financial year, we expect net capital expenditure for the group to be between AUD 1 billion and AUD 1.2 billion. This estimate includes around AUD 400 million to support the development of the Mount Holland Lithium Project and a further AUD 40 million of associated capitalized interest.
Estimates for WesCEF's share of total CapEx for the Mount Holland lithium project have been revised. We now expect total development CapEx, excluding capitalized interest, of between AUD 1.2 billion-AUD 1.3 billion in nominal dollar terms. The updated estimate represents an increase of around 10%-20% on the guidance that we provided at the time of FID of approximately AUD 950 million in real 2021 dollars. This equates to approximately AUD 1.1 billion in nominal dollar terms if escalated at actual and forecast CPI. The updated guidance has been provided in nominal dollar terms in order to provide greater clarity on the actual investment we are making and what will ultimately be recognized on our balance sheet.
The expected increase in capital cost relates principally to the refinery and is largely due to COVID-related disruptions to key infrastructure items sourced from offshore and some engineering delays. Turning to the balance sheet and debt management on slide 16. The strength of our balance sheet continues to provide significant flexibility and capacity to support investment in growth initiatives across the group and to take advantage of value-accretive opportunities as they arise. The group has benefited from actions taken over the past 2 years to reposition the balance sheet to optimize the cost and maturity profile of our debt. The average cost of funds for the half declined from 3.7% to 3.06%, with a weighted average term to maturity of 4.6 years.
As at the end of the first half, Wesfarmers had available unused bank financing facilities of approximately AUD 2 billion. Our strong investment-grade credit ratings from Standard & Poor's and Moody's were maintained, and the group retains considerable headroom within its key credit metrics. Finally, to dividends on slide 17. The board has determined to pay a fully franked interim dividend of AUD 0.88 per share, representing a 10% increase on the prior year. The dividend is in line with our historical interim payout ratio and consistent with our dividend policy, which takes into account available franking credits, balance sheet position, credit metrics, and cash flow generation. Thank you, and I'll now hand back to Rob to cover outlook for the group.
Thanks, Anthony. I'll turn to page or slide 19. Through the first five weeks of the second half, our retail divisions continued to trade well, and trading has been broadly in line with the divisional sales growth reported for the first half. As inflation remains elevated and higher interest rates are impacting demand in parts of the economy, households are facing headwinds and becoming more value-conscious. The group's retail businesses are well-positioned for this environment with their strong value credentials and low-cost operating models.
There are also increasing costs of doing business in Australia and New Zealand, such as rising costs of labor shortages, higher energy and power prices, and higher costs in domestic supply chains and transportation. Our businesses are well progressed with key productivity and efficiency initiatives across these areas that are where the costs are within our control. In summary, we continue to invest to strengthen our existing operations and develop our platforms for future growth. This includes WesCEF, Covalent Lithium, and our new health division. We believe that the actions we've taken in recent years, together with our strong balance sheet and high-quality businesses, make Wesfarmers well-positioned to deliver satisfactory return to shareholders over the long term. That ends our presentation. We're now happy to take your questions.
Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. We do ask that you limit your questions to one per caller and that clarifying questions are concise. You may rejoin the queue for any additional questions. Your first question comes from Shaun Cousins from UBS. Please go ahead.
Thanks. Good afternoon from Sydney. Maybe some questions on Bunnings, please. Can you maybe just address a few small issues to the headcount cuts that occurred in the first half and any extra warehouse costs for inventory? Then more on the first half 2023, what drove the pre-property impact margin compression? Costs are rising, you might have invested in price, and if there was any price investment or price rises occurring later, should that be seen as an enabler of ongoing market share gains and then hence a more resilient profile on the revenue line there, please?
Thanks, Shaun. Well, I, you know, I think ultimately we have a really resilient business model. I'll start with margins. You know, we are very returns-focused, and I think when you look at the long term, the margin's broadly in line and, you know, we're really continuing to ensure that we have a really strong value proposition in the market for our customers and earn the right to be chosen every day by them. Obviously, we really wanna stay focused on maintaining our low-cost operating model. The, the headcount changes you mentioned in the first half, they were very, very small, and they were really, you know, from a practical point of view, some realignment of a couple of functions.
In a post-COVID environment, we're able to actually get back out and spend time with our team rather than necessarily run things from more of a sort of a support center focus. The change in margin from last year's really price investment. As you know from what I've said in the past, you know, it does vary significantly category to category. We've got inflation in some categories, deflation in others, and movement in COGS that sort of goes up and down. We are very, very focused on that value proposition. You know, I think when you sort of think about going forward, you know, where we're positioned, we wanna continue to invest for long-term growth. That's very much at the heart of what we do.
We've got some really good leverage through our operating model in our stores and ability to flex labor up and down very, very quickly, and also leverage some of the sort of tech investments we've made around point of sale, you know, registers, trade desks, those sorts of things, to be able to drive more productivity through the store network, which sets us up to be able to make the investments we need to make for long-term growth. On the warehousing costs, I think that one's a bit of a furphy, to be honest. We always increase warehouse space over the summer. We've done that every year that I can remember in the 17 years I've been in Bunnings. It was really just an outcome of access to sites.
We ended up with a couple of sites, more than probably usual because we couldn't get the bigger site. Really it just normalized itself out and not much to see in that space.
Great. Thanks, Mike.
Thank you. Your next question comes from Adrian Lemme from Citi. Please go ahead.
Hi. Just a follow-up question to Shaun's. The way I understand it, most of the margin decline in Bunnings is price investment. Correct me if I'm wrong on that. If I look at the COVID cost this half, I understand they've been not material, whereas in the CDP they were in the order of AUD 40 million for Bunnings. That to me indicates about a 100 basis point underlying decrease in margin. Now I understand that you wanna invest in price and stay competitive, but I'm trying to understand, as the market leader, why you wouldn't be putting passing on to the price increases from suppliers. Is there increased competition in the market, or are you concerned about volume impact to the price increases, please?
Well, I think it's a fiercely competitive market, and we sort of go to great lengths every year to sort of point that out, and it does sort of swing around category to category. You know, for me, it's very much around, you know, the customer value proposition and having long-term trust, but it's a really rational approach we take. You know, we're moving hundreds of prices every day. You know, some are going up, some are coming down. You know, we're now starting to see price decreases from some of our suppliers. We absolutely pass them on when we need to. You know, it is striking that balance, and it is also about investing in long-term growth.
You know, we've got very strong, you know, growth aspirations, and I think when you look at our sort of, you know, EBIT margin and you sort of model it over, you know, the last decade or so, there's a real consistency to that which, you know, reflects the very long-term approach we have to growing the business in a really profitable and sustainable way.
Thanks. Can I just ask one clarifying question on the price investment that relates to growing into new market segments? Is part of that trying to push that further into trade? I know you're trying to increase the mix of sales and trade. Is that part of it, please?
Ultimately, when the sort of trade customer that we go after, Adrian, is very much the small to medium, you know, builders. We're not chasing the really large volume builders where margins are really, really tight. We sort of see the customer margin mix between that sort of customer and the retail consumer as quite similar. Yeah, we've got a stated position to grow, you know, commercial to a more significant part of our operating model, which I think gives us further resilience. I don't think you should read into that there's a significant swing in margin between consumer and commercial. The lift in commercial in the half there was, but that's in line with our strategic ambitions, but it wasn't a material shift either.
Thanks very much, Mike.
Thank you. Your next question comes from David Errington from Bank of America. Please go ahead.
Hey, Rob. Rob, look, I don't wanna be focusing on the negatives. I think this is a great result, and, you know, you're doing a great job across the board. When you're losing AUD 100 million from a business as peripheral as Catch, I think we need to discuss it. Look, you know, I don't wanna sound condescending, but as you'd know better than anyone, growth is pretty hard to get. To bleed AUD 100 million of cash from Catch, is frankly just unacceptable as you've highlighted. My question is, what can we as investors or in, you know, market followers expect going forward? How much pain are you prepared to put up with? How much patience do you expect us to have?
If this business doesn't improve, like if the consumer does weaken in the second half, which seems to be that most pundits are believing, one would have to expect that, you know, performance could get worse before it gets a little better. Can you give us a bit of an overview as just what to, you know, because the business is going well, but it's just a shame that you're just gonna bleed so much money here, and you're offsetting such a good performance and across the other businesses. I mean, your investments in Kidman is doing, you know, Lithium's great, Bunnings is great, Kmart's coming back. To bleed this on Catch is just ordinary. What can we expect going forward here, Rob? Do we put AUD 200 million loss in for the full year?
Is it going to get worse next year? When are you going to cut it? Can you give us a bit of an overview as to what you're thinking going forward? Because it's pretty... It's now in the too important basket, this one.
Yeah. Well, David, firstly, I agree with you. It's not good enough. It's unacceptable. We're not, we're not satisfied with this at all. What, what can you expect? You can expect that we are taking very serious action to improve the financial performance. We would expect, well, we would demand that the financial performance improves from here on. There are a number of things that are well within our control to improve the financial performance. There are other very deliberate decisions we're making around investment, such as the development of the Moorebank facility and the Fulfilled by Catch solution. We're still pleased about directionally where that's going and the opportunity to deliver value for the group there. Unfortunately, this year, we're incurring a net cost around that, but over time, we're confident that that will deliver value.
The other thing, David, with Catch is that we still see opportunity financially for Catch within the group, but not at any cost, right? Not at any cost. We have a lot of flexibility around how we scale up or scale down the investment. That is within our control. We'll make very commercial decisions going forward. You know, I would expect that the earnings, the earnings loss will improve in the second half, and we'll make very deliberate decisions around the investment we're making. If we're not seeing the value come through, either at the Catch level or across the group, then we'll materially cut back on that investment. I, yeah, I guess it's gonna be a disappointing year for Catch, but it will need to improve.
it'll need to improve materially, in the years ahead, or we just simply won't keep investing at the current level.
No, apart from not investing in it, you know, that's okay. How hard will it be to exit it? Is there barriers to exit this business? Is it too entwined with Kmart? I remember the investment originally was under Ian Bailey, and I don't want Ian Bailey walking away from this one too easily, because my understanding was, is that he was knee-deep in this acquisition as well. You know, is it entwined in the businesses here that you can't get out?
No.
It seems to me that this.
Certainly not, certainly not entwined, David. We made a very deliberate decision to keep the business, quite, you know, with a separate management team. Obviously, there have been certain things that we've pursued around Fulfilled by Catch and some of the product sharing capabilities, but they are very much on an arm's length basis. No, look, and I, you know, I'm optimistic that we can improve the financial performance and create value for shareholders. There are, you know, various options that we could consider. This is inherently a valuable business. We've made a few mistakes, we need to fix it up. You know, I guess I'd say just judge us by what we do over the next year or so.
Clearly, I see the current level of losses as totally unsatisfactory. We're not gonna accept that over the longer term.
The clock's ticking, though, as you say.
Thank you. Your next question comes from Michael Simotas from Jefferies. Please go ahead.
Thanks very much. Can I just follow on with a little bit more detail on Catch? What Can you quantify the benefits that you'll get from the AUD 33 million spend on restructuring? Are you sort of comfortable with the shape of the business for now, and you just need to execute better, or are we likely to see more restructuring come through?
Yeah, Michael, I might just, oh, sorry, I might just make one quick comment on that and then Anthony can provide the detail on the provision. Look, I think it's worth acknowledging that we made some very deliberate decisions around investing heavily in the business through COVID. We, you know, invested very heavily in range and inventory. We dramatically expanded the first party retail business, which, you know, was not a core capability of the old Catch business. We invested heavily in supply chain capability, technology, personnel, and then we saw the market adjust very dramatically faster than we expected around decrease in online transactions. We clearly over-invested. The provision is really focused in on resetting some of that over-investment, but I'll let Anthony talk to the specifics.
Yeah. Michael, just in terms of your question around the AUD 33 million, about two-thirds of that, so about AUD 20 million is related to further stock clearance activity that we have to undertake. As we'd called out, there was a level of stock clearance that was undertaken during the first half, but there's more work to do to reset the first party business. We expect some further clearance activity into the second half, and AUD 20 million is in relation to stock provisions for that. The balance is partly to do with the redundancy program, which was announced at the end of January. That has largely been done, and we'll start to see some benefits of that from a cost perspective as we go through the half.
The other piece, it was some write-off of some plant and equipment at the Truganina DC as we restructure some of that. It's just a component of that. That pretty much makes up the AUD 33 million restructuring provision that we took at the half.
Okay. Just a clarification. Just in terms of the business as it stands now in terms of the assets in it and the number of people, do you think there's a way or a path to value creation for the group in its current form, or are you likely to need to make more adjustments?
No, look, I think overall the, you know, the reset of the cost base, the headcount, the refocusing of the first party retail business, provide a basis from which Catch can move forward and develop a profitable and viable business. Like, clearly, we are continuing to invest in a very deliberate way in the business. We're confident that at least this reset is going to materially improve financial performance. I think it's also important, and whilst not, diminishing the disappointment we have in the performance, we've made some very significant investments in data and digital across the group over the last four or five years. Overwhelmingly, those investments have added material value to our businesses and the group. Not everything has gone right as we've gone through that process, more has gone right than has gone wrong.
We are looking to learn from the disappointing result within Catch and adjust very quickly, and we'll continue to monitor it very closely.
Yeah. Thank you very much.
Thank you. Your next question comes from Craig Woolford from MST Marquee. Please go ahead.
Hi, Rob and Anthony. I think I'll continue on the Catch theme, but more about how it relates to the broader retail businesses. You've got the two automated DCs that can be used for delivery, and the sense that I got from the strategy day was that OnePass would allow you to use the DCs from Catch for deliveries. Is there much volume going through those Catch DCs for the Wesfarmers retail businesses, and how does it impact your thinking around online delivery, which is, as you've called out, about 70% of your online orders?
Yeah. Craig, I'll let Ian and Nicole can talk in more detail about this, but there are various strategies that we're pursuing to build more capacity and to improve the efficiency of e-commerce fulfillment across the group. Officeworks are obviously very well advanced in terms of the use of automated technology within their Melbourne CFC. We have adopted exactly the same technology and software within the Moorebank facility, so there's some obvious synergy there. The Moorebank facility is providing a solution that is expected to deliver better cost outcome than Kmart is currently able to deliver. You know, there are various strategies that we are pursuing. This will continue to evolve.
We see, you know, Catch as providing some optionality around this, leveraging technology and capability across the group. It's not the only solution that we can pursue. Look, I'm happy to provide... Let perhaps Nicole or Ian provide more context if you'd like. Maybe Nicole.
Yeah, sure. We're actually really happy with the performance of Moorebank now. We've invested in that heavily, working closely with the Kmart Group, we did a pilot for their online orders in New South Wales, that has been successful, and we're looking to scale that. I think the other thing to call out is we introduced next day delivery in Metro Sydney and Melbourne, running into peak, that was also very successful, we're looking at expanding that. Fulfillment in all e-commerce business is, you know, a key focus, we just need to keep improving, if we can drive those efficiencies for not only Catch, but also for the wider Wesfarmers and the Kmart Group, I think that's a really good outcome.
Great. Thanks for that, Nicole.
Thank you. Your next question comes from Lisa Deng from Goldman Sachs. Please go ahead.
Hi. Just wanted to understand the GP margin trend for some of the key retail businesses, especially Bunnings and Kmart. It looks like the raw material cost, if I'm just looking at the group, grew by 35% year-over-year. Just wanted to understand how it sort of folds into each of the groups or businesses. Thanks.
Lisa, as you know, we don't provide specific details on gross profit margin. I, you know, I think Mike's already answered that question pretty well around how they have dealt with price investment, having regard to cost increases. The other point I think you need to recognize with Bunnings as well, is that the margin differential between commercial and retail, and the significant difference that we observed in the first half around sales growth. mix has.
Mm-hmm
... an impact on margin in short-term scenarios like that. Might let Ian provide some observations around how we're dealing with price and cost generically within Kmart and Target.
Yeah
... if you like, Sarah can comment on Officeworks.
Thanks.
Just briefly, Lisa. We, very much like Bunnings, we try and figure out how do we maximize the EBITDA AUD dollars that we can generate in any given year. Of course, we'll look to figure out what's the right margin, what's the right price point to hit, and the resulting margin that flows from that in order that we can maximize that outcome. As you can see through the half, we did pretty well on turning the sales into profit AUD dollars. Clearly there hasn't been a major movement within that margin number. Certainly I'm pretty happy with how it's currently trending, as we manage, you know, pricing implications as well as cost movements.
What we are seeing now, of course, is a reduction in costs, particularly in raw materials, things like cotton, and polyester, and some of the other raw materials are starting to fall now relative to their peak through COVID. That starts to help us as we manage margin as we go forward.
Yeah. Lisa, from an Officeworks perspective, I think, look, Mike summarized how similarly as EDLP retailers, we address price in our respective categories. You know, we have a very broad business. We sell a lot of different products with over 40,000 SKUs and cost inflation and what we're seeing is very varied depending on what we're talking about. Technology hardware, we know, for example, there's a lot of monitors in the market right now.
Mm-hmm.
The we're not seeing significant cost inflation obviously in that side of our business. On the flip side, paper, where pulp and gas inputs are really growing, we are certainly seeing some inflationary pressures. We look at it category by category, and we just make sure that we continue to invest in maintaining our trusted EDLP position with customers, to make sure that we are giving them the best value.
Lisa, it's Anthony. Just quickly to add to your question. I just wanna be clear, when you're looking at cost of goods sold for the group, that includes all of the group, it includes WesCEF. That will significantly distort the percentages-
Exactly. Yeah, that's what I was asking.
that you were calculating. Yeah.
I, yeah. I do understand that. I just, I wanted to understand the trend potentially for the retail businesses more so.
Yeah, okay. I think the retail MDs have just covered that, but just wanted to be clear, I don't think you're gonna be able to draw any conclusions from looking at that COGS number 'cause there's a lot going on in there.
Sorry, just to clarify the Bunnings GP trend, right? Or the GP margin trend. Understand we won't talk about the specifics, is down, right? Largely due to the price investment, offsetting whatever, you know, different category mixes or pricing that we may have put through.
Mm.
Do I understand that correctly?
No.
The GP margin trend is down.
No. It's Mike. Lisa, I wouldn't say that. I think if you look at.
Okay
... at our margins over time, they're broadly consistent, but we just don't dive into the detail. As I said before, the mix between the type of B2B customer that we're servicing and the B2C customer is very similar from a profile point of view.
Okay. Got it.
Lisa, Rob here. When you have much stronger growth on the commercial side of the business than the retail side of the business in a short period of time, that will have a margin impact.
Mm.
Yeah, the mix shift.
When you have, significant weather activity and that impacts certain outdoor products that generally trade at higher margins, then that's gonna have an impact.
Mm-hmm.
That's why, you know, we probably sound like a broken record, but we always caution around drawing too many conclusions from short-term trends in margin, because they can, you know, they can be driven by very short-term factors.
Got it. Thank you.
Thank you. Your next question comes from Ben Gilbert from Jarden. Please go ahead.
Good afternoon all. Question for you, Mike, just on Bunnings. Just keen on understanding how you guys are thinking about category expansion, 'cause I think one of the things that Bunnings has done such a good job over the last 30 odd years has been expanding, whether it be sort of garden, kitchen, lighting, kids play equipment, et cetera. As you move forward, do you still see some outside of sort of pure commercial, do you still see some big legs or opportunity around categories and would you go so far as to extending ones that might be a little bit less obvious, such as things like pet or electronics? I know you play in electronics partially, but a more sort of a bigger push towards it.
Yeah, it's a great question, Ben. It's probably one that I'll expand on come strategy day. As I touched on last strategy day, you know, pets is something we see as an adjacent category. It's been a category that we've had a range in Bunnings for a really long time around sort of durables and dog houses and chook pens and all those exciting things. You know, I think you can expect to see quite a big expansion in that category over the next few months. I think we do see a big market opportunity, a lot of customer demand for the things we've been selling, and we've been testing and learning through some promotional drops of pet durables over the summer period, which has been really pleasing for us. That's one.
You know, I think you might remember, I sort of think about the Bunnings ranging lens being sort of everything from the front gate to the back fence of a property or a job site. It does give us a lot of adjacent markets. We want profitable growth. We're not gonna chase into categories where there's really low margin and really high service expectations without operating models that would support that. Online, our expanding online capability gives us more optionality in that space over time. There's a range of other categories. No, I think we'll not only continue to, you know, grow the categories in we're in, you know, we're all about growing the market and growing our share.
We do see some exciting opportunities in some adjacent categories where we see good customer demand and opportunity to enhance competition and bring a new value proposition to the market.
Does that include Marketplaces? I saw a report, one of the industry reports out last week that had you guys as the third most engaged marketplace in Australia. Are you looking to put any more effort or investment around that in terms of growing range and trying to sort of accelerate the GTV in that site?
I'll need you to send me that report so I can use it in my appraisal, Ben. That'd be really, really helpful. Look, Marketplace is all about bringing people into the Bunnings ecosystem and having them stay there. We know that customers are shopping, you know, for things for the home, make the home safer, make the home more secure, make the home more livable, and that's happening more and more as people work from home more often. They're also interested in the things that sit across a range of different categories that we don't think we've got capability in, either to have it in store or have the merchandising capability today. Partnering up with some good trusted partners across adjacent categories there, you know, allows us to provide a service to customers.
It's good to know that it's resonating, we certainly see that with some growth there. It is really, you know, something that's nice to have within the ecosystem and, you know, we'll keep tinkering and building away at that over the next little while. I think it leans into some of the broader ecosystem aspirations we have as a broader Wesfarmers team as well.
Great. Thank you.
Thank you. Your next question comes from Bryan Raymond from JP Morgan. Please go ahead.
Thanks for taking the question. Just on global sourcing, obviously it's a big part of the Kmart business. We've seen pretty steep reduction in global shipping costs, and as I understand it, you know, factory costs in China have also come back a bit with less global demand coming through for production. Just keen to understand for Kmart, but also for other businesses where it's relevant, I assume Bunnings and Officeworks should have some leverage to this, the lower shipping costs and other global supply chain costs. What sort of timeline should we expect that to flow through? I assume it hasn't yet, but how, what sort of magnitude that is coming through at? Thanks.
Yeah. Thanks, Bryan. It's Ian here. I'll start off on this one. When you look at cost of goods, there's so many factors involved. Clearly there's the raw materials, there's the production cost, there's the international shipping, as you called out, and there's FX. There's a number of dimensions. Clearly that all plays through into the price that we then charge for, to the end consumer, and we're constantly trying to figure out how do we keep that price as low as we possibly can. Therefore, we do move pricing around both up and down as we see those changes.
As we do see these costs coming through into our system, what you'll see us do is we'll adjust pricing so that we can capitalize on that and continue to grow market share. In terms of how quickly does that come through, some comes through very quickly. If you've got seasonal categories where we're dropping product in which we're not currently carrying, then of course that it's almost immediate in terms of the raw materials. Frankly, the business model of Kmart in particular is super good at extracting that value earlier than most other businesses will be able to access it because of our pure line of sight through to the raw materials and the factories. When you've got other products, clearly it goes into a rolling average cost.
There's a period of time it takes to wind through the system as we sell through the products that we have. We're certainly talking in terms of months there, not halves or years.
Right. Is it meaningful for any other businesses, just before we move on?
From a Bunnings point of view, about 30% of our inventory is directly sourced and comes through, but there's nothing in what I'd answer that Ian hasn't already covered.
Yeah, I'd say from an Officeworks perspective, exactly the same.
Okay, great. Thanks, everyone.
Thank you. Your next question comes from Grant Saligari from Credit Suisse. Please go ahead.
Good afternoon or morning to you. Wonder whether the directors would comment on shopping, customer shopping behavior that they're seeing in terms of just shopping frequency, value trends, basket size trends, and just a brief comment on quality of inventory, if they would mind, please?
Yeah, I might start, Grant. I think from a Bunnings point of view, you know, if you look at the commercial side, that's really helpful for us because we can see more into the pipeline. The nature of the contracts and things like that, you know, suggests to us that there is a good pipeline. If you look at, you know, the numbers that are being called out on housing starts, they drop a little bit, but it's not material and you then see a reversion to what we've seen over a number of different housing cycles, which is moving to alteration and addition. You then sort of look at the sort of demand for trades and the shortage of trades and the shortage of apprentices that pushes people to DIY things themselves. You know, I think there will...
My guess is you'll hear a bit about movement to value from my colleagues. You know, for us, when we sort of see this sort of market and you're not going out and doing things, you're not traveling as much because things are a bit tighter, you're spending more time at home. I think for a business like Bunnings, with the assortment and the price mix and the value proposition, that positions us well to participate strongly in the consumer market and the commercial market.
On the Kmart side of the equation, you know, everything we have within our boxes is at an incredible price, as you know. We pretty much haven't seen too much price inflation that some businesses saw through the COVID period. Therefore, our basket size has moved around, but to a much lesser extent than other retailers would have had through the last three years. If you look at it on a pre-COVID level, it is marginally higher than it was, and some of that's explained by a slight change in shopper behavior, where they do put a little bit more in the basket now than they did pre-COVID. In the case of our business, we're still seeing transaction growth and comp transaction growth at a total customer level.
Yeah, I think, yeah, a relatively modest change as we've gone through the last period of time.
I think from an Officeworks perspective, we continue to see recognizing our channel mix, with our every channel offer. We continue to see strong return to stores, with really strong transaction growth in stores, and a normalization of our online channel, albeit we will, and as we saw in the first half, normalize at a level that's materially higher than pre-COVID levels. Similarly, in terms of customer behavior, in terms of basket, as well as our B2B business, similar to Mike, we're seeing good growth in our B2B business, as people, you know, continue to invest in how they work, and continue to invest in their business, recognizing a lot of our business customers are small business and mid-sized business, and we expect that to continue in the second half.
we are seeing the value in the basket move around as prices move. particularly recognizing the strong tech and high level of ASP sitting in tech for us. we did see good growth in tech in the first half.
Yep. Lastly, Grant, just on your question on inventory quality, I think we're in pretty good shape across the group. The only one which we've already called out is Catch. We'll continue to have clearance activity in the second half. Across the rest of the businesses, we're in good shape. We have called out, and as Ian said on a number of occasions, we're still holding some buffer stock in Kmart, and we will obviously monitor how supply chains normalize and hopefully disruptions are removed. As that becomes clearer and we get more confidence, we'll remove some of that buffer stock as we move forward. As I said before, I think we're hoping that working capital will improve in the second half.
Thank you.
Thank you. Your next question comes from Richard Barwick from CLSA. Please go ahead.
Thanks, guys. My question is for Ian Bailey. There's obviously a big drop in the online penetration, evident in both Kmart and Target. To what extent did that reduction contribute to earnings and the EBIT margin?
Yeah, thanks, Richard. It's, I think what you've got there is a material return of customers back to stores. Some of that is the fact that stores were closed in the previous half of the comparable period, and some of it is we've just seen a real shift back of consumers back into stores full stop, which I think has probably surprised everybody in the market. I think if you're comparing year-on-year, it's super hard to do that comparison because of those store closures on the way through. If I actually look at the dollar value we're doing online, I'm still pretty happy with where it's going. I'm pretty happy with the growth trajectory that we're delivering.
We very much wanna grow our share of wallet with customers full stop, and we're very happy to do that, whether it's home delivery, Click & Collect, or in stores. We manage the business model to ensure that we deliver the right value for shareholders as well as consumers.
Can you offer a comment then, Ian, on the sort of, how the profitability of the online sales, compare to the in-store sale?
Yeah. Well, every sale that we get through the various channels is contributing to our profit, that's the way that we look at it. Obviously we're already running our business, so we've already got the fixed costs. If we can get an incremental sale and we can make a margin from that, then it adds to the bottom line. That's very much the way we look at it. We look at it from the broader perspective of if we can deepen our engagement with our customers, and our most engaged customers shop online and in-store, then we get a greater share of wallet.
Yeah. Okay. Great. Thanks, Ian.
Thank you. Your next question comes from Ross Curran from Macquarie. Please go ahead.
Hi, team. I guess the question is for one for Anthony. Notwithstanding the delays in getting the lithium plant up and running, that lithium investment will start throwing off quite a lot of cash fairly soon. Just looking at the maturity profile of your debt over the next three years, you know, there's a nice expiry of debt between now and 2027. Just thinking how you're thinking about the cash generation out of Mt Holland, the cash it's gonna throw off, the maturity profile of the debt and what we should think about gearing going forward once this plant does come on stream.
Thanks, Ross. Yeah. Look, there's a lot in that, I think. Certainly, as Ian has already pointed out, we're looking to have sales of spodumene in FY 2024. They'll obviously be ramping up in the second half of FY 2024, we obviously won't have full volumes. Certainly at current spodumene prices, that should certainly contribute to earnings for the group. Yes, that will obviously help us in terms of our debt position. What we try to do with our debt profile, though, is have a mix of shorter term bank debt and longer term bond debt, which you've seen in our profile, that obviously gives us the flexibility. Gives us the flexibility to pay off the shorter term debt when we've got the cash flows coming through.
We underpin our debt position with some longer term, cheaper bond debt. At the moment, the mix of debt is currently sort of half and half. That will obviously shift and change as we move forward, depending on what sort of cash flows we can generate, what sort of dividends we can pay out. Obviously, as we've said before, franking credits have no value to us, so we wanna get them to shareholders where we can. I think it's a combination of all of those factors, making sure we have a debt position that's flexible enough to accommodate those changes in earnings.
Investment, I would add, because, you know, we do want to look at opportunities opportunistically, and so we wanna make sure we've got a strong balance sheet to be able to do that as well.
Thank you.
Thank you. Your next question comes from Phil Kimber from E&P Capital. Please go ahead.
Hi, guys. Just a question on the Covalent business. Apologies if you'd answered it earlier, as I've just jumped on the call. I think from memory, it's roughly 400,000 tons a year of spodumene. You mentioned it'll ramp up over the second half of fiscal 2024. You know, is something like 100,000 tons, you know, a semi-sensible expectation of what you might sell? Because I guess we're just not sure about exactly the ramp-up profiles of the business.
Yeah. Hi, Phil. Ian Hansen here. I'm not sure whether your 100,000 that you're referring to is on a 100% basis or a 50% basis. In other words, our share or the total volume being generated by the concentrator. The nameplate
Total.
Yeah, total. The nameplate capacity of 380,000, you're very close with 400. Well done. I think 100 would seem sensible given that we would see the sales revenue flowing in in the first part of calendar year 2024. Although the concentrator may become operational late 2023, calendar year 2023, we'd probably see the sales in calendar year 2024. If you think about the concentrator having a nameplate capacity of 380, and we'll get 6 months worth of operation, but it's ramping up. Our share of 380 at a nameplate capacity would be 190. If you say maybe 50%, 60% operation, I think your 100,000's probably close to the mark in terms of expectations.
Of course, we'd like to see more, and if we can get more out, we will.
Can I also, as a follow-up, just ask, we can go back and I think, there's some data on the cost, for the mine, so putting the lithium refinery business to one side. Just the mining costs back at the time, Kidman, you know, was being acquired. Are they still broadly relevant now, or has there been a massive change that we should be aware of in terms of the cost per ton of mining?
I think the costs which were announced back at the time of FID, which were based upon the updated definitive feasibility study, would have changed significantly. They were produced back in 2020. The world is totally different today. We've seen significant changes in commodity prices, including input costs such as reagents. I think one of the things we need to be aware of is that traditionally, Wesfarmers doesn't publish its costs associated with our production of other products, and probably going forward, we're not going to do that with lithium either. We will obviously provide updates about production and operations, but normally we don't give a background, any background on costs per tonne.
Okay, thanks.
Thank you. Your next question comes from Shaun Cousins from UBS. Please go ahead.
Thanks. Just some quick follow-ups. Ian, you're saying that $5,400 a tonne, which you provided a year or so ago, that doesn't apply anymore, the lithium hydroxide cost per tonne?
All I'm saying
Real.
All I'm saying, Shaun, is that that was a cost at a point in time from, I think, the I&S back in 2020. We haven't reworked those costs as yet, but we won't be restating those costs.
Okay. I might take it offline because I think you've provided those costs. Just what were the operating costs in Mount Holland that you incurred this year in WesCEF?
Oh, they were very minimal, Shaun.
Yeah, it's pretty small.
It's ba-
They're just office costs.
It's associated with the-.
Yeah.
It's associated with the-.
Office.
office and the accommodation, Shaun.
Okay.
Shaun, Rob here. Just on that, I think the number you're quoting is that $5,400 real number.
Yeah.
That was-
That's your number.
Yeah.
Yes.
That was a number that was reported as part of the previous reporting on the project from our joint venture partner as well, which was absolutely the correct number at the time. The point I think that's worth remembering on the cost side, the integrated project should be a very low-cost producer. From a structural point of view, given the quality of the ore base, the concentrating process, and then over time, the refining process, it should remain a very cost competitive project. What Ian is highlighting is that what's happened over the last 3 years globally is that we've seen cost inflation. There are certain input costs, certainly on the refining side around reagents, where we've seen significant inflation.
These are costs that everyone in the market is going to have to deal with. As Ian also said, a lot of the reporting that goes on around costs, contracts, and so forth is being done by companies that are having to report that data for the purposes of trying to get finance. That is not an issue for us. Although we were required to disclose that data point previously, it's not something we're necessarily going to give a regular update on. What you will see is you will see the ultimate profitability of the project that will be reported on a regular basis.
Gotcha. Just another quick clarification. The Catch guidance of loss making in the second half but less than the first half.
Is the way you're looking at the first half pre or including the AUD 33 million restructuring costs?
No, Shaun, pre. I... It'll be less-
Pre the restructure.
Yeah, the underlying loss of AUD 75.
Okay.
Yeah.
That makes sense. Yeah, that's helpful. Thank you.
No worries.
Thank you. Your next question comes Adrian Lemme from Citi. Please go ahead.
Yeah, thanks for taking one more question. This one's for Sarah on Officeworks, please. Look, while JB Hi-Fi's Australian brand is not an exact comp for Officeworks, they are both in the technology categories. If I look at, you know, Officeworks EBIT today versus three years ago, it's basically flat, and JB Hi-Fi Australia's is up 63%, while they've also grown the top line about 7 percentage points faster. Can you talk to how the business is performing in the context of its peers, and how you think the market share has been moving, please?
Thanks, Adrian. Look, I'll start by saying, I appreciate, lots of, you know, I appreciate your comparison, but obviously we are very different businesses. As you know, we run five different portfolios within Officeworks, so we have our Stationery, Education and Art business, and our furniture business, our technology business, and obviously as well, we also have our Print and Create business and our Geeks2U business. Each of those businesses through the COVID period have been really, have suffered really different impacts. With store closures, stores being open, and also, as we highlighted in the first half results, we have seen quite a lot of volatility around Stationery, Education and Art and also Print and Create with store closures.
Those are businesses that are high-margin businesses, also are businesses that really heavily benefit from two things. One is foot traffic into stores. They're very store-driven businesses. They are also, particularly for our Stationery, Education, and Art business, strongly skewed to B2B as well as B2C. Obviously with small businesses suffering disruption and a number of our B2B customers over that period, we have been impacted quite differently. We also have quite a broad competitor base in each of those businesses, not just JB Hi-Fi. What I would say is in our technology business specifically, we've seen strong growth through the last 3 years, which is delivering a good EBT return for us.
We're pleased with the progress we've made on our strategy, and we're looking forward to exploring more of the opportunities and explaining them at the strategy day. Particularly, we see opportunities in the B2B side of technology and also in the telco areas, as well as attached. Still lots of adjacencies for us to explore to drive profitable growth, but we're really pleased with the progress on the tech strategy.
Thanks for that, Sarah.
Thank you. Your next question comes from Craig Woolford from MST Marquee. Please go ahead.
Hi, Rob. I just wanted to circle back on Bunnings. It might be for Mike. Just around the contribution, I may have missed it, but what contribution to group sales did commercial have? Is there any comments you can provide about the Q1 versus Q2 performance? I'm not really trying to get too caught up in the minutiae of the quarters per se, but trying to understand November and December, which were far less impacted by lockdowns in the prior year, and therefore may be a better read on underlying trends.
Sure. Well, I think as you'd remember, Craig, you know, everywhere but metropolitan Melbourne, we were able to trade through. Unlike a lot of retailers, you know, I think the essential nature of the products and services we offer was recognized by governments and we were allowed to trade. We didn't have some of the big bounces that you've seen across the board, which, you know, I think, you know, underlies the strength of our performance, you know, on a CAGR basis over the last few years. It's around about 10%, which I think is incredible when you sort of think about the size Bunnings was pre-pandemic and where it is today. Consumer commercials, it's sort of sitting around the sort of 65, 35. 65 consumer, 35 commercial.
That's broadly in line with what I talked about at Strategy Day last year. It's, it is growing, but it hasn't grown materially in that period of time. The one thing we saw, you know, we try to avoid sort of conversation around weather, you know, within the Bunnings business. I do think the sustained wet at the start of the Q2, particularly in major trading regions like Vic and New South Wales, was really challenging. The first 30-degree day in Sydney, I think, was not till January. It was definitely a cooler start. In saying that, our December and Christmas trading we were really pleased with.
That weather probably affected both commercial and consumer, right? Or you're trying to steer me one way or another?
It certainly has a more immediate impact on consumer because it's a time of the year where you're out and about doing things in the garden. You're prepping decks. You know, it's across a range of categories. It's not just gardening. We did see a slowdown in a few site starts, and we sort of saw that through some delays in orders in frame and truss and things like that. You know, trades are pretty resilient. They find, you know, other places to go, so they get inside, you know, properties and do some of the sort of fix-to-finish work and things like that. It was certainly more pronounced on the consumer side.
Okay. Thanks, Mike.
Thank you. Your next question comes from Lisa Deng from Goldman Sachs. Please go ahead.
Hi, guys. Just one follow-up on Catch. That AUD 33 million is more about stock clearance and the redundancy packages. Are we at any risk of having to do goodwill write-downs or impairments on the acquisition value?
Thanks Lisa. Look, we obviously we always do impairment testing, a lot of the goodwill associated on the acquisition of Catch actually sits under the Kmart Group CGU, there's probably less likelihood of an impairment of goodwill. We're obviously still covering other assets like brand name for Catch, most of the other assets are real assets sitting there. Like any of our businesses, we have to undertake impairment testing every half year. I guess there's always a risk, as it relates to goodwill, most of the goodwill related to Catch on the acquisition is actually sitting in the Kmart CGU.
Actually, can you potentially let us know how much goodwill was recognized on acquisition?
look, I'll have to go back and have a look, but I think it's about AUD 140 million, I think, from memory.
When you do impairment testing, like what are the key criterias that you guys test for?
There's a whole bunch of things that we test for, depending on which methodology you're using under impairment testing. We obviously look for impairment triggers. We then undertake DCF valuations if that's the appropriate approach. We look at forecast and future earnings. We look at net realizable value of assets. If, you know, if it can't be supported by the cash flows in the business, you then look at the underlying value of the assets that are sitting there. If they are stock, for example, you then go through a realizable value of those individual assets. It's a obviously technical accounting approach to the way.
Mm-hmm
that we look at impairment like every other company is required to do.
Mm-hmm
which is quite a thorough process. Yeah.
Bottom line is there's, you don't believe at this stage to be a high risk of potential goodwill impairment?
No, I don't. Yeah.
Okay. Got it. Thank you.
Thank you. Your next question comes from David Errington from Bank of America. Please go ahead.
All right, Rob, just a couple of quick follow-ups, probably to Mike and Ian. Mike, in Melbourne, I mean, I can remember following on from the weather comment. I can remember in Melbourne, I reckon there would have been about two months in the key selling period, like Father's Day in that September, October, November period, where all of Melbourne was underwater. I know that you don't wanna call out how much your sales would have been impacted, but how many weekends do you reckon you saw really wet weather? I remember John Gillam always used to say, you know, "When the sun shines in spring, people do DIY. When it rains, they just don't." How many weekends do you reckon in trading, you reckon were negatively affected by the weather?
I suppose, Ian, as well, we, you know, I don't reckon we had a spring on the eastern coast. How much did that affect your sales?
Look, you know, I think we've called out the fact that, you know, it was an impact to spring, you know. I always look at, you know, the underlying resilience of the business being if seasons are behaving the way they're meant to and are we performing the way we're meant to. The answer is yes, when you looked at markets like Queensland and Western Australia and South Australia. It was probably too many weekends for my liking, David, particularly Father's Day when, you know, it's the first one in 3 years where we'd had everyone out and about able to do stuff. You know, we have certainly seen into November, December a later take-up of gardening activities that probably are done a little bit earlier, you know, by consumers.
Mm-hmm.
Certainly, you know, I think Melbourne Cup Day 2022 was 30 degrees and 2021 was... What year are we in? Anyway, the year before last was 27 or 28 degrees on Cup Day and it was hailing and 13 this year. It just shows you the seasonality that we have to work through. Pleasingly...
Mm-hmm
we've had a strong November, December and that started to sort of pull through sales in those categories.
Mm-mm.
Yeah.
You're being a bit modest, I reckon, Mike. I reckon you've done a great result given the weather.
Thank you, David.
Yeah. Just on the Kmart side of the equation, again, same states, New South Wales, Victoria were the ones that were the most impacted. If you look outside of that, we actually had pretty good conditions in the other states and we saw pretty good sell-throughs on seasonal apparel in particular. A lot of our stock that we sell, of course, is not seasonal, so the three six five just sells pretty constantly irrespective of what's going on.
Yeah.
When we do look at that through those two states, you know, we've managed it. We, we probably had to hit, you know, particularly in Target, a few more promotions than we would have liked as we went through November and December to keep the inventory flowing. Then, of course, we've tackled clearance as we needed to and the inventory quality as we ended the half's pretty good. You do also get a bit of a bounce when the sun does shine, you do get a kick. It's not like you lose all of those sales, but there is a, there is a net impact over the, over the season. We've, we've managed it in the context of our overall inventory and yeah, and just taking the action where we needed to.
Yeah. If I could sneak one more we're coming to the end of the call. Just to Ian Hansen. The offtake arrangements that you've got, Ian, with lithium with global counterparts, I'm assuming that's on hydroxide. You wouldn't have arrangements. Can you give us a bit of an idea of what percentage of sales are forward orders? If the refinery keeps getting pushed back, is that a problem that you have to, you know, it's you've got to deliver that before you know, take or pay sort of stuff? Or can you give us a bit of an idea how much, you know, your forward orders, how that works?
Yeah. Thanks, David. We don't have any contracts in place yet for the spodumene concentrate. However, they will be in the near future. Of course, that's short-term selling positions. For the lithium hydroxide, we're still working with significant global counterparties, be they OEMs or battery manufacturers. The negotiations are well advanced.
The way the contracts will work, they will come on foot upon successful commissioning of the lithium hydroxide facility. Therefore, there'll be no exposure to the time it takes for the lithium hydroxide refinery to come online and produce quality product.
Right. The price that you set at that hydroxide, is that at the spot price at the time, or is that a contractual price set in advance?
The contracts that we've been working on will have a market linkage price.
Right. Okay. It'll be closer to what it is at the time.
Yeah.
Okay. Thanks. Look forward to seeing it in March too.
Yeah. Thanks, David.
Thank you. Your next question comes from Bryan Raymond from JPMorgan. Please go ahead.
Thanks for taking the follow-up. Just a quick one. I just wanted to clarify on the outlook comment, where the first five weeks of trade is running at similar levels to the first half for Bunnings and Officeworks that they're pretty normalized growth rates. Just trying to make sense of the Kmart numbers, given the strong year-on-year growth in the first half, it implies that that's maintained in the teens in January. Most competitors have, not competitors so much, but other retailers have called out a slowdown in January.
Just trying to understand how that underlying run rate looks maybe versus, you know, January, you know, pre-COVID to try to get a feel for if things have accelerated, 'cause it's a very big number compared to most, what most retailers are producing at the moment. Thanks.
Thanks, Bryan. Ian here. I think first of all, obviously look at the comp number not the headline to try and isolate out the closures as you look through that. If you cast your mind back to this time last year, particularly through January and February, COVID was still very prevalent. Kmart was more impacted, I think, in the product categories we play than any other retailer by the reticence of customers to visit stores just because of the how busy our stores are. If you are a customer that's worried about COVID, then we were a place to avoid. I think our base, when you look at last year, was probably a little softer through January and Feb.
Then, of course, as we went through the half, we saw those customers return, and we ended up with a very strong half, as you probably remember, as we went through. I'd expect our sales numbers, and they have been, they've been very solid through the last period of time. You know, we feel like we're trading well, we feel like we're drawing customers, we feel like we're gaining share from the data we can see. I would expect the absolute number to moderate as we go through the half because the base is different.
Right. Just to clarify, Jan 2023 verse Jan 2020 or 19 is not as unusually high as we might imply from that 17% like for like number.
Yeah
Continuing on.
I think on one of the sheets, we did, like, a 3-year CAGR to give you a sense and, you know, that was sitting at a, I think, at a 5%, and that included all the Target closures that we had embedded within that number. You know, the business is a much stronger business now than it was pre-COVID. I think the work we've done.
Right
I think the work we've done around improving the product offer in a whole bunch of ways as we've run through the various strategy days, has meant our price leadership position has continued to extend. Our product is better than it was. I think that's playing through in our sales at the moment.
Yep. Great. Thank you.
Thank you. There are no further questions at this time.
Okay. Thanks, everyone for your time. If any questions, please give Simon and the team a call. Have a good day.