Wesfarmers Limited (ASX:WES)

Earnings Call: H1 2021

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Feb 18, 2021

Very much. Well, good afternoon and good morning, everyone, on the call, and welcome to our 20 21 Half Year Result Briefing. I'm joined here in Perth with a number of our leadership team, and then we have some others in Melbourne on the phone amongst our Managing Director Divisional Managing Directors. I'll provide an overview of the group's performance, following which Anthony will provide some more detail on the financials. The divisional managing directors will then talk to their performance and the outlook of their respective businesses. And I'll conclude with the outlook for the group, and then we'll move to Q and A. So just starting on Slide 4. The results for the first half were strong, but as you know, we don't judge our success over such a short term horizon. What pleases us about the results is that we're seeing the benefits from the three areas of strategic focus that I've been talking about in recent years, and we've continued to invest in these areas. These three areas relate to: number 1, positioning our businesses and the portfolio for future growth accelerating our data and digital capabilities and then addressing areas of underperformance. This is all about providing a satisfactory return to our shareholders, which we define as a top quartile TSR over the long term. We believe it's only possible to achieve this over the long term if you provide support to your broader stakeholders, as set out on this slide, which is a slide you should be very familiar with by now. Moving to Slide 5. During the half, we continued to demonstrate this in a number of ways. For almost a year now, we've supported our team, our customers and the community with paid pandemic leave, commitments to pay team members during lockdown periods and additional community support. Our investment in data and digital over recent years positioned the group to respond well to rapid changes in customer preferences and to support more vulnerable customers through COVID. During calendar 2020, Wesfarmers businesses created almost 10,000 on Jobs. Over 800 new Aboriginal or Torres Strait Islander team members also joined our group, and we're well on the way to employment parity. Across the group, we continue to manage our businesses with carbon awareness, and that focus saw emissions reduced by 8% in the first half, which is pleasing progress towards our net zero target and aspirations. It's also worth noting yesterday's approval of the final investment decision for the Mt Holland lithium project. Ian Hanson will be able to talk more to this soon. Now turning to Slide 6 and our results for the half year. The group experienced strong retail sales growth of 19.2 percent in store and online, and this is more than 1.5x overall market growth in Australian Retail Sales, excluding Food. Total online sales, excluding Catch, were more than double last year. And including Catch, online sales of $2,000,000,000 were recorded for the half. Reported net profit after tax was 1,390,000,000 And net profit after tax from continuing operations was $1,410,000,000 an increase of 25.5 percent. On dividends, our directors have determined to pay a fully franked ordinary interim dividend of $0.88 per share, an increase of 17%. Turning to Slide 7. Bunnings Kmart and Officeworks delivered strong trading results for the half, reflecting their ability to adapt to changing customer preferences and provide a safe and trusted environment for customers and team members. Good progress was made to accelerate the growth of Kmart and improve the performance of Target. The simplification of Target's business and store conversion program is progressing well. On a combined basis, Kmart and Target delivered a record earnings result for the period. Chemicals, Energy and Fertilizers delivered a good operating performance, particularly having regard to the increase in supply from a competitor ammonium nitrate plant during the period. Industrial and Safety's results Also benefited from an improved performance in Blackwood's. Then finally, on Slide 8, The group has maintained its strong focus on generating an acceptable return on capital with most of our divisions delivering an improved ROC. I'd like to thank Our Divisional Managing Directors, Mike Schneider, Ian Bailey, Sarah Hunter, Ian Hanson and Tim Bolt, for their leadership that has delivered the results that we're discussing today. I'll now hand over to Anthony, who will walk through the group's balance sheet and cash flows for the half. Thanks, Rob, and good afternoon, everyone. I'll start on Slide 11, which provides a summary of other business performance. In total, our other businesses and corporate overheads reported a loss of $1,000,000 for the half, which compared to a profit of $72,000,000 in the prior corresponding period. The key driver to the lower result is of the group's remaining 4.9% shareholding in Coles as a financial asset. This reclassification means our result no longer includes a proportional share of Coles net profit after tax. Instead, we only report dividends received during the period, which during the half was $18,000,000 It's also worth noting that any movement in the value of our residual holding in Coles will be taken to equity and not reported through the profit and loss. The net reduction in the reported contribution from Coles of $55,000,000 together with a lower contribution from the group's investment in Gresham, more than offset the benefit of higher property revaluations in BWP Trust as well as the $6,000,000 reduction in our corporate overheads. Turning to working capital and cash flow on Slide 12. Divisional operating cash flows increased 16.1% for the period, which was supported by strong divisional earnings growth. As highlighted at our full year results, lower working capital inflows during the half this half reflect the ongoing normalization of working capital positions across our retail businesses following the favorable but temporary movements which we recorded towards the end of the 2020 financial year. The working capital result also reflects the targeted investment in Kmart to increase stock weights in some categories, providing greater flexibility to accommodate demand fluctuations from COVID-nineteen. We're pleased with the progress that was made in Kmart during the half to improve inventory availability, which supported stronger sales growth through the Christmas trading period. Our payables also remained elevated at the half, which reflected the continued build in inventory across the retail businesses to support the strong sales growth. We expect to see further normalization of our working capital position into the second half of the year. As a result of the lower working capital inflows, divisional cash generation was 111% for the half, which was slightly below our 5 year average. At a group level, operating cash flows increased 4% and were impacted by the timing of tax installments, which was significantly higher during the half. As a result, the group's cash realization ratio finished at 102% for the half. Turning now to capital expenditure on Slide 13. Gross capital expenditure was $410,000,000 for the half. This reflected continued investment in data and digital capabilities across All of our divisions as well as the conversion of 19 Target stores to Kmart stores that was offset by lower capital expenditure on new stores and refurbishments in Bunnings and across Kmart Group. Net capital expenditure for the half increased 17.4 percent to $243,000,000 due to reduced property activity resulting in lower proceeds from Bunnings property disposals. For the 2021 financial year, We expect net capital expenditure for the group to be between $650,000,000 $800,000,000 This estimate reflects ongoing store network activity, Our continued investment in data and digital projects and capital expenditure associated with the Mount Holland lithium project following yesterday's announcement of our approval of FID on the project. Turning of our approval of FID on the project. Turning to balance sheet and debt management on Slide 14. The group's continued to retain a strong balance sheet with flexibility to support further investment in the group's businesses. At the end of the half, the group recorded a net cash position of $871,000,000 reflecting the strong operating cash flow performance and the actions taken last year. During the half, the group recorded a $9,000,000 reduction in other finance costs due to lower average debt balances following the repayment of $500,000,000 in domestic bonds in November. Our weighted average cost of debt increased slightly to 4.38% due to a shift in the mix of debt towards our remaining European bonds. We continue to maintain our focus on managing our lease portfolio to balance network flexibility and security of tenure. Our average remaining lease tenure reduced to 4.7 years during the half, supported by the store closures and conversions within Target. Our work to reposition the target network has supported a 14% reduction in its lease liabilities since the 2020 financial year. Further detail on our lease portfolio is included on Slide 20 sorry, Slide 47 of the presentation. Overall, we are pleased with the strength of our balance sheet, which provides flexibility to respond to the significant Certainty associated with COVID-nineteen as well as to support the continued investment in the long term growth of our businesses. To the extent that we have capital that is surplus to these requirements, we will look for opportunities over time to return it to shareholders in the most tax effective manner. Turning now to dividends on Slide 15. As Rob mentioned, the Board determined to pay a fully franked interim dividend $0.88 per share, reflecting the strong net profit after tax result for the half. This dividend is consistent with our dividend policy, which Seeks to maximize the value of franking credits to shareholders while having regard to current year earnings, credit metrics and forecast cash flow requirements. The group will again provide shareholders with the option to participate in the dividend investment plan, and we expect that shares for the plan will again be purchased on market. And with that, I'll now hand over to Mike Schneider. Thanks, Anthony, and hi, everyone. I'd like to start by acknowledging the incredible hard work from the Bunnings team and our suppliers in the face of considerable challenges last year. The team have worked tirelessly to keep everyone safe, responding to ever changing regulations in different states and regions and to keep our customers served and our stores stocked. Now starting at Slide 17 and looking first at our safety results. Importantly, our number one team measure, TRIPPA, Our total reportable injury frequency rate continues to improve, down from 10.4% in the prior corresponding period. This is a pleasing result as we continue to progress towards our goal of ensuring that every one of our team members goes home safely every day. Operating revenue increased 24 percent to $9,000,000,000 for the half with earnings before tax increasing nearly 36% to $1,270,000,000 Excluding property, the property contribution, EBT increased 39%. Now turning to Slide 18. Total store sales growth of 25% was achieved during the half with the store on store sales growth increasing by 28%, Driven in part by the extended lockdown in Metropolitan Melbourne stores over a number of months, online penetration rose to 3.1%. All major trading regions performed strongly, and the trading performance across all product categories showed strong growth, led by gardening and outdoor living products across barbecues, Furniture and Lighting. Approximately $16,000,000 was invested in the half in additional cleaning, security and personal protective equipment to operate safely in response to COVID-nineteen. In addition, we also continue to pay our team in full during all COVID related trading restrictions during the half. Return on capital increased to 76.6% as a result of strong earnings growth and continued disciplined capital management. Turning to Slide 19. Despite the highly complex trading environment, we haven't skipped a beat in progressing our strategic agenda. We've continued to invest in our team, the customer along with service and digital innovation to drive growth throughout this period. To improve the customer experience, we continue to proactively lower prices across a wide range of categories and products. We also recruited over 6,000 additional team members across Australia and New Zealand to serve as higher demand, and I welcome these team members to the Bunnings family. With the help of our supplier partners, we further improved the ease of shopping for customers to reflect their shopping habits through product display upgrades and refreshed ranges, including garage organization and kitchen design. Further enhancements were made to the website experience through improved functionality and expansion of our online range. Customers continue to respond well to the convenience of the Product Finder app, which helps them research and find the products they need in store, meaning they get in and out of our stores more quickly. Customers also continue to enjoy the convenience of online ordering through our click and collect, contactless drive and collect and click and deliver services. Continued strong support from suppliers assisted with good inventory management, particularly in light of high levels of demand. We also continued to strengthen our relationships with commercial customers through expanded product offerings, particularly in our supply and install office of builders, which expanded to support NDIS and retirement living refurbishment as well as current offers across kitchens, flashboard insulation and staircases. We also introduced a number of initiatives to further improve service for our commercial customers. A successful trial of a new trade service desk format was completed, providing a dedicated service area that improves the customer transaction experience, And the next phase of this will be rolled out in the second half. Over 1,000,000 transactions were completed through the Power Pass app over the last 12 months, and functionality continues to improve. The performance of Adelaide Tools was pleasing, and we are excited to be opening our newest format store in Parafield, South Australia. Our locally based Adelaide Tools team is doing a great job, and we anticipate more stores opening late in 2021. Now turning to Slide 20. Whilst the outlook remains uncertain, the home improvement and lifestyle sector is expected to continue to benefit from consumers spending more time in their homes. Sales and earnings growth is likely to moderate from March, particularly as we cycle the upward from COVID-nineteen in the prior year and as government stimulus programs come to an end. Costs associated with operating safely and complying with government regulation in a COVID-nineteen environment will continue to be incurred for the foreseeable future. However, we are well positioned for continued growth and are committed to investing for the long term success of our business through continued digital innovation and capabilities, broadening commercial markets and strengthening our in store offer. We expect to open 6 stores in the second half, all of which are currently under construction. To finish, I'd again like to thank our teams and suppliers who've done an outstanding job in dealing with the ever changing trading conditions over the half, minimizing disruption to trading and looking after our customers while keeping each other and the community safe. That's it for me, and I'll now hand over to Ian Bailey. Thanks, Mike, and hi, everyone. Kmart Group's focus during the pandemic is on being there for our customers, keeping our team members, customers and community safe and making the right decisions to set our business up for future success. I'm exceptionally proud of our team and the way they have performed through the uncertain times and very difficult operating conditions, and I'm very grateful and thankful to work with such a wonderful team. Overall, Kmart Group has been a net beneficiary of strong retail demand in the first half, with some categories benefiting from the shifting consumer preferences, while other categories Seeing significant declines. Consumer shopping behavior has changed with customers reducing the number of visits in store and spending More with us per visit. The online channel has grown rapidly across all our brands, and we have also absorbed many incremental costs during this time. Importantly, Keane's business has made significant progress on their longer term strategic agendas. Now turning to Slide 22. Safety is a key priority for Kmart Group, and we have made good progress with the total recordable injury frequency rate decreasing 34% to 10.6% during the half. Kmart Group delivered revenue of $5,400,000,000 up 9% for the half. Including gross transaction value for cash, Kmart Group revenue increased 12.4% or over $600,000,000 for the half, demonstrating the group's Now turn to Slide 23. Kmart's comparable sales increased 9.1% in the half with home, toys and active categories growing strongly. This translated into the strongest earnings half Kmart has delivered. Kmart started the financial year with an improving trend in product availability, But as the half progressed, unprecedented disruptions in international shipping, combined with local port congestion, resulted in considerable delays for us and many other businesses. Kmart's scale and strong relationships have enabled us to minimize the impact to customers demonstrated by improvement in our net promoter scores through the half. These disruptions are expected to persist into the second half and we will continue to make incremental investments to support key product lines and leverage strategic with our shipping partners. Target's comparable sales increased 13% in the half, driven by a combination of strong retail demand and the considerable work undertaken over the last 2 years on improving the core product ranges, Target's profitability also improved significantly in the half. As more customers chose to shop online than ever before, Kmart and Target reported record online penetration of 8.7% and 15.9%, respectively. While this channel is profitable, we have significant opportunity to optimize our online operations, And we continue to invest in replatforming Kmart's website to improve the customer experience. Turning now to Slide 24. The strategic changes announced last year to grow Kmart and create a smaller and simpler target are delivering strong results. The conversion of select target stores to Kmart is progressing well and the much larger Kmart store network is expected to unlock additional scale benefits to underpin Kmart's future growth. 19 Target stores were converted to Kmart during the half, including 7 smaller format K Hub stores with initial results well above expectations. We have also created over 8 60 net new roles in Kmart conversion stores predominantly in regional communities. Solid progress was made in Target to simplify the business operations and overhead structure and prioritize online growth. In Kmart, We have continued to invest in key strategic initiatives to enhance the customer offer. This includes in store RFID technology to enable a more efficient and agile operating model and greater stock visibility and continued development of data and digital assets and capabilities. Turning now to Slide 25. Chassis' gross transaction value increased 95.6% in the prior period with strong performance in both the in stock and marketplace segments as more customers shopped online and the product offering was expanded into new categories and brands. As per previous guidance, Catch's earnings performance reflects accelerated investment in warehouse automation, technology, marketing and team capabilities necessary for the business to scale ahead of future top line growth. Catch Now Range is increasing numbers of Kmart and Target products and is expanding click and collect options across Kmart and Target Stores. Now turning to Slide 26. As we have previously said, FY 'twenty one It's a year investment for Kmart Group as a foundation to lay for a significantly larger and more digitally enabled Kmart, a smaller but more profitable target and a rapidly growing catch. These investments are focused on improving the customer experience, both in store and online and on making the business a great place to shop that is simple to run and delivering better products at even lower prices. By using technology to leverage Kmart's strengths, its brand, ability to deliver lowest prices profitably and leading product development capabilities, we see enormous potential to continue to grow this business. We expect to incur one off costs or one off non operating costs approximately $90,000,000 to $110,000,000 for the full year relating to target store closures and conversions to Kmart. To Catch, we see great opportunity for continued growth in the online market and we will continue to accelerate our investment in that business to fuel that. Thank you. And I'll now hand over to Sarah Hunter. Thanks, Ian, and hi, everyone. I'm pleased to be joining you today to report that Officeworks has continued to deliver strong sales and earnings growth during the half. Turning to the next slide. Safety, health and well-being of our team members and customers remains a priority for Officeworks. We continue to adopt best practice in hygiene measures across our operations to ensure our team feel safe coming to work and our customers feel safe when shopping with us. From a financial perspective, revenue grew by 23.7 percent to $1,500,000,000 Earnings grew 22 percent to $100,000,000 And return on capital increased to 23.4%. Turning to the next slide. Officeworks' ongoing focus on and Continued investment in our every channel proposition allowed the business to respond quickly to changes in customer behavior during the half. Online sales penetration increased to 37.1 percent driven by periods of particularly strong online sales growth when access to stores was restricted. Sales growth was supported by strong demand for technology and furniture products, and customers also responded positively to our Christmas offer with our STEM, Early Learning and Art and Craft ranges proving particularly popular for gifting. Strong earnings growth of 20 6% was delivered despite gross margin compression as a result of changes in sales mix and continued investment in price. COVID-nineteen restrictions adversely impacted sales in higher margin categories such as print and copy and office supplies. The significant growth in online sales did require some additional resourcing to support peak demand resulting in higher performance costs. Turning to the next slide. Despite the changing circumstances surrounding COVID, we continue to invest for the long term to deliver our strategy. The safety, health and well-being of our team members remains paramount, and there is always more to do in this space to ensure that our team go home safely every day. The mental health of our team was a particular priority, and we supported them by investing in a number of initiatives and offering pay and work certainty during the COVID lockdowns. We launched our diversity and belonging program and we've made significant progress in indigenous team member employment. We also expanded our analytics capability with the launch of Phase 1 of the Officeworks data and analytics platform. And our range has continued to evolve to make changes in customer demand. For example, expanding our cleaning and hygiene range to enable small businesses Continue to operate safely and launching our new exclusive art brand, AORN. Over a period when our communities really needed support, we contributed $3,000,000 to local groups and our national partners and good progress was also made to reduce emissions. Investment in our supply chain capacity across every channel enables greater flexibility to manage COVID restrictions and customer demand. And we continue to invest in growing our business. We upgraded store layouts, opened 2 new stores, made enhancements to our mobile app, online checkout and delivery options for Customers, our new Geeks 2U subscription service continues to grow to complement our technology offer. And we also Investment in replatforming and building a new integrated website for our Prints, Copy and Create business, which will deliver a materially improved experience for customers. Turning to the next slide. While the outlook is uncertain, Officeworks remains well positioned for the future. We are expecting sales and earnings growth to moderate from March as we begin to cycle the initial sales impact of COVID-nineteen. We will drive long term growth by investing in our team, the customer experience across every channel, enhancing capacity of our supply chain and improving productivity through use of technology. We will continue to invest in opportunities to grow our core business as well as expanding into adjacent areas in B2B and in education. I would like to take this opportunity to recognize and thank to the amazing Officeworks team for delivering yet another half of positive progress under extremely challenging circumstances. Thank you, and I'll pass over to Ian Hansen. Thanks, Sarah, and hello, everyone. Overall, Westaff has continued operations and supported customers I'd like to acknowledge the great contribution of all our team members in achieving this. And I'm very pleased that during this ongoing phase of disruption, We've maintained our good safety performance. Turning to Slide 33. You can see that each of our business segments experienced Decline in revenue with earnings impacted as a result. Overall, this decline was less than expected given this is the first reporting half When the competing Burrup plant has been in operation, coupled with lower and volatile energy prices throughout the half relative to the prior corresponding period and reduced fertilizer volumes due to the late season in 2019 that was not experienced in 2020. We have been pleased with the resilience of the business and its strong return on capital. Turning to Slide 34. As you're aware, Wesfarmers, together with joint venture partner SQM, announced the final investment decision for the Mount Holland lithium project. The project establishes a new growth opportunity and market sector for Westaff. It aligns with our strategy of investing in adjacent markets and identifying new opportunities, where we can utilize our core capabilities in project development, sustainable chemical processing and product distribution. Westaff has successfully built chemical processing plants and moved into new markets over its history, with process plants to produce various acids, chlor alkali, sodium cyanide, ammonia, ammonium nitrate and Aon emulsion plants, just to name a few. This project is a key focus area for myself and the senior leadership team at Westaff, And we continue to provide all necessary support to the Covalon joint venture to ensure sound project execution. The announcement follows the completion of the updated definitive feasibility study, which is the culmination of 12 months work It has provided the joint venture partners with greater clarity on the project's engineering design and cost. Importantly, we've also optimized the project to increase the annual production capacity to 50,000 tonnes per annum with Wesfarmers share being 25,000 tonnes of battery quality lithium hydroxide per year at full production. Turning to Slide 35. I will now address the performance of each of the business units. The Chemicals portfolio generally Faced positive customer demand fundamentals with buoyant commodity prices and the industry avoiding significant COVID production interruptions. The strong ammonium nitrate demand from the iron ore sector was offset by increased supply from the competing Burrup plant, which impacted the sales result. Ammonia earnings were marginally down on the prior period due to planned 2 week shutdown of our plant. The cyanide business has seen export volumes and spot pricing negatively impacted by COVID related mine disruptions in several export markets. Furthermore, some increased cost pressures were experienced within chemicals due to short term supply chain issues related to COVID. Now Now to the Energy segment. The Clean Heat LPG business experienced a volatile period reflecting global energy markets. Earnings from LPG were down slightly on the corresponding period with higher export sales offset by lower average Saudi CP, The international indicator price. The natural gas retailing business continued to grow its residential customer base in Western Australia. The LNG business increased earnings slightly due to improved margins and volumes. Now to fertilizers. While not as material as the second half due to seasonality, fertilizer earnings declined on the prior corresponding period due to a dryer end of season in calendar year 2020 compared to the late rains and therefore higher fertilizer sales in the same prior year period. The business is benefiting from a newly commissioned liquid storage facility in Kwinana and has continued to invest in data and digital capabilities to enhance its service activities and customer experience. Now turning to Slide 36. In terms of outlook for the businesses, within the chemicals portfolio, the demand for ammonium nitrate is expected to remain stable. The ongoing disruptions to some offshore mining jurisdictions is likely to continue and could impact cyanide export demand in the short term. In the longer term, we still expect growing demand from the gold sector and the team are investigating opportunities to expand production capacity. The Clean Heat LPG business will likely benefit in the 2022 financial year from the imminent closure of the BP refinery in Kwinana, resulting in reduced LPG production capacity in Western Australia. This will see an increase in Clean Heat's domestic sales volumes of LPG and a corresponding reduction in exports. The remaining energy businesses are expected to be stable. With respect to fertilizers, the recent 2020 Western Australian harvest was above average, which will assist grower sentiment. However, second half earnings will remain dependent upon the timing and extent of the seasonal break in autumn and maybe impacted by increased competitive pressures in the West Australian fertilizer market. Thank you and I'll hand over to Tim Bolt. Thanks, Ian. Before I begin, I'd like to commend the hard work done by all the teams in the Industrial and Safety businesses over the past 6 months of activity, particularly following on from the challenging times we faced in the second half of the last financial year and as our teams navigated this into the first half of this year where the challenging operating environment continued. Our businesses did a great job of continuing to support our customers in response to COVID-nineteen during the period through sourcing of critical products, ensuring critical oxygen supply to hospital groups and providing additional risk consulting services. Turning to the half year results on Slide 38. Industrial and Safety's earnings grew from $22,000,000 to $37,000,000 before the payroll remediation costs that were incurred in the prior year. The earnings performance was primarily driven by Blackwood's, which was in line with our expectations. Safety remains a key priority for us. The total reportable injury frequency rate increased slightly to 4.5 in this half. However, that was a stable result given the current operating environment. In relation to the specific performance of businesses within Industrial and Safety on Slide 39. I'll start with Blackwood's. Revenues grew in Blackwood's due to continued growth from strategic customers and strong demand for critical products in the Q1, including respiratory cleaning and hygiene products. This was partially offset by weakness in some coal mining, oil and gas and manufacturing sectors. Investment to date to improve Blackwood's operational execution supported the reliable supply of products despite COVID-nineteen related shipping disruptions, and this was a strong achievement by the team. Earnings increased from the higher sales and cost improvement initiatives, partially offset by continued investment in customer service and digital capabilities, including the Enterprise Resource Planning, or ERP, system. Turning to Workwear Group. Earnings were in line with the prior year with lower revenue from Uniforms as a result of the impact of COVID-nineteen on some customer segments, including airlines, retail and hospitality. Pleasingly, these were offset by higher revenues from the industrial workwear brands, including King G and Hard Yacker, together with operating efficiencies within the business. CoreGas' earnings increased on the prior year due to the higher demand from industrial and health care customers, Reflecting investment in the product offerings in these segments in recent years, the business also benefited from improved material sourcing which was a good outcome. Turning to the outlook for Industrial and Safety on Slide 40. Market conditions are expected to remain uncertain and challenging for the remainder of this financial year. Blackwood's continues to focus on improving its customer value proposition. The business will build on improvements to its core operational capabilities, including through progressing the implementation of the ERP system. Customer demand in Workwear Group will continue to be impacted by COVID-nineteen. The business continues to focus on growth from key brands, cost improvement initiatives and continued investment in its digital offering. Customer demand in core gas is expected to remain stable with continued strength in Healthcare and Industrial segments, offset somewhat by weakness in other sectors and ongoing competitive pressures. Thank you. I'll now pass back to Rob. Thanks, Tim. Now turning to Slide 41 and the outlook for the group. Economic conditions in Australia have recovered strongly, and the outlook is now more positive. Sales across the group's retail businesses have continued to remain strong through January February, with some impact from government mandated trading restrictions. It is apparent that we need to learn to operate in a COVID safe way for some time to come because there continues to be risks and uncertainties, particularly as we seek to contain the virus and with the risk of future lockdowns. Effective and well coordinated COVID management in areas such as hotel quarantine, test, track and trace capabilities and adopting more measured and sophisticated approaches to outbreaks will help to reduce the enormous harm on families and businesses from hard lockdowns and will ultimately support the economic recovery. Australia is in a unique position to manage the challenges of COVID-nineteen, And it's important we focus on longer term strategies that will sustain our future prosperity. Consumers spending more time at home and working from home While the restrictions while other restrictions persist is likely to support higher demand for some of our group's businesses. The group will continue to invest in our digital offer to meet the changing needs of customers while also improving operating efficiencies and always managing our businesses for the long term. Regarding the Mount Holland project, we're excited about the opportunities with this project. This is a very long term project and one where Wesfarmers and our partner, SQM, bring some very specialist and highly complementary expertise and experience. The group's portfolio of cash generative businesses with leading market positions remains well positioned to deliver satisfactory returns over the long term. Now that brings us to the end of the briefing. We'd now be very happy to take your questions. We will now begin that question and answer session. Your first question today comes from Michael Samotis from Jefferies. My first question is on Capital allocation and in particular, how you're thinking about the balance sheet at the moment? And maybe a comment on The interim dividend that's been declared because the payout ratio looks like it is a little bit at the lighter end, notwithstanding the very strong earnings and cash generation. And how you're balancing the opportunity to invest in existing businesses, invest in new businesses and return capital to shareholders. Thanks, Michael. I'll take that question. So firstly, as I think we mentioned, It's a really good time to be sitting on a strong balance sheet at the moment given the uncertainty around COVID and we see that playing out obviously with the recent lockdown. So I think it's a good environment to have a strong balance sheet in. We continue to invest in our existing businesses. As you know, Yes, our philosophy is very much about getting franking credits back to shareholders. So we're not sitting on surplus franking credits, And that's because we've managed to pay those back to shareholders as we've earned them over the years. So we will continue to look at capital management As we go forward, but I think at the moment, we are comfortable with sitting on a strong balance sheet, which allows us to invest in our existing businesses. Sorry, in terms of the interim dividend, you're right that the $0.88 probably represents a slightly lower Payout ratio. As you know, our interim payout ratio is always lower than our full year payout ratio. We haven't moved away from our full year payout ratio range. The current interim represents about a 72% payout ratio. Typically, we're Between that and about 75%. We have seen a shift a bit in earnings pattern across the halves. So that's impacted that decision slightly, but It doesn't change our approach to dividends over the longer term. Okay. Yes, that's helpful color. Thank you. And then just a second question from me on the retail businesses. A lot of retailers Have demonstrated significant margin expansion as you have. And some of that's been operating leverage and some of it's been Gross margin expansion as a result of the very strong demand. You've given us some very useful commentary on margins for Officeworks. I was just hoping you could give a little bit of qualitative color on gross margin performance across the other Retail businesses, please. Yes, Michael, it's Rob here. Look, I'll answer it at a high level, and each of our Retail MDs can provide a bit more color. Look, I think there are a few things. It's important to understand the differences in each of our businesses. So if you take a business like Officeworks, as Sarah was saying there was a very significant change in sales mix such that some of the higher the impact of COVID on Officeworks was that some of the higher margin products, such as print and copy, we saw a decline in demand. And some of the lower margin products, particularly on the technology side, we saw very strong demand. If you contrast that to, say, Kmart and Target, Them selling more product at full price and less discount and clearance is clearly going to give a gross margin benefit. On the Bunnings side, Bunnings being an everyday low price retailer and being deeply committed to keeping low prices, as all of our businesses are, I should say, You wouldn't expect such an increase in gross margin, and indeed, it's not how we focus on the businesses. The other point I'd say is that The objective of all of our businesses and the group is not simply to ask the question of how much Operating leverage and how much profit can we make in a 6 month period. As I said and as our MDs have said, we have we've continued to invest heavily. We've invested heavily in our team, heavily in COVID safe practices, continue to invest heavily in setting our businesses up for the future. So We're quite pleased with the extent of leverage that we achieved, but we're also pleased with the foundation that we've set for the future. Michael, it's Mark Schneider here. I'd just add to that Pretty much as Rob said, but for us, as I said in my sort of opening remarks, for us, we've been continuing to invest in price as an EDLP retailer. It is Something we are excited on in terms of delivering for customers. So yes, for us, it's been more about leverage than margin. Ian Bailey here. Michael, just a few points from Kmart Group side of things. I think it's obviously, margins We've been positive for the reasons which Rob called out where we've had less clearance in the mix. There's also a cost story in there too on the way through. So obviously, we've been converting targets to Kmart. Those conversions have delivered greater sales density and greater sales in those stores. So of course, that translates Show to the bottom line, particularly as you get the fractionalization of the fixed costs of the Kmart business. And of course, within Target, last year, we actually had Quite high clearance levels. So we had an unusually low margin number and obviously benefit this year with the stronger margin at full price. But equally, we've done a substantial reduction in cost in that business as well, which has been a contributor to the result. So it's a combination of margin and costs Okay, great. Thank you. Your next question comes from Shaun Cousins from JPMorgan. Please ask your question, Shaun. Thanks. Good afternoon. Just a question, hopefully, Mike, that you can answer. Just regarding Bunnings, Can you talk a little bit about what was stronger in terms of the contributor to revenue growth, whether it was DIY or trade and whether or not you've seen the DIY market Become a bit larger than what you had anticipated previously? And then how are you thinking about trade into calendar 2021, calendar 2022 cycling The strong trading that you've got, but also how you're positioned for a renovation or a housing investment cycle there. So hopefully, some answers in there, please. Hi, Sean. Yes, look, I think we've been going to talk for quite a while about the fact that we sort of because we can see the trade customers through Power Pass, that sort of 35, 65 split of revenue sort of is continuing and both have seen a good lift in sort of volumes across There's no doubt in my mind that Australians and New Zealanders have fallen back in love with doing things around the home. Some of that will have been out of Necessity and some of it is very much about staying occupied, particularly if you think about Melbourne and the better part of 3 months being locked down. It was very much a case Seeing people stay really active at home. I think that on the trade side, there's certainly a lot of activity both on new starts and on Paul, today, when you think about what's going on with housing churn, there's a lot of interest in that. So we're really well positioned. We've been worked really hard over the last 12 months to improve the capability of the trade team. So we've got a new Trade Chief Operating Officer, Ben McIntosh, who joined us last year and a number of new leaders across the 3 categories of Bunnings trade, which is really helping us focus on sales and relationship management alongside The technological developments, improvements in Power Pass, it's great to see so many trades and small businesses using the app. It increases convenience And speed and time in store, but also a lot of really good work on product innovation and in store experience with the new trade service desk that I touched on earlier That creates a much better experience for tradies when they're in store and on the way through. And obviously, during periods of lockdown, We're fortunate that the business can be open for the trade to do emergency repairs and things like that. So obviously, that's been a benefit during The first half, but yes, we've got a really positive outlook for what we can do in trading terms of improving the way we go to market and the quality service offering, I think that will benefit us in increased sales. And so to be clear, so you didn't see any divergence in the growth rates between trade And DIY, they both grew at the same amount and stayed at 35 percent trade stayed at 35%. Is that what you're saying there? Yes, pretty much. Okay. Perfect. That's helpful. And my second question is maybe just for Ian. Can you maybe sort of provide us a little bit of Detail around what are you seeing from the target conversions in terms of broadly what have been The ranges of sales uplifts in that generally Kmart stores generate much greater sales than a Target store and you're obviously also more profitable. What are sort of can you share any financial metrics around how this sort of how these conversions are progressing, please? Yes, sure. I think the best thing, Sean, the very early days. So I'll put that caveat on there. But so far, the performance of the stores have been stronger than expected. Now when we look at the economics of the stores, it's very much a rational financial assessment. So we'll assess the costs of establishing the new Kmart. So that includes the cost of closing the target, that The cost of the fit out and so on and match that against obviously the incremental revenues that we get post that. And that then gives us a sales profile for those stores. We're consistently overachieving against that sales profile that we had within those business cases, but I say very early days. In the case of the K Hubs, which is a small format, We're seeing very strong growth in NIMs relative to their historical levels as target countries. And the reaction we're getting from customers in the communities where we've opened has been Incredibly strong. So can't really give you any numbers. I think even if I think that I did, I'm not sure how useful they'll be because of the stages, the life cycle we are with those. But I would say the early indications give us a lot of confidence for what's coming in the second half. Great. Thanks, Ian. Your next question comes from Grant Saligari from Credit Suisse. Please ask your question, Grant. Good afternoon. Thank you. Sorry for the delay. Iain, could I just Continue perhaps just on target, specifically, so the reposition target formats. Obviously, incredibly hard to judge, I guess, underlying performance given the period we've been through. But are there any other proof points that you Point 2 in terms of where you've got the cost position to where sales might have been some of the more stable ranges that could support progress in the turnaround of that target business. Yes. It's a good question, Grant. I think a couple of things. We've analyzed the performance in many ways and trying to isolate out the net benefits of COVID. It's not a simple equation. Obviously, some categories have seen really strong performance and then other categories have seen the opposite. And if you look at both Kmart and Target, we would sort of class ourselves in the middle of the retail market as being benefiting in some and not in others, Clearly with a net benefit position, I should hasten to add. When we look at the look within the categories, I'd say the work we've been doing around quality and style At an affordable price, I think it's starting to get traction. I say I think because it's so hard to isolate that out from the environment that we're in. But when we look at rates of sale of the products that we would say are delivering on our brand proposition, we're seeing those rates of sale being higher than some of the other products. We've also been in filling the range where we felt like we were missing products within categories that were more at the basic end And they have performed well. So we feel like that is a real number that's going to continue to stay with us. So when you look at the underlying health of the I would say good progress, but none of us are declaring that we're at the destination at this point and we have more to do. As we go through the second half though, What we do have is we have a continuation of the closures and conversions to Kmart and we have a continuation of the reduction in the cost base of target. Now both of those things are working well. The closures are generally performing well up to the point of closure, which is one of the reasons why the one off costs Reducing from what we initially predicted. And then the cost base is very much on track for where we wanted it to be. So I think by the time we end this half, we're going to have a very different target, which is smaller than it was historically, and it is very focused around quality, style and affordable price. And I feel like we've made a good start on that journey of getting to a sustainable level of performance. But I don't think any of us are declaring victory just yet. Sure. I appreciate that. If I could ask one other question, perhaps of Tim, just in Industrial and Safety, which has been the other repositioning and restructuring task. Again, are there any proof points that you can talk to with that business? I mean, it's obviously pleasing to see the profit Going up in the half, which is the first time for a while we've seen that. But in terms of the cost base of that business, You mentioned the ERP system is sort of approaching, I guess, the final implementation phase. Just interested in where that business is at in terms of progress with its turnaround. Thanks, Grant. I'm guessing you're referring primarily to Blackwood's in that case, but correct me if that's not the case. Look, I think there has been some good progress with the team led by Rachel McVittie around cost management, and the business has certainly become more efficient. We've seen some good growth in sales, as I outlined, notwithstanding the difficult operating environment we've been. Now it's a really mixed bag because some customers have Performed very strongly, and the business has had some good success with its major strategic customers in terms of growth. But Then we've had really reduced demand, not losing customers, I might say, but reduced demand from some customers that are in heavily affected segments whether COVID affected their operation or it's reduced the price of their products and therefore, their level of activity. We've also had some benefit from which may not be lasting around hygiene related products that have, I guess, resulted from the impact of COVID-nineteen. In aggregate, COVID-nineteen has not been good for the business, But there has been some offset, as I say, in relation to those products. It's very early days. If we look at the division moment, its return on capital has improved from 3.4 percent last year to 5.4 percent, but that's in no way satisfactory. We've got a long way to go. We're building some early momentum, but it's very early days. In relation to the ERP, both the team within Blackwood's and with the support of our new implementation partner have done an enormous amount of work. They're very well advanced. The build process of the new system is complete and we're deep into data migration and user acceptance testing. It's a very complex project with us approaching 250,000 SKUs. We're well advanced, but still with quite a bit of work to do and it's an important investment clearly for the business and very much part of the focus for us going forward. Yes. All right. Thank you. That's helpful. Your next question comes from Andrew McLennan from Goldman Sachs. Please ask your question, Andrew. Thank you. Good morning and afternoon, everyone. Anthony, I completely agree it's a good time to have a strong balance sheet with the uncertainty around COVID, etcetera. But I think even after paying for the Kidman development, you're going to have $4,000,000,000 to $5,000,000,000 of capital in excess of the A minus credit rating. And I think I saw you're paying fees on undrawn $2,000,000,000 of undrawn banking facilities. It doesn't appear That you're sitting on that kind of balance sheet position from a conservatism perspective. It's I imagine you'd be paying that down, etcetera, if you didn't have plans for that capital. What is the what are you guys waiting for? I mean, obviously, it's an expensive market at the moment, but You previously said you'd return excess capital to shareholders If there was no other purpose for it, I'm just wondering how we can overcome this balance sheet issue at the moment. Yes. Thanks, Andrew. Look, there's no doubt we've clearly got a strong balance sheet. We're not hiding behind that fact, and we're sitting on net cash. I think the reality is though, as we've always said, and I think we've got a history of doing this, is getting capital back to shareholders when we don't have a need for it. The reality also is that we are still in a COVID environment and it's still a level of uncertainty and we continue to see that on a daily basis. And I also, as I mentioned before around our franking credit position, we want to be able to do this If we're looking at giving capital back to shareholders, we want to be able to do it in a tax effective way. We're not sitting on a meaningful balance of Franking credits that will allow us to pay out a very large special dividend. So we need to look at other forms of capital management if that's Appropriate at a point in time. And there are other means of doing that. They will require shareholder approval. So we'll need to consider how that plays out in the future. But I think there's no doubt It's a great time to be having a strong balance sheet. And take the point that from an efficiency point of view, we're paying a small cost for that at the moment. But in the context Where we sit and the growth opportunities that we're looking at, we think that's in the best interest of shareholders. Okay. And one for you, Rob. I think in terms of the outlook statements from Wesfarmers, I've always thought that Your comments have been very balanced. This time around, it's clear that the view is much It's certainly more optimistic. And I'd note that for most of your retail businesses, you're talking Around the outlook is so the growth would moderate and certainly given the very high base, it's not surprising, but it doesn't sound as though you're At all anticipating profitability to go backwards, can you just confirm if that's an over interpretation of how you've been Explaining the outlook for the Retail businesses, please. Well, Andrew, I'm certainly not giving any forecast on profitability. You recall back in August, I was quite I was very cautious, and that was at a stage where we were facing month Very extended lockdowns, an enormous amount of uncertainty with COVID. Not we're still working through government stimulus response and so forth. Where we sit now, clearly, the data shows that the economy has bounced back very strongly. So I guess my statements are just a statement of fact that we've seen unemployment reduced, jobs have come back, Savings rates are a lot higher. Consumer spending is and confidence has improved. My comments are also with the caveat that risks and uncertainties remain. And as Anthony said as well, The virus is changing month on month with various mutations. We have snapped lockdowns week on week that are not anticipated, and we read about them and hear about them in the media. We can't just ignore those They do represent risks. So I think we've got a lot to be pleased about and optimistic about in Australia, in particular. But we shouldn't lose sight of those risks. I think what we've also demonstrated through Our performance in 2020 is that our portfolio of businesses and our teams have been able to adapt and respond really effectively. So We've gained a lot more confidence in our capacity to manage this volatility and uncertainty and still deliver good comes. So yes, we do feel more optimistic, but we shouldn't ignore the fact that there are still risks that remain. Okay. Thank you very much. Your next question comes from David Errington from the Bank of America. Please ask your question, David. Thank you. Thank you, operator. Rob, can I ask you this question? It's very broad, but And maybe Ian Hansen can follow in as well. Why is investing in lithium? And I understand EVs, but can you give us a bit of an update? Why you think that is a really good investment for Wesfarmers, given Now you've spent, what, dollars 780,000,000 inquiring Kidman, and you're putting in another $950,000,000 for your 50% stake. Can you give us a bit of an overview as to now I understand EV demand is strong, but can you give us a bit of an overview why you think this is a great investment for Wesfarmers in the long term, please, given it's For Wesfarmers in the long term, please. Given it's likely to dilute returns for at least 4 or 5 years because they are very long duration and they are pretty capital intensive and there is a lot of supply coming onto the market. Yes. So David, I'll touch on that and then Iain can talk more. There isn't a lot of supply coming onto the market, particularly on in lithium hydroxide. But I think If I take a step back, as you know, the way that our WESF division has grown over the years is by making significant investments of capital with a long term view. And often, those investments are to support new industry opportunities that have arisen and where Western Australia possesses some unique points of competitive advantage. And you can look at that with the growth of WESF over the years, be it around the growth of its fertilizer LPG business, the expansion the multiple expansions of ammonium nitrate, the move into sodium cyanide, the more recent move with Emulsion. And lithium is a unique situation that we Globally, there are some of the highest quality hard rock reserves here in Western Australia. The chemical Process for converting concentrate to lithium hydroxide is It has a number of very similar processes that lend itself to a lot of the expertise we have in Kwinana in chemical processing. So partnering with a world class operator, a very experienced group like SQM, We think it's a great opportunity to leverage some unique capabilities and assets that reside here in Western Australia, Create a new growth platform for WESF consistent with how we've grown WESF over the years. Now there's still a lot to do. Just to be really clear, this has nothing at all to do about Wesfarmers Speculating on lithium mining or commodity prices, it's not about that at all. It's about building 1 of the best lithium hydroxide Refineries with a global leader in that process, SQM, and we are very confident in the future demand for that product. And I might hand over to Iain. Iain can add to some of the detail on the project. Yes. Hi, David. I think you have to look at it from the perspective that the Mt Holland deposit is very high grade relative to other deposits around the world. You add to that the fact that Western Australia is a mining jurisdiction. So we're used to mining here in Western Australia and we have the Structure and the labor to support the mining. And then on top of that, you've got the growth demand in the EV thematic. And if you look at the projected growth Demand requirements for lithium hydroxide in electric vehicles going forward, there's a big disconnect between forecast demand requirements and current supply capability. So we see the combination of that very high grade Lithium deposit, our ability to execute projects in Western Australia together with our chemical processing capability to refine the concentrate that will come from that mine into lithium hydroxide, working with our joint venture partner, SQM, who are experienced in the downstream processing of lithium and also the marketing of lithium. And it's just an opportunity that we see Is there for Western Australian lithium to become a major supplier into the growing battery electric vehicle market. When you explain it like that, it sounds pretty compelling. So you're basically saying probably 'twenty five, 'twenty six, We'll start seeing some returns coming through and then hopefully a very long good long term investment going forward. Is that that's Generally the theme, isn't it? That's correct, David. I think we expect to be cash flow positive around FY 2025 and thereafter good returns. And David, just final point. You've got a good track record to answer, yes. Yes, David, look, We acknowledge that this is a it's a big project. It's a long term project, not without risks. But in the scheme of things, it represents around or just under 3% of our equity value. So it's these are not the kind of things that we'd want to go out and make 5 to 10 different bets on, but in the context of the overall Wesfarmers portfolio, given the capability and track record of our WESF team, We think it's an investment that should be good for shareholders longer term. Absolutely. And this will be under Ian Hansen's Influence and he will be the one controlling it. Is that right? Well, that's right. He's got a great check record. He's the one in control. Well, that's right. And I guess, yes, it's Ian also has a very good team around him, and we've had the benefit of being able to second a number of our Most senior engineers from Ian's team into the Covalent JV. So the Head, the Project Director CEO of Covalent is actually one of our most experienced development engineers. Okay. Sounds great. Thanks, Rob. Second question, if I may. On Kmart, I remember talking last couple of calls where and Ian, I think, was talking about basically Kmart business wasn't really set up well Because of COVID, this very big surge in demand caused a lot of inventory problems that you weren't really able to eradicate in the short term. Can Iain, can you give a bit of an update as to where you're at with that? You seem to be I mean, the profit performance seems to be very, very positive. Are you on top of those issues? And are we getting back to more normality where Kmart is generating the strong profitability that it was before COVID? The short answer is yes, David. The story, though, continues to be an evolving one. So the last time we had a conversation, I think it was the end of the full year result. And of course, we just come off the back of predicting demand to reduce when, it caused demand increase and that left us with empty shelves as we all remember. And then on that conversation, there was a question around, well, how Going forward, now in that moment in time, we had a lot of inventory on the water and landing, and we were seeing significant improvements in our Net Promoter Score. So we were that number was in the 20s back in July. By the time we hit September, it was back in the high 30s, low 40s, which is where we would normally sit. So that gave us confidence we were back on track. The new news which hit us after that point was the international shipping and the port congestion, which came through, which has now been quite, I think, quite well publicized externally. But that is causing issues around the speed of getting product from Asia to Australia and New Zealand. Our delivery from our suppliers in Asia is at absolutely standard level. So we still got Orders of magnitude are north of 95% delivery and full on time to our freight forwarders, so that's very much historical norms. The time it takes to get from the freight forwarder into our distribution centers in Australia has extended, and it is erratic. And that erratic nature occurs probably more frequently in New South Wales and in Melbourne than it does in WA And Queensland, if you're looking at Australia. We've compensated for that by putting more stock into the system. So when you hear language of investment inventory, that's how we're compensated for it. And then the next thing we've done is we're working very closely with our shipping partners. We are one of the biggest, if not the biggest importer of products into Australia. And so we have very significant contracts with our shipping partners, which gives us priority when there is scarcity of shipping availability, which is what's been happening. So we feel like we're quite well placed. We have a number of effectively Our product availability is pretty solid at the moment and we have a lot of inventory That's On the Water and Coming. So at this point, I feel like I'm in a pretty good place. But I guess as we go through COVID, What we keep seeing is there's new topics and new issues have emerged as we've gone through the pandemic. At the moment, it looks like we're across all the ones that are transparent to us. But I guess it's worth the potential of something new coming along. Yes. It sounds like you're on top of the issues a bit now. So thank you, Ian. Thank you, Rob, and thank you, Ian, as well. Thank you very much. Thanks. Okay. We have another question from Ben Gilbert from Jarden. Please ask your question, Ben. Good afternoon, all. I just had a question on Bunnings, if I could. And I just wanted to go back to the leverage point. I appreciate I think you continue to invest in price, but your EBITDA was up pretty much in line with revenue. And even Make the rental adjustment, looks like you sort of grew at about 1.3x. It just suggests that there wasn't a lot of fixed cost leverage through the business. And I suppose my question there is, do you think that you overinvested or put projects forward and then you put them into OpEx because you had the opportunity to given the strength? Was it dilution from online? I'm just trying to understand because I would have thought you'd probably be comparable with JVs, which still managed to grow at 2x Even with the gross margin decline. Yes. Ben, we certainly don't compare ourselves to other businesses we focus And what's right for Bunnings, what's really important is to sort of look at the fact that with a top line growth in the Mid-20s and a bottom line growth, close to 40 when you back out the property. We're happy with the leverage position, certainly investing in price. Nothing I've noted that we've sort of pulled forward or done differently, but we are very much as focused on that long term performance and that's what we sort of have stuck to through and through. So to that point, does it mean that there's not really any leverage ex rent and depreciation in the business? It's all variable cost. It's certainly been reaching inside the P and L, but throughout the half, there have been increases In some labor costs in some markets, if you think about Victoria, what was it, close to 3 months, 50 stores Happy to sort of service their consumer base for their mind. It's not going to be a material impact in and of itself, but there's a number of things Through there, but in terms of what we can do with cost going forward, there is always going to be opportunity for improvement, and there's going to be opportunity to Great benefits of some of the investments we've been making into digital over time. So I'm confident in the long run, we'll continue to deliver really, Really solid results, both top and bottom line. Okay. That's helpful. And then just final one for me, just to Anthony. Just interested in understanding, I appreciate you got a lot of Hedging books you'll see across all the different businesses, but particularly for retail and within the DDS within Kmart Group and to a lesser extent, Bunnings and Officeworks, just how the hedge book looks over the next 6 to 12 months. And I suppose what I'm getting at is, as you start to get sort of the 15 odd percent tailwind from the Aussie into fiscal 'twenty two, What sort of impact do you envisage that having on margins? Yes. So you're right, Ben. We've got a hedging policy in place across with Kmart Group. What we tend to do is we have a higher hedging rate in shorter term, so 3 months, and we hedge out just past 12 months and that declines over that period. So we're less about trying to guess what currency is going to do because that's Very difficult. I think it's more about providing some certainty for our buyers around pricing. That means that we'll miss some of that improvement As the currency strengthens, but some of that will flow through. So generally, look, just roughly, we'd probably have about 50% hedged 12 months out. So that should give you a bit of an indication. Your next question comes from Richard Barwick from CLSA. Please ask your question Richard. Okay. Thanks. First one for Anthony, just with the Mount Holland CapEx, the GBP 950,000,000 how much of that's going to fall into FY 'twenty one? Talked about some of the longer dated or the first acquisitions you have to make. And then how do we think about the allocation across FY 2022 and 2023? Yes. So, Richard, I think we have flagged that the CapEx estimate we've given for the current year includes A bit in relation to Kidman, I would say that's sub $100,000,000 in the current year. Outside of that, I'm not going to give detailed plans on the CapEx spend, but if there will be CapEx spend that then extends between FY 'twenty two to FY 'twenty four, Fairly evenly split, I would say, across those 3 years, but probably a little bit more towards the front end. And a question for Mike on Bunnings and And look, probably more generally on the Retail business as well. I mean, if there's one message that's come through pretty clearly today is the expectation that come March, Sales are going to moderate. It shouldn't be a surprise to anybody. But how do you how are you thinking about that? What do you do to prepare for it? Do you have to do anything differently? I mean, the way you think back to last March, the sales came Without much warning and came thick and fast, you had to adapt and apply. At least this time around, you actually got some time to prepare to how do you perhaps mitigate cycling such a huge spike? Yes. It's a good Great. Richard, it certainly has occupied our thoughts. And I think one of the things that we've been Cautious on all the way through in our own internal thinking and forecasting has been around what happens if something changes. And that doesn't just have The cycling strong growth, it could have been further lockdowns or disruption, and we've seen small bursts of that already this half in a few jurisdictions. So the team has done a lot of really good planning. I think one of the advantages for our type of retail business and in the home sector is going to be that at least until The widespread vaccine rollout, there's going to be an apprehension to travel domestically, and you We can't travel internationally, so people being at home, the housing market being strong, interest rates being historically low. We think the attributes of the market for home improvement are positive. And I think also from an inventory point of view, one of the things that I'm particularly proud of both of the Bunnings team but also our extended Bunnings Our supply base has been the flexibility in accelerating stock into the business, but also a lot of those products don't have the sort of sharp seasonality that Other retail businesses facing too. So we've got the opportunity if sales, for example, in barbecues would have come off and they'll come off anyway because summer When it comes to an end, it is not the same sort of fashion or change in that product. So we can sell products through over a A longer period of time, so we might end up with a little bit more stock than we want short term. But I think the other piece is we've got good flexibility in the way that we roster Our stores that we'll continue to invest in service, continue to invest in keeping our team and customers and community safe. We do have the ability to sort of flex that up and down As we need. So I think one of the things we're really just focused on is do the basic things right, do it really, really well, make sure we've got stock availability, Make sure that the website performance is where we want it to be, and we've got things in place that we'll see that improve in the months ahead and really just Continue to invest in the customer experience. Our customers are choosing Bunnings. They trust when they come in that they're safe. They trust when they come in to get in the value proposition they're looking for because we do think that the Interesting doing things around the home is going to continue for some time to come. I might leave it at that because it's probably not my place to comment on other areas of retail. But Sarah or Ian might want to add to that. Yes. Look, I think it's a great question. Certainly, from an Officeworks perspective, as Mike said, and I think across all the web Retail businesses putting safety first, ensuring our team feel safe to come to work and our customers feel safe To shop with us continues to be a priority because we have to deal with the ambiguity of the virus and what that means in terms of trading and operating environments. So as we look ahead, I think that safety first focus as a priority, also the agility that we've Really discovered within our team and our processes and systems, I think, is a huge opportunity for us as a business as we start Not just cope with the growth that we've had, but actually accelerate from there going forward. And so the third point I'd make is just From a leadership perspective, we've been very focused, as I know the other businesses have. And I said today, I'm not losing sight of the long term and making sure we're making those right investment decisions for the long term to capture The growth into the future and customer as customers' expectations change and shift and what we need to support them to work, learn from home Or in the office or to keep their business running safely, absolutely, we can support them and help them make bigger things happen. So for us, not being caught in the crisis, albeit acknowledging the agility that we have to operate with, But still being really focused on the long term and making those right decisions for our customers and for our team. And Sarah, can I jump in there? Just Given your business seem to you talked about the different categories that were impacted. How I mean, Again, from a response point of view, as this evolves, then some categories are going to be on decline and some are going to be will come roaring back. How quickly can you respond to that in terms of dialing up your communication or your focus or whatever to maximize the benefits from that whatever category switch occurs. Yes. Look, I we've proven in the last 10, 11 months how quickly we can respond. And I gave the example of cleaning and hygiene in the presentation. We started selling. We had an idea from our team early on in the pandemic around the sneeze guards or the sneeze screens at the checkout, and we were looking for options for our own team. And The store manager of our Trousen store said to us, well, why we've got small business customers coming in asking us hairdressers, beauticians, Can they get them? Can they buy them? And within a week from a local Melbourne supplier, we were selling them. So I think it's It's an absolute credit to our merch team and our supply chain team and our stores because the ideas come from them. The agility with which we've been able to pivot the range to really capture those opportunities. And of course, there are some things that are on the decline and That's not new news for us. We've been dealing with categories that have been growing and categories that have been declining Like every retailer has for many, many moons, and we will move as quickly as we can to close down on some of those areas and open up on the new ones. And We've done that recently in technology. Actually, in the first half, we relayed our entire technology section across every store in the fleet To open up on new lines that are really in demand with work from home and And gaming and really enable a greater a better experience for customers and better availability, at closing down online Where we weren't seeing the same traction. So I feel very confident in our ability to move our range to meet and capture customer changes in and customer Changes in customer trends. Thank you. I think I cut you off, Ian, when you were about to make a comment. Yes. I think we've covered it pretty well, Richard. I guess we're trying to get the pandemic settings right operationally so that we stay very present And then accelerate the strategic agenda. That's the balance of that limit. All right. Thank you very much. Your next question comes from Aryan from UBS. Please ask your question. First one for me, just around Catch Group. And could you just share a bit around what your plans are, medium to longer term, any aspirations and how you're tackling fulfillment within the Kmart group, please? Yes, sure. The well, our aspiration is to continue to grow and be a very significant player in this space. And of course, with the benefit of COVID, we've seen extraordinary growth in that business in the last 12 months. So we're building out capability as Called out within the results, so we've certainly accelerated some of the capability areas within the business, which is This gives us the ability to fuel future growth, which we think is obviously very, very important. We would hate to be in a position where the demand is there, but we're unable to capitalize on that. On the fulfillment side, we had considerable capacity within our facilities that we have within Melbourne But of course, with the growth that we've had, we started to utilize that capacity quite quickly. So we will be looking at how do we expand that we have to fulfill our online orders. And we will look where it makes sense to leverage group volumes so that we can optimize the efficiency of those facilities. But that's very much work in progress at this point. Perfect. And just following on from Ben's question on FX piece. So obviously, there's a lot of talk around freight rates or What freight rates being up significantly? How do we think about the dynamics as your hedges roll off in fiscal 2022? The dynamic between higher freight rates versus Currency benefits. I mean, should we think that sort of roughly cancel each other out? Is there one bigger than the other, please? Yes. It depends what happens with FX. So I'm not trying to be funny about it, but it's so difficult Predictive calls. And so if the foreign exchange sits where it is and continues to sit there, then that's a really material benefit. And I'm sure you can do the math on the size of the price if that occurs. Now as Anthony calls out, we have considerable forward hedges, so that will take a while for that to flow through our all the way through to the bottom In our business and then we run average weighted cost on our inventory. So of course, that's the second delay not arriving. But clearly, there's a benefit there. On the international freight, I think you got a look at that very much on a business by business basis. We import a lot of products, so therefore, we spend a lot of time with freight with our freight companies and our international shipping companies. And we have long term contracts in place, which is secured which was secured at historical rates. As our volumes have increased and as the cubes increase with the natural product we're selling during this period of time, then we need excess capacity. And of course, we need to negotiate that and that is at higher rates, but we still have, obviously, commercial leverage when we go through those processes. So I don't think we're as exposed as some, but the numbers are still significant. The last piece I'd say is there's also movement in raw materials. So that's the other one just to factor into your into the calculation. And we're starting to see a cycle Yes, cyclic movement in raw material prices where things like cotton are starting to move up again pretty much in line with their normal cycle. So there's a few dynamics in play that are out Yes. As to how that will all play out into final margin, it's very hard to predict. That's perfect. Thanks, guys. Your next question comes from Brian Raymond from Citi. Please ask your question, Brian. Thank you. Look, my first question is just on the gross margin benefit you got through the Kmart Group. Just interested if there's anything in that that you would consider to be sustainable, something that beyond mix or just market wide reductions in promotions That we could look to maybe some margin enhancement on, say, a 2 to 3 year view or if it's just purely the cycle, happy to Should we take it that way as well? Brian, I think there's a few dimensions going on. Obviously, full price sales has been a contributing factor that we've had. And With demand being so high, the products are selling at rapid rates, which is just resulting in a lower mix of clearance in the two businesses. And you would say at some point that will normalize back to a normal level of clearance, of course. If you look at Target, our historical levels of clearance have been too high. And as we make progress in the product offer that we have and as we continue to focus around the core proposition that we've described, I think there's reason to believe we shouldn't return to the more recent historical levels of clearance that we've seen in that business. So I think there's an opportunity ongoing within Target in particular. The second piece is the mix that we've seen within the businesses has been a shift towards general merchandise on average, not solely because there have been categories like sport that have gone well. But you have got a negative margin influence that's currently sitting in the numbers, which is the shift towards toy categories and general merchandise categories away from clothing, which historically runs at a higher margin. So of course, when we do return to a more normal environment post the pandemic, then of course, we'd expect some of those apparel categories to rebound, which would be a positive influence on margin as well. So I think there is reason to believe some of that will be sustainable over time. Trying to unpack exactly how much is not a simple question, however. Sure. No, I appreciate the color, though. Probably speaking with Kmakuru, I'm just interested in your comment earlier that you are profitable online. I always thought that would be a challenge for discount department stores given Low ASP and basket sizes. So perhaps you could just help me understand the sort of drivers of that. One, around what sort of basket size Typically have online versus in store, is all the product picked in store or are you sending any out of the Catch warehouse or anywhere else? And then What you assume around incrementality of sales? So I think that's a key assumption for a lot of retailers, whether the cannibalization is in store. So hopefully, you can up on some of those metrics. Yes. I think you covered numerous topics in there. And depending upon which accounting methodology you come up with, you probably got 10 different answers All the way through, when you start factoring, is it marginally accretive? Is it if you fully load it, how does it play out? What's the relativity versus retail? And to what extent would those sales have occurred anyway in store as you now have online? And I don't think anyone's really cracked the code on having that the perfect analysis. The way that we've looked at it historically is we've looked at it as in addition to the store sales. So we pick from store in both Kmart and Target. We are looking, As the volumes continue to grow to pick some outside of stores, well, and Target has already begun doing that from some of these distribution centers but a pretty small scale. So of course, when we pick from store, it's very much a marginal cost basis. But even when we load in some allocations for the store footprint allocations for the office and some of those other elements. We're still getting a positive contribution from both businesses for online. Now we see this, and I think I touched on it briefly in my commentary, the businesses have grown very rapidly in online in the last period of time. And of course, we're not as efficient as we could be with that in store picking. So the net result and how that manifests itself is split shipping. So we end up having to fulfill products from multiple stores. And if you go to, well, why do the economics work when your prices are low, the basket size online is much, much Higher than it is in store. And so that gives us the ability to put multiple items in the basket and then pick those in one hit and deliver them in one hit. Of course, when we get to split shipments, that starts to dilute those economics and that's where we see some upside going forward. Okay. That's fantastic. My very last one is just around the small format tools offer for Bunnings, The Adelaide Tools, I'm just interested in how there's a store rolling out in Adelaide, how that is how the economics look at that? And are you going to run with the Adelaide Spanner with this or is it going to be a hybrid bunnings type banner? Can you just give a bit more color around what you're expecting there in terms of store rollout? Yes. So it's still very early days on Adelaide Tools. Adelaide Tools will be the brand in South Australia. It's got good Brand awareness and a fantastic family business history in that community. Once it moves outside of South Australia, we We'll have a different branding proposition. It won't be Bunnings at all. This is very much in line with our strategy of trying to bring Customer value into sectors where we've got very low penetration. Industrial tools is one of those. The Parafield store, which will open In about 6 weeks or so, it's really bringing some of our current thinking and sort of global research around specialist tool businesses So I'd like once we've sort of proved that up, we've got plans in a couple of different markets to get going. But For the sake of not educating our competitors, we'll keep our powder dry on when and where they'll be for now. Great. Thanks, And we have one more question from Phil Kimber from Evans and Partners. Please ask your question, Phil. Hi, guys. Just you gave some good online penetration numbers for the various retail businesses. Can I ask if there's Much difference in the exit online penetration rates as to the ones that are Quoted there, which obviously averaged over half? Mike, do you want to kick off on that? I don't really have anything to come back to you, Phil. That's a good question, but one I don't have an immediate answer to. So let me come back to you after this. Sorry. Actually, Mike, I can comment directionally. So yes, as you'd expect, Phil, that the peak levels of we experienced peak levels of online penetration, particularly through the Melbourne lockdowns, 111 days where you couldn't physically go in as a consumer couldn't go into many of our stores. So we saw peak levels there. In all of our businesses, we so we exited the half at lower levels. But I'd say, Office Works, the variance wasn't as great in Office Works given it represents a much Larger part of online is a much larger component of overall sales, so it was a modest decrease. And Target and Kmart, although down not as much as Bunnings. Rob, if I can just add on Kmart and Target. Obviously, December, which is the end of the half, always flows up for online because of getting products delivered in time for Christmas. And then it doesn't pick up as quickly as you come out the other side of Christmas as it would in Physical Retail, so that's a contributor. And this year, it was exacerbated by a slower than average delivery time. So customers were quite wary of ordering too close to Christmas. So I think that contributed to that outcome, but we feel I think Rob summarized it quite nicely. There was a peak, Not surprisingly, during lockdowns, and then that normalizes again once you come out of lockdown and there's a bit of stability, but of course, that normalization Still substantially higher than we were prior to COVID. Sorry, Phil, it's Mike here. Ours had come back at the end of December, it's about 2%. So yes, similar to what the others said, certainly despite particularly metropolitan Melbourne, we're getting In those 50 stores, up to 30,000 orders a day, which is amazing what team could do, but it certainly cycled back to that sort of 2% mark. Great. Thanks, guys. That's all I had. Okay. There are no further questions at this time. Okay. Thank you all very much. Thanks for your time. And if any further questions, Please give Simon and the team a call. That concludes our conference for today.

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