Demerger Endeavour Group

Jun 16, 2021

Thank you for standing by, and welcome to the Woolworths Group Demerger of Endeavor Group Analyst Briefing. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Mr. Brad Banducci, CEO, please go ahead. Good morning, everyone, and welcome to Woolworths Group's call to discuss the demerger of Endeavour Group. Joining me this morning in the room and available to answer questions later are Stephen Harrison, Woolworths Group Chief Financial Officer, Steve Donahue, Endeavour Group CEO Shane Gannon, the Endeavour Group Chief Financial Officer and Bill Reed, I will open with some introductory comments and I'll hand over to Steve Donohue and Shane Gannon to provide an overview of Endeavour Group and then we will go I propose to start on Slide 3 of the document that has been sent out. Just start by talking about the fact The Woolworths Group Purpose. As a purpose driven retailer, it's very important to us that the proposed demerger of Endeavor Group is consistent with our purpose Of creating better experiences together for a better tomorrow. What we mean by together is how we work in partnership With each other, our partners and communities. So while we intend to separate the business, I can't think of a better example of Better Together than the ongoing partnership We expect to have with Endeavour Group. Just turning to Slide 4. You will recall that Shareholders had previously voted to approve an internal restructure, which facilitated the merger of Endeavor Drinks and ALH To form Endeavor Group, this step was completed on the 4th February 2020. The separation of Endeavor Group through a demerger is the final stage It was initially delayed due to COVID, but we formally reinitiated the process in February. And thanks to the extraordinary efforts of teams across Woolworths Group and Endeavour Group, we are in a position today to confirm We expect Endeavour Group to be trading as a standalone business by the end of June. On Slide 5, You will see a slide that we used when we announced the potential separation of Endeavour Group in July 2019. And we continue to think that the rationale for the merger is strong with the win win partnership at its core. We expect Woolworths Group and Endeavor Group to benefit From simplification, increased bank, brand clarity and the ability to focus on areas of future growth most relevant for each business. We will work to continue to retain the benefits of the leading infrastructure built by the combined group over a number of years and partner in areas like joint food And brings offerings, everyday rewards and data and analytics. I will talk a little bit more about the partnership agreements we have in place Turning to Slide 6. The demerger will create 2 leading ASX listed companies With Woolworths Group expected to remain a top 20 ASX company and Endeavour Group expected to be a top 50 company. Post the merger, Woolworths Group will remain Australia and New Zealand's Union Food and Everyday Needs business. We are privileged to have some of Australia and New Zealand's best known and most trusted brands, and we operate in growing and resilient markets. We're investing and building key capabilities for the future and have a strong balance sheet, which provides us flexibility to deliver value for our shareholders. I will try not to steal Steve Donahue's thunder, but investors in Endeavour Group will be getting access to Australia's leading drinks Hospitality business with a portfolio of incredible retail and hospitality brands and products, a legal and social license start rate and run by an experienced management team. Just in terms of the mechanics of the demerger as laid out on slide 7, Woolworths Group shareholders will receive 1 Endeavour share for every share held in Woolworths Group. The total number of shares on issue for Endeavour Group will be higher than Woolworths Group, Reflecting Woolworths Groups and our joint venture partner, Bruce Madison Group, each retaining 14.6 A vote on the demerger resolutions is scheduled for the 18th June at a general meeting. And assuming we receive The approval required, Endeavour Group will start trading on the ASX on the 24th June on a conditional and deferred settlement basis. Slide 8 highlights the pro form a financial impact of the demerger. While F 2020 results were materially impacted by COVID, Based on F 2020 pro form a numbers, Woolworths Group had revenue of $53,100,000,000 and EBITDA of $2,500,000,000 With over 172,000 team members and over 1400 stores, Endeavour Group had revenue of $10,600,000,000 with EBITDA of $693,000,000 with over 28,000 team members and an incredible network reach with almost 2,000 stores and venues. Endeavour's pro form a net debt at the 3rd January 2021 was $1,300,000,000 But is expected to be $1,400,000,000 to $1,500,000,000 on demerger. This largely reflects the drawdown of external debt to replay the existing inter company borrowings between Endeavour Group and Woolworths Group on demerger. Shane will run through some more detail on the numbers of Endeavour Group shortly. On Slide 9, you see an update on our retail ecosystem. And we've shown this And at the core of it are our customers and everyday needs. As I said upfront, Endeavour Group will become a very important partner And allow us to extend choice for our customers and at the same time leverage Woolworths Group's digital data and One of the differences in the context of this demerger is the number of and the strength of the underlying partnership agreements That are laid out on Slide 10. And what we have done is a combined group has full strong capabilities across a number of core competencies Through material investment over a number of years, we want to preserve the benefits of this capability and investment from both groups With ongoing win win partnerships, we have partnerships keep agreements in place across Supply chain and stores that relates to, in particular, the attached stores, but there's also facilities management that Support that. Loyalty and FinTech, which is a focus around Everyday Rewards and W Pay and also our Wish card business, digital and media, which is focused around provision of e commerce services via the walrus.com.au website primarily plus Some of the marketing support agreements, business support, which is focused around, in particular, the underlying IT platforms that Endeavour Group We'll leverage and a few other minor agreements. And the last set is International, which really has two components to it, the sale of Pinnacle products to Woolworths, New Zealand and also some export partnerships We have been providing a shared platform in key markets such as China. I'm sure I'll get some questions coming back to the partnership agreements and we're happy to go through them then. Then just keeping us moving on Slide 11, I want to address what the demerger means for Woolworths Group's balance sheet and capital management considerations. Through the repayment of the intercompany borrowings As at the 3rd January 2021, Woolworths Group had a net cash balance of $75,000,000 on a pro form a basis. Our pro form a lease liability as of that date was approximately $12,000,000,000 We expect the group's operating cash flow and cash realization to remain strong, And we don't anticipate any changes to our credit rating targets or dividend policy. Following the completion of the demerger, The Woolworths Board will consider Woolworths Group's capital management options. Subject to trading conditions and Board approval, $1,600,000,000 to $2,000,000,000 could be returned to shareholders. Further updates will be provided when a decision has been made. Finally, on Slide 12, in summary, we believe that a demerger is the most value accretive To separation for shareholders, we are confident that Endeavour Group has strong foundations for success and growth as an independent company. I would now like to turn over to Steve Donahue to give his overview of Endeavour Group. Over to you, Steve. Thanks, Brad. I'd like to start today just by thanking everybody for their interest in the Endeavour Group to merger. As I personally work towards my 30th year as a retailer and more recently a hotelier, I do feel very privileged to be leading such an outstanding team. I'm pleased to share some details of what Endeavour Group is And our continued opportunities to grow as a strong standalone business in a new partnership with Woolies Group. So if you Start on Slide 17. Before I jump into the details, I just wanted to highlight the importance of purpose for us as an Endeavour Group team. Being purpose led has been an important part of the Woolworths Group journey and I believe it's the key to success of any organization. At Endeavor, we're led by our purpose of creating a more sociable future together and the bookend words creating together are really important reference to the history of our organization, One which is built on an entrepreneurial approach to business always granted in the knowledge that we're part of the communities that we serve. One of the very important learnings in the Woolworths experience has been that a purpose has to come from Adseam, not be imposed on them. And that's certainly true for this one. When we talked about Teams, they talked a lot about how they connect people through the products we provide and how we connect people with how we connect with customers in the places All in the pursuit of enabling great experiences. And I saw that firsthand again myself on Saturday night calling into the Crow's Nest Hotel here in Sydney, Which was a live example of people enjoying themselves while being offered great service. And I also saw it again yesterday on Mother's Day with the family having a picnic next to us in the park and they were enjoying a glass of red Shaffel Hill, part of our portfolio of brands. So our purpose is alive in both our team and in the lives of our customers that we serve, Which I think is very powerful. Another point worth noting is that the device we associate with the Endeavour Group brand, the circle, Represents the imprint that a bottle leaves behind when it touches the surface. A reminder to for us that as a team, we The importance of our personal imprints on one another and the communities we serve and we strive every day for that to be a positive imprint. Stepping forward to slide 19, the Endeavour Group, Australia's leading drinks and hospitality business. So we're a team that are charged with being the custodians of market leading brands like Dan Murphy's and BWS, well known to you all, I'm sure, As well as over 330 local hotels across Australia, places that our customers refer to as their own, whether it's MyDAN's or MyBWS or My Pub. And when combined, all of these places represent Australia's largest retail and hotel network, Underpinned by digital capabilities, which enable deeper connections with customers powered by Endeavorix and also the thousands of drinks products that we We're at our best of the business when we combine all of our assets into a single compelling customer offer. That is when we can get a BWS and or a Dan Murphy's on the same real estate as a hotel or Woolies and when we activate with great products and digital capabilities. We have a proven track record of generating some of the best if not the best returns in the retail drinks and hotel segments, Notwithstanding the challenges of COVID, in the past year, our combined business Continued to deliver with hotels quite effectively and somewhat surprisingly emerging from lockdowns, while the retail side of the business enjoyed upside benefits that they're cycling now. Noting that challenges remain given short term lockdowns in some markets and the current restrictions in New South Wales. We've sustained a long running expansion of the retail network while continuing to improve existing stores. And whilst the expansion of the hotel network has been somewhat more subdued in recent We do have strong capabilities in improving our existing hotels with a real focus on each local market. Leveraging the network effect of the group and driving efficiencies It has allowed us to grow sustainably. We're a large group with more than 28,000 team members present in just about every Australian community. Living and working in those communities requires real effort and investment to live our purpose and deliver market leading practices with the responsible service of alcohol and gambling services. Here we've maintained a consistent leadership position by investing in supporting our team with training, partnering with other organizations and investing in technology. We're also proud of the efforts that our team have gone to keep each other and our customers safe during COVID events. In particular, our hotels team Have experienced many thousands of regulator visits and only received 2 minor infringements for social distancing standards since the pandemic Shane will talk in more detail to the numbers, but in broad terms, our F 2020 combined financial performance was strong at a revenue level, but profitability was impacted by the COVID As Brad mentioned, we generated $10,600,000,000 in sales and $693,000,000 in EBIT, With a swing from the usual sixty-forty mix of EBIT generated by retail versus hotels to something closer to eighty-twenty. The natural hedge between retail and hotels played out relatively positively for the group as we continue to navigate localized short term lockdowns and other COVID related restrictions. Both the retail drinks and hospitalities markets have demonstrated stability over the long term up to the point of COVID related impacts, which we believe will normalize Into the future. Our digital platforms have already become the front door to our businesses in the retail space and that will similarly play out in hotels. We now have a greater number of digital connections with customers than we do physical visits to stores each month and the hotel experience is increasingly enabled by technology for bookings and ordering in venue. Our business has been built on the strength of our partnerships with a wide variety of partners that have helped enable our growth and the partnership agreements with Woolies will do the same. They're key to providing continuity of connection with our joint customers through the stores, loyalty and digital agreements as well as providing services on commercial terms in areas such as supply chain and core technology. So I wanted to step forward onto the topic of the areas of future growth for us. So that's slide 30. And starting with the continued growth of digital engagement with customers and the returns that we generate from an e commerce standpoint. It's worth noting that in retail e commerce, we slightly under share relative to our share of bricks and mortar. So we've really accelerated investments in digital, particularly over the past 2 years. We intend to continue to invest here with a focus on activation of the suite of digital platforms operating across both hotels and retail. As shown in the pack, the retail business has a history of network expansion driving solid year on year And we're expecting to finish the current year having added a further 35 plus stores. In fact, we're not far away from 1400 BWS stores and we'll have our 250th Dan Murphy's open before the end of June. I think a great example of our partnership with Woolworths is that our upcoming new dams at Here are we, we'll have a shared customer drive through pickup facility enabled by our respective apps. We continue to grow our retail network as well as it enhancing the existing footprint, firstly, in the retail offers with new capabilities injected from our specialty businesses and new formats, including the 2 neighborhood Dan Murphy We'll also take a disciplined approach to accelerating hotel acquisitions, where Opportunities represent a good fit with our network and capabilities and of course we have the opportunity to accelerate the hotel fleet renewal. A large part of historical growth and certainly key to the future growth to our future growth will be our continued ability to respond to emerging product and consumption trends in order This is true across both retail and the Hotels business and importantly is increasingly driven by the depth of our customer understanding through our digital platforms. The insights from which are applied by all of our teams across the group and drive things like new ranges and new store layouts. The recent resurgence of Rose in our stores and our leadership The emerging seltzer category being 2 current retail examples, whereas in hotels, whilst we are very locally focused, We've also taken a group wide 3 tiered approach to our Nightcap branded accommodation offerings reflecting customer segmentation. Another area of historical focus for the group and certainly a feature of our new growth will be our ability to enhance end to end efficiency throughout the business. There's been a lot of work done across both hotels and retail in recent times, but it's also true that these two parts of the group only came together through the merger of retail and hotels just So we'll continue to focus on areas where synergies can be unlocked in particular in digital, but also across other parts Business leveraging our scale and making considered investments to drive efficiency. So overall, I feel confident that we've got the capacity to grow our business through a variety of levers. One of the other things that gives me great confidence is the quality of the team that we've built and it's particularly good to have the support of Shane Gannon as our group CFO. There's only any second month with us having joined from Mirvac. So welcome, Shane, and I'll hand to you now to step us through some of the numbers. Okay. Thanks, Steve, and good morning to you all. While I've only been in this role for a relatively short time, I'm very excited to be involved in the journey of Endeavour Group to becoming a successful listed company, and I'm looking forward to being part of the team Responsible for delivering significant value to our shareholders. As you have heard from Steve, under Woolworths stewardship, the Endeavor Group has become a very With market leading brands, an extensive and fast growing digital footprint, a unique portfolio of high quality assets An impressive track record of value creating growth over a long period of time. At a headline level, the business has continued to demonstrate Strong growth in EBIT margin generation, even in challenging times such as COVID. We have a strong cash generation profile, which will provide the flexibility to fund dividends to shareholders as well as support historical CapEx investment levels of over $300,000,000 annually. It is worth noting subject to Board approval, it is our expectation that we will pay a dividend for the 6 months ending 30 June As the periods covered by the pro form a financials have material non comparable factors in each year, I will provide some context Next slide in order to increase the available insights. Endeavor generates a bit over 80% of its sales from retail and 20% from hotels. However, it is worth noting the 2 are sometimes interconnected where retail and hotel are co located on the same site. In terms of EBIT contribution, hotels over index with an EBIT margin of around 15% and retail around 6 Which is market leading relative to competitors. Over the last 3 years, the Endeavour business has delivered solid revenue growth, Which has continued into the first half of the twenty twenty one financial year. And as you will have seen from Woolworth's recent Q3 trading update, That momentum has maintained in the March quarter. The EBITDA outcomes in each year are characterized by some unique factors They complicate comparisons, so I'll take you through these at a high level to provide clarity. FY 2019 So a step change in investment in a number of critical areas for Endeavour's future performance, including digital platforms, data and analytics, Customer experience and retail range optimization. This was the year in which we launched Endeavor X. We have been growing e commerce at double digit rates, which is a strong contributor to our retail performance during COVID, And we saw a big shift to online sales. However, the additional costs incurred has put some downward pressure on margins. Our hotels business also came under cost pressure in FY 2019, particularly in the first half, which saw weaker trading conditions, Privia to an under recovery of fixed costs. This improved the second half of FY twenty nineteen and flowed into FY twenty twenty until the impacts of COVID were felt in half 2 of FY 2020. Fiscal year 2020 was a year of 2 different halves And 2 businesses pulled in opposite directions during COVID. The first half of the financial year was relatively soft in retail With drought and large scale fires over the December, January period causing nationwide disruption. From March, COVID caused a nationwide shutdown of hospitality impacting the whole hotel portfolio, materially reducing EBIT due to the inability to Rationalized fixed costs, substantially core team lease costs and depreciation. The COVID retail sales surge was accompanied by a premiumization trend and softer price competition, which improved GP margins. This was partially offset by the higher cost of e commerce sales, higher staffing levels to support in store demand and by Specific related costs such as PPE. This continued through first half of FY twenty twenty one With hotels reopening gradually under restricted trading conditions and a second wave lockdown closing in the state of Victoria for several months. Now with respect to outlook, heading into FY 2022, we expect hotels to continue to Subject to the easing of trading restrictions as COVID risks abate. Retail is expected to return over time to pre COVID levels, having a short term negative impact on retail sales growth year on year. However, we are confident that the accelerated shift to e commerce we saw during COVID will be sustained and we will continue to invest in our offerings, which Also seek to optimize efficiency. Next slide, pro form a balance sheet. As you can see from this slide, as of the 3rd January 2021, Endeavour had a strong balance sheet, which will help support ongoing growth initiatives. Our intangible assets include $2,000,000,000 of liquor and gaming licenses, which underpin our license to trade And they are a core source of competitive advantage in a tight regulatory environment. Our freehold assets Include properties from which we believe there remains development opportunities. Our pro form a net debt position at 3rd January 2021 was $1,300,000,000 excluding the lease liabilities. This is a cyclical low level of net debt Immediately following the Christmas peak trading period before the payment of trade payables attributable to Christmas stock buildups. The next slide on pro form a cash generation. It must be noted that the pro form a cash flows have been From what was a deeply integrated balance sheet with Woolworths Group and so is illustrative only. In addition, COVID trading and retail has generated a consequent surge in cash flow. Regardless of these issues, I'm confident in saying that one of the strengths of this business is its strong cash flow generating characteristics. We estimate that our CapEx For the 2022 financial year, we'll be maintained at around current levels of between 300 And $350,000,000 Going to capital structure. As part of the demerger process, Endeavour has negotiated new banking and term loan facilities separate from those operated by Woolworths. As a listing, Endeavour's net debt is expected to be between $1,400,000,000 $1,500,000,000 which is a level which we are confident that Can be comfortably serviced based on the current business and financial settings. Post the demerger, one of our priorities is to achieve credit metrics, which are consistent with an investment grade profile. Our first dividend payment is expected to be for the 1st 6 months of End of June, 2021 and in the range of 70% to 75% of NPAT. Notably, the new Endeavour Board will have discretion to review this policy over time. So in summary, Endeavour is in a strong financial position. We have momentum in our existing business, which we expect to continue into The 2022 financial year. We expect the business to continue to generate sufficient free cash flow in the coming year to deliver a balanced approach To funding CapEx in line with 2021, to reward shareholders by paying appropriate dividend And to make steady progress towards achieving an investment grade rating. Thank you. And I'll now hand back to Steve for a few concluding remarks. Thanks, Shane. So just briefly to close before I pass back to Brad and we open for questions. We're feeling positive about taking Endeavour Group forward as a standalone company. We're focused on continuing to enhance and grow our businesses and deepen our understanding of customers to better meet their needs. And through a combination of our ecosystem and We can focus on stability through the demerger will benefit from continuing to be purpose led and aim to drive strong financial outcomes Thanks, Brett. Thanks, Steve. Thanks, Shane. Without any further ado, we'll turn the floor open to questions, And we'll do them 1 per individual and then back into the queue, if that makes sense. So over to the questions. Thank too. Your first question comes from Grant Slagerie from Credit Suisse, please go ahead. Good morning, Brad and Steve, and thanks for the opportunity. And yes, it This is a very good day for Woolworths and Endeavour Group. My question, Steve, if I could, is just if you wouldn't mind Expanding on the return on capital profile of Endeavour Group. I mean, it is fairly obvious The numbers over a long period of time Endeavour generates a significantly lower return on capital than the supermarkets business. It would be interesting to get from you some color as to why that is the situation and sort of some of the puts and takes in that And why you would feel confident that you would get better returns, I guess, from some of the Reinvestment opportunities you talk about whether they be retail or whether they be hotel acquisitions or redevelopment because At pace value, it looks like the return on capital has been stuck at a certain level for sort of fairly long period of time. Thanks, Grant. And congratulations or whatever the right expression is Let me make some introductory comments and then turn the floor open to Steve. If we look at our return on funds employed, that is very strong across the group, in particular, if you look at the way our working capital our weighted average cost Capital has evolved. And so both businesses generate, we think, very good returns way above WACC and certainly above Aspirational hurdle rates as well. They're quite important, I think, in particular in the context of Endeavour is always To look through some of the goodwill from what assets we've acquired in the past and look at the underlying characteristics of the return, because when you do that, you see A much better picture than you might do if you leave the goodwill in there, which is obviously a legacy issue, but shouldn't confuse future investment decisions, which can be Much higher depending on whether they are organic, of course, versus M and A. So we see and from where we sit As an owner historically and as a partner and as a shareholder going forward, we see a very strong spread between the return and the weighted average cost And particularly if you adjust for goodwill. So I'll let Steve talk to some of the opportunities that the group sees to continue to grow Value for the group going forward. Yes. Thanks, Brad. And Brad's right. The carrying value of license is material on our balance sheet and It has an impact on the overall ROCE, but we're licensed and regulated business. So it's also an important asset that enables the business So I think if you look at the as I said in the markets we operate in, in the retail drink space and the hotel space, we think we deliver above segment returns. When you look at the actual component parts, we get very strong returns from our digital investments first up and that's why that remains A big focus for us, the renewal of the BWS fleet has been something we've been very focused on over the last few years, really important for us given The chance of that sort of falling out of fitness, if you like, being such a big network, but we're In a really good place there and our BWS renewals have traditionally provided us very strong returns, which is why we've We've had a lot of focus on that part of the business. Dan Murphy's a lot of the returns that we've got out of Dan Murphy's has been Network growth and we've only just started to put down a number of new formats. We've just opened our South Melbourne store. And as I mentioned, we Got those 2 smaller neighborhood stores. They are providing us some really interesting insights into the sort of returns we could get out of the existing fleet going forward. So Positive opportunities there. And then with respect to hotels, I think we recognize we've got an opportunity to improve the returns The hotel business, but the hotels that we have touched or renewed over the last 12 or 18 months have delivered Quite solid return. So it does give us a degree of confidence going forward. Now I sort of mentioned those all in a bit of a descending order, I suppose, with hotels being an area Real focus for us into the future. Thanks, Steve. Thanks, Grant. Thank you. Thank you. Your next question comes from David Errington from Bank of America. Please go ahead. Good morning, Brad. Good morning, Steve. Brad, this is a question to both On my rough numbers, I mean rough being the operative word, but your net debt to EBITDA On a reasonable level, Woolworths, even after if you paid $2,000,000,000 out, you're going to be under 3 times net debt to EBITDA woolies, But Steve is going to be about anywhere between 3.74, which means that Woolies, even if you did 2,000,000,000 of capital management, you're going to be Still under the magical three number, which you need to be to be a BBB plus but Steve's going to be sitting there close to 3.7 or 4. So the The prime questions are that's a statement. The questions are 1, your Woolies balance sheet even with $2,000,000,000 is going to be unders, which means that you could do more capital, but Steve's balance sheet is going to be pretty stretched and going to be reliant upon a significant recovery. Otherwise, he's going to be balance sheet constrained for future growth. Now that's my rough numbers, but bear with what the numbers tell me given the numbers that you've given us. So can you give some comments as to is Steve's balance sheet is going to be stretched for future growth. And 2, after this even with $2,000,000,000 is your balance sheet going to be under, so we can Thanks, David. Good to hear from you. You've asked one of the most important questions In the context of what we announced today, and obviously, it's been a topic on a lot of thought conversation analysis across both I'm actually going to turn it to Stephen Harrison to talk through how we work through it and why we think It places both businesses in the right position to succeed going forward. But I think Steve started with some context and color to Where we set authority with Endeavour Group and the debt levels inside Endeavour Group, what we've been refinanced and how we're going to start thinking about The consequences of the motive for Woolworths Group. Thanks, Frode, and thanks, David. Yes, I think it's worth just giving some historical context. As you know, at the end of December, the Woolworths Group had external debt of about $2,600,000,000 in a gross basis. And a lot of that's obviously sat in traditionally the ALH Group and more recently Endeavour post the merger and restructure. And in fact, the level of debt that you see in that business does reflect the level of debt historically. And I've got to say, actually, the level of debt currently at 1.4 to 1.5, which is what we're forecasting, at the end of June would probably be the lowest level of debt, that we've had in over 5 years within that So it is in the context of this business is a trade with a degree of leverage for a period of time. Obviously, as you look at the metrics, You're right in terms of the math. And obviously, you've adjusted for looking through F 2020, which I think is right. You can't look at the metrics just on F-twenty basis because of the impact of COVID. But we have looked very much at what is the reasonable level of gearing for Endeavor, but Insurance has the capacity to service debt, continue to pay a good dividend and also invest to grow. And our view is and you should ask Stephen Shane this as well, But our view is that actually with these current settings, the Endeavour Group has good access to capital and will be able to support future growth. And then in terms of how we thought about the Woolworths balance sheet in a post demerger environment, obviously, we've looked at A number of considerations. So what are our balance sheet and credit settings? What is an appropriate level of Room for us to have to fund the sustaining of the business and continue to grow the Woolworths Group. What are Certain levels of debt and should we pay down debt, that's something that we looked at. But actually, we looked at the cost of debt and the cost of some of those We don't think that that's necessarily the right level. And you point out, we've got capacity within our credit metrics Do you return funds to shareholders? And so that's why we flagged actually the opportunity post the demerger and post completing all The processes in terms of tax office release, etcetera, the opportunity to return funds to shareholders, which we signaled is at 1.6 $2,000,000,000 We're just looking to flag that action in the second half of this calendar year. And so ultimately, we feel comfortable with where Woolworths Group's at a in terms of its credit metrics and its balance sheet settings. But equally, we're very conscious that the shareholders of Woolworths today will be the shareholders of Endeavor tomorrow, and we want to make sure that there's an appropriate Level of balance sheet settings for Endeavor to support its future growth. So I mean, in summary, David, I mean, we've tried to balance the 2 as Steve has talked through most of the And is Steve happy with the balance sheet of Endeavour? Brad? I'll turn to him to speak for himself. Yes, David, I Support everything that Brad and Steve said. We are feeling confident about our abilities going forward to grow our business and That will mean for our cash flow. So, as Steve Harrison pointed out, has it just reflects the traditional level of debt that That was carried whilst we've been part of the Woolworths Group. So, yes, we feel confident. Okay. Thanks, Brett. Thanks, Thomas. Thank you. Your next question comes from Ross Curran from Macquarie. Please go ahead. Hi, team. And thank you for the detail this morning. Steve, I was wondering if you could help us understand a bit better the hotels business, but specifically gaming and how important gaming will be for the Endeavour Group going forward. You're going to end up with 1200 roughly poker machines, 2 90 tabs, 2 50 kilos. Are you happy with the poker machine fleet? I see you've only been replacing 11% of those machines per annum. Do you need some catch up CapEx across poker machines and gaming more broadly? Thanks, Ross. I'll let Steve talk to how we're thinking broadly around hotels and the go forward and The capital profile, which sort of does come back in a way to the question that David posed. So Steve, Over to you in terms of where you're thinking about CapEx in hotels and the role of gaming in that. Yes. Thanks, Brad, and thanks, Ross. A small correction at 12,000 gaming It's almost about 1200, so it is a big number. Yes, to Brad's point, we do have an opportunity to think Probably more deeply about the way we're renewing our hotels fleet. As I mentioned in my remarks, there's this very nice Benefit that we get from developing a BWS or Dan Murphy's on the hotel site. So that's going to continue to be a feature of the hotel property asset development into the But the hotels themselves, I think, really interesting in terms of their component parts. You're really talking about a bar offering or multiple bar offerings, Food offering in the bistro and gaming as well as accommodation, which has actually been, notwithstanding COVID challenges, Part of the investments we've made in recent times. You're right to focus on gaming now in terms The cycle of investment, the gaming machine category is very similar to a lot of categories That are operated in both the drinks and food business in terms of the need for us to keep it current and relevant and focused on Customer trends, it has a fashion element to it like a lot of categories do. And the life cycle of all technology It's shortening, of course. So I think you're right to point out the historical rates at which we've renewed our gaming machine fleet. There's probably an opportunity for us to step that up marginally. We're not talking about any major shifts, but just in terms of trying to keep current with The expectations of patrons when it comes to gaming would be an area of focus for us in the future. Thanks, Steve. Thanks, Ross, for the question. Thank you. Your next question comes from Ben Gilbert from Jarden. Please go ahead. Good morning, Brad, Steve and team. Sorry, another one on the hotel side, because it seems like it's sort of a real opportunity in the group, albeit obviously the liquor side is performing very well too. Just could you give us any feeling around sort of what sort of returns you'd be targeting on CapEx for the fleet? And maybe, Steve, just what the average age of the fleet in terms of What's been touched? I know supermarkets have all the times what every 7 years, how the hotels are looking. Just trying to sort of put some numbers around what we could about the outlook as you put more CapEx into that part of the business. So, Sabet, I assume we're talking about hotels in your question. Yes. Yes, sorry, Brad. Yes, sounds good. Okay. Well, I'll let Steve work through and give you a sense of where he's going on that. Just one caveat, which I think is really important. In the whole topic of renewal, age is becoming increasingly hard to measure because you tend to Touch different parts of a site, whether it's a venue inside ALH or even a supermarket with A different frequency and therefore you sort of blend it out, so you might touch something over 7 years, but actually you don't touch it once every 7 years, if you know what I mean. So it's It's actually becoming a very hard metric to comment on specifically. But I'll let Steve talk to where the state of the venues are and how you're thinking about Investment back into them. Yes. Thanks Brad and thanks Ben for the question. Brad's right. Increasingly it's about how much The venue is being sweated, if you like, so the foot fall through rather than the age thereof. But we do look at both, and that Increasingly, we'll feed into our plans in terms of the renewal opportunities that we target. As I said when I was sort of trying to describe The IRRs we get from our various capital initiatives, hotels does have an opportunity to improve, but the hotel renewals that we've done in recent times have Given us cause for optimism as to the extent to which we can continue to improve and the fact that it already delivers well above our risk weighted Cost of capital. So we feel positive, I suppose, about our capacity to do it. I won't give you a specific number, but suffice to say, It is it does offer us positive returns. Another point just worth noting is we have this propensity as a Finance team, I'm including myself in that somewhat, to try and disaggregate our hotel and retail business. So you've got a dance on a site with a pub. We're sort of narrowing down trying to understand the returns from gaming and separately the returns from the Bistro for example when in fact all of them are interrelated. So as I said again in my A lot of the benefits that we get are from the aggregated set of numbers. So we spent a lot of time trying to pull them apart and then put them back together All in pursuit of building the best local pub we can and activating the optimum retail offer associated with it. It's a funny one Ben just in general. There's A lot of sound and period that goes on inside Woolworths around return on capital, but we're sitting invariably with Opportunities are 10% to 10% plus and our issue is really executing more than there is anything else. And that's in the context of a weighted average cost of capital that has trended down. And you would In the documents, the cost of financing the debt into Endeavour Group, which is well under 200 basis points as you'd understand. So Our real challenge as a collective is generally being and continues to be whether Woolworths Group or Endeavor Group Actually executing well, not necessarily the underlying return we get. And we started the renewal journey in And it was into BIG W. To Steve's point, we really have seen some great ones now in dams, but being a bit more creative inside What it is we're trying to do in Dan's a small one or a real up one that is in South Melbourne. And the same forensic attitude It's now starting to be applied into the venues, which is good. And we still today and in the future, we'll still be sharing learnings and Capabilities and format of renewal across both businesses on a go forward. Double. Thanks. Thank Your next question comes from Andrew Glennon from Goldman Sachs, please go ahead. Good morning, everyone. Just wanted to know if There's been any major impact to the franking credit balance post the transaction and if you could also rule out the dual track Thanks, Andrew. Good to hear from you. So the first one was on the franking credits. We might just need to come back to the make sure I understood the second one. I'll let Steve Harrison just talk to the franking credit question. No, Andrew, and appreciate we put a lot of pages out for you to read. But at the end of December, franking credits within Endeavor Group were in the magnitude of $100,000,000 and that is just a function of the fact that within ALH Prior to the merger and restructure, it effectively set outside the worst Tax Group and therefore had its own franking credit balances for the tax paid. And has that therefore made an impact On the sort of the magnitude of the potential capital management within Moores? No, that's been a separate consideration. We've looked at that much more through the lens of what is the Woolworths Group need moving forward and what are our Appropriate credit fees to the right level of headroom. So that's I mean, it's not been a key driver of that consideration. Okay. And do you want to clarify that question back for Brad on I think you were asking about the dual track Yes. No, I assume it's pretty obvious answer, but just wanted to confirm that there'll be no So the progression from the potential corporate sales versus the dual track? I can't hear you very well, Andrew, but let me assume that you're talking Julsprac process and whether we're still considering it, I think you can see in the documents, there's been a lot of conversations Our joint venture partners, the Endeavour Board of the Woolworths Board. And as we sit today, our recommendation is to proceed with the demerger and we're hoping and would urge Our shareholders when the vote comes on the 18th June to support that proposal. And that's balancing a whole range of considerations What we think is in the best interest of our shareholder on a go forward basis. Right. Okay. Thank you. Thank you. Your next question comes from Scott Ryall from Rimma Equity Research. Hi, there. Thank you. I came on a bit late. There was another call, so apologies if this has been asked already. But I just wanted, Steve, if you can clarify, give me the elevator pitch on Endeavour Group. Is the major opportunity that you've got As a separate entity because you've now been able to integrate ALH and therefore run them as a portfolio as you've been describing With your answers to a couple of questions. Or is it the fact that this business has received insufficient capital under the Woolworths ownership, which is One of the typical reasons for demerger? Or is there something else that in the high level pitch that you'd give to shareholders Well, Scott, let me just start, if I may, and then I'll pass it over to Steve. We have been talking about the various aspects of this transaction since June 2019. And in the document we sent out, there are many stages to it, of all which collectively layer up to the right series of benefits. One of them clearly was in our stage 1 sorry, in stage 2 was the merger between ALH And Endeavor Drinks, so you could create 1 Endeavor Group. And that was a key part of trying to create simplification given some of the duplication that had emerged over time So the way we operate both groups. So we sort of had the elevator speech, I guess, going For a variety of ways over quite a long period. So that is one aspect of it. In the document, you'll see on pages 45 Some of the detail for The Rational, but I'll let Steve come back to from where we sit today what the benefits are. Yes. Thanks Brad and thanks Scott for the question. I think if If you go to the presentation pack and have a look at Slide 30, the point you were making is really the bottom right hand Corner of that slide talking to enhanced end to end efficiency. So sure, you're right, there are opportunities for us to bring synergies to the ALH Business and the former Endeavor Drinks retail business, and we're progressing our thinking on how we're going to do that. And there's also a lot of opportunities for investment in technology that is going to help us streamline the business as well. So really that slide 30 constitutes The elevator pitch, if you like, in its most distinct form, growing digital engagement, expanding the network and enhancing the existing footprint of Reinvesting in our offers in our in both our stores and hotels so as to increase their propensity to return to Our business is really the flywheel of where we'll focus our investments going forward. Thanks, Scott. Thank you. Your next question is a follow-up from Gransz Zallegar from Credit Suisse. Please go ahead. Thanks for the opportunity. Well, actually just two follow ups, if I could. Just one on the freehold property in Endeavour Group of $600,000,000 or just below that. Could you give some sense as to what proportion of that is in hotel preholds that might be available for redevelopment versus Sort of other property that might be, for example, upstream in manufacturing or vineyards, etcetera. I think that would help understand the opportunity. I'm not sure I fully followed the question. Do you mind just repeating the Okay. I'll try again. So in Interlever Group, You have $600,000,000 of freehold property. I was wondering whether you could indicate Basically where that what type of property that is. So the proportion that might be sort of hotel freeholds versus So as I said, manufacturing or vineyard I'll turn to Steve. Yeah, I've got it. Sorry. Yes, yes. Sorry, Grant. Thanks. It's predominantly pub. There's only a handful of retail sites included in that number. So they do represent opportunities. The primary focus for us is to Deploy the existing assets and capabilities we have in terms of hotels and retail, but we will be thoughtful down the track about other development opportunities. Okay. And just one other follow-up, if I could. Just on the net working capital balance, you did mention that payables obviously elevated in the First half accounts given Christmas trade, could you give us a sense of what a more normal period in net working capital might be or what reduced throughout the year just so we get a sense of sort of how much sort of extra cash there might be in net working capital. Thanks, Grant. I'll turn to Steve Harrison just to talk about the working capital position. Over to you, Steve. Yes. Grant, just some Obviously Woolworths operates Woolworths Group and our food businesses operate a negative working capital cycle, whereas in Indevo, we have a net Inventory over time. So we would typically be in the magnitude of sort of 70 days of inventory. Now that might fluctuate, But that sort of reflects inventory across our stores, our DC network, our Dan Murphy seller program and equally some of our Pinnacle owned brands And some of the wine inventory that we hold, that's through the cycle. We typically run payables in the mid-40s. So you are looking at a net investment Working capital is a low point sorry, net investment inventory is a low point in December just because you typically buy a lot of stock, you sell it True for Christmas and New Year and then these will sit on the payable at December. And so that would unwind. And I think that's Reflected in partly signaling of where the net debt was at the end of December, which is around 1.3 ish and it's More in the 1.4 to 1.5 range expected at the end of June. And I think that a lot of that reflects that shift 15 working capital cycle over time over that half period. Thanks, Steve. Thanks, Craig. Thank Your next question comes from Phil Kimber from EMP. Please go ahead. Hi, guys. My question was just and apologies if it's buried away in the documentation. When we think about going forward, are there any Like dissynergy stranded costs, extra costs that we should assume? Or do we just simply take what we had previously been Forecasting the division as part of Woolworths. And that's a good guide? Or is there actually some costs that we should think about That will occur upon separation. Thanks, Paul. There are the direct stand up costs that you will He called out in the document of Endeavor being a separatist to Livingston, you can see the number of just under $50,000,000 I think it's $47,000,000 for that. Then what we've done with the partnership agreements is we're very thoughtful to make sure that both businesses can leverage the infrastructure Woolworths Group, but In the short term, also offset what could otherwise be seen as stranded costs. Now In the partnership agreements, if Woolworths Group does not perform in line with expectations of Endeavour Group, those partnership agreements have the ability To be unwound as they should and that could cause some challenges down the track for Woolworths Group, but that would be entirely of On its own making in terms of its performance level for Endeavour Group. And if there was, there would be an ability over time, there would be Enough time in any of the unwind for Woolworths Group to adjust how it managed cost in the context of the service provider. So no, there aren't anything material, Steve, Harrison. I'm not missing anything. No. Thank you. Your next question is a follow-up question from David Errington from Bank of America. Please go ahead. Brad, this is a difficult question to ask, but a very important one. And it's on the makeup of the Board And also the corporate governance. I've tried to work out Colin's story what his position is. Yes. Is he going to remain on the Board? Or what's he going to do? And then I suppose the question is, is it appropriate I know that the Matheson Group have been outstanding contributors to this group and it created a lot of value. There's no question about that. But it is going to be a public company now. It is going to stand on its own 2 feet. Is it appropriate that you've got A father on the board and a son managing the Hotels Group. How are you going to manage that? How are Steve going to manage that situation? And what went into the consideration of the Board? Thanks, David. A really important Consideration, let me just go to the facts and then we can come back to some of the other questions. What was agreed very early on in this process is that given both the BMG and Woolworths Group all 14.6% of the business. Each business would nominate 1 Non independent director on to the Board. In the case of Woolworths Group, that is Holly Kramer. And in the case of BMG, it's Bruce Batterson, Senior. So that was part of the original agreement that we struck and both have the prerogative of doing that. I feel I have mixed emotions on Con's story actually being on the Board because as you will note on Slide 14, he's listed as A non executive director and actually as part of him moving on to the Board of Endeavour Group, he will be transitioning out of a full time executive role Ed Woolworths, and he's done an amazing job for us over the last 5 years. So it's rather Sweet to have him sit in there as a director in his own right. We're very pleased for him to do that. You will not completely sever his ties with Orbitz Group and will still continue to be on the Board of Quantium for us, which is so ably help us just Change the shareholding and hopefully on and also in the context of PFD assuming that that deal goes through as outlined. So that's Colin's role. And I think I'll speak for Steve Donahue and Peter Hurl as well. Given Colin has been central to the Endeavour Board in In its current structure or the ALH Board before that and as Ashford shared, the order committee for that board for us Having his institutional knowledge on the board on a go forward basis is enormously helpful. The documents also should outline, by the way, David, that there is that this Endeavor Group Board is looking to appoint one more Non executive direct to the Board and that will take place in the next few months. So that would then give a balance of independence onto the Board, which is important. Other points, I guess, I can make on the Board would be, Pito has put a lot of time and balance into what you see presented there and there's been a lot of dialogue, as you might imagine, Between him and the directors elect and the Woolworths Board to be comfortable with the balance of it. And each member of that board has signed an undertaking of being very committed to preserving Dependence and objectivity of their Board and that includes Bruce Madison, Senior. I guess if there's a last point, it's good to see another person being the Chairman of the Board because I will then step down officially on the 28th June and Peter will take over. So I'll be very pleased to see the independence and veracity that Uniper will bring to the role. And the management of the The Hotels Group? Well, that is for Bruce, Jr. Look, I mean, we've managed through this Perceived conflict for 20 years, Peter. Bruce is committed to independence. We manage it on an everyday basis. Having that operating experience inside the business is enormously valuable to us. As you well know, Huge institutional knowledge in Bruce Senior and Bruce Junior. As I can honestly tell you as the Chairman of the Board at the moment, It is something we manage, I think, particularly well. It doesn't mean we don't we're not aware of it and don't put in place the right protocols. But Yes. It is something that I think it is all imminently manageable. I won't put Steve in the position well, Steve, anything you'd like to add? No. Support your comments Brad and just I guess David point you back to your own comments about the track record that both Bruce's are behind them and We're the beneficiaries of their knowledge across the group and Bruce Junior very ably leads the hotel team. So, yeah. Thank you. Your next question is a follow-up question from Scott Ryall from Rimmat Equity Research. Please go ahead. Thanks very much. So that was my macro question before and my micro one is just you started talking about your inventory before. I don't know. I can't remember a time where there's been more cheap wine on the markets in the channels that I buy through. So I was wondering if that if the current Operating environment for wine where export markets are difficult, restaurants are not yet back To full throughput, is that a risk to your inventory position? Or is it an opportunity because of your channels To bring better value to market, please. Well, Scott, I'll let Steve talk to it. I mean, conceptually as a retailer, if you look at Holding in our inventory turns, conceptually opportunities in the upstream like this are For retailers and that's not different whether we're a food or a drinks retail, but I'll let Steve comment specifically on where We are in a wine cycle in Australia. Yes. But Brad, you would be in a bit of trouble if you held 70 days of inventory, right, as a retailer. So I'm more interested in that. As a walk back from our personal capacity, I hold 24 months. So everything's relatively lost. And If you want to sell us a restaurant, you're on 80 days payment terms. So everything is relative. Sorry. I thought you upset Brad. This made me anxious. A very brief comment on the state of the wine market. There was actually some press over the weekend actually pleasingly about the quality of V21, which we think is great for the industry and we're a material participant in the industry, I might add. So we think that's Very positive. You point out some of the pricing fluctuations. Really the impact of China has had some downward pressure on Some of the more premium regions like Barossa, for example, where there have been declines. But you're probably also aware of very strong demand in particular from the U. K. Market and that's Seeing a real underwriting, I think, of pricing of some of the more value end of the wine spectrum. So SEA, Southeast Australian prices Have held up relatively well when compared to some of those cooler climate very premium regions. And then we also have this interesting Situation playing out with New Zealand and we are material customer of New Zealand wine particularly Marlborough Sauvignon Blanc and we've got Our Visible Estate team over there who do a lot of our very large scale sourcing for us, but there's actually a lot of pressure on pricing for New Zealand Sauvignon Blanc, Predominantly because of a bit of a shorter vintage and a lot of demand coming out of North America. So like all markets and all segments, there's a lot of puts and And it's very much true for the wine business this year, but I'd just reiterate the point about how pleased we are that the Australian producers have had A volume of vintage and a high quality vintage this year, I think that's good news for everybody. Okay. Thank you. Thanks Steve. Thanks Scott. Thank you. Your next question is a follow-up question from Ben Gilbert from Jarden. Please go ahead. Hi, Otto. Just a final quick one for me. Fred, just interested, did the Board discuss potentially lifting the power ratio for Woolworths For Woolworths Group, now you're obviously going to have different inventory cycle, different working capital cycle and gearing is obviously looking Relatively conservative as we talked to before, was there any discussion around lifting that power to 75 to 80 plus type number? Thanks, Ben. A A good question if I understood the dividend ratio for Woolworths on a go forward basis. I'll turn it over to Steve Harrison to comment on the discussions we've had. Yes. But at this stage, there hasn't been any discussion with the Board about changing NPAT ratios. It's a long established Ratio of paying up between 70% 75% of NPAT, which we feel gives the right balance of being able to continue to sustain the business, invest to grow the business, but also Strong dividend to our shareholders. Yet to your comments on working capital cycle, whilst we're a net Negative working capital, ultimately, the cash generation and the move in that will be how does that change over time. And so at this stage, There's been no discussion about any change. Thank you. Thanks, Ben. Thank you. There are no further questions at this time. I will now hand back to Mr. Banducci for closing remarks. Thank you everyone for joining us this morning and for your questions. We realized there was a whole lot of documents sent to you. So Apologies for nature of the process that but hopefully, you will find in the detail of the demerger booklet itself The management presentation all the details that you need to understand why we think this is the right decision to make for both businesses and why we Strongly support Endeavour Group as a separately listed public entity in Australia. Thank you very much and speak to you all soon. Thank you. That does conclude the conference for today. 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