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Article Excerpt
RICHARD GOYDER, MANAGING DIRECTOR, WESFARMERS LIMITED: I'm joined in Perth by Gene Tilbrook, John Gillam, Ian McLeod, Launa Inman, Guy Russo, Stewart Butel, Rob Scott and Keith Gordon. They'll all be talking about their various businesses before we open up for questions.
So I'll just give a bit of an outline of the overview of the half and then I'll hand over to John, who will commence the divisional run-through.
So I'm now on slide -- the Group performance slide, slide four. And we've today announced a half year profit of, after tax, of AUD879m. That's after the AUD125m of actual write-downs and provisions that we've disclosed in January. Strong operating cash flow of AUD1.8b. And the Board today has declared the interim dividend of AUD0.50 per share, fully franked.
The detailed results are on slide five. And I won't go into any detail. Gene Tilbrook will give a bit more information on the financial aspects later on in the day.
So if we move to slide six, I just want to talk briefly about how we've seen the divisional performance. Bunnings, as you can see in the release, a very impressive result for the half, strong cost sales growth, as John will go into and an improving trend on that front. And so a very good performance for Bunnings. And afterwards he will talk about the improvements that we're seeing in the retail side of things, the challenges of the direct improvements we're seeing in the retail, particularly coming from the implementation of some of the strategies that we're putting in place in Officeworks.
In Coles, Ian will run through that performance. I want to tell you that Coles is where we thought it would be in terms of our plan. There is some momentum in the business at the moment which is positive. There's enormous focus on getting the things that we want to get right for Coles that Ian will go through. And we're not going to take any shortcuts on that front. There is still a lot to do in the Coles business.
And Target was a very good result for the first half, with strong cross-sales growth and, again, an improving trend in that number. And Launa will provide more details on Target.
And Kmart, Guy will give you a bit of an update on Kmart. One of the reasons Kmart's performance this year is below the five weeks last year is the five weeks that we reported last year are five profitable weeks. And it's not profitable in the whole six-month period and that's one of the issues which I'll be tackling and my fellows at Kmart. And Kmart, like Coles and Officeworks, is a true turnaround, as we've said before.
And Insurance business we're very happy with the first half result in Insurance, particularly out of broking, and particularly the turnaround in Lumley, New Zealand. There are some challenges in the underwriting businesses, although the forecast in terms of rate for that business is extremely positive. And of course our investment income, like others, will be under pressure because of the lower interest rates going forward.
On the Industrial businesses, Resources has had a very strong first half and Stewart will go over that, record sales, record production, record profit.
And Keith Gordon will run through the Industrial & Safety and CSBP divisions. We were really pleased with the Industrial & Safety division's performance. We continued the improvements in performance in that business for the first half.
CSBP and Energy, both impacted by Varanus Island gas issues. Also some inventory write-downs in both those businesses. And CSBP fertilizer volume has been down in the first half.
On slide seven, we talk about the provisions for write-downs that we've previously disclosed. On the divisional performance, you've got there a rolling 12 ROC for the divisions where there's no comparison. Previously we didn't have a dividend. And clearly there is some work to do in a number of our businesses to get return on capital up, which leads me into slide nine, the return on shareholders' funds slide.
And this demonstrates very clearly the task we have, where we bought an underperforming business and reduced Group return on equity. This is through a return on capital, both at the divisional level and leading to a strong return on equity focus at a Group level, how we anticipate improving the total shareholder returns over the coming years, and with a very strong focus of ours, as it always has been.
And then finally on -- there's a slide on cash flow and dividends and earnings per share. They are per-share numbers. And Gene will give you more details on cash flow in his presentation. I'll talk about outlook at the end, but I'll now hand over to John Gillam, who will do a run through the Home Improvement & Office Supplies division.
JOHN GILLAM, HOME IMPROVEMENT & OFFICE SUPPLIES MANAGING DIRECTOR, WESFARMERS LIMITED: Thanks Richard. I'll start at slide 14 and comment basically on the Bunnings results. Bunnings finished the first half strongly in what is a volatile environment. Volumes in November and December were pleasing and helped lift our trading revenue growth across the half to 8.9%. Earnings for the period grew by 13.8%. Trading earnings, which we adjust to exclude property activities, grew by 14%. And our overall trading margin strengthened to 12.1%.
Our trading margin held up despite the adverse A-dollar exchange rate movement. And this is because about 40% of the products we sell is totally manufactured or grown in Australia or New Zealand. And we continue to work hard on reducing our cost base and achieving low buy-side product costs, relative to our competitors.
Return on capital was 31.1% on the back of a net capital investment of just over AUD180m in the business in the first half. We have a strong safety focus in Bunnings, and it's pleasing to see these results also turning in the right direction.
Turning to slide 15, the highlights of the first half were cash sales growth of 10.3%, with cash store-on-store growth of 7.7%. The retail performance has held up well. Strong returns were generated from our existing store networks through value-focused merchandizing and good operational discipline.
We're pleased with the 1.6% lift in trade sales given the weakness in Australian and New Zealand housing markets. And this trade sale growth indicates our strategy here is on track.
The Bunnings store network continues to expand. And in the first half we opened six warehouses, with one of these being our important first multi-level warehouse store in Hawthorn. We also opened two smaller format stores and six new trade centers. Details of the store network movement for the full year are contained in the supplementary packet, page 25.
Looking into 2009 and beyond, our new store pipeline is in good shape. Investment in bringing current building and merchandizing standards into older parts of the store network continued at a similar level to prior years. And works to force the returns we're achieving from our existing store network.
The Bunnings business is well positioned in the current trading environment with a focus within our offer on value and ease of DIY, supported by further gains in operational effectiveness and efficiency.
Turning now to slide 16, our expectation for the remainder of the financial year is to continue cash sales growth, albeit possibly at a lower rate, depending on [new turn] economic outcome. Trade sales will be sensitive to any further slowing in housing construction. And Bunnings will continue to focus on driving better customer outcomes and making further improvements to our cost of doing business.
Turning now through to slide 18, I'll comment on Officeworks. Trading revenue for the first half were AUD602m, which produced earnings of AUD25m at an EBIT margin of 4.1%. And we're looking to improving our EBIT margin in the years ahead.
Turning to slide 19, looking inside the Officeworks results, we were pleased with the 3.9% sales growth in the retail stores, underpinned by stronger growth in transaction numbers. It has been encouraging to achieve this in a period when the business was transitioning to everyday low pricing and margins were subjected to significant competitive pressure.
Reinvigorating Officeworks for long-term success is a priority for Mark Ward and his team. And there were some key achievements in the first half. Good steps have been taken towards reestablishing range authority. Customer-facing conflicts between the store and online channels have been eliminated. Store presentation standards have been lifted through better operational practices and targeted store livery and fit-out investment.
And, as I outlined in the October briefing day, after successful trials, a new store look and feel has been settled, with encouraging trading results. New stores, and there were four in the first half, have the new look and feel. And a number of refurbishments were also completed. This work is ongoing.
Unfortunately, adverse sales trends were experienced in both the Officeworks Business segment and in the Harris Technology operation. These two channels the market have suffered due to the lack of confidence amongst the core small to medium-sized business customer base which are at the leading edge of the economy and have been heavily impacted by the current environment. There was also a disruption experienced in these businesses as the strategic direction for them was reset.
Turning to slide 20, trading conditions for Officeworks are expected to be difficult for the remainder of the year, with continued pressure on sales and margin, particularly in the small business sector. However, we do expect there to be moderate sales growth as the business continues to gain traction from the revised strategies that are now in place. Within the business, the team is very keen to build on their hard work of 2008 and drive further gains from the strategic agenda that's now been implemented.
I'll now hand over to Ian.
IAN MCLEOD, COLES MANAGING DIRECTOR, WESFARMERS LIMITED: Thanks John. I'm on slide 22. Since my arrival last May and the subsequent arrival of a senior team with a proven track record in retail, our priority has been developing phase one of a five-year recovery plan, focused on improving the basic foundation of Coles against inheritance of years of neglect and underperformance. This is an important context in which to place these results. At such an early stage in the turnaround, we find it encouraging, but recognize there is still significant work to be done.
In the six months to December 31, 2008, Coles generated operating revenue of AUD14.6b, with earnings before interest and tax of AUD431m. Total store sales for the half were 3.9% ahead within food & liquor, plus 8.9% within convenience stores.
Moving to slide 23, we talk about the Coles transformation. It's worth noting that my senior team have been together for only six months. The activity on a number of fronts has been intense. We've been working hard to kick-start change in a number of areas, to improve operating standards, become better at fresh, increase focus on service, revise promotions, develop new formats, improve communications and move away from the lumbering bureaucratic political culture of the past. We're pleased with early progress, but recognize that this is a turnaround which, to be meaningful and sustainable, will take time.
So the early results are encouraging, as shown on slide 24. Comp store sales are up from 1.3% in quarter one to 3.8% in quarter two. We're seeing positive volume growth for the first time in two years, on the back of rising customer numbers. Also the changes to our promotional program and catalogue timing have paid dividends.
And fresh food sales are improving, particularly at Christmas, where we saw strong sales growth in areas such as produce, bakery, seafood, where prawns and crayfish are actually 50% up year on year.
Right, moving on to slide 25. Our Fresh food strategy, of course, beginning to bear fruit, if you pardon the pun. But we'd stress again that it's still early days and we need better consistency, better operational focus and improving supply chain to supporting better availability. We're investing capital in areas of need, such as refrigeration and checkouts. Equally we are raising the bar on our own expectations and in-store standards. After some early trials, we have landed our [renewal] refurbishment. It is not the finished article but customer reactions are very positive.
In liquor on slide 26, Tony Leon has hit the ground running and is really making a difference. He's an excellent operator and a great addition to the senior team. Our value position across all liquor brands has improved and customer numbers are improving also. Our network continues to expand, with eight new 1st Choice stores open, and 66 Liquorland refurbishments.
Convenience stores have also performed well. New formats have been trialed and shop sales have grown by [5.3%], having increased to 5.9% in the second quarter.
Finally, on slide 27, going forward, it's clear that economic conditions are hardening. Consumer confidence is waning, leading to more a more value-conscious customer. We're seeing it already with more customers shopping for a specific budget and house brand sales rising three times faster than the brands.
These conditions are aligned with Coles' desire to deliver better value to our customers. It is still early days in the turnaround. A sustainable change will take time, but momentum is growing. And we remain confident that the recovery of Coles can be successfully delivered over time.
Thank you. I'll now hand over to Launa.
LAUNA INMAN, TARGET MANAGING DIRECTOR, WESFARMERS LIMITED: Good morning to everyone in the West, and good afternoon to those in the East. I'm very pleased to take you through Target financial and business highlights for the period. And if we go on to basically slide [43 and 44] combined, we'll talk about them.
Our results overall were excellent, particularly given the market conditions in the first part of the first half. And we finished with an EBIT of AUD215m in total for the half. Target's EBIT margin remained very strong at 10.3% and we've continued to maintain margins overall. Our comp store sales growth for six months was 4%, with total sales revenue up 8% for the half.
And I'm pleased to report that all merchandise departments reported growth during the period. In particular, we had a very strong outcome on ladies', youth apparel, also all our technology-based products and toys.
Target has also had an outstanding Christmas. And we planned a strong campaign and certainly supported it with appropriate stock levels in key departments. Our success was also reinforced undoubtedly by the improved consumer sentiment in December with the government stimulation package, lower interest rates and petrol prices.
However, at the same time, I can say that we were extremely focused on costs. And they were and are continuing to be well controlled in this difficult environment. Our inventory is remaining fresh and is below last year, even with 11 new stores on the ground since the start of the half. We've got over 5% more selling space than a year ago, just to put that in context.
Going forward, our margins on direct imports are also supported by hedging in the near term. However, we have to carefully monitor any potential increase that we're receiving from third-party importers. And any significant cost increases for imported products will require careful price management, particularly as our customers are really looking for value in what they're buying.
Target now has 283 stores at the end of the half. And we've got plans to open five new stores in the next six months. Those are going to be three Target stores and two Target Countrys. We're also continuing to invest in our existing store network, with 19 store refurbishments taking place in the past half. And we've got 15 more planned for the remainder of the financial year.
In the current economic conditions, we believe Target is well positioned to retain existing customers and certainly entice new customers that are looking for value. We are also well placed to be beneficiaries of the recently announced second wave of government stimulation package. And we're working very carefully to ensure that we've got the right product at great value and great quality to entice that customer in.
Although the economic outlook is undoubtedly challenging, we are confident of riding out this uncertain period. And we are very much focusing on inventory levels and costs, but not losing sight of the fact that we need to be constantly offering new products, and are making sure that that value equation is very strong, and also, finally, ensuring that we do continue to refurbish our network so that we are well placed for the future.
All right, thank you. And Guy, I'll pass over to you.
GUY RUSSO, KMART MANAGING DIRECTOR, WESFARMERS LIMITED: Thank you, Launa. Slide 33, [welcome] everybody, morning and afternoon. The only...
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