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Edited Transcript of COL.AX earnings conference call or presentation 17-Feb-20 11:00pm GMT

Half Year 2020 Coles Group Ltd Earnings Call

Mar 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Coles Group Ltd earnings conference call or presentation Monday, February 17, 2020 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Leah Weckert

Coles Group Limited - CFO

* Steven Cain

Coles Group Limited - MD, CEO & Director

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Conference Call Participants

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* Andrew J. McLennan

Goldman Sachs Group Inc., Research Division - Consumer and Retail Analyst

* Ben Gilbert

UBS Investment Bank, Research Division - Executive Director and Analyst

* Bryan Raymond

Citigroup Inc, Research Division - VP & Analyst

* David Errington

BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia

* Grant Saligari

Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director

* Johannes Faul

Morningstar Inc., Research Division - Equity Analyst

* Michael Simotas

Jefferies LLC, Research Division - Equity Analyst

* Niraj-Samip Shah

Morgan Stanley, Research Division - Equity Analyst

* Phillip Kimber

Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer

* Richard Barwick

CLSA Limited, Research Division - Research Analyst

* Ross Curran

Macquarie Research - Analyst

* Scott Ryall

Rimor Equity Research Pty Ltd - Principal

* Shaun Robert Cousins

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Coles Group Limited Half Year FY '20 Results Conference. (Operator Instructions)

I would now like to hand the conference over to Mr. Steven Cain, CEO. Please go ahead.

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Steven Cain, Coles Group Limited - MD, CEO & Director [2]

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Thank you, and good morning, everyone. Welcome to the Coles 2020 Half Year Results Announcement. Joining me today on the call is Leah Weckert, our Chief Financial Officer, and you'll be hearing more from her later. We'll open up for Q&A after a short presentation, and now I'll kick off. What we're about to say complements the ASX trading update that we made on the 6th of February.

So these half year results, covering the first 6 months since we did our strategy refresh back in June, showed solid progress that we're making on our Winning in our Second Century strategy execution. Three things to call out financially. First is that sales grew 3.3% in the half to $18.8 billion, with growth pleasingly across all of the segments. EBIT increased by 0.4% to $725 million, partially due to strong demand for Coles properties at the current time. And we've now achieved 49 consecutive quarters of comparable sales growth, which is in line again with what we said at the time of the demerger about Coles being a very resilient business.

From a strategic point of view, Smarter Selling initiatives saw $95 million of savings. Leah will discuss these in more detail, but the team is very focused on becoming more efficient, more agile and delivering at pace. We incurred gross operating capital expenditure of $316 million in the half, which included the start of the supply chain modernization project with Witron in Queensland. We have a strong balance sheet with operating cash flow of $607 million, a cash realization ratio of 87% and net debt of $566 million. I'm also pleased to report an interim dividend of $0.30 per share, fully franked. This is in line with the guidance we provided at the time of our demerger from Wesfarmers.

Safety and well-being at Coles is a key component of our Winning Together strategy, and I'm pleased that we were able to deliver a reduction in TRIFR of 10%.

With regards to the announcement we released this morning on our website around our ongoing award covered salaried team member review, we have identified that for less than 1% of our total team members, there were some differences between our remuneration and the general retail industry award, or GRIA. We have taken provisions totaling $20 million for the estimated salary-related payments, interest and our costs covering the past 6 years, kind of implemented steps to improve our systems and processes.

Moving on to Slide 4, our strategy slide. We're making good progress, as I've already said, inspiring customers through best value food and drink solutions, smarter selling through efficiency and pace of change, and winning together with our team members, suppliers and communities. I'll go through some of each of these pillars in a bit more detail.

So moving on to Slide 5. We've had a very busy 6 months, as you can see. In Own Brand, we've had great success and we achieved sales of more than $1 billion for the first time in December, which was up 7% for the month and 6% for the half. We launched more than 3,000 new products, that's Own Brand and branded, in the half as part of our tailored range review. This is the most extensive range trade period in supermarkets for many years and the customer response has been very positive. Our dedicated convenience space featuring our Food For Now and Food For Later range was also successfully delivered to 114 stores, and a pet treat bar was also introduced at Coles Local in St Kilda.

We also provided more alternatives for our vegan and vegetarian and flexitarian customers via Nature's Kitchen and the introduction of products like our first plant-based roast at Christmas, which we had at our house, incidentally. Successful marketing campaigns in the half included Little Shop 2 and Spiegelau glassware, which were both well received by our customers. We saw an improvement in customer satisfaction with investment in service driving a better checkout experience. And Coles online sales growth increased 24% and Delivery Plus was introduced. Delivery Plus is a good option for customers who regularly shop online to manage their family budget by knowing exactly how much they were paying for online delivery each month. Overall, 55 new exclusive liquor brand lines were introduced in the half and a total of 248 medals and awards were received. Our growth areas saw export and active flybuy members both increasing in the half.

Moving on to Slide 6. This is Good Things, Great Value, part of what it's all about and lowering the cost of meal occasions. And that's been across breakfast, lunch, dinner, the cost of Christmas entertaining and also lowering the cost of kids' lunch boxes for school.

Slide 7 is Smarter Selling. $95 million, as we've said, 2 main areas of savings have been the Store Support Centre, which was flagged last year, and also supply chain efficiencies. And Leah will talk a little bit more about that. We've changed some of the decision-making processes in the Support Centre to make -- to change things faster. And we've improved the work environment, including hot desking. We've also implemented the Ariba IT system, enabling procurement savings and streamlining processes. We've now connected more than 1,000 of our stores for high-speed broadband, improving productivity, and solar power has been rolled out to 42 supermarkets, reducing energy costs.

As far as the tailored store strategy is concerned, we renewed 2 Format As, 13 Format Cs and a second Coles Local store at St Kilda. As I've mentioned already, we've started building the Queensland Witron distribution center, and we've also identified 2 -- sites for 2 Ocado fulfillment centers in Sydney and Melbourne. These will help deliver a long-term structural cost advantage.

Moving on to the final pillar of our strategy, Win Together. This is about winning with all of our stakeholders, teams, suppliers and community. Things that we did do in the half, very much around improving the health and well-being of our team members. 3,000 of them are trained in mental health resilience, some support for Movember as well, which raised more than $200,000, and then indigenous team member employment, which is one of our big programs, have increased to 4,464 as we move towards our target of 5,500, including 500 in trade and leadership positions by 2023.

From a dairy point of view, we now source milk directly in Victoria and Southern and Central New South Wales from farmers and for our Coles brand 2- and 3-liter milk, providing more certainty for future incomes for our dairy farmers. Other support for communities includes $430,000 donated to REDcycle to increase plastic recycling, more than $1 million provided in sports equipment to Little Athletics centers across Australia, and delighted to report that we've delivered our 100th million meal equivalent to SecondBite since 2011. We've also raised more than $9 million with our customers for Country Women's Association drought relief since July 2018.

During the half, we also signed a power purchase agreement to source the equivalent of 10% of our national electricity demand from 3 new solar plants, which are being built currently in New South Wales.

Moving on to Slide 9. I'd like to take some time to acknowledge our team members, suppliers and communities across Australia who have been devastated by some of the worst drought and bushfires on record. In December and January, I traveled around New South Wales and South Australia, visiting badly affected drought and bushfire-affected communities. I'm extremely proud of the way that Coles has rallied to help with these emergencies. With many of our fresh produce suppliers, they're facing some of the toughest growing conditions on record and we varied product specifications by accepting produce that would otherwise be rejected based on size, shape or cosmetic blemishes but not taste. As a result, we can maintain supply for customers and importantly, income for farmers dealing with the impact of drought and bushfires.

In total, Coles has contributed more than $6 million to drought and fire relief, including $3 million in gift cards to more than 6,000 rural fire brigades. We've also donated animal feed to a number of centers, including Mogo Zoo in New South Wales. I know I speak on behalf of everyone at Coles when I say that we are so incredibly grateful to our firefighters and emergency services for their bravery and commitment, and also to our team members who donate their time to the CFA. So thank you once again.

Moving on to Slide 10, the strategy tracker. I won't go into detail here because most of the points have been covered, but we will be reporting every 6 months on this. And I'm delighted to say that we're making progress with all of the 8 KPIs that we presented in June.

I'll now hand over to Leah to take you through the brief financials in more detail. Leah?

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Leah Weckert, Coles Group Limited - CFO [3]

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Thank you, Steven, and good morning, everyone. I'm now on Slide 12, which showed our group results on a retail basis. As Steven mentioned in his presentation, sales revenue increased by 3.3% to $18.8 billion. Going forward, Coles will report including the change for AASB 16 lease accounting. On a reported basis, post-AASB 16, we reported EBIT of $910 million. As prior year comparatives have not been restated, the change is not meaningful. And so my commentary in this presentation, with the exception of the balance sheet, will be on a pre-AASB 16 basis. EBIT pre-AASB 16 and significant items increased by 0.4% to $725 million, assisted by strong profits in our property operations. This number includes a provision of $20 million, comprising $16 million in supermarkets and $4 million in liquor, the estimated salary-related payments, interest and on cost for the prior 6 years associated with the ongoing award covered salary team member review.

Net profit after tax, pre-AASB 16 and significant items, increased by 1.7% to $498 million and earnings per share increased by 1.7% to $37.03. I will note, in the prior year, the corporate costs were not at a full run rate as some corporate functions were only established partway during the reporting period as we moved through the demerger. As Steven has already mentioned, we're also pleased to announce the board has declared a $0.30 per share fully franked dividend.

Moving now into the segment financials on Slide 13. It is pleasing to report satisfactory sales revenue growth across each of Supermarkets, Liquor and Express. In Supermarkets, sales revenue growth was driven by the [Welcome] breakfast, lunch and dinner campaign and a successful Christmas. Little Shop 2 and the Spiegelau glassware campaign also had a positive impact. In Liquor, revenue growth was the result of continued solid contribution from First Choice Liquor Market and online sales, while Express revenue was also supported by the Little Shop 2 campaign and improving fuel volumes. This slide also provides you with a reconciliation of the segments on a pre- and post-AASB 16 basis. You will see that the group impact to EBIT of $185 million from the adoption of the lease accounting standard. This movement is effectively due to the removing of lease operating costs and replacing them with depreciation on the right-of-use assets and the interest on the lease liabilities, and I'll cover that in more detail shortly.

Supermarkets EBIT increased by 5.7% to $637 million, driven by higher sales and gross margin, but also from cycling incremental costs incurred in the first half of FY '19 relating to the removal of plastic bags and increased flybuys promotions. These were not repeated in this period. Liquor EBIT was down by 9.9% to $67 million. The result benefited from New Year's Eve falling within the half compared to last year. However, this was more than offset by clearance cost and promotional activity associated with the tailored range change that commenced during the half. Express EBIT was $4 million as the business now operates under the new alliance agreement announced in March 2019, but we are pleased that the business has seen a return to fuel volume growth, the first consecutive quarters of growth in 6 years. The Other segment recorded EBIT of $17 million. As we announced in our trading update on the 6th of February, EBIT in Other was favorably impacted by a $15 million release to the Workers' Compensation Self-Insurance Provision, largely as a result of improved safety performance and earnings from our property operations of $33 million, including net gains from property disposals.

We note that corporate costs remained broadly consistent with the $66 million of annualized costs noted in the demerger book clip, although this is offset by the $15 million self-insurance provision release I've already mentioned.

I'll now turn to the normalized cash flow on Slide 14. This slide shows cash flows normalized for demerger-related items. Operating cash flow, excluding interest and tax, was $920 million, a reduction of $407 million compared to the first half of FY '19, primarily due to the timing of half year-end, which impacted working capital. To expand on that point, with the first half of FY '20 ending on the 5th of January, compared to the first half of FY '19 ending on the 30th of December, the first half of this financial year included 7 monthly pay runs to our suppliers compared to 6 monthly pay runs in the first half of FY '19. So this short-term working capital impact is expected to unwind in the second half. Cash realization of 87% was impacted by the adverse movement in working capital, but this is expected to reverse in the second half, and we are still targeting greater than 100% cash realization for the full year.

I'll now take you through capital expenditure on Slide 15. Gross operating capital expenditure on an accrued basis decreased by $44 million to $316 million in the half. The majority of the decline relates to reduced CapEx spend on net new space and fewer Click&Collect locations rolled out compared to the prior corresponding period. This was partially offset by higher efficiency initiatives, with investments made in the store operating model in relation to loss prevention measures and CapEx in relation to the supply chain modernization projects, with the Witron Queensland distribution center build commencing during the half. Store renewal CapEx was driven by 32 supermarket renewals and 23 renewals across liquor. Growth CapEx was driven by 5 new supermarkets and 13 liquor stores opened during the half, in addition to the rollout of our dedicated convenience space featuring our Food For Now and Food For Later ranges.

Before moving to the next slide, I'm just going to make a couple of comments on property CapEx. We reported net property CapEx of negative $174 million for the half. This means there was a capital inflow as we took advantage of the strong property market. For the full year, due to the supermarket property conditions, we expect a net property CapEx inflow, i.e., divestments will exceed purchases, and we expect that to be up between $130 million and $180 million, noting that we had previously guided to plus/minus $100 million.

We expect full year gross operating CapEx guidance to remain within our previously guided range of $700 million to $900 million, with further progress payments on the supply chain modernization program and still targeting approximately 75 renewals for the full year. However, it is worth noting that there is uncertainty about the coronavirus delaying some renewal equipment being shipped out of China, which may impact the renewal program, and we will be able to provide a further update on this at the Q3 sales results.

Turning now to the balance sheet on Slide 16. The balance sheet provided on this slide is on a post-AASB 16 basis. As you can see, as at 5th of January, on a post-AASB 16 basis, we reported working capital of negative $839 million, capital employed of $3.7 billion and net assets of $2.5 billion. The movement in inventory days and credited days is largely due to Coles no longer holding fuel inventory under the new alliance agreement and a change to the tobacco excise treatment. The change in tobacco excise came into effect from the 1st of July 2019, whereby the excise value is now recognized from the point of acquisition rather than when the stock is delivered to stores.

Seasonality also had an impact on inventories and payables balances, and therefore, the working capital movement, as we hold more stock in supermarkets and liquor over the Christmas and New Year trading period. Net debt as of the 5th of January 2020 was $566 million, an increase of $46 million with the payment of the FY '19 ordinary and special dividends in the half. Coles also refinanced some of its debt facilities, which I'll talk to in a moment. The leverage ratio pre-AASB 16 was 0.6x, which provides significant balance sheet flexibility going forward.

I'd now like to just talk through some of the impacts of AASB 16, which Coles has applied from the 1st of July 2019. So turning to Slide 17. Upfront, I would like to say that this has been a very significant accounting change for a business like ours, which has over 2,000 leases in our business. This is a set of noncash accounting adjustments and have not changed the way in which we run the business or our ability to access capital. The credit rating agencies and our banks have already taken into account our lease profile since the inception of our credit ratings and debt facilities.

On adoption, Coles recognized right-of-use assets of $7.5 billion, a lease liability of $8.9 billion, a deferred tax asset of $356 million and the elimination of lease-related provisions of $188 million. The difference of $831 million is taken to retained earnings. And you can see on the slide what the corresponding balances were at the 5th of January. The impact on our P&L is on the right-hand side of the slide. The unfavorable impact on profit after tax of $9 million was due to the elimination of the operating lease expenses being more than offset by the recognition of depreciation in interest expenses associated with the lease portfolio. The bottom part of this slide provides a reconciliation from lease -- operating lease commitments, which were disclosed at June 30 to the $8.9 billion of lease liabilities we recognized on adoption on the 1st of July. As I said, this is a significant change, but hopefully, this gives you some clarity on the impact.

Turning now to Slide 18 on capital management. As I've said in the past, we will continue to take a disciplined approach to capital management. As Steven already mentioned, the Coles board has determined a fully franked interim dividend of $0.30 per share. The dividend reinvestment plan has been activated from this dividend. No discount will be offered, and this will be neutralized with on-market purchases. In October, Coles issued new $300 million 7-year and $300 million 10-year senior unsecured fixed-rate medium-term notes. And I'm pleased that the transaction was strongly supported by debt investors being significantly oversubscribed with strong pricing outcomes.

Following this, in terms of funding and liquidity, our weighted average drawn down debt maturity is 5.2 years compared to 3.7 years prior to the bond issuance. This provides funding stability. Undrawn facilities of $2.2 billion and cash at bank and on deposit of $242 million provides sufficient headroom. Over time, we will look to refinance additional debt facilities and further smooth our debt maturity profile. Finally, on credit rating, we remain committed to solid investment-grade credit ratings with Standard & Poor's and Moody's. Importantly, we do not expect any impacts on rating outcomes from the introduction of AASB 16.

Before finishing up, I'll just spend a little bit of time on Smarter Selling on Slide 19. Firstly, I just want to point out, this slide is illustrative and it's not meant to provide a view as to the phasing of Smarter Selling benefits we expect to realize over the 4 years of the program. It's our attempt to conceptually demonstrate how the $1 billion in cost savings is constructed. As we've previously communicated, a big part of the role of Smarter Selling is to largely offset inflationary cost headwinds in the business.

So starting with the dark blue blocks. These represent new initiatives commenced each year. For FY '20, that number will be in excess of $150 million, as we've previously communicated. The pale blue blocks represent the actual sustainable cost savings achieved and then annualized for the prior year. For example, in FY '20, if we achieve an actual cost out of $150 million, this amount will annualize to amount in excess of $150 million as new initiatives commence at various points throughout the financial year, which is why the pale blue block looks slightly larger than the dark blue block in the previous year.

Now for the first half, we reported cost out of $95 million in relation to Smarter Selling initiatives. It is important to note that these initiatives relate only to the FY '20 year. And there are no annualization benefits from any initiatives which began prior to this. The most significant contributors to the $95 million were supply chain initiatives and streamlining of our Store Support Centre. The transport hubs in Victoria and Western Australia are now fully operational, which is leading to an improvement in the utilization of our fleet through increased backhaul. We are also seeing an improved operational alignment between our store and distribution teams, facilitating delivery frequency and cartons per pallet optimization. We won't be going through the detail of the segment slides.

So with that, I'll hand back to Steven, who will make some concluding comments on outlook.

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Steven Cain, Coles Group Limited - MD, CEO & Director [4]

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Okay. Thank you, Leah. So by way of a trading update for the remainder of the quarter and FY '20, comparable supermarkets have remained broadly consistent with the levels achieved in the second quarter, which is pleasing. Incremental costs associated with the removal of plastic bags and increased flybuys promotions, which were a benefit to supermarket EBIT growth in the first half of FY '20, will not occur in the second half of FY '20. However, Supermarkets EBIT growth in the second half of FY '20 will benefit from a Smarter Selling provision of $19 million, which impacted Supermarkets EBIT in the second half of FY '19 last year, which is not expected to reoccur.

In Liquor, it is expected that earnings will remain under pressure in the second half as a result of the tailored range, reviews and clearance activity, which commenced in the first half. The bushfires have also had an impact on volumes in Q3. The new leadership team under Darren Blackhurst, who joined in January, is undertaking a review of operations, and an update will be provided at full year results in August. In Other, as previously communicated, the first half FY '20 earnings from property operations are expected to represent the vast majority of FY '20 property earnings. Corporate costs are expected to be broadly in line with the $66 million annualized costs noted in the demerger scheme booklet, offset by the $15 million in Workers' Compensation due to an improved safety performance.

Gross operating CapEx continues to be on track for between $700 million to $900 million full year spend, although the coronavirus has delayed renewal refrigeration, as we've already mentioned. Some impact is expected also on export sales. Finally, due to strong supermarket property conditions and net property inflow, it's expected (technical difficulty) $130 million to $180 million and not the plus or minus $100 million, as previously communicated. So that concludes our presentation.

And with that, I'll hand back to the operator and open up for Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Bryan Raymond from Citigroup.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [2]

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My first one is on the cost base in supermarkets. We've seen underlying cash CODB growth of a bit over 3% in the half, and that's excluding the provision that you raised. And it's also including that at least a portion of that $95 million of Smarter Selling benefits. So I just wanted to understand the underlying run rate of cost growth in the business and how that is expected to look on a -- basically, over the second half and into FY '21? And also, how much of that Smarter Selling benefit has fallen to the CODB line within Supermarket space?

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Steven Cain, Coles Group Limited - MD, CEO & Director [3]

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Bryan, thanks for that. I think what we've always said about cost, underlying cost inflation, is that it's around about 3%. And then obviously, we then decide what initiatives, like Smarter Selling, there are to take cost out. And we also make decisions around what costs to add in. And I think we did call out in this particular half that we have invested in service, in particular, which has improved on our total Coles results for customer satisfaction.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [4]

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Okay. So we could put that -- most of it -- most of that increase to increased staff levels? And then how much of that $95 million in Smarter Selling benefit in the half would have flowed to Supermarkets overall? And then I assume some is in gross margin versus CODB. Can you give us a bit of a breakdown there?

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Leah Weckert, Coles Group Limited - CFO [5]

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Yes, you're saying -- I mean, it's split. So as we pulled out 2 of the big contributors to the $95 million, where the streamlining of the stores are forecast, they're going to be in CODB, and then a lot of your logistics benefits will go into GP. And we see that, that $95 million is actually what we've taken out in the half, so it's fully in the numbers.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [6]

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Okay. Great. Just my second question then is just on the gross margin in Supermarkets. So we saw a bit of a mix shift to private label, which would have helped. Obviously, it's pretty rational out there, in my view at least. So I'm not surprised to see it up, although it was up more than I thought. The one piece that I haven't seen mentioned is stock loss and how that has progressed. I know you've put in some anti-theft measures and you've had a bit of sales momentum. So I would expect your markdown for sales also moderated. So can you guide us to sort of what sort of basis point contribution stock loss added to that 31 basis points of Supermarket gross margin expansion, please?

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Steven Cain, Coles Group Limited - MD, CEO & Director [7]

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Yes. Stock loss was broadly flat, Bryan. So it wasn't really a contributor one way or the other to the GP change.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [8]

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Okay. Was there anything else in there that I'm missing then in terms of the drivers of that 31 basis points? Was it just sourcing and so on that you called out?

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Steven Cain, Coles Group Limited - MD, CEO & Director [9]

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Yes. So it's that strategic sourcing. And also, we've talked about supply chain. And I think in particular, on the supply chain, we've made fairly big strides on the backhaul operations, which is working well.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [10]

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Right. So you haven't seen any return on that CapEx investment on reducing theft levels? Or has there been some offset within stock loss?

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Leah Weckert, Coles Group Limited - CFO [11]

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So as Steven said, the stock loss is broadly flat. Stock loss is one of those things that it actually takes time to come through after you roll out an initiative. So we have started rolling out some loss prevention and CapEx initiatives, but they were largely weighted towards the back end of the half. We wouldn't expect to start to see benefits from that coming through probably for a few more months.

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Steven Cain, Coles Group Limited - MD, CEO & Director [12]

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The other thing to add to that there is things like the convenience rollout where we've put the modules into 114 stores and so on. That's sort of in the whole stock loss waste area, then obviously, that sort of drives your waste numbers up a little bit. And then, obviously, we've got initiatives to offset some of that as well. So I think we're reasonably pleased with the stock loss results in the half.

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Operator [13]

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The next question comes from David Errington from Merrill Lynch.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [14]

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I've got 2 questions. One is on the CapEx and the balance between what you're looking at in terms of efficiency initiatives in maintenance and balancing that CapEx to cost efficiencies because, as you're saying, you're facing cost increases at the moment. How do you look at that CapEx? Because this half was quite low in CapEx. And I've been critical toward Woolworths in spending too much for forever. And they've got big increases in depreciation. I noticed your depreciation is fairly flat. So it shows that you're not spending overs, but are you -- I mean this might sound a silly question, but are you spending enough in terms of efficiency and maintenance so that you can keep a handle on this cost inflation, which does appear to be coming through in supers in the last year or 2 at a fairly accelerating rate, by the looks of it.

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Leah Weckert, Coles Group Limited - CFO [15]

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Yes, it's a good question, David. So the maintenance number is a little bit around phasing, which we are expecting more coming through in the second half around that. And that just relates to the planning cycle. So that should go up more in line with what we saw for the full year last year on maintenance in the second half. In terms of the efficiency initiatives, I mean there's a lot of work underway in developing out the Smarter Selling program, some of which requires CapEx, for example, those loss prevention initiatives that we just spoke about. And obviously, the supply chain modernization capital costs will fall into that bucket as well, and we are expecting some additional costs and payments related to that going through in the second half. We've been prudent with the way in which we're using our capital. We feel at the moment that we've got a good balance between choosing to invest where we're seeing it work and then trialing new things to make sure we're comfortable and then putting the money behind it.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [16]

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Sensible. And I don't want to tap on the negative of the result because it was pretty solid, but the Liquor group did stand out to me as something in that business isn't quite working. I mean your sales growth looked pretty tidy, 3.3%, but your EBIT down 10%. Can you go into some of the things that -- you got a new CEO there, I believe, starting. I mean it's not significant yet, but you wouldn't want to be continuing this down 10% in a reasonable sales environment, I would have thought. So can you give us a bit, Steve and Leah, as to what you're looking to potentially turn this business around so it can actually be a profit support rather than potentially a bit of a drag?

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Steven Cain, Coles Group Limited - MD, CEO & Director [17]

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Yes. Well, as you can see from the results, the Liquor business is less than 10% of the overall group profits. And in the half, we started what we've been talking about, which is the tailored range reviews. When you go through a significant range change in Liquor, it can be costly because you've got to delete the other lines and the rate of stock turn in liquor isn't as high as it is in fresh food, as an example. Darren -- and then what we've seen in January is certainly some subdued sales as a result of bushfires, which is not only the bushfires themselves, but obviously, the smog and so on that's impacted areas of Sydney and Melbourne, as we've all seen.

As you mentioned, Darren joined the business in January. He's made a bit of a running start. And we'll hopefully update you with what any changes to strategy might be in August. I think it's -- the things that we can say about the strategy is the range does need to be more tailored. And clearly, we need to move to a situation where the business, over time, becomes less promotional and also drive towards continuing to improve our Own Brand, exclusive brand proposition, and also deliver a better online solution to customers as well.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [18]

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Firstly, the question I was getting at, what I'm more worried about is, I'm okay, the day-to-day trading, as you say, may not be significant. But what I'd be worried about is if the new CEO comes in and looks at your property and says, "Look, our stores are just in the wrong place. We need to take a major cut and repair," and that could be quite costly to get out of some sites. Is that potentially is the property in the Liquor because from what I'm hearing, the Liquor business overall or the liquor industry is going quite well. And this result did include New Year. So you're down 10% with that New Year included, which is a big part for liquor so the -- which is -- it was a pretty poor result in liquor, and I'm just worried about the structure of the business. Could it be more material in terms of a major cut and repair that you may need to make?

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Steven Cain, Coles Group Limited - MD, CEO & Director [19]

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Well, I think we should wait to see what the outcome is. I mean he's been here 4 weeks, I think, so he's getting around the country and...

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [20]

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But you should have a good look at it. You should know what the business looks like. You should have an opinion on that. So it's really your decision as well.

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Steven Cain, Coles Group Limited - MD, CEO & Director [21]

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We'll all be involved in any decision, that's for sure. Just the other thing to bear in mind about the half year result, David, is it does include, in Liquor, $4 million for the wages that we called out earlier as well.

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Operator [22]

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The next question comes from Shaun Cousins from JPMorgan.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [23]

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Maybe just on food like-for-like. To start, third quarter '20, you've highlighted that it's been broadly consistent with the second quarter '20 at 3.6%. Was the start of third quarter '19 in line with the 2.2% that you reported for that quarter? Or was it worse? I'm just curious now that, given you've talked about the start of the third quarter '20, I just want to get an understanding of what you're actually cycling during that period, please.

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Steven Cain, Coles Group Limited - MD, CEO & Director [24]

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We're not -- I don't think we're going to be sort of breaking down quarters, Shaun. I definitely don't want to start that trend. With the -- the only reason we've actually given you an update is just to sort of obviously, the Q2 performance was significantly better than Q1, and it was just to say that the momentum is still there in the business, pleasingly.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [25]

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Okay. But first, Stikeez was a positive and that came in the third quarter, came in probably around the start of February, I recall. Is that right?

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Steven Cain, Coles Group Limited - MD, CEO & Director [26]

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Yes. It's similar sort of timings, and we announced -- we launched Stikeez 2 last Wednesday.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [27]

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Yes. Okay. And my second question is just around cost savings, the $95 million. Obviously, that was a very strong sort of result. How do you see the likelihood that cost savings actually support food EBIT growing? Because if you back out the $95 million and the $16 million provision in food, your EBIT in the first half actually fell 7% and then also the PCP had some costs in there as well. But I'm just curious around -- I mean does this $1 billion cost savings, is that -- all of that just designed to offset cost inflation as we've seen in the first half '20? Or do you actually think that can -- some of that can be retained and go to shareholders, please?

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Steven Cain, Coles Group Limited - MD, CEO & Director [28]

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Well, I think what we've tried to do is to set out, as best we can, what the phasing of the $1 billion cost-out is. And we always said it was to mitigate potential inflationary cost increases. The way we think about it is that we have to simplify our existing business to enable us to have funds to invest in all of the new things we're doing, whether that's technology investment in Witron or Ocado or whether it's additional service in stores. So we took the view this half to invest in additional service in stores, and we've seen the benefit of that in the Tell Coles customer satisfaction results, which you've got in the deck there.

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Operator [29]

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The next question comes from Michael Simotas from Jefferies.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [30]

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First question for me is on the provision you've taken around the wage cost review, and credit for taking it above the line. Are you confident that you've provided enough given that the review is ongoing? Or will there potentially be more cost to come through there?

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Steven Cain, Coles Group Limited - MD, CEO & Director [31]

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It is an ongoing review, albeit as a majority of -- sorry, there's just a bit of background noise from somebody's phone I think. Yes. So we've obviously covered the vast majority of our team members. We've said that this applies to less than 1%. But we've also said that the result -- the review is sort of ongoing. So as it stands today, that's our best view of what the provision looks like.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [32]

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Do you [apply] the provision factors in a little bit more than what you've already found? Or does it only factor in what you've already found?

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Steven Cain, Coles Group Limited - MD, CEO & Director [33]

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I don't think we're going to get into the detail of the provision. As you can see, from a group point of view, it's not a material number. It probably has a percentage impact, Liquor a bit more than Supermarkets. But obviously, we've made the provision to make sure that there is sufficient amount to pay over the 6 years based on the legal advice that we've received.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [34]

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Okay. Great. And then the second question from me. You've called out a couple of weeks ago and again today that the second half won't benefit from cycling the increased flybuys costs and costs around plastic bags that you cycled in the first half. Can you give us some idea of what the quantum of that was? And also, to what degree that was in CODB versus cost of goods sold?

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Steven Cain, Coles Group Limited - MD, CEO & Director [35]

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Yes. We won't be going into specifics. But obviously, if it's to be called out, you can assume that it's tens of millions, not single-digit millions.

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Leah Weckert, Coles Group Limited - CFO [36]

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I'd probably say, Michael, that it was the majority of the underlying growth we saw in the EBIT for Supermarkets.

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Operator [37]

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The next question comes from Grant Saligari from Crédit Suisse.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [38]

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Interested just understanding the sales growth in Supermarkets better, because it's just a bit vague on your comments around market share. And I wondered whether you could sort of elaborate a little on what was actually driving the sales growth improvement in the second quarter, because you put a lot of extra range in, for example. You indicated you had a successful promotional program. So if you could elaborate on that a little and around the market share comment, please?

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Steven Cain, Coles Group Limited - MD, CEO & Director [39]

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Yes. So the market share numbers are a bit variable at the moment in terms of what the market reads are. I think we've put in the deck, somewhere maybe Slide 10 or something, that the ABS number is around 3% growth, but the Nielsen number is higher. We think that the Nielsen number might be higher because it relates to home consumption, and I think the general hypothesis is that the bushfires have caused more people to eat at home than eat out and that's led to some growth. We've seen strong transaction growth in the business. In fact, the strongest we've seen, I think, since Little Shop. And we've also seen some improvements in average selling price emanating from the range reviews. So that things like Kombucha and the healthy products that are going in as well. And then that's all been complemented by the program we referred to in the presentation, which is "Good Things. Great Value." and the lowering the cost of the various meal occasions. And then, of course, we've had a fairly successful, in terms of engagement, Little Shop 2 and glassware promotion as well, which I think has helped. So a number of factors in short, Grant.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [40]

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Yes, okay. And secondly, on the -- I'm probably being a little bit choosy, but on the $95 million cost-out program in the first half, my understanding from what you said on the call was that this reflected only initiatives that were undertaken in the first half. So it wasn't annualizing initiatives that were commenced in the prior period, for example, in the second half of '19. So presumably, some of those, the effect or the benefit of those initiatives in the first half carries through into the second half '20. So I'm just trying to reconcile that with your full year guidance of $150 million of benefits, which obviously implies a lower contribution in the second half.

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Leah Weckert, Coles Group Limited - CFO [41]

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No, you're right. We've maintained the guidance at greater than $150 million. And I think where you're going mathematically on this is probably the right direction, Grant, which is we've had a very strong start.

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Operator [42]

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The next question comes from Ben Gilbert from UBS.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [43]

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Steve and Leah, just the first question from me. Leah, just around the ABI, is there another one coming up in the second half of this calendar year? And do you envisage any impact or headwind around that into fiscal '21?

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Steven Cain, Coles Group Limited - MD, CEO & Director [44]

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There's nothing major as far as I'm aware, but obviously, you'll get the annual increases.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [45]

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Okay. So there's nothing to be renegotiated in the second half of this year?

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Steven Cain, Coles Group Limited - MD, CEO & Director [46]

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Not to the best of our knowledge, Ben.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [47]

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Okay. Got it. And just second one for me, and it's probably sort of bit of a bigger picture one. I'm just interested, and just following on from David's point just around the CapEx. Just how you're thinking about long-term versus short-term initiatives within the businesses. It's -- look, it's a great first half result and obviously cost-outs tracking ahead. Just how you then weigh up CapEx? And again, to David's point, that Woolworths is obviously spending a lot more and probably putting some more into areas like Darch and these sorts of things. I'm just interested in whether you think there's a need to sort of put more money into some of these growth CapEx initiatives at the moment. And just how you see some of the people within the business taking a bit of a longer-term lens, and how you're sort of trading that off?

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Leah Weckert, Coles Group Limited - CFO [48]

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Yes. So I mean we have quite a comprehensive suite of capital projects that we have sort of visibility of. And some of them are quite low, and we take the Supply Chain Modernisation Project or the Ocado project, even things like some of the SAP implementations with the implementation of SuccessFactors and the like. There are initiatives where we know we have additional CapEx coming. And so we are planning for that in terms of the profile that we have. But equally, as part of the Smarter Selling program of work, we're very conscious of having good momentum around the cost-out. And so there are more, what I've described as sort of tactical in-year investments that we are making. As I said to David, what we are trying to walk the balance of at the moment, particularly around things like the store renewals and growth initiatives, is being aggressive and forward thinking around the trials that we are putting in place, but actually taking the time to make sure that they're working before we then put money behind them to invest in broader rollout. And so you will have seen, we've got quite comfortable with the rollout of the convenience ranges, for example. That's been a significant capital investment that we've had in the first half. And then as we're starting to get more confident around things like the performance of our Format C and Coles Local, we'll start to see more of those stores come into the mix as well.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [49]

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And do you think that means going forward, to your point around SaaS, we should probably be looking not just as explicitly as CapEx as we have in the past and maybe focusing around C to B, because a lot of these maybe growth projects are to be running through the P&L?

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Leah Weckert, Coles Group Limited - CFO [50]

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I think we have to continue to have a focus on both, to be honest. I mean CODB is one of the things we focus on every budgeting season around and how we're working to offset increases that we're seeing coming through in that line. But we're also very conscious that from a capital perspective, we want to make sure that we've got really good and growing returns.

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Operator [51]

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The next question comes from Andrew McLennan from Goldman Sachs.

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Andrew J. McLennan, Goldman Sachs Group Inc., Research Division - Consumer and Retail Analyst [52]

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Congratulations on the results. Just wanted to talk to you about the sales performance on an inflation-adjusted basis, so volume basis looks to be one of the strongest quarters you've had. You've spoken to just recently the potential impact of the (inaudible), the Nielsen data, et cetera, suggesting people are eating at home a bit more. I know also that it was a very weak period in second quarter of the prior year. But I'm just wondering if you could just speak to the categories that have performed well here from a volume perspective. You mentioned transactions were good. But if you could just speak through some of those areas of strength, because there's also ongoing feedback from suppliers around continuing execution issues within Coles. And I've just been wondering -- just be interested to hear where the positives are coming from, but also what areas of improvement you still got on the shop floor?

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Leah Weckert, Coles Group Limited - CFO [53]

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Yes. Yes, thanks, Andrew. I think what we would say is there has definitely been good performance across the board. The couple of areas that I'd probably call out sort of most significantly where we're seeing increases are really in the fresh and convenience spaces. So the rollout of convenience into those 100 stores is definitely helping us to get a bit of momentum in that space. And a lot of that for us is actually what we would view as incremental sales. And then in fresh, actually, some of the work that we've been doing to improve quality processes, particularly in fresh produce and the like, is helping us to get a bit of momentum in that business as well. But to be quite honest, it has been an across the board shift upwards in the business, which is really driven almost half-half by transactions and growth in basket size. And the basket size is actually units as well as price. So we are seeing people put more into the basket, some of which we're attributing to the more eating at home over the last little while. But we also believe some of that is because of the new ranges that we've got in stores and that really resonating with customers.

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Andrew J. McLennan, Goldman Sachs Group Inc., Research Division - Consumer and Retail Analyst [54]

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You had indicated previously you're a bit disappointed in the sort of share that Coles has been picking up or, in fact, losing in that small basket convenience area. Obviously, with the convenience rollout, you're starting to see a response there. Are you happy with what you've seen? And are you seeing a much better impact from a small basket customer?

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Steven Cain, Coles Group Limited - MD, CEO & Director [55]

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Yes, I think we're seeing improvement across the board. It's not just around the convenience. I think we're seeing better flybuys numbers, and flybuys customers tend to be bigger shoppers as well. So I think we're happy with what we've seen so far from the convenience rollout. Obviously, there's still a lot of work to do in that regard. But the most -- the -- probably the highlights of the Supermarkets result was the increase in transactions that we saw in the quarter, which we've managed to maintain in the third quarters.

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Andrew J. McLennan, Goldman Sachs Group Inc., Research Division - Consumer and Retail Analyst [56]

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Okay. And just on supply, have you spoken with your suppliers around assuring future supply, whether it be private label or branded, in relation to Chinese sourcing? I know it's very much an evolving piece, but how are you feeling about supply over the next few months?

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Steven Cain, Coles Group Limited - MD, CEO & Director [57]

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Well, most of the supply, obviously, comes from Australia and the extent to which it will hit the food business is mostly around things like packaging. Clearly, what we've said so far is that it's mainly impacting refrigeration and obviously, our export meat sales to China, which we're obviously trying to sell to some of the other 40 countries that we sell to as well. I'd imagine -- our best read at the moment is that things will start to improve towards the end of March. But if it doesn't, then clearly, we'll need a plan B for products coming out of there.

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Operator [58]

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The next question comes from Niraj Shah from Morgan Stanley.

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Niraj-Samip Shah, Morgan Stanley, Research Division - Equity Analyst [59]

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Just a quick question on the moving parts within Supermarkets margins. I was just wondering if you could comment firstly on, I guess, promotional intensity in the first half versus the PCP.

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Steven Cain, Coles Group Limited - MD, CEO & Director [60]

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Sorry, could you just repeat that question, please?

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Niraj-Samip Shah, Morgan Stanley, Research Division - Equity Analyst [61]

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Sorry, just coming back to the moving parts for Supermarket margins, I was just hoping for some color or some comments on promotional intensity in the first half versus the prior year.

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Steven Cain, Coles Group Limited - MD, CEO & Director [62]

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Yes, it was broadly flat. Doesn't mean promotions are the same. We're trying to do more profitable promotions, obviously, which will help the gross profit, but the overall promotional participation was broadly flat.

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Niraj-Samip Shah, Morgan Stanley, Research Division - Equity Analyst [63]

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Okay. And just secondly and sorry to belabor the point, but I think previously, in terms of Smarter Selling, you've said that it would roughly be 30% to COGS and 70% to CODB. It sounds like in the first half, it was more evenly balanced. Is that fair?

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Leah Weckert, Coles Group Limited - CFO [64]

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Well, the 30% to 70%, we took the view over the life of the program. So there's going to be ups and downs on that within any particular year.

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Operator [65]

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The next question comes from Richard Barwick from CLSA.

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Richard Barwick, CLSA Limited, Research Division - Research Analyst [66]

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I just got one question on the supers and one on the Liquor. Obviously, you've talked about you're happy with transaction growth within supers and fresh and convenience. But I mean essentially what you're saying here, though, if you're talking about a market with -- showing the average of the 2 industries growing at 4.7%, you've only grown at 3.3%. Doesn't that mean -- well, doesn't that imply that you've actually lost market share across the half?

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Steven Cain, Coles Group Limited - MD, CEO & Director [67]

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I think you've got to break it down quarter-by-quarter. So you'll recall that in the first quarter of 2019, we had Little Shop, and I think we reported comp sales of about 5.1%. So as we cycled Q1 in this quarter, which we did successfully, you might recall, the combined number was around about 5.2% or something as a 2-year stack. In the second quarter, we obviously improved to 3.6% as a comp sales growth. If you look at the Nielsen numbers as well, they don't include things like tobacco or general merchandise, which obviously have an impact as well. So there's no perfect measure for market share, which is why we've given you both numbers. But if you look at the average of the numbers for Q2, then we're there or thereabouts.

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Richard Barwick, CLSA Limited, Research Division - Research Analyst [68]

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Right. So that's -- so the Nielsen number that you've given is a Q2 number, isn't it?

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Steven Cain, Coles Group Limited - MD, CEO & Director [69]

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No, those numbers are for the half.

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Richard Barwick, CLSA Limited, Research Division - Research Analyst [70]

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Okay. All right. So the point is, but once you sort of take into account the cycling of the Little Shop, et cetera, then much stronger growth in the second quarter. Okay. And if you're thinking about the Liquor sales, we've talked a lot on the call already around the earnings impact. But from a sales side of things, obviously, there's a lot of promo activity. Did that actually boost the sales growth coming through from Liquor?

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Steven Cain, Coles Group Limited - MD, CEO & Director [71]

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Well, Liquor is a more promotional business than Supermarkets. So more than half of the sales in Liquor come through from promotions, whereas in Supermarkets, it's much more like 1/3. Obviously, what we're trying to do over time is to make the Liquor business less promotional and more every day, and that's where things like the exclusive Liquor brands come into play.

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Richard Barwick, CLSA Limited, Research Division - Research Analyst [72]

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But the point being with this range, sort of, reset that's going on, did that deliver more sales growth or contribute to sales growth more so than normal? When we cycle it through this and we look at the second quarter this coming year, are we going to get a situation where we go, okay, well, actually, that was an inflated sales number because of the unusual level of promotional activity?

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Steven Cain, Coles Group Limited - MD, CEO & Director [73]

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I'm certainly not going to be forecasting sales for Christmas next year. But the key point here is that we've got sales coming through from clearance events that happened through to Christmas, and those were diluted lines. And what we've said for the third quarter is that, certainly around the bushfire time when it was most intense, we did see that sales were impacted in Liquor.

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Richard Barwick, CLSA Limited, Research Division - Research Analyst [74]

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Okay. And just last one on Liquor. Do you -- are you confident with this range review or range reset that's going on that, that will be limited to FY '20? Should this be the base from which we can get growth into FY '21? Or do you think the effects will flow through into FY '21 as well?

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Steven Cain, Coles Group Limited - MD, CEO & Director [75]

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Well, as we've said, it will certainly flow into the second half, the half we're currently in. And then obviously, we'll be sitting down with Darren and his team to look at what the picture looks like over the next 3 years. But I want to give them the time to have a good look at the business and decide what the right approach is going forward. There's a lot of things that are going well. The First Choice Liquor Market conversions are producing good sales results. The online business is growing significantly, and ELB is doing well as well. So there's a lot of good things happening in Liquor. But as I say, we should wait until August to find out what we are going to do in more detail over the next 3 years.

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Operator [76]

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The next question comes from Phil Kimber from Evans & Partners.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer [77]

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Just had a question on inventory. It's up a little bit year-on-year. Are you able to sort of talk to how much the fuel inventory, what sort of reduction there was because of the New Alliance Agreement? What the tobacco excise did? The fact that you finished 5 days later or 6 days later in the half? Just to get a bit of an understanding of the various movements in the inventory levels.

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Leah Weckert, Coles Group Limited - CFO [78]

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Yes, sure. So you've rightly identified the 2 biggest contributors to the change in number. So -- and I'll probably talk to an inventory days number, if that's okay. So the removal of fuel has obviously had a pretty big impact there, but Express in the overall inventory days is small. And then the second biggest impact is the tobacco excise. If I looked at normalizing the supermarket inventory days for the tobacco excise, it would have been flat. So that is driving the majority of the increase that you're seeing there. And you're seeing the offset of that in the trade payables.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer [79]

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Right. So it was almost a 5-day impact of tobacco in excise?

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Leah Weckert, Coles Group Limited - CFO [80]

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Well, you're getting a combination of the -- across the group, you're getting the combination of the fuel and the tobacco excise. If I just took Supermarkets, the increase in your inventory days is pretty much 100% driven by the tobacco excise.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer [81]

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Okay. But the chart you gave there, the 5-day increase is, obviously, for the whole group, not just Supermarkets.

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Leah Weckert, Coles Group Limited - CFO [82]

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That is the whole group. That's correct.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer [83]

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Yes. Yes. And then my second question was just around pricing in the Supermarkets business, pricing relativity to your competitors. Did you see much of a change over the period in relation to how competitive prices were and where your average basket sits versus your competitors in a price sense?

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Steven Cain, Coles Group Limited - MD, CEO & Director [84]

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We have made quite -- some quite significant investments in price in the first 6 months, and competitors responded in different ways. From our point of view, we're pleased just where we are on the value index. And obviously, we've got plans to continue to invest for the remainder of the year.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer [85]

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Okay. But you can't -- you haven't -- have you improved your competitive position, so to speak, against your biggest competitor? Or has it basically -- all the investments just basically are being matched by everyone and everyone is just as competitive as they are now as they were 6 months ago?

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Steven Cain, Coles Group Limited - MD, CEO & Director [86]

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Yes -- no, I think what's happening generally is that as we do some of the range changes, we are starting to get sort of differentiated products at a differentiated price. I think it's fair to say that if you have an undifferentiated range and you reduce the price, then competitors can and do respond.

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Operator [87]

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The next question comes from Ross Curran from Macquarie Group.

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Ross Curran, Macquarie Research - Analyst [88]

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Steve and Leah, just 2 quick questions. First, on dividend. Can you give us a feel for how we should think about the dividend going forward? The first half, second half split and sort of the payout ratio that you're thinking about?

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Leah Weckert, Coles Group Limited - CFO [89]

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I'd just point you back to the policy that we announced at the point of demerger, which is the 80% to 90%. The board has made no change to that policy, so that continues to stand.

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Ross Curran, Macquarie Research - Analyst [90]

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And the first half, second half split?

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Leah Weckert, Coles Group Limited - CFO [91]

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Again, I'll point you back to the policy.

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Ross Curran, Macquarie Research - Analyst [92]

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Okay. And then secondly, early wins from Ocado, online sales were up nearly 24% in Supermarkets. Are you getting any benefits from that Ocado relationship there?

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Steven Cain, Coles Group Limited - MD, CEO & Director [93]

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Yes, I think is the short answer. So we've identified a couple of sites, as we've said, already in Sydney and Melbourne. Obviously, we spent a lot of time with them looking at how their model works and how that might apply to us in the future, which is sort of 3 years away, but also what short-term things we might look at to improve the way we trade online. So yes, it's been a very encouraging start. I think the other thing about Ocado that often gets overlooked is that it's not just about CFCs. They're trialing smaller centers as well in London. So I think the relationship will be a very advantageous one to us over the course of time.

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Ross Curran, Macquarie Research - Analyst [94]

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Yes. Sorry, is there anything specific in this period in that 23.8% online sales growth? Have you done anything different from your Ocado learnings?

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Steven Cain, Coles Group Limited - MD, CEO & Director [95]

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I wouldn't say anything in the 23%. I think it will take a little bit longer than that. I think we signed the contract earlier in the year. So yes, we're spending a lot of time thinking about the future with them, and it won't be -- we certainly won't be waiting for 3 years to start implementing things if we can do it a little bit earlier.

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Operator [96]

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The next question comes from Scott Ryall from Rimor Equity Research.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [97]

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I wanted to ask you about your tailored range review. 3,000 new products seems to me like a lot. Can you just tell me what would be your average over the last couple of years of introduction of new products? And how many products were taken off the shelves, if you've got that number as well, please?

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Steven Cain, Coles Group Limited - MD, CEO & Director [98]

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Yes. We're not -- we don't sort of -- we haven't always called it out in previous years, the number of products deleted or introduced. I mean certainly, we've had a range reduction program over a long period of time in Supermarkets. I'd look at this and say that the range change activity and the number of range reviews we're doing is up by well north of 30% in terms of what's going on. And then we've got specific ranges like the convenience range, where that's gone from being an average of 1 day in those -- across the network to 14 or more in some cases. So we've seen some massive increases in the convenience business, in particular. Overall range has increased, it's fair to say, but not everywhere. So we're trying to tailor what we're doing in the process. You certainly won't see this level of range change forever, but we did have a flat range, which is why the tailored strategy was introduced.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [99]

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Yes. Okay. All right. Now that keeps me in check. And then I wonder if you could comment, Woolworths, they had some pretty variable weather conditions, particularly on the East and South Coast, where a lot of the growing is done. As best you can see at the moment in 2020, how are you thinking about fresh product inflation? And how do you ensure stability of supply, please?

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Steven Cain, Coles Group Limited - MD, CEO & Director [100]

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Yes, it's very variable by product. So we run a promotion on bananas recently, where I think we were selling for $2 or $1.99 or something, which is one of the lowest prices we've had on bananas for quite some time. Having said that, overall, there is price inflation going through fresh food businesses. We are up against some higher inflation in produce last year. Dairy is consistently higher. And then as far as supply is concerned, it tends to be quite spasmodic by products, so we'll be able to get avocados one week, but not the next. And so we are trying to help as many of our farmer suppliers as we possibly can do. But it's certainly a bit more difficult for the produce trading team to track down the right quantity of product in all categories.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [101]

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And just on that, though, what -- have you made any changes strategically in terms of thinking about your sourcing at this stage or not?

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Steven Cain, Coles Group Limited - MD, CEO & Director [102]

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Well, we've been changing strategically for quite some time on fresh food. If you go back 10 years and look at the supply chain then versus now, it's very different. And what you're broadly seeing is longer-term relationships with key suppliers, you're seeing the emergence of bigger farms and more efficient farms over time. And over time, we're finding out where is the right place to do things. And so for example, Queensland, the best grown in -- sorry, bananas best grown in Queensland. And Victoria is turning out to be the most productive place to have dairy farms. So there are some things that are emerging over time. But this has been going on for 10 years in Coles, and the supply chain is far better today than it was back then.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [103]

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Sure. So yes -- then you haven't done anything specific apart from incrementally change as the market changed in the last 12 months or so?

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Steven Cain, Coles Group Limited - MD, CEO & Director [104]

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Sorry, could you repeat that question?

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [105]

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Yes, I'm aware the 10-year changes are quite dramatic, as you say. So I'm just wondering if there's -- has there been anything that you specifically have identified the need to change in the last 12 months or so.

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Steven Cain, Coles Group Limited - MD, CEO & Director [106]

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Well, we've changed --as we've said in the presentation, we've changed our arrangements with the dairy farmers in Victoria and in Southern and Central New South Wales. That's quite a significant change, where that was going through processes, and we're now dealing direct. And that's, again, something that's spread throughout the fresh areas where we used to buy a lot of our produce from central markets, and we now deal direct with farmers both in produce and meat. And obviously, that's been extended to some parts of milk as well. So yes, there are some quite significant changes going on generally. And obviously, the dairy one is something that we're keeping a close eye on.

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Operator [107]

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The last question today comes from Johannes Faul from Morningstar.

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Johannes Faul, Morningstar Inc., Research Division - Equity Analyst [108]

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Steven, I was wondering if you could talk a bit around the trading performance of the refurbished stores. And maybe a bit around what actually happens when a B-grade store turns into a C-grade store, what exactly besides the impact on ranging obviously happens there?

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Steven Cain, Coles Group Limited - MD, CEO & Director [109]

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I'm sorry, I didn't hear that one very clearly. Could you...

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Leah Weckert, Coles Group Limited - CFO [110]

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I think if I understand you right, you're asking what happens when we convert a store to a Format C.

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Johannes Faul, Morningstar Inc., Research Division - Equity Analyst [111]

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Yes, exactly. And also, if you could maybe talk a bit around the trade performance, [specifically about] the sales uptick on those stores that have been refurbished?

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Steven Cain, Coles Group Limited - MD, CEO & Director [112]

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Okay. So I'll take the (inaudible), if that's okay. So on Format C, we've got 2 tailored formats in the core operation, which is, A, which is more higher-demographic, higher-volume stores, where we're putting in extended convenience ranges. And then we've got Format C, where that's driving towards greater efficiency. And what we've tended to do in those stores is we've moved to a self-service deli, and we've tended to sort of team the store up with a local Coles bakery so that they get fresh baked bread every day.

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Johannes Faul, Morningstar Inc., Research Division - Equity Analyst [113]

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Got you. Okay. And I guess in terms of ranging that strong upward in private label that you've seen through the half, is that partially driven through the, I guess, the conversion of stores in C stores -- C grade stores?

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Steven Cain, Coles Group Limited - MD, CEO & Director [114]

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It's -- most of the Format Cs tend to be in lower-volume, lower-demographic stores. So they will see an improvement in their convenience range over time, but they won't be getting the sort of treatment that an Eastgardens would get, for example.

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Leah Weckert, Coles Group Limited - CFO [115]

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Well, were you referring to the whole of the Own Brand growth that we're continuing to-date?

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Johannes Faul, Morningstar Inc., Research Division - Equity Analyst [116]

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Yes.

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Leah Weckert, Coles Group Limited - CFO [117]

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Yes. No, the Own Brand growth is primarily driven out of the Coles fleet, and it's primarily driven through the introduction of a lot of new ranges in Own Brand that we're bringing in through the half.

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Operator [118]

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We're showing no further questions at this time. I'll hand the conference back to Mr. Cain for closing remarks.

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Steven Cain, Coles Group Limited - MD, CEO & Director [119]

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Yes, thank you, everybody. As we said, a very busy half. Hopefully, we've been able to demonstrate to you that the strategy is taking shape and being delivered upon. And that we look forward to seeing you in August, which will include an update on the progress in Liquor. Thank you.

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Operator [120]

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Thank you. That does conclude our conference today. Thank you for your participation. You may now disconnect your lines.