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Edited Transcript of JBH.AX earnings conference call or presentation 9-Feb-20 11:30pm GMT

Half Year 2020 JB Hi-Fi Ltd Earnings Call

Brighton, Victoria Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of JB Hi-Fi Ltd earnings conference call or presentation Sunday, February 9, 2020 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Nick Wells

JB Hi-Fi Limited - CFO

* Richard Murray

JB Hi-Fi Limited - Group CEO & Executive Director

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Conference Call Participants

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* Ben Gilbert

UBS Investment Bank, Research Division - Executive Director and Analyst

* Bryan Raymond

Citigroup Inc, Research Division - VP & Analyst

* 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

* Mark Wade

CLSA Limited, Research Division - Research 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

* Ross Curran

Macquarie Research - Analyst

* Shaun Robert Cousins

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [1]

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Thanks very much. Good morning, everybody, and thanks for joining us for JB's half year results.

Before I turn to the update on the half year results, I just wanted to acknowledge the recent bushfires in Australia. We've all been touched by the loss of life, property and the impact on animals and our bushlands. Our thoughts are with those impacted and recognize the amazing work of our emergency services and volunteers protecting and supporting those impacted communities. And I'll touch on what we've done from JB's perspective a bit later.

Today, we also announced that our Chairman, Greg Richards, is retiring at the end of this financial year. He has made a massive contribution to the success of JB over the last 12 years, and his support and counsel to the executive team has been very much valued and will be missed.

Steve Goddard, our current non-executive director, will take over the role of Chairman. Stephen has been in retail over 30 years, and many of you will know him well. He was Finance and Operations Director at DJ. Founding Managing Director of Officeworks and also was, for a period, at Myer. In his new career, he's focused on the Boards of, in addition to JB, Accent Group, Nick Scali and GWA, so he brings a wealth of retail experience to the role of Chairman. So we obviously -- we thank Greg and wish him the best as we come to the end of the financial year and then also welcome Stephen when he takes over the role.

We'll walk -- work through the presentation, and then we'll allow some time for questions.

I'll now turn to Slide 3, titled group overview. And actually, I'll quickly flip to Page 4. We have discussed often how we see the power of our dual brand retail strategy. The group represents the #1 technology and CE brand in JB HI-FI and the #1 home appliance brand in The Good Guys. Both brands share a discount heritage, a passion for customer service and a multichannel strategy. It is critical we ensure each brand is focused on its target customer and each brand's unique DNA must be maintained and enhanced. We leverage the group's support office, which is underpinned by 5 unique competitive advantages: scale, low-cost of doing business, quality store locations, strong supply partnerships and multichannel capability.

I'll take Slide 5 as read, but that just gives you a bit more detail on how we see those competitive advantages.

And I'll just -- and I'll turn to the group result on Slide 6. This is a solid result for the group for half year '20. We are proud to report record sales and earnings for the first half with JB HI-FI Australia and The Good Guys recording strong earnings growth. I would like to thank the over 12,000 team members across Australia and New Zealand, whose hard work and continued focus on our customers delivered this result.

Total sales grew 3.9% to $4 billion with comparable -- positive comparable sales growth across the 3 divisions. EBIT grew 8% to $255.6 million. Net profit grew 8.9% to $174.4 million. EPS grew 8.9% to $1.518. And our interim dividend grew 8.8% to $0.99 per share.

I think you'll appreciate if I don't ad-lib on the next point. The statutory results for half year '20 reflect the adoption of the new Accounting Standard AASB 16 Leases. The company has adopted AASB 16 using the modified retrospective approach. And as a result, prior comparable -- sorry, prior period comparatives have not been restated. To allow for the prior period comparison, all half year '20 results disclosed in the presentation are pre the application of AASB 16 and exclude the impact of AASB 16. Appendix 1 includes reconciliations of statutory and pre-AASB 16 results.

I will now move to the divisional performance on Slide 7. While I take this as read, as I said before, it was really great to see sales growth across all our divisions and particularly strong earnings growth in Australia for both JB HI-FI and The Good Guys.

Turning to group highlights, Page 8, and again, I'll take the financial achievements as read. For our group operational achievements, in half year '20, the company adopted a Sustainability Plan outlining the company's commitment to having a positive impact on our people, our environment and our community. The key areas of focus in this Sustainability Plan are: Health, Safety and Diversity, encouraging a diverse and inclusive work environment and protecting the health and safety of our people; Energy Consumption and Efficiency, monitoring and reducing our energy consumption and greenhouse gas emissions; Product and Waste Recycling, minimizing the waste we create and encouraging responsible recycling; Social Impact, supporting social causes that are important to our staff, particularly through our workplace giving programs; and Ethical Sourcing, working with our supply partners to improve working conditions in our supply chain and ensure what we use and sell is sourced ethically. The company is pleased with the progress made on these key areas of focus to date and an overwhelmingly positive response from our team members.

Our new combined support office was completed, enabling the sharing of best practice while maintaining individual brand DNA. This enabled the establishment of group IT and group HR functions. We've also, from a group perspective, launched an entry TV offer, FFALCON, with strong adoption from customers and our team.

We commenced the consolidation of 18 bulky goods DCs into 7 group home delivery centers, with Sydney transitioned in October and Melbourne and Brisbane to be completed in the second half. We continued the expansion of our group Commercial business and product offering.

As I mentioned earlier, we're all touched by the impact of the bushfires in Australia. There were 4 elements to our response. As you will be aware, we are a big believer in the power of workplace giving. We turned on a once-off workplace giving initiative where team members gave $115,000, which the group matched. Customers gave $186,000. And with the group making an initial donation of $150,000, we have raised over $563,000 towards the bushfires. A majority of this went to the Red Cross, and $50,000 was spread across 4 state-based animal welfare charities. We have also increased paid leaves for volunteer emergency service members to 10 days paid leave.

I'll now turn to Slide 11 and the JB Australia results in more detail. For JB HI-FI Australia half year '20 sales, we saw sales growth of 5.1% to $2.72 billion and comparable sales up 4.4%, including online sales growth of 18.3%. Sales momentum has been strong through the half, and it was pleasing to deliver 4.8% comparable sales growth in the key Christmas quarter.

The power of the JB model is highlighted as we're able to enjoy above-market growth in new categories as customers see us as a destination for new products but also saw solid gains in established categories. Hardware and services sales are up 7.8% and 7% on a comparable sales basis driven by Communications, Audio, Computers, Visual, Connected Tech and Accessories categories. Communications had a strong result. Product sales drove the growth with Apple particularly strong. Our Apple offer on entry, mid-range and flagship models really resonated with our customers. Audio continued to perform well. Headphones, both in-ear and over-ear, performed well particularly in wireless categories. It was pleasing to see Computers returned to solid growth in the half. Mac and PC laptops performed well. Visual had a very strong half.

And it was particularly pleasing to see our FFALCON offer resonate with customers. We also saw an increase in sales of larger panels as customers moved to 75 inch and above panel sizes. The strength of Communication and Computer sales [as well] as Accessories has benefited from strong attached sales. The Commercial business recorded strong sales growth as we continue to expand our product and service offering. With regard to Software, we continue to grow market share in DVDs, but headline sales continue to reflect the growth in digital alternatives. Games software was particularly challenged as we cycled our biggest release in history in Red Dead Redemption last year. We continue to invest in Online, particularly with successful migration to Shopify Plus platform completed in September '19. Providing the foundation to continue to expand and enhance our digital offering, sales grew 18.3% to 6.3% of sales, up from 5.6% in the prior half. The Solutions business recorded strong sales growth as we continued to expand our product and service offering.

Turning to Slide 12. A key element of our customer promise is the biggest brand at the lowest prices in-store and online, together with passion and knowledgeable team members delivering great customer service. Online, we strive to ensure our site simplifies the journey for customers whether they're researching or transacting. The team worked with suppliers to build a relevant and agile promotional plan, coupled with JB's ability to bring products to life in-store and online, which creates a unique customer proposition. It is this that enabled us to maintain our price leadership and -- sorry, price and market leadership.

JB is a sales-led organization with an unrelenting focus on growing top line sales and gross profit dollars. Half year '20 gross profit increased 4.8% to $600 million, with gross margin down 6 basis points to 22.1%. This was driven by sales mix as we managed the decline in high-margin software categories and the acceleration of growth in low-margin brands and categories. This was particularly evident in quarter 2 as we saw strong growth in telco and Apple-branded product. And we maintained our price investment to reinforce our market leadership.

Cost of doing business was 13.9%, down 10 basis points. Cost of doing business in absolute terms grew 4.3%. Our low cost of doing business is a key competitive advantage and is maintained through our continued focus on productivity, minimizing unnecessary expenditure and leveraging our scale.

EBITDA grew 5.5% driven by sales growth and cost control. Depreciation declined 4.4% as we continue to manage our investment in the store network. EBIT was up 6.5% to $204.5 million, with an EBIT margin up 10 basis points to 7.4% (sic) [7.5%].

I'll now turn to Slide 14 and our New Zealand business. Sales were up 0.8% to NZD 132.8 million with comparable sales of 0.8%. Whilst quarter 2 sales moderated as we cycled strong comparable sales in the prior year of 14.4%, we are pleased with the progress made over the last 18 months and remain focused on delivering on our plan to reposition our New Zealand business.

The key growth categories were Communication, Small Appliances, Accessories and Fitness. Online sales grew 22% to NZD 9.6 million or 7.3% of total sales. Gross margin was down 16 basis points to 17.4% primarily due to sales mix. Cost of doing business was 15.8%, up 10 basis points; and in absolute terms, up 1.4% as store wages remained well controlled. EBITDA was NZD 2.1 million, down NZD 0.3 million or 13%, primarily driven by the gross margin decline. Depreciation expense declined 22%, resulting in an EBIT of NZD 1.1 million, in line with the pcp.

Just as we think about how we're -- what we're focusing on in FY '20 for the JB Australia business and in some reference to New Zealand, we continue to drive sales across all areas and focus on growing top line sales and gross profit dollars. We continue to expand Communications and Connected Tech while we optimize the category space allocation to maintain profitability of floor space -- productivity of floor space. We continue to invest and optimize the store network to maximize profitability.

In JB Australia, 3 stores opened in the first half: Mt Gravatt, a store in Southbank and one at Melbourne Airport. And 3 stores were closed in the second half. We continue our rollout of small-format stores in domestic airport locations, most recently the store I referenced above, at the Qantas domestic terminal at Melbourne Airport, adding to our 2 domestic stores at Sydney -- at the Sydney domestic terminal in Jetstar and Virgin. Our partnership with Heinemann Duty Free at Sydney International also continues to perform well.

We continue executing our strategy and improve performance in New Zealand. The national rollout of the TV installation services received positive customer feedback and strong supplier engagement. It was really pleasing to tick off the migration to Shopify Plus, which was completed in September, providing the foundation to continue to expand and enhance our digital offering. We continue to drive -- to simplify processes and drive productivity with a focus on improving stock flow into store and back-of-house operations.

Turning to The Good Guys result, and it was a really strong result for the half, which is pleasing. Total sales grew 1.5% to $1.15 billion with comparable sales of 0.6%. Sales momentum improved through the half with 2.7% comparable sales growth in the Christmas quarter. In a competitive environment, we remain focused on growing sales and market share in a sustainable manner whilst continuing to evolve the business.

Key home appliance and consumer electronics show growth for the year. With home appliances -- within home appliances, Dishwater sales were strong driven by increased unit sales at higher price points. Floorcare performed well with growth in stick vac and robot vacuums. Cooking performed well with strong offers across key price points. Within the consumer electronics, highlights include Communications to continue to grow as we continue to build out our financials and expand ranging. Communications also benefit, with The Good Guys stores now selling Telstra contract. This highlights that JB and The Good Guys can cater to different customers and still see strong results, which we did across the connections we saw in the Communications category. Online sales were up 12.6% to just under $80 million or 6.9% of sales, with strong sales on The Good Guys website partially offset by a decline in third-party marketplace sales.

Turning to Slide 19. Gross profit was $237.6 million with gross margin up 8 basis points to 20.7%, driven by improvements in gross margin partially offset by sales mix. Cost of doing business was down 38 basis points to 15.8%; and in absolute terms, declined 0.9% as store wages remained well controlled, and the business benefited from productivity initiatives implemented in the second half of '19. Sales growth, gross margin expansion and cost control drove strong EBITDA growth of 12%. Depreciation declined 4.6% as the pre-acquisition IT investment is now fully amortized. EBIT was up 14.7% to $50.1 million with an EBIT margin up 50 basis points to 4.4%.

Likewise, I'll just touch on what The Good Guys team are focused on for FY '20. As we have always said across both brands, they continue to focus on driving sales, both in store, online and for commercial. They have got a leading position -- they want to establish a leading position in the growing connected home appliance market, improve the cooking offer and in-store experience and complete the national telco rollout in partnership with Telstra. They continue to upgrade stores -- sorry, the upgrade program stores focused on adjacencies, improved customer flow and showcasing the home appliance categories, which they're famous for. They continue to build on supplier relationships, working with suppliers to create branded in-store displays and improve visual merchandising. We're really excited about the results with this introduction of SMEG in portable appliances. And we rolled out Miele Cooking into 17 stores in the second half of '20.

We're working on a group supply chain capability to consolidate carriers and provide customers an enhanced delivery service. We continue to roll out technology to streamline our in-store processes, and we leverage multichannel capabilities to further connect the online and in-store experience.

I will now hand over to Nick to discuss the balance sheet and cash flow.

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Nick Wells, JB Hi-Fi Limited - CFO [2]

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Thanks, Richard.

So on Slide 22, the balance sheet and focusing on working capital. Inventory was well controlled with inventory turnover up 8 basis points to 6.2x. Receivables were up year-on-year primarily due to the later Black Friday and Cyber Monday promotional period, which ran from the 29th of November to the 2nd of December this year in comparison to the 23rd of November to the 26th of November last year. As a result of that timing difference, the promotions ending December this year and the claims to suppliers get settled in January, whereas last year, the promotions entered in November, so the claims get settled in December. Payables, which would ordinarily grow in line with inventory, were also impacted by Black Friday as we bought stock in earlier this year in order to maximize sales during this now key promotional period.

On Slide 23, highlights on the cash flow statement. Operating cash flows and operating cash conversion, whilst down on last year due to the Black Friday timing differences I just mentioned, continue to be strong with cash conversion at approximately 95%. For the full year, we don't expect any timing differences, so operating cash conversion is expected to be returned -- to be in line with prior year's levels. CapEx at, $26 million, remains in line with our expectations as we continue to invest in the store network, our digital propositions and strategic initiatives.

In line with prior years, net debt at 31 December is seasonally low. We'd expect net debt at 30 June to be in the range of $240 million to $270 million, a reduction of circa $50 million to $80 million year-on-year as we continue to generate cash and pay back debt. The group performance indicators summarized in the table all continue to be very strong and in line with our expectations.

On Slide 24, capital management. We've today declared an interim dividend of $0.99 per share, up $0.08 per share or 8.8% on the prior year. The dividend represents 65% of pre-AASB 16 impact. We continue to believe the 65% payout ratio appropriately balances the distribution of profit to shareholders, the repayment of debt and the reinvestment of earnings for future growth. The record date for the interim dividend is the 21st of February, with payment to be made on the sixth of March.

Moving on to Slide 25. As Richard mentioned, as required, we adopted the new lease accounting standard on 1 July. Our half year '20 statutory results presented in the financial statements have obviously been prepared in accordance with the new standard, while some of the half year '20 results disclosed in this presentation, they're prior to the application of AASB 16 and excludes the impact of AASB 16. There is the appendixes in the back of the presentation to reconcile the statutory and pre-AASB 16 results, where we intend to adopt this same approach to presentation at the full year.

The impact we've set out on this slide -- the impact of the change, sorry, are set out on the slide. I don't intend to go through each. As we said previously, the standard has significantly changed the reported results, however, has had no impact on the group, its cash flows, debt covenants or shareholder value.

I'll hand back to Richard.

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [3]

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Thanks, Nick.

So we'll just turn to Slide 27 and the trading update and outlook. Total sales growth for JB HI-FI Australia was 6.5% in January with comparable sales growth of 6%. Total sales growth for JB HI-FI New Zealand was negative 1.6% with -- the same with comps. Total sales growth for The Good Guys was 1.4% with comparable sales growth of 1.4%. We are pleased with the quarter 2 and January sales momentum in Australia. We continue to see growth in low-margin categories and a bias towards customers purchasing towards key promotional periods.

For FY '20, the group expects total sales of circa $7.33 billion, comprising JB HI-FI Australia of $4.93 billion, JB HI-FI New Zealand of $0.24 billion and The Good Guys of $2.18 billion. The group NPAT pre-application of AASB 16, to be in the range of $265 million to $270 million, an increase of 6.1% to 8.1% on the prior year.

As I close, I'll leave you with Slide 29 with our investment checklist. Both brands work hard to maintain their market leadership: for JB HI-FI, technology and consumer electronics is a stable and front-of-line purchase for our customers; for The Good Guys, market leadership in home appliances and a strong position in consumer electronics. The group works hard to maintain our position as the #1 destination for technology, CE and home appliances in Australia. We are focused on maintaining a resilient retail model that rewards our team and customers for their loyalty and reinvest for the future.

So thanks for your time today. We'll now open it up for questions.

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Questions and Answers

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Operator [1]

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You've got a question from Michael Simotas, Jefferies.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [2]

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Great result. Just a question on your outlook commentary, if I can. So specifically, the comment you've made about growth in low-margin categories and a bias towards promotion periods. Should we expect going forward that to be any different to what you've reported in the first half given that trend seems to have come through in the first half as well?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [3]

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I guess we just wanted to make sure we reminded you of that and that it is certainly something we want to -- yes, it is something we're noticing. So -- and there are also less promotional periods in the second half. While I acknowledge JB is always -- and The Good Guys don't wait for an opportunity to promote, I guess, just some of those headlines. There's no Boxing Day, and there's no Black Friday.

So I guess, [tax time] is important, and back-to-school is important. It's just more of the overall contribution of those promotional periods as a proportion of the half. And we've continued to see very good growth in telecommunications, which is a lower-margin category.

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Nick Wells, JB Hi-Fi Limited - CFO [4]

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And Michael, it was no doubt it was more pronounced in Q2 than it was in Q1. So over the course of the half, it was more evident in Q2, so we just wanted to call that out.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [5]

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Okay. All right. That's helpful. And then on the gross margin that you've reported in the first half, I think you've said in the past that your gross margin tends to move around with product mix, but on a category-by-category basis, it's broadly maintained. Was that the case in the first half? Or did you actually see some gross margin improvement on the back of supply-funded promotions which somewhat offset the mix shift that you had?

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Nick Wells, JB Hi-Fi Limited - CFO [6]

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I suppose our objective is to always maintain or grow gross margin. There's ups and downs in each category.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [7]

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Okay. And on a category-by-category basis, did you manage to grow it in the first half?

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Nick Wells, JB Hi-Fi Limited - CFO [8]

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Yes, in some categories, we did. But there's also -- I think there's probably, Michael, those mix impacts within categories as well. So the mix of brands within a category can also impact.

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Michael Simotas, Jefferies LLC, Research Division - Equity Analyst [9]

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Yes. Okay. And just the last question from me. Would you be able to make a comment, please, on the difference in any performance between your mall stores and your bulky goods stores? Specifically, are you starting to see any benefit for the bulky goods stores from the recent increase in property prices?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [10]

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The recent performance in homemaker centers, yes, has been [true].

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Operator [11]

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Next question from Grant Saligari, Crédit Suisse.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [12]

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Richard, I'm wondering whether you could give us your perspective on supplier inventory levels. And whether your outlook is factoring in any potential disruption in supply ex China?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [13]

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Yes. Look, Grant, great question. And we're obviously staying very close to our suppliers. It's -- with Chinese New Year being extended a week, obviously, the visibility sort of gets pushed out. And then obviously, as factories re-ramp -- ramp up again post, it's still pretty early days. That said, we're very comfortable with where we sit at the moment, but it is evolving.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [14]

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Yes, it's a very fluid situation. What typically would be the supplier stock levels in the country? Could you give us some perspective on that?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [15]

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I guess it varies supplier by supplier and category by category. You can airfreight the mobile phone. You can't airfreight a fridge. So yes, well, you can. It's just expensive. So it really depend -- so suppliers make a range of choices. Obviously, at times, February air freighting in air purifiers, obviously, over the bushfires because there was strong demand. So it is both a matter of in-stock within the country, as you highlight, and our suppliers take different strategies. There's no doubt that more suppliers now are bringing stock into the country per forecast that they work with us on. So that has pros and cons. Obviously, there can be less stock just unallocated in country, but obviously, we have a higher conviction on the stock that we've agreed to take. At this stage, again, as I've just said earlier, we're sort of comfortable with where things sit.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [16]

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Okay, that's great. And just one other from me, if I could. Just on the home stores strategy, you did open a home store, I think, during the period. I'd just be interested to get your updated thoughts on the home store format. Will you continue to grow that? Or will they eventually convert to more conventional JB stores?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [17]

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We -- I think what we -- what -- it's a store-by-store proposition at the moment. So what we've achieved, so we still absolutely believe at a more theoretical level that JB has a role in home appliances. Obviously, we own The Good Guys, so we constantly think about how those 2 evolve. But fundamentally, we believe the customer -- for a majority of times, the customers are different. And the [macro of] that store, given the size, it was -- it had room for the home appliance offer. That store location had some heritage around home appliances. So we were sort of [counting on that, that kind of stores] sort of leaning to that. You would see we haven't been rolling out home stores in shopping centers, and we certainly haven't been making it a priority, but that's more been a function of the offers. And also, we've obviously had a lot of learnings out of The Good Guys. So I appreciate that is a little leaning on the fence answer, and that's probably deliberately so.

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Operator [18]

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Next question from Bryan Raymond, Citi.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [19]

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Yes, my first one is just on the cash cost of doing business number for The Good Guys and the drivers of that being actually down year-on-year. You mentioned controlling labor costs and productivity initiatives. I just wanted to dig into those a bit more. Are you happy with your labor weight in-store at the moment? Or do you think if sales continue to improve, then you might need to be adding back some labor? And then secondly, just what -- it would be great if you can give us a bit more color around the productivity improvements and how far through that process you are.

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [20]

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I guess on productivity, we've always been a believer in slow and steady, as in it's just constant improvement, you can implement the strategy but actually getting the implementation at the store level. And the buy-in from the team, it's a constant improvement. So what you have seen in the productivity gains across The Good Guys business is half on half on half of hard work and making sure that we get it right. We've rolled out PDAs within both the JB business and The Good Guys business. Everywhere you look, there's opportunities because, each time, we just want to do it smarter. And as the business evolves and technology becomes either more affordable or more suited, you have opportunity to jump in.

So while we're very conscious of finding out what solution works for each brand and what's the right for their team. And I don't want to go into tons of detail, but for example, how many deliveries of supply makes it to the back store, how many carts on the -- how many times the team have to move stock around? I think we did a lot of work sequencing stocking at the back of house in both businesses over Christmas much better than prior period, ensuring that the team are clear on what they're trying to achieve and the resource -- that labor resource is allocated to the right spot.

So there's a lot -- if you think across 300 stores, there are always opportunities to improve the average KPI performance. And as you improve below-average stores, that encourages the above-average stores to continue to step up. So really comfortable across both businesses with those opportunities to find productivity gains.

Now sometimes -- before we get ahead of ourselves, sometimes that productivity gain goes to just helping us maintain labor because, obviously, if you have a weaker sales environment per se, you want to make sure that you've got the labor on the floor. And we are acutely aware of balancing labor on the floor and service, which we're -- particularly The Good Guys have been -- are renowned for, making sure that, that conversation about your new kitchen can't be had if there's not labor on the floor, so acutely aware of freeing up labor across the business to make sure there's labor on the sales floor.

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Nick Wells, JB Hi-Fi Limited - CFO [21]

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And then just adding to Richard's point, so that's why the -- outside of the store labor, we did flag it in the presentation around -- we are benefiting from some of the other initiatives that rolled through in the second half of '19. So you see those in the -- sort of the admin and the other expense lines where, there is no doubt, we are realizing some of the benefits of the combined scale of the group. We do start to cycle some of those in the second half.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [22]

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Okay. Great. And then just in terms of the -- just the medium term for The Good Guys in terms of EBIT potential in that business, obviously, it took a big hit a couple of years ago on pricing and gross margin, but just interesting to see gross margins improve and cost of business come down -- cost of doing business come down. Can you give us a feel for what sort of levers are available to you more medium term to get that business back to sort of the level of profitability it was when you bought it?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [23]

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Well, I don't -- I think it's actually, on this basis, ahead of the profitability when we bought it.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [24]

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[On EBIT margin, I'm sorry, I didn't hear it.]

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [25]

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I still think the EBIT margin would be thereabouts. But then I -- where you're saying there's other opportunity to continue to improve, which is, I think, probably the headline of the question, I just said earlier, we see it constant. It is easy -- look, every retailer wants to drive sales because you get operating leverage. That said, sometimes when you grow those sales, you believe in putting labor in to support those sales. Other times, you say, well, hey, I've got a fixed cost base, and I'm comfortable with that cost base. We make that decision store by store. Some categories are lighter touch. You can imagine at the moment, as we're rolling telco out, well, I'm actually blown away with the results The Good Guys have achieved in telco. You can understand staff will get smarter at selling it over time, and that labor becomes more productive, just as a specific example.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [26]

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Right. And then just my final one, if I can, just on the CapEx and D&A side. Obviously, you saw a bit of step down in CapEx in the first half. And you also saw D&A decline in absolute terms across each of the 3 divisions. Just thinking about that into the second half, obviously, independent of AASB 16 because I know that moves the D&A line around, but just on a like-for-like basis, would you expect that line to continue to track lower on the D&A side? And then CapEx, what's the sustainable level of CapEx for this business on a, say, 1- to 2-year view?

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Nick Wells, JB Hi-Fi Limited - CFO [27]

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Yes. So CapEx in the first half, again, it's probably -- it is -- at the time, I think it is a bit light. We've said we expect it to run at 50 to 60, and so I expect no different this financial year. So that will catch up a little bit in the second half. And the depreciation, I think I said last time that I'd expect it -- it was down last year as well. It's still -- it's not down as much this year. Yes, we do expect it to start to get back to -- in line with the prior year or some small increases in Good Guys start to come through over the next 12 months.

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Operator [28]

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Next question from Mark Wade, CLSA.

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Mark Wade, CLSA Limited, Research Division - Research Analyst [29]

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Just a question around the opportunities to improve your customer offering. I know that you made those comments around the price investment. I was also curious about 6 months ago that the survey went around by one of the independent companies, and they looked at the 2 brands. And you guys rated really well on better for range but pretty average on value for money and around customer service. So yes, opportunities there to improve your service standards and your value perception, please?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [30]

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I think, Mark, we might have to sort of discredit a couple of elements within there. I appreciate it, but I think we're good value every day. And I think our customer promise is very clear. The -- and when I -- I mean we've discussed how we manage price internally, which is a thing called key value drivers. Well, it's actually KPIs, but they're sort of the same. So there's a bunch of products in every category that we -- within every product category, we keep an eye on. And those products have probably tripled in the space of 24 months. So price scraping and keeping on top of competitive pricing is much more complicated than you might anticipate because, obviously, scraping website is a science as much as an art. And so we constantly get price information and make decisions as to is that a job lot, is that actually -- is that a sustainable market price. We work with suppliers to understand and if we're missing the point on something. But across the board, I'm really comfortable with our position. We have invested a lot since the acquisition of The Good Guys.

And we've said many times before, one of the hidden benefits across both for The Good Guys and JB was reinvesting those synergies to make sure that we were -- we made our price -- we maintained our price leadership. Every time I see a broken note with some price intelligence, I give it to the guys. And often, it will be somebody went on sale, it's very point in time that we -- if somebody went on sale at some point, we then matched, or we've gone on sale and they matched. Sometimes one of the challenges is, obviously, the platforms can tend to do things that go over the top, and that's complicated -- an added complication. But all in all, very, very comfortable with where we're at. And that's why we remain Australia's #1 destination for consumer electronics, both the price and the great service.

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Mark Wade, CLSA Limited, Research Division - Research Analyst [31]

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Okay. And just turning to the express format. I mean some of the -- what do you think has worked really well for you there? And what could you do a little bit better at, you think?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [32]

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It's one store, it's downstairs in the office building we're in. We obviously were able to learn from that with our airport locations because they're not massively dissimilar. In airports, you can imagine that's very leveraged to audio, whereas the store downstairs does a lot of telco with people sort of, I guess, their phone. And contracts is a pretty front-of-mind expense for customers, and so it's a good opportunity to get someone to check your Telstra bill or compare what the JB plans might bring to the table. So it's obviously opened late November, and yes, we get a bunch of learnings. I mean there's no doubt, having stores that are 68 square meters and stores that are 2,000 square meters and even bigger for The Good Guys, you just get to test and learn different things and, obviously, challenge yourself. I have to say, if you'd asked me 10 years ago, would we have a 68-square-meter store, I would have adamantly said no. So obviously, our experience at Sydney Airport and then been out at also the stores with -- what we did with Sydney domestic terminals and then Melbourne and then Southbank has given us an opportunity to understand how those smaller format stores work. But we're pretty -- we certainly aren't calling a small store rollout.

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Mark Wade, CLSA Limited, Research Division - Research Analyst [33]

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And just on that, I mean just Click & Collect, is that a bigger feature of that store given its proximity and the size and the range...?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [34]

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Yes. Well, the challenge is it obviously carries a lot less stock, so the ability -- yes, you -- I actually can't remember if we turned Click & Collect on at that store. We haven't -- Nick said to me. We -- because the challenge you've got is it's only carrying a small proportion of the products, and so it just gets confusing for the customer. It's more of an impulse, you're walking by, yes, you want to pick up a smaller item.

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Mark Wade, CLSA Limited, Research Division - Research Analyst [35]

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That's the function. Okay.

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Operator [36]

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Next question from Niraj Shah, Morgan Stanley.

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Niraj-Samip Shah, Morgan Stanley, Research Division - Equity Analyst [37]

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Obviously, (technical difficulty) commenced consolidation of their supply chain with Sydney transition. Just curious whether there was sort of a meaningful measurable benefit from that in the first half and how we should think about that in the second half.

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [38]

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Actually, at the moment, it's probably -- while we bed it down, you obviously invest a bit too as you run old facilities and transition into the new facilities. So no benefit, though absolutely comfortable that as we look forward, this is the right decision because we will never see benefits or economies of scale if we don't do this consolidation. The warehouse facility, some of them we've been in where we call it fit for purpose, which is code for cheap and cheerful. And so as we move into -- probably more often into newer facilities, which are more secure, we have had some issues with security, so much more secure, more modern, better facilities for our staff and customer pickups. Yes, I feel comfortable that, that's sort of that baseline from there is the appropriate base to move forward.

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Niraj-Samip Shah, Morgan Stanley, Research Division - Equity Analyst [39]

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Great. And just a second one from me. You've called out strength in Apple products. Just curious whether you have a feel for the extent to which you benefited from Myer exiting sort of Apple product sales earlier last year?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [40]

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I think in the -- if you think about the scale of Apple within our business overall, Myer's exit across the market is -- well, obviously, I cannot -- it's a small proportion across the market. I think it was -- the number I heard was $60 million, but you guys would have a better read than me.

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Operator [41]

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Next question from Ben Gilbert, UBS.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [42]

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Richard and Nick, just following on just from that question, just around the centralized back end. Just could you talk through how you're thinking about sort of the more medium-term benefits there? So I know, obviously, you've been able to get some stock on consignment, software. Do you see opportunities around working capital here? Could you go down a similar path with some of the hard goods? And then secondly, on that centralized base just around terms because, obviously, a lot of these ones had been direct to store historically, and you probably get that embedded in terms, and you probably subsidized some of your smaller competitors. Does it open the way to push for some better terms around being more centralized as well?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [43]

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I might kick the question a little bit, step the question up. You can imagine that how we need to work with our suppliers to ensure that we get -- we've invested in these home delivery centers. And there is some support we receive from suppliers due to making it more efficient. As we ramp up and drive more efficiencies, we'd like to lower our cost of doing business and our suppliers' cost of doing business. And we'd hope to share in some increased support if we deliver and we deliver that cost of doing business efficiency, we'd like to share that with our suppliers.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [44]

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Okay. And also, just a second one as well, just around the terms piece and telco. I noticed, I think we're seeing probably sort of Telstra and Optus are probably pushing a lot more support more into sort of the resellers such as yourselves. Is -- when was that -- was that Telstra contract out recently? And I suppose are there any changes around that structure? And just interested in the comments around margin dilution. I'm presuming we're more talking of the hardware piece as opposed to actual contract piece.

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [45]

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So I'm answering the last part first. Yes, it's absolutely around the hardware piece. We did renew our contract with Telstra last year. It's got a number of -- it's a couple of years with renewal period. So look, to be honest, the bigger issue for me with Telstra is the quality of the relationship. And if I think about some of the key relationships with JB, Telstra is right up there. I think that their team works incredibly hard to support what we're doing. Yes, the rollout of Good Guys is testament to that. We're really comfortable with where the partnership is at. The results continue to deliver strongly for both Telstra and for us. We obviously bring -- the JB brand brings a customer to Telstra that sometimes they have not been as strong in. But the flip side is also The Good Guys -- are absolutely blown away with the results of The Good Guys and the number of new connections they're getting versus maybe reconnects, which we might have thought, previously, they're at the higher proportion of reconnects. They're getting, yes, a good proportion of new connects. So we're really comfortable with how telco is going across both brands.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [46]

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That's great. Maybe I could squeeze one more quick one in, just finally. Just on housing, Good Guys, I know you're cycling a pretty tough comp in there or tough result in the pcp. But how are you feeling around just housing headwinds versus tailwinds for your business? Would you sort of talk to seeing green shoots with prices ticking up? Just how you're thinking about that backdrop and how you're positioned to benefit from any sort of uptick we see again in housing. I know it's a bit more of a macro question versus (inaudible) specific, but...

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [47]

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You have more economists at your disposal, Ben, than I do, which is not high because I have none. But look, I agree conceptually with your question. Does the housing market feel better today than it did this time last year? Yes. We obviously -- there are other -- they had a Nick Scali reporting, which gives you confidence that there seems like green shoots in the housing market. But yes, there's a lot of data that comes down in the housing market, and everyone can sort of take a view on that. Fundamentally, I guess, our product is ready to go whenever -- if there's a stronger period because of the housing market, very comfortable we'll be able to maximize that outcome.

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Operator [48]

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Next question from Ross Curran, Macquarie.

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Ross Curran, Macquarie Research - Analyst [49]

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Two quick questions this morning. Firstly, just on the very strong comp sales growth numbers in January. Did you notice any impact in the first week of January from bushfires? Are we actually looking at sort of 3 weeks' worth of sales here in January, effectively, which make it even stronger than the sort of reported 6% top line number?

And then secondly, as we look forward through 2020 and you get the replacement cycle on consoles and Xbox and Sony, would you expect -- like how do we think about margins on those software and consoles over the year as you run out the old generation and sort of put the new generation in? How does that play through margins?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [50]

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Okay. So just around the question of early January versus late January, actually, it was pretty consistent. We -- our sales have actually been surprisingly stable. So...

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Nick Wells, JB Hi-Fi Limited - CFO [51]

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And we don't -- yes, we we're pretty metro skewed. We're not particularly regional skewed.

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [52]

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Yes. And just to pick up Nick's point, again, it's also a bit of a bias to where the stores are located. To how do we think about the console changeover, yes, a new console can be pretty competitive. It's obviously a high-profile launch. There's no -- the only comment I'd make is obviously not particularly helpful with those being telegraphed such a long period in advance. So if you can imagine, if you're a customer thinking of a purchase, you sort of go, well, maybe I'll wait. That said, we still saw reasonable sales probably for what we bought, but it was obviously not up. So that's something we're just working through. Sometimes we do make good margin as suppliers try to exit products, and they might try and give us some incentives to drive through -- or give us extra stock to sort of hit some price points as they exit the old models. I mean suppliers are getting much -- sorry, let me put it that way, suppliers have seen the opportunity to exit the old model and sometimes actually run 2 models, and that's obviously more evident in, say, iPhone, where Apple's obviously worked out how to make those price points work for customers across a number of all series models.

So a new Xbox or a new PS4, it will be a competitive period. As a leading player, we will -- we enjoy leaning into that price competition because we can handle it, but also we enjoy the traffic and the engagement it brings in-store and continues to enable us to sort of cement our market position. I'd be comfortable and say I think those margin things work themselves out. And if you were saying to me a strong games period versus a strong communications period, I'd probably say they're both on the lower margin side, so we just juggle.

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Operator [53]

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Next question from Phil Kimber, Evans & Partners.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer [54]

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Just wanted to go back over the cash flow. I know, Nick, you explained it pretty well. But can I just double check? So the rebates would've been booked in the P&L, but it was basically a 30-day deal on getting your -- getting those rebates paid in cash. So they were -- can you just confirm they've come in, in early January?

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Nick Wells, JB Hi-Fi Limited - CFO [55]

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Yes, exactly right. So just like an invoice has payment terms on it, a rebate claim has payment terms on it. So yes, they get settled in January. So by the end of January, cash flow have had sort of normalized with last year.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer [56]

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Okay. But it was in the P&L in the first half, so there's -- we shouldn't expect impact.

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Nick Wells, JB Hi-Fi Limited - CFO [57]

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There is no impact on the P&L. So it's in the P&L in the first half, yes.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer [58]

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And then my second question was just around the online metrics. Your online sales growth is still pretty solid, and you'd mentioned that you switched over to Shopify. There's some data out there that seems to suggest that the customer traffic has been weak in certain months, but that's obviously not always correlating with sales. Is there anything to call out there on the online business? I mean are conversions going through the roof, for example but even -- but maybe traffic is a bit weaker?

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Nick Wells, JB Hi-Fi Limited - CFO [59]

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No, look, I think some of the providers that track the traffic may have struggled with the transition and may not have adjusted some of the metrics afterwards. So I have seen that, Phil, with our traffic data, we're very comfortable with the growth in traffic. And we continue -- conversion, obviously, is a key focus for us, and we continue to try and focus on improving conversion. There's nothing -- it was probably -- as with any migration, you could probably look back on it now and say during the actual migration or immediately after that migration, it was making sure we got that traffic to the site. It was a bit more challenging for a short period but comfortable with where we sit today.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer [60]

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Okay. So traffic is going up on your data, which would be more accurate because you've obviously got the full picture set.

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Nick Wells, JB Hi-Fi Limited - CFO [61]

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Yes, absolutely. We're seeing strong growth in traffic on both websites.

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Operator [62]

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Next question from Shaun Cousins, JPMorgan.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [63]

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Maybe just back on China and further to Grant's question. Hopefully you can address this. What share of product for JB Hi-Fi comes from China? And how do you think about having inventory for new television launches in April? When do you need to have that product in-country? Do you have it already? Or when does that become problematic, please?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [64]

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I actually don't have the percentage. It's just a loss that comes out of China, let's just call it. There is obviously a bunch that comes out of Korea and then some from other parts of the world. But there is a higher proportion that comes out -- of hardware that comes out of China.

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Nick Wells, JB Hi-Fi Limited - CFO [65]

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And most products would at least have some components that come out of China.

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [66]

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Yes, that and actually -- sorry, and that was where I was going to go. The key element is that even if it -- maybe may not -- it could be assembled elsewhere, but it would have componentry. And obviously, you're missing a key component. And that's, I think, where the challenge is going to be as factories reopen, that I think most reasonable sized manufacturers have a reasonable stockpile of components. It's just as they go to replenish those components, are there any challenges. And as I sort of said earlier, it's a bit early to make a call on that.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [67]

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And when do you need to have product in-country for TV?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [68]

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And [let me add,] some of those suppliers have multiple factories around the world, so that's -- it's helpful. And it's obviously a matter of -- and I would say, as a larger client, that hopefully, we can ensure that we maintain our stock levels in the market.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [69]

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And sorry, TV inventory, when do you need the product inventory?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [70]

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I'm sorry, TV, the new models switching over?

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [71]

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Yes, please.

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [72]

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Yes, I mean it certainly would have been going on the boat late last year into early this year. But again, as I've said, we haven't had any heads-up from the TV guys that there's issues at the moment.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [73]

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Great. And maybe just in terms of the January strength, you don't have a lot of regional stores, and even those tend not to be in locations impacted. Do you think you actually picked up any incremental spend as consumers didn't holiday in coastal regions, rather stayed in cities and, hence, may have -- with school children at home decided to sort of spend more on gaming or categories there? So do you think you actually picked up a share of discretionary spending during that time?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [74]

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Genuinely, it'd be very anecdotal. If you look through the numbers, that I get where you're going, but I think it would be at the margin. The strength across the business was, yes, what we called out earlier, telco. And certainly, I mean, to be honest, it wasn't gaming per se.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [75]

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Got you. Okay. And just finally, just in regards to Black Friday, it looks like you've attacked that -- probably that event very, very well again. Do you think that's helped JB gain share within the broader, I guess, consumer electronics space, but also more broadly in discretionary retail during that month of -- I guess, the combined months of November, December?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [76]

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And I know you're aware of this, Shaun. I guess a key part of our model is working with suppliers given that some of the margin we make on categories we can't -- we couldn't fund the discounts internally, whereas, I guess, an integrated fashion brand or something might have to handle -- internally fund those promotions. So we -- and I'm happy with how across both brands we've worked with suppliers to create value for customers. I mean it's undeniable success of Black Friday, it's now a critical sales event. And so from there, we obviously have basically -- start planning next Black Friday when you finish this Black Friday and take all the learning.

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Operator [77]

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Next question from Johannes Faul, Morningstar.

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Johannes Faul, Morningstar Inc., Research Division - Equity Analyst [78]

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I had a question on Online and just in terms of how the mix is there between delivery and pickup and how that trend looks like. And perhaps you also -- I guess you didn't really call out any impact on the cost of doing business from Online. Has it been positive or negative or neutral?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [79]

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Okay. So let's go to Click & Collect first. Yes, as many of you know, we spent time -- we're regularly engaged with our peers overseas and made the call a couple of years ago that, yes, Click & Collect is now a hygiene factor. The fact that we can now have over 90% deliveries within JB Australia ready in 30 minutes, the actual time it takes a customer to collect that hasn't really changed a great deal, but we consider it sort of close to a customer promise now. We're going to get that online -- sorry, that Click & Collect delivery sorted quickly, and we feel that, that saves the customer of JB or The Good Guys to have their house in order. So it can -- yes, and particularly for The Good Guys, they've had massive growth in the internal times to complete Click & Collect, and that's really pleasing because, again, think of it as now a hygiene factor. Click & Collect, for most retailers, is circa around 40% to 60% of their online sales, and that's where we fit and continue to see there's an opportunity to sort of ensure the customers sort of -- yes, or maybe I'll just go back to the sort of a hygiene factor. As to cost, we are getting more and more efficient in how we handle those Click & Collect deliveries and online dispatch within store.

As we've discussed previously, we obviously have some stores often do morning picks now before customers get into the stores, so they're more efficient. We've got a picking app that sequences the picks to make it more efficient. And then on -- and then we have hub stores, which support delivering online efficiently. So as I -- we touched on earlier when we talked about productivity, a lot of these things are just continuous improvement. I mean, JB has got great metrics. Good Guys have great metrics. If you take JB or Good guys metrics, compared to global peers, we have good operating metrics. What we want to do is make sure we continue to find productivity gains to make sure we continue to support our -- maintaining in-store labor because we want to make sure -- we know that when a customer comes in store, we've got a lot of opportunity to connect with them. And therefore, we want to find other opportunities in the back of house to make the business more productive.

All right. Well, it's 11 -- just before 11:30. We might make this the last question. Or if there's no more questions, which Nick says to me there's no more questions, I think we've -- if it goes over an hour, I start getting a few negative e-mails. So we'll take it as done. Thanks for your interest. Really comfortable with how we've delivered the half and looking forward to delivering the second half. Thanks for your time today.