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Edited Transcript of JBH.AX earnings conference call or presentation 12-Aug-19 12:30am GMT

Full Year 2019 JB Hi-Fi Ltd Earnings Call

Brighton, Victoria Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of JB Hi-Fi Ltd earnings conference call or presentation Monday, August 12, 2019 at 12:30:00am 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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* 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

* Grant Saligari

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

* Phillip Kimber

Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst

* Rob Freeman

Macquarie Research - Analyst

* 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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Welcome to the JB Hi-Fi 2019 Full Year Investor Conference Call. Today's call will involve a short presentation from JB Hi-Fi's Group CEO, Richard Murray; and Group CFO, Nick Wells. Following the presentation, there will be a question-and-answer session with the call concluding around 11:30 a.m.

Please note that, as in previous calls, representatives of the media are welcome to listen in. However, this is not an appropriate forum for media questions. Group CEO Richard Murray will be available for media comments after the call on 03-8530-7303.

I would now like to introduce JB Hi-Fi's Group CEO, Richard Murray.

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [2]

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Thanks very much, and good morning, ladies and gentlemen. Thank you for your interest in our full year results. We'll talk through the investor presentation that's been released through ASX this morning and then we'll have some time for questions.

I will now turn to Slide 3 titled FY '19 Performance Overview. This is certainly a solid result for the group for FY '19. We delivered record sales and earnings with all brands delivering sales and earnings growth. Total sales were $7.1 billion, were up 3.5%; EBITDA, $372.8 million, was up 6.4%; NPAT of nearly $250 million, up 7.1%; EPS was also up 7.1% to $2.174; total dividend was $1.42 per share, fully franked, up 7.6% and in line with our current group dividend payout ratio of 65%.

I'll now turn to the divisional performance. While I will basically take this slide as read as we're also going to talk through more detail in the subsequent slides, it is pleasing to know that all the divisions grew sales and earnings for the year.

Now turning to Page 5. We saw sales growth -- in JB HI-FI Australia, we saw sales growth 4.1% to $4.73 billion and comparable sales up 2.8% with Online sales growing 23%. It was a pleasing finish to FY '19 with strong sales in the key tax time promotional period driving quarter 4 comparable sales up 3.3%. 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 the destination for new products. But we also saw solid gains in established categories.

Hardware sales were up 5.4% with comparable sales 4.7 -- 4.1%, driven by Communications, Audio, Fitness, Games Hardware and connected tech categories. Telco continues to be strong. Despite cycling some strong product releases in last year, we grew both our outright sales and new connections in the year with good results from key brands. Audio had a solid year in an aggressive market, headphones both in-ear and over-ear performed well, particularly in wireless categories. We continue to take particularly strong price leadership positions on key (inaudible) in same models in the second half.

Fitness continued its strong growth in trackers and smart watches. Games Hardware was particularly strong with Nintendo Switch. We continue to invest in expanding our branded Accessories range and depth. You will note that in [Sydney and Canberra], we have rolled out a new game features and we are pleased with the results. Connected home sold well with strong results from smart home ecosystems, particularly Google, and security systems like Arlo and Swann. And we continue to see good growth across connected tech. With regards to Software, we saw strong result in Games Software. We continue to grow market share in DVD, but headline sales continue to be a challenge.

We continue to invest Online. Sales grew 23% to 5.5% of sales, up from 4.6%. We saw a positive increase in our primary Online KPIs, including online traffic, site speed, average transaction value, delivery times and customer service queries. While it's pleasing to see the absolute growth in our Online business, our store network is critical to this growth and our competitive advantage, supporting our ability to delight customers however they wish to engage and transact with us. The Solutions business recorded double-digit sales growth and remains on track to deliver on our longer-term aspirational sales target of approximately of $500 million per annum.

Turning to Slide 6. A key element of our customer promise is the biggest brands at lowest prices in-store and online, coupled with passionate and knowledgeable staff delivering great customer service. Online, we strive to ensure our site simplifies the journey for customers, whether they are researching or transacting. We work with our suppliers to build a relevant and agile promotional plan, which, coupled with JB's ability to bring products to life in-store and online, creates our unique customer proposition. It is this that enables us to maintain our price relationship and market leadership.

In Australia, gross profit increased 3.9% to $1 billion. Gross margin was 22.1%, a 4 basis point decrease on pcp, which was driven by sales mix as we managed the decline in higher-margin Software categories and the growth of low-margin brands and categories, which was more significant in the second half, and price investment to reinforce our market leadership. We continue to leverage our scale, enabling us to manage our changing sales mix as diversified product mix is pretty critical. Our ability to manage numerous categories through different stages of their life cycle is an important element in growing sales and delivering gross profit.

As we have often discussed, we focus on growing gross profit dollars in absolute terms and ideally growing gross profit dollars within individual product categories faster than sales. Gross margin is relevant, but it is an outcome of maximizing the sales in each product category. Sometimes it helps gross margin and sometimes it's dilutionary. As you look across our product portfolio, we are pleased with how we have maintained our price leadership and delivered great value to our customers.

Turning to Slide 7 and the cost of doing business and earnings. We consider our low cost of doing business as a key enabler of our operating model. As we grow, it is critical we do not let complexity impact our culture, empowering our team members to enable them to delight customers. Cost of doing business was 14.9%, up 7 basis points on pcp and in absolute terms grew 4.6%. Total operating costs remained well controlled as we managed costs in line with sales and continued to focus on customer service. Our unrelenting focus on productivity and simplicity while maintaining our culture is a focus for all the organization's leaders, from store managers to the executive team.

JB in Australia has always operated on a low cost of doing business. And in many ways, just maintaining it as a percentage of sales has been an achievement as we have had periods where we've had to balance low sales growth and invest in new stores or product categories online and digital, supply chain solutions. That said, it is pleasing with the growth in sales of 4.1% and with cost control drove the EBITDA growth of about 2.6%. Depreciation declined by 1.4% as we managed our investment in the store network. EBIT was up 3.2% to $301.7 million. 5 new stores were opened. 2 were sort of we call them (inaudible) Sydney domestic line in the Virgin (inaudible) and the Jetstar (inaudible), Warriewood in New South Wales, Toowoomba on the Gold Coast, Midland Gate in WA and Sunshine Plaza in Queensland (inaudible) and 2 stores were closed.

Turning to JB HI-FI in New Zealand. Sales were up 2% to NZD 236 million, with comps up 8.2%. Key growth categories were Communications, Fitness, Audio, Small Appliances. Online sales in New Zealand for FY '19 grew 38.3% on pcp to NZD 13 million or 5.6% of sales, up from 4.1% in FY '18, as we benefited from the improved Online platform. Gross margin was down 37 basis points to 17.3% due to the sales mix.

Cost of doing business was 16.7%, down 57 basis points and in absolute terms, down 1.3%, driven by cost control and strong comparable sales growth. EBIT was negative NZD 1.9 million, an improvement NZD 1 million on prior year. We are encouraged by the improved performance in New Zealand, particularly the strong comparable sales growth, which is evidence that our offer is resonating to customers.

Moving to The Good Guys' performance on Slide 9. Total sales grew 2.2% to $2.15 billion with comparable sales up 0.9%. Key home appliance and Consumer Electronics drove growth for the year. With home appliances, Refrigeration sales were strong with French door fridges driving growth. Laundry performed well with growth across washers and dryers. Large size and combo models drove higher ASP and delivered on growth. Dishwashers performed well driven by strong offers across key price points.

Within CE, televisions continued to show strong growth with large-screen models supporting increased ASP. Communications and Computers continues to grow as we continue to build our nationally expanded ranking. We have continued to improve store (inaudible) merchandise, we continue to invent the culture and store (inaudible). But that said, one of the things that we're most focused on is ensuring we could take our (inaudible) to The Good Guys brand and we maintain and enhance it.

Online sales were up 3.7% to $130 million or 6.1% of sales, which is broadly in line with the prior year with strong sales on The Good Guys website partially offset by decline in third-party marketplace sales. We saw good growth in Commercial sales, a bit off a low base, at the same -- as the team started to leverage the benefits of the combined group Commercial function.

Page 10. Gross profit was $442.7 million with gross margin up 33 basis points to 20.6%. Second half gross margin was up 88 basis points as we benefited from the initiatives put in place over the last 12 months and cycled the strong price competition in the prior half. Cost of doing business was 16.6%, up 3 basis points but in absolute terms grew just 2.4%.

Total operating costs were in line with expectations and store wages remained well controlled. Sales growth, combined with gross margin expansion, drove EBITDA growth of 10.6%. Depreciation declined by 23% as significant pre-acquisition IT investment is now fully amortized. EBIT was up 19.8% to $72.9 million while EBIT margin was up 50 basis points, which is (inaudible). 2 new stores were opened in FY '19, one at Springvale in Victoria and one at Moore Park in New South Wales, which are both performing well.

Now I'd like to hand over to Nick to discuss the balance sheet and cash flow.

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Nick Wells, JB Hi-Fi Limited - CFO [3]

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Thanks, Richard. So on Slide 11, the balance sheet. We've always focused on having a strong balance sheet. And again, you can see that it's evident at the end of FY '19. Inventory, both the value on hand at 30 June and the timing of purchasing, drives the majority of our balance sheet movements.

Inventory this year was down on the prior year as a result of very strong and better-than-expected sales in the end-of-year tax time promotion.

While this is obviously a great outcome for JB at FY '19, it did mean we closed 2 [lines of stock], which impacted sales in early July. Inventory turnover as a result of the reduced stock on hand upon improved to 6.3x from 6.2x in the prior year. Net debt at $320 million was in line with our expectations.

On Slide 12, highlights on the cash flow statement. So operating cash flows were strong $302 million and high cash conversion continued to be a strength with our model with cash conversion this year at approximately 100%. CapEx at $59 million continues to be well controlled as we manage our investment in our store portfolio, our digital offers and other strategic initiatives. The group performance indicators summarized in the table all improved year-on-year and are in line with our expectations.

On Slide 13, capital management. We today declared a final dividend of $0.51 per share, up $0.05 per share or 10.9% on the final dividend in the prior year, bringing the total dividend for FY '19 to $1.42 per share, up $0.10 per share or 7.6% on last year. The dividend represents 65% of NPAT, which continued to allow us to repay debt and reinvest in our businesses for growth whilst providing a strong return for our shareholders. The record date for the final dividend is the 23rd of August with payment to be made on the 6th of September.

On Slide 14, we have set out the estimated impacts of the adoption of AASB 16 leases that will be effective in FY '20. And this standard obviously changes our reporting results. However, we want to emphasize, it will have no impact on our business, its cash flows, debt covenants or shareholder value.

Just stepping through the key impacts. On the P&L, EBIT and EBITDA will materially increase as a result of operating lease expenses, which is the rent on our stores and support office, being replaced in the P&L by depreciation and finance costs. We estimate an overall impact on NPAT is a reduction of between $4.9 million and $6.3 million.

On the balance sheet, under the new standard, we recognize on balance sheet a lease liability and corresponding right of use asset for all leases. As a result, total assets will increase by between $693 million and $796 million and total liabilities will increase by between $734 million and $834 million. The estimated overall impact in the reduction of net assets is between $38 million and $41 million.

On the cash flow statement, under the new standard, lease payments (inaudible) are paid to the lease liability and the associated financing charges. As a result, we'll see an increase in operating cash flows and an offsetting increase in financing cash flows. There will be no net impact to cash flows.

We've put further detail in Note 29 of the financial statements. And importantly to that, we will include a bridge between the results under the old standard and under the new standard in our half year '20 and FY '20 results presentation.

I'll hand back to Richard.

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [4]

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Thanks, Nick, and moving to Slide 15, the outlook slide. July 2019 -- and just touching on July 2019 sales update. And I know you always love talking about (inaudible) sales so that's okay.

So total sales for JB HI-FI Australia was 4.1% with comparable sales growth of 3.2%. Total sales growth for the JB HI-FI New Zealand business was negative 0.4% with comparable sales growth of negative 0.3%. Total sales growth for The Good Guys was negative 2.1% with comparable sales of negative 3.4%.

While we continue to see variability in the sales environment, we remain confident in our ability to execute and grow market share. In FY '20, the company expects total sales to be circa $7.25 billion. And the detail is there, the breakup between the various divisions.

Now turning in to the group's brand strategic update. Given we went through this in detail at the Macquarie conference in May, I'm not planning to go through them extensively [in a lot of] detail because I know people want us leave time for questions. So I'm going to take most of this as read.

I did just want to draw out a couple of points, Slide 18. We've now completed the relocation to the support office, the combined support office in Southbank, which Nick and a couple of people on the team, Michelle (inaudible), put a massive effort on (inaudible). So I just wanted to (inaudible) actually far exceed my expectations to [have whole] moved on. And it's just really great to have everyone on the same building. It's a pretty cool environment. So congratulations to Nick and the team.

To the group executive appointments, it's really exciting to have Lynda and Simon respectively in the Group HR and Group Technology positions. And I'll talk about it a bit later on. But obviously, Simon coming back to being (inaudible) Australia is also a great outcome.

So there's a lot of things we've achieved. You'll notice the group merchandising. We announced that both JB and The Good Guys, the (inaudible) range has come out, which is our private label offer, which we're really excited about. Lots of opportunities in group supply chain, we've talked previously about the review we've undertaken. A small example is taking 18 big and bulky DCs into 7 sort of what we call home delivery centers. And the team is doing an absolute (inaudible) work on that. And I think (inaudible), but it's awesome and really continue to (inaudible) growth in the Commercial business.

If I turn now to the JB Hi-Fi key focus, and obviously led by Cam this year. And our net sales in July are pretty good under Cam's leadership. So one way to continue. Also with Cherie appointed in New Zealand late last year, really, really excited about what she's doing. They may not be a bigger store, but I think (inaudible) square meters, that Sydney airport and the domestic terminal in Virgin and Jetstar has really brought us some interesting lessons and are both performing well. And certainly, we've got some opportunities across Australia to think about that further.

Our sponsorship of Melbourne eSports in year 2. Really, really excited about -- what we've learned from (inaudible) into year 2. And we're continuing to think about how we can take -- how services plays a role in our business going forward, so comfortable with what we achieved last year.

And as I think about this year, there is a lot of (inaudible) in the pre-multiyear projects. But certainly, what I've been really excited about is just what we've achieved in '19 and how we (inaudible) for FY '20 the challenge we have. And I'm sure most businesspeople would say that is, and it's across the business, is we are trying to simplify things while inherently taking on complex projects. So that is obviously a challenge. I think the business has at its heart a desire for simplicity, even where we're approaching complex parts. And I think that does mean we probably take those things on and try and lower the risk (inaudible) grow an outcome.

As I touched on before, The Good Guys team, cracker results, particularly in the second half. There are so many elements that go into what we've achieved at The Good Guys I could sort of talk all day about it. What really -- what I'm most proud of that is great team effort, great results of the team. We're really just thrilled (inaudible) with how (inaudible) and (inaudible) performed the whole year. Because the first half wasn't a good outcome, they'll have to continue on track post last year's second half, which was (inaudible) first 6 months. And then second 6 months has remained on track, so I'm really excited about that.

I talked about how we continue to think about how we lay out the stores, the visual merchandising, the category we want to lead in, how we're working with suppliers and then how we get that to customers and then continue to focus on productivity. So again, great results for The Good Guys team.

When I then turn to sort of bring it all together, it would be remiss to say not to say thanks to those 12,500 people, team members across the business in Australia and New Zealand that contribute to this result. Our team members are our #1 asset and our most important competitive value. Their dedication and knowledge continues to delight our customers every day. So there's no doubt, looking forward. We do see some variability in the sales environment. And obviously, for our retail business, the all-important Christmas trading period is ahead of us. So we need to know Christmas. And obviously, as we come to you in February with the happy numbers, that always gives us a bit of a sense of clarity.

But in closing, both brands will try to maintain their leadership. For JB, Technology and Consumer Electronics is a staple and front-of-mind purchase for our customers. For The Good Guys, they have market leadership in home appliances and a strong position in CE. The group works hard to maintain our position as the #1 destination of technology, consumer electronics and home appliances in the Australian market and a strong position in the New Zealand market. We are focused on maintaining a resilient retail model that rewards our team and customers for their loyalty and reinvest for future growth.

So thanks for your time this morning. I'm now happy to open it up for questions.

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Questions and Answers

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Operator [1]

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Richard, we have few names in the queue. And the first one is we've got Grant Saligari from Credit Suisse.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [2]

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Solid results, and congratulations to the team. Richard, my question, I guess, is just around JB HI-FI Australia in the -- I guess in the second half. As you called out, there's some price pressure, drove some decline in gross margin, there's some mix in that as well. And I guess through the last couple of periods, we're seeing the CODB ratio just increase a little. And as you called out as well, the low cost of doing business is important for JB.

So what I'm just interested is whether you can elaborate on whether you can actually hold those ratios with the sort of initiatives and game plan that you've got. Or whether the complexities that are coming into the business are just -- they're just the nature of them, we're going to see those ratios potentially continue in the same trend we've seen in the last couple of periods, please?

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

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Great question. No, I don't think that's something we ask across the business ground. So that really does get to the heart that balance between productivity, cost growth and sales growth. So as you would appreciate, our (inaudible) in gross sales. And gross sales at a good rate, that should keep the cost in check. When sales growth is lower, we obviously have a few levers in the business. And as sales growth flows, you use -- you have to use those levers more. If we just think about sort of investments in IT systems and supply chain maybe (inaudible) Online, which comes up often, I feel broadly comfortable at the moment that we can manage that. I guess the objective over the next 2 to 3 years, you drive a whole lot of productivity improvement. This sales growth was a little bit on the lower side, but we would be able to continue to achieve what we want to and maintain -- it would be nice to maintain our EBIT margin broadly. I am -- we are probably more focused on growing EBIT dollars, if that means we think we're remaining more relevant to our customers. So there's no vision to maintain the EBIT margin in absolute isolation.

But as we have made from previous periods, we've tended to be able to manage -- we do tend to manage our cost in line with sales. Now I'm probably having a bit of (inaudible). But we have not called out material investment sort of be it in cost or margin that would materially impact our KPIs. So there obviously is a view that we can balance the investments we wish to make across the group and broadly maintain our KPIs. (inaudible) challenge. And I guess I feel that we've made a lot of investments. And as we think about -- when I think about, say, group IT (inaudible) there's 2 teams that are servicing our 2 brands. I think that's probably the right amount of people. What I want to make sure is that those people, we can harness the power of things we can do at a group level and things we need to do at a brand label and hopefully be more productive with the (inaudible).

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [4]

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That's helpful. If you look at a granular level, we saw, for example, the growth in Online within the JB Oz business. Are you finding at all that the labor intensity of the business increases, like if you look at it at that sort of granular level? Or are you able to maintain your productivity levels?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [5]

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Look, well, let me even take your question on this. Obviously, the challenge is when you feel you're using labor in-store, that is head capacity. The minute you're putting labor on to service online dispatch, I guess you've inherently acknowledged that there's less capacity than you thought and had to put labor in to deal with that. To date, we are comfortable doing that than moving -- setting up a dark store or relocating small product out of our stores into centralized warehouses. There's no doubt we constantly check if we think that's still a productive outcome. And at the moment, we're comfortable with that. (inaudible) the opportunity to ramp speed to market in the sense that we have the hub stores with JB, particularly in Good Guys, we're working on it, but a bunch of hub stores that are located near (inaudible). And so therefore, when we want to do a dispatch, we can get them to the (inaudible) that I can get to customer really quickly.

I know there was some publicity on the way in with new planes moving flights between Melbourne and Sydney to achieve 3 hours (inaudible) get anything Melbourne to Sydney under 3 hours. So the fact that we have a store -- stores conveniently located to our customers in a world where customers obviously want things faster and faster, we think that's a major competitive advantage. And the challenge it has is if you set up these DCs and a customer wants a watchband, red-hot, how do you achieve it from at least 1 or 2 DCs in a state? So really feel at the moment that the combination of -- sorry, it's a long answer, the combination of the power of having a store close to customers and accessible at the moment plus they're pretty productive, I'm comfortable with that, makes sort of economic sense but also good customer outcome.

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Operator [6]

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The next question is coming from Bryan Raymond from Citi.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [7]

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My first question is just on the like-for-like sales growth profile through the fourth quarter and then the trading update. In the fourth quarter, Richard, you mentioned that (inaudible) sales were strong. (inaudible) into the reference more to, say, the computing category or any kind of specific areas? Or this is about the Solutions business, which you say is still growing double digits? Maybe you could just give us a bit more color around that fourth quarter profile.

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [8]

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Actually on the Solutions business, while they did have a solid year-end, it was a pretty, pretty tough half for them because as I think we all acknowledge, people -- the economy was certainly not without its challenges in the 6 months. And in our Solutions and Commercial business, these are functions of business confidence and what they want to see. And so I would love the Commercial business to (inaudible) that they could change costs on their own. But the reality is it was all about the stores. We had to buy from -- for both JB Hi-Fi and The Good Guys, we had (inaudible) plans. 6 months of planning went into those events.

We continue to obviously learn lessons. You can't just have a promotional plan in isolation. Obviously, we reinforce value across the business every day. And so when customers are shopping, which they were for (inaudible) and as we've highlighted previously, key promotional periods are ever more important at the moment. And customers tend to be very focused on them. And so we delivered in that period. And as we highlighted that maybe it just (inaudible) but highlighted that it was a great finish to the year.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [9]

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Okay. And then looking to the trading update, you mentioned that you ordered a lot on stock in early July. When you look at your -- at what you were recycling from last year and then include the like-for-like this year, you did see (inaudible) stack sort of slowed quite a bit from the fourth quarter to July. I know it was only 1 month of trade. So I'm just interested in whether that inventory was holding you back materially on like-for-like or if that reflects a bit of a moderation in growth for that short time period?

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Nick Wells, JB Hi-Fi Limited - CFO [10]

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So certainly in the JB HI-FI Australia business, you know it improved throughout July. So it was a slower start to July and then it came back over the course of July.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [11]

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Okay. Great. And then just to pick up on sales guidance. So over the course of FY '20, your sales guidance implies about 3.2% total sales growth. I'm just interested in what sort of store growth you have planned in the [interim], so you didn't really open any net new stores and you went back (inaudible) one in the second half across the group. Are you -- should we be taking that as close to like-for-like for the FY '20 period in your guidance? Or is there more of a store rollout planned?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [12]

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Well, I think on store rollout, we are obviously not rolling out as many as we were 10 years ago and which is obviously a (inaudible). But we -- one, if a store opportunity pops up, we're very happy -- and even at short notice. And so -- but I mean, we're very disciplined around store openings. We obviously know what formula works. And -- but we continue to learn and listen. So at the moment, we're obviously trying to balance where do we think sort of the broader economy is there. And where do we move stores in the broader context of things across the business. And so we are cautious about the rollout as we continue to evaluate a bunch of things, but we can react very quickly when an opportunity presents. And so from my perspective, for the stores -- new stores in (inaudible), then I acknowledge that yes, we haven't got a lot of new store across built in. So yes, comparable sales is closer. Yes, best that you cycle the 5 -- well 7 stores roll in, maybe 5 in JB and in 2 in The Good Guys. You'll cycle that rolling into the number over the period.

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Nick Wells, JB Hi-Fi Limited - CFO [13]

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So it's not -- so new stores aren't a material contributor to growth in the sales guidance, but there is some maturing of the stores opened in the last 12 months, which will contribute to some of that growth.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [14]

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Okay. So if I think about as the like for -- as the gap between total sales growth and like-for-like growth should narrow a bit further into next year?

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Nick Wells, JB Hi-Fi Limited - CFO [15]

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Yes, that should (inaudible). Yes.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [16]

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Okay. Great. My final question's just on The Good Guys gross margins. Just -- I mean, it's running at about 150 basis points below JB HI-FI still. The category mix, I would have thought would suggest that you'd have a little higher gross margin given the Whitegoods element within The Good Guys. I recognize you got 90 of the 200 basis points back in the second half versus pcp, when obviously it dropped a lot. Should we be thinking about -- how should we be thinking about The Good Guys gross margin structurally either compared to JB in Australia or compared to where it was before the 200 basis points? Just trying to think about the future profile of margin there for you.

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

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I think you can -- there are -- we always think there are opportunities to improve our gross margin. It's [not part of an] outlook, but we -- I'll admit when we get out of bed in the morning, are thinking there are opportunities to improve our buying term. Obviously, being the challenger is what we hope. So I don't want to make too many bullish comments or -- sorry, I wouldn't want my comments to be construed at all as bullish. We continue to see opportunities with The Good Guys business and not the difference between The Good Guys margins and the JB margins and obviously even normalized for a higher proportion of Whitegoods, whereas JB has software. So obviously, software gross margin is higher -- sorry, (inaudible) higher (inaudible). So taking all that into account, you certainly wouldn't see the -- we wouldn't expect the movement (inaudible) in the prior year improvement obviously, given we were cycling a price war versus buying terms. But we continue to see opportunities. The private label strategy, we're 1 year into the group merge and the learnings we've taken from that. So the way I look at gross margin is we need to improve it internally because sometimes we hold on to it and sometimes we don't but we better get ahead and improve our buying terms and make sure we've got the opportunity to protect the margin.

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Operator [18]

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Our next question will be coming from Ben Gilbert from UBS.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [19]

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Just first question around me -- sorry, for me, was just understanding how you're thinking about D&A and CapEx going forward. And particularly I know you've given a bit more color on the supply chain strategy and adjust the costs, et cetera, associated with that consolidation of the DCs and just how you're thinking about implications for CapEx going forward with respect to that.

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

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I'll have a go and Nick can -- so particularly on The Good Guys, I guess the movement's more pronounced. So we're coming off some major investments prior to the acquisition, but then we've obviously been investing in the stores. So we probably feel this is a little bit of a low point in the cycle, and we would expect that to tick back up again. Not probably quite at the level it was previously, but you would see we've been spending more in line with depreciation. And so therefore, that's kind of always been a bit of our methodology within the business, make sure we continue to invest and keep the stores fresh. So if we guide to certainly carrying the same big (inaudible) journey there, that's certainly true. But it remains a solid investment.

From the JB side of things, just obviously as you roll out less stores and then couple that with the other -- not challenge, but the reality is kind of Shopify Software as a Service. So I'm going to give these products now less CapEx and more OpEx. And so you will continue to see, I would think, just better alone whereas if you think (inaudible) supply chain, you want a new routing and scheduling tool. Majority of that is Software as a Service and goes through the OpEx line. But whereas I guess 5 to 10 years ago, that would have been a CapEx investment. So I certainly feel like we continue to invest for growth. But I know in the conversations we've had over the last couple of years about the magnitude of that investment and how well does that need to be stepped up. And I'm comfortable at the moment. I think I gave sort of a long answer earlier, but comfortable that we're managing that within our CapEx envelope.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [21]

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Okay. That's great. And just second for me, just maybe one for Nick. There was about a $9.9 million loss on disposal of the noncurrent assets. What was that through the accounts?

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Nick Wells, JB Hi-Fi Limited - CFO [22]

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Yes. I appreciate the way you're describing this, it's rather helpful. It is all associated with the relocation of our support offices to a combined support office. It is -- it's definitely not a net loss. So overall, there is no impact to the P&L or there is no cash flow impact. It's just the way it had to be disclosed in the financial statement. So without giving too much commercially away on the day we did the [level], we were incentivized [promoter benefit]. We had to write off some assets. There's no net profit impact.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [23]

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Okay. That's great. And just final one for me, just around synergies. I think from memory, you were sort of aiming for another $10 million of net through fiscal '19. Just where are you up to with that? And also just in the context of the price investment, do you still feel you've got more coming through in terms of the ability to sort of continually invest in price and how you're thinking about that dynamic into fiscal '20 as well?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [24]

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I'm not sure I actually want to answer -- and great question, Ben, I'm sorry so if I don't -- price investment, I think I'll say the fact that we take our market leadership seriously. And I might put a full stop there, and we'll juggle that between creating great value, great promotional brands, price leadership, that's all -- that's economy inherent DNA of the business. The synergy number, I guess as I'm sure you all saw this. But obviously, we feel it's now buried in both businesses. We have achieved what we set out to achieve into that guidance. We now move to that sort of second and third wave, where it's just, how do you want me to, as a business as usual, extract value across the group?

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Operator [25]

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Our next question will be coming from Shaun Cousins of JPMorgan.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [26]

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Just a question, I guess, in terms of trading environment outlook? What benefit do you think the company received from the implemented and announced expansionary fiscal policy and monetary policy in July? And is this expected to support sales growth in fiscal '20?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [27]

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Going back to my old economic data to make sure I answer that correctly. So I guess it's always hard -- we are dealing with a relatively short period, Shaun, as I think you'll admit. If we're talking to the tax cut, yes. Would I expect to see them in JB a little earlier than I expect to see them in Good Guys? Yes. Because JB is in shopping centers and are lower ticket, and I guess if consumers have a little bit more money in their pocket, then you would -- I would bet JB on the first instance to capture that passing traffic. And I think they might be that. I guess it's very hard for us to say, it does feel a more positive environment post the election. And I think for retailers, it's a challenge understanding where consumers are at sort of prior to May. And I think as we moved into June-July, we feel a little bit more confident, I would say cautiously optimistic. And yes, so that's how I feel about trading at the moment.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [28]

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Okay. That is helpful. And maybe just in terms of the management changes, can you just talk a bit about the reason for the group merchandise MD role to sort of no longer exist? Was it always the plan for that to only be sort of a 12-month role in that Cameron would generate the systems and the like there in place there and hence, sort of going back to the JB Australia, we're all just curious why it only lasted sort of 12 months? And maybe that was the plan all along.

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [29]

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I think we had some optionality, which obviously given the group merchandise director has a number of stakeholders and a number of engaged conversations, we probably play our cards pretty close to our chest. The -- you got to remember, it's a pretty small executive team, and it's a very -- obviously, a team that's worked together for a long time. Terry, Cameron, Nick and I have obviously -- how we've run the business, there's a model that's been working well for a long time, even though we have expanded the group with regards to acquisitions. So Cam was doing a bit of group merchandise. When he was JB MD, he was doing a lot more. When he was group merchandise director and back to running JB, he had owned stock for internally currently; and worked with Terry and I on that. So we think we're achieving the best of both worlds, but in our usual frugal way, investing in other executives. And let's not -- again, another executive is a significant sign investment for the group, and we want to take our costs in check. So we felt we can do less with more -- sorry, I think I said it the wrong way. We can do more with less.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [30]

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Great. And just finally, just in terms of The Good Guys. You obviously had an improvement in the last sort of 12 months, some of the initiatives that you've got have sort of played out. But July was somewhat disappointing, I'd assume. Can you just talk a little bit about what proportion of stores have been relayed? Have you seen rising ASPs on the back of the changes in range that you've implemented there? And how long do you think you get benefits off the staff incentive changes there in terms of continuing to help sales, please?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [31]

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Yes. So can I sort of tackle the last bit first? But I have a view on the benefits. So I think the harsh reality is good retail is good retail. And sometimes you see no benefit for it. But if you haven't been doing it, it would have been [tragic]. But there's no doubt our reward -- sorry, our commission or staff reward program in-stores, the staff understand. And commission sales, again, is the great outcome versus one they couldn't, which was the previous model. So that's sort of, in some ways, on a simpler aspect. But irrespective of the trading environment, we believe that people, they had to understand what they're going to take higher and that, that might motivate them. And so that's sort of accretive for all. So my view is that still continues to [drive] those. You rightly would ask the question, well, surely, it's more impactful of The Good Guys, where they're at in the journey. And that's a good point. But I just look at a world where we will be continually improving staff, obviously, learn and get comfortable with systems. And some take longer and some get it quickly, and so we just work through that as we go. And so that will continue to deliver what we call [Stars] at JB or [Create] at The Good Guys via our long-term investments that are just good retail.

Then what other sort of improvements and where are we at? The stores have been relayed. The materials are sort of relayed, then there's improved visual merchandising. And I guess, obviously, when you relay a store, you think that you improve the visual merchandising. There's a lot of stores that have had light relay. And they will now think that -- so they must think about how do we want to have category leadership. And I -- there's no doubt, Good Guys is now seen as the destination for launching new home appliances in the Australian market. And it's not just about the stores, it's about how the team gets unlocked: the buying team, the marketing team, the ops team all line up behind those launches. And that's been a massive achievements for The Good Guys from a couple of years ago. But that leadership, be it in the sense of the -- sorry, the market leadership is critical because suppliers want to partner with you and they want to invest with you. It's good for, obviously, where we stand in the market with our customers. And then on top of that is, how do we help the teams in-store to execute on -- to ensure that they are rewarded in-store for selling well.

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Operator [32]

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Gentlemen, we have Phil Kimber from Evans & Partners.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [33]

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Just first question on the gross profit margin, sort of detailed in the second half to -- sorry, for JB HI-FI Australia, that there was some price investment taken. Should we assume that sort of pressure on GP margins continues into FY '20? Or is there something unusual in the second half that isn't going to continue going forward?

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Nick Wells, JB Hi-Fi Limited - CFO [34]

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Phil, like we've always said that the biggest is actually mix. Obviously, sales mix was more of a challenge in the second half. And then on top of that, we feel like the pricing investment we've made in some of those hero categories should be more in that (inaudible) now. So we'd like to think that it all starts to moderate, but it's all subject to sales mix.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [35]

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Yes. And -- but you specifically called out the second half. So if you saw it coming at second half of FY '20, so we've got another sort of 6 months before that -- those hero category investments [so who] -- would that be fair?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [36]

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Okay. Phil, and I will tack JB points to every sentence, but that is fair. But I think we can mention (inaudible). And yes, you're right -- sorry, then maybe I guess [when we talk of] liability or anything at JB in the gross margins line, obviously, software is declining which is a negative for more gross margin. We continue to be very focused on price leadership. So there are a number of actions we're taking that are -- obviously impact our gross margin. And then we work backwards from there. So we've continually been challenged over many years sort of around gross margin in the sense of it's very -- I guess it's very easy to make decisions that impacts gross margin sort of negative and then the buying team was there and they go away and work with suppliers to make sure we protect that gross margin.

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Nick Wells, JB Hi-Fi Limited - CFO [37]

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And if it wasn't that clear in the slide, we did try and call out that it's the sales mix, which was more particularly in the second half and the price investment was there across the book rate.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [38]

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Okay. And look, I know you guys managed a dollar profit. And if I look at, you had a good outcome in the second half, Australia, in a pretty tough environment. You still managed to grow EBIT about 1%. If I look, though, into FY '20, your sales guidance for JB HI-FI Australia basically suggesting what [work styles] are probably going to be, 2 or maybe a little bit below. Do you have enough levers to recover -- I guess, thinking about what you did in the second half, you were sort of predicting sales are going to be weaker in FY '20 than they were in the second half. How many levers have you got to make sure that the EBIT dollar level the JB HI-FI Australia business can keep growing?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [39]

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I think as we -- the one comment I don't want to lose sight of is it's August, and we make a hell of a lot of money in November and December with Christmas. And so that really defines the half. And obviously, all that has pretty material impact on the year. So look, conceptually, if the sales growth is as we forecast, we feel comfortable we can manage the levers in the business. I -- as I said earlier, I'm kind of cautiously optimistic. I note that -- Nick mentioned sort of the improving sales trend during July. And so we do -- yes, we do, at the same time, feel that there is -- the tax cuts, et cetera, coming back into the economy are no doubt positive for retail. And particularly in the JB business, we often see an ability to leverage that money coming to the economy reasonably well. And then if the economy is moving, that's good for property prices and consumer confidence. And I think that's pretty good for The Good Guys team in the sense of lovely step price, when's a good time to buy a home appliance or when's a good time for purchasing a house or when's a good time to renovate the kitchen. So I think when I look out for the year, if some of the government policies flow through in the confidence, et cetera, yes, that would be a good outcome for retail.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [40]

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And then last one, probably just on the reverse of that. With those benefits, I mean, we're a little bit disappointed with The Good Guys sales and [management] months. But I mean that was -- I mean the fourth quarter dropped off, minus 0.7% and then a further minus 3.4% like-for-like for Good Guys. Is there anything specific to call out there? Because I understand that the product mix there may be slightly longer before consumer confidence impacts, but I still would have thought in an improving consumer spending environment, you might have had better outcome in Good Guys.

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [41]

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Yes, the effect that we're getting is they're gaining market share, they're over-delivering and actually Whitegoods has been really, really tough. So I actually think the result was very incredible. I guess in (inaudible) there's not a ton of data points on home appliances, I think not. And given a bunch of decisions from leading players in the market that maybe is not from industry data either. So we feel comfortable, we're taking leadership, we're maintaining market leadership and we're taking market share, especially in the areas we want to play strongly in. So I feel very comfortable with where The Good Guys are at. It's not just me that doesn't like negative sales growth. Terry doesn't like it and the team doesn't like it. So if you (inaudible) business with positive sales. And that is, we could surely tap what we like, but retail is quite positive now. That said, it was not without trying. Yes, there were some staff issues in the first middle period. But it has been negative, and we want to get that back to positive. You maintain the basics of retail. If the economy is there, we'll be there. And I will say at the moment, I feel like The Good Guys' numbers are probably better than most in the industry.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [42]

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Okay. Yes. So I mean it was -- you had an awesome second half. Profit result is really just sort of deterioration in the like-for-likes or...

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

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Management made -- that's the right question.

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Operator [44]

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The next question will be coming from Rob Freeman of Macquarie.

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Rob Freeman, Macquarie Research - Analyst [45]

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Just when you call out variability in your outlook statement, look, I'd say, we're talking about an acceleration in JB HI-FI Australia, which doesn't sound that variable. Is it region? Is it product type? Like what are you saying that's variable?

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Nick Wells, JB Hi-Fi Limited - CFO [46]

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It is by category. So it's -- we see significant differences by category and sometimes by week. And then to Rich's earlier point we thought we flagged in Feb, we're still seeing that bias to key promotional events. And so that's the variability we're talking about by category, by week, and those bias -- those bias to promotion.

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Rob Freeman, Macquarie Research - Analyst [47]

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And so as you guys get ready for Black Friday, Cyber Monday, you called out Christmas, but it feels like it does get pulled forward now to that period, are you doing anything differently this year? Have you been changing merchandising plans? Stock levels?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [48]

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I think you'll respect if I don't answer that question. One thing I love about both these businesses, and one thing I've noticed with regards to the Good Guys is -- and it's not in any way meant to be a flippant comment, retail 101 is retail 101. But how you do that 101 is really important. So Christmas for us, for both businesses, starts in January, and it's a 12-month game. Now they obviously have to take out the learnings from last year. Be it Christmas or Black Friday, all we know is we need to be agile, and that's what a lot of the investments are about. We don't want to make long-term investments that we can't pivot quickly as consumers pivot. So I'm sure every executive over years has said it feels volatile, but what we're trying to draw out is we can note -- and I guess, we note that we want to maintain flexibility in how we execute across a range of things in the business because of at times it can be volatile. And I think that's actually the strength of the DNA of the business that we deal with that complexity very, very well. I'm just constantly blown away by store managers at JB and The Good Guys, how we have ideas with -- 10 years ago, you went in the store, shoppers came in, sometimes you did home deliveries, most of the top shoppers will be by. Nowadays, you've got commercial, online click and collect, you've got all this complexity and the guys are dealing with it, maintaining store productivity, and there's a lot of things we can do to help them. But I still think we're doing a very good job and feel very comfortable with how that sort of happens over the next year or so.

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Rob Freeman, Macquarie Research - Analyst [49]

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And maybe just putting this conference call together. So if we do have, call it, 2% sales growth, if customers, obviously, are already having bias towards key promotional events, like how confident are you in this achievement of your KPIs as you put it, Richard, if we are doing more volume just on lower gross margin?

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

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Well, there are 12 months and that's a lot of water passed under the bridge, but I feel that at the top of that announcement, we've seen 5 years of very solid sales earnings and EPS growth. And when I look across the business, we've got 2 of the best retail teams anybody could ask for in the country. So I'm pretty confident in what they will deliver.

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Rob Freeman, Macquarie Research - Analyst [51]

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And then just finally, on this CapEx, D&A issue so CapEx, up 9%; D&A, down 8%. When do you think D&A will start to stabilize and [stop] being a source of EBIT growth, please?

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Nick Wells, JB Hi-Fi Limited - CFO [52]

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So it's -- the disconnect between CapEx and depreciation is not that material now. Depreciation of $56 million -- or depreciation and impairment of $56 million in FY '19 versus $59 million. So that gets pretty close. We continue to see CapEx at that $50 million to $60 million. You'd expect depreciation, particularly in Good Guys, probably that could come up over the next 12 months.

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [53]

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So it's 11:28. So we might take this one last question and then we'll call it.

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Operator [54]

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Raising the next question is Andrew McLennan, Goldman Sachs.

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Andrew J. McLennan, Goldman Sachs Group Inc., Research Division - Consumer and Retail Analyst [55]

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And congratulations on the results. Just a quick final one for me. If you could just talk within the categories, particularly around Communications, which you called out as a strong point for JB and also panel TVs, so just looking at the careful balance between ASP growth and deflationary trends in the panel TV component as well.

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [56]

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Okay. So in telco, well, great relationship with Telstra, continue to cement that. We've renewed our contract. We're rolling it out. The Good Guys, feel that increased points of presence is both good for Telstra and good for JB HI-FI. And the way we roll it out, The Good Guys, given the learnings at JB, it's a pretty good outcome. And again, given how we think about the customer base is that The Good Guys and JB, that's -- certainly, that's a really great opportunity for us. We're Australia's -- we're selling, I think, close to 1 million handsets a year, and we just want to connect as many of those as possible. And that's a good outcome for connections and we are rewarded for that. So we absolutely dominate that space now as a group, which is really pleasing. And I couldn't be happy with how we work with the Telstra team and how supportive they are. So that's a good outcome.

If I think about panels. Great question. The joy of increasing panels moving ahead the price deflation, there are probably computers that could knock that conundrum out. So it is obviously a challenge if you can't grow -- sorry, if you can't grow your volumes within individual sizes of panel versus sort of deflation, as another way of putting it. So if everyone's trading up to a bigger panel, but that ASP overall is declining, being -- you've got to try and balance it all. And too, that is a great challenge where we obviously -- sometimes, it's a bit of a famine; and sometimes, it's a bit of a feast across the group. Very relaxed that we're dealing with the complexities of that.

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Andrew J. McLennan, Goldman Sachs Group Inc., Research Division - Consumer and Retail Analyst [57]

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Panel TV deflation, from a category perspective, hasn't really moved ahead amongst your global peers as yet. Would you agree with that?

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [58]

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Just to clarify the question, you're saying our global retail peers?

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Andrew J. McLennan, Goldman Sachs Group Inc., Research Division - Consumer and Retail Analyst [59]

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Yes.

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Richard Murray, JB Hi-Fi Limited - Group CEO & Executive Director [60]

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Certainly, I think it's always there. Whether we're talking about it is another issue. But it's always there.

All right. Well, thanks, everybody, for your interest this morning. We're obviously going to -- we've got a bunch of meetings over the next week, and I'm sure we'll get the opportunity to connect. Thanks very much for your time today.