U.S. Markets open in 1 hr 57 mins

Edited Transcript of MTS.AX earnings conference call or presentation 24-Jun-19 12:30am GMT

Full Year 2019 Metcash Ltd Earnings Call

Sydney Jun 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Metcash Ltd earnings conference call or presentation Monday, June 24, 2019 at 12:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brad Soller

Metcash Limited - Group CFO

* Jeffery K. Adams

Metcash Limited - Group CEO & Executive Director

* Mark Laidlaw

Metcash Limited - CEO of Independent Hardware Group

* Scott Marshall

Metcash Limited - CEO of Food

================================================================================

Conference Call Participants

================================================================================

* 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

* Mark Wade

CLSA Limited, Research Division - Research Analyst

* Michael Simotas

Deutsche Bank AG, Research Division - Research Analyst

* Rob Freeman

Macquarie Research - Analyst

* Gary Barton

================================================================================

Presentation

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [1]

--------------------------------------------------------------------------------

Okay. I think we'll get started here. Good morning, everyone. And welcome to those of you here in the room that have braved the weather this morning to join us and to everyone joining us online this morning for the Metcash Financial Year 2019 Results.

We'll follow our normal format this morning with an overview of the group results by myself, some comments on the performance of each of our businesses and some updates on their key initiatives. Brad will then walk through or talk through the financials before handing back to me for the outlook statement, and then we will be opening up for your questions.

Before I start, I would like to introduce some of my leadership team that is here with us this morning: Scott Marshall, the CEO of the Food business. Welcome, Scott. Mark Laidlaw, CEO of IHG; and Rod Pritchard from ALM. They'll be available to help answer questions during the Q&A session. We also have Chris Baddock with us today. Chris is here as a guest and will be joining us in a few weeks' time as the new CEO of ALM. So welcome, Chris.

Just turning now to our purpose, vision and values. Our purpose remains unchanged, championing successful independents; and our vision and values support that purpose. That is what all of us at Metcash are focused on delivering every day for our retailer and supplier partners and underpins everything we do.

Looking now at the group overview slide. As I mentioned at our half year results, financial year '19 includes the adoption of the new accounting standard AASB 15, which excludes charge-through sales from the revenue line. And just to remind you that we will continue to show revenue including and excluding charge-through sales, as they are a core component of our business.

Reported group sales were up 1.8% to $12.7 billion with sales growth in the Food and Liquor pillars. Including charge-through, group sales increased 1.4% to $14.6 billion.

Overall, our businesses have performed well at the EBIT line. However, group EBIT was down 1.4% at $330 million, with EBIT growth in the Liquor and Hardware being offset by a decline in Food and a reduction in the net corporate result.

Food EBIT includes about $10 million of operating investment into the MFuture initiatives, as per our guidance at this time last year. And in corporate, the prior year included the benefit from the reversal of the provision against the New South Wales DC insurance claim which we settled during that year.

At the bottom line, underlying net profit after tax was $210.3 million. This was down 3% on the prior year, largely reflecting the New South Wales DC provision reversal in the prior year and an increase in finance costs due to our $150 million share buyback last August. Importantly, underlying EPS was 1.8% higher at $0.226, reflecting the benefit of last August's share buyback. Statutory profit after tax was $192.8 million.

We again delivered solid operating cash flows, and our balance sheet remained strong. And the Board has declared a final dividend of $0.07 per share, fully franked, bringing the full year dividend to $0.135, a 3.8% increase in the year.

From a strategic perspective, we now have our MFuture program underway, which as we have outlined, will be a balanced approach to both revenue growth and cost out. This follows on from the completion of our very successful Working Smarter program which has delivered about $125 million of savings over the past 3 years versus our original target of about $100 million.

On this slide you can see the breakdown in sales and EBIT by pillar as well as the movement in the corporate line. You can also see the extent of our charge-through sales at $1.9 billion, which are mostly generated in the Food and Hardware pillars. I'll go through the earnings performance of each of the businesses in more detail as I move through the pillar sections; firstly, the Food.

In Supermarkets, total sales including charge-through were 0.5% lower at $7.2 billion. From a market perspective, there was a further improvement to the highly competitive conditions in the second half of the year, which you can see reflected in a reduction in the deflation number to 0.9% from 1.3% in the first half. Deflation for the full year was down to 1.1% compared to 2.4% in the prior year.

Across the country, sales were again up on the eastern seaboard. And while Western Australia remained challenging, there was an encouraging improvement in the sales trajectory for that state. The second half also a -- saw a further improvement in the trajectory of our wholesale sales excluding tobacco, which declined 1.3%. This represents the fourth consecutive reporting period of improvement, as you can see from the graph at the bottom right. And as you will hear when I move to the outlook comments, this trajectory has continued to improve through the first 7 weeks of financial year '20.

Over the full year, the decline was 1.5%, representing a significant improvement from the 3.6% decline in the prior year. There was also an improvement at the retail level, with like-for-like sales for the year down 0.5% versus a decline of 0.9% in financial year '18. Our teamwork score's improved, and we have seen an increase in our retailer and supplier satisfaction survey scores.

And in our Convenience business, we've seen sales increase by 4.4% to $1.6 billion. This is largely due to the growth of our major customers and the addition of some new customers.

Looking now at Food EBIT. EBIT for the Food pillar was $182.7 million. This was $5.6 million lower than the prior year and is after the incremental investment of about $10 million in MFuture initiatives, as I mentioned earlier. The year-on-year movement also included a small benefit from the implementation of AASB 15.

There was no further contribution from the resolution of onerous leases in the second half of the year. And pleasingly, we saw an improvement in our joint venture earnings. Working Smarter savings have once again helped to offset cost inflation, and importantly, we will continue to have a strong focus on costs under the new MFuture program. In Convenience the business continued to make a positive contribution to EBIT.

Just to update you on some of our key initiatives in the Food business. On retailer engagement, at our Strategy Day in March, we noted that our MFuture strategic direction had been endorsed by the National Retail Council. This was an important step in our work to further improve the competitiveness of the network, and we are now continuing to work closely with our retailers to help accelerate existing successful initiatives and to implement new ones.

On DSA, I'm pleased to -- I'm pleased with the confidence our retailers have shown in the network -- in the future of our network by continuing to invest into their stores. This year, we had a further 79 stores complete the DSA program. This brings the total stores through the program to about 400, with an average sales growth of around 10%. Following feedback from our retailers, we have now simplified the DSA program in the second half of the year. This will help us accelerate the DSA rollout from the start of financial year '20.

On Community Co, our very successful and award-winning Community Co range is now available in all IGA and Supa IGA stores nationally. The range has grown to 280 products, including a number of fresh items, and we are very pleased with how the range is being perceived by our retailers and their customers. Community Co continues to -- Community Co sales continued to grow, with sales growth in the year over 100%, and Community Co is now a $100 million brand. Our plan is to continue to add more products and grow the Community Co range.

And finally, in small-format stores I'm also pleased to advise that we have now opened the first of our new small-format stores. The store, branded the Fresh Pantry by IGA, is located in Bondi. It is the first of our 10-store trial, with the format having a strong focus on fresh, including ready meals, while also enabling a full shop. We've simplified the operating model in this store, enabling the store to be competitively priced. We opened the store in May, and it's performing well and in line with our expectations with about 25% more customers and fresh participation of over 50%. And we're just finishing the deals on our second and third trial sites.

Moving now on to Liquor. Our Liquor business continued to perform well. Total sales including charge-through were up 5.6% to $3.7 billion. This included modest volume growth but higher value sales through the continuation of the premiumization trend. Wholesale sales to the IBA bannered network were up 5.3%; and included the benefit of a number of contract customers moving to the IBA banner during the prior year, including Thirsty Camel in Southern Australia and the northern territories.

Like-for-like sales to the IBA bannered group were up 1.9%. This now represents 6 consecutive years of like-for-like sales growth and shows the strength of the IBA network. Sales through the bannered group accounted for around 55% of Liquor's total sales, in line with the prior year. And the container deposit schemes have now been rolled out in New South Wales, the ACT and Queensland. And we're expecting Western Australia to roll out their scheme in early 2020.

Looking at Liquor EBIT performance. Reported EBIT for the year was $71.2 million, an increase of $0.9 million or 1.3%. It is worth noting that the implementation of AASB 15 has adversely impacted the Liquor EBIT movement by $1.9 million. EBIT margin was 1.9%, down slightly on the prior year due to the sales growth being largely value-driven and from some additional costs related to the CDS scheme and the MFuture initiatives.

Just looking now at some of the initiatives from the Liquor team. We have once again made good progress on our store investments to improve the quality of the IBA network. A further 81 stores were refreshed and 110 cool rooms upgraded, bringing the totals to around 330 and 610, respectively.

In our private and exclusive labels initiative we now have about 80 SKUs across our wine, beer and spirits categories. Sales continued to grow strongly, particularly in the wine category which was up about 20% on the prior year. The wine category now represents around 85% of the total private and exclusive labels sales.

In core range we've continued to have a strong focus on providing a regionalized core range tailored to the local community and to the changing consumption trends. Quality stores conveniently located with localized ranges and with personable and knowledgeable service is what differentiates our IBA network and provides us with a competitive advantage.

And finally, in on-premise. We have historically under-indexed in on-premise sales and have a renewed focus on the significant growth opportunity that this channel provides. Our plan includes better leveraging of our existing network and strengthening our alignment with key partners. During the year, we have invested in and mobilized the dedicated on-premise team, which is already leading to some pleasing results.

Now to Hardware. Total IHG sales including charge-through declined 0.9% to $2.1 billion. The decline reflects some further softening in the construction activity in the second half. It also reflects a loss in the first half of a major customer in Queensland that had a number of clash sites following the HTH acquisition, as well as some closures of some nonprofitable corporate or JV stores. Excluding the loss of the Queensland customers, IHG sales increased by 0.3%.

On a like-for-like basis, wholesale sales to the IHG banner group were up 2.3%. And on a like-for-likes basis, retail sales, wholesale sales to the IHG banner group -- sorry. On a retail basis, like-for-like network sales were up 3%.

Our online click & collect sales continued to grow strongly, although from a low base. And trade sales have increased to 65% of our total sales versus 63% in the prior year.

From a market perspective, the largest decline continued to be in multi-dwellings, with the large Tier 1 builders the most impacted. The DIY segment has been less impacted and, in fact, was up in the second half of the year compared to the first half.

Moving now to the Hardware EBIT performance. Despite the slowdown in construction activity, Hardware has again delivered a very pleasing earnings result. EBIT increased $11.9 million or 17.2% to $81.2 million. The stronger result was due to additional synergies from the HTH acquisition of about $10 million and increased earnings from our company and JV stores. Total gross realized synergies from the very successful HTH acquisition have totaled $34 million. And some additional savings from Working Smarter have again helped to offset inflation. The total IHG EBIT margin increased to 3.9% mainly due to the increased earnings in our retail business.

Now just to touch on our Hardware initiatives. We've accelerated our Sapphire upgrade program this year. This has led to a further 30 stores being upgraded, increasing the total stores through the program by the end of the year to 60. We continued to see strong sales growth from our Sapphire stores, and these stores have delivered an average sales improvement of over 15%. We've targeted a further 140 stores to go through the Sapphire program by 2022.

In trade focus we have added a further 7 stores; and now have 11 low-cost trade-only stores; and continue to target 40 stores by 2022. And we've also made good progress on our digital initiatives supporting our strong trade business such as truck tracker and Trade Plus.

On our Hardings' plumbing business, we are excited about the growth opportunities with the Hardings business and are making good progress with the rollout of Hardings in New South Wales and Tasmania. The new store-in-store Hardings at our Tooronga Mitre 10 store in Victoria is almost complete. And customer awareness and sales through the balance of the IHG network of the Hardings range are growing and in line with our expectations.

And then finally, we've again made good -- we've had good success in rolling out our core ranging programs across all key categories.

I'll wrap up by just touching on our new MFuture program. As I mentioned earlier, MFuture is now underway and it will focus on both revenue growth and cost savings. From a revenue perspective, we outlined our growth initiatives and potential funding requirements at our March Strategy Day, as well as our expectation that we can fund these investments from internal sources. The key MFuture initiatives from the Strategy Day are summarized on this page, and we plan to provide updates on our progress in future results announcements.

From a cost perspective, MFuture takes over from our successful Working Smarter program. Our aim is to offset the impact of inflation over the next 5 years, and we have already identified initial savings of about $50 million over financial year '20 and '21.

I'll now hand over to Brad to cover the financials.

--------------------------------------------------------------------------------

Brad Soller, Metcash Limited - Group CFO [2]

--------------------------------------------------------------------------------

Thanks, Jeff. And good morning, everybody.

Let me start by reiterating Jeff's comments regarding our operating results. I do believe that, despite what was continuing difficult market conditions, the group delivered incredible results for the year. And importantly, as you'll see from a later slide, it was underpinned by very strong operating cash flows.

As Jeff has already talked to the EBIT, I'll expand on the other lines in the profit and loss accounts. However, before we start looking at the numbers, just to remind you all, as Jeff already mentioned, even though I'm sure you don't need reminding, that there are 2 major changes to accounting standards that will impact on our reported results. The first is AASB 15, which is a new revenue standard. We've talked to the impacts of the standard at the half year. And the second one is AASB 16, the leasing standard. While this only takes effect from next year, I'll give you a quick heads-up as to how it's likely to impact our results later on in our presentation.

While the impact from AASB 15 on EBIT was significant in certain pillars at the half year, the overall impact on the full year results was not material with a net-net -- net year-on-year impact of $200,000. For those of you who want to follow this through in detail, we have summarized the impact by pillar in our appendix to our presentation, and I'll leave you to go through that at your leisure.

Let's now look at the P&L account. You'll recall from the half year, the most significant change, as Jeff mentioned as well, as a result of the AASB 15 is the revenue line. And under the new accounting standards, charge-through revenue has been included from sales in our statutory accounts. As previously explained, we believe this to be a core component as to the way we supply of goods to our retailers; and have therefore, for both internal management reporting and for the purposes of this presentation, added this back to sales. Charge-through sales account for $1.9 billion of our total sales in the year.

You can see from this slide our depreciation and amortization charge is in line with last year at $56 million. And as you will see in our cash flow slide, this is broadly in line with the capital expenditure for the year.

Net finance costs of $28.9 million are $2.5 million higher than last year and that's reflective of the higher average borrowing for the year, which is largely attributable to the $150 million share buyback which we did in August.

The group's effective tax rate is now 29.4%. This is in line with our previous guidance, where we said our effective tax rate would be more in line with a corporate tax rate of 30% over the coming years.

Also in line with the guidance we gave to the market, we have separately disclosed the implementation costs related to Working Smarter and the costs of the South Australian distribution center. The spend in the year of $17.5 million posttax is lower than what we spent last year.

In accordance with accounting standards, we have not booked all the costs associated with the SADC move in FY '19, and there'll be a further charge in FY '20. And we'll continue to separately disclose that number.

As Jeff mentioned, we expect a further $50 million of cost savings from the MFuture program over the next few years and as you will expect, there will be costs associated with delivering these savings. We estimate those to be 25% of the targeted savings. These costs will continue to be separately disclosed.

As you'll note from the slide, there was an increase in underlying earnings per share of 1.8%. That is despite the decline in underlying profit after tax, and that reflects the positive benefit of the share buyback in August.

We've now completed the final year of our 3-year Working Smarter program. Gross annualized savings in the year were $30 million, of which $25 million was delivered in year. The program has now delivered $125 million of gross annualized savings over 3 years versus our initial target of $100 million, most of which have benefited the Food pillar.

We incurred $19 million of implementation costs in the year. This included a provision for a -- for the closure of a further Hardware DC and a organization restructure within the Supermarkets pillar. These 2 accounted for a significant proportion of the one-off costs in the year.

While the Working Smarter program comes to an end, this will not be the end to our focus on business improvement. And as Jeff said, as Working Smarter ends, MFuture will take over. And we are committed to a further $50 million of savings over the next 2 years.

Moving now to our cash flow statement. Metcash inflow from operating activities was $244.9 million in the year, and that represents a cash conversion ratio of 92%. Just to remind you all, last year's cash flow included a one-off receipt of $20 million related to the recovery of our Huntingwood insurance claim. Excluding this one-off item, the cash realization ratio in FY '18 was 96%.

Our strong focus on working capital has enabled us over the past 3 years to report an average cash conversion ratio of 96% excluding -- and excluding one-off benefits and [103%] if we include one-off items. While we will continue to focus on our working capital and cash flows, the cash conversion ratio may moderate in future periods as we invest in the business and as we continue to utilize provisions on the balance sheet.

Net cash used in investing activities was an outflow of $47.9 million, and this primarily reflects capital expenditure of $54 million. During the year, the group spent $11.8 million on acquiring businesses. These principally relate to the acquisition of corporate stores across all our pillars.

Most of the $18.1 million inflow from the sale of assets and net loans [repaid] relates to loans advanced to retailers in prior periods now being repaid. It is good to see the advancements we provide to retailers to support their businesses now being returned, and this investment underpins the growth in their stores. And the repayment of these loans frees up capital for us to support other retailers in their growth initiatives.

There was a $283 million outflow from financing activity with $132 million of dividends paid and the buyback of $150 million. As a result, net debt increased by $86 million in the period, and this is shown on the balance sheet on the following slide. If it wants to come up -- oops.

The key callouts on this slide are, firstly, we've continued to manage our working capital and had a net working capital balance of $41 million at the year-end, which is in line with the prior year. As noted in the prior slide, while management will continue to focus on working capital, there is the potential for this number to increase in future periods.

As you can see, we ended the year with a net debt position of $42.9 million versus the $42.8 million net cash position in the prior year. This is reflective of the cash flows in the prior page, which as we said included the buyback of $150 million.

The balance sheet is going to look dramatically different next year once we implement the new leasing accounting standard, and the key impacts of that are shown on the following slide.

We will be implementing the new leasing standard for the first time in our FY '20 half year results. The new standard has no impact on our net cash flows, our bank covenants or shareholder values. It will, however, impact the way our results are reported each year. The impact on the balance sheet means that we will recognize a right-to-use asset and a lease receivable with an offsetting liability. As a result, there is a very large grossing up of the balance sheet, with no or little impact to the reported net asset position of the group. We expect to book an asset of between $800 million and $1 billion, and this includes both the right-of-use assets and a receivable related to the subleases where we're the primary lessor on stores sublet to retailers. Offsetting this, a liability of $1 billion will be booked related to both Metcash occupied properties and the back-to-back retail subleases. The [purpose] of these numbers should not come as a surprise, as we have disclosed our future lease obligations in our year-end accounts.

While the net impact on new -- of the new standard on our profit after tax is not expected to be significant, less than $15 million, the changes in reported metrics will be material. Next year, we'll see a significant increase in reported EBIT and reported EBITDA as the rental expense is replaced by depreciation and interest charges. The increase in EBIT and EBITDA will be more than offset by the higher depreciation and finance charges.

There will be no change to our reported cash flows, but again there will be movements between the reported lines, with the increase in operating cash flows being offset by higher financing cash flows. What is going to make this even more difficult next year is that there is no requirement for us to restate prior year comparatives. And given the significant work required to do this, we will not be restating our prior year comparatives. However, in order to enable comparison of the year-on-year results next year, we will in FY '20 provide the market with the results excluding the impact of AASB 16 as well. We don't see any other way to allow for a meaningful comparison of our year-on-year results.

Let's now look at our borrowings in more detail, remembering that next year's reported debt -- reported number will be up to $1 billion higher.

We ended the year with a net debt position of $43 million. As I advised you before, our debt position is a low point in October and April, reflecting our seasonal cycle such that our average borrowings are higher than what is reflected in the year-end balance sheet, with our average net borrowings in the year being circa $310 million.

We continue to look for ways to optimize our financing structure, and during the second half of the year, we refinanced $400 million -- $450 million of debt facilities. We had strong support from our banking group and we not only rebalanced the tenor of our debt, we were also able to reduce the costs of these facilities. The average tenor of our debt is now 2.9 years, and as you can see from the graph, there is a well-balanced maturity profile.

At the half year, we reported that we had repurchased the last of the USPP notes outstanding to the value of $23 million and refinanced $125 million of debt which was due to mature in FY '20. This brings the total refinancing of the year to $575 million and shows the strong support that we received from our banking group.

The Board has approved a final dividend of $0.07 per share. That will be fully franked. This brings the total dividends declared in the year to $0.135. Our shares will go ex-dividend on the 9th of July, and the dividend will be paid on the 7th of August. The dividend payout ratio is in line with the guideline of 60% of underlying earnings.

I'll now hand it back to Jeff, who will give you -- take you through our outlook statement.

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [3]

--------------------------------------------------------------------------------

Okay. Thank you, Brad.

Now to the outlook. In Supermarkets there's been a continued improvement in the sales trajectory of wholesale sales excluding tobacco -- thank you, Mark, through the first 7 weeks of financial year '20.

As announced, Metcash has entered into a 5-year supply agreement with Drakes Supermarkets in Queensland. Metcash, however, expects to cease supplying Drakes Supermarkets in South Australia once their new DC becomes operational, expected to be 30th of September 2019.

Supermarkets will continue to invest in growth initiatives through the MFuture program and expects related operating expenditure in financial year '20 to be in line with that incurred in financial year '19. The contribution to Supermarkets EBIT from the resolution of onerous lease obligations in financial year '20 is expected to be significantly lower than that reported in financial year '19. Cost savings through the MFuture program in financial year '20 are expected to help offset inflation in the Food pillar.

In Liquor, continuation of the premiumization consumption trend is expected to be the key driver of market growth in financial year '20. The business is continuing to focus on key MFuture initiatives, including building and improving the quality of its IBA network, growing its share of the on-premise market, the trial of corporate stores, expanding private label and the rollout of Porters Liquor.

In Hardware, sales through the first 7 weeks of financial year '20 are lower than the corresponding prior year period, reflecting the loss of a major customer in Queensland in half 1 '19 and a slowdown in trade sales. It is too early to say whether the changes in the economic environment for the residential housing sector will feed into construction and DIY activity in financial year '20. However, there appears to be an improvement in the level of confidence in the network, post the election. Additional cost savings are expected to help mitigate the adverse impact of any further slowdown in the construction activity in financial year '20.

We are encouraged by the commitment of our independent retailers across all of our pillars to continue to invest in their stores.

We will open up now for any questions you might have. I think they're just going to grab some microphones.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Michael Simotas, Deutsche Bank AG, Research Division - Research Analyst [1]

--------------------------------------------------------------------------------

It's Michael Simotas from Deutsche Bank. So look, you pointed to improving deflation numbers in Food, so clearly the market has got a little bit better. It doesn't seem to yet be translating into results for the Food business. If we sort of adjust for a few of the one-offs or moving parts, it still deteriorated a little bit at the EBIT level on an underlying basis. And the like-for-like for IGA actually got a little bit worse in the second half than the first half. Can you just sort of talk us through those impacts and what you expect going forward given conditions have continued to improve?

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [2]

--------------------------------------------------------------------------------

Yes. I think, again underlying, we did have some investments that went through, as we called out, Michael, on the Food pillar...

--------------------------------------------------------------------------------

Michael Simotas, Deutsche Bank AG, Research Division - Research Analyst [3]

--------------------------------------------------------------------------------

Yes. So if I back that out and then back out the $7 million one-off benefit in the first half, it still went backwards maybe $3 million on a...

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [4]

--------------------------------------------------------------------------------

Yes. So I mean there is some impact from the decline, as you've called out, but some of that is helped to offset by some of the things that we've done through Working Smarter and some of the other initiatives. But yes, there was a decline in volume.

--------------------------------------------------------------------------------

Michael Simotas, Deutsche Bank AG, Research Division - Research Analyst [5]

--------------------------------------------------------------------------------

Okay. So I mean things have obviously continued to improve, based on what you've said on the outlook. So there'll be moving parts again in 2020, but if we pull those moving parts out, will the underlying business stabilize or even grow a little bit or should we expect it to continue to decline?

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [6]

--------------------------------------------------------------------------------

No. I think that what we've called out there is about all that we can say at this point, so...

--------------------------------------------------------------------------------

Michael Simotas, Deutsche Bank AG, Research Division - Research Analyst [7]

--------------------------------------------------------------------------------

All right. And then maybe one for Mark, if I can. 6 months ago, we spoke a little bit about what the customers of -- your Hardware customers were saying. And I think the comments you made back then were pretty fair, and we've seen a little bit of a slowdown now. Has there been much of a change, either better or worse in what they're sort of seeing in their pipelines?

--------------------------------------------------------------------------------

Mark Laidlaw, Metcash Limited - CEO of Independent Hardware Group [8]

--------------------------------------------------------------------------------

All right. Thanks, Michael. The quick answer is no. There hasn't been a change, so we're going to stick with the outlook. We're 7 weeks in, and we've gone back a little bit from same 7 weeks last year. We lost a big customer in Queensland, Bretts Timber. We actually factored that in. We knew we would lose it. But I think again, Michael, our business is very well placed. You and I have had these chats. At one end, you've got the big trade guys Bowens, Dahlsens, good businesses, all trade. At the other end, you've got Bunnings, powerful business, DIY 90% -- 90% DIY. Both ends there -- Bunnings are trying to get more into commercial, and the big trade guys are trying to get more in DIY. There's us in the middle, 65-35, well placed across all the segments.

When I talk to our big independents, which we expect to do very regularly, they're not panicking. As we said in February, we knew it's going to be a tough time as the housing market came off. They recognize they've had 8 years of record growth, and it's going to be a tougher 2 years. They're not panicking, and the numbers are as they've suggested. There are -- but the one thing I'll add to -- and I know these questions will come up, but Queensland is a little bit worse than we thought, and Tasmania is better than we thought. And we've got strong businesses in both those states.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It's Bryan Raymond from Citi. We might continue on with Hardware given what Mark said before? Just on that guidance. I mean, if we couch that commentary around the outlook statement around it's down year-on-year and compare that to what you delivered in FY '19 at down 0.9%, would it be fair to say it's down more than that 0.9%, i.e., its growth is decelerating further? Or is it a similar -- broadly similar run rate to FY '19?

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [10]

--------------------------------------------------------------------------------

Do you want to pick it up, Mark?

--------------------------------------------------------------------------------

Mark Laidlaw, Metcash Limited - CEO of Independent Hardware Group [11]

--------------------------------------------------------------------------------

It is, it's similar. So in that first half, we had this big customer, I'll keep coming back to it -- sorry, [you're next, aren't you, HR]. Bretts. So that will cycle through come August. So we've still got those Bretts' numbers in there. And it is similar exactly to what we'd factored in.

--------------------------------------------------------------------------------

Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [12]

--------------------------------------------------------------------------------

Which is similar to the down 0.9%...

--------------------------------------------------------------------------------

Mark Laidlaw, Metcash Limited - CEO of Independent Hardware Group [13]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, okay, great. And just trying to...

--------------------------------------------------------------------------------

Mark Laidlaw, Metcash Limited - CEO of Independent Hardware Group [15]

--------------------------------------------------------------------------------

[That's one] of Bretts is what I'm saying.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Right, okay. Yes, okay, I understand. And then just on the -- just sticking with Hardware for one more, just on -- in terms of the commentary around saying confidence has improved postelection. There's been a lot of discussion in the industry, not just hardware but broader retail industry, about consumer confidence and how the people had reacted to the election, yet you've also said sales are down. So I just wanted to kind of understand given your -- the timing of your year-end just prior to the election and then you sort of delivered, I think about 5 weeks post that in your trading update, how would you characterize the postelection period? Is it a bit better in terms of sales? Or is it more -- are you talking about something else when you're referring to...

--------------------------------------------------------------------------------

Mark Laidlaw, Metcash Limited - CEO of Independent Hardware Group [17]

--------------------------------------------------------------------------------

I think Queensland has been hit on that. I think Queensland was genuinely thinking there was going to be a labor government coming in. That's just a personal opinion, but I think that has -- it's affected consumer confidence. And as the outlook statement says, we believe it's settling down now that there's stability in government. We still want more changes. The tax cuts would be very helpful if they went through, but now we're feeling better about that.

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [18]

--------------------------------------------------------------------------------

I think that, just to add to that, Mark, that statement that we made about the sort of encouraging is mainly coming from talking to the retailers, just the feedback that they're getting from [some retailers] they're talking to. There is this lag effect. We're sort of in a lagged period of time, so that's why we've tried to sort of word it that way.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. One final one from me, just on Food, and maybe one for Scott. There's been a lot of talk in the industry about a bit of a restructure below your level obviously, which is something you're seeing in direct reports. Would you guys shed a bit more light on that? Is that part of the MFuture program? There's been a few people -- some changed roles, [lead the] business, et cetera. I just wanted to get some color around that and what that might mean going forward for the Food business.

--------------------------------------------------------------------------------

Scott Marshall, Metcash Limited - CEO of Food [20]

--------------------------------------------------------------------------------

Thanks, Bryan. I think we are and as we said at the last update, we've done a big piece of work called Project Align, which was to really put decisions back closer to our customers. We -- in that process we put some more roles into our states so we can get things done and also take out some of the duplication between our head office and states. We have just also reset to -- which is in line with our strategy to set up some new teams. So we've set up retail channels teams to be really focused on our network strategy so that -- which is what we've shared moving forward.

We've also then streamlined the process for our merchandise teams. And we've now completed that reset. So for us it was a one-off reset. We think we have got the right structure now to move forward and implement the strategies that we shared in February.

And I will just loop back on your first question, on sales, just the comparison, because I'm sure the questions may come again. There's no specific like-for-like comparison with us in the market in sales because of the wholesale retail component. As you know, it's a different model. So just always keep that in mind. What I would say is we have been rolling out winning range and resetting core range and price. So that has had some impact in the prior year on our sales numbers. We haven't backed off on our promotional activity. We definitely haven't, but we have seen the market start to ease. But we're still very focused on giving our shoppers value in our stores.

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [21]

--------------------------------------------------------------------------------

I think just to add to what Scott said there. On his restructure, at this point, it's less about cost savings, it's more about trying to move faster, make decisions faster, improve some of the things that we're doing in MFuture faster. So there is the benefit, I guess, of some additional cost savings, but really that was not the main point of it. The main point if it was to try to get decisions made faster.

--------------------------------------------------------------------------------

Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [22]

--------------------------------------------------------------------------------

Ben Gilbert here from UBS. Maybe just another one on Food, just starting off with Scott around just the inflation or lack thereof over the last couple of years, what you're seeing out there with respect to an inflation. And just [intuitively looking at your prices] there should be enormous amount of fixed cost leverage through prices coming through, the extent to which you're seeing inflation and how we should think about that potentially benefiting you into next year with respect to stock profits and also just getting more value per box moving through the shelves and if you're actually seeing inflation.

--------------------------------------------------------------------------------

Scott Marshall, Metcash Limited - CEO of Food [23]

--------------------------------------------------------------------------------

So as I said, for our business again there's no direct comparison, so I won't give guidance on what we think will happen, but what we are seeing is our stores are definitely resetting range and price. So there's probably a lag effect versus the market. We've got to be focused on giving our shoppers better value. And as we reset those formats, that will continue on. So for me, I think there -- in some categories where we underparticipate like Fresh there's more inflation because of the -- what's happening through the economy. We're not seeing that in our core business.

--------------------------------------------------------------------------------

Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [24]

--------------------------------------------------------------------------------

And just on the one-off, the $10 million investment you had through last year. How much should we think about that flowing through in fiscal '20? Are there still going to be some more costs around that for next year?

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [25]

--------------------------------------------------------------------------------

Yes. We've called that out before. We think it's going to be a similar level of investment.

--------------------------------------------------------------------------------

Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [26]

--------------------------------------------------------------------------------

Great. Just a final one then for Mark just on the Hardware side of things. Just in terms of things that you guys can control in your business at the moment. So it seems in the cost-out opportunity also the impact as we annualize some of those loss-making stores into fiscal '20, how much of a tailwind is that?

And then finally, the teamwork score this year has got the new pricing [which has been out] a while, for the Home Timber guys as well.

--------------------------------------------------------------------------------

Mark Laidlaw, Metcash Limited - CEO of Independent Hardware Group [27]

--------------------------------------------------------------------------------

Yes, yes. And again, nothing new to what we didn't talk about in February, but the growth programs are good growth programs. So the Sapphire one, what Jeff showed there, we need to keep upgrading our stores. So 670 stores. We've now done 60 in Sapphire. We have to get to 200 because we're seeing good uplifts there, and the uplifts are coming in DIY. And we're entering a very exciting phase in that now because the first 60 were in the main Mitre 10 stores. We're about to go into this year's phase because we've finally got the Home Timber & Hardware guys onboard. It's taken a couple of years. The next round of Sapphires will be in those Home Timber & Hardware stores, and that's where the team score opportunities are because they had lower team scores than the Mitre 10 stores.

So that's a really good growth program. It's going to continue to roll out. Very happy with our digital program. We've been working away at it for 6, 7 years. We increased our digital sales, click & collect, to $6 million last year. That's 1% of DIY. Of course, we want to get it to $30 million over the next 3 years, and we want to double that in the next 12 months.

You then talked to cost out, so that's going to be balanced with that as well. We've now moved away from the synergies in the integration, but business as usual, we'll still see supply chain savings. So when we picked up Home Timber & Hardware, we went from 3 DCs to 7. We're now down to 5. We need to get it to 3. So that will find its way back through the cost initiatives.

--------------------------------------------------------------------------------

Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [28]

--------------------------------------------------------------------------------

Just annualizing those loss-making stores, how much of the losses that came out from last year versus which are still to come through fiscal '20?

--------------------------------------------------------------------------------

Mark Laidlaw, Metcash Limited - CEO of Independent Hardware Group [29]

--------------------------------------------------------------------------------

Well, that's interesting. So the company stores had some heavy leases. There's no doubt about that, and a lot of those have been factored in. Although, there's 2 other stores that have recently been closed in the last 6 months, so that will still factor its way through into the savings as well.

--------------------------------------------------------------------------------

Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [30]

--------------------------------------------------------------------------------

Is that like a couple million bucks...

--------------------------------------------------------------------------------

Mark Laidlaw, Metcash Limited - CEO of Independent Hardware Group [31]

--------------------------------------------------------------------------------

I'm not sure. I'll have to check, yes...

--------------------------------------------------------------------------------

Brad Soller, Metcash Limited - Group CFO [32]

--------------------------------------------------------------------------------

You [shouldn't expect any material] number. It's...

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [33]

--------------------------------------------------------------------------------

Yes. It would be less than that. Okay. Do we want to take any on online -- any questions online? Sorry, we've got another one here.

--------------------------------------------------------------------------------

Gary Barton, [34]

--------------------------------------------------------------------------------

Gary Barton, Australian Shareholders' Association. With the impact of the ASA 16 (sic) [AASB 16] leases, what's your average lease been for the lease portfolio of approximately $1 million -- $1 billion?

--------------------------------------------------------------------------------

Brad Soller, Metcash Limited - Group CFO [35]

--------------------------------------------------------------------------------

So it's actually disclosed in the notes to our accounts, but if I took -- look at the average, it's probably around about 7 years on average, the lease term.

--------------------------------------------------------------------------------

Gary Barton, [36]

--------------------------------------------------------------------------------

Another one. With the impact of -- sorry, a new product coming into the market and if Edmundston ever get their act into gear, what impact is that going to have on to you people?

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [37]

--------------------------------------------------------------------------------

You're speaking about Kaufland, I guess.

--------------------------------------------------------------------------------

Gary Barton, [38]

--------------------------------------------------------------------------------

Sorry?

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [39]

--------------------------------------------------------------------------------

You're speaking about Kaufland, or...

--------------------------------------------------------------------------------

Gary Barton, [40]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [41]

--------------------------------------------------------------------------------

Yes. Well, it looks like they're a ways off. And their start-up will take some time, so no material impact to us in this financial year, for sure. So any questions online?

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question is from Rob Freeman from Macquarie.

--------------------------------------------------------------------------------

Rob Freeman, Macquarie Research - Analyst [43]

--------------------------------------------------------------------------------

Can I just understand the treatment of the MFuture costs impacting Food EBIT above the line versus, I think, some Working Smarter costs taken below the line? Just how does this scheme works to go above or below and for the MFuture costs will be above the line, please?

--------------------------------------------------------------------------------

Brad Soller, Metcash Limited - Group CFO [44]

--------------------------------------------------------------------------------

Yes. So -- there's some feedback on the mic. So in terms of what we've actually put above and below the line, what we've always done is we've trailed it to the market in advance of what we've actually done. So just to be absolutely clear, what we said this year is that the MFuture costs -- sorry, the Working Smarter costs would be below the line and the costs of the SADC would be below the line. What we actually said at our Investor Day, that there will be certain costs associated with the savings target of $50 million. And those costs, which we quantified as being roughly 25% of the total savings target, we would continue to actually report those below the line as well. So the only thing that you should actually expect next year below the line is that component and whatever we rolled for in terms of the actual lease SADC costs that haven't yet been booked in FY '19.

--------------------------------------------------------------------------------

Rob Freeman, Macquarie Research - Analyst [45]

--------------------------------------------------------------------------------

Sorry. Just to be clear, [there's some costs] have been taken above the line in '19?

--------------------------------------------------------------------------------

Brad Soller, Metcash Limited - Group CFO [46]

--------------------------------------------------------------------------------

In relation to the costs, yes. They are costs that are above the line. So if you actually look at some of the costs we called out, we said $10 million of investments. I think the easier way to actually look at it is all costs have been above the line, except for those costs that we actually just explained to you are below the line. And I know there's some extensive debates about what actually goes above and below the line, but I think the way I look at it is we give complete transparent disclosure to you guys in terms of the makeup of those costs so you can adjust your models accordingly.

--------------------------------------------------------------------------------

Rob Freeman, Macquarie Research - Analyst [47]

--------------------------------------------------------------------------------

And so the payback on the $10 million, should we expect that in addition to the next $10 million in F '20?

--------------------------------------------------------------------------------

Brad Soller, Metcash Limited - Group CFO [48]

--------------------------------------------------------------------------------

I'm not sure I understand the nature of your question.

--------------------------------------------------------------------------------

Rob Freeman, Macquarie Research - Analyst [49]

--------------------------------------------------------------------------------

So Food EBIT declined. You're spending a bit of money above the line. You're targeting a return on that spend. Should we expect the return on the $20 million in financial '20?

--------------------------------------------------------------------------------

Brad Soller, Metcash Limited - Group CFO [50]

--------------------------------------------------------------------------------

So what we actually, once again, said at our Investor Day is, to the extent we actually allocate capital for those businesses, we expect a return on the capital investment we've actually made. And there are some OpEx costs coming through the businesses that we have actually made.

Just to be clear, I don't think you should actually factor in an incremental $10 million going through next year. What we actually did is we said we actually invested $10 million last year in MFuture initiatives and that we'll broadly spend the same amount of money in FY '20. So looking at that from your -- the earnings next year, what we're trying to say to you is don't back out that $10 million that we actually incurred in FY '19 because we're going to spend a similar amount of money to that in FY '20.

--------------------------------------------------------------------------------

Rob Freeman, Macquarie Research - Analyst [51]

--------------------------------------------------------------------------------

But the rate in the money to get a return, so should we see an uplift coming through from the $10 million or $20 million?

--------------------------------------------------------------------------------

Brad Soller, Metcash Limited - Group CFO [52]

--------------------------------------------------------------------------------

Clearly, we should actually see an uplift. We wouldn't actually be spending the money if we actually didn't think it was going to be of benefit to shareholders. In terms of the uplift of the $10 million of expenditure, yes, we said all the investment we actually make is going to deliver above our cost of capital. So that is our intention, yes.

--------------------------------------------------------------------------------

Rob Freeman, Macquarie Research - Analyst [53]

--------------------------------------------------------------------------------

And then just shifting to CapEx. I think it was $54 million this year. Could you just confirm how much of that was your $300 million target from the Investor Day? And then a few months post Investor Day now, are there any thoughts on the timing of the spend of the $300 million?

--------------------------------------------------------------------------------

Brad Soller, Metcash Limited - Group CFO [54]

--------------------------------------------------------------------------------

Yes, it's a good question. So I think very little of it actually was related to the CapEx we called out at our Investor Day. Just to actually remind you, what we actually said is we were going to spend $300 million over 5 years in relation to CapEx. Most of that, about half of it was actually in the Food pillar.

What we should expect going forward in terms of that CapEx is we'll continue to actually spend our maintenance CapEx. Our maintenance CapEx is our expectation will be broadly in line with what we've actually spent to date, so somewhere between $50 million and $60 million. And then we'll be looking to actually invest that MFuture CapEx as quickly as possible.

One of the things to actually call out though in terms of the timing of that spend is some of that investment is really by way of loans to retailers. And the CapEx is actually happening in the retailers' stores, so it's not always within our control to actually work out exactly when that expenditure is going to occur. What we -- in terms of giving you some kind of guidance as to how much CapEx we expect to spend next year, I would probably add a number of around -- over and above our ongoing $60 million, a number around about $75 million for next year is what we'd actually look to actually spend.

--------------------------------------------------------------------------------

Rob Freeman, Macquarie Research - Analyst [55]

--------------------------------------------------------------------------------

And Just one more. You called out pretty explicit-looking cash flow utilization looking forward. I think some of that was invested in business. Just back to my first point, if you are going to take some MFuture stuff above the line that's sitting in EBIT or the proxy for cash flow, why would we see cash flow utilization continue to fall from that factor?

--------------------------------------------------------------------------------

Brad Soller, Metcash Limited - Group CFO [56]

--------------------------------------------------------------------------------

So I think what -- we are looking at our cash flows. If you actually look at our cash conversion ratio, I have constantly said to you guys that a maintainable cash conversion ratio is around about 90% is what I'd said. Because we actually do shelter some of the profit by way of provisional leases, and we actually adjust that. What we actually have delivered over the last 3 years is an average of 96%, so it's actually trending above what we think is a long-term maintainable number as we continue to actually drive down net working capital balance. The issue is, as we invest in some of these initiatives, the key movements in that cash conversion ratio and the actual cash flows in the period is going to be a movement in that working capital number. So if we actually allocate more working capital to any one of our businesses, that will have a dollar-for-dollar impact on the cash flows and would actually impact on the cash conversion ratio, but my concern more is from that line as opposed to what the actual earnings will be.

--------------------------------------------------------------------------------

Rob Freeman, Macquarie Research - Analyst [57]

--------------------------------------------------------------------------------

Okay. Great. And which provisions do you have in mind that you said would get utilized in these periods?

--------------------------------------------------------------------------------

Brad Soller, Metcash Limited - Group CFO [58]

--------------------------------------------------------------------------------

So we have around about $125 million of provision sitting on our balance sheet at the moment. Lots of those provisions were established to cover some obligations that we took over. The biggest chunk of it relates to the acquisition of Franklins, when we actually did the Franklins' acquisition. And they are being drip-fed back into the P&L account in accordance with accounting standards to cover largely onerous lease obligations. And we said to you in previous analyst briefings that, that number is somewhere between $15 million to $20 million. So each year, when we actually report our profit, our EBIT for the period, if we did nothing else to our working capital or any other movements, our cash earnings would be $15 million to $20 million lower.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

Your next question is from Andrew McLennan of Goldman Sachs.

--------------------------------------------------------------------------------

Andrew J. McLennan, Goldman Sachs Group Inc., Research Division - Consumer and Retail Analyst [60]

--------------------------------------------------------------------------------

I might leave it short. It's a really bad line. Can you just talk about the impact of JV stores, particularly in the second half? And what would you think is sustainable?

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [61]

--------------------------------------------------------------------------------

Yes, I'll start. Brad, if you want to add anything to it. So the improvement that we saw there, there were there a couple of one-offs that went through a few of the JVs in last year. One of them was a tax true-up. The other was an investment that had been made in some systems. So we rolled over that and year-over-year then, plus in the Ritchies' JV we saw some slight improvement in the Ritchies' numbers as well.

--------------------------------------------------------------------------------

Brad Soller, Metcash Limited - Group CFO [62]

--------------------------------------------------------------------------------

So I think that's -- if you look at our JVs, improvements predominantly came through the Food JVs. The Hardware JVs are broadly flat. And as Jeff said, it's more to actually do with the prior year number being lower, which we did call out because of some adjustments, some issues in terms of truing up their numbers in 2 of our bigger JVs in the prior year.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

We have another question from Grant Saligari of Crédit Suisse.

--------------------------------------------------------------------------------

Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [64]

--------------------------------------------------------------------------------

Could you elaborate on the 24 store closures that you called out to occur, I think [you indicated a line] in Western Australia, perhaps you could just indicate the underlying reasons for the store closures.

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [65]

--------------------------------------------------------------------------------

Yes. Steve -- Scott, do you want to take that one?

--------------------------------------------------------------------------------

Scott Marshall, Metcash Limited - CEO of Food [66]

--------------------------------------------------------------------------------

Thanks for the question. I think, with the store closures, we don't call out the specific breakup of those, but what I would say is just, wherever we identify a lease come to an end and a store may have an onerous lease source that's not going to be profitable, we do work with the retailer to exit those stores. And you'll notice this year the openings -- or in the previous period, the openings were trending more positively. And the underlying feeling from our retailers is that there'll be more openings going forward, particularly as we reset the network brand and the channel clarity.

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [67]

--------------------------------------------------------------------------------

I think, just on that, we've seen that number start to decrease in as far as the number of stores closing versus openings. And in fact, as Scott said, this year, we would hope that that's going to change around completely to where we're opening more than we're closing, but some of that is out of our control because of the counting on the developers to finish projects for us.

--------------------------------------------------------------------------------

Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [68]

--------------------------------------------------------------------------------

Yes. If I could ask a follow-up question just on the costs. And I know it's been discussed quite a lot. The $10 million being [used around] the MFuture initiatives, you keep calling that investment, but I think it is actually an operating expense. And if that's the case, could you indicate where that's being spent? And what type of activities they are being spent on? And then continuing to fiscal '20 as you indicated?

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [69]

--------------------------------------------------------------------------------

Yes. Well, look, I think, on the accounting rules, until a project reaches a business case state to where it can be capitalized, you can put capital into it, you have to expense the cost of those teams. And we've got a number of big teams in Scott's area that we're mobilizing now for some of these projects, so that's what drives that.

And just to call out, which we did in March and also at our half year results for the prior year, so for financial year '19, there was 2 big projects that we spent money on there. One of them was our small-format store which we've now gotten through to trial. So that's where that money was being spent and that was mainly on mobilizing the team, building the mock store and then getting that ready for the first store opening which took place in May.

And the second thing we called out was on the loyalty program which we were trialing in WA, and there was some money being spent on that team and on that program for loyalty. That's now reached the point where we're starting to roll that out. And Queensland is the next state that's taking that to begin to roll that out. I don't know if there's anything else, Brad, you want...

--------------------------------------------------------------------------------

Brad Soller, Metcash Limited - Group CFO [70]

--------------------------------------------------------------------------------

I think -- in relation to you calling out, I think what you're actually saying is the $10 million of costs is now actually in our base in terms of our operating costs. And what we're actually saying to you, we will be driving to actually get cost savings through the MFuture program, but we shouldn't take that $10 million out of our base. So...

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [71]

--------------------------------------------------------------------------------

Okay. We've got a question here in the room, so we'll just hold up online for a moment.

--------------------------------------------------------------------------------

Mark Wade, CLSA Limited, Research Division - Research Analyst [72]

--------------------------------------------------------------------------------

Mark Wade, CLSA. Scott started talking about -- in the last -- answer to that last question. Just a bit of an update if you can on the channel clarity and where you are with that [prebranding] method in Food?

--------------------------------------------------------------------------------

Scott Marshall, Metcash Limited - CEO of Food [73]

--------------------------------------------------------------------------------

Yes, it's important to call out we're working with our retailers to make sure we land that. So if you'll recall, at our Strategy Day, we talked about segmenting more and not stretching the brand so far. So one of the reasons we've stood up and restructured new teams is so we can be very specific in how we get the right offer per store and by each location and demographic.

So where we are on that journey, at the moment, we've stood up the teams. We're working very closely with our retailers. And as you would know, the retailer relationship's critically important. We won't execute many things that aren't right for the network and, in the end, for the shopper. The retailers are very engaged in that process through our national retail working groups. And I'm very confident that you'll see a very big change in our network over the next 12 to 24 months.

--------------------------------------------------------------------------------

Mark Wade, CLSA Limited, Research Division - Research Analyst [74]

--------------------------------------------------------------------------------

Okay. And what is that -- just [further], what is the opportunity? You talked about improved customer satisfaction in terms from a retail perspective [supplier]. Where could you really get that to in the next 3 to 5 years? And what does that look like?

--------------------------------------------------------------------------------

Scott Marshall, Metcash Limited - CEO of Food [75]

--------------------------------------------------------------------------------

I think, for us, the improvement is the base offer and consistency. And if you look at store size and -- one of our criticisms over time has been the inconsistency of our offer, so getting that offer consistent is absolutely critical and similar to how we have done in our other pillars. And the retailers are very aligned to that. So I'm not going to give guidance on what that could look like, but we're very focused by channel. And I think there is genuinely a good feel amongst our retailers that we're on the right path.

--------------------------------------------------------------------------------

Jeffery K. Adams, Metcash Limited - Group CEO & Executive Director [76]

--------------------------------------------------------------------------------

Okay. Any other questions? Are we done, Steve? Steve's flashing, we're done. So thank you very much for coming this morning.