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Edited Transcript of MYR.AX earnings conference call or presentation 4-Sep-19 11:30pm GMT

Full Year 2019 Myer Holdings Ltd Earnings Call

Melbourne Sep 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Myer Holdings Ltd earnings conference call or presentation Wednesday, September 4, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Anthony King

Myer Holdings Limited - CEO, MD & Director

* Nigel Chadwick

Myer Holdings Limited - CFO

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Conference Call Participants

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* Aryan Norozi

UBS Investment Bank, Research Division - Associate Analyst

* Bryan Raymond

Citigroup Inc, Research Division - VP & Analyst

* Mark Wade

CLSA Limited, Research Division - Research Analyst

* Morana McGarrigle

Macquarie Research - Analyst

* Phillip Kimber

Evans & Partners Pty. Ltd., Research Division - Senior 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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Good morning, and welcome to the analyst investor full year results call with Myer's Chief Executive Officer, John King, and Chief Financial Officer, Nigel Chadwick.

I'll now like to hand the conference over to Mr. John King. Thank you. Please go ahead.

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [2]

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Thank you, and good morning, everyone, and welcome to Myer's Full Year Results Call for financial year ended July 2019. I'd also like to acknowledge our major colleagues who are joining us on this call on a listen-only basis. I have here with me, Nigel Chadwick, our CFO.

Before I start, I would like to draw your attention to the disclaimer on Page 2 of the presentation deck.

Today, I'll give some introductory remarks, then I'll hand over to Nigel to present the financial results in much more detail. I'll then come back and talk about progress against our Customer First Plan. I just want to be very clear, the plan we started last year is the plan we are delivering against today. And it will be the plan we'll deliver against over the coming months and years. We've made some good progress to date, but there is so much more to be accomplished, and we are still very early on in our customer journey.

So if we turn to Page 4. The results today reflects our focus on profitable sales, disciplined management of costs and cash, and on deleveraging the business. So in relation to trading, total sales were down 3.5% to just under $3 billion. Comp store sales down 2.9%. If we take Apple, which exited in 2019, our comp sales were down minus 1.3%. Operating gross profit was down 1.9% to $1.162 billion and OGP margin up 65 basis points to 38.9%. Cost of doing business improved by $32.6 million or 3.1% to just over $1 billion.

In relation to earnings, EBITDA was up 7.2% to $160.1 million, impact -- excluding implementation costs, was up 2.2% to $33.2 million. Earnings per share, $0.04, and dividend remains suspended for now.

So our balance sheet, net debt down $69 million. Net debt was actually $39 million at the end of the period. Inventory down just over 5% to $347 million, and all banking covenants have substantial headroom.

In relation to cash flow, operating cash flow before interest and tax was up $8 million to $138 million, and CapEx was down $42 million to $45 million, reflecting our heightened focus on return hurdles.

If you turn to Page 5, Customer First Plan progress to date. We said we would improve the in-store experience, and we are doing just that. We have and are relayering stores, improving their look and feel for our customers, and as a result, see some encouraging results. We have made good progress working with our landlords through a portfolio partnership approach rather than a store-by-store approach, to reduce our footprint, refurbish stores to transform the customer experience, while simultaneously delivering material cost savings in a win-win relationship for both of us. We said that we would add further new and exclusive brands, and we've done just that, adding 50 during the financial year, and we'll have more than 90 new brands in-store by Christmas. And we are increasing our Myer Exclusive Brands mix. We made it very clear we will not chase unprofitable sales. And we will continue to exit brands, products and categories that do not contribute to increased long-term profitability or customer choice. We said we will further improve our online offer, and we've done just that with more than 100 brands added to the website. Digital sales now represent 9.8% of total sales with much more opportunity ahead of us. We have further improved the look of the website, and we'll make sure it is operating in the best possible way for the upcoming peak periods of trade. We said we would reduce space, and that is what we have done. And you've seen this with the changes we've announced at Belconnen Emporium in Melbourne and Cairns, by working with our landlords, and there is much more to come.

We said we would operate in a simplified way, and we're delivering on that with some $33 million in costs taken out of the business with further opportunities ahead.

I'll speak further about our Customer First Plan, but now like to hand over to Nigel to go through the financial results in more detail.

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Nigel Chadwick, Myer Holdings Limited - CFO [3]

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Thanks, John, and good morning, everybody. As John has said, these results reflect our first full year under the Customer First Plan, and whilst they show a modest improvement over the prior year, we're under no illusion that there remains a lot of heavy lifting to further improve our performance. There were some highlights in the results, including our ability to continue to improve our EBITDA and EBITDA margin in the second half despite weaker trading conditions and also our improved net debt over the year, including through the more challenging second half.

Moving to Slide 7, the income statement. Total sales for the period were down 3.5% compared to last year and down 2.9% on a comparable store basis, reflecting our focus on profitable sales as well as the subdued trading conditions in the second half. Comparable store sales, excluding sales in Apple product, which we exited in May 2019, were down 1.3%. Once again, there was strong growth in digital sales, up 22% to $292 million. Myer's digital sales includes all online sales, including for Marcs and David Lawrence, sass & bide, Myer Market and the $30 million in sales on iPads in store. Online only sales were up 25.6%. As we said previously, during the first quarter, growth in online sales was subdued as we transitioned to a new website. Excluding that first quarter, so for the past 9 months, online sales grew by 34%. And the run rate so far in FY '20 shows further improvement. OGP was down year-on-year, reflecting the decline in revenue, but OGP margin improved.

Pleasingly, CODB was down 3.1% to just over $1 billion, which was a good outcome given inflationary pressures. So putting all that together, we finished the year with EBITDA of $160 million, up 7.2% on last year.

Depreciation increased by $7.6 million during the period, principally due to the commencement of depreciation on our new merchandising system and our new website, which was progressively rolled out from September 2018. We incurred higher interest charges from the higher margin on our new debt facility, offset to some degree by our lower debt levels during the period. So our bottom line NPAT before implementation costs and individually significant items was $33.2 million, which was 2.2% above last year. Implementation costs and individually significant items related to redundancies and an onerous lease provision and associated asset impairment from vacating a further level in our Support Office. Reported NPAT was $24.5 million compared to last year's loss of $486 million, which, of course, included the large impairment of goodwill and brand names that we took last year.

Moving to Slide 8. As flagged at the first half, trading conditions in the second half were more challenging, and this was reflected in our sales performance, which showed a year-on-year decline of 4.4% or 3.8% on a comparable stores basis.

Second half sales were impacted by our decision to cease selling Apple products from May 2019 as well as the wind down of Country Road, Politix and Mimco towards the tail end of the year. Excluding all of these brands, second half comp sales were down 1.5%, and on a full year basis, we were down 1.2%. Sales mix for the full year remained relatively stable versus the half year. Sales of Myer Exclusive Brands increased to represent 17.6% of total sales. Sales from concessions declined to 20.4%, and national brands declined 62%. Inventory was down year-on-year by over 5% compared to a 3% improvement at the half, and we expect this to continue to fall as we drive further efficiencies into our working capital cycles.

From a stores perspective, setting aside Logan and Belconnen, which were both originally slated for closure, we only had 1 store which had negative EBITDA contribution and that was a clearance store. At the EBIT level, we had one further store that had a negative EBIT contribution, and this particular store is currently showing signs of stabilization following implementation of an improvement plan. As you know, Logan closed at the half year. Belconnen will now remain open, but on a reduced footprint and lower rent per square meter. And we are removing the clearance floors from the portfolio in January 2020 post the Stocktale Sale. So in all cases, we expect these stores' performance to improve over the coming year. Our SLA at the end of the year was 763,000 square meters, which was 1% lower than the same time last year due to the closure of Logan in January. As John mentioned, we have made good progress with our landlords and more reduced space at Cairns, Belconnen, Melbourne Emporium and Hornsby, and we have significantly more space from directed discussion.

Moving now to Slide 9, OGP. Despite the fall in sales, our OGP only declined $22 million. And as you can see on this slide, the negative volume impact was in part offset by the shift in mix from concessions in National brands to MEBs that I've just described; an increase in higher-margin product, particularly over the online channel; reduced sales of unprofitable or lower-margin product; and finally, savings in shrinkage. From a margin perspective, this has resulted in an improvement in margin of 65 basis points over last year, representing the return to OGP margins not seen for a couple of years. We continue to believe there are plenty of opportunities to extract further efficiencies in OGP, and I'll touch on some of those a little later.

Slide 10. As you can see from this slide, we made substantial progress in reducing our CODB during the year, and these accelerated in the second half. CODB declined by $33 million despite inflationary pressures, including a 3.5% increase in wages under the ABI from the start of the financial year as well as further investment in online and other projects and providing long-term benefits to the company.

Major areas of cost reduction included occupancy costs, mostly driven by space reduction; optimization of our store rostering through the work we've been doing with our recently introduced workforce management system; lower IT costs as we transition to a new service provider, reengineered the platform that runs myer.com.au and turning off support for the old software; refining the organization structure in the Support Office and removing a number of unnecessary activities and functions; marketing, we have done a full review of how we and where we spend our money; and finally, general procurement savings, where we continue to explore more efficient nonmerchandise products and services. Again, we believe there are still substantial opportunities to further reduce our CODB, which we'll touch on later.

Moving to Slide 11. As John said, we continue to maintain a strong focus on cash within the business, which is demonstrated in how (inaudible) the operating cash flows. The change in working capital shown here was largely due to the noncash movement in lease incentives, which is in line with last year. In terms of working capital, despite creditors being lower than last year, creditor days were actually higher, but unfortunately inventory days were also, but to a much lesser degree. As I said at the half year, we are focusing on further opportunities in working capital in both inventory management and payables to tighten our working capital days and the program of work to chase after those savings has now started in earnings.

As you can see, CapEx is being tightly controlled and is down significantly from last year as a number of significant projects, mainly in the IT space and store refurbishments were completed. So overall, we've delivered free cash flow for the period of $71 million, which is $48 million better than last year, and net cash flow of $70.6 million, which is $64 million higher than last year, admittedly assisted by the suspension of the dividend at 1H '18.

Moving to the balance sheet on Slide 12. So the key items to note on the balance sheet are obviously net debt. Given strong cash flow performance, this has resulted in us moving from net debt of $107.4 million last year to a net debt position of $38.7 million this year, which is an improvement of nearly $69 million. Total equity has improved from this time last year to $602 million. Fixed assets have declined as depreciation expense is higher than CapEx for the period. And lastly, inventory is down 5.4% despite the challenging sales environment, reflecting our focus on working capital cycle.

So moving now to Slide 13 and a popular topic with retailers at the moment, the new leasing standard. So the new standard AASB 16 will apply to us from the 28th of July, just passed, for financial year '20. We will apply the modified retrospective method, which means that we will not restate comparative figures when we formally reported half year and full year for FY '20. We do intend, however, to provide supplementary information to allow users to compare the results with the old standard.

The major impact for Myer, given our extensive lease portfolio, include recognition of our right-of-use asset estimated between $1.35 billion and $1.55 billion, which will depreciate on a straight-line basis over the remaining term of each individual lease. And recognition of a discounted lease liability of between $1.8 billion and $2 billion, which will unwind as lease payments are made and the effect of discounting unwinds through finance costs. There are a number of knock-on impacts that affect deferred income, any existing lease provisions and also deferred tax. But when these are all combined, we expect the net adjustment to opening retained earnings to be down between $200 million and $300 million.

In terms of P&L, [at mix], depreciation expense and finance costs go up and operating lease expense goes down as rental expense is no longer recognized. So on a net basis, we expect the impact from this change in standard on FY '20 profit before tax to be flat at best or lower by up to $15 million compared to the old standard. All of these outcomes are based on our current assumptions on things like whether changes to our floor space will be executed through lease amendments or new leases, our assessment of whether we will extend leases when options are available and numerous other factors, and so actual outcomes are likely to be different to what I've just described. All of these things will potentially introduce a new level of complexity and volatility into our results, which previously didn't exist, particularly when, as you know, we are in big discussions with many of our landlords about changes to our lease arrangement. Importantly, though, whilst there will be changes to the presentation of cash flows, there is no net change in actual cash generated or used. In addition, I can confirm that following discussions with our banking syndicate, we will continue to measure our covenant on the basis of the old accounting standard for the remaining life of the facility.

Moving now to net debt on Slide 14 and our covenant position. As I mentioned earlier, our continued focus on managing cash has enabled us to reduce net debt by $69 million over the year, and so net debt was just $39 million at year-end. This is the lowest year-end net debt position for the company for more than a decade, and reflects our continuing efforts to deleverage the business and allow for controlled reinvestment. Peak gross debt during the year was $290 million in late November 2018, down from $335 million previous year, and our average gross debt across the year was just under $180 million, again down from $212 million in 2018. Net debt was obviously lower again with average net debt of around $130 million. This compares against our total facility size, which is currently $390 million.

Also on this slide, we can see our performance in each of our covenants under our new financing arrangement completed in November last year. As you can see, we have improved in each one since last year-end and there remains significant headroom in all of them.

Importantly, it is worth noting that the first step-up in FCCR occurred at the end of March this year from 1.4x to 1.45x, but we improved our performance of the year by the same margin, and so in effect, we held our headroom. The next step-up in FCCR back to 1.5x, which is what it was under our old facility, occurs in March next year. So overall, we are very comfortable with our financing position, and we continue to have strong relationships with our syndicate banks.

So to summarize all of that on Slide 15, there's clearly been a significant amount of activity during the year, and that has resulted in an improved OGP margin, significant savings in CODB, higher EBITDA over the prior period, and a 2.2% increase in NPAT before implementation costs and individually significant items. And finally, higher operating cash flows combined with lower CapEx resulting in net debt of just $39 million, which was $69 million better than last year. So overall, we feel this result continues to move us in the right direction. But as I said earlier, we are cognizant that there is much work to do to continue to improve our financial performance.

In terms of costs, the key areas we are focusing on in the coming financial year include the following: Online fulfillment, we've made good progress on determining how we will manage the significant volumes we see across Black Friday, and of course, the Christmas sales period, and we are implementing a number of changes to our fulfillment network to better accommodate these volumes, improve the customer experience, and overall, to fulfill more efficiently. These initiatives will be in place for this year's peak period, and we've already started to consider how we can deliver further improvements next year.

Secondly, factory to customer optimization. This includes delivering more products, more ready to stores and implementing more of a demand pull model from central warehousing to stores rather than the push model we have today. This initiative has temporarily slowed given its complexity, the time needed to execute it successfully prior to this year's peak trading and the pending arrival next month for new member of the executive team to lead the whole supply chain.

Third, shrinkage. We've completed the review that we talked about at the half year and have now moved into implementation mode, which contributed to a reduction in shrinkage of nearly $4 million during the year. However, due to the decline in revenue, shrinkage continues to be at a rate of 1.2% of wholesale sales versus 1.35% last year and compared to just a few years ago when it was below 0.8%. We're progressing with further actions in the current period and expect additional savings to flow through in FY '20 and beyond.

Fourth, store operating efficiencies. We've seen some benefits from the work we've done to date in rostering, but we expect to continue to refine that work and how we optimize our time in both front and back of house. Some of our other focus areas also affect store efficiency, such as the online fulfillment and factory to customer initiatives I've just mentioned, which should result in less handling in stores and more available space.

Fifth, occupancy costs. As John has mentioned, we continue to have productive dialogue with all of our landlords and have identified numerous opportunities for further space rationalization.

And finally, in the Support Office structures and processes, we continue to review and evolve our internal structures and the way we work, which is resulting in more streamlined accountability frameworks and the removal of duplication. In addition, end-to-end process reviews are being conducted to identify areas of potential efficiency and removal of pain points within our core processes, which will also lead to efficiencies within the business.

So to conclude, we are certainly not getting carried away with where we are, but given the changes we've been implementing, we continue to be optimistic about what can be achieved in the near term.

Thank you. And I'll now pass you back to John.

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [4]

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Thanks, Nigel. I'd now like to spend some time on our Customer First Plan. So if you please turn to Page 17. The plan is on the page there. Before I move on to the key elements of the plan, I just like to advise, we've continued to strengthen our executive management team. So in addition to the key appointments of the Chief Customer Officer, Geoff Ikin; the Executive General Manager People & Culture, Tabitha Pearson; and AGM Store Design & Development, Paul Goodall. I can also advise today that we finalize the appointment of Tony Carr to become the Executive General Manager of Supply Chain. Tony joined us from ASOS.com. This appointment will further boost our capability in ensuring we deliver leading factory to customer efficiencies in our supply chain, online fulfillment and store replenishment.

As I said, much work has been achieved across the key focus areas of the Customer First Plan, but there is so much more to be done, as we continue to strengthen the foundations of this company for future growth.

Turning to Page 18, focusing on the customer experience in store. We've undertaken many improvements across numbers of stores across the whole country. So Carindale, Chermside and Brisbane City in Queensland; Doncaster, Highpoint and Southland in Victoria; and in Bankstown, Bondi, Chatswood and Parramatta stores in New South Wales. And in most cases, we are adding additional brands. So these are new brands to these stores. And we believe that we have to change the offer as well as changing the environment. Brands such as likes of VERO MODA, SELECTED FEMME and HOMME, and Jack London. We recently launched a new premium fragrance offer in Libertine Parfumerie in our Melbourne store. And we've also rolled out the Beauty Emporium by Myer, which is a new area within our cosmetic floors providing our customers with a one-stop shop for everything beauty with a carefully curated collection from most wanted, most innovative skincare and makeup brands, and including many brands that are exclusive to Myer. The Beauty Emporium is open at Myer Sydney, Chadstone and Melbourne stores and will be rolled out to the other stores over the coming months.

We've also announced an exciting partnership, the first of its kind in the department store to bring the most innovative home and lifestyle gadgets to Australian customers with Litmus Labs, which prides itself on connecting people to new innovation. Litmus Labs will be setting up store activations in Myer Melbourne, Sydney City, Brisbane and Chatswood with an ever-evolving range of world-leading lifestyle and tech products. We also announced the new consumer initiative, Myer After Dark, which kicks off today, which will bring energy and excitement back to late night shopping across the East Coast initially. The program will help us to reinvigorate late night trades, initially in Melbourne, Sydney and Brisbane. We plan to repeat it in other locations. As we mentioned previously, we've also undertaken store refurbishments and space reductions at our Cairns and Belconnen stores. And as part of this work, we will improve the range and offer of these stores to our lower customers. We tend to look at changing 25% of the offer in these stores as we refurbish them. In addition to this, we have extended the lease of our historic Ballarat, Victoria store and we'll be embarking on store improvements there as well.

In relation to our loyalty program, MYER One, we know that this is a considerable asset, and we'll continue to make sure that we evolve this program to ensure that it remains at the forefront of retail loyalty programs in the country, providing a seamless positive rewarding online experience for our customers. We'll also be providing further payment options for our customers in-store with Afterpay and humm launched by the end of October. And in relation to clearance stores, as I've said previously on a number of occasions and Nigel has just said earlier, they will be -- they will close following our Stocktale Sale in January 2020.

Moving on to Only at Myer Brands. During the period, we expanded several of our most successful brands to additional stores, including Polo Ralph Lauren and Rodd & Gunn, Industrie, Tommy Hilfiger and Calvin Klein, to name a few. Similarly, a number of brands that were not performing were exited from stores and online. Many of our new overseas brands have strong online sales in Australia through their home website, but most of them do not want to set up operations in Australia due to high cost of entry. And this is how we are both able to see value in setting up distribution through Myer store network and online, giving them the physical presence they need without the high cost and giving us a point of difference. VERO MODA is a great example of the strategy part of the Bestseller group. The brand was launched successfully in Myer in August 2018 with customers responding positively to the competitive price points in the range of an offer. As a result of the successful launch, the brand has extended to a further 10 stores in March of 2019, and subsequently now rolled out to all stores. Radley is another example, was rolled out progressively to 40 stores during the year, and customers have responded well to the high-quality British brand and its classic styling, it is both quirky and unique. And Karl Lagerfeld Paris was launched in March 2019 in 11 stores across women's apparel and accessories. This is an Australian department store exclusive launch, which was met with immediate success. Customers have been able to purchase suitably priced product from iconic fashion brand name, and as a result of this success, it has been rolled out to 30 more stores from the spring. In April 2019, Warehouse London was introduced into our fast -- fashion department in 20 stores. This U.K. brand has been offering the latest catwalks at great prices for over -- catwalk trends, sorry, for over 40 years. And based on the positive customer response we've had, we plan to expand the brand into 50 stores by February 2020. So in the past year, we've added more than 50 new brands, which will be increasing to more than 90 brands to be introduced by Christmas. We are constantly reviewing every aspect of our brand and product mix to ensure that we are getting it right for our customers, and that we are adding new, productive and in-demand brands to our stores and online.

In terms of our online business, we said that we wanted online to be our biggest store by 2020, and we have delivered on this early, with online now Myer's biggest store, but we want it to be even bigger and better. Throughout the year, we've continued to working to improve the customers' experience online, following the launch of our new website in September 2018. We have enhanced the experience by focusing on customers' feedback and building new features and improvements they would expect from us. The result is that the NPS of customers who browse the site has increased by nearly 3 times. The significantly enhanced site offers a much more improved customer experience, in particular on mobile devices, offering a faster search capability, clearer filtering and navigation, improved merchandise presentation and a more engaging brand and editorial journey. But there is so much more to do and the team are working on this with easier payment solutions and much greater personalization. In addition, we continue to close the gap between our in-store and online ranges, and are very close to completing our aim of matching our own store -- our store ranges online by the end of the year and then accelerating a much broader offer as we aggressively grow our digital businesses, selling products that are online only.

In terms of efficiencies -- in terms of driving efficiencies and reducing costs, we've made decisions throughout the year, not to chase unprofitable sales and to ensure that we only have popular in-demand and productive products and brands in-store and online, and we saw this with our decision on Apple and various other brands. To ensure we are optimizing our productivity, we made the decision to hand back Level 4 at the Emporium in Melbourne, currently occupied by children's wear, toys, travel goods, men's footwear, men's underwear and apparel. With all departments currently located in Level 4, we will be moving these back into our Bourke Street store, again driving greater profit density per foot.

As announced in 2017, Myer's Logan store closed in January 2019, and our Hornsby store is due to close by January 2020. So far, with the recent announcement on Cairns and Belconnen, we have removed more than 22,000 square meters of selling space, and there is more to come, a further 5% to 10% of selling space, which is under advance negotiations with our landlords. In addition, we've continued to ensure that our store Support Office is operating as closely to our customers as possible by simplifying structures and reducing duplication. As Nigel has said, we vacated an additional level at the store Support Office to ensure we're operating in the most efficient and productive way. All things currently located on this level have been moved to other floors at the Support Office. The longer-term supply chain solution will be finalized during 2020 under the leadership of Tony Carr, who I mentioned earlier. We are confident that significant savings exist in our supply chain. We will continue to focus on operating efficiently and productively as we can, having team members in-store at the right time and the right place to ensure we are providing better service to our customers. We are doing this through our workforce management investment. And as we will continue to have a lens on cost across every single area of the business and clearly areas such as shrinkage where we've seen a 12% reduction already, we will continually look to reduce the cost of running this business.

Turning to outlook. Look, we all know it's a challenging time for retail globally. And to be honest, I've never known anything but challenging times in my 35 years of retail. But let me be very clear, our focus since we launched our Customer First Plan has been on profitable sales, a disciplined management of costs and cash and the deleveraging of the business, and nothing has changed from this. We continue to focus on our customers. Although we've made some good progress on executing the Customer First Plan, we know there is much more to be done, and we will continue to deliver against this plan in the best interests of our customers and shareholders. I just want to be very clear again, the plan we started with our Myer team members, our brand partners and our suppliers last year is the plan we're delivering against today, and it will be the plan we will deliver against over the coming months and years. Although there is much coming the way of retail, this plan keeps all my team members across the whole business focused on the job at hand, what was in the Customer First and the reaction we've taken, every decision we make. And this will ensure we remain Australia's favorite department store with leading service, exclusive brands, all at great value. We've had a great spring launch, and I look forward to updating you all further at the AGM about our plans for Christmas and peak trading.

So thank you, everyone, for your time today. I would now like to open the line for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our next question in queue is from Shaun Cousins from JPMorgan.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Just a question in regards to rent reduction and the opportunity there in terms of space givebacks. I think in the first half '19 result, you indicated that 30,000 square meters would -- reducing space by 30,000 square meters would result in an annualized rent reduction of around $10 million. Does that still hold? How do we think about the reduction of 29,000 square meters in fiscal '19? Is that -- all that benefit realized in fiscal '19 or some of it dips into fiscal '20? And then how do you think about that opportunity around the 5% to 10% of gross lettable area, which, I think, some 53,000 to 106,000 square meters, how should we think about that coming through and the potential savings available, please?

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Nigel Chadwick, Myer Holdings Limited - CFO [3]

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Yes. So the 30,000 we talked about at the half year, obviously peeled back a little bit because of our change in relation to Belconnen. And so the savings from that sort of -- from the 20,000-odd square meters are actually in the high single digits rather than double digit. And no, they weren't all flowing through during FY '19 because many of those changes, such as changing Cairns and flagships like that are actually into next year and beyond. So they haven't physically been completed at this point in time. So they're gradual over the next couple of years. As we sort of move forward, the identified potential square meters that we're looking at has the opportunity to deliver between $10 million to $20 million worth of rent savings if we executed all of them. However, there's a number of negotiations, et cetera, to occur, and that, again, will be phased over a number of reporting periods.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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Okay, great. And then maybe just on the consumer, John, your comments around a challenging sort of macro environment, I guess, sort of fair. We've seen from some of your peers or some of the discretionary retailers, they've certainly called out some improving trends, maybe since the election since beginning of July on the back of lower interest rates, house prices hitting some sort of stabilization point, the opportunity out of tax cuts and the like there, have you seen any sort of change in the consumer over the last, say, 3 months relative to sort of the preceding sort of 9 months?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [5]

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Nothing substantial. But for us, it's kind of -- from an outsider looking at us, it's probably quite difficult because we're in such a turnaround situation as we exit brands and bring brands back. But I think, I'll just take you to the Apple number, exiting Apple went from minus 3 to minus 1.3. So let me bring in new brands. We're quite confident. That's why we've ramped up bringing new brands. And online, in particular, as Nigel said, we exited the half in the 3s, and it's continued to improve. So there's a changing environment going on in terms of our customer. But I certainly wouldn't use the r word in terms of what we think about the economy at the moment.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [6]

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Got you. And maybe just finally for Nigel. Just how should we think about CapEx going forward in terms of $45 million? Just where should we see that, given that, that's been a strong operating cash flow, but also low CapEx has contributed to the debt result? How should we consider CapEx, some outlook, please?

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Nigel Chadwick, Myer Holdings Limited - CFO [7]

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Yes. Look, we do have quite a strong pipeline of things that we want to do within the business. So whilst we did really strangle it this year, we expect to sort of have a slight release there of the strangle hold we've had over it. So my expectation is that we'll sort of move back to somewhere in the sort of 75 to 90 range for FY '20.

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Operator [8]

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Our next question in queue is from Aryan Norozi from UBS.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [9]

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Just firstly, first question is around a more mechanical specific one. There's a $1.3 million credit in the P&L for long-term incentives. I mean last year, it was about $1 million cost. How do we think about that moving forward into FY '20, please?

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Nigel Chadwick, Myer Holdings Limited - CFO [10]

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Well, that's as a result of sort of the nonvesting of long-term performance rights.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [11]

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Yes.

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Nigel Chadwick, Myer Holdings Limited - CFO [12]

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Clearly, those get measured on an annual basis, and we'll -- it's a bit hard to predict because we'll measure next year's sort of based off the next round of performance rights and how we're performing against the performance hurdles. But we clearly expense that over the term of the performance rights. And so -- but it's -- then we subsequently find that one has not vested that results in the credit to P&L.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [13]

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And just around the gross margins. I think the second half was up -- second half '19 gross margins were up about 24 basis points. They were up around 100 in the first half. I mean you've had a lot of benefits during the half, but you've called out obviously the clearance product that you've reduced. Was that all of the impact? Or how do we think about the impact from that and the sort of lower growth in the margins?

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Nigel Chadwick, Myer Holdings Limited - CFO [14]

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Yes. I mean we do sort of see that the second half was a little bit more challenged and the MEB mix improvement did slow during the second half. So we got a bump up from the really strong MEB mix change in the first half and then not effectively held steady in the second half. So you don't get the year-on-year uplift that you would have got had we continued that trajectory.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [15]

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Yes. Okay. And just around the space hand backs you guys are talking to. I mean can you just give us an idea around or how we should think about what the sales impact to the story is once you do hand back aside? I mean I would just say because it's probably less productive and unprofitable space that you might be handing back. How do we think about the sales -- total sales mix of the store once you've actually...

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [16]

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Thanks, Aryan. We believe that there'll be very little impact to some of the sales numbers. Because what we're doing is, I'll give you an example, to say, we've got a 4-floor store that we're reducing to 2. What we're doing is we are flowing out the reserves on 2 remaining floors, so that we're almost getting same space back or slightly less, but we're able to drive productivity through sales per meter and profit per meter. So you'll see that with Cairns going from 2 to 1. You can see it with Belconnen ongoing from 3 to 2, we expect sales to increase as we bring in 30, 40 new brands. So what we're actually doing is not a like-for-like line of comparison. If you know we (inaudible) 30% of the store, we're not going to get 30% fall in sales. In fact, we're looking for flat sales, if not improved sales.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [17]

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Fair enough. And sorry, if I can sneak just one more in, please. Just on the benefit, if any, you would save from sort of disruption at [David Jones] and Elizabeth store. Have you guys seen any sort of improved or kick up in the second half during that or not, any noticeable impact?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [18]

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Not really. I mean we don't -- I mean apart from some of the beauty brands, there's not a lot of brands that we sell that they sell. So from our perspective, we're just focusing on our business and that they are focused on theirs.

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Operator [19]

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Our next telephone question is from Bryan Raymond from Citi.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [20]

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My first one is just on sales, starting to get my head around this Apple impact and what it might meant for FY '20. So to confirm, you had about 130 basis point impact for full year like-for-likes from Apple exit. That's about a 3-month impact. Is it fair to annualize that for the full year '20, am I thinking about that the right way?

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Nigel Chadwick, Myer Holdings Limited - CFO [21]

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Yes, I think so. So Apple sales were sort of in the order of $70 million to $80 million per annum. So that's the sort of number that you'll see coming out once you sort of annualize the last 3 months.

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

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Right. Okay. And just to confirm, giving you -- giving us a like-for-like figure, I assume you're excluding the products that you've replaced Apple with; otherwise, it wouldn't be a particularly fair comparison. Are you stripping out what you put in Apple's place after it exited?

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Nigel Chadwick, Myer Holdings Limited - CFO [23]

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As in on the lost space because we haven't really replaced Apple with Samsung or anything else. So no, we haven't done that in terms of lost space. It's just a direct sort of -- we've taken Apple likes for both years.

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

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Right. But you've -- assuming that space isn't empty, you probably got product selling in that area. You had some sales coming in that you wouldn't have ever arranged before with Apple in it.

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Nigel Chadwick, Myer Holdings Limited - CFO [25]

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That's right. But that will be there next year as well. So from a cost perspective that will also normalize out next year.

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

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Okay. Okay. That's not really what -- we can work with that. Just on discounting intensity then, given that previous question around gross margin in the second half moderating, you obviously had still a mix shift towards MEB. You had Apple exit, which I assume contributed positively to gross margin as part of the rationale. Can you talk about how you're seeing the discounting environment? Whether that step back up again? I thought one of your strategies was to reduce your reliance on discounting, anything on how that's going?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [27]

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Yes. We still -- directionally, we still are reducing. And when the rest of the High Street was discounting beauty, pre-Christmas and also pre-Valentine's Day this year, we didn't price match. So we definitely did less than last year. So obviously, in tougher headwinds, we've got to be mindful. So what we're probably doing is the level of discounting is less. So we did maybe a bit more of 20 and 30 rather than 40 and 50. But the direction of travel is still the same, that we want to reduce discounting -- the level of discounting and the amount of discounting that we do over time.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [28]

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But excluding the Apple exit, would your second half gross margins, ex-concessions, actually fall?

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Nigel Chadwick, Myer Holdings Limited - CFO [29]

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No. OGP would have benefited from Apple.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [30]

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Yes. Yes, that's I'm saying. So if you exclude that out of second half, the underlying gross margin ex-Apple, ex-concessions. Yes, I can only say that going backwards. But maybe take it apart. Yes. Final one from me then, just on labor cost. So that obviously you've got some efficiencies there. Just interested in overall store hours and how that's trended? And how that compares to wage growth underpinning that number?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [31]

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Look, we -- the workforce management system we implemented is to make sure that we -- it's automated it and it really does hone down the hours that you need to your peak trading. What we've done is we looked at the back of house. So as Nigel alluded to, we're looking at getting more [stuff] flow ready. So the guys in the back of house don't have to spend as much time on it. So we've been able to make some efficiencies there. And we feel there's a lot more to go in terms of mitigating wage growth with efficiencies.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [32]

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Right. And just following on the in-store wages. The ABI -- your ABI [flawed] many years ago. It's been a big topic across the retail sector in reestablishing their ABIs. Is that something you guys have looked to revisit at this point? Do you think that's worthwhile? Or are you happy with your current situation?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [33]

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We're happy with the current situation.

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Operator [34]

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Our next telephone question is from Mark Wade from CLSA.

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

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My question is on the Customer First Plan, John. And you are just trying to take apart and to the extent that customers are noticing. Although, the press release referenced an improvement in customer service metrics for the year, which is terrific. And besides that service element, I mean how are you tracking on some of the other aspects of customer satisfaction? (inaudible) value and merchandise appeal?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [36]

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Yes. Well, I think the -- we're (inaudible) short program, which will hopefully help us in terms of understanding what customers are saying. We've certainly seen the standards have improved in terms of store layout. The uptick of those new brands, customers are certainly telling us that they like those and sort of feedback points that we get are in-store and online surveys from consumers saying that they're liking the new brand. So it's qualitative rather than quantitative, but we believe the proof of the pudding will be as we launch these new brands and we see good returns on them. So we're in a period of change. And there's hell of a lot to do. If you just take the space piece, you've got nearly 100,000 square meters of space that we're going to reshape. But in terms of what we're doing for our customer, they're hungry for new brands. They want a better online experience. They want simplicity and they want convenience. And a lot of it -- the majority of it is mobile driven. So we certainly got some work to do on Myer One, and at the half year, we'll be able to announce what we've done. We've got a lot of trials going on during this peak trading period as we go into Christmas. And we believe we'll be able to update you a bit more on that as we go forward in the other half.

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Mark Wade, CLSA Limited, Research Division - Research Analyst [37]

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Sure, sure. And maybe just elaborate, John, on the success or otherwise you are having in, let's say, customer visitation rates and I guess the ultimate upshot of the results is sales dollars, but just trying to step back from that and just think about visitation rates and how you're seeing that across your different age groups of your customers or demographics? I mean were you kind of having the most success there? And conversely, behind what areas of improvement do you think it will be need to done?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [38]

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Yes. I'll answer that in a couple of parts. So certainly stores that we've refurbished and relayed and where we brought in new brands, we're seeing them outperform their peers with positive sales uplift. So there's clearly something happening there that the customer likes. In terms of our customer, we're a broad church. I was having this conversation with Levi’s the other week. And they saw from 16 to 66, and so do we. So I think that's why our partnership with Levi’s is so strong. So for us, we're kind of a broad church. It's parents shopping for their kids, it's grandparents shopping for their grandkids, it's people shopping for themselves. So what we've got to do is make sure that we edit appropriately and give them a reason to come in.

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Mark Wade, CLSA Limited, Research Division - Research Analyst [39]

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Okay. So no real particular age group you'd call out where you're having more success at, at the moment?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [40]

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No, I think we've got to go. I mean we kind of abandoned our -- yes, I think we kind of abandoned our core customer. The sort of Gen X lady. So we are doing a lot more with that. And you'll see that in all of the sort of quite diverse advertising campaigns, and you'll see more of that as we go forward.

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Mark Wade, CLSA Limited, Research Division - Research Analyst [41]

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And that's good. I mean that's also your concern. The customer is kind of like aging a bit, and now you're kind of recruiting the next generation. So that's good to hear.

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Operator [42]

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Our first question is from Phil Kimber from Evans & Partners.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [43]

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Just a couple for me. One, you mentioned there Country Road growth brand is exiting from first quarter of this financial year. Do you got any sense of how big they are? I know you got -- your plan is to replace them, but just to understand the sort of hole that needs to be replaced?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [44]

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It's probably early days yet. We filled the hole with a mixture of expanding existing brands to bring in new. So really, Phil, it's probably too early to tell. So I think we will get more sensibility of it probably by the half.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [45]

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Okay. But it is -- I mean with Country Road growth, $50 million to $100 million of sales on an annualized basis, somewhere in that range?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [46]

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Somewhere in the middle, yes. But as I said, we -- I mean we didn't see the impact on their business because we were a significant player, for certainly Mimco and Politix. So for us -- the brand is diminishing anyway over time. So for us it was about replacing it with more profitable products. So that's what we've done.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [47]

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Yes. And then just a clarification. I don't know if you can provide some details, but you do mention in your outlook, depreciation, amortization and interest will both increase again in FY '20. I mean would I be -- should we expect material increases there? And what sort of dollar increases are you expecting?

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Nigel Chadwick, Myer Holdings Limited - CFO [48]

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So I don't think we said that in the context of sort of the old accounting standard, but those lines will be impacted in the context of the new accounting standard. And we did put those impacts on the slide in the pack.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [49]

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Okay. But that's the AASB impact. But on the FY '20 side, you are saying that there is continued higher interest.

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Nigel Chadwick, Myer Holdings Limited - CFO [50]

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Yes, but at a similar levels to where they are at the moment is what we're trying to say. Sorry...

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [51]

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Okay. So there's no step change. Because I was just buying for that.

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Nigel Chadwick, Myer Holdings Limited - CFO [52]

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No. There is no further step from where we are.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [53]

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Yes, yes. Because I mean you've done a great job on the debt. I was just surprised that you had interest costs go up again next year given that your debt levels are coming down.

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Nigel Chadwick, Myer Holdings Limited - CFO [54]

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Yes. You're right.

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [55]

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Fair point.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [56]

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Yes, excellent. I just wanted to clarify. That's great.

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Operator [57]

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Our next question in the queue is from Morana from Macquarie.

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Morana McGarrigle, Macquarie Research - Analyst [58]

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Just a quick question. You've called out increased supplier contribution on one of your slides. Could you just please provide some commentary on the changes that you've seen in the last 12 months? And just maybe the nature of the -- or the form of these contributions. So are they in the form of pricing? Is there more marketing support? Just the changes that you've seen.

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Nigel Chadwick, Myer Holdings Limited - CFO [59]

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They're actually more in the form of marketing support. And actually -- it was actually -- the delta year-on-year was actually quite minimal. So -- but it was slightly higher this year.

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Operator [60]

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And the final question from today is from Aryan Norozi from UBS.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [61]

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Sorry, thanks for the follow up. Just around the impact on currency in the second half on the private-label business. Can you just sort of quantify that or just let us know how we should think about it, please?

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Nigel Chadwick, Myer Holdings Limited - CFO [62]

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I actually don't have that to hand just at the moment. I'll need to come back to you on that.

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Operator [63]

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There's no more further questions at this time. I'd like to hand the call back to the speakers for closing remarks. Please go ahead.

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [64]

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Thanks, everybody, for joining us this morning. I look forward to catching up with you soon. Have a great day. Thank you. Bye-bye now.

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Operator [65]

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Ladies and gentlemen, that does conclude the call for today. Thank you for participating. You may all disconnect. Goodbye.