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Edited Transcript of SUL.AX earnings conference call or presentation 13-Feb-19 11:30pm GMT

Half Year 2019 Super Retail Group Ltd Earnings Presentation

LAWNTON , QUEENSLAND Sep 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Super Retail Group Ltd earnings conference call or presentation Wednesday, February 13, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Michael Heraghty

Super Retail Group Limited - Group MD, CEO & Director

* David J. Burns

Super Retail Group Limited - CFO

* Peter Birtles;Group MD, CEO & Executive Director

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Conference Call Participants

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* Ben Gilbert

UBS Investment Bank, Research Division - Executive Director and Analyst

* Bryan Raymond

Citigroup Inc, Research Division - VP & Analyst

* Grant Saligari

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

* Josephine Little

Morgans Financial Limited, Research Division - Senior Analyst

* Shaun Robert Cousins

JP Morgan Chase & Co, Research Division - Senior Analyst

* Shaun Weick

Macquarie Research - Analyst

* Thomas Kierath

Morgan Stanley, Research Division - Executive Director

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Super Retail Group Teleconference. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Peter Birtles, Group Managing Director and Chief Executive Officer. Thank you, sir. Please go ahead.

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Peter Birtles;Group MD, CEO & Executive Director, [2]

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Yes, thank you, and morning, everyone. Thank you for rearranging things to join us on this call this morning. We appreciate you doing that, given that we had scheduled for Thursday morning. I'm joined by David Burns.

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David J. Burns, Super Retail Group Limited - CFO [3]

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Good morning, everyone.

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Peter Birtles;Group MD, CEO & Executive Director, [4]

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So this morning, we will be covering on the 2 announcements that we posted on the ASX this morning, the first of those in relation to the additional underpayment issue that we've identified and then we will talk through the trading updates for the first 26 weeks of the year.

So turning to the underpayment issue. You'll recall on the call 6 months ago I mentioned that we would be conducting a full and comprehensive review of all payroll arrangements, all employment arrangements in the organization following the discovery of the issue in relation to store setup. That review has been ongoing. And during the course of that review, we identified a related issue in respect of our retail store managers. So with our retail store managers, we've identified that we have a salary arrangement that is in excess of the award arrangements. But as the store managers start to work additional amounts of overtime, they become eligible for additional payments for overtime and also for allowances under the auspices of the general industry award. And what we have identified through this review is that the salary payments that we have made to our managers have not fully compensated them for their full entitlements. We have engaged Deloitte to work with us to do an assessment of that issue, and we have an obligation as an organization to remediate that issue going back over a 6-year period. We have identified through analysis that the level of underpayment amounts to a total quantum of around $32 million over that 6-year period. That $5 million to $6 million a year is equivalent over that time period to around 8% of the salaries paid to store managers over that time and is equivalent to about just under 1% of the overall payroll costs of the organization.

This is clearly a very significant issue, and it's very disappointing that we have to report this issue. We take our team as our highest priority in the organization, and we've let them down. And so as a reflection of that, I think it's appropriate that in terms of ultimate accountability for this issue, that rests with me in the organization and so I've discussed with the board this morning, I offered to bring forward my retirement from the company and the board have accepted that. So we will be moving forward with our transition plan to Anthony taking over as CEO. I will be attending the investor meetings over the next few days, and then Anthony will formally take over as CEO as of next Wednesday.

I think from a financial standpoint, it's important to highlight that under our arrangements, we have had a system whereby managers determine their own rosters. And as we've identified through this process, we have seen that some of those rosters being worked have attracted significant amounts of overtime. And so we have put in place new controls in the organization in relation to rosters being worked by our managers, and we have in place quarterly audit and compliance checks to ensure that we are fully compliant. What that means is that the go-forward impact of this issue is not as significant as the historical issue because we will be managing the quantum of overtime that our managers are working. And new processes were put in place in the company in this financial year, and so that cost has already been reflected in the results that we are reporting for the first half of the year.

So with that, I will turn to the trading results, and we felt -- given that we were going to provide this update on the underpayments issue, we felt it was appropriate also to update the market with our provisional trading results. These are subject to final board and audit review, and we have reported down to a segment EBIT level, so that's before taking into account the impact of the underpayment issue. That will all be worked through and all fully disclosed and recognized in the financial statements that we will post to market on Thursday, as per our original timetable.

So turning to the slide pack that we have posted on the market this morning and just some headline numbers. I think pretty good momentum across the business, with sales up by 6% and our EBITDA at the segment level up by 11%, constrained a little at the EBIT level up by 9.6% and I think that's a recognition of the investment that the company has been making over the last few years in terms of its omni-retail capability. So we are seeing that flowing through into higher depreciation and amortization, but importantly, the cash generation of the business very strong, strong EBITDA growth, and then again, being able to convert that EBITDA into strong operating cash flow. Last year, we had a very, very strong focus on our trade partner funding, and we've been able to sustain that going forward. So we're very pleased with that, and as I'll talk later, investment in inventory as well, which has put us in a good position for continued sales momentum.

So if we look at that -- the business is performing solidly at the top line. The Macpac contribution has been really pleasing, and I recall back 12 months ago when we had the pleasure of announcing that, there was a degree of skepticism about that, but I think we have bought a really good business, and I look forward to Anthony and the team really capitalizing on that going forward. I think Macpac could be a really great contributor to the organization.

I think we continue to see the benefits of the investments that we've been making as an organization in building all the foundations for omni, and you're seeing that sort of coming through in strong online growth, but importantly, customer perceptions of the business in that area significantly improving. And obviously, very disappointing to announce this underpayment issue, but our team member metrics continue to be very strong, and I think, importantly, for the organization, one of the reasons why I'm so pleased that Anthony is taking over as CEO is that he's got a really strong understanding and commitment to our team. And also, our customer metrics across the organization continue to be moving upwards, which is really pleasing.

So turning to Page 4 of the pack. Each segment has delivered growth and, clearly, the Outdoor segment has benefited from the contribution of Macpac, which we'll go into. So in terms of Auto and you can see all the sort of background information on Page 5, but I'll turn to Page 6. So the Auto business, again, good solid result. We took a decision as we looked at the way in which the market was operating, that -- and looking at our activity in the prior year, we rebalanced our promotional activity in the second half with a view to ensuring we delivered the best bottom line result for the business. So strong gross margin improvements coming through and good EBITDA growth in the business. Solid like-for-like sales growth at 1.8%. Given the business is reflecting the investment in omni, so EBITDA margin is up by 0.3%, but EBIT margin's flat on the prior year. Good growth in Queensland, so Queensland really starting to revert back. Victoria, very good as well. New Zealand continues to be strong. New South Wales was more challenging for the Supercheap Auto business.

Turning to the Outdoor segments and Outdoor consisting of BCF, Rays and Macpac. As you know, Rays is in the process of being converted to Macpac, and so going forward, we will start to see BCF and Macpac being reported as separate segments. But in line with that, we've tried to provide a good breakdown of both BCF and Macpac's results for you. Rays, the conversion is underway, and the first of the 9 Rays stores, at Preston, has now converted to Macpac, and we will see all 9 being converted by April. So that's all on track, and yes, so I think we're certainly pleased and, obviously, Macpac being a big part of the Outdoor results.

So then turning to BCF. Again, Page 8 has the statistics. You can continue to see the online traffic growth for BCF and leading the markets there. And a decision that we made with BCF is that we have seen some very active price competition in this market, particularly in the fishing and camping segments, and we have taken the decision as a business that we will protect our position as the market leader and have managed our pricing accordingly. That has resulted in a significant investment in gross margin to achieve that outcome. And we, though, feel and we've started to see as we move through the half and -- as we move, certainly into the second half, the signs are very positive that the business is positioning itself to gain market share and particularly volume growth. And clearly, Anthony will be driving that forward as he transitions into the CEO role.

Moving on to Macpac and Rays. So first full half of Macpac, we don't have a comparative performance in Super Retail for Macpac, but Macpac contributing very strongly with $8.7 million worth of EBIT on $51 million worth of sales and, importantly, over that first half of the year, 10.8% like-for-like sales growth, which, as you know, is strongly ahead of our expectations. And so that was a key driver of that very good EBIT result and, I think, the business in particular benefiting from its increasing maturity in Australia with really good growth there. Again, good online growth, 24% online growth in the business and sales -- online sales now representing 10% of overall sales. So on top of the online -- on top of the like-for-like growth, new store growth as well, 9 new stores coming in, and we'll continue to be investing in store opportunities for Macpac as well, of course, as converting those 9 Rays in the second half.

Rays. We continued to promote business in the first few months, but as we started to prepare for the transition, we turned off the tap in terms of support for Rays over that Christmas period, which meant that we did see a slowing of like-for-like growth. But the underlying trend with what we're seeing in Rays is very promising, with particularly strong growth in the cash squeeze that will continue as key parts of the offer going forward and the stores are going to be rebranded as Macpac Adventure Hub, which will have that full Macpac offer augmented by a much broader equipment and accessories offer with additional apparel brands as well. So it's great. So I think in the certainly albeit very, very early days, the Preston store off to a good start. So Rays' loss of $1.2 million bang in line with expectations there. So that's what we're tracking to plan.

Rebel. So turning to Sports, which now is clearly the Rebel brand. Again, you've got the trend information there, and I think really pleasing that having been through that period of transition with integrating the Amart brand into Rebel, we feel very positive about how that's all played out. We're starting to see from the end of October, we were fully comparative, and we're seeing really good strong growth coming through, sort of accelerating like-for-like sales growth, so ending up at 3% for the half. Good management of costs, in particular, with benefiting from the synergies from the Amart integration, and so that led to a very pleasing increase in EBITDA margins, 50 basis point increase, so -- which led then to that EBITDA growth of 8.3%. So really, really good momentum with the Sports business.

So with that, I'll turn to David to talk through the next few slides.

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David J. Burns, Super Retail Group Limited - CFO [5]

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Yes, thanks, Peter. So our group in (inaudible), obviously, includes our corporate costs and investments in our omni-retail redevelopment and our annualized distributions and the costs. Overall, just a slight increase in distribution and the costs as a consequence of rate increases. No real change to space and nothing expected for the rest of this financial year. The digital area we've gone and no longer included Auto Guru in the segment result. Last year, if you remember, we took a gain on Auto Guru below the line, and we will no longer be investing -- our expectation is to no longer invest any cash into that business going forward and that it will be reflected below our segment results. And overall, the investment in omni-retail slightly lower than last year.

On group cash flow, pleasingly, our strong operating cash flow has continued in this period and represents a good growth above -- a good collection above segment EBITDA. As always, our seasonal cash flows are much stronger in the first half as a consequence of the key Christmas trading period, the benefit of cash collections occurring in December, particularly in the Sports and BCF businesses. We've been able to fund the investment in inventory that you'll see in -- on the next page through strong working capital management. Our capital expenditure has reduced as a consequence of more of it being directed towards some investment in omni-retailing capabilities and less investment in stores, recognizing that in the store figures in the prior year, we were going through the rebranding of the Amart stores to Rebel. But there is an overall reduction in store activity that's expected in the second half as well.

The other capital expenditures are outlined there in terms of the types of expenditure we've been successful in this period in replatforming all of our core website onto Salesforce, with both the Rebel and Supercheap Auto brand going live in this half, which -- and Macpac going live in this half, so that all core brands are now on the Salesforce commerce side.

Also, we've had continued investment in our product information systems, our software infrastructure, networking and core information systems.

If we turn to the balance sheet, we'll see in the balance sheet inventory position are higher -- overall inventory position. Auto just slightly ahead, recognizing that we have increased the impact of private brand in Australian dollar, depreciation flying through. In Outdoor, there is the inclusion of Macpac in the Outdoor figure, and it is slightly seasonally higher in this period and also an increase -- a decision to increase investment in Sports. That has, overall, been funded, though, by a -- while our net inventory position compared to December '17 has gone up by $17 million when you adjust for Macpac, we've been able to fund that increased investment in inventory through trade partner funding, so pleasingly, overall, a net inventory investment in -- on a like-for-like basis lower than the prior year. Net debt, obviously, is improved, as it does at this time of the year, due to cash flows.

I hand it back to Peter for trading update, second half.

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Peter Birtles;Group MD, CEO & Executive Director, [6]

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Yes. Thank you, David. So just an update on second half trading and, I mean, always a word of caution with short periods and -- because we are a week ahead of our normal timetable. This is a 6-week period, so we have to be cautious. But, yes, good start across the board with the exception of Macpac, which I'll talk about. So Auto 4% like-for-like sales growth in that 6-week period, and we'll continue to build our store portfolio as we go forward. As we look at Outdoor Retailing, BCF benefiting from the inventory investment that David's referred to. And also, we see that competitive positioning of the business, we think really starting to play out well. So 8% like-for-like growth through this period.

Macpac has slipped into negative growth over the 6 weeks, but I think we need to recognize and, certainly, one of the areas that we looked at in our due diligence as we looked at the business was just some additional clearance activity that the business was running in this time period last year ahead of the ownership transition. So when we look at the underlying volumes in dollars, we're still pretty comfortable with how that's trading, so I don't think we should be concerned about that.

And then Rebel, also, really good start with 8% like-for-like growth over that time period. And again, I think inventory investment helping the business fare stronger in stock positions. And I think that's something as a management team we've been wrestling with and part of our plan, which we talked about previously, is to invest in inventory. As we need to compete online, having better and better stock availability is important, so making sure then we fund that inventory and working with our trade partners. So you'll continue to see that going forward.

So okay, I think a good solid trading update. And whilst I'm very disappointed to be stepping down ahead of schedule as a consequence of the underpayment issue, I'm very pleased that I'm able to hand the business over in, I think, pretty good condition to Anthony. I think we've done a lot of really good work over the last couple of years in terms of restructuring the business. I think we've got 4 great brands, and I think we've got some really good platforms in place for the future growth. And I'll just say just as a point to consider is that retail is an industry that needs to continue to invest, and it's an industry that needs to continue to develop. And we see strongly that it's a benefit in doing that together. There's benefits of shared investment, shared learnings and, actually, benefits of skill. We've been able to attract a high-quality team to Super Retail, some real high-quality experts on the back of working for a $2.6 billion organization. So there's some really strong important aspects there, and Anthony will work through that, and he will make his own calls on that in due course. But I feel that Super Retail Group is very well set for the future.

So thank you all for your interest and your support. And I'll open for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Bryan Raymond from Citi.

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

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I'm just really trying to understand the trajectory of like-for-likes through the back end of the first half and then into the trading update and just understand how your promotional program worked over that entire period. I understand in Auto, you've been pulling back on promotions and -- but then you'd have to do a kind of up-lift there in like-for-likes. And so perhaps you could step through the divisions, starting with Auto. Have you seen any re-acceleration in promotions? Or is it simply just a timing of promotions this year that may have driven that uplift in like-for-like? Or in fact, it has nothing to do with promotions and it's actually just underlying business [incurs] in terms of sales trajectory?

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Peter Birtles;Group MD, CEO & Executive Director, [3]

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Yes. So I think, inevitably in that business and in promotions, which clearly a percent of sales always play a role, and we've been looking at our activity. Another general point I'll make, so just, Bryan, apologies for sort of taking a bit of a right step, but I think it's important that -- which is coming on this, which is that what we saw through the first half was that the November period was a pretty strong period, and the online promotional events, Click Frenzy, Black Friday, et cetera, they are becoming retail events and not just online events, and they're driving store traffic. We chart that in our business but more broadly as well. And although store traffic has generally been declining, during that November period we actually saw increases and, I think the industry saw increases. So November is a period that, I think, all retailers will need to look at. And I feel Super Retail Group has an opportunity to capitalize on that even further and, potentially, that means bringing forward inventory in the business and just looking at our promotional activities. So what we found was that our promotional activities at the start of December were not as successful as they've been in the past. So whilst we overtraded in November, beginning of December was a bit behind. As we moved into pre-Christmas week, good trading across the business and, I think, capitalizing on last-minute shoppers, no need to invest as heavily in promotions there. I think we managed that very well. I think we got that right. And then the post-Christmas clearance was pretty successful across the board. All of our businesses traded very well in that post-Christmas period and, pleasingly, have maintained momentum as we've gone through January and into February. I think the weather has been good as well. We've had that benefit for our Sports and Outdoor businesses. Auto has promoted a bit harder relatively in this period than they were doing at the end of the quarter and, I think, there has been a bit more margin investment there. So we -- as with that business over time, we treat the levers, we sometimes go a little bit harder on top line. We're willing to invest a bit in margin, and we're looking at our competition, and they -- we are -- we've just been updating the sources of our market share. We're moving to build a broader set of market share information working with Mastercard. And that's in its early stages. We're not comfortable presenting at this time, but David will have that ready for later in the year, and that will be a key metric. And what we're seeing from the early signs of that is Auto has actually played that market share pretty well through this period and has actually got some pretty good market share growth.

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

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Okay. And just a follow-up then on BCF. I think you've called out the price investment you've made in some of those categories, but just a bit surprised at the ramping. The 6-week trading period, given particularly the weather in Queensland, I'd imagine has been a bit unfavorable for you. Could you maybe comment on how much sort of incremental price investment you've made over the first half month and then into the start of the second half? What's the trajectory for margins for that business over the full year, please?

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Peter Birtles;Group MD, CEO & Executive Director, [5]

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Yes. So I mean, the weather in Queensland, certainly -- I mean, our big traders out there and [in net terms] we'll -- for across the group, we've had to close stores for periods of time. But now the business -- the BCF business is a much bigger business, and we've seen really great growth in BCF Victoria, Tasmania and New South Wales coming through. So South to Queensland, they're all going pretty well. So we see that. And the margin investment is going to continue through the year. We're seeing almost a bit of shakeout time for the Outdoor segment, and we're very, I suppose, committed to sustaining our position as a market leader. Interestingly, we are starting to see some of the competition starting to take a little bit of a less aggressive position as we've been aggressive. So we'll see how that plays out. But in terms of our planning, we're certainly assuming continued margin investment in that business for the second half.

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

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Right. And then just final for me just on Rebel. That one did see a massive spike in the first 6 weeks in terms of getting up to 8% like-for-like. I'd just like to understand the drivers of that. Is that a promotional timing? Or have you seen anything else happening in that business to really accelerate it? Obviously, [won't depend on our] numbers for the full half, but I'm just trying to understand how sustainable an uptick in that business is from the run rate you were achieving in the first half.

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Peter Birtles;Group MD, CEO & Executive Director, [7]

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So as I mentioned, we were going through the transition last year. Post transition, we mentioned last year that the Amart stores slowed down a little, particularly in Queensland. And customers are becoming familiar now with the Rebel offer, and we're starting to see that cycle on a comparative basis. So I think we are expecting a good strong second half, probably not at the 8% level, I think that would be quite remarkable to sustain that level of growth. But, no, I think good, solid like-for-like growth in Rebel through the second half.

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

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Okay. And any new [invaders] in the Sports business? Is that -- are you guys still searching? Or is there any [sort of] appointments after...

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Peter Birtles;Group MD, CEO & Executive Director, [9]

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So I mean, really, pleasingly, we had within our internal bench, Wayne Tozer, who, as we can see, is doing a fantastic job in terms of running that business. And so certainly, we've not missed a beat there, which is great to see. So credit to Wayne for the work he's been doing and the team for backing him. As we've been managing our transition, I had kicked off a recruitment process looking at both internal and external candidates. Anthony has picked that up, given his transition, and I think we're close to getting to an appointment, but it will be another couple of weeks before we get there [re seen]. But as I said, importantly, the business is going well, and we'll see how that plays out. Wayne's doing a great job.

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Operator [10]

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Your next question comes from the line of Tom Kierath from Morgan Stanley.

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Thomas Kierath, Morgan Stanley, Research Division - Executive Director [11]

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Just a question on BCF. Can you just elaborate on when the price investment started there and then how we should think about that price investment flowing through into the second half?

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Peter Birtles;Group MD, CEO & Executive Director, [12]

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Sure. So I mean, the business has been continuing to pull its levers and play with pricing and so on over a period of time. And Anthony, when he joined us, in terms of the full year results, talked about what he was doing there with the pricing of [foreground] prices, KVIs and so on. I think we have continued with that through the half. There's a little bit of a ramping up in October. As we looked for the Christmas lines in particular, there's 118 lines, I think, there or thereabouts, which we identified KVIs, and there's been a particularly significant investment in those 118 lines to ensure that they were really on -- really sharp during that Christmas period. But in terms of are we going to see a -- on a run-rate basis, does that mean that we'll see a more significant margin in -- perhaps in the second half? No, we wouldn't see that. I think the investment's already been fully there. And recognizing that Christmas is such a key time that you've got that weighting of sales that's already in there with those margin impacts.

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Thomas Kierath, Morgan Stanley, Research Division - Executive Director [13]

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Okay. And just my second one. On the wage underpayment, in the first half '19 numbers, is the headwind in the second half in roundabout $3 million or so, like, half what the annual amount is? Is that how we should think about that when we compare to the second half '18 earnings space?

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Peter Birtles;Group MD, CEO & Executive Director, [14]

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Yes. So I think important point to recognize here is that we've had a situation where our managers have set their own rosters, and they've done that appropriately with all the information that they had. What we didn't have in place was a recognition that some of those rosters attracted high levels of overtime or eligibility for high levels of overtime. And so with the change in process, we have put those controls in place so that you will not see that same quantum of impact going forward as what we've seen historically. And those controls are in place. So that cost impact has been reflected in the first half. So we shouldn't see a step-up in costs in the second half.

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Thomas Kierath, Morgan Stanley, Research Division - Executive Director [15]

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Right. So less than the annual amounts, so like maybe $1 million or $2 million versus the second half '18?

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Peter Birtles;Group MD, CEO & Executive Director, [16]

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Yes. But -- yes, I mean, that's probably right. It's around that sort of number, yes, yes, yes.

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Operator [17]

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Your next question comes from the line of Grant Saligari of Crédit Suisse.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [18]

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Just continuing on just the wage underpayment just to clarify that. Have you been able to do -- or the company been able to do enough audit work to confirm that there's not anything more systemic further here than -- because we've had 2 issues now. We wouldn't want a third, obviously. So is there enough audit work being done that you can be quite confident that there's not further issues here?

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Peter Birtles;Group MD, CEO & Executive Director, [19]

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Yes. So when we talked about the first issue in August, we said we would do a full review of all employment arrangements across the organization, and that review has been undertaken over the last few months. And that review has identified that there is this issue, but we're confident that we will not see any material impact from any other issues from an overtime perspective in terms of this overtime and allowances issue.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [20]

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And your comments earlier around the impact for the remainder of 2019 not being as significant basically reflects having pulled back on the overtime that store managers previously worked. Is that sort of the correct interpretation?

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Peter Birtles;Group MD, CEO & Executive Director, [21]

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Yes. So I mean, what we've identified, for example, a significant component -- kind of getting into the detail, is if a manager returns to work within 12 hours, so if they do a late night shift and then come back within 12 hours the next day, then that whole next day is at an overtime rate. And that would be something that, going forward, we wouldn't have in place. We would manage that situation. So that, as we've gone back over 6 years, is a very significant amount of money. And so addressing that going forward.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [22]

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Sure. That makes sense. And just wondering if you could clarify the inventory position. I think, David, you said that underlying inventory up $7 million, $8 million compared with the PCP, which suggests sort of Macpac at about $50-ish million. That seems very high for a business turning over $100-odd million, cost of goods obviously quite a lot less than that. Can you just -- maybe just explain that a little further?

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David J. Burns, Super Retail Group Limited - CFO [23]

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Yes. So what I said was that adjusting for the net inventory position with Macpac, it's about $30 million of net inventory investment with Macpac. So not $50 million.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [24]

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Net compared with the -- so net in terms of additional inventory for Macpac in total. Is that what you're saying?

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David J. Burns, Super Retail Group Limited - CFO [25]

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No, no. What I'm saying is that the net inventory position for Macpac in December was $30 million. And the balance is $30 million net [investment]...

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [26]

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Compared to June?

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David J. Burns, Super Retail Group Limited - CFO [27]

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Compared to June, it is slightly higher because there was some seasonal difference. Obviously, June is benefiting from the clearance events -- significant clearance events that are in June. So there's a slightly higher weighting of inventory in the December period compared to the June period, percent of balance days in comparison to the June balance days.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [28]

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Okay. And just, finally, could you comment at all on the trading of the Amart stores you converted? How well they're trading?

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Peter Birtles;Group MD, CEO & Executive Director, [29]

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Well, I think, as I have sort of mentioned with Bryan's question, we're starting to see that those stores are now comparative. They were converted in October 2017. So as we started to move forward from November this year, it was cycling against like-for-like stores. And we're starting to see some momentum coming back, whereas previously through that transitional period, we'd seen the stores stall a bit. So customers are understanding the new offer, and that's been part of the improved like-for-like that we're seeing in Rebel as a whole.

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Operator [30]

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Your next question comes from the line of Ben Gilbert from UBS.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [31]

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Just the first one just around the cash flow, just following up on the last question just around inventory. If we look at sort of the 18-odd percent decline in your operating cash flow year-on-year, first, is it a solution that's all attributable to the inventory investment and then just the uplift from Macpac? Or is there anything else within that we need to be aware of?

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Peter Birtles;Group MD, CEO & Executive Director, [32]

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So I think -- I mean, just be careful with that sort of assessment. Remember that last year, we had a strong focus on trade credits to funding, which was a big benefit to the cash flow in terms of that year. So you don't get the same benefit each year coming through. And I think, importantly, we've maintained a good cash conversion in the business. So I think just -- that straight comparison of cash flow versus the prior year, we've got to recognize those -- that factor.

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David J. Burns, Super Retail Group Limited - CFO [33]

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There is also a timing benefit that was in the prior year related to -- and you'll see that in our prepayments related to rents and so there's about a $23 million impact in terms of the timing of the rent payment that the [quiet avenue] comparative had in it.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [34]

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Okay. So if we're looking on an underlying basis, we should be adding at least that to the $23 million item, and there's, obviously, some of the inventory investments you'd probably get [go back twice a door] -- a flattish-type outcome.

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David J. Burns, Super Retail Group Limited - CFO [35]

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Yes. Certainly there's that and there's just other smaller timing flows that are running through in the prior year as well.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [36]

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And just around Macpac. Just wanting to understand the seasonality in that business. Obviously, we didn't get a full period, we got at least through the (inaudible) period last year. How should we think about the seasonality? This business has been booked into second half. And particularly on the commentary on clearance in the PCP, but presumably the margin is probably looking a little bit better through Jan based on your comments, and if we reconcile several [commentaries] based on it as well.

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Peter Birtles;Group MD, CEO & Executive Director, [37]

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Yes. I mean, we've got in place, I suppose -- you had, let's say, a bit of cash maximization going on in the business ahead of sale. So I think we've got to recognize that, that inevitably was going to happen and, as I said, that was something we picked up in due diligence that we saw that. In terms of the pattern, we're still seeing -- actually, I mean, as we said, the first half, we expected potentially like-for-like growth of around 7%, and that was what we were assuming. So we did a lot better than we had anticipated. So the first half has been stronger than we expected. We'll see how it plays through in the second half, but one of the things that Anthony has been working with the team on is strengthening the year-round offer of Macpac and not just sort of the key promotional period. So that's going to continue, and we'll see how that plays out in terms of flow-through of profit. But I think a bit too early just to give you a definitive call on that.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [38]

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And just one follow-up just around maybe just broadly on the consumer. You've obviously got pretty diverse growth of businesses across the country. The cedar price is lagging into Christmas and price has been pretty negative around the consumer. But just interested in your sort of high-level view, are you seeing signs of sort of some of those housing [like they’re] providing. Or do you think it's been a little bit overplayed? Interested in just your high-level thoughts around that as well.

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Peter Birtles;Group MD, CEO & Executive Director, [39]

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So I think, I mean there's no question that if you look at the state pattern that New South Wales were, perhaps the housing issue has been more of a factor. I think that has played out a little in New South Wales performance across the group. We've seen New South Wales, which a couple of years ago was leading the pack, it's fallen back now, and it's behind in number of areas. So there has been some impact there. I mean, our customers as a whole are suburban, and we've seen fuel prices being a factor over time that always plays a role, and we've seen those go up and down a bit through the half, and we do see -- so that's having an impact. So I mean, what I'd say is our employment is still important. So how confident do I feel about my job particularly for our customers. Their employment is such a key factor in influencing their purchasing. And because that's pretty positive at the moment, there's not the same concerns about job losses. I think that's seeing our customer in a reasonable position. That being said, they still want a good offer. They're probably as value-aware as they've ever been. They certainly shop with their information, and I think it's really important that retailers are providing good value. They need to do that, and promotions need to be targeted. I think what we're trying to do is to probably be a little sharper with our promotions, reduce the volume, a bit more focused, and I think that seems to be working pretty well.

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Operator [40]

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Your next question comes from the line of Shaun Weick from Macquarie.

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Shaun Weick, Macquarie Research - Analyst [41]

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Couple of questions. First one, just in terms of Auto, you're obviously doing a good job there in terms of extracting gross margin benefits and facilitating that OpEx investment. Just wondering to what extent you think that can continue and then also how we should be thinking about EBIT margins going forward in the context of the incremental OpEx investment that you are making?

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Peter Birtles;Group MD, CEO & Executive Director, [42]

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Yes. So I mean, the depreciation across the group has definitely been a factor. As we see in terms of that, I think, really great growth of EBITDA, double-digit growth of EBITDA and then just coming back a little at EBIT. And we are going to see that playing out the next couple of years, as David mentioned, and I think we mentioned in August, we are pulling back up overall CapEx, and this year CapEx and depreciation will be pretty much equivalent. So that would suggest that, that depreciation is going to pretty much stay around that sort of level, maybe a little bit of growth next year. So that -- over the next couple of years, that impact that increasing depreciation has had, should start to dissipate. And as you've highlighted, the Auto business has continued to do a great job at managing its gross margins and is still confident that there's a bit more headroom there, all the things that we continue to do. Supply chain, we've got a new supply chain leader in the organization who is, I think, very excited about the opportunities that he can bring to us. And also, we'll be a big beneficiary of that and the continued private framework, purchasing deals and so on. So the 12% EBIT margin target for Auto is still something that the business aspires to.

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Shaun Weick, Macquarie Research - Analyst [43]

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Okay, great. And then maybe just more broadly on trends in [indiscernible]. If you can just talk about the environment there and you continuing to save rent reductions flow through it.

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Peter Birtles;Group MD, CEO & Executive Director, [44]

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I think it's -- again, it's a mixed answer to that one in that the Rebel business has actually had to manage some continued increases in its cost base from the A-grade shopping centers. We continue to see expectations of high rents there, not so much as we transition into more stand-alone locations. So for Rebel, rent is a challenge. And in terms of increasing costs for the other businesses, it's more in line with our sales growth that we're achieving.

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Operator [45]

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Your next question comes from the line of Jo Little from Morgans.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [46]

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Peter and David, just a couple more. So sorry, just really clarify. So that first half wage kind of cost impulse exactly what it was coming through EBITDA and EBIT? Is it 1 to 2 back for the full year? Or is it 1 for the half? Just trying to really pin that down.

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Peter Birtles;Group MD, CEO & Executive Director, [47]

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So across the full year, it would be double that amount.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [48]

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Sorry, it was 1 to 2 is what you were saying in the first half?

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Peter Birtles;Group MD, CEO & Executive Director, [49]

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Well, I think the question was what would the second half be and that's sort of about 1 to 2 and then you've seen that in the first half.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [50]

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Okay, perfect. And just what was Macpac's cycling exactly in those first 6 weeks of the PCP?

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Peter Birtles;Group MD, CEO & Executive Director, [51]

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I actually -- sorry, I don't have that to hand. Yes, I mean, [always] there was a big clearance program of footwear that was going on at the time and it really brought down the inventory levels, but I don't have the actual numbers that it generated in front of me. And David, I don't think you have them either. Yes. We'd have to come back to you on that one, Jo.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [52]

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Yes. That's okay. Because I was cycling, I think, when you bought (inaudible) and stuff like that. So it was obviously an exceptionally strong trading update that time if you're calling it out, I suppose, is what I'm pointing to?

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Peter Birtles;Group MD, CEO & Executive Director, [53]

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Yes.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [54]

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Okay. And Peter, just on the Rays' loss. So we can still see that's breakeven by year-end as per previous disclosure? Or am I...

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Peter Birtles;Group MD, CEO & Executive Director, [55]

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We said that it would see that 1 to 2 over the 12 months. So I think what we've got is that's exactly as we saw it going. In the second half, yes, I mean, it gets -- we've continued to run the business as a stand-alone business. The level of overheads is going to reduce as we transition into Macpac. So it will be a breakeven contribution to Macpac.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [56]

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Okay, great. And just lastly just last year, you provided both kind of 3-year revenue EBIT, CapEx kind of target for every division. Could you just give us a bit of a feel for level of engagement from the board and your divisional MDs on that strategy, and perhaps under Anthony's control, whether we should see any changes to those 3-year targets?

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Peter Birtles;Group MD, CEO & Executive Director, [57]

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Those come from the strategic plan that is signed off by the board, and that strategic plan is built from the divisions up. So it comes from the divisions, and it's signed off by the board. I mean, sorry, I was just -- I mean, second part of your question, I mean, Anthony, I think has been part of that, but inevitably, he will bring his own flavor and his own perspective to that going forward. But I mean, one of the things, I think, he's very supportive for the opportunity, so.

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Operator [58]

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Your next question comes from the line of Shaun Cousins from JPMorgan.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [59]

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Just a question on BCF. Just curious when do you think we'll see a stabilization of EBIT, just in that it seems to have fallen each year since 2013, and we've also seen each half -- I mean, I think all but 2 halves EBIT decline? Are you anticipating EBIT growth? Either, Peter, you can take this or if Anthony is there, are you anticipating EBIT growth in second half '19?

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Peter Birtles;Group MD, CEO & Executive Director, [60]

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Anthony has been a silent participant just in terms of the call, so just he's obviously transitioning. But -- so Anthony, did you want to comment on that?

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Anthony Michael Heraghty, Super Retail Group Limited - Group MD, CEO & Director [61]

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Yes, Shaun. Yes, I mean, there's a couple of things that are driving that dilution over time. One is your -- we talked about the competitive environment impacting gross margins. We're yet to see how that plays out in terms of whether that will ease as we work through the half and that's an unknown at this point in time. So if that was to continue, that's going to put pressure on the EBIT margins. The other significant headwind from a cost perspective is as we think about supply chain costs coming into the business, BCF hasn't been as significant a beneficiary of supply chain optimization as the other divisions, and we need to work very hard to find ways of reducing those costs. So I think between some continued sales momentum, unknown in terms of what we see with the competitive impact of pricing, which at the moment looks to be okay, but we'll watch it closely, and then with some supply chain efficiencies, there's every reason to expect BCF EBIT margins to improve.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [62]

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Great. And I guess, maybe thinking about the business more generally, I mean, do you think this can -- I think there was an aspiration at one time for this to be a double digit -- sorry, it might have even been 8% to 10% EBIT margin business. Is that the way you would think about the potential of this business into that high single-digit EBIT margin level?

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Anthony Michael Heraghty, Super Retail Group Limited - Group MD, CEO & Director [63]

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Yes. I think what I want to see to be confident around that kind of performance is that, that shakeout and consolidation of the market. I mean, what we're seeing in the Outdoor industry is that we're seeing good consumer tailwinds where the market is growing, consumer interest is strong and, as a result, we are observing a number of entrants sort of aggressively trying to stake out market share. And so I'd like to see that stabilize and consolidate before we sort of say that, that's in the near term from a goal. But putting that to the side, private brand now for BCF is into the 30's, almost to the mid-30s. We are seeing some strong top line performance. And I think there is significant opportunities in some of the supply chain costs and other costs associated with BCF that sort of mitigate some of that. So it's sort of a -- it really, really depends on how we sort of see the market structure evolve over the next coming halves.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [64]

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Great. And I guess, a question back to you, Peter, please. Can you just remind us when -- I think you went on -- sorry, signed up with Afterpay, it might have been late calendar '17, early calendar '18, and I think maybe zip money a little bit after that. Can you maybe just talk a little about, I guess, how you've seen the ramp-up as you've accessed those payment platforms? Maybe what proportion of sales did they comprise? And how do you think about sort of cycling, signing up to those payment platforms in terms of do they actually bring forward sales and hence might be difficult once they get momentum?

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Peter Birtles;Group MD, CEO & Executive Director, [65]

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Yes. So I mean, in terms of the detail there, I'll just let David take you through the detail of that.

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David J. Burns, Super Retail Group Limited - CFO [66]

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Yes. So we have, obviously, had -- we initially put Afterpay in back in November '17, and we then looked to bring live it in store in the Easter after. And...

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Peter Birtles;Group MD, CEO & Executive Director, [67]

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So online only first.

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David J. Burns, Super Retail Group Limited - CFO [68]

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Online only first, I should say, sorry. So there was a stronger bias towards online support as a consequence of Afterpay. It went into store in the April. zipPay went into store in the July and online, I think, in September of '18. So we've comped Afterpay online already, and we're seeing, obviously, strong attraction to customers on Afterpay, and we think it's related to particular demographic that was initially the case for Afterpay. Customers, as we were one of the earlier nonfashion entrants onto their platform, and strong appetite, but that has -- and it has presented itself more strongly online. As a proportion of overall sales, it's still very small because compared to other payment types, it's not a high percentage, but it is -- it probably has a higher concentration with online customers than it does for in-store customers.

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

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So when you say it's not a big number, would that be circa sub-5%?

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David J. Burns, Super Retail Group Limited - CFO [70]

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Yes, it's less than 5 -- 5% or less than 5%.

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Operator [71]

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There are no further questions. Please continue.

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Peter Birtles;Group MD, CEO & Executive Director, [72]

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Okay. Well, thank you, everyone. We will be continuing as planned, the meetings on Thursday, Friday, Monday and Tuesday. So Anthony will be joining us for those meetings. So on behalf of Anthony, David and myself, thank you for your time today and look forward to seeing a number of you over the next few days. Thank you.

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Operator [73]

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Thank you, sir. Ladies and gentlemen, that does conclude our teleconference for today. Thank you for participating. You may all disconnect. Thank you.