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Edited Transcript of WES.AX earnings conference call or presentation 27-Aug-19 2:00am GMT

Full Year 2019 Wesfarmers Ltd Earnings Call

Western Australia Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Wesfarmers Ltd earnings conference call or presentation Tuesday, August 27, 2019 at 2:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Natale Gianotti

Wesfarmers Limited - CFO

* David Baxby

Wesfarmers Limited - MD of Industrials Division

* Ian Bailey

Wesfarmers Limited - Head of the Australian Conglomerate's Department Stores Division & MD of Kmart

* Michael Schneider

Wesfarmers Limited - MD of Bunnings Group and MD of Bunnings Australia & New Zealand

* Robert G. Scott

Wesfarmers Limited - MD & Director

* Sarah Hunter

Wesfarmers Limited - MD of Officeworks

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Conference Call Participants

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* Andrew J. McLennan

Goldman Sachs Group Inc., Research Division - Consumer and Retail Analyst

* Ben Gilbert

UBS Investment Bank, Research Division - Executive Director and Analyst

* Bryan Raymond

Citigroup Inc, Research Division - VP & Analyst

* David Errington

BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia

* Grant Saligari

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

* Johannes Faul

Morningstar Inc., Research Division - Equity Analyst

* Morana McGarrigle

Macquarie Research - Analyst

* Phillip Kimber

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

* Richard Barwick

CLSA Limited, Research Division - Research Analyst

* Scott Ryall

Rimor Equity Research Pty Ltd - Principal

* 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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Ladies and gentlemen, thank you for standing by, and welcome to the Wesfarmers 2019 Full Year Results Briefing. (Operator Instructions) The call is also being webcast live on Wesfarmers website and can be accessed from the homepage of wesfarmers.com.au.

I now like to hand the call over to Managing Director in Wesfarmers Limited to Mr. Rob Scott. Please go ahead.

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Robert G. Scott, Wesfarmers Limited - MD & Director [2]

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Thanks very much, and welcome, everyone, to the Wesfarmers 2019 Full Year Results Briefing. I'm joined today by each of our divisional managing directors and our CFO, Anthony Gianotti.

To begin, I'll provide an overview of the group's performance over the last year, following which Anthony will provide some commentary on the group's other businesses, balance sheet and cash flows. The divisional managing directors will then provide an overview of the performance and outlook of their respective businesses. I'll then conclude with the outlook for the group and there'll be an opportunity to ask questions at the end of the briefing.

So starting off with Slide 4. Our results released today reflect a number of actions that we've taken over the last year to reposition the Wesfarmers portfolio for long-term sustainable growth. A highlight this year was a successful demerger of Coles as a standalone listed company as well as the disposals of Bengalla, KTAS and our interest in Quadrant Energy. The Coles demerge delivered a good outcome for shareholders and in a year of change, both companies made significant progress with their strategic agenda. These actions also had the benefit of further strengthening the group's balance sheet. Importantly, we were able to share the profits realized on completion of these transactions with our shareholders in the form of a fully franked special dividend in April 2019.

In addition to our portfolio management activity, we've made good progress in establishing the foundations for future growth of the group. We have transitioned a number of leadership roles and I'm pleased that the majority of these appointments has been filled internally. From my perspective, one of the most material changes in Wesfarmers in the past year has been the step change in data and digital capabilities and integration of these capabilities into our businesses. Supported by the Advanced Analytics Centre, we have teams across our divisions working on numerous use cases, supported by advanced analytics to better serve our customers and improve business productivity.

This month, we completed the acquisition of Catch Group. We are excited about the new capability this brings into our group and look forward to accelerating the growth of Catch Group's platform. In May, we entered into a scheme of -- a Scheme Implementation Deed with Kidman, which is subject to a shareholder vote scheduled on the 5th of September and final court approval. Catch Group and Kidman are both relatively small investments of the -- in the context of broader Wesfarmers group. However, they are good examples of our disciplined approach to capital allocation and are consistent with our objective of deploying capital in areas where we can leverage existing capabilities and where we expect to generate attractive returns over time.

Now moving to Slide 5. While each of our businesses have their own unique strategies, all remain focused on managing their business for long-term success. There are 3 themes that resonate across all our divisions and you'll hear this from our divisional managing directors. Firstly, a relentless focus on customers means maintaining price leadership and investing in better quality, service and convenience. Providing better value to customers requires investment, both in our products and in our business processes. All our businesses are continuing to invest in the data, digital and e-commerce capabilities. This will be important. It helps improve our decision-making. And in the last year, our retail businesses grew online sales by 33%. We are fortunate to have strong and resilient businesses in our portfolio. But we're always focused on building on our unique capabilities and platforms to deliver even better value for customers and to provide new growth opportunities.

With this, our addressable markets are expanding each year. By way of example, Bunnings increased penetration in the commercial market, Officeworks offer of IT services through Geeks2U and the acquisition of Catch are just a few examples of ways in which our businesses are expanding their markets.

Now turning to Slide 6, the financial overview. In a year of portfolio renewal, the group has continued to record strong results and delivered improved shareholder returns. The reported net profit after tax was $5.5 billion, which included $3.2 billion related to discontinued operations and the gain on the Coles demerger and other divestments. The group generated net profit after tax from continuing operations of $1.9 billion, an increase of 13.5%. After adjusting for the contribution from the group's 15% stake in Coles, the increase in NPAT was 8.3%.

Our directors have declared a fully franked final dividend of $0.78 per share, which we'll distribute around $900 million to shareholders. Including the special dividend and early interim dividend, we have paid approximately $3.6 billion to our shareholders in fully franked dividends over the last 12 months.

Turning to Slide 7. Each of our divisional managing directors will cover their businesses in more detail but I'll make a few introductory comments. Bunnings delivered another strong result with ongoing growth in sales and earnings. Achieving this result in a softer residential housing market is a reflection of the diversity of its customer base and the resilience and breadth of its product offering. The Kmart Group performance was below expectations and earnings declined relative to the previous year. Despite this moderation in performance, Kmart continues to deliver strong returns and Ian Bailey and his team ended the year with improved sales momentum, better operational performance and stronger customer NPS.

As we set out at our Strategy Day, the Target team is accelerating the repositioning of its customer offer and remains disciplined in managing the store network. Officeworks has again delivered solid growth with earnings up 7.1% on the prior year. Officeworks continues to benefit from its investment in new and expanding product ranges and enhancements to its omnichannel offer.

Now moving to our Industrial businesses. A solid operating performance, strong customer demand and disciplined focus on capital investment over time has allowed our Chemicals, Energy and Fertiliser business to deliver another strong result. You'll see that we've provided more detail in the pack on operating metrics for WesCEF that helps explain the strong financial performance and why we are confident to invest more capital in this division. The performance of Industrial and Safety was disappointing and reflects the impact of Blackwoods earnings from ongoing investment in customer service and the ERP system.

Turning to Slide 8. Our commitment to disciplined capital allocation has not changed. Each of our divisions has maintained a strong focus on generating an acceptable return on capital with most of our divisions again delivering strong returns.

Turning to Slide 9. At Wesfarmers, our primary objective is to provide a satisfactory return to our shareholders. We recognize we can only achieve our objective over the long term if we create shared value for all stakeholders. This includes our shareholders, customers, team members, suppliers and the communities in which we operate. We continue to build strong relationships with our suppliers with over $29 billion of payments made in the last year. We also paid over $6 billion to our team members and relentlessly focused on providing engaging and even safer working environments. If we consider continuing operations, our total recordable injury frequency rate was 6% better than the prior year. We remain one of Australia's largest taxpayers with payments to governments of around $1.5 billion.

Finally, I'm very proud of the contributions the group continues to make to the community, either directly or through our customers and our team members. In the last year, contributions totaled over $72 million, an amount that I know is making a real difference to many people.

Now turning to Slide 10. The group's balance sheet remains strong with a $1.4 billion reduction in net financial debt on the prior period.

I will now hand over to Anthony, who will talk in more detail to the group's balance sheet and cash flows.

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Anthony Natale Gianotti, Wesfarmers Limited - CFO [3]

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Thanks, Rob, and good afternoon, everyone. I'll provide further information on the group's other businesses, balance sheet and cash flows. Starting on Slide 12, where we've provided a summary of significant items for the year.

As we highlighted at the half year results, the group's portfolio and management activities resulted in gains on the disposal of Bengalla, Kmart Tyre & Auto, the group's interest in Quadrant Energy and, of course, the gain on demerger of Coles. I won't run through these items again except to note that following a review of available tax losses, related to the disposal of Bunnings U.K. and Ireland, posttax profits from the various asset sales have increased by $112 million compared to the amount that we disclosed back in February.

Turning to a summary of earnings contribution from discontinued items on Slide 13. As Rob has mentioned, our reported earnings included the trading performance of the businesses we disposed of during the year. Total earnings from discontinued operations contributed $587 million to the first half result, reflecting the various periods of ownership of the divested businesses. This compares to a full year contribution in the prior year of over $1.6 billion.

Turning to other businesses on Slide 14. Other businesses and corporate overheads reported a profit of $122 million for the year, which compares to an expense of $133 million in the prior year. There are a few moving parts within this result, including Wesfarmers' share of earnings from our 15% interest in Coles as well as some items that are nonrecurring.

Our share of profits from associates for the year contributed $215 million, an increase of $159 million. This increase primarily reflects earnings from the group's 15% interest in Coles for the 7-month period following demerger of $128 million. Going forward, earnings from associates will reflect the full year contribution of our 15% interest in Coles.

The group also recognized a $61 million noncash gain on its investment in Barminco following its acquisition by Ausdrill. $28 million of this gain relates to our indirect interest, which is held through Gresham Private Equity and is recognized in other associates. This amount increased $19 million during the second half, following a revaluation of the Ausdrill shares. Interest revenue also increased during the year due to higher average cash balances. Other corporate earnings were $1 million for the year compared to an expense of $66 million in the prior period. The increase reflects the remaining $33 million of the Barminco gain, $34 million received as a result of the value share mechanism that we entered into as part of the sale of the Curragh coal mine as well as a reduction in the group's insurance costs of $24 million.

Corporate overheads also decreased during the year by $14 million. It's important to note that the Curragh value share agreement will expire in March next year with any further contribution from this arrangement dependent on future coal prices.

Turning now to operating cash flow on Slide 15. Pleasingly, divisional cash generation from our continuing businesses remain strong at 97%, reflecting the highly cash-generative nature of our existing businesses. Reported operating cash flows of $2.7 billion for the year were below the prior year as a result of the demerger and sale of the various discontinued businesses.

The contribution of Coles to operating cash flow was significantly lower than the prior year, reflecting the removal of 7 months of Coles' cash flows, including the busy Christmas trading period. The divestments of Bengalla, KTAS and Quadrant also resulted in the reduction of associated earnings and cash flows relative to the prior year. Reported group cash realization of 86% was impacted by a number of one-off items. These include the noncash gain of $61 million relating to the group's investment in Barminco as well as the higher-than-usual gains on property disposals in Bunnings, which are not recognized in operating cash flows. In addition, although we have recognized our 15% share of Coles net profit after tax in our reported earnings, we are yet to receive a cash dividend on this investment, which has further impacted group cash realization.

Reported free cash flows of $2.96 billion were 13% below the prior year, primarily reflecting a reduction in operating cash flows following the demerger of Coles and the sale of our businesses completed obviously during the first half.

Turning to working capital management on Slide 16. Year-on-year working capital performance was impacted by the removal of discontinued businesses during the year. To provide some further clarity on the reasons for these movements, we separately called out working capital cash movements from continuing operations as well as providing working capital, including our discontinued operations.

Working capital from continuing operations improved on the prior year, resulting in a smaller cash outflow. During the year, cash outflows associated with inventory movements within our retail businesses increased as a result of a nonrepeat of the significant inventory reduction achieved in Target in the prior year as well as higher levels of inventory investment in Kmart to support year-end sales campaigns in key product lines. This investment in inventory also resulted in a corresponding increase in payables at the end of the year.

Importantly, inventory health in both Kmart and Target remains in good shape. Working capital investments in the retail businesses were more than offset by an improvement in working capital performance across Industrials. Including discontinued operations, the increased working capital outflow on the prior year was also impacted by the timing of the Coles demerger, which occurred during the seasonal inventory build prior to Christmas and the usual working capital unwind that occurs during December. We've included further information on the balance sheet and working capital, including a breakdown of working capital for continuing operations in the appendix.

Turning now to capital expenditure on Slide 17. Gross capital expenditure, including our discontinued operations, decreased $459 million to $1.36 billion. The decrease reflects lower capital expenditure following the demerger of Coles and the sale of discontinued operations as well as lower gross capital expenditure across our continuing businesses, which decreased by $80 million. The majority of the reduction in capital expenditure associated with continuing businesses was due to the one-off acquisition of the Kmart brand name for $100 million in the prior year. Higher CapEx in Industrial and Safety during the year was primarily associated with the investment in Coregas health care and ongoing implementation of the ERP.

Total proceeds from disposals in continuing operations increased $133 million to $497 million, primarily from property disposals in Bunnings. The elevated level of property activity reflected the favorable conditions in the commercial property market during the year. In total and including our discontinued operations, net capital expenditure of $827 million was $382 million below the prior year.

For the 2020 financial year, we expect net capital expenditure for the group will be between $550 million and $750 million. This guidance excludes any capital expenditure associated with the Catch Group and our proposed acquisition of Kidman and as always, we will be dependent on the level of freehold property activity during the year.

On Slide 18, we've outlined the movement in the group's net financial debt during the year, which included the proceeds from the demerger of Coles, the sale of discontinued businesses as well as the payment of the interim and special dividends during the year. Overall, net financial debt decreased by $1.5 billion to $2.1 billion at the end of June. Providing the group with significant debt capacity to fund the acquisition of Catch and the announced acquisition and further capital investment associated with Kidman.

Turning now to Slide 19 and the group's debt management. The group's balance sheet and access to funding remains strong. Our already strong credit metrics improved during the year and remain well ahead of the minimum targets required to maintain our current ratings. Our total finance costs continued to decline due to lower average debt levels and were $46 million lower than the prior year. Despite this, our overall weighted average cost of debt increased to 5.1%, reflecting a higher weighting of overall debt to our capital markets bonds, following the repayment of our lower cost bank debt during the year. We expect our weighted average cost of debt to come down in the current financial year, reflecting the use of lower cost bank debt to fund the acquisition of Catch and subject to completion, the acquisition and the associated capital investment in Kidman.

During the year, we also renegotiated our existing bank facilities, which will provide additional flexibility and improved cost of funds. Our bank facilities provide us with a substantially lower cost of debt than our current Capital Markets issuance. Importantly, we continue to have a balanced debt maturity profile and appropriate diversification of funding sources.

Turning to Slide 20 and our lease portfolio. Wesfarmers' undiscounted lease liabilities totaled $8.5 billion at the end of the year and reduced by more than $9 billion following the demerger of Coles. The group's average lease tenure, weighted by dollar commitments, is now 5.1 years compared to 5.8 years as at 30th of June 2018. This was achieved for the demerger of Coles, which removed longer-term supermarket leases as well as the continued disciplined management of leases across our remaining retail businesses. We continue to focus on lease-adjusted return on capital as a key metric for making network investment decisions across our portfolio.

Turning now to Slide 21, where we have provided an updated information on the impact of the new lease accounting standard. As you know, Wesfarmers has adopted the new lease accounting standard from the 1st of July this year, bringing leases onto our balance sheet for the first time. We've provided preliminary estimates of the impact to our balance sheet and income statement at our Investor Briefing Day in June. We have taken the opportunity to update these estimates as at the 1st of July 2019, and note that they have changed materially following a significant reduction in discount rates as a result of reduction in the prevailing risk-free rate since the 1st of July 2018. It's important to note that as this updated estimate has now been determined at the date of adoption, our estimate of the right of use asset and associated liability for existing leases will not change materially from what we expect to report at our half year results, with the obvious exception of any new leases that entered the portfolio or any portfolio changes that occur during the half year.

Our pro forma income statement for the 2019 financial year for continuing operations would have shown an increase in EBITDA of around $1.2 billion, an increase in depreciation expense of around $1 billion and a decrease in operating lease expenses of approximately $1.2 billion. These changes would have resulted in reported EBIT being higher by approximately $200 million with an increase in finance costs of around $200 million, resulting in a broadly neutral impact on our reported net profit after-tax. Again, there will be no changes to our total cash flows, debt covenants or credit ratings and these changes will not affect shareholder returns.

To assist with the transition to the new standard, for the 2020 financial year, we will provide reported results, including and excluding the impact of the lease accounting standard.

Turning now to Slide 22 and the group's dividend and capital management. As Rob mentioned, the Board declared a fully franked ordinary final dividend of $0.78 per share, along with the $1 per share interim dividend and the further $1 per share special dividend paid in April, Wesfarmers has declared total dividends of $2.78 per share for the 2019 financial year. As always, our dividend policy seeks to maximize the value of franking credits to shareholders, while having regard to current year earnings, credit metrics and full cash flow requirements. Importantly, it also preserves balance sheet capacity to take advantage of value-accretive growth opportunities if and when they arise.

The final dividend will be paid on the 9th of October to shareholders on the company's register on 2nd of September. The group will again provide shareholders with the option to participate in the DRP. Given our strong cash flow performance and credit metrics, it is our expectation that shares for the plan will be purchased on market.

And with that, I'll now hand over to Mike Schneider.

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Michael Schneider, Wesfarmers Limited - MD of Bunnings Group and MD of Bunnings Australia & New Zealand [4]

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Thanks, Anthony, and hi, everyone. It's been another busy year across the Bunnings business, and I'd like to start by thanking our amazing team for their hard work and support. I'm going to begin on Slide 25.

Our headline results reflect the good progress that we've made across our strategic agenda this year. Reported revenue for the home and lifestyle division increased 5% to $13.16 billion.

Turning now to Slide 26. Total store sales growth of 5.2% was achieved during the year, underpinned by an increase of 3.9% in store-on-store sales. Sales growth reflected the diversity of our customer base and resilience of product offerings despite softening conditions in the Australian residential housing market. Pleasingly, we saw continued growth across all major trading regions in both consumer and commercial markets and all product categories.

Turning now to Slide 27. The solid trading performance achieved during the year can be attributed to focused execution of our strategic agenda, which continues to build on the underlying strength of our business. Bunnings recorded EBIT of $1.62 billion, was an increase of 8.1% on the prior year. EBIT, excluding the property contribution, was up 4.8%.

An ongoing focus on disciplined cost control supported earnings growth despite a moderation in sales growth. Incremental operating costs of just over $10 million associated with the development of our digital offer were incurred in the second half. We expect to step up that investment to $20 million in the 2020 financial year as the offers enhanced and we continue to rollout of our Click & Collect offer in Australia and then into New Zealand. Solid earnings growth and disciplined capital management continued a strong return on capital of 50.5%.

Turning to Slide 28. Throughout the year, we have stayed focused on delivering against our strategic agenda of driving stronger growth, delivering better experiences for our team members and customers and driving efficiency through the core of our business. Throughout the year, we opened 17 new trading locations, 10 of which were replacement stores. We continue to invest in our store network and look for opportunities to bring customers an even wider and more compelling home improvement offer, whether that is addressing a gap in the market with a new store, expanding the footprint of a current store or bringing a multilevel offer to inner urban locations as we did at Caringbah in New South Wales and Newstead in Queensland. For example, a replacement warehouse at Caringbah in Sydney has given us 10,000 meters more retail space and over 200 additional car parks, whilst our Newstead warehouse on the edge of the Brisbane CBD spans over 16,000 square meters and allows us to provide a really strong offer in this great inner city location.

We continue to be excited about the opportunities in our trade business. We believe our wide range, sites and long-trading hours as well as the delivery of digital applications such as the PowerPass app create a very convenient offer that customers are responding to. Right now, we have 700,000 members signed up to our PowerPass trade program, which is growing at about 10% to 15% a year. With downloads of the PowerPass app, which we launched in November last year, averaging 1,500 downloads a week.

We will continue to focus our effort on building more substantial commercial categories across all channels so that we offer relevant brands at an attractive price and with high convenience.

In respect to driving growth, range innovation and extension opportunities, we see them exist in most categories with a strong appetite from our suppliers to collaborate with us on bringing new and innovative products to market for our consumer and trade customers alike. This innovation continues to deliver a more competitive offer for our customers.

As discussed at Investor Day and at Strategy Day, we will continue to challenge the way we view the market in terms of new ranges, expanded categories, including in low-market share categories, along with our clever home range where we know we have a strong runway for growth.

Delivering better experiences remains a priority and continues to underpin our growth. This included building out our anytime, anywhere offer with the introduction of Click & Collect in Tasmania and Victoria, following a successful trial earlier this year. And I'll talk more about our digital aspirations for the new financial year shortly.

While making DIY even stronger remains core. We continue to build solutions that connect our customers with local experts, making it easier and more affordable for them to have products installed, particularly when it comes to a licensed tradesperson. We have expanded our assembly and installation offer to help our customers who don't always have the time or skills to undertake some jobs and projects. 18 new services were introduced throughout the year with a total of 30 services now available.

Uptake from customers continues to grow with ducts hot water installation, toilet installation and barbecue assemblies being some of the most popular services we offer. We have also expanded our in-store events and activities making it even easier for our customers to learn new skills and bring their home and lifestyle aspirations to life. Every store now has a mobile DIY unit, which is used to engage our customers in aisle with product demonstrations, displays and craft.

Turning now to Slide 29 and looking to the year ahead. While moderated trading conditions are expected to continue, Bunnings remains well positioned for growth in the 2020 financial year. We will continue to build on our recognized market strengths to create an even stronger offer for our customers and accelerate our trade growth through further investments in value, category expansion and growing our service and installation offerings. These will be fueled by our investment in our data and digital capabilities as well as talented retailers and merchants across our business.

As I mentioned earlier, we will continue to invest in the stage rollout of our Click & Collect offer across Australia, which we expect to complete in time for Christmas trade. Next month, we will extend the offer into the ACT followed by South Australia, the Northern Territory and Queensland in October, followed soon after by Western Australia and New South Wales. Once we've completed the rollout in Australia, we will look to introduce the Click & Collect offer into the New Zealand market during 2020.

In addition to Click & Collect, we will continue to invest in our online transactional platform so that we deliver a true omnichannel experience that meets the needs and expectations of our customers. This includes looking at how we can expand the range of home and lifestyle products we make available to our customers whether it's in-store, online or through a marketplace offer. Whilst it is still early days in respect to our online offer, rest assured our investment in data, digital and the in-store experience, which will always be central to our DNA, we'll will be focused on how we continue to deliver a competitive and relevant offer wherever and whenever our customers choose to shop. The quality of this offer will ensure we continue to be chosen and trusted by our customers. I'm pleased with Bunnings continued growth in the 2019 financial year and look forward to building on our offer in 2020. I'd like to sincerely thank our team, suppliers and partners for their contributions to this year's results.

That's it for me. I'll now hand over to Ian Bailey. Thank you.

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Ian Bailey, Wesfarmers Limited - Head of the Australian Conglomerate's Department Stores Division & MD of Kmart [5]

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Thanks, Mike. Please turn to Slide 30 for an overview of Kmart Group's performance summary. Excluding Kmart Tyre & Auto, Kmart Group delivered revenue of $8.6 billion for FY 2019, up 1.1% on last year. Total earnings before interest and tax decreased 13.7% on last year to $540 million. Including Kmart Tyre & Auto, which was disposed of on the 1st of November 2018, earnings declined on last year by 16.7% or $550 million.

Return on capital decreased 3.1 percentage points to 29.1% driven by the lower EBIT performance this year. The division's safety performance has improved with total recordable injury frequency rate decreasing 2.5% on last year, reflecting our ongoing focus to reduce the number of safety incidents in our business. For the 2019 financial year, Kmart sales were up 1.5% on last year with flat comparable sales growth. Target sales decreased 1.5% on last year with comparable sales down 0.8%.

Turning to Slide 31. Kmart's moderate sales growth for the year was impacted by a number of factors, including the modest price investment this year compared to prior year. In FY 2019, the business implemented a number of initiatives to optimize product flow and store processes to support future growth. These changes led to a reduction in on-shelf availability, which in turn impacted our sales growth for the year. Lower sales growth was also achieved in apparel, particularly in womenswear as well as in our nonseasonal products.

In addition, the planned exit from DVDs negatively impacted sales by approximately 1%. The execution issue was largely resolved at the end of 2019 and on-shelf availability and execution has now improved. Kmart online continue to deliver strong growth during the year supported by the improvements in the online offer as well as the extension of the Click & Collect service.

Turning to Page 32. At Target, sales were below expectations with comparable sales declining on last year. Trading momentum moderated during the second half of the financial year, reflecting a customer proposition, which is yet to resonate with customers in a sustainable way and highlights the need for ongoing repositioning. Whilst overall sales underperformed, pleasingly Target saw growth in its best ranges in apparel and soft home, which demonstrates customer demand for quality, stylish products at affordable prices. The online channel continues to grow strongly with improved site traffic and conversion, reflecting improved availability, expanded ranges and an improved customer experience.

Turning to Slide 33. Total earnings for FY 2019 were lower than the prior year, impacted by a number of factors. At Kmart, earnings were impacted by the moderation in sales momentum, higher operational costs, including the implementation of a number of initiatives to address the stock management challenges resulting from the significant volume growth in recent years, along with an increase in stock loss. At Target, earnings for the year remain positive but decreased due to lower operating leverage from the decline in sales. Cost remained well controlled and inventory held continue to be tightly managed.

Return on capital, although lower than in the prior year due to the lower EBIT performance, reflects our ongoing focus on effective capital management, which is also supported by the group's continued discipline and integrated approach to the store network. Kmart opened 4 new stores, closed 1 store and completed 23 refurbishments during the year, Target opened 1 new store and closed 15 stores during the year. It is worth noting that the timing of the Target store closures has been aligned to the lease expiry to minimize our exit costs.

Turning to Slide 34. Looking forward, the Kmart Group will continue to take a long-term focus to delivering strong returns over time and continue to leverage the group's structure to optimize our cost base. Kmart remains committed to delivering sustainable growth through 2 strategic pillars of being a great place to shop that is simple to run and delivering better products at even lower prices. Kmart ended FY 2019 with improved sales momentum and will continue to defend its price leadership position in the market by continuing to enhance our product offer, relentlessly pursuing the lowest cost, improving operational productivity and accelerating our digital and data capabilities. Kmart will also continue to invest in its store network through new stores and the Plan C refurbishment program.

Target will accelerate the transformation of its customer offer to deliver a vision to inspire families to live better through a curated range of high quality and stylish product re-weighted towards apparel, soft home and toys. This repositioning has resulted in a reconfiguration of the Target support office structures as announced in recent weeks. Target will continue to enhance and expand on its online offer and further optimize its store network. On the 12th of August, the acquisition of Catch Group was successfully completed. The acquisition of Catch provides high caliber skills and capability in e-commerce and fulfillment and a leading technology platform. This is an exciting development for the Kmart Group, and we look forward to leveraging Catch's expertise to drive continued improvement and innovation in the online execution of our existing brands.

Lastly, I'd like to take this opportunity to acknowledge and thank our 47,000 team members across Kmart Group for their hard work and support during the year. I look forward to working with you all and your continued support in the year ahead.

Thank you. And I'll now hand over to David.

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David Baxby, Wesfarmers Limited - MD of Industrials Division [6]

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Thanks, Ian. Turning now to Page 35. The results for the Industrial businesses comprises strong operational and commercial results from the WesCEF businesses offset in part by a WIS portfolio, which is undergoing a material transformation program. Whilst we have seen some improvement in customer service metrics for the Blackwoods business, it is taking longer than anticipated to see earnings materialize.

I want to commend the hard work by all the teams in the last year of activity, but in particular, I want to call out Ian Hansen and Ross Martelli and their teams who deserve special mention not only for their core operational performance but also their very significant efforts with respect to our business development priorities.

Turning now to Page 36. The Industrials division comprises the WesCEF and WIS portfolios. Following the divestment of Quadrant Energy and the 40% interest in Bengalla, the Industrials result excludes any attributable trading results for resources in Quadrant. For 2019, the Industrials division grew revenue by 7% to $3.8 billion and generated earnings of $518 million, which is a 4.2% higher than the prior corresponding period.

WesCEF earnings grew by $54 million to $433 million, while Industrial and Safety recorded a disappointing $33 million (sic) [$32 million] decline to $85 million (sic) [$86 million], the drivers of which are detailed in the following slides.

Turning now to Page 37 and to WesCEF. Pleasingly, ongoing focus on safety at WesCEF, particularly with respect to high potential incidents, so a decrease in TRIFR from 5.4 to 4.2. Safety remains a key priority and the increased focus will continue on high potential events and a strong reporting culture. WesCEF earnings, excluding Quadrant Energy, increased by 14.2% and return on capital increased to 32.6%. Excluding the insurance proceeds and the one-off provisions, earnings increased 11.3% to $422 million, with a 3.4% increase in return on capital. The insurance proceeds relate to the 5-month ammonia plant production disruption this year and the provision for the removal of redundant equipment across a number of our sites.

Turning now to Page 38. WesCEF's strong results have been driven by a focus on operational excellence, and I'd like to call out a few of the metrics that I believe demonstrate this focus. As mentioned, safety is the #1 focus at WesCEF and the graph on the left displays the TRIFR since FY '11. The overall downward trend has been delivered through a continual improvement ethos, including a focus on behavioral safety where we've empowered our people to drive positive safety practices to have an ongoing vigilance against complacency and promote an open culture where we proactively report hazards and capture learnings from safety incidents. Specifically in recent years, we have placed a greater emphasis on high potential incidents to ensure we are controlling hazards for incidents with a potentially greater consequence.

The graph on the right displays the production performance across our chemical products and the average availability across all our chemical facilities. The step-up in production in 2015 is primarily driven by the commissioning of the AN3 plant but it's also due to the incremental debottlenecking of sodium cyanide capacity.

In terms of availability, there is some variability driven by planned and unplanned production disruptions over the years but the 9-year average of 93% compares very favorably to international industry benchmarks. Since coming online, the third nitric acid train has had excellent availability of 96% and is scheduled for its first major maintenance shutdown in the first half of FY '20.

Turning now to Page 39. The breakdown of the WesCEF result is the following: in the Chemicals business, the AN business continued to benefit from ongoing Burrup disruptions, which contributed to growth in EGAN sales. However, earnings declined due to lower margin contracts and higher operational costs. Ammonia earnings improved due to higher production levels and lower gas input costs. Higher production and export margins drove an improvement in sodium cyanide earnings. In the Energy business, higher sales volume for LPG, LNG and natural gas retail were also assisted by lower gas input costs helping to contribute to earnings growth. Earnings also benefited from a 10% higher Saudi CP during the year.

In the Fertiliser business, we achieved earnings growth despite a late seasonal break driven by higher sales volumes as a result of positive sentiment following a strong wheat harvest in Western Australia in 2018.

Turning now to Page 40 and the Industrial and Safety businesses. Disappointingly, TRIFR increased to 6.9 from 6.6. However, all lead indicators are well above target and a positive reporting culture is intact. The earnings performance of Industrial and Safety was impacted primarily by disappointing year in Blackwoods. The Industrial and Safety portfolio generated revenue of $1.7 billion, which is a marginal decline on last year and is underpinned by reduced sales in Blackwoods offset in part by growth in Coregas. Disappointingly, earnings of $85 million (sic) $86 million were $33 million (sic) $32 million below the prior year, the drivers of which are set out on the following slides.

Turning now to page 41. The Industrial and Safety result breaks down into the following components. The Blackwoods, as previously mentioned, we've made a conscious decision for the next 12 to 18 months to focus on key strategic customers while new systems and processes are implemented. As a result, revenue was marginally down with increased demand in mining, offset in part by lower sales in construction and small-to-medium enterprises and a corresponding impact on margin. Earnings continue to be impacted by ongoing investment in customer service, supply chain and ERP and is reflected in increased support costs. Positively, customer service metrics have improved and remain strong with average DIFOT of above 95% for the largest customers and customer backlog is being reduced by 75% compared to 2 years ago. These are fundamental building blocks for the business in the future.

For Workwear Group, revenue was broadly in line with the prior year with higher uniform sales offset by the impact of the retail store divestment and the ongoing macroeconomic weakness in the U.K. Earnings benefited from one-off insurance proceeds and the profit on the sale of the divestment of the retail stores. In Coregas, revenue increased due to increase in demand for bulk sales and the successful launch of our health care offering in December 2018. Earnings increased marginally due to higher sales offset in part by margin pressure by higher input costs. For Greencap, lower utilization in expert services offset strong growth in our online services platform.

Now turning to Page 42 and the outlook for WesCEF. For WesCEF, overall production and product demand is expected to remain robust. The AN business will continue to benefit from ongoing disruptions at the competing Burrup plant. However, beyond this earnings are expected to be impacted by an oversupply of EGAN in WA and some contracts rolling over to new lower margin pricing. Kleenheat continues to benefit -- continues to focus on long-term customer value propositions and retention, with earnings expected to be impacted by lower Saudi CP outlook. Fertiliser earnings remain dependent on a seasonal weather conditions. We have an investor tour that's scheduled for Thursday, the 3rd of October this year at the Kwinana plant and I would welcome you all to attend. Please contact Erik and the team for the details.

And finally, turning to the outlook for the Industrial and Safety businesses on Page 43. Overall conditions in Australia and New Zealand are expected to remain stable. Digitization and automation activities across the WIS portfolio are expected to continue for at least the next 12 to 18 months. Earnings are expected to remain under pressure during this period. Successful implementation of the ERP, supply chain and digital investments are key for the success of the Blackwoods business and will continue the cost pressures in the business in the next 12 to 18 months.

The leadership changes that we've already announced for the Blackwoods business have been all about rebalancing the team to get closer to our customers, drive greater local ownership of results and by moving to a regional model and reestablishing our market leadership in safety and technical excellence. Coregas will benefit from an annualization of the health care offering, which launched in December 2018 but earnings are expected to be moderated by margin pressure. Workwear Group and Greencap have stable outlooks in their core markets.

I'll now hand over to Sarah on Officeworks.

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Sarah Hunter, Wesfarmers Limited - MD of Officeworks [7]

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Thanks, David, and hi, everyone. I am pleased to report that Officeworks has continued to deliver positive progress over the past 12 months.

Turning to Slide 45. We recorded our safest year under Wesfarmers' ownership, with TRIFR decreasing 16% to 8.5. The safety, health and well-being of our 8,000 team members is a priority for me and for Officeworks. And whilst we are proud of our progress, even 1 injury at work is 1 too many so there remains more to do. Providing an easy and engaging customer experience remained the focus throughout the year. Our customers told us our service continued to improve with strong satisfaction results. Coupled with strong transaction growth, this drove revenue growth of 8% to $2.3 billion. Other key financial metrics performed well with EBIT growth of 7.1% to $167 million and return on capital increasing to 17% from 16.6% in the prior year.

Moving to the next slide. Sales momentum was underpinned by investment in new and expanded product ranges, online enhancements and improvements to the Click & Collect experience. The every channel strategy continues to resonate well with customers, delivering strong sales growth in both stores and online. Positive momentum in the B2B segment was maintained with more customers choosing Officeworks to help them start, run and grow their business. The uplift in earnings was delivered by the strong sales growth and very effective cost management. Return on capital grew to 17% as the business continue to invest in products and services to support growth.

Moving to the next slide. Having an engaged team that feel they belong and have a safe place to work is key to the success of our business. The successful vote in favor of the new Enterprise Agreement for our store team members was an important milestone in the second half of the year. We look forward to the approval of the agreement by the Fair Work Commission and implementation during FY '20.

Delivering an easy and engaging customer experience, as I said, has remained a focus. In March, we opened a trial format in Mentone, Victoria. And to date, the store has performed in line with our expectations, and it is informing the shape of our future renewal program for this year and beyond. During the year, we also invested in making our Click & Collect service easier for customers, which delivered an increase of 45% in Click & Collect orders and a materially better customer experience.

Officeworks is committed to operating a responsible and sustainable business that supports the communities in which we live and work. A couple of the highlights from this year were our 7% reduction in carbon emissions and our continued improvement in the recycling of our operational waste, which improved from 76% to 82%. Making focused investments to drive operational excellence will enable future growth and improve productivity.

For example, during the last year, we made good progress building our new distribution center in Hazelmere, Western Australia, which will open this financial year. This will enable faster and more cost-effective operations supporting our every channel model here in WA.

During the year, we also grew our business by opening 4 new stores, acquiring Geeks2U and continuing to invest in evolving our ranges to better meet customer needs, for example, in educational products, commercial furniture and commercial technology.

Turning to the next slide. We remain focused on making bigger things happen for our customers, our team, the communities in which we live and work and other stakeholders. We will continue to drive growth by executing our refreshed strategy, as outlined at the Strategy Day, and investing for the long term. During FY '20, earnings growth will be impacted by maintaining price leadership and the new Store Operations Enterprise Agreement which we expect will be partly offset by productivity initiatives.

I would like to take this opportunity to recognize and thank my team for delivering another year of positive progress for Officeworks. The future for Officeworks is exciting, and the team and I are looking forward to building on our recent progress to continue to deliver satisfactory returns to shareholders over the long term.

I'll now hand back to Rob.

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Robert G. Scott, Wesfarmers Limited - MD & Director [8]

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Thanks, Sarah. So I'll turn to Slide 50 and the outlook for the group. Our efforts in repositioning the portfolio have resulted in a very busy year for Wesfarmers. And I'd also like to add to the thanks from our divisional managing directors to the 105,000 team members across the Wesfarmers Group for their hard work and dedication in what was a very busy year.

Going forward, our businesses are well positioned within their respective markets and will continue to invest to deliver even greater value, quality and convenience to their customers. Given the diversity and resilience of our portfolio, the group remains well positioned for a range of economic conditions. While we maintain an eye to new opportunities, our primary focus will remain on our existing businesses, together with the Catch acquisition and subject to shareholder and court approval of Kidman, as we continue to build on our unique capabilities and platforms. And this includes further investing in and developing our data, digital and e-commerce capabilities. As always, we will remain disciplined in our approach to capital allocation when considering these opportunities.

That brings us to the end of the briefing. We'd now be happy to take any of your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Andrew McLennan from Goldman Sachs.

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Andrew J. McLennan, Goldman Sachs Group Inc., Research Division - Consumer and Retail Analyst [2]

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I was just wondering with respect to Bunnings, if you could provide any guidance around store openings. You mentioned 13 were in planning, but I note that the net expansion you had this year was a little bit on the soft side and so just wondering if you could provide some commentary there. And also, you did mention that there was improving momentum in Kmart. I'm just wondering if you can reflect on Bunnings start to the financial year as well.

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Michael Schneider, Wesfarmers Limited - MD of Bunnings Group and MD of Bunnings Australia & New Zealand [3]

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On the store form, on the store OS, we just had a little bit around timing from a construction point of view. Some of that tends to be caught up a little bit in planning and weather, so no real change to the sort of longer-term guidance in that sort of 10 -- net sort of 10 new stores a year frame. And from a trading point of view, we're here to talk about results today, so that's where our primary focus is on.

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Andrew J. McLennan, Goldman Sachs Group Inc., Research Division - Consumer and Retail Analyst [4]

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Okay. I'd just like to follow up, sorry, on wages growth was around 5.5% compared to rent at 4%. Just wondering given the enterprise agreements that you're looking ahead at, if you can provide just some commentary on where you expect that to step up to, please.

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Michael Schneider, Wesfarmers Limited - MD of Bunnings Group and MD of Bunnings Australia & New Zealand [5]

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Yes. We are -- we've had a fairly consistent sort of approach to EBAs. Even in periods when our EBA has been lapsed, we've sort of passed on our increases to our teams, so we don't see any sort of surprises in that space at all. And our focus obviously, given the sort of expert level of service we provide in store usually means that some of that investment in salaries and wages at a store level can be a little bit higher than others, but we are very focused on it.

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Operator [6]

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(Operator Instructions) Our next question is from Morana from Macquarie.

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Morana McGarrigle, Macquarie Research - Analyst [7]

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So just following up on that earlier question, I'm just trying to, I guess, interpret what the comment around Bunnings' growth moderating in the first half of '20 is. Does that mean those like-for-like sales around -- say around the 4% mark? Or are they actually declining now?

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Michael Schneider, Wesfarmers Limited - MD of Bunnings Group and MD of Bunnings Australia & New Zealand [8]

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I know -- at least I think just to sort of clarify the point I made during the presentation, we sort of see continued moderated -- moderated conditions in the housing market as opposed to the moderation in our trading performance.

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Morana McGarrigle, Macquarie Research - Analyst [9]

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Okay. And then just on that, I guess the commentary on the weaker housing market, could you just provide some high-level comments on any trends that you're seeing across different states? And then any commentary on what you're seeing across trends in discretionary versus necessity and just some mix there?

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Michael Schneider, Wesfarmers Limited - MD of Bunnings Group and MD of Bunnings Australia & New Zealand [10]

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Yes. I think the only sort of commentary I'd sort of make around the housing market has been we really talked about some higher clearance rates in auctions over the last few weekends in the sort of Sydney and Melbourne housing markets, talking to a few agents, I think that's as much a by-product of less stock in the market as anything else, so it's sort of really hard to say. And we sort of talked about some of the broader macroeconomic issues in markets like Western Australia in the past, but it's sort of -- it is a hard one to sort of call out. I'm sorry, I've forgotten the second part of your question.

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Morana McGarrigle, Macquarie Research - Analyst [11]

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And then just any trends that you're seeing at Bunnings across discretionary versus necessity categories?

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Michael Schneider, Wesfarmers Limited - MD of Bunnings Group and MD of Bunnings Australia & New Zealand [12]

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Yes. It still sort of continues to be pretty much as it's always been, which is that there's sort of this balance between the trade side of the business and the consumer side of the business where trade has a stronger bias to the sort of necessity has been weak and, I guess in some ways, we're a supermarket for trades people. So that sort of bears out. And then I think you sort of see that mix right across the sort of product category range for discretionary and necessity for the consumer customers, so there's nothing that's particularly different to what we've seen in the long term.

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Operator [13]

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Our next question in the queue is from David Errington from Merrill Lynch.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [14]

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Rob, my question is to Ian Bailey. I'm trying to get an understanding as to what is actually happening within Kmart and Target. At Kmart, there's a couple of worries that I've got. I'm trying to get my head around what this, first of all, reduction in inventory was. And then there seems to be have been about a $400 million increase in inventory that you've put in the back of your -- I think Page 55 where inventory has increased by just under $400 million. And then basically, it says it's reflecting investment in Kmart. But then on the flip side, Ian was talking about stock loss, and all the rest are -- I just don't understand how well Kmart is going at the minute. And he made the comment -- or Ian, you made the comment that Target, you're still not resonating with your customers yet, and you need a lot more work. That's all like doesn't give me a lot of confidence to what the long-term sustainable future is if -- for probably 5 years if, truth be known, you've been trying to find an offer that resonates with your customers. And you still haven't found one, so that doesn't give me a lot of confidence. So these are my questions. They're a bit jumbled, but if you'd have a go at trying to alleviate some of my concerns as to what's happening in those businesses, that would be really appreciated.

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Anthony Natale Gianotti, Wesfarmers Limited - CFO [15]

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David, it's Anthony. I might start with just the first part of your question on the inventory. So a couple of things that we've called out. As you recall back in 2018, we called out there was significant inventory reduction in Target as that was obviously a business deleverage and there was a much greater focus on inventory controls. And so we saw inventory come back significantly. Clearly, in FY '19, we're not cycling that same level of inventory release. Secondly -- so that means that the inventory levels in the current year are more normal.

Secondly, on Kmart, there was an increase in inventory towards the end of the year, partly related to timing, partly related, as we said, to increased sales campaign. And that was probably around the $180 million of additional inventory. But again, that was also reflected in payables from a working capital perspective.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [16]

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Before you jump off, Anthony, and hand over to Ian, so you cleared out inventory from Target, but then you built it back up. So that was that stock was it that you couldn't sell or your clearance stock or -- and now you're building up inventory again in Kmart before you've actually got resonance with customers or actually, you've actually got traction in sales. Is that a wrong way of reading it?

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Anthony Natale Gianotti, Wesfarmers Limited - CFO [17]

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Yes. Yes. And that's not right. What we've -- as you know, in Target in 2018, there was a significant reduction in inventory as the business repositioned. There was a closure of stores, and there was, historically, inventory issues in Target which were addressed for the 2018 year, so that came off significantly. In Kmart, it's more about campaigns and timing of campaigns. So -- and Ian can talk to inventory in terms of what happens.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [18]

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Anthony, I'm sorry to cut you off. I don't want to cut you off here, but just on Target, I've got to try to get my mind around that. You cut the inventory back because you closed some stores. But now you've built it back up again to more normal levels but you're not resonating it with your customers, and yet you tell me that you've got a healthy inventory position. It's just that sort of line of logic doesn't sort of like flow to me.

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Anthony Natale Gianotti, Wesfarmers Limited - CFO [19]

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No. So David, inventory hasn't built back up. It's at more normal levels. So the inventory increase hasn't been in Target. It's been in Kmart, and there's been some in Bunnings. But it's at a more normal level of inventory now. So we haven't seen increases in inventory in Target.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [20]

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Right. Okay. So we haven't seen -- so okay. But you've gone back to more normal levels?

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Anthony Natale Gianotti, Wesfarmers Limited - CFO [21]

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Yes.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [22]

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Right. Okay. But you're still not resonating with customers yet?

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Anthony Natale Gianotti, Wesfarmers Limited - CFO [23]

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That's a -- I think that's a separate issue which Ian can talk to. I'm just more focused around what's happening in the inventory.

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David Errington, BofA Merrill Lynch, Research Division - Head of Consumer Research for Australia and Asia [24]

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Okay. Sorry.

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Ian Bailey, Wesfarmers Limited - Head of the Australian Conglomerate's Department Stores Division & MD of Kmart [25]

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Yes. Thanks, David. I'll have a couple of goes on the inventory one as well just to round that off, then I'll come back to the position of the 2 businesses. The first thing I'd say on the Kmart inventory is it was a high increase at the end of the year, but that was really a timing issue. And when you look at inventory over the course of the months, the increase isn't anything like that great, so that was really a moment in time. As Anthony said, it's offset by the payables from the balance sheet view, which also says that again, it's a moment in time that we are confident with. As seasonal performance in Kmart has actually been pretty strong through the back half of the financial year, so we come out with a cleaner clearance this year than we did last year. So my feeling around inventory health in Kmart is good as we come out of there, irrespective of that inventory increase. And my expectation that, that will normalize is high.

On the Target side, there's a very modest increase of inventory which is more to do with FX in the cost of goods than it is to do with any other factor. And we very closely watch the VIX cover we carry in that business.

So if I go to the question on are we building inventory in Kmart in advance of sales momentum, we called out that the sales momentum has picked up to a degree from where it was. And indeed, you can probably back-calculate how that's going in the last month of the year from the announcement we've made when we gave the market an update on profit through to the end of half, which is really us making improvements in some of those areas which we talked about at the Strategy Day. So our execution has improved, our in-stock availability has improved, and our products are also improving as well. So those elements on their own are starting to now gather some traction, which gives us confidence in the long-term position of Kmart.

I think on your question of Target, I think we're all very acutely aware of the fact that the business has been through a great deal over the last period of time. I think one of the great successes in the last few years has been to reduce the cost in that business and get that business to a position of profitability, which is where it is today. Of course, what we want to do is maintain that profitability into the future. And what we're seeing is that the product offer and the offer we have in front of our customers isn't generating a positive sales position. So that says to us we got to continue to improve at a faster rate than we currently are. So that's why we've called out accelerating the transformation of that business. And Marina is doing a really great job with the Target team on getting really clear on how that proposition is going to evolve in the future to drive improved performance.

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Operator [26]

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Our next question on line is from Bryan Raymond from Citi.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [27]

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Just maintaining the focus on Kmart and Target at the moment. Just interested in how you're finding discounting activity across the market. I think the downgrade in June on this business, you mentioned that's been a bit unsustainable. How have you found that in sort of final 4 weeks of the year and potentially a bit past that? Have you seen any improvement in those conditions?

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Ian Bailey, Wesfarmers Limited - Head of the Australian Conglomerate's Department Stores Division & MD of Kmart [28]

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Yes. Thanks, Bryan. I think I'll probably describe it as erratic is probably the best description. So certainly out there, there's times when some of the prices was incredibly sharp. And then at other times, it seems to lift away. I think the thing that we've really focused on in the last -- certainly in that last quarter is really making sure we are #1 on price. So we've put through one of our biggest price drop campaigns in the last quarter of the year, and we are seeing evidence in customer's minds that Kmart is really leading in that lowest price position.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [29]

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Right. So on that basis then, there will be some annualization of that price investment into the first 3 quarters of FY '20? Was that the fair assumption?

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Ian Bailey, Wesfarmers Limited - Head of the Australian Conglomerate's Department Stores Division & MD of Kmart [30]

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Sorry, Bryan, I couldn't quite catch the start of that.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [31]

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Okay. Sorry. Just confirming then if there would be some annualization of that price investment through into the first 3 quarters of FY '20 on the basis of the timing of it, is there anything that would indicate that margin shouldn't be down in at least the first half '20 or year-on-year?

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Ian Bailey, Wesfarmers Limited - Head of the Australian Conglomerate's Department Stores Division & MD of Kmart [32]

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I think what I'd say is the drop in prices is something Kmart has a rich history of doing, and so we very much do it in the mind -- with the mind to how the business is going to perform into the future. So I think if you're looking at it from a margin viewpoint, I wouldn't look at the price drops on their own as a unique factor that's going to drive a different outcome.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [33]

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Sure. Okay. And then just on Bunnings. I'm just interested in that online investment of $20 million in FY '20 -- I'm sorry, $20 million in FY '20, is this something that should be finished after that? Is there planned investment that are concluding throughout FY '20; and then from FY '21, it turns just into a trading profit essentially for that online business? Can you just give us a feel of that or if that $20 million should be in the base and ongoing indefinitely?

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Michael Schneider, Wesfarmers Limited - MD of Bunnings Group and MD of Bunnings Australia & New Zealand [34]

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I think it would be fair to assume, Bryan, that it'd be -- it also would be in the base and ongoing. It was sort of things that we think about in the year ahead, it's really moving our offer from good to best. It's ongoing technology development. It's day-to-day management of the e-commerce business. And obviously, as you can imagine, it's a commencement of depreciation which starts to roll through in the years ahead as well.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [35]

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Right. You've talked a lot about Click & Collect from a Bunnings online perspective. But in terms of delivery, can you tell us where -- can you give us an update on where you are in Victoria? I think you were -- that was Phase 2 of the rollout around the delivery side specifically because I'd see that has been more of a margin risk on the Click & Collect side. If you can give a bit of color on that.

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Michael Schneider, Wesfarmers Limited - MD of Bunnings Group and MD of Bunnings Australia & New Zealand [36]

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Yes, it's an interesting one. I think in FY '18 through to FY '19, we had something like [600 and -- 4,600 and 50,000] deliveries out of Bunnings stores. We've been doing deliveries for a really, really long time. So we've tried a few stores in Victoria and in Tasmania with click & deliver, and we find that the delivery rates we asked of our customers, they understand given the nature of the product. So we don't see that is having any impact at all because we're processing those as we've always done.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [37]

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Okay. And then just finally on Bunnings, just the sales discriminator performance in FY '19, I appreciate you gave us same-store sales, but there's been quite a large gap between sales productivity and like-for-like sales. I'd just be interested in whether that is -- that gap has been maintained or whether that sales discriminator is broadly in line with our comp store sales.

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Michael Schneider, Wesfarmers Limited - MD of Bunnings Group and MD of Bunnings Australia & New Zealand [38]

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Yes. I think as we -- I think if you think back to Investor Day and Strategy Day, Justin Williams, our CFO, sort of explained that out a little bit around the mix of stores. And that carrying bars example is quite a good one where you build some things a little bit bigger than what you had before. It takes a period of time for those to sort of come back to normal, so it's a little bit of a by-product of the way the network's going and sort of flattening out over time.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [39]

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And that should continue given your -- that strategy is unchanged in terms of the top store formats?

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Michael Schneider, Wesfarmers Limited - MD of Bunnings Group and MD of Bunnings Australia & New Zealand [40]

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Yes. The store formats are a mix. Like for a lot of the big ones, we open like a new stage and the carrying bars; there's the smaller ones like Fairfield in Victoria, which is 4,000 square meters. So there is a bit of a blend, but it's more often than not a by-product to when we open some of those really big ones or we refurbish and create a lot more space.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [41]

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Okay. Great. And then just finally, just the EBIT contributions and sales contributions from Geeks2U and Catch on a pro forma basis, just trying to mold that through into FY '20, if it's possible to get some information around that, please.

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Robert G. Scott, Wesfarmers Limited - MD & Director [42]

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Look, for both -- it's Rob here. For both acquisitions, not material to either Officeworks or the Kmart Group. And in fact, in both businesses, we are looking to make some additional investments to scale the platforms up. So in turn, obviously, over time, we'll be looking for an improved cash realization from the investment. But in the short term, I wouldn't expect a material change in earnings, but I would certainly be focused on the sales and the customer benefit that we're extracting and the cross-sell benefit as well we'd expect to get from those value-added services.

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Operator [43]

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Your next question comes from the line of Richard Barwick from CLSA.

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Richard Barwick, CLSA Limited, Research Division - Research Analyst [44]

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My question is for David Baxby. Wanted to talk about Blackwoods in particular. So it would appear that not much is going right. I mean you have flagged at the Strategy Day a weak second half, but I don't think anyone was expecting such a weak second half. I'd just love to hear your thoughts a bit more from the strategy point of view here because based on some of the things we're seeing in terms of our people movements, it would appear that you're moving back away from more of a national approach back to a regional approach. And if that's the case, it's sort of winding the clock back to where this business was some time ago. So if that's true, then I guess it's acknowledgment that what you've been doing or what's happened in the last couple of years hasn't been working. So just love to hear your thoughts on that.

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David Baxby, Wesfarmers Limited - MD of Industrials Division [45]

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Now look, it is a great question, Richard, and thanks for asking it. I think if you look back over the last 3 years of the transition of Blackwoods, I think what the business has successfully done is reestablish some real credibility with respect to our supply chain and our merchandising platforms at the center of the business. And I think you've got to go through a period of sort of central reflection in order to strengthen those 2 functions. And I think that work is now being broadly done. And we've talked a lot about the investments we've made in both the merged team, and that number's in excess of 25-odd people. And we've also got a number of investments that have gone on in the supply chain. We've talked about and there was a video at the Strategy Day around like the cohesive system that we've installed, the additional stock more SKUs work we've done at Greystanes. And we've added little pieces of automation to those supply chains. And I think what those 2 initiatives have done have enabled us to achieve, DIFOT level is now consistently across the network in excess of 95%. And we've taken backlogs and times to turn quotes right back to what we regard as being, well, world-leading results. So from a fundamental building block perspective, we think that's sort of really, really important. And in addition to that, we've also strengthened, and I think we've talked in the past before about the number of salespeople that we've got focused on some of the larger accounts. And I think I called out at the Strategy Day that the growth that we've had in some of those large are national accounts that interact with multiple branches, multiple DCs around our network, yes, we've seen reasonable growth in those accounts. But that growth also come at a lower margin. And I don't think we've shied away from that, and that's been a deliberate attempt to ensure that we can continue to extract the investment in those centralized functions. I think having completed that work, and obviously, we've also talked a lot about being part way through ERP, yes, we've continued to carry 60-odd branches during that process, and they are branches that have got deep local community ties in their local communities.

And if you look at the business, yes, the part of the business that has been disappointing have been those businesses that are more naturally attached to those branches. So rather than a sort of back to the future, I'd characterize it as being retaining that centralized discipline around supply chain and merchandising, retaining our very strong focus on national accounts where we've shown that we can deliver for our customers, and that's been shown in both DIFOT performance and NPS scores. And now through the addition of some organizational change, some actually having state-based P&Ls, and also the addition of a couple of incremental senior managers, the ability to go back and releverage the investments that we've already got in the ground with respect to the branch network while we also complete a reasonably significant replatforming with ERP, and I talked at the Strategy Day of having relaunched our web front end, which has dramatically reduced the amount of friction our customers feel when they work with us. These are all parts of the building blocks to getting back to realizing the potential of Blackwoods. So I'm not going to shy away from the fact that no one is more disappointed with the results in the last 12 months than me. But what I feel we have done is we've bidden off a lot of the data remediation, a lot of the systems remediation, challenges that you always encounter that maybe you don't fully expect when you undertake an ERP program. That's going to go on for the next 6 to 12 months. We can't shy away from that. But I feel like we've got the team focused on exactly the right things that are important to the business. We will continue to leverage that regional presence. We will reestablish our leadership in safety. And both of those initiatives don't require incremental investment because we have all the building blocks in place, and that's where the team is focused.

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Richard Barwick, CLSA Limited, Research Division - Research Analyst [46]

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I mean a lot of what you said, I mean this progress, it sounds like this is being made. And I hear you're winning with some of the big customers, and you say that comes with a margin impact. But I mean we don't know the exact numbers because you don't disclose them, but you've been pretty clear saying Blackwoods' revenue overall has still declined. So, yes, if you could explain that because most of what you're explaining here to me talks about where we'd see an EBIT impact but not necessarily a negative revenue impact?

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David Baxby, Wesfarmers Limited - MD of Industrials Division [47]

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I think, look, the revenue trend within Blackwoods is very modest. And so when we talk about the decline, it's very, very modest. So I wouldn't focus too much on the sales line. The way I characterize it is that we've seen a shift in mix of customer underlying. There's no doubt that we've lost both share of wallet and also overall gross sales with some of our smaller customers, which is part of that centralization effort. They are the customers that we're going to go back and refocus on to ensure that we can start to grow sales again but also inject some additional margin into the business over the next sort of 18 to 24 months.

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Richard Barwick, CLSA Limited, Research Division - Research Analyst [48]

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Okay. So if we think about that sort of time frame, David, when you're talking that the ERP program another 6 months to integrate, are we 6 months away? Or well, just correct me if I'm wrong, are we 6 months away from finding a floor in earnings here or not?

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David Baxby, Wesfarmers Limited - MD of Industrials Division [49]

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Look, again, I don't think we've called out 6 months ERP will not be installed until June 2020. So that's something that we're very, very focused on, which is why I've been quite cautious in terms of our outlook for the Blackwoods business because there is a lot of change in management to go on in that business. And while the teams are doing a great job, I think it's going to take continued focus while so much change is going on in order to stabilize the business.

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Operator [50]

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(Operator Instructions) Our next question in queue is from Grant Saligari from Crédit Suisse.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [51]

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Just the Officeworks margin in the second half was down around 30 basis points, and you called out some additional expenditure to reposition on price. Just wondering whether you could elaborate on what's actually happening there, what are the market factors that are causing that, whether it's permanent, and if there's any contribution in that margin decrement from the EBA that you're moving to.

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Sarah Hunter, Wesfarmers Limited - MD of Officeworks [52]

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Yes. So you're right. We continue to invest in the second half to maintain our price leadership position. As it has been our strategy for a number of years, we continue to see, as I said at the Strategy Day, a competitive environment that's strong and that hasn't alleviated. There's a continuation of that as we go through into this year, which I referenced in our outlook as well. In terms of the EBA, that we are waiting for ratification from the Fair Work Commission on that, and we hope that, that will come in the coming months. And at that point, we will make the changes and implement that. So that hasn't hit our performance yet and certainly didn't last year.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [53]

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Just a little bit more on the price investment. Are you seeing that come through with additional promotion in the market that might be a function of sort of fairly soft consumer conditions? Or is this something structurally changing there that is necessitating those moves?

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Sarah Hunter, Wesfarmers Limited - MD of Officeworks [54]

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No. I mean we haven't really seen a change in our, what I'd say, consumer position over the last 6-plus months. What I would say is that we've been working in a competitive marketplace for many years. It is certainly intense, and it remains intense. Those competitors are far and wide depending on the sector, whether it be furniture, whether it be technology hardware, whether it be online or bricks-and-mortar retailers. So we have a very strong trusted price position with our customers, and it's very, very important we continue to maintain that. And that is what is driving sales in our business and customers continuing to choose Officeworks.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [55]

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Okay. Just a quick one just on Chemicals, Energy and Fertilisers. You had a terrifically strong second half. The commentary seems to suggest it was probably built off higher fertilizer volumes which were presumably seasonal. LPG sounded like it was quite strong, and you called out some softness in margin in the end market. I guess my question is just to get an understanding of the permanence of that lift in the second half or should we sort of think more about seasonal effects to fertilizer and the like?

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David Baxby, Wesfarmers Limited - MD of Industrials Division [56]

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No, I think you're right. I think it's far more likely to be a seasonal effect.

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Operator [57]

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Our next question is from Ben Gilbert from UBS.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [58]

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Just first question to David just around the Chemicals business into next year. I appreciate there's some commercial sensitivity around spot and contracts, et cetera, but is there any color you can give us in terms of just how we should think about the headwinds as we move into next year from not being able to sell as much in it that's high-priced spot? And what sort of EBIT drag that's going to have? Because presumably, it's going to have a reasonable type EBIT drag on that division.

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David Baxby, Wesfarmers Limited - MD of Industrials Division [59]

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Sorry, when you say high-priced spot, which commodity are you referring to?

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [60]

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In terms of the explosive side.

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David Baxby, Wesfarmers Limited - MD of Industrials Division [61]

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Yes, look, as we've talked about before, yes, there's -- it's a reasonably sort of fluid and, frankly, competitive market, so it would be wrong to sort of pull those apart to try and give any more guidance. And again, I think the teams have done a great job in providing enough contracted forward contracts to give us some certainty with respect to our production schedule and then try and manage at the margins. And we'll continue to do that. But I don't think it will be appropriate to give any more guidance beyond that.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [62]

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Okay. And maybe just then maybe to Rob, just interested around Catch and how you're thinking about that strategic opportunity. Because I appreciate it's relatively immaterial in terms of the scheme of things, but in terms of the back end and what it provides in terms of your ability to reach across all of your businesses and, as you mentioned, sort of talk to the marketplace, those sort of things, how are you sort of thinking about that in terms of the opportunity? And one thing I'm interested in terms of your ability to move into categories you might have said that's dipped your toe in previously. So obviously, Officeworks is quite being electronics, Bunnings, appliances, et cetera, always been talked about. Is that something you're thinking about? And then also interested in food and grocery and if you look to sort of enter back into that through an online type platform.

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Robert G. Scott, Wesfarmers Limited - MD & Director [63]

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Ben, you raise -- you raise a number of interesting opportunities that do arise by virtue of having a marketplace platform, and initially, the focus is very much going to be on looking at ways we can leverage the marketplace across the Kmart Group. There's some obvious synergy there around fulfillment on the online fulfillment in parts of the Target business. And in the team, we'll look at ways in which we can better leverage the significant web traffic we have and using Catch as a way of expanding range in a more capital-efficient way. So that's first and foremost the focus. I should note that we already have a very significant investment in a high-quality food retailer and not proposing to do anything other than see that investment be successful. But we won't be -- as it relates to Catch, we'll keep you up-to-date on what we do, but we won't be like our other competitors in the digital space. We won't be broadcasting in advance everything we're going to be doing strategically, but we will be looking to leverage the capability of the team and the platform that we have acquired.

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Ben Gilbert, UBS Investment Bank, Research Division - Executive Director and Analyst [64]

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And then just a follow-on from me to you as well, Rob. I appreciate you're not giving trading updates from the divisions. But as you sort of mentioned, you got around 100,000 team members across Australia, and you probably got a pretty good finger on the pulse in terms of what's happening in a few of your retail peers out there and talk to some improving conditions through the back end of July and into August. Just interested if there's any interesting broad-based comments you can give us in terms of you how you're seeing the consumer, any signs of green shoots, et cetera, et cetera?

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Robert G. Scott, Wesfarmers Limited - MD & Director [65]

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Yes. So as I've said earlier today on the media call, we see the environment as being not too bad. And if you look at the results that are being delivered across the board, I guess that demonstrates that things aren't too bad from a consumer point of view. They are patchy across Australia. So if you look at different regions, there are certainly different trading conditions by region, which is always the case. But when we get our offer right at least in the businesses we have in the portfolio, we're able to deliver reasonable growth. And we haven't seen -- haven't really seen a material change in what we saw towards the end of the fourth quarter when we updated the market this time of year, also with weather conditions, weather week in, week out, can also drive some different trading conditions particularly in areas like apparel and on the home improvement side. So that's partly why we're not specifically calling out any changes.

The comment I made in the outlook statement around economic outlook and uncertainty, I'd really characterize it as follows. We think the trading environment is not too bad in Australia. I think we have a lot of things going for us in Australia that other countries don't have. Population growth across the board is an important driver. There are a few things on the horizon, which could well deliver some improvements over time such as the tax refunds; such as stabilization in house prices, but that will take time; lower interest rates. But then I guess those potential positives need to be seen in light of quite a volatile global economic environment. And I don't think anyone would be confident enough to make calls on the broader global environment. And in Australia, we're not immune to what happens globally particularly as it relates to the China-U. S. trade relationship. So that's why we're focused on ensuring that each of our businesses are as well positioned as possible. Most of our businesses on the retail side have a history of outperforming in the tough times, so our focus is to make sure we get our cost under control, keep investing in digital and data, to ensure we're expanding our addressable markets and continue day in, day out to be focused on customers and outperforming our competitors. And I think with the strong balance sheet, we're well positioned to do that.

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Operator [66]

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Our next telephone question is from Shaun Cousins from JPMorgan.

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

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Just a question regards to Mike for Bunnings. Just maybe talk a little bit about if there was any difference in the growth rates between commercial and consumer and maybe just more generally as you look at going after that commercial market with a little bit more gusto, just talk a bit about the KPIs you're giving to your sales reps and if any of them have sort of margin in it. We understand you're particularly leveraging sort of price and convenience as the attributes that you can use to gain market share. But particularly how interested are you in using price in sort of signing up customers and just growing revenue being the primary, arguably the only sort of criteria for those sales reps, please.

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Michael Schneider, Wesfarmers Limited - MD of Bunnings Group and MD of Bunnings Australia & New Zealand [68]

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Yes. I think that we've sort of been on record for a long time not talking about the sort of -- the growth rates of commercial and consumer. We'll probably continue that trend today, Shaun. But on how we sort of want to engage with our sales force in the field, the thing that really I love about our business is the long-term focus we have on really good relationship, so we got store-based trade specialists. Their job is to really create and connect fantastic relationships based around convenience, in-stock availability and high quality sort of product advice and service for the really small trades and giving those customers some way to come in and have a bit of a base in the community because we're bit isolated out there working at a small business on your own in someone's home. And then for the sort of medium to larger builders, again, it's very much built around relationship. And I think the thing that we see right across the segment in which we operate, whether it's ours or any of the sort of broader competitive side is, that relationship is very important. Price is always going to be important particularly when it's competitive. But we are very focused on long-term profitable growth, and you can't do that by giving away margin and price. So the investment in relationship, quality of product and convenience of product are the sort of primary drivers for us.

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

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Okay. Maybe a question for Ian, just a few questions on Target. There were 15 closures in '19. If there's a plan to have say maybe 50 close over the next sort of 5 years, I'm not sure if that's still the case, but how should we think about the number of closures for fiscal '20, please?

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Ian Bailey, Wesfarmers Limited - Head of the Australian Conglomerate's Department Stores Division & MD of Kmart [70]

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Yes. We've called out previously that we would look to close about -- or reduce about 20% of the overall space over time as leases come up for renewal. So if you look at last year, we closed 15. It's going to be -- it's probably going to be in that order of magnitude, maybe a little less; in some years, maybe a little more, basically depending upon when the leases come up for renewal.

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

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And any color that you've got in terms of line of sight you have on leases that are coming up for renewal for '20, please.

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Ian Bailey, Wesfarmers Limited - Head of the Australian Conglomerate's Department Stores Division & MD of Kmart [72]

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Yes. I've not got all the numbers in front of me. But if you use a number that is in that ballpark, it's going to be pretty close.

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

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Got you. And maybe just more broadly, what gives you confidence that Target can sort of win in apparel, softgoods and home just in that your competitor set is a lot stronger than it was when Lorna was running the business, and the company -- the business was doing fantastically well. I'm just curious what do you think you've got that's different to your now, I guess, more international competitors that if you are on bricks-and-mortar and also online basis as well. What do you think you've got that's different, that can help you be a success? Because I think as Dave sort of mentioned earlier, it's been something that's been somewhat elusive for the last sort of 5-plus years.

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Ian Bailey, Wesfarmers Limited - Head of the Australian Conglomerate's Department Stores Division & MD of Kmart [74]

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Yes. No. It's a good question again. Yes, I guess what I've got, Shaun, is I've got the advantage of being able to see the product sales that we deliver down at an item level. And when I look at that, I'd see when we get the combination of quality, style and affordability right, then we get incredibly strong sell-throughs. I think our issue currently is the mix of product we have doesn't live up to that standard consistently, which is why we're not delivering sales that we would really like to. So where Marina has really spent her time is getting really clear around what does a great product look like within those categories at Target, and then we're going to start really building the product offering around that.

So we can see the evidence is there. We can see the customer reaction when we get it right. And we can see the reaction to the brand which remained strong, which gives us confidence there's an opportunity for us in that business.

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Operator [75]

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And the next question from the telephone is from Phil Kimber from Evans & Partners.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [76]

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I have another question for Ian. Just if you could talk a little bit about what you're seeing from an FX currency perspective on your buying cost and maybe if you can give sort of your hedge rates for fiscal '20 versus fiscal '19. Is that becoming more of an issue with spot selling dollar where it is?

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Ian Bailey, Wesfarmers Limited - Head of the Australian Conglomerate's Department Stores Division & MD of Kmart [77]

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Yes. Phil, we won't go into the exact hedge rates we've got because, of course, they vary considerably. We do hedges, and the reason that we hedge is so that we have certainty over cost of goods for the buyers because we preprice a lot of our products particularly in apparel. I think irrespective of our hedging policy, if an FX is falling, obviously sooner or later, that's going to translate into cost of goods. And that's true for everybody within the market, so I don't -- I think it's a pressure that's on us, but equally, I think it's a pressure that's on everybody else.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [78]

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Are you saying costs -- now are you saying -- you mentioned before that aggressive price reductions in the fourth quarter, but are you -- and you talked a bit about discounting. But are you seeing any signs that those higher Aussie dollar product costs are starting to flow through the market?

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Ian Bailey, Wesfarmers Limited - Head of the Australian Conglomerate's Department Stores Division & MD of Kmart [79]

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I don't think you would see it yet. Certainly, I don't think I can call it out in any of our competitive set. But what I would say is that there's a real skill in having less price and making money. And I think that's something that Kmart has been pretty good at over the years.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [80]

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Okay. And then my second question is just on Officeworks. You -- I think in your commentary, outlook commentary specifically said productivity initiatives will partially offset the investments in price leadership and the new EBA. I mean does that -- should we expect earnings, therefore, not to grow as a result of those investments? Or yes, it will affect earnings growth, but you're still expecting some sort of growth in earnings in FY '20?

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Sarah Hunter, Wesfarmers Limited - MD of Officeworks [81]

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Yes. So what I said was earnings growth will be impacted. So our expectation is that we will continue to grow. But we are flagging that there will be an investment as a result -- in our team as a result of the step change required for the new enterprise agreement. And we're working hard to mitigate that impact with productivity initiatives across the business, not just in stores. We want to ensure that we continue to maintain the fantastic momentum we have around customer experience in stores, and that's really, really important to continue to invest in.

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Operator [82]

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Our next question in queue is from Johannes Faul from Morningstar.

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Johannes Faul, Morningstar Inc., Research Division - Equity Analyst [83]

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I had another one for Ian, if I may. I'm just trying to get my head around the difference in customer shopping habits across the 2 discount department stores. And really what I'd like to know is where is online currently standing at Target and Kmart in terms of penetration and growth. And how do customers shop? Do they pick up more Click & Collect at Kmart and Target? Are they because they're perhaps more price sensitive? And then would it be fair to say that the approach to the store networks cutting back at Target but probably expanding in Kmart? Does that suggest that there is actually a difference?

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Ian Bailey, Wesfarmers Limited - Head of the Australian Conglomerate's Department Stores Division & MD of Kmart [84]

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Thanks, Johannes. A few questions in there. Let me have a go at the online piece. We don't call out the online penetration within the businesses, but what we have said within our release is that both Target and Kmart are growing online very quickly. And what we see in terms of customer shopping behavior is so much of the customer journey now begins online. And then the customer ultimately makes the choice, do they purchase in store? Or do they convert online at that moment? And as they convert online, does that translate to Click & Collect? Click & Collect is being very successful across both Kmart and Target. And I think there's an economic reason for that for customers, and it's a low cost. But equally, there's a convenience reason and we're seeing that as a global trend not just as a local trend as well. So we see it as a really great opportunity to leverage our store footprint across Australia as a Click & Collect destination. I think we've called out before we're looking at how do you have as many Kmart and Target products picked up at our stores as we can to make it really nice and convenient for customers. As we continue to rationalize the Target number of stores, it's one of the areas which we see we can feel the online growth in Target. We want to keep a very tight relationship with those customers so that when the store closes, we don't lose the customer relationship, and we stay as close to them as possible. We've already started doing Click & Collect in some of the local locations where we have a Kmart store near a Target closure, and we're seeing already good success of Target customers converting to pick up their Target products from that Kmart store. So it's very much an omnichannel strategy that we're embarking upon. We see a lot of growth opportunity from it. And of course, staying really close to our customers is key as we develop that strategy.

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Johannes Faul, Morningstar Inc., Research Division - Equity Analyst [85]

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Just to clarify, so a Target customer can pick up Click & Collect at a Kmart store, is that right?

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Ian Bailey, Wesfarmers Limited - Head of the Australian Conglomerate's Department Stores Division & MD of Kmart [86]

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Yes, that's correct. There's only a small number of stores at present, and we're looking to expand that across the fleet over time.

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Johannes Faul, Morningstar Inc., Research Division - Equity Analyst [87]

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All right. And how's that logistically in terms of delivering the product into that Kmart store? Does that have interest...

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Ian Bailey, Wesfarmers Limited - Head of the Australian Conglomerate's Department Stores Division & MD of Kmart [88]

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Yes. It's pretty much -- it's been like any other delivery coming to the Kmart store is delivered to the store. It's put away. And when the consumer comes in, we pick it out and hand it to the customer.

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Operator [89]

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And our next question from the telephone line is from Scott Ryall from Rimor Equity Research.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [90]

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The question is for David Baxby, I think. On the Chemicals business, I was wondering if you could comment across your different product lines on the potential for opportunities outside of Western Australia and how cost competitive you are because, obviously, you got some headwinds you've called out in ammonium nitrate at some point. Fertiliser, yes, you have, you said, a very strong seasonal performance, but I'm just wondering what opportunities you see at the medium term to, I'll call it, export out of Western Australia but, you know what I mean, get access markets outside Western Australia, please.

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David Baxby, Wesfarmers Limited - MD of Industrials Division [91]

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Yes, Scott, look, it's a great question. We do have modest explosives, sodium cyanide, and have done for some time. Although we are seeing there had been some significant international capacity expansions with respect to that commodity, so we're watching that market very carefully. The rest of it is very, very modest. But what I'd encourage you to do is come along with the site tour that we've got, we can actually come and speak to the team. Yes, we believe our cost and operational performance benchmarks are internationally competitive. But at the end of the day, the further you go away, the larger the freight component becomes and, therefore, going to create some headwinds. So -- but be happy to elaborate that further as -- if you'd come along with the site tour.

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Operator [92]

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There is 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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Robert G. Scott, Wesfarmers Limited - MD & Director [93]

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Okay. Thanks very much, everyone, for joining us for a long call. If any questions, please call Erik and the team. Have a good day.

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Operator [94]

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Ladies and gentlemen, that does conclude the call. You may all disconnect. Goodbye.