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Edited Transcript of WHL.J earnings conference call or presentation 29-Aug-19 5:30am GMT

Q4 2019 Woolworths Holdings Ltd Earnings Presentation

Cape Town Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Woolworths Holdings Ltd earnings conference call or presentation Thursday, August 29, 2019 at 5:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ian Moir

Woolworths Holdings Limited - Group CEO & Executive Director

* Reeza Isaacs

Woolworths Holdings Limited - Group Finance Director & Executive Director

* Zyda Rylands;CEO, Woolworths South Africa

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Conference Call Participants

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* Jeanine J. Womersley

HSBC, Research Division - Analyst, South African Retail

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Presentation

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Ian Moir, Woolworths Holdings Limited - Group CEO & Executive Director [1]

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Morning, everyone. First of all, thank you very much for coming here at this early hour. Lovely to see you. We have quite a number of our non-executive directors here. We have Simon, the Chairman. We have Hubert, the Deputy Chairman. We've got Sivi, and Sivi always comes to our presentations. And we also have a number of the new nonexecutive directors. I saw Belinda Earl earlier. Hi, Belinda. And we've got Chris Colfer. And we've got Clive Thomson also. So welcome to you all.

So without further ado, let's get straight into the overall group performance. No surprise to any of you, there have been many businesses talking about how tough it's been in the South African market. It's also continued to be tough in the Australian market. But the highlight of the half of the year has certainly been the turnaround of our Fashion, Beauty and Home business. I'll talk more about that later.

And Spencer, to you and your team, thank you for your continued performance and continued momentum in Foods. It's actually accelerated into the second half, which is wonderful.

We've had a disappointing performance in David Jones. Elizabeth Street is really impacting us at the moment. And that makes a difference of about 3% of our total sales because it's about 15% of our business.

We've already announced the reduction in the carrying value of the David Jones asset by AUD 437 million. Within David -- within Country Road, it was a reasonable performance within what's a pretty tough market.

Turnover for the group as a whole, that was up by nearly 4%. Adjusted profit before tax was down by 3.7%. Our adjusted HEPS declined by 2.1%, and the dividend is down by 20.3% because we withheld the dividend in Australia to reduce debt as we announced previously.

Okay. Well, let's just unpack it a little further. The South African environment is tough. The growth has been weak. The consumer is constrained. We saw load-shedding in Q1 really impacting the market overall. But confidently -- confidence seems to come up a little bit and then it just dissipates.

I think there are concerns about we've got high electricity, high fuel costs, weak income growth, really high unemployment and there's been muted credit extension across the market in the last 12 months. So there is no doubt right across the market, we're facing a constrained consumer.

But within that, Woolies South Africa seems to be doing a pretty good job, Zyda. So well done to you and well done to your team.

If you look at Fashion, Beauty and Home, I hate using this phrase, the old football joke, it really was a game of 2 halves. If you look at the year as a whole, the sales were up 1.5%. Comp sales were up 1%. Price movement was 3.6%. But within that, 2.5% for Fashion, because Beauty has a big impact on that. Not that we -- and that's not a pricing issue, it's a mix issue as we've gone into the big beauty brands.

But the second half is really worth calling out within Fashion, Beauty and Home. We've got it back to where it should be. We've refocused the business. We've made the changes that we talked about. Our disciplines are better, our skills are better and we're getting back to what Woolies is all about. Its core basics are there. The key item, the building block of your wardrobe, you can see it in depth, in color and it's available and it's right. And that's what people come to Woolies for.

And then on top of that, we've got our fashionwear right. We're focused on the sub-brands. We've got them delivering the right level of quality and the right level of fashion for our demographic. And we've reminded ourselves just who our customer is, and I don't think we're really delivering to them.

So if you look at the second half alone, our sales were up by 5.5%, which is above market growth. Our comp sales were up 4.7%. Online is growing at 41 -- 40%. But the real story is it wasn't just good top line growth, we had good margin growth. We -- because our goods were better, we were marking down less, we were promoting less. So that flowed right through to gross margins. So it was 1.2% higher in the second half.

And then if you have a look at profit for the second half, our full year was 1.1%, but profit for the second half grew by nearly 16%. So a real turnaround in the clothing business. And I don't know how you're looking so grim, Charmaine. You shouldn't be looking quite so grim with that result.

Foods. Foods was unbelievable, really. I have to say, Spencer, you've -- when you took over, you sort of stepped into that role and you stepped on the gas and we've seen a continued acceleration of that business. We saw total sales for the year up nearly 8%, comp up by about 5.5%. We saw price movement of just under 2%, and we saw a 2% new net space. But again, even stronger into the second half. We saw second half sales up 9%. Our comp sales, up 6.5%. Good focus on promotion, but still maintaining our gross margin. Good cooperation with our suppliers on this.

I think we're offering great values at great margins. And we saw our operating profit up by nearly 5.5% for the year. But again, just as in Food -- as in clothing, we saw our profit up 10% for the year. So a really good result. And we've maintained our operating margin just above 7%, and we've seen that pretty consistent for the past few years.

So this is -- we do not yet have a chart for clothing, but it's coming because we're back into the [RCL] group. Now that's a pretty impressive chart, and it's been like that for nearly 10 years now. The gap between us and the market seems pretty consistent at few percentage points. As you can see, we had a really strong May and June, but continuing that trade above the market.

Over to Australia. Australia's -- the economy is tough, it's slowed to its weakest level since 2009. The apparel sector is particularly tough. We're seeing a lot of structural change, we're seeing a lot of businesses going under and a huge amount of promotion in that marketplace. We're seeing less people coming into malls. And we've understood and talked about that structural change. When I get to David Jones. I'll talk more about what we're doing about it.

And if you look at it, there's still that GDP growth of around 2.5% and treasury rates are at record lows. And there's even strong job growth, but wage rates are not growing strongly. You've got a cooling housing market. The level of indebtedness is very high. And you've got rising nondiscretionary costs. So you've got a real wealth impact and a real economic impact on the market as a whole. So a pretty tough market to operate in.

David Jones, difficult year. Huge pressure still coming out of the economy, coming out of structural change, but also coming out of what we are doing. We're not through all of our refurbishment in Elizabeth Street. In fact, we're right in the middle of it. I'll talk to you about it a bit more and exactly where we are, how much more we've got to do.

We're coming to the end, we're getting there. But the year still saw a massive disruption of that store. All the things we were doing about systems and people and moving head office, all of that structural change is done and complete and through, and we're beginning to get the benefit of those systems now.

But Elizabeth Street is really pulling us down. It looks like a building site. It's 15% of our sales, so of course it's going to have an impact on the business. We saw a net increase in space of 0.4%. But we see real decreases in net space going forward. And again, I'll talk to you that when I -- I'll get to that when I talk to you about the David Jones strategy.

Online, we're seeing -- we replatformed at the beginning of financial, and we saw each quarter Online really accelerate. That's really working for us. It grew at 47% for the year, it's now 7.7% of our sales and it's currently growing at around 60%. So each quarter gets higher than the one before. We've still got some functionality to switch on, but a good result.

Our GP margin decreased by 1.1% to 36%, and that was because we took the decision to really clear out stock. In going in, we took the view that really wanted to clear it out and be much more aggressive. The market was highly promotional, but we need to get our stocks down. So we took our aged inventories down by nearly 30%. Our total inventories on a comparable basis were down on the year. So a really aggressive focus on inventory within that business. And our adjusted profit margin declined from 2.9% to 1.7%.

In Country Road, kind of similar sales to David Jones. That's pretty much where the market is trading at. So they were up by 0.5%, with comp sales 0.6% lower. Country Road's [Trenery], which is the big story, we think it's the biggest brand within that business. So in the last quarter, we see -- saw a real turnaround in the Country Road business. And it wasn't just women's, it was right across the business, women's, men's, kids. We've launched a new tween range within it.

So really good and better margins. So in the last quarter, we saw our margins grew by nearly 5 full percentage points as we sold more at full price and walked away from some of the promotions that we had been engaged in.

Offset against that is Witchery seems to have come off the boil. They had a great first half, not such a good second half, so they're balancing each other out. GP margin was up because of that focus on less promotion. And our online still continues to grow. Now 12.9% might not sound much, but when it's 20% of your sales, it's good growth. So that platform works well. It's a truly digitally enabled business, and we'll continue to focus on that within the group. Net space reduction of 2.9% and operating profit 2.9% lower.

Okay. Reeza, over to you.

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Reeza Isaacs, Woolworths Holdings Limited - Group Finance Director & Executive Director [2]

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Thank you. Thank you, Ian. Morning, everyone. We've got a big 52:52 there, but just a reminder that we had a 53-week year. This happens every 6 or so -- 6, 7 years or so, and it makes comparability with the previous years a bit difficult. So income statement presented on a 52:52 basis, and balance sheet and cash flow on a 53-week basis. So just bear that in mind when we go forward.

Right. I think Ian's covered most of these numbers. Turnover and concession sales up 3.9%. In constant currency, it was 3.2%. So the rand was weak against the Aussie dollar over the period. Adjusted profit before tax, down 3.7% to ZAR 4.6 billion. HEPS, down 4.6% to ZAR 3.30 per share and then adjusted diluted HEPS down 2.1% to ZAR 3.56 per share.

So we gave you ranges, I think it was towards the end of July in our trading statement, and those -- both those numbers are in the middle of those ranges. Obviously, [are we] -- those numbers then stack up, maybe it looks a bit different to what you've estimated.

EPS, minus ZAR 1.26 per share, and that's after the impairment of the David Jones assets. The total dividend down 20.3% after the suspension of the Australian dividend, with a final dividend of ZAR 0.985 per share. That is down ZAR 0.24. And ROE, 17.5%. Both the current year and the prior year has been calculated based on the adding back of the impairments in both years. So that -- so those numbers -- the capital base, the calculation is consistent and comparable. Right.

Group income statement. Woolworths, up 2.5%. Ian spoke about the turnaround. It was minus 4.8% in the first half, just to remind you of that in totality. So a significant improvement in FBH in H2 and the continued strong performance in Food. And obviously, good book growth in -- continued good book growth in Woolworths Financial Services.

David Jones delivered $37 million of profit for the year. I'll unpack that a bit later, but challenging trading conditions, a tough Christmas, as you can recall from H1. And of course, Elizabeth Street impact in -- well, for the full year, really.

Country Road delivered $100 million worth of EBIT in what we would call a reasonable overall performance for the year. A better first half than the second half. And H2 obviously impacted by the Myer exit.

Net finance costs, more or less in line with prior years with reduction in SA interest rates, offset by higher volume in Australia and some currency differences there.

And then tax rates, you will see the adjusted effective tax rate is down on last year. We've had some over-provisions, which we've reversed, but essentially it's down to a higher proportion of SA profits. And just remember that Woolworths Financial Services is also after tax. That $295 million is a post-tax number.

And in the adjustments, the impairment of David Jones assets are covered on the next slide, but we've written that down to -- the recoverable value to $965 million. So that's a $437.4 million impairment this year. All these adjustments are post-tax.

Relocation and the restructure costs, we covered the first, but in the first half, it was the relocation of the Country Road head office from its previous head office in Melbourne to Richmond to join David Jones. And then we undertook another restructuring of David Jones towards the end of this financial year or the FY '19 financial year, which will positively impact the cost base going forward.

Myer exit costs, that was also covered in H1. That was a provision in respect of the exit of Myer of the Country Road brands, part of our exclusivity strategy. And that includes the lease make good as write-offs and some redundancy costs.

Onerous leases, we reversed about $2.5 million of onerous lease relating to Eastland, the store in David Jones, but we provided another $22 million in H2 with regard to further onerous leases in David Jones. And Ian will talk about our store network strategy and just what we're doing in terms of optimizing that.

Just a few words on the impairment. Obviously, it follows a very tough and difficult year within David Jones, and the performance was below expectations. The models and the assumptions were independently reviewed. The independent review looked at discount rates, looked at total value growth rates, [total] value CapEx. And of course, it was subject to audit by our external auditors.

And in the -- just a reminder, the final point, we made this during the previous impairment as well, is that the impairment is added back to the capital base when we do our ROCE calculations for purposes of long-term incentives. So there's no benefit derived with respect to that. Right.

Moving on to the divisional income statement. If you can recall, turnover in H1 was actually down 2%. We saw an improvement from quarter 2 to quarter 1. That improvement, as Ian said, has continued into quarter 3. Quarter 3 was better than quarter 2. And quarter 4 was -- that momentum continued. And you will see, when Ian touches on the first 7 weeks of trade post year-end, that momentum has actually continued post year-end as well.

So H2 growth of 5.5%. 5% if you adjust for that day of trade included in H2, the Christmas day -- pre-Christmas day, which was included in H2, not in H1. And a price movement of 3.6%, with price movement relating to fashion at 2.5%. And GP, up 120 basis points in H2, up 8.4%.

And in the cost base, again, well managed. Not quite achieving jaws but definitely achieved jaws in H2. And the store cost, just bear in mind, includes costs relating to Beauty and the Beauty rollout. And other costs -- other operating costs includes a performance incentive as well.

So again, a reminder, we were down nearly 12% in H1, and we are up 15.7% in H2, and that is after incentives. I would have mentioned incentives as well when I talk to Food.

So just moving on to Food. Again, overall, an outstanding performance and up 7.7% for the year. It was 6.3% if you can recall in H1. So H2 accelerated to 9%. It was 8.4% if you adjust for that Christmas day. But again, price investment, volume growth, good -- backed by good availability within that business.

And if you look at the margin, we were -- we invested more margin in H1 than we did in H2. H2, we pulled the margin back with more targeted price investment. And -- but we still continued to see strong volumes. So a great job there by the team, as Ian has said. And in other -- and then expenses, it's comp store growth at that 5.5%. Store costs include -- well, affected by volume growth as well as some additional space.

And other operating costs, as I've mentioned, include health incentive now this year. And again, a reminder, it was flat in H1 EBIT. Actually, it was marginally up 0.6% and up 10% in H2 after incentives. And return on sales, 7.2%. It was 7% in H1, and it's ahead of the medium-term guidance. So that's a good problem to have.

Right. Woolworths Financial Services. Again, good job also by Sivi, Sivi and the team. Average financial services assets is up 5%. The closing book was actually up 7.4%. So good book growth there. Obviously driven by customer acquisition campaigns, [credit] increases with existing customers, a better performance from FBH. There was Charmaine and the team helping there. And yes, it's -- we're certainly very happy with the book growth there.

Just on the income statement. 2019 is presented on an IFRS 9 basis and 2020 -- I'm sorry, 2018 on an IAS 39 basis. So those numbers on the right-hand side are not really comparable. I'll try my best to explain it. But interest income now includes interest on stage 3 accounts. So stage 3 defined as accounts in excess of 120 days, but it includes interests at an amortized -- on an amortized basis. So it actually shows a reduction. But on a comparable basis, it was actually up 2.9%, obviously impacted by the retail rate adjustments declining, and offsetting that is increase in the book.

And then that, in turn -- so you've got lower interest income, but the impairment rates on those accounts are actually positively impacted as well. So that impairment is down 16.3%. On an adjusted basis, on an IAS 39 basis, it's actually 4.6%. So again, that's a decline over the 4.7% last year. That includes collection costs of about circa 1%. So another great result from a collection's point of view.

Noninterest revenue up because of the better credit card activity. More credit card activity means more merchant service fees and interchange income. And then operating cost is a bit of a negative jaws, but all good costs. Good costs relating to growth in the book, collection costs and digital on-boarding. Digital being a big driver of the book going forward.

And in ROE, ROE is comparable. And ROE is around 33% on that book. We've included some more information on Woolworths Financial Services in the back of your booklet and if -- just for further analysis.

Book performance. Chart on the right, IFRS 9; chart on the left or the numbers to the left, IAS 39. Book growth from last year to this year, up nearly ZAR 1 billion. Obviously, now includes the legal portfolio, which also increases the coverage ratio of impairment, and that's gone from 13.6% to 20.6%, obviously also impacted by the move to IFRS 9. And that impact was about ZAR 750 million increase there.

David Jones, no doubt a challenging year. You look at the column on the right, there's lots of brackets there. Maybe just a few things to bear in mind. I'll mention it again, Elizabeth Street was at peak disruption. The -- there was significant clearance activity especially in H2, clearance of aged stock, and that impacted margin.

And then Food continues to be a drag on profits as we get that business to breakeven. We haven't shown that loss separately this time. And other operating costs is a bracket, but it's a positive bracket because that obviously reduces based on the cost-out exercise that we have done.

So let me just run through the income statement very quickly. Turnover and concession sales down 0.8% for the year. It was up 1% in H2. The Elizabeth Street disruption, the -- it's about 2% of total sales, and online sales was up 46%.

And the margin, as I mentioned, the clearance of aged stock especially in quarter 4. That significantly impacted margins, but we started the new year off with stock in a much better position. And there's a significant focus on stock turn, stock turn especially in the lower doors, in the underperforming stores, and the team is focused on that.

Store costs. Two new stores this year, Carousel and Sunshine Plaza. We're obviously not planning new space going forward, except for the new food store in South Yarra and additional online costs classified within store costs.

And in other operating costs, obviously lower by 6.6% based on the cost-out exercise that we've done towards the end of 2018, which impacted the 2019 cost base. And then we undertook another cost-out exercise towards the end of 2019, which will positively impact the 2020 cost base going forward.

Financial services' strong contribution to profit. A function of our good relationship with Amex and investment in that top partnership.

And in adjusted EBIT. Sorry, I know we get to just say $7 million this year, but due to the factors that I have mentioned, and it does include the Market Street rent. Just bear this in mind, it does include the Market Street rent of circa $16 million, which falls away in 2021.

Adjusted EBITDA is $103 million and about $66 million of depreciation and amortization. So that is still healthy cash generation there.

Country Road, it was up 2.3% in H1. Turnover, basically flat for the full year, up 0.5%. As you can see, the tale of two halves. Not much to add there except that H2 started being impacted by the Myer exit. As we -- we started exiting Myer from April, it will be completed next month. But clearly, you send the stock to the stores and you trade out of those areas, so that is impacting the H2 number.

GP was up 60 basis points, and that was despite the clearance activity. So a good performance from a GP perspective. And then expenses up 2.3%, so costs well controlled, benefiting from some store efficiency initiatives, including staff rostering; and the increase in other operating costs related to the head office move; some investment in David Jones' private label, which Country Road now runs; and also some incentives.

And you'll see -- sorry, adjusted EBITDA at $140 million, which is healthy. Circa $30 million of CapEx investment.

Net finance and other costs. From an SA point of view, down from ZAR 870 million to ZAR 812 million a reduction due to lower base rates in SA. And then that's been -- like I said, being offset by higher volume in Australia, and that was mainly due to the Elizabeth Street spin.

Okay. Just a bit of a pit stop on accounting standards. I'll keep this very brief. The first 2, fairly, fairly simple. I think IFRS 9, the major impact for us is in respect of Woolworths Financial Services, which we equity account, there's been an opening reserves adjustment, which affected our investment in WFS to about -- to the tune of about ZAR 217 million.

IFRS 15, there is some reclassification of revenue between sales, cost of sales and expenses. For example, online delivery charges. We charge a customer for online, you have to classify that as revenue, and you don't offset that against the cost of online. So some reclassification there.

The opening reserves impact is not material, and the profit impact for this year is not material. The most significant statement that will affect us, as you know, is IFRS 16, which requires you to capitalize leases based on certain criteria. The most significant for us is stores, store leases and operating store leases, which we are having excess of 1,000 within the group. We are planning a separate presentation on this in October to give you a bit more detail on this. And there will be a significant impact on our balance sheet, our income statement. And the cash flow, not so significant. But we have done an exercise, and we will share the details of that with you. There's some ranges in terms of our assets, liabilities, finance charges and depreciation that's impacted, so to give you a sense of where this will go.

There's a small disclaimer at the bottom there, that the ranges are dependent on the exchange rates given the significant lease liability, for example, that we have in David Jones.

Okay. Group balance sheet. Total assets down by circa of ZAR 4 billion, in the main due to the impairment of David Jones -- the David Jones assets, and that's affected intangible assets as well as shareholders' funds, the investment in joint venture that is Woolworths Financial Services. And then our stock is up 10.9%. From an FBH point of view, the increase has been driven by, as we have said, improved availability and backing core ranges and basics, and we also had an under bylaws there, just bear that in mind as well. And in good working capital and stock management story, both in David Jones and Country Road, where we've significantly reduced age clearance stock in those businesses.

Deferred tax has been impacted by the -- by the release of the deferred tax liability on the impairment of the David Jones plans. So that is some significant movement there. And trade and other payables is down but impacted by week 53 based on payments that we've made, including salaries that we have settled. Last year, we ended the year on the 24th of June. This year, it's on the 30th of June.

Okay. And then from a net gearing perspective, total unutilized facilities are significant at ZAR 8 billion for the group. From an SA point of view, marginal increase in total debt. And then we continued to diversify sources of funding within our debt commitments with 3.8 billion now under -- issued under the DMTN Programme and auspices. And then we have reduced the unutilized committed facilities, as you can see, given the headroom that we have there.

Australian net debt, up from $355 million to $420 million. And that, as we said, is mainly as a result of the David Jones' CapEx spend on Elizabeth Street. And also a reminder, we are going to withhold the dividend in Australia until net debt reaches circa $200 million.

Covenants. We disclosed this for the first time last period at interim, and we have done it again. So it's a bank covenant. It's a covenant well within bank levels, as you can see, both net debt-to-EBITDA as well as interest cover. And then the Australian bank covenants has been impacted, but there's still headroom, but it has been impacted by the Elizabeth Street disruption, Elizabeth Street CapEx as well as the impairment of the David Jones assets.

CapEx. These numbers for 2019 and 2020, I have -- we have restated these numbers in -- to include rollovers. Rollovers has a bit of an impact from 1 year to the next. So between the '19 number, it won't quite tell you what's in the cash flow statement, but that gives you a sense. I think it's a bit of sort of a depiction when you include rollovers of what your actual commitment is and your spend is in a particular year.

So ZAR 2.8 billion for 2019. We guided you to ZAR 3.2 billion. So significantly better than that, and that's in the main due to CapEx, deferral of noncore CapEx and a bit of a rollover.

And then with regard to Elizabeth Street CapEx, which is mainly represented by the light blue blocks, that is a -- just to a reminder that ends in 2020. So by March 2020, we open below ground in Elizabeth Street, and that ends. We have -- there's some make good with regard to Market Street that we have to do between March and June, but it ends in 2020. And normalized CapEx for the group will be in the region of about ZAR 2.5 billion, of which ZAR 55 million is David Jones; and ZAR 30 million, Country Road.

And then depreciation and amortization in the table below, which we also -- which is also useful information for you.

Cash generation, ZAR 7.3 billion cash inflow from trading. Working capital movements does look high at nearly ZAR 1 billion but bear in mind that we invested in stock in FBH. And then also, there was a negative impact of about ZAR 330 million relating to week 53, so there's a week 53 position.

And in maintenance CapEx at 2.2 billion, we classify Elizabeth Street as maintenance CapEx. I mean it's a big refurb, but we've included that in there. And then free cash flow of ZAR 1.9 billion, with a total increase in net gearing of ZAR 659 million.

Free cash flow and dividends. We've done this now a few reporting periods, I think it's useful information. Just to show you the difference between free cash flow including and excluding strategic initiatives. And strategic initiatives, we define as strategic CapEx, which is mainly Elizabeth Street acquisitions and property disposals. So the property disposal was the disposal of Market Street in 2017. That's the ZAR 3.6 billion that comes in the column on the far right. And then if you exclude the strategic CapEx from the cash flow, there is a decrease in net gearing on that basis.

And this is the final slide in my presentation, my part of the presentation, at least. And this is earnings and distribution. We exclude the Australian dividend from the total dividend. Dividend cover increases, obviously, there's mathematical increases to 1.8x for the year, $1.90 cents per share for the full year based on HEPS of $3.30 cents per share.

So back to you, Ian.

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Ian Moir, Woolworths Holdings Limited - Group CEO & Executive Director [3]

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Thanks, Reeza. Okay. I'm going to start with Woolies Fashion, Beauty and Home. And what we're doing here is a continuation of what Charmaine and the team have started. We've got to keep the momentum going. We've got to keep that business building on the very great base that's already been created. We've got to keep focused on what we're about, who our customer is, get those key categories right, the base building key items. Can I talk to you a little bit about -- I was sitting there, I've been thinking, do you know what, there's a great example of exactly what we're doing just here. And it wasn't planned, it wasn't planned that way. I was just reading through the presentation. And it's worth looking over because we've talked about elevating our quality, getting the key item right, using that as the basic building block of our ranges.

So if you see across here with the tees, it's all about having real options. So you've got different styles of tees. It's a real focus within the offer. You can go in, you can shop at, it's what we're famous for, it's what people come to us for, we've increased the quality. So you can see, we're using BCI cotton, and we've got a new technology the added -- gives it a different added product attribute, and we've got it in it for great values. It's linked back to our reward program. And then what that does, it then flows around into fashion. So you can come for your staple item, you can get it in good quality and great value, and then you add to that with the fashion and the sizzle that's just around the corner. So it's a really good job of exactly what the team have been striving to do.

We're going -- we're still working on the brands. Not all of our shop brands are working as well as others. RE:, which is just behind me, has worked with the denim brand, it's working really well. But we've still got more work to do in Studio, we've still got more work to do on classic. But the team are focused on the customer, they're focused -- they realized what they're getting wrong and what they're getting right, and they're building that business and the momentum in it is strong.

And this -- the focus that I think the team have brought about, better quality, more innovation, more attribute, more value add to the product, I think has made a big difference. The fibers we're using, the fabrics we're using are better than they've been. And the technology that we're adding to that to give an additional attribute, I think has been first class. So well done to the team on that.

But what Charmaine has also done is brought a real eye to the business. It's more disciplined, there's more process, and she sees just about every single item that goes into the range. So it's a much more disciplined business than it has been before.

Beauty is also trading well for us. We talked -- in the last 2 years, we've talked a lot about beauty, building that as a category, making sure there's a destination, taking customers away from the Edgars business. We've brought the exclusivity that they had. We've got CHANEL and Estée Lauder brands in our store now. And that business has been growing at about 28% in the last year, and it grew about the same level in the year prior. So a nice big build of that business. And again, a cornerstone of our clothing and beauty business.

The other thing that we're doing is focusing on online. And online is a relatively small part of our business as it is in most businesses in SA. But we're converting ourselves to be truly digitally enabled. We're using data more and more within our business. Our platform, we've been constantly adding to and reinventing, making it better. And we're seeing really good growth. We've launched an in-app shopping capability. So that business is growing, growing with good momentum and offering a good service to our customers.

In Food, I think it's more the same. You don't really want to break what that -- what's going on in that business. It's really -- it's a first-class business. It's providing the best-in-class. It's not just the best-in-class in South Africa, it's the best-in-class worldwide. They don't bench themselves against what happens in this market, they bench themselves against -- they benchmark themselves against the best worldwide. And that's really important because people can always catch up unless you are trying to always be the very best.

Our product is innovative, it's high quality, it lasts longer, it's great value. With this focus, we've got on convenience and making life easy, so the convenience translates into format. So smaller stores, more neighborhood stores, Engen stores' expansion. It's not just that. It's also about making your life easier and convenient, giving you meal solutions, giving you options, pushing our prepared business, which is growing really nicely for us. And it's something we really stand for, but within all of that, strengthening the value perceptions. It's -- we have performed far better than anybody would have thought through a really difficult economic period. And we've done that because we focused on the yin and the yang of the business. And Zyda has always pushed this for years within the Food business where she's saying, it's not just about being the best in quality and being innovative and making it different, it's also about providing great value and making sure you're priced competitive. So I think the guys have done a good job and doing mid-month, month-end promotions, but also focusing on everyday low prices and offering deals that -- really, [Henry] used to say, that's not what the Woolies customer is about. We now know it absolutely it is. Everybody wants good value. They want great food and they want quality, but they also want good value.

But we also want to be the destination for sustainably sourced and ethical food. It's a part of our good business journey, it's what we're all about. And we continue to drive that within our Food business, and we do it through our supply base. Our supply base is very strategic. It's exclusive to Woolworths by and large. We've been with them a long time, we both make good money from this, we've both got a really good understanding of the Woolies customer. What quality means and how to drive and attain that, and how to innovate and develop the investment that our suppliers make, and this is significant.

But the other thing that the guys have done a really good job of is improving availability. Yet again, we've had further system improvement, and they've got availability up again, and it's making a difference and it's increased availability. At the same time, they're actually taking waste down. So a really good performance. And that's what we're focused on for this year.

In David Jones, the future is being through the toughest of times, the biggest of transformations, and it's cost us a lot, and it's been disappointing. The first 2 years we had the business, it was great. We got double-digit growth, both top and bottom line. But the last 3 years, you all know as well as I do, how tough they've been and how disappointing they have been. But we're coming through the end of that, and the future lies in what we're doing. And it's an absolute focus on the upper middle to top end of the market. Now we've got more data on the customers. We've got a loyalty system, we've got over 2 million customers captured, we know the same information and data on our customers as we do here. So we know their all about.

Where we're getting our money from is the luxury-trend customer, it's the top end of the market. So we want to provide luxury, an exclusive, differentiated product. Future for department stores and all of the successful department stores around the world are doing this. It doesn't matter whether it's Selfridges, la Rinascente, whether it's Printemps, Galeries Lafayette, they're all doing the same thing. It's all about luxury, it's all about making that accessible and making luxury accessible down the chain. Luxury means different things to different demographics. Understanding your demographic, understanding what luxury means, getting innovation, the mix -- the right mix of product and the right mix of brands and making sure your top doors are amazing experiences.

But it's also about making sure that we are alive to the structural change. Online has really taken off in Australia. And you could see the figures in Country Road earlier that it's 20% of their business. It's nearly 8% of David Jones business. It's not long before it's going to be 10%, but it has to be a great online platform, but the whole business has to be digitally enabled. We have to have data on our customers. We have to have the very best loyalty program. We just, in the last few weeks, launched a loyalty program that was digital. So it's no plastic, it's no points, instant rewards and it really works. So in the first -- we launched it with the -- you got a $10 reward for joining the program. And in the first 3 days, we had about 4.5 million spent on people coming with the -- with their mobile and getting the $10 reward. And it's about making sure that we capitalize on all of the investment, all of the hard work, and we've really got to turn that business around. We know that deeply.

We've had a real focus on inventory management. I've been very close to the business. I've been acting as -- I've been the acting CEO of that business for some months. And we want -- I really wanted with the team to drive inventory levels down. Get as much stock out of the system as we possibly could, focus on better stock turn, focus on the bottom stores, get that stock down in the bottom stores. Get new brands in, get more innovative product in. And so the business is really excited about where we're shifting with our inventory.

We're also focused on better inventory -- sorry, better margin management. We've got our vendor trading terms program in at the moment. So we're talking on to our vendors about what the terms are, how we can improve them, how we can get more margin into the business. We've set targets by category and by brand within each of the groups. So they're all focused on that, and they're all delivering well on that. And we expect that to deliver approximately 10 million during the course of the year, and we are on track to do that. And I've already talked about the loyalty program.

Other things we're doing, we're building our Food business. We announced this week, a joint venture with BP in Australia. We're doing exactly the same thing as Woolies did with Engen, and the focus will be on pretty much the same product. It's about prepared with the percentage of long life. That's a store-within-store concept. We'll trial 10. The first one launches November, it'll be New South Wales and Vic, and we'll see how that goes. If it goes well, obviously, we'll see an expansion into that business.

We've also, I think, had a good focus and appropriate focus, given where we are, on reducing the costs within that business. So towards -- in the first week of July, we restructured the business. It will save us about $7 million a year. The cost of doing that was provided for in last year's figure. But it's not just $7 million, we've identified another $13 million of costs that we can pull out of the business and other areas so that we'll become a much more cost-effective business.

But one of the biggest for us is to really optimize our store network. We've been talking about this for a time. We've got to get less stores, less space in the lower demographic areas. We've got to exit any marginal or undesirable leases. Now we're saying on the expiry, but we really want to try and do it earlier. We want to try and get more aggressive with the landlords, do different deals with the landlords that gets us out of space or out of leases earlier. We want to renegotiate our terms. So we're looking at more and more of a -- trying to get more and more of our leases that are turnover related rather than fixed escalations. We've done a good job in terms of not only getting out of space, not only getting out of leases but also taking our space down by taking out floors. And it's difficult, it's not easy at all, we understand that. (inaudible) is responsible for adding indiscernible] his staff there. He's done a really good job, and it's been tough over the last 6 months. And you have to create partnerships with some landlords and taking a more aggressive stance with other landlords, but we are absolutely focused on getting our space down. And where we believe we can get to is around a reduction of around 20% of our space by 2026. Might be a bit less now if they give us amazing deals on those, but our intention is to reduce it by 20%.

Where are we with Elizabeth Street? Well, that's a biggie. When this is complete, it will make a difference of $42 million to the bottom line. The rental falls away and finally, we get this trade -- this store back trading to where it used to be, and hopefully -- and some. We opened a luxury shoe floor in October '18, we added kidswear with our unique partnership with Disney in November 2018. And just recently, we opened beauty and accessories on the first floor. So luxury is still to come. This is brands -- this is more accessible brands on that floor.

We are opening -- we've opened 2, just about to open a further 1 of our womenswear floors. So we've opened young and contemporary women's. We've opened designer women's, we've got 1 to go. And then we will, in December, open ground floor, which will be all the luxury brands. So the CHANELs, the Estée Lauders, LV, [Givenchys] of the world, they'll open on ground. And then we'll trade that through Christmas. And then by March, we'll bring menswear over from Market Street. We'll open Food on lower ground, and we'll open Home in the basement and the store will be complete.

And we will take 2 months to exit Market Street and then the rental will fall away. So by May, Elizabeth Street is complete and Market Street has fallen away, and the full impact comes in. And we've got to make sure we complete this on time, to budget, and we at least meet the expectations, if not exceed. Now the good thing so far is we are trading well and ahead of our expectations on every single floor that we've opened. So long may it continue.

Before we go to Country Road, can we just show a video, please? This is a short video that was done recently on Elizabeth Street and where we are with it.

(presentation)

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Ian Moir, Woolworths Holdings Limited - Group CEO & Executive Director [4]

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Okay. So complete by March.

Country Road. Country Road, I think Scott and his team and his MDs have done a great job of really remaining focused in a tough market. I'm really happy with the job that Elle Roseby has done in coming into Country Road. She's really focused on the customer. She gets the brand. She gets the marketplace. That business is trading very well at the moment. And it's all about making sure you deliver all the stuff we were talking about FBH earlier. It's about understanding your customer, getting your product right, making sure you've got the right designs, the right quality, the right fit for that customer, ensuring you've got differentiation between the brands. The drive -- big driver in the market, pull away from more and more promotion, concentrate on getting full price and more loyalty base. So less blanket promotion, more loyalty, more personalized and more focused on the right promotion rather than just blanket.

The team, I think, provide -- have done an amazing job over the years of providing the best digital experience across. I think I'm right in saying the percentage of online sales within Country Road is higher than any other physical business within Australia. So over 20% is quite -- and it's a big business, so it's quite remarkable and continues to grow at a good rate. But again, absolute focus on continuing to deliver a better and better service within that.

They're doing the same thing, as we talked about, with David Jones. As online grows and reducing their physical space, much easier. The average lease is 5 or 6 years and the -- they've got about, I think, a 3-year average from now to expiry on the leases. So easier for them to do that, but again, very focused on it.

Reeza talked earlier on about the exit from Myer. Scott has managed that well. It's a big move for us. It's really important for us as a business to have that exclusivity in David Jones. The Country Road brands were big in Myer. But to have them exclusively for David Jones to be the destination for our 5 iconic brands within the Australian marketplace is really important. But we're doing that more and more with David Jones. We hope to announce shortly another very big Australian brand, and we've just launched 65 international brands all exclusive to David Jones.

So we are just about complete that. We will complete that in the next few weeks. And we're very focused on making sure that we pick those sales up from either the standalone stores within the Country Road Group or from David Jones or from online in either business. And again, just like the David Jones business, a good focus on cost, getting our costs down.

Outlook. South Africa, look, it's -- we've talked before about, yes, there's lower interest. Inflation is lower than where it's been. But we still expect, for the reasons we talked about earlier, consumer spending expected -- is expected to remain constrained. You'll have had other retailers talking over the past weeks saying exactly the same thing. Our price movement in half 1 for foods is about 3.3%, about 4.4% for FBH, but that includes beauty. We expect foods to continue to grow volumes and to grow market share. And we expect FBH to continue to improve, build better ranges, better depth of product and continue the momentum we've got.

In Australia, we think consumer spending will be boosted. Everybody is talking about the impact of the housing market is stabilizing a bit and also the tax benefits, the tax stimulus that was announced by the government. That will come into play in October of this year. Lower interest rates in that marketplace, but I think it's still going to be a very tough marketplace. I think retail is still going to be in the middle of a real strategic structural change. I think there's going to be a lot of promotion in that marketplace still. And Elizabeth Street refurb, I've talked about it, is completed and trade will normalize in Q4.

How's trade in the first 7 weeks? Woolies FBH, still continuing that momentum, so up by just over 5% in the first 7 weeks on a comp basis; Food, up by 7.7% on a comp basis; David Jones, down by 1%, but don't forget there's a 3% impact of Elizabeth Street; and Country Road is pretty much flat for the first 7 weeks.

Our medium-term targets. In FBH, we believe we can get over 14%. We've talked about 14% to 16% before. We think we can get over 14%. But we also recognize it's a tough market we're heading into. Margins might well be constrained, so we're being conservative. Foods, we're sticking at 7% -- we're 7.2% just now, but we've always said our medium-term target is 7%. David Jones will pull back from 6% to 4% to 5%, just to reflect where we are and how difficult the market is and how long it's going to take us to get through that. Country Road is at 12%. And then the return on equity from our FS business is forecast at 27.5%.

Okay. Questions?

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Questions and Answers

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Unidentified Analyst, [1]

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[Sasik Mohammed], [Yearn Investment Management]. You talked about your joint venture, the pilot with BP. Can you just give a little bit more color? Is it very similar to the model you've got with Engen in South Africa from the sharing ratios? And could it be quite big if it's successful?

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Ian Moir, Woolworths Holdings Limited - Group CEO & Executive Director [2]

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It's actually a slightly more -- it's slightly better margin than we get -- sorry, Zyda. It's slightly better margin than we get with Engen. Good thing -- I can't tell you the details of the deal, obviously, but it's a good deal. BP are really keen. They've done a great job with us of building what the store look like and what the catalog should be. There's no CapEx involved from us, so there's very little risk to us in this. And they've got a belief it can be a big business, but it's a trial. Let's see how those 10 stores go. But again, it's going to be a 0 CapEx rollout of that business for us. And it started -- [Sam] and you, you started the Engen business with Woolies, and you can understand what it's capable of and how it works. This is pretty much exactly the same model, slightly different in terms of terms -- in terms of the terms we are getting from them. And so waste is their responsibility, so there's no real risk to us around waste or CapEx. So it's a good model.

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Unidentified Company Representative, [3]

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Ian, perhaps related to that, we have a question online that asks whether the DJ strategy to replicate this South African Food business in Australia has been abandoned and what is your strategy for DJ's foods?

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Ian Moir, Woolworths Holdings Limited - Group CEO & Executive Director [4]

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No, it's not abandoned at all. We said we're trialing different formats within that business, trialing different things. That's exactly where we are. We should be at breakeven pretty much as we forecast within 18 months on that business. Some things have worked well, some things not so well. So prepared has worked incredibly well for us. We overdid food service. We're pulling back on that. We put our first trial of a standalone store in October, so we're continuing the rollout. We want to make sure we understand what works in that business and what doesn't, but we're absolutely committed to replicating our great Woolies Food business here in Australia.

Jean, you were going to ask something.

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Jeanine J. Womersley, HSBC, Research Division - Analyst, South African Retail [5]

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Just on your medium-term margin targets. After you've removed the debt, how do you define medium term now?

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Ian Moir, Woolworths Holdings Limited - Group CEO & Executive Director [6]

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It's 3 to 5 years.

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Unidentified Company Representative, [7]

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Okay. A couple of online questions, Ian, or perhaps one for Reeza. How much goodwill relating to David Jones is still recognized on the balance sheet?

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Reeza Isaacs, Woolworths Holdings Limited - Group Finance Director & Executive Director [8]

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With regard to the group balance sheet, there is no goodwill left.

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Unidentified Company Representative, [9]

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Thank you. And then another one for Reeza. Do you expect the free cash flow from the Australian businesses to be sufficient to support in-country CapEx and reduce net gearing to $200 million over the next few years? Or do you expect the SA balance sheet to have to provide further capital support to your Australian businesses?

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Reeza Isaacs, Woolworths Holdings Limited - Group Finance Director & Executive Director [10]

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We -- I'll answer the second part of the question first. We don't expect to fund the Oz business from SA. And with the dividend reduction in -- look, I mean we -- based on the EBITDA numbers that you've seen, David Jones generated $100 million and Country Road about $140 million, so that's $240 million. CapEx reduces to circa $85 million in 2021. So that region should be self-funding.

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Unidentified Company Representative, [11]

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And then, Ian, given the shift of relevance in the department store model to more of an experiential one, are you able to replicate the Elizabeth Street store experience to the rest of the portfolio? And if not, what are the implications for the smaller stores?

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Ian Moir, Woolworths Holdings Limited - Group CEO & Executive Director [12]

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There will be only one Elizabeth Street store. There's $400 million being spent on that store, $200 million from us and $200 million from our partners. But there are other stores where we'll have a version and the right version for that area of Elizabeth Street. So obviously, in Melbourne, there will be a number of stores that will replicate that. In Sydney, there'll be a number of stores that replicate that. They'll have the same quality, same -- virtually the same quality of fit-out, but they'll have less space, they'll have less brands. They might have less luxury within the store, but they'll still be focused on that lux trend customer and they'll still have all the international brands that we have in Elizabeth Street. So it'll still be an amazing experience and, therefore, a long-term sustainably profitable experience in the top 10-plus stores.

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Unidentified Company Representative, [13]

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Okay. And then back to David Jones Food. Can you provide more information on the progress of the food stores in David Jones, including their profit and loss?

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Ian Moir, Woolworths Holdings Limited - Group CEO & Executive Director [14]

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As I said, they'll break even in the next 18 months. As we build the business, we're getting better and better at managing labor and waste. So profitability is improving, performance is improving. If the -- even the 10 stores in BP will make a difference in terms of scale. And obviously, that brings -- that's margin enhancing. So the business is improving month by month.

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Unidentified Analyst, [15]

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David Jones, I think the one area of weakness is the gross profit percentage. When you bought the business, you're going to put in own label. And also the new stock system would have improved the GP, but we haven't seen any of these benefits. Can you really explain -- if the stock system is working and where the slippage is and possibly if the stock is clean at this stage?

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Ian Moir, Woolworths Holdings Limited - Group CEO & Executive Director [16]

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Okay. Let me answer the last bit, (inaudible) is very clean. So one of the things I'll absolutely be focused on is getting the stock turned down, improving inventory levels, getting rid of anything that is slightly aged and being really disciplined in that regard. So stock's coming down. As I said before, the aged inventory has come down by 30%, so it's a very small part of our total. Our stock turn within the -- sorry, our stock cover, so weeks covering the lower doors has been brought down. Our compatible stock in stores was 4.5% down on prior year. So there's an absolute focus on better inventory management and making sure we have more new goods coming through on a regular basis. And if they don't work, taking the pain straightaway and not holding on.

And so why is their margin not coming through that we expected? Two reasons. It's private label -- the Country Road brands in the [stable] are working very well and margin enhancing, but they've been through -- a couple of them have been through a bit of difficulty. But they are now trading well on more space, and it's highly productive for us. On private label that's coming out of Country Road, so the David Jones label itself, that's growing nicely. So -- and in homeware, for example, we're at 20% now. So that margin should come through.

And in terms of the systems, we're only just really understanding how to use those systems. The fact that we lost 75% of our staff at the same time as we're introducing the new systems was damaging and difficult. But with the team that have been in place, they've been using that system 6, 9 months. It took Woolies long -- I mean I was running Woolies at the time, and when we introduced exactly the same systems, it took us nearly 2 years before we really understood, before we believed in it, understood how to use it and we got them right. So it doesn't happen overnight, but I do see that flowing through. And I already see it flowing in terms of we can manage our inventory so much better because we can get it down to item level and brand level now. So we're profiling our stores better, we're allocating our store better and we're better able to target our markdowns, and that is happening now.

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Unidentified Company Representative, [17]

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Just one more online. Ian, how have the new stores that you've opened in David Jones traded? And are the problem stores ones you inherited?

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Ian Moir, Woolworths Holdings Limited - Group CEO & Executive Director [18]

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Some and some. Some that we opened over the last 5 years haven't traded as well as we expected, but the bulk of our issues are in stores that we inherited. For me, it's about really aggressively dealing with the tail of the stores within David Jones. I think it's going to make a dramatic difference to the profitability of that business.

One of the things I should have said is that I intend to spend the vast bulk of my time in Australia over the coming year. And the reason for that is I'm acting as the CEO, but it is where our issues are. I mean I don't need to tell you that. So I'm very focused on what we need to do. I'm very focused on helping to deliver that and making sure that we complete the process to find a replacement CEO.

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Unidentified Analyst, [19]

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And just at the best-in-class department stores globally that you mentioned, can you give an indication of where their margins would be and trading densities? I mean who's getting it right? And what is the top level of -- that can be achieved if you get it right?

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Ian Moir, Woolworths Holdings Limited - Group CEO & Executive Director [20]

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Look, if you -- a lot of them don't disclose, a lot of them are private. And look, if I look at the best, they're getting double-digit growth, and I would estimate their margins to be in the order of 8% plus. So it's even -- and it depends on how big, what markets they're operating in. But if you -- when you get -- when we get this business right, we're absolutely capable of delivering the margin target that you saw. It might take us a few more years. But by 2021, when we've got Market Street out, Elizabeth Street running, we've got out of space in those lower-tier doors, our merchandise systems are working, our online is growing at 60%, then we should be capable of easily delivering the targets that we've set.

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Unidentified Company Representative, [21]

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Maybe a question for Reeza. Has there been any discussion with Australian bankers given the bank covenants and just very little room there for any error?

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Reeza Isaacs, Woolworths Holdings Limited - Group Finance Director & Executive Director [22]

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We are currently in a refinancing process, and that will be completed over the next few months or so. But otherwise, I mean we are within covenant limits, and it has been obviously impacted by the one-off like Elizabeth Street, which has impacted EBITDA, and in the spend on Elizabeth Street, which has impacted the net gearing and then the impairment which has impacted the minimum equity covenants. But the minimum equity covenant still has 20% headroom within that after the impairment.

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Unidentified Company Representative, [23]

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So assuming any more impairments are done on the business, would you raise the covenant level?

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Reeza Isaacs, Woolworths Holdings Limited - Group Finance Director & Executive Director [24]

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Well, that's part of the refinancing at the moment, but we've done extensive exercise on the impairment and looked at all the assumptions with regard to that. So that's our best view of the impairment at this point in time.

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Unidentified Company Representative, [25]

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And then we've got a question on single-use plastics. And in fact, we've got a slide in our appendix on the highlights and achievements of our good business journey and packaging. The question is -- and I'm not sure if Feroz is here or perhaps Spencer can answer this. Single-use plastics are topical and of a great concern. What is Woolworths doing to reduce its impact on the environment?

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Ian Moir, Woolworths Holdings Limited - Group CEO & Executive Director [26]

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Zyda, why don't you answer that one?

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Unidentified Company Representative, [27]

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Well, Zyda, yes?

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Zyda Rylands;CEO, Woolworths South Africa, [28]

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So we have made a commitment to remove single-use plastics from all of our stores. We have got 4 stores who've got no plastic -- single-use plastic bags in them. It is taking us a little bit longer to get through our entire chain. It is still our commitment to do that. We need to make sure that we set up a sustainable supplier base in South Africa. We want to do that with a [BEE] supplier. It is taking a little bit longer, but we are committed to doing that, and we will do it in a sustainable way.

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Ian Moir, Woolworths Holdings Limited - Group CEO & Executive Director [29]

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Thanks, Zyda.

Okay. I think we are done. Thank you very much for coming this morning.