Woolworths Group Ltd
ASX:WOW
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Woolworths Group Ltd
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Thank you for standing by and welcome to the Woolworths Group F ‘23 Half Year Earnings Announcement. [Operator Instructions] I would now like to hand the conference over to Brad Banducci, Managing Director and CEO of Woolworths Group. Please go ahead.
Good morning, everyone and welcome to the Woolworths Group’s Half Year Results for the F ‘23 Financial Year. Joining me today are Stephen Harrison, our Chief Financial Officer, who will present H ‘23 results a little later; Natalie Davis, Managing Director of Woolworths Supermarkets; Amanda Bardwell, Managing Director of WooliesX; Von Ingram, Managing Director of our newly formed W Living; Spencer Sonn, Managing Director of Woolworths New Zealand; Dan Hake, our newly appointed Managing Director of Big W; and last but not least, Guy Brent, Managing Director of The Woolworths Food Company.
Before we start the presentation today, I would like to acknowledge the traditional custodians of the land on which we meet today, the Gadigal people of the Eora Nation, and I’d like to pay my respects to elders, past, present and future. I would also like to acknowledge our key team members and customers as they deal with the devastating impact of the recent flooding events and Cyclone Gabriel just last week. Our thoughts are with those who have experienced loss as a result of extreme weather events, whether it’s in New Zealand or in Australia.
I will start today’s presentation with an overview of the group’s performance and our progress on our strategic agenda. Steve will then present our financials before handing back to me to finish with current trading and outlook before handing over for questions. If you follow by the slides, I am going to go straight to Slide 4. The group’s performance for the half reflects a very balanced result with improved customer and financial outcomes compared to the COVID impact to prior year. This was achieved through a more stable operating rhythm, the non-recurrence of direct COVID costs in the prior year, strong seasonal trading and a continued focus on better experience for our customers. Most of our customer metrics improved on a year ago and Q1 of this financial year. Group VOC NPS ended the period at 51%, up 2 points from last year and up 1 point in Q1. And a highlight to me remains our customer care scores, which are very strong across all of our businesses.
Our focus on value and availability throughout the half as well as an inspirational Christmas for our customers, led to solid sales growth in the half. Group sales increased 4% from last year to $33.2 billion and group EBIT before significant items increased 18.4% to $1.6 billion. On a 3-year compound annual growth basis, which we strongly believe is the best way to assess our performance, given the variable impact of COVID by half, group sales and group EBIT increased by 7.5% and 7.1% respectively.
By segment, Australian Food sales increased by 2.5% in H1 and EBIT increased by 18.2%. However, if we were to exclude the very material direct coverage costs incurred in the prior year, EBIT increased by 4.3%. In Australia and B2B, PFD was the major driver of the strong half although our B2B supply chain business, PC+ also performed strongly. Australian B2B sales were up 23% and EBIT more than doubled from the prior year.
In New Zealand Food, H1 EBIT was NZD122 million, which was within the earnings range provided at our Q1 sales results in November. Pleasingly, we have seen some signs of stabilization in Q2 and improved sales momentum over the half. The recent weather events have created new challenges for us and our focus at the moment is on assisting our impact to customers and teams in any way we can. Importantly, our DCs have not yet been materially impacted and stock is flying through them out to our stores where it’s needed. Big W’s EBIT improved materially in H1 due to strong sales growth reflecting the period of COVID-related temporary store closures in the prior half.
Moving to Slide 5, key feature of the half was the continued reversion of customer shopping patterns to pre-COVID levels as customer ability has increased our shopping stores more often, which in turn impacted e-commerce sales, which were down 9.5% across the group on the prior year. Customers also shopping more on the weekend in malls and shopping centers are also seeing an increase in visitation relative to neighborhood stores.
I should just add that this trend has continued into H2. And I would say in the last 2 weeks, if you looked at the behavior to pre-COVID is literally back to where we were in a very broad sense. One thing that has remained constant however is the growth in digital engagement. Digital engagement across our group websites and apps has continued to grow strongly with average weekly digital traffic compared to the prior year, up 9.5% in the half to $22.7 million, approximately 50% of digital traffic growth is coming from our apps, particularly everyday awards.
Turning to Slide 6. Let’s see just a brief recap on our food and everyday needs ecosystem. And the headline to me is we made good progress in activating our ecosystem over the half to both strengthen our cornerstone businesses listed in the slide as well as for our longer term growth.
On Slide 7, we just talked about some of our progress against our strategic priorities in the half. I won’t go through any detail except to give you some of my personal highlights. We have been awarded most trusted brand for the third consecutive year by Roy Morgan and we are named most valuable brand by Brand Finance is a validation of all the work we are continuing to do to do the right thing in every way we pitch up with all of our stakeholders. Clearly, this is a work in progress. There is lots of challenges with it, but it’s nice to see the consistency of recognition we have achieved, in particular on most trusted brand. RT3, which is right team, right task, right time, has now been embedded nationally in all of our Woolworths Supermarkets and Metro food stores. And we are getting better at using it to ensure that we have the right team in place and doing the right task for our customers. This is a critical change project for us and I am sure we will get questions later, which Matthew will answer.
At the end of December, we had 14.1 million Everyday Rewards members and active rewards members have grown by over 5%. Membership programs are coming back into globally and are a critical way for us, not only to know more about our customers and personalize what we do for them, but to add even more value for our members who invariably are our best customers. Our B2B supply chain also known as PC+ brought a new partnership between community enterprise, Queensland and our Australian grocery wholesalers to provide North Queensland remote communities with affordable Woolworths and our own exclusive products. There is a lot we do in the First Nations space. I expect we might get some questions later on it. This is something we don’t talk about. And I think we are really proud of as Australia’s leading food retailer, it’s critically important that we make sure that we get value out to the communities that need most.
Turning to Slide 8, a slide what was known as that David Errington slide. This slide highlights our progress on our major warehouse investments delivered since 2019 and what is still to come over the next few years. No doubt we get questions on our progress on our supply chain transformation, given it is outside of stores, the biggest investments inside our group and we are continuing to work through the inevitable teething challenges of commissioning new technology. We are however starting to make good progress and are pleasingly past the halfway mark in our multiyear transformation. So a long way to go, but it’s nice to be well progressed and starting to see benefits coming to our P&L at the same time as we continue to make investments in our balance sheet. As hopefully everyone is aware, our new facilities or expanded facilities in some instances will provide our customers with a wider range of fresher products and our business with safer and lower long-term operating costs and of course, not to be underestimated is the capacity for future brands.
After a number of years of disruption through – primarily through COVID but some of it how we have had to commission our technology, MSRDC is starting to deliver for us and hits record new volumes, especially over the Christmas period. In H1, the facility consistently averaged 2.3 million cartons per week, which is very close to our business case. While there is more we can do to continue to lower our cost of carton within MSRDC, we are currently materially below where we would have been had we not invested in this facility just over 30%.
In terms of the other activities to call out, our new Fresh DC in Christchurch, Auckland in New Zealand has – at Christchurch, New Zealand, we have commissioned it and we are making very good progress on our first automated customer fulfillment center in partnership with KNAPP in Auburn and our material investments in Moorebank in our NDC and new RDC is progressing to plan.
Moving on to Slide 9, it shows the progress we are making across our digital platforms and adjacencies. As I mentioned earlier, digital is critical to us and engagement continues to grow through weekly digital business across the group and they are up 29% on a 3-year CAGR. And a lot going on there to call out one that I think is important is our real-time offer program that with real-time loyalty program that gives the ability to do real-time offers, which we commissioned fully during the half and it can add a lot of value to the broader digital engagement agenda.
Turning to More Everyday, in the current environment, our Everyday brand is a fantastic brand to provide additional value for our members. In addition to the growth in the number of members in Everyday Rewards, I’ve spoken about already, all of our everyday businesses, including insurance, mobile and wPay grew sales on the prior year. The power of Everyday Rewards was also evident when MyDeal became an Everyday Rewards partner in January with just in a very short period over 27,000 MyDeal customers linking their cards to Everyday Rewards in the first week.
B2B Food as talked about in growth has had a solid half driven by PFD, which benefited from a strong market and new customer growth, with sales up 26.4% to last year. We also wanted to see the early benefits of value creation across B2B Food in the group with PFD now supplying Woolworths Supermarkets with seafood, Australian grocery wholesalers jointly tendering with PFD when it makes sense for various contracts that come up, and just the PFD been able to access some of our preferential rates for resale. And B2B supply chain primarily connects third-party business with PC+ also had a good first half.
Finally, during the half, we have welcomed MyDeal and Shopper Media to Woolworths Group that happened in September. And in December, we announced the proposed acquisition of a 55% equity investment to Petspiration Group subject to the relevant approvals. We expect all of these investments to strengthen our cornerstone businesses and assisting to deliver on longer term growth for Woolworths Group, and no doubt, I will get questions on them later.
Slide 10 shows our continued journey on sustainability. And we did continue to materially progress our agenda on that topic, but like everything in Woolworths, with WSO, there is always much more to do. A number we don’t talk about a lot is our total injury frequency rates, which declined by 7.3% compared to the prior year. We are starting to be much better at also measuring our Scope 1, 2 and 3 emissions. We only talked to the reduction in Scope 1 and 2 emissions, which is by 7.9% compared to last year and hope to come back in future periods and start talking about Scope 3 in our progress not only on measuring it, but reducing it in partnership with our supply partners.
Our commitment to removing virgin plastic across our products continued and we now have removed over 12,000 tons of virgin plastic package in Australia, which is a 26% reduction relative to our F ‘18 baseline. We are also progressing the phasing out of 50% reusable plastic shopping bags nationally, Queensland and ACT joined other states by starting to run down by moving across to this running down stock in the last couple of weeks. And our aspiration is to be completely out of multiuse plastic bags by the end of this calendar year.
Finally, not everything goes your way in the sustainability space and we are disappointed by the challenges that we have had with soft plastics in particular with the recycle program. But all of our stakeholders should rest assured that our commitment to leaning in working with governments, grocery manufacturers, other retailers and the recycling industry more generally to find the right, long-term solution in the space. And it is a major priority for us right now just given a lot of the challenge and negativity that are sitting around this issue.
For those that have had the chance to review our results materially in detail, you will see that we have include extra disclosure in this by providing more detailed sales and profit measures for both Australian Food Retail and WooliesX part of our Australian Food segment. This has not been an easy thing to do. We have worked very hard on doing it. I am sure it can be refined and we look forward to feedback and speak to subsequent ones on how we might do that. But we did think it was important to do given the increasing importance of e-commerce, digital, media, rewards and services, in activating our ecosystem and strengthening our cornerstone retail investments, cornerstone retail businesses. It’s done as a sub-segment, because there are clear judgment decisions we have had to make in how we allocate costs inside this portfolio, particularly because of our reliance deliberately so on using our physical infrastructure, in particularly our stores to fulfill the vast majority of what we do in an e-commerce sense.
And then inside the WooliesX context, there is a lot of judgment decisions required in how you allocate the costs of your building a digital platform. And so there is a lot of judgment calls, that’s why they are in the sub-segments. I think the benefit of it is you start to get a sense of it and you – we create a baseline which we can report progress from, which we think is very important. So we hope that this new disclosure will provide better insights into underlying performance. And as I say, I look forward at your collective feedback and challenge on the sub-segments.
I will now turn over to Steve to talk about our financial results and I then come back to talking about the outlook. Over to you, Steve.
Thanks, Brad and good morning everyone. I will start on Slide 14 with the half one F ‘23 results summary for the group. Group sales for the first half of F ‘23 increased 4% to $33.2 billion supported by strong seasonal trading in our food businesses and the cycling of COVID lockdown in the prior year in Big W and Australian B2B with sales growth accelerating in Q2 as we cycled the easing of COVID impact in the prior year.
Group EBIT before significant items increased 18.4% to $1.637 billion, with the growth in EBIT margin increasing 60 basis points to 4.9%. EBIT growth reflects – our growth in sales, the non-recurrence of material COVID costs in the prior year of $239 million and increased stability in our operating rhythm.
Group NPAT attributable to equity holders of the parent entity before significant items was up 14% on half one of F ‘22 to $907 million. We have also included on this slide, our 3-year sales and EBIT CAGR to demonstrate the growth we have achieved relative to pre-COVID, which shows strong through-the-cycle growth and reflects the resilience of the group’s earnings when you look through the volatility caused by COVID over the last 3 years.
I will discuss the dividend later in the capital management section. So turning to Slide 15, our group trading performance. On this slide, we have laid out our half one F ‘23 trading performance by business unit, together with the 3-year CAGRs by business. In Australian Food, H1 total sales increased by 2.5% despite a reduction in e-commerce sales of 7.5% as customers return to stores or more customers return to stores. Through the half, sales momentum improved with Q2 sales growth of 5.8% due to a strong seasonal trading period and as we cycled a more normal quarter in the prior year. Australian Food EBIT was up 18.2%. We have always indicated that direct COVID costs would be removed when no longer required and we were able to achieve that. Excluding these costs incurred in the prior year, Australian Food EBIT increased by 4.3%, which is a solid result, delivering earnings leverage despite material cost inflation.
As just discussed by Brad, we have provided for the first time additional disclosures within the Australian Food operating segment. Woolworths Food Retail represents our Woolworths Supermarkets stores, our metro stores and our e-commerce business. Profitability measured through directly attributable profit and EBIT increased by 20.8%, with a strong profit improvement from stores. E-com DAP declined on the prior year largely driven by the impact of lower sales and high delivery costs.
WooliesX profitability declined by 30.4% to $83 million largely driven by the decline in e-com profitability I just mentioned with higher EBIT in Cartology offset by increased investment in digital and technology in the half. Australian B2B sales increased by 23% and EBIT more than doubled driven by a very strong half from PFD. This was somewhat offset by losses in some of our other smaller B2B businesses that are not yet at scale.
New Zealand Food had a challenging half impacted by lower sales growth, ongoing COVID disruptions and a material increase in TAM costs. While EBIT declined 39% to $122 million in New Zealand currency, the half one performance was within the earnings range we disclosed at the end of Q1. Pleasingly, the business is showing increasing signs of stability with Q2 sales growth of 5.3%. Big W performance was one of the key highlights of the half as the business experienced a more normal trading environment, cycling a period of temporary store closures in the prior year. Sales growth was strong at 15.3% and the EBIT margin recovered to 5% with EBIT in the half of $134 million.
Our other segment includes a range of things, including group costs, the performance of Quantium, MyDeal, our property trading and our share of profits from Endeavor. The net loss in the half was $85 million compared to $69 million in the prior year. Excluding our Endeavour Group contribution, the net loss is expected to be $250 million for the full year of F ‘23. This an increase from our previous guidance and is due to one-off cost associated with recent M&A activity and expected losses from MyDeal, which did trade in line with plan for the first quarter of ownership in Q2.
The group also reported significant items in the half of $76 million related to updates to the end-to-end payroll review, which is now complete, as Brad discussed, increased redundancy costs associated with previously announced supply chain network changes and future DC closures, the reversal of the historic onerous lease provision related to Big W store network, which is no longer required and cost associated with the exit of Summergate, which we have recently announced.
Moving to Slide 16 and our balance sheet metrics, average inventory days from continuing operations increased 0.9 days to 31.1 days compared to half ‘22. This was largely driven by our food businesses due to higher investment in inventory to mitigate ongoing supply chain and availability challenges. ROFE from continuing operations was 14.2%, an increase of 50 basis points compared to F ‘22 full year and 10 basis points compared to half one F ‘22 due to higher EBIT from continuing operations.
Now moving to Slide 17, where we have included a summary of our capital management framework and called out some of the highlights for the half. In half one, we generated operating cash flows of $2.9 billion before interest and tax, which was up 11.6% on the prior year. And I will touch on some of the other capital highlights – capital management highlights including CapEx and dividends on later slides.
Moving to Slide 18 and cash flows. Pleasingly, EBITDA from continuing operations grew strongly, increasing by 16.1% to $2.85 billion, reflecting the improved group trading result I just described. We had a modest net working capital inflow of $27 million in half one with higher inventory holdings to mitigate supply chain disruptions and to provide availability, being largely offset by payables. Cash flow from operating activities before interest and tax was up 11.6%, an increase of $299 million on the prior year.
Interest paid increased by $37 million due to higher interest rates and higher average net debt in the half in part due to lower net debt in the prior year following the repayment of the Endeavor Group intercompany loan in June 2021, which was used to fund the share buyback in October 2021. Cash tax paid declined 30% compared to the prior year, reflecting the lower prior year earnings.
Investing activities of $839 million was below the prior year, primarily due to proceeds on the partial sell-down of our Endeavour Group shareholding with proceeds of $634 million, which will be used to fund our investment in Petspiration Group, which is expected to close in mid calendar 2023, obviously, subject to regulatory approval. And I will talk to CapEx on our next slide. So closing on Page 18, our cash realization ratio for the first half was 101%.
Moving to CapEx on Slide 19, operating CapEx for the half was $928 million, which was driven by an increase in Australian business CapEx with the prior year being impacted by COVID restrictions and restricting our ability to do some of that work. IT spend increased predominantly due to lifecycle management and the replacement of store equipment together with increases in new stores, renewals and digital. CapEx also included $76 million on projects with strong sustainability benefits in areas such as refrigeration, solar and LED lighting. There is no change to our full year guidance with operating CapEx still expected to be $2 billion.
Moving to dividends and funding on Slide 20, the Board today approved an interim dividend of $0.46 per share, an increase of 17.9% compared to the prior year, reflecting the strong earnings growth in the half. The payout is broadly in line with our typical payout ratio for half one and the full year payout ratio is still expected to be in the 70% to 75% range.
Turning to debt and funding, there are no material maturities occurring in half two and the next material maturity is $750 million syndicated bank facility maturity in November 2023, which will be refinanced and we expect this to be completed prior to the end of the fiscal. We remain committed to a solid investment grade credit rating and have significant headroom under our current ratings of BBB from S&P and Baa2 from Moody’s.
Thank you. And let me turn back to Brad.
Thanks, Steve. Just on current trading before we turn the floor over to questions. 7 weeks in, this is the change for us. We have had a strong start to the second half. While comparisons to the previous year are impacted by the fighting of last year’s Omicron outbreak, which really happened around New Year’s Eve for us and materially did impact January, operating conditions in our business have continued to stabilize and sales growth has been robust.
In Australian Food, Woolworths Food Retail sales for the first 7 weeks grew by 6.5%. Coincidentally, on a 3-year CAGR basis, sales increased by 6.5% as well. E-commerce sales trends have started to stabilize and with e-commerce also returning to growth. Inflation continues to remain stubbornly elevated. And while customers are adjusting the way they shop, the overall impact on our business at this stage from these adjustments remains modest at the combination of tailwinds and headwinds and we will come back to talk around the trading in phenomenon we have seen in our business that we talked about it in the media call. As you might imagine, just given that inflation is coming down, but not as quickly as we would like, we remain very focused on ensuring our customers can get their Woolworths through various programs of prices, low price special personalized offers and range curation. We will focus on meeting the needs of the communities and customers we serve. And as Natalie mentioned in the media call his week, we announced our new prices [indiscernible] on everyday essentials.
Australian Food trading momentum has continued to improve relative to H1, with sales increasing by 6.3% for the first 7 weeks, 3-year CAGR of 4.4%. But it is worth referencing that EBIT in H2 is expected to be higher than H1, but the extent of the improvement remains still uncertain. And obviously, recent events make it very hard for us to be precise. Our current priority of course is to assist our customers and team impacted by the recent devastating weather events. Big W sales growth was strong at 9.7% for the first 7 weeks as we cycle the impact of Omicron in the previous year with a 3-year CAGR of 7.5%. Of course, as with food, we remain cautious about the impact of cost delivery pressure on discretionary spend, but believe that Big W’s range and value proposition positions it well in the current environment.
In summary, sales growth has been solid in the half to-date and the operating rhythm of our business continues to improve. However, group EBIT growth in H2 will be below H1 as we will be cycling a more normal second half with less direct COVID-related expenses. We will continue in this half and in the year ahead to continue to balance the needs of all of our stakeholders, providing our customers with great value, treating our suppliers fairly offering competitors pay for our team, the right hours and a positive working environment, continuing to play our part in creating a better tomorrow and importantly, delivering sustainable financial returns for our shareholders.
Thank you as always to our customers for their support and our team for their unwavering commitment and care. I will now turn the call over to the operator for questions.
Thank you. [Operator Instructions] The first question today comes from David Errington from Bank of America. Please go ahead.
Good morning, Brad, I’ll do the normal tradition and limit it only to two question. But my question to you is – you’ve emphasized stability in operating rhythm returning. And yesterday, Coles really talked up that they were suffering supply chain challenges still. You haven’t raised that this time around. And I noticed a really good result in supermarkets that your voice of customer has improved. So my question to you is, are you not seeing supply chain challenges? Or are you seeing them, but you’re just dealing with them better. And I suppose where I’m going with this, I’m trying to work out what would be the latency of earnings? Because when I look at your 3-year CAGR, your sales in supers are up 5.5, but your EBIT is only up 7.6. I would like to probably see a little bit more leverage there, which tells me that you’re still being held back in your supply chain. So there is a bit in that, but I’m just trying to work out. You have pointed out supply chain challenges in the past. You’re basically saying that your operating rhythm now has improved, and Coles really highlighted yesterday that they were challenged. So I’m just trying to work out where you’re at and what we can expect to see forward with increased productivity and efficiencies coming through.
Yes. Thanks, David. I think it’s a great question. I think – and I’ll go through the detail, but the number of it is relative to what we experienced in the last couple of years, it was much more manageable for us. But let me go through some of the details I can. Firstly, the biggest pain point for our customers is availability. So availability score is not where we want it to be. And so outside of value for money, it’s availability. And often availability is related to value for money. Some of the other stocks, some of our key value lines, this creates quite a loop, if you know what I mean. So we’re seeing enormous opportunity and the easiest way for us to improve our customer scores is an availability, which is running in the sub-70 and has been continued in that range despite all the work we can do.
Now in availability has become more localized where the gaps are, David, in the store. So we had availability across the whole store. Now it’s becoming much more localized, whether it’s dry dog food, whether it’s still a lot of frozen challenges and potatoes and vegetables, still some capacity process and challenges in poultry and so on, so bit more localized, still there a big opportunity, so no doubt about it. To give you a sense of some of the scores, our outbound service level is still running around 80 or below 80. So that is our service level of delivering what is right through our stores. And our store service level in a store in terms of what is available [indiscernible] about 95%, should be at 98%. So we’re leaving custom experience, sales, and we’ve got customer experience opportunities, sales opportunities and, of course, operating cost opportunities up in the supply chain. But we are not using those to kind of distract from where we are. We just need to continue to work on that.
In the month of January, you look at what happened in Derby and grooming in Western Australia, the amount of effort and cost that went into transportation, not necessarily DC for us. That’s where our issue is more transportation and DCs to address that, the issues in January as well into [indiscernible] and the routes that some of our truck drivers need to drive and the actual drive times. It is rather extraordinary. So hopefully, that will come back and will help us. So you’re right, still a big opportunity for us outside of value, the biggest opportunity. But the nice thing is we are making progress, David. And so – and it’s [indiscernible] incredibly hard-working primary connected team. We talked about this a lot in Woolworth, not a lot outside of Woolworth. The highlight was from about September we started to hit our budgeted productivity measures, despite the disruption and despite the volatility we are seeing in demand and that predictability of achieving that has continued to increase. So a long way to go, certainly not to carry victory, still some secondary absenteeism in the contractors to work in the business, but hopefully, over the hump, I’m looking at Nat, as I said, we will see.
It sounds like you are working your way through it a lot better. It sounds like you really got your act together this half, so well done.
Well, I mean, it’s – I know I adjusted a bit but pardon me for that. But we’ve been working on upgrading our supply chain since 2019 with very material costs and our shareholders have been very patient. You’ve rightly pointed out the number of times the materiality of that investment. It’s nice to be starting to see some of the benefits come out of it, not all of them. We have a long way to go. It’s also major investments, as you know, particularly Moorebank still to come, but it’s kind of nice to see that. And nice to be sitting with MSRDC $100 per carton right now, and we know that, that’s not good enough yet but still nice to be materially below where we were in. So yes, a team that has a little bit of wind behind their back is a team that will continue to prove a team that has – feels like it’s all ahead. It’s just really hard to motivate, excite the team, and we’re in the first position former not the latter.
Excellent. Well, thank you, Brad. Thanks again.
Thank you. The next question comes from Michael Simotas from Jefferies. Please go ahead.
Good morning, guys. And well done on the results. Can I just follow on from Eri’s question? And it sounds like you’ve still got a bit to do to get back to your operating rhythm and then to deliver on some of the productivity investments that you’ve made. Your margins in the first half in Australian Food improved nicely and approaching 6%, the highest level we’ve seen in quite some time. As you do get the benefits of getting back to your operating rhythm and you do start to deliver some returns from the investments you’ve made, do you think you can bank much of that upside in the form of margin expansion? Or is it now time to reinvest some of that to generate better customer experience, market share, etcetera?
Yes. Thanks, Michael. Obviously, this is the question, we will find out during the course of the second half as you know. Very important to state, and we said it in the media call and you would understand this. If you look at the margin expansion, primarily driven by mix and the material ongoing decline in our tobacco business, which quarter-on-quarter and half-on-half is down 15%, and you run that in very low double-digit GP number. So you get in a major mix adjustment that just washes through the numbers. If translated for that, and the growth in our media business, and we report that through the GP line, you don’t see margin expansion of materiality in the half. You see some moving pieces, but they all sort of come together. The third biggest benefit we had in the half actually was our next-gen promotional program, which has been done in partnership with Wiq and the commercial team will with supermarkets where we’ve just been better at promotional effectiveness. So there hasn’t been a lot of margin expansion. And in fact, when you look at the categories, you see material investments by us and you look at our price index in particular to Aldi, which is I think is the key one to look at, you see the index, I think in as good a shape as I can remember in the last 3 to 5 years at the moment. So yes, we feel good on that level.
If you come back to GP, I would just call out our biggest risk right now is stock loss and its stock adjustments. I don’t want to overplay it, but we’ve had a great performance in that, but we are seeing some early signs of challenges in the stock adjustment space, not in the dump wise space, we are much better at that. So we just need to actively continue to lean into that. So I think that’s where our risk lies, assuming we have a rational market, assuming we continue to work on value and bringing value to life for our customers. Still a work of opportunity for us.
If you look at the value we deliver in value indices to whomever, Coles, Aldi, specialty the index itself is great. Our customers don’t often give us full credit for the index, and that is to do with helping them find the value more effectively in our business and helping call it out, whether it’s – there is a lot of great work going on how we think about – in the range to the store concerns that they can find the value or the former value that looking far more easily or how we make sure our customers realize how much value they get through Everyday Rewards and their member benefits or whatever the case may be. So a lot of work there. So I haven’t answered your question. This is obviously – we’re not talking about an outlook for profit, but those are the major things on our minds right now.
That does help. But it sounds like most of the improvement in your EBIT margin, which is what I was referring to has actually been from items below the gross profit margin line, at least at a product level, which was…
Yes, absolutely.
Thank you. [indiscernible] delivery, right?
Yes. One of the things – we talked about achievements in our business, the achievements in our business was we need our team, and this is true inside stores and supply chain to be focused on item-based productivity and not on just the headline sales number. And from about September, we really moved into really was a major achievement for the team. Given you had negative items during the half. Now that slowly it’s gone slightly flat, but you had this major negative items as we cycle the impact of COVID and to get our team to, focus on item-based productivity was the conversation we talked about at the end of last year, at the end of last year’s results, and it happened during the first half, and it’s one of the great achievements in the business, I’d call out.
Thank you, that’s really helpful.
The next question comes from Tom Kierath from Barrenjoey. Please go ahead.
Good morning, guys. Just got a question on RT3, can you maybe just step us through when that was implemented and maybe talk about how much benefit was kind of banked in the half? And then how are you thinking about, I guess, the future benefits of that program? Thanks.
Tom, I’m glad you’re on the line, and I hope you continue to be one of our most loyal, selected customers across stores, which we can come back to and attribute some of that debt to you, but our market Natalie will just talk through where we are with RT3, why we did it and then what we see as the benefits going forward.
Yes. Thank you for the question. This has been a really huge and important change for our store team. So as Brad said, this is our new rostering tool. We started this work about 2 years ago and started piloting it in South Australia also in our Metro stores. And then just over the last half, I think we completed the rollout in about October, November just before Christmas to every store in the country. So we’re at the point now where every store is leveraging RT3 to do their rostering every week. There is two really significant changes for us as we’ve rolled this out, one is that we’ve actually remeasured all our labor standards. And that’s really important because previously, we had a bit of a black box of a model and it hadn’t been updated and our store teams were losing trust in labor standards. And so as we’ve rolled this out, we’ve worked with an external engineering company, with Connors Group, to actually remeasure all the tasks in our stores and to create a true baseline of the hours across departments across the time of day, etcetera, in our stores.
So we have a very good baseline now from which we can understand where we are investing hours in our stores, where the opportunities are for productivity and then being able to realize those opportunities across our store fleet. The second change was actually our department managers now effectively every week, take on the role of making sure that they have the right team in every department on the right day at the right time throughout the day. And that’s been a huge change. We found that in many of our stores, for example, we have a lot of contracted hours, Mondays to Wednesdays or mornings. And actually, customers are shifting into the evenings or into the weekends as they shop.
And so what our team has been doing is, we’ve rolled this out is actually having a lot of conversations in the store – shifting team hours in the store to where they are needed, whether that’s because tasks are being done at that time such as taking inventory or filling inventory or that’s when our customers are in our stores and we need people on our checkout. So a very big and important change. And in states where we’ve rolled this out initially such as Tasmania and in SA, we are seeing as we go through, it takes a while, actually, for the team to obviously have those conversations begin to move the hours, but we are seeing both voice of customers and voice of team improve over time. So very important for us to establish baseline, and we will still spend the next 6 months refining that system and the way we’re using it and responding to the team feedback that we’re achieving. We’ve also – we’ve done that really focused our team on meaningful hours. So we’re trying to also make sure that rather than recruiting more team, we’re actually finding opportunities for our existing team to work more hours in the store, it might be in a different department. And we’re also trialing a system now, which led some providability for neighboring stores or resort stores in season. So we really want to make sure that our team gets more hours and remain 4 hours and shift from us as we roll this out.
So in parallel, I think your question was also about productivity. So as we’ve rolled this out, we now have a great baseline. And it’s really informed a number of productivity opportunities, and we decided to implement those opportunities. We’ve rolled out and enhanced inventory routine, for example, which removes manual tasks in stores. So our team doesn’t need to roll cages anymore like just double beat, quick scan, everything and they know what can fit on the shelf and what they need to take out. So we’re at the beginning, I think, of a really good journey in terms of making sure we have the right hours for our customers and our team in stores at the right time, but also having a very informed productivity pipeline for the future.
Thanks. And just a few other comments to add just at the high level, Tom, I think we’ve been pretty overt that we felt our key competitors led us in the space in terms of where they did rostering and leveraged [indiscernible] mention through that. So this was thoughtful way that we wanted to tackle the same opportunity. It’s an item-based tool. So I think it’s very important. It’s been one of the things that has really helped us get item-based productivity back into our business irrespective of the additional productivity savings we haven’t, as Natalie said, it gives us some nice baseline as some of the various other key productivity initiatives that we scaling across the group.
Thanks, guys. I am very customer.
Thank you. The next question comes from Shaun Cousins from UBS. Please go ahead.
Hi, thanks. Good morning. Just a question regarding Australian Food, start to second half ‘23 at 6.5% total sales growth. Coles indicated that volume growth had come back for them from mid-January. Has Woolworths seen that? Or has there potentially been an improvement on the volume decline that you had in the second quarter ‘23, perhaps?
Yes, it’s the answer, Shaun. You it’s very noisy by the way, items and are you including fresh items like fruits or not because there is a lot of price elasticity in items there can be quite sensitive. But if you look in aggregate, we’ve actually seen items actually fine enough remain remarkably stable, but in a relative sense, we have got from negative to slightly positive, and that’s strengthened over the last 7 weeks.
Sorry. So you guys are in volume growth, sorry, just to be really clear.
Yes.
And there may be...
Of the half.
And maybe just a quick follow-up, just on stock loss to Mike’s question, where is that number? And is the issue that you’re facing theft? Or is it product perishing. I’m just curious, just to clarify that, please.
Obviously, we’re not going to give you the number, but thank you for asking. It is about where we had been. It’s only modestly above where we had been shown. We don’t want to overplay it actually. New Zealand is still ahead of us in terms of stock loss and one of our conversations is if we’re not careful, we could end up a bit more in the New Zealand scenario. So we’re taking a lot of lessons out of that. But it is in stock adjustments which has got non-payment is a key factor that drives it as you point out. So we just need to stay on top of that and continue to work on our plan and to continue rolled out all of our various stock loss initiatives
Great. Thank you.
The next question comes from Adrian Lemme from Citi. Please go ahead.
Good morning, Brad and team. Well done on the Big W result. I was interested in the range that you’ve effectively given for that business. It seems to be a fairly tight range when many other retailers in that space are giving guidance. So just wondering if there is anything specific giving you confidence to provide guidance? And then also if you could give an idea of where maybe the inventory days are inventory to sales position for Big W relative to its history, please?
Thanks, Adrian. Actually, we thought the guidance was to reduce whatever someone might just take the first half and extrapolate it to the second. So there was no other reason than just obviously, discounting department stores are highly leveraged to the first half, in particular, the Christmas trade. So we just wanted to make sure, given it’s been – if you look at the 3-year numbers, you get the right trend, but you can – there is temptation to just extrapolate the first half so that doesn’t work quite the same way in the department store. Don’t read anything else into it outside of that. I think it’s a great question, one that should be asked on inventory. Steve, did you want to start an industry and then than maybe we can bounce back into you.
Yes, sure, Brad. I mean inventory is up modestly in BIG W. I think we called out that it’s up lower than sales. Actually, if you looked through it on a 3-year view, actually, sales, and this is not a CAGR, but it’s a cumulative 3-year view, sales were up like 25%, 26% and inventory is up more like 7%. So we feel like actually, our inventory is in pretty good shape. Dan can talk to the details, but we’re not. It’s something in a [indiscernible], you’re always monitoring and always trying to stay on top of, but we don’t feel like we’re sitting on material excess inventory, which is probably at the heart of your question.
Yes. Steve said. And I think just important to call out that we’re obviously monitoring inventory very closely just given a little bit of the uncertainty in the market in general, discretionary spend and the like. We think it’s under control. And maybe the other bit of context is that obviously the supply chain is still normalizing, right? So receding stock and the timing of those receipts will still not fully normalized, but it’s all things that we’re just monitoring closely
Great. Thanks very much.
The next question comes from Ben Gilbert from Jarden. Please go ahead.
Good morning, Brad and team. I know you said you’re not providing profit guidance but you just made that comment before that you don’t see second half EBIT growth being greater than the first half. And I just kind of understand your thinking around that in the sense that I appreciate BIG W is not going to be as strong as you said, in New Zealand but New Zealand is going to be better. So that sort of washes out and you started the half up 6.5 in food. You’ve talked to benefits coming through to Tom’s question around rostering and some of the efforts of supply chain and presumably get some operating leverage coming through the business. Is that just a cautious comment or do you sort of genuinely believe that even if these top line rates don’t – if were to continue inferred, you couldn’t print sort of around an 18% type number again in the second half?
Thanks, Ben. It’s a great question. Cautious optimism is the modus operandi. But look, it’s just we don’t have as many direct COVID-related costs in the second half. So we saw those come out. We just wanted to make sure everyone’s very cautious on looking at what – and we’ve been quite hopefully, diligence reporting direct COVID-related costs, not indirect ones, which a lot of the questions they had had on supply chain. So we’re just – we’re not cycling the same materiality of direct COVID-related cost. It will be fair to say the start of the second half has been ahead of our expectations. And I think that’s just a product of the hard work our team actually did against Christmas and a lot of conversations in WooliesX how we really wanted to make the best of the opportunity we had in January given Omicron disruption last year. So – but 7 weeks is hardly a half.
Well, just on that cost point, Brad, do you think ex the COVID costs and maybe ex wages, which feel like we’re going to get another step up with fair work. Do you think some of those cost pressures are easing when you look at a lot of the initiatives you’re putting through on to the business?
What I will say, we are – in the first off, when we talked about it, – then every cost that you looked at was going up, and it was only a question of what percentage of that cost was going up and so whether it’s goods for resale, goods not for resale. So there is just not – normally, you have something that kind of offset. There are more offsets from come through, in particular, the products we sell, and you would have seen the material reduction in international shipping charges. It will take a while to flow through, but we’re going to see some counterbalancing benefits, which is terrifying, I would say, Ben.
In terms of then inside the cost that we directly control, as I said, I think we do – we can talk about the productivity plans, but core operating productivity is the key. And we’ve made great progress, but we’re still not where we were pre-COVID. And our goal in this half is to get there. We can see lower, but if I look to the e-commerce demand for a moment, we know that given the disruptions and so on, there is still a lot we can do just on items picked per labor hour or the number of drops we do per truck roll and so on. So we can still see some room in core productivity. And then we have a really – we think, a pretty robust series of productivity improvement plans that we’re rolling out across the group. And that sort of gave a sense of that. But we don’t need new ideas in the group. We need to roll out and scale and realize the ones that we currently have had. Some of them, as we’ve talked before, have had to go slow because of COVID disruption, and we just had to put them on the back burner. So we do intend to really try and scale those up best we can, assuming we continue with stability. So I’ve been a bit high level on in, Ben. But there is as many positives as there are challenges on the cost base in the half, which is good. And so we will see how it plays through.
Fantastic. Thanks, Brad.
The next question comes from Lisa Deng from Goldman Sachs. Please go ahead.
Hi. Thank you for the additional disclosure on WooliesX. I wanted to ask a little bit about e-commerce profitability. So it seems that during the half, our sales came down by 7.5% profitability came down by 37%. So it is high fixed cost leverage business. And if we’re saying that the e-com is now reverting back to growth, then do we also expect a similar amount of positive operating leverage look into the second half. Additionally, with the CFCs opening or the urban CFC and a couple more planned opening, what do we think about sort of like a ‘24/’25 profitability for e-com, please?
Thank you, Lisa, for the very intelligent question. Obviously, we’re not going to answer some of it, but we can give you some color to it. I am glad you asked it, because there are a number of exhausted people at the table to actually create the sub-segment reporting that you have seen today. I need to thank them all for doing this. One of our conversations in the group was it was actually a really challenging half for e-commerce. Why would we show it when we were at we think a low point in our cycle for e-commerce. And we decided we won’t – we are going to use that as a reason not to do it. But it was a challenging half for e-commerce. And as with everything, when you started the half, we knew it would come off because of COVID disruption, particularly in New South Wales earlier in the half and then later in the half of Victoria, but it came off board dramatically than we had expected. And so our forecasts in e-commerce that we have put into our plans were higher than the numbers we had. So adjusting was very painful to get this unit productivity. We called it an e-commerce event to talk to. So you really are seeing the product of that. What we really need for e-commerce is stability and our forecast to be accurate and we are starting to see that be true as we come through that volatility.
And so, some of the benefits of the demand talk to that, you have been very diligent to call out as well the commissioning of 2 CFCs in the half, which is really painful to do, because you do need to fold them up. And it’s been a lot of work between Woolworths Supermarkets and WooliesX as we have moved volumes out of stores into the CFCs, they are an important part of what we do, but boy, they are painful to get them fully commissioned and scaled out. Over to you, Natalie.
Yes, thanks. Thanks Brad. And Lisa, Look, just to recap on what happened last half in terms of e-commerce sales, the first quarter was a very, say, dramatic and volatile decline. And that’s where Brad, as you are talking to, we really needed to start to focus on item productivity, which is what we did, particularly in New South Wales and Victoria, which obviously we had a massive uplift in the prior year. So that was really the first half was getting all of our settings right at the end of the first quarter. And then in the second quarter, actually, a different dynamic has started to play out, which is quite interesting. Yes, there is still a very strong return to stores for some of our occasional shoppers and we are actually collectively happy to support that shift. We have also seen a real increase in the same day. And so the order profile coming through from our customers looks a little bit different, fabulous in terms of unlocking actually our store network and our speed to customer, but just a slightly different profile than what we have seen during the COVID years where customers for the most part are home, we are running 4 or 5 hour windows, very, very large baskets as customers are ordering more. And so we have just seen a real shift actually back to pre-COVID shopping behavior and we have to adjust to that.
So one of the big contributors to the decline in profitability in the half of e-com is really, yes, the overall sales and that’s flowing straight through. And then the other big shift that we have seen is actually in last mile. The last mile for us is an area that frankly has been quite challenging, particularly in our fleet last mile and that’s an area that we are focused on for the second half. That’s driven by all sorts of things. As I say, basket size is being slightly different as we see a higher order frequency coming up. We have also got a lot more traffic on the road. And I know that sounds like quite a basic sort of comment, but actually that has a very, very material impact on our ability to drive drop density, which is a big, big factor. And then on top of that is if we didn’t have enough in the last mile, there is the fuel and the wages that sort of played a role.
As we look forward, I think the way that w are looking at it is we have got a lot of great opportunity in productivity. We did a lot of great work, I think with the supermarkets team particularly in the first half. And we are pretty excited about actually some of the efficiency we are starting to see come through that and same for our CFCs as well. Yes, we had a good ramp up with the first two big [ph]. Yes, it was painful, but we are really actually quite pleased with the two being we are selling, how they are performing now. So again, improving.
So, we are not going to give you the outlook, at least for obvious reasons, but like all parts of our business having a more stable operating rhythm is really important. We are not commissioning any new CFCs. So, in the right balance into that business is key.
And just a follow-up, thank you for that, that looks very helpful. But a follow-up now that we have gone through the exercise of getting to an EBIT or allocated EBIT for e-com, is that going to be now part of that team, the KPI like a key KPI as well?
It was before this – was before this, Lisa, but clearly it’s a much more KPI now that we told to our shareholders. So yes, we do take it very seriously. We always have, but this is elevated and obviously in the focus inside our business.
I mean in all serious because we have used this measure for 6 years. It’s a well-established measure within our business. We have run tests that we have improved it. So, actually, it’s a very good KPI for us.
Thank you. The next question comes from Bryan Raymond from JPMorgan. Please go ahead.
Good morning. My question is just around the comment you made in the outlook that you are not really seeing any material impact from high inflation at this stage. I understand it’s probably more of a net effect you said earlier, Brad. But just trying to understand sort of how you are seeing shopping behavior around trading down a mix effect, given volumes are back into flat to maybe slightly positive and overall sales of 6.5% is probably below where inflation is. I am just trying to understand how that mix effect is playing out for your customers are people trading down or changing their behavior.
Yes. I mean Bryan, this is the key question. And we keep stating, I wish we could just come back and just give you this crystal clarity to demonstrable moves. But there is actually good news in not doing that either. So, the word we used in the media call was trading in. And we are sort of seeing this trading in phenomenon going on. And it starts with actually trading into the home versus from out-of-home. And even in our up-stores in the last two weeks, we have seen a material lift in sales. You can’t help, but believe that that’s a practical demonstration of trading into the store. We see trading in from specialty, as we talked about in the media call where beauty is one of the highest growth categories right now, not a category we have ever really been able to get traction. But MCo is our highest growth brand there, the market dealer, which is sort of the value like kind of phenomenon. And so you can see trading in from specialty into store. Inside our stores, we can see in many cases, trading into macro value with values, macro is really booming for us, and it’s growing very strongly. In particular, actually in long-life categories to my great surprise, and I am happy to have been proven long, I should say, from the team. But when we line in it up and it’s giving the customer a good healthy alternative at a prices slightly at least market leader, we have seen that happen. So, we have seen a lot of that trading in that is not necessarily negative and value-added solutions for us are a big part of the growth in the Woolworths Food Company, the franchise that Matthew talked to earlier, and cook barbecue ranges. So, there is a lot of value that’s a step. So, we don’t necessarily see that as all as negative. And then what you started to find, and if each customer finds value in their own way, what it’s not mean so – but they seem to balance each other out. Some customers are moving, as we talked about earlier, from fresh to frozen, we have had availability from frozen into can. So, there is quite a lot of those movements. But net-net, at the moment, it’s not a net negative. People are trading into Woolworths Group in general, and that’s a positive. That doesn’t mean we should rest on our laurels for a moment. This all requires consistent focus and material effort from our team. As you would be aware, our strategy is to do the right thing for every community or store and every customer segment. And when you continue to work and refine and challenge the model that we have in place, but so far so good in the first seven weeks.
Okay. Got it. Thank you.
The next question comes from Grant Saligari from Credit Suisse. Please go ahead.
Good morning. Thanks. Brad, you increased the guidance for losses in the other segment, which I presume is sort of MyDeal and $9 million, some M&A costs. Could you give us an idea that I guess the path forward for that business? It’s a small problem at the moment in terms of drag on earnings that could be kept to be a bigger drag in the future. So, see just how you see that business evolving? And what sort of rate could potentially be on the profit line?
Yes. Thank you, Grant. I would like get Steve to talk to that segment, and I will come back specifically to MyDeal. But Steve if you want to talk to the segment and then I will come back.
Yes. Grant, in our August results, we have guided to a total other, excluding the contribution from Endeavour of 220. And so the increase is sort of, and that’s a combination of what we anticipate from MyDeal and also the M&A costs associated with the shopper, the completion of the MyDeal and our Petspiration transaction. But just to clarify, there are a range of things that sit in that other segment. So, it has all of our group support costs, including investments in things like payroll remediation terms, risk, sustainability. It’s got our property, actually property trading. We had a slight decline in gains on property in the half. And it also has quantity and has MyDeal as well as our share of different products. So, there is a range of things that sit in there. So hopefully, that helps contextualize why we have changed the numbers. Brad, do you want to then talk to MyDeal?
I think it’s a very important question actually, once you flipped it into the conversation, but it is a very important question. The investment in MyDeal was based on us actually strengthening our extended range capabilities across the group because the extended range is key to provide a more holistic customer experience whether in our individual businesses or across group, and there is a capability there that we need to use in order to do that. In addition to that, we do get an introduction to a number of new customers that don’t always shop out the brands, and we need to really bring them into everyday awards and give them access as members to a number of other benefits. So, it is the capability play as much as an investment in the business in its own right. And we do need to progress how we realize the capability inside degree. That’s something we will need to come back to a report at the full year. We have made our first step of BIG W range being on MyDeal. That range is going very well, which gives us the cue we are be looking for, it does resonate. However, the priority right now is using MyDeal to actually create an extended range for BIG W. We are very sensitive to the fact that we have got 5 million people come in to the Big W digital property. We can do a better job of monetizing that. But even more importantly to me, Ron, and we can come back later in other sessions, talk about how extended more digital traffic to that platform. We are the number two, a shopping app in Australia right now behind Amazon with Everyday awards, but we are materially behind ways as is Amazon in the overall traffic they drive into the ecosystem and having extended range is a really core mechanic to help us drive that overall traffic profile. So, lots to do. The good news is they traded in line with expectations in the second half. That’s not true for a number of other marketplaces, but that doesn’t justify the premium. So, we need to come back and report how we have progressed justifying the premium. But I would say, we are not sitting there trying to triple the size of MyDeal. We are trying to say use this capability, and we need to come back and show you how we have done this.
Okay. Thank you.
The next question comes from Ross Curran from Macquarie. Please go ahead.
Hi team and congratulations on a great result. I just wanted to focus a bit on New Zealand and my thoughts go out to your team members and customers over there at the moment. Specifically, I want to talk about wages. So, we have got a 19% wage increase over 2 years. That’s a fairly significant EBIT margin headwind. You have given us some guidance in the second half for margins in New Zealand where profit should improve. But can you talk us through how you are offsetting some of that EBIT margin pressure from wages.
Look, I mean, that is one of the key factors why we are just trying to keep management on expectations. That increase, Ross, just to give you context and Spencer can give more context of understandable reasons, he is on the line from New Zealand right now. We had found ourselves during the context of our enterprise agreements according to New Zealand being uncompetitive in wages. This was leading to material turnover in our stores and risks on very low-teen morale. So, we needed to address it. We will be uncompetitive. We needed to get to the sustainable living wage, and we were seeing that in the turnover motivation of our team. Since we have done that agreement, there has been a dramatic change in team attitude retention and our performance on our customer metrics, which has flowed through into our sales metric. So, there is no doubt whether we would have liked to number that back, no. But there is no doubt the investment has – is part of why we started to see the momentum move in New Zealand. And then you wanted the benefit of going there, but if you do, you will see that it’s dramatic and demonstrable and very pronounced. Now of course, we need to work hard on getting that sales momentum through the business to monetize itself and address the material increase as well as take all the learnings out of Australia or on productivity and the volumes of RT3 and get it into New Zealand as quickly as we are. And that’s what we are working hard to do. But Spencer, next questions in this session. So Spencer, I can’t see you. I hope you are still there. Can I throw it over to you to add to that?
Yes. Thanks Brad and Ross, for the question. Brad, I mean, you have pretty much covered it. This was – it was important for us to address the [indiscernible]. We will lag in the market, as Brad said, as a result of a previous collective agreements signed. We saw the impact of that in a very tight labor market through significant attrition. And so one, we needed to do right by the team. And the thesis is that, that will improve retention, team advocacy and resulting lower attrition, all of which we have seen, which I think the biggest opportunity for us to address that is through improving our base productivity and reducing the cost of high labor turnover. So, that’s really the thesis of doing right by our team and all of that materializing through improving our base productivity. So, yes, that’s – you have covered most of it, Brad.
And I would call out, Ross, just finally, whole productivity metrics are improving in New Zealand, but not at a pre-COVID level. So, it’s had actually more disruption just through good in dense shipping into New Zealand, a number of other issues. So, we have still got a bit more. I feel like it’s a performance review, Spencer, but it’s a bit more core productivity there that we are working on of course.
Thank you very much.
The next question comes from Craig Wolford from MST Marquee. Please go ahead.
Good morning Brad and team. And I just wanted to understand the cost performance on the food business, which was obviously very good in the half even if you strip out COVID costs, I was getting that would be up 3%. Can you just itemize some of the factors that may have contributed to what looks like well-contained cost outcome? Is it some of the initiatives that have taken place, or is there anything else that we should be mindful about?
Yes. Craig, I will take that one and thanks for the question. But clearly, the biggest benefit is the removal of those COVID costs, which I think in Australian Food, we had $160-odd million in the prior year, most of which, Brad has said, as we know, there is material wage inflation going on. So, our enterprise agreement, which ties to the fair work ruling was 4.6% plus some extra super. So, we actually ran close to over 5% wage inflation. So, I think the team did actually an excellent job in offsetting it. That is the combination of some of the productivity initiatives that Natalie spoke about. But in particular, that focus on managing our cost to units like we are actually a volume-based business. We moved cartons through our DCs and items through the checkout and the team just did a great job on focusing on those metrics, whether or not was the scan rate or the carton fill rate in long life for the e-com, pick rates or the cartons are powered in supply chain and logistics or the DC. DC clear comp to keep that, those were just our key focus. And I think Brad referenced that from mid to late Q1, we really got in our groove of managing those costs to units. And so I think that combined with the focus on managing costs and being focused on controlling things that we can control and landing some of those productivity initiatives allowed us to, I think get a reasonably modest cost growth in light of the quite material inflation that we are facing with where wage rates are right now.
Just the way you record your own cost of transport and logistics, that’s the driver that’s fits in, doesn’t end as well because that must have been quite a headwind?
Transportation is in GP, Craig and…
And the DCs are in…
And there are always been on sort of in different DC mix.
Great. Thanks so much.
Thank you. The next question comes from Phil Kimber from E&P. Please go ahead.
Hi guys. Sorry, just a couple of quick questions. One, BIG W obviously had a fantastic result, lapping lots of store lockdowns. Have you seen any change in shopper behavior in that part of the business over the recent months?
Thanks Phil. I will get down to give a little bit of color as we go into now, it run a different rhythm. We have the Christmas, but then you also have this back-to-school, which is a very big event. And so as we slowly coming on out of that into a more stable rhythm, so we will kind of know in the next couple of weeks where the dramatic changes are, but it’s gets out a little bit of color from what you have seen if you look to the detail [indiscernible]
Yes, for sure. I think the story of H1 is really one of normalization. And I think it’s played out in two ways. One is the cycling of lockdowns through Q1, but then in particular, a normalization of our e-com versus in-store growth. So, we have both gotten a dramatic lift to the COVID period, but are also now seeing a dramatic shift back into the stores. And we do report the Q2 3-year CAGR. And I think the 3-year CAGR is the thing to look at, and there is a piece in the analyst pack as well on kind of the first seven weeks. And so we have seen the Q2 trend roughly continued so far. But we have got back-to-school, Easter coming. So, we will see how the market overall behaves. And we are conscious of the economic pressures, the impact of that on discretionary spend, so it’s kind of too soon to call it for the half. But so far…
I mean, as you might imagine, Paul, we are very – we are using the word trade in inside supermarkets, but also inside BIG W, we are hoping that a lot of customers will trade into the affordable inspiration that was there, the home category, the entertaining, party. So, that thesis to be to be borne out, but if we are careful and we deliver the right value and the right comp is hopefully a very powerful trading opportunity. Go ahead.
Conversation we are having and the team is clearly looking at it as an opportunity.
Okay. Great. And quickly on the B2B business, we don’t have a lot of history there. Is there much seasonality in that business? Like should we use the first half result as a bit of a guide for the second half?
To be honest, I think we are learning about this business in parallel with you, Phil. I mean PFD don’t have a seasonal bump gain through Christmas. It’s not quite as pronounced, but there is a seasonal bump there. Given the strong growth – and some of that growth is through acquiring new customers. It’s kind of a tricky one to talk to, I don’t know if you have got few insight. So, it did have a bump. I just don’t know how much it’s about was customer-driven versus seasonality driven. And to be honest, it’s had strong momentum in the last couple of months. And that’s the major driver of the overall revenue to EBITDA, which is...
I think the point about PFD as well as it’s got a very diverse customer base as well. So clearly, we are looking at the out-of-home consumption trends coming through in PFD and it is resilient given that a lot of the – what we are also seeing in out-of-home actually is that customers trade into different segments of the out-of-home eating market. So, they will move from restaurants and cafes into fast food chains. So, we are delighted actually with the way the business is trading and the strength of the business.
But it has been moving modestly first half weighted.
Yes. First half weighted given Christmas, yes. I am sorry, a bit of loudness, we will find out together.
Thank you. The next question comes from Shaun Cousins from UBS. Please go ahead.
Thanks for allowing the follow-up. Just a broader question regarding New Zealand. Can you maybe talk a bit about the broader benefits Woolworths gets from its business in New Zealand. And then moreover, how we would also can bring some of its Australian learnings you called out productivity, RT3 there into that business. And maybe just looking over the medium-term, what does success look like and possibly with a reference to return on funds employed. I think it’s even back in ‘19 and ‘18, it was less than 10%. It was at 9.5%, 9.8% like there. But just curious, what are the benefits? And what should we be thinking about success looking like over the next sort of few years, please?
Thanks Shaun. I would have to say, COVID did rather stop a lot of the benefits we thought we could realize across the Tasman. And I think we spent or took 1.5 years before we saw you [indiscernible] joined New Zealand. So, simple thesis was and is and continues to be, we have built strong capabilities inside the group, and then we worked with each one of our businesses to help them realize the benefits of that capability. Where we build the capability does depend on which business is how benefit it is and what it does. And then if we are going to invest in the new capability, if the team has the capacity to engage and start to move with supermarkets. And that’s why like recall, get more from those team to make promo and range personalization inside the Woolworths Supermarkets. But it’s not always the case. There are many things in New Zealand has historically done better than Australia and there are other things that across the group, but we are trying to codify those and then share the collective benefit. We are making good progress on this. But because of the isolation of New Zealand, it has been hard to really a truth driver across the Tasman for good reasons over the last couple of years. But we do expect to that. If I look at the kinds needs to talk to this to give you a sense of it, Shaun, with Cartology, with the launch of Cartology has gone fabulously well for us in New Zealand. It’s got off to a great start, delivering great outcomes. Actually, when we started looking at it for that stage of the journey, there has many of the learnings and benefits we want to bring back that Cartology team reports into most New Zealand, but also into Cartology so the share in there. I look at that as a real highlight. And it’s now that we are really leveraging our increasing capabilities and driving DC productivity. The Primary Connect team is lined up there as well, and we have a lot of teams going across the Tasman fact this week with the site plans. We sent facilities management team to give the team there rest as well as supply chain experts to deal with disruption. So, starting to see that happen, which is exciting. We have actually sent some of our high-potential talents in the rewards area. One card has been a very strong program in base engagement, but not really inviting additional engagement. So, we have seen the mix between one card and everyday rewards crossing that. And we have sent some really strong people over there. Our real-time loyalty platform, which has been very successful in terms of status called Eagle Life. Again, well the economies you should we get a bit confused. We are looking at a climate there, and that’s a big priority. Light version of RT3, we are working to take across Tasman next gen promotional thing that we have built inside supermarkets is actually in the process of being implemented in New Zealand. We are testing some other ways with about better buying in New Zealand that we hope to bring back and they are at the right place for us to test that, and it’s a big investment for us. So, there are many others are beginning, Shaun, but as we get stability, we are hoping it becomes a much more active part of the group, and there are things we can help New Zealand with, and there are things that New Zealand is helping us with I should reference, as I sort of look around the table. There are a number of people who we brought out of New Zealand that immensely helped Australia, whether it’s actually coming back, selling confidently around our e-commerce business, our Chief Financial Officer for WooliesX and many others, so there is significant talent. But we are early in that journey, Shaun. So, that’s what we need to do when Spencer and team are committed to doing and we need the proof of in the pudding. On overall ROFE, you do need to look at the ROFE of this business ex the goodwill that was paid many years ago on New Zealand. We can all debate that, but since a concord [ph] decision-making because you need to look at the incremental ROI that you get from investments. And when you start looking at that, you get a much more positive view of the group, but a lot to do. But I think if we had stability, including on the political landscape in New Zealand so that we can actually do this and prosecute it – but as the rest of the group, we see a lot of upside.
Sorry, Brad, but can you get back to previous ROFE metrics? Do you think you can, or is there something that’s fundamentally changed in the business, sorry?
In the forecast we have, we can definitely improve. There is no question about that. So, we are not going to give a forecast is.
Thank you. The last question today comes from Craig Wolford from MST Marquee. Please go ahead.
Hi everybody. Just a quick follow-up on the price inflation outlook as you see it on the food side. I remember back in August, you talked about 5x the number of price rise requests or submissions coming through your buying team. What can you comment now on the magnitude and breadth of price rises you are seeing from suppliers?
Yes. Thanks Craig. It’s a really good question to finish on actually because it is our number one priority in the next couple of months. So, I appreciate you finishing on that question. In the opening comments, our thesis has been – and it is doing out, but not to the extent we had thought, if you talk – if you look at 1-year inflation, our price is going up, it should start going down, given inflation popped up in November 2021. So, we are starting to see 1 year inflation slowly go down, not as quickly as we had expected, and Nat can talk to you a little of the detail there. But we look at 1 year and 2 years. So, 2 years holding slightly elevated, but 1 year is coming down. And that’s really important for us. We do need to see it continue to go down. And as I say, we are starting to see parts of the store that have got deflationary, which is kind of helpful vegetable at least the current period and so on. So, it is coming down. But yes, just not as quick, and there is a lot of very specific factors that results in that. And so we need actively engaged, and I will talk to where we are in the number of supplier requests in the long-life sections of our store. So, the things that you wouldn’t normally talk about that we are worried about [Technical Difficulty] in particular for me, worried about it’s all because these all go back to families, young families, and they are a key demographic for us to talk to. So, it is a moving piece, I would say what is important is the international freight rates downward adjustment. Now, many people are hedged does create a material cost benefit that we would hope for engaging with our supply partners that will be shared with our customers. Nat, you are on the day today on a number of increases.
Yes. Look, I think the cost cuts that were coming through in terms of volume did decrease over December, January, but it probably reflects the seasonal timing of costs. So, we are at similar levels to where we were last year at the moment. And the level of the cost ask is still relatively high and that hasn’t come down yet. So, we are hoping we will see the year-on-year inflation moderate and as Brad said, that our suppliers are still coming to us and feeling cost pressures coming through. I think the positive outlook is really around fruit and vegetables and Brad talked about vegetables, in particular, now being fantastic value. We did ask our growing team around the outlook going into winter this year, and they are quite positive because of milder weather and also very full dam they are hopeful around supply of things like tomato, broccoli, lattice and strawberries as we go into that winter selling periods in Q1 ‘24. So, I think we will continue to see some improvements coming through in fresh, driven by vegetables in particular. And that’s moderating inflation in long-life.
I think that’s our last question gives me the opportunity. Thank you all for your questions. Our priorities, actually in line with the questions we had, we need to get availability right and get the right experience for our customers. We need to deliver value for money. We continue to improve our core underlying productivity. And then the overall that is to continue to progress our overall strategic agenda. We will be speaking to you very soon on Q3 sales. We are closer to Easter than we are to Christmas on our mind. So, look forward to speaking to you soon, improved in our stores and just a real call out, I think to have very hard working teams and all the effort they put into the half. Thanks very much.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.