Earnings Transcript for COL.AX - Q2 Fiscal Year 2022

Operator: Thank you for standing by, and welcome to the Coles Group 1H ‘22 Interim Results. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. I would now like to hand the conference over to Mr. Steven Cain, CEO. Please go ahead.

Steven Cain: Thank you, and good morning, everyone from a sunny Melbourne. Welcome to our half year results for FY22. Joining me on the call for the last time in her capacity as CFO is Leah Weckert. As previously announced, she is excited to be starting her new role as Chief Commercial and Express in April. And Leah, thanks for the outstanding job you've done as CFO since our demerger back in 2018. Charlie Elias, who will be succeeding Leah as CFO on the February the 28th is also here. A warm welcome to you, Charlie. Looking resplendent, I’ll add, in his Coles’ red polo shirt this morning. Since joining Coles in early December, Charlie has completed a thorough induction, including stores, DCs and even a trip to the UK to see our various partners there, including Ocado. Also in the room is Matt Swindells, our Chief Operations Officer and COVID guru; and Ben Hassing, our eCommerce Chief. I'd like to start by thanking our team, suppliers, community partners and state and federal governments for their incredible efforts, during the latest waves of Delta and Omicron, and through the flood related road and rail recovery operation for WA, which has been highly disruptive, in fact, the most highly disruptive, in fact the most disruptive period in Coles’ history. I would also like to thank our customers for their support during periods of reduced product availability in store, which is now thankfully improving day by day on the eastern seaboard. The headline we've got today is pretty straightforward and would really be our summary of the half, which is the Smarter Selling program, and efficient management of COVID-19 has delivered a very solid profit in Supermarkets. Added to which, we had the delight in December of the remainder of the Wesfarmers retail stable joining flybuys for the first time, most notably, Bunnings and Officeworks, which means that we've got the largest coalition in Australia. And we will be able to provide more rewards in the future and greater personalization going forward. I thought I might start on slide 3 for those who've got the pack in front of them, which really talks about the strategy because it's easy to become immersed in the emergencies that confront us, but the strategy is really important, too. And another half of good progress with more benefits still to come. We're now almost three years into our Winning in our Second Century strategy to grow trust and long-term shareholder value. And what these results show is that our strategy is beginning to differentiate us from our competitors. One of the operational highlights during the half was Supermarkets and Liquor eCommerce of 46% and 60%, respectively, as we invest in capacity and the customer experience. Total eCommerce sales in calendar '21 were approximately $2.6 billion. Ocado, offering the widest online food range and best delivered in full on-time experience in the world, opens in Sydney next year, the first in the Southern hemisphere. Our Own Brand offer continues to grow and is increasingly focused on health, convenience and sustainability. We also had an outstanding range of great value, easy entertaining options at Christmas to help customers celebrate with their families and friends post-lockdown. There will be more to come at Easter. Our Own Brand range and prices, the vast majority of which are made in Australia, will stand us in good stead as the cost of living increases for many Australians. Our Smarter Selling program is on target to deliver $1 billion of savings by FY23, and I'm delighted that our first Witron automated DC will open in Queensland next year, which will further increase our efficiencies. Three years ago, sustainability was a trend. It is now a prerequisite for generations of Australians ahead. Our program is Together to Zero because we know we can't do it on our own, we must work with all stakeholders, including customers, suppliers, community partners and government to make a difference. Whilst most is still to be done, it is pleasing that we have now secured a path to 100% renewable electricity by the end of FY25, and that with our customers in REDcycle, 2 billion pieces of recycled plastic have been recycled into amongst other things, benches and even car parks. The work we are doing together is being recognized with the World Benchmarking Alliance rating Coles as the second most sustainable supermarket globally. Finally, with regards to our 130,000 team members, we are moving faster together. Health and happiness is a value at Coles, and all team members will be fully vaccinated by March or have a medical exemption, and we continue to invest in their mental health, which I'll talk about later. We have seven team members who have worked for Coles for more than 50 years. That's each, not collectively. At the other end of the spectrum, I am meeting the hundred-or-so graduates who have joined Coles this year, recognized for the second year running as the leading program in retail and FMCG, I wish them well with their careers at Coles. Let's move on to slide 4, the financial highlights for the half. Our Smarter Selling program, which delivered in excess of $100 million of benefits in the half and our efficient management of COVID-19 disruption, helped deliver a solid earnings results, particularly in Supermarkets. Total sales increased by 1% to $20.6 billion. On a two-year basis, sales revenue increased by 9.2%, EBIT decreased by 4.4% to $975 million, which I will discuss later. Net profit after tax decreased by 2% to $549 million. Gross operating capital expenditure was $418 million, operating cash flow of $2.1 billion, cash realization of 117%, and we have a strong balance sheet for future growth with a net cash position of $54 million. For our shareholders, I'm also pleased to report a fully franked interim dividend of $0.33 per share. Finally, from a safety point of view, I am very pleased to say we continue to make progress on safety, and our total recordable injury frequency rate, or TRIFR, improved by 4% compared to the second half of FY21. Moving on to slide 5. Digging into the earnings results for the Group and the Supermarkets segment, you can see that overall, COVID disruption costs of approximately $150 million for the group, which were an incremental $45 million compared to the first half of last fiscal year. Lower earnings from our Express segment from COVID reduced traffic flows as a result of the COVID-19 restrictions in New South Wales, Victoria and the Australian Capital Territory in the half, and then higher net costs in our Other segment of $13 million and implementation costs of approximately $20 million in relation to Witron and Ocado. In our Supermarkets segment, excluding the one-off project costs, CBIC grew by 1.3% and 16% on a two-year basis, a pleasing outcome given the current environment and a result that we could not achieve without our Smarter Selling program and the strategic focus on running an efficient and agile business that was able to respond to the challenges that we faced during the half with COVID. Moving on to slide 6. eCommerce growth was delivered through expanded customer offers such as double flybuys points for Coles Plus members, as well as investments in capacity, which supported the elevated demand experienced, particularly earlier in the half. eCommerce penetration was 8.2% in the half, increasing from 5.7% in FY21. Our eCommerce strategy recognized the importance of the omnichannel customer. In the second quarter, the omnichannel customers spend more than 2 times that of any in-store-only shopper. Our new -- sorry, and in-store shopper, not any in-store shopper. A new unified Shoppable app was also launched during the half to further improve the customer experience, bringing together eCommerce, the catalog and recipes. Finally, same-day delivery is now available at around 500 stores, allowing customers greater access and choice of the Coles Online home delivery service. We added more than 100 Click&Collect to the boot locations, taking the number of locations to more than 640, while 30 new Click&Collect rapid stores were added to the number of stores coming to over 430 now. Before moving on to strategic pillars, I would like to update you on our Ocado transformation project. Moving on to slide 7. Some time ago, Coles recognized the importance of having a compelling online offer, 2019, in fact, which led to the announcement of our partnership with Ocado. Ocado remains at the forefront of grocery eCommerce globally. More recently, as a result of the significant investments Coles has made in capacity but also in customer experience and the rapid acceleration in eCommerce revenue and penetration since COVID, we agreed with Ocado to update the arrangements regarding how the Ocado Smart Platform, or OSP, will integrate into these new digital initiatives. Coles will manage the online store and web presence for the intake of orders, and Ocado will provide OSP automated fulfillment functionality through the CFCs and store-pick channels as well as last mile solutions. As we have said in the past, COVID-19 has also caused significant disruption upon the construction industry. In Sydney, construction delays have largely been mitigated, and as a result, the Sydney CFC is expected to open in line with the original schedule in the early part of FY24. Construction delays have had a greater impact on the Melbourne CFC, which is now expected to open in FY24. We continue our strong working relationship with Ocado, the world's leading technology provider in automated single pick technology and home delivery solutions, and we look forward to bringing Ocado solution to our customers in calendar 2023. Moving on to slide 8, our strategic pillars. I'm pleased that we've made significant progress, despite a highly volatile operating environment. As such, customer satisfaction, as measured by NPS, was stable in Supermarkets and improved in Liquor, albeit that both softened towards Christmas as COVID-related availability issues impacted us. We strengthened our flybuys program, as I've said, with the addition of Bunnings and Officeworks, providing new opportunities to collect points and the opportunity to personalize offers and value for consumers in the future. Liquor eCommerce growth was supported by the opening of a fourth eCommerce dark store in New South Wales. Exclusive to Coles sales, mostly Coles Own Brand increased by 5% with 9 Coles Own Brand products winning 2022 Product of the Year awards. That range is increasingly focused, as I said, on health, wellbeing, sustainability and convenience. Finally, we provided more customers with access to our Best Buys range with the launch of an online platform and the in-store offer was rolled out to a further 83 stores to more than 400 stores at the end of the half. Moving on to Smarter Selling, slide 9. Our Smarter Selling program is a key strategic differentiator for Coles and helped us deliver solid earnings results despite the cost pressures we faced. We've delivered more than 100 in the half and expect to deliver over 200 for the year. Some of the key initiatives included measures to reduce loss in store through the use of artificial intelligence with dynamic markdowns rolled out to the dairy category. This followed the successful deployment in meat, which I spoke about last year. We also continued the rollout of front of store loss prevention initiatives such as electronic entry gates. During the half, we aligned our meat operating models nationally to deliver high-quality retail-ready meat for our customers, which reduced wastage and a safer work environment for our team members. Service transformation store continued with the rollout of trolleys assisted checkouts and customer bagging benches, enabling greater customer choice while improving team member productivity. We also delivered efficiency benefits in our eCommerce business through the introduction of an automated fraud detection tool to reduce loss, while there's a continued focus on reduced cost to sale through improved pick efficiencies and delivery van optimization. We've provided transport solutions and other value-added services through Coles Collect, including very recently, APC going to WA, with revenue growth of 20% in the first half. We completed Phase 1 of the Fresh Produce Easy Ordering program with the successful rollout of a Coles range, which is helping drive growth in emerging fresh categories such as organics. Finally, and as I've mentioned, we're especially excited that the biggest automation projects in Coles' history are coming to fruition with Witron and Ocado leading the way next year. Moving on to Win Together on slide 10. It's always pleasing to report improvements in safety, which we've talked about already. This was delivered through investments in team member development, wearable technology, critical risk reduction programs such as fall from height improvements and manual handling equipment in stores. We also invested in team member mental health and wellbeing with the launch of a mental fitness app, company-wide mental wellbeing family activities and continued rollout of our GEM program, gratitude, empathy and mindfulness. Working together with our customers, team members and suppliers to provide community support, Coles was ranked number one in the 2021, GivingLarge Report for the largest percentage contribution of profit to the community amongst Australia's leading organizations. Significant contributions were also made during the half to our community partners, including $2 million to SecondBite, $680,000 to Movember to support men's health and more than $2 million for Redkite to support children and families impacted by cancer. Finally, we have strengthened our executive leadership team with the appointment of John Cox as Chief Technology Officer, who joined in September, and I've already mentioned Charlie a little bit earlier. Moving on to our strategy tracker on slide 11. As we do at every results presentation, this is the tracker, and I'm pleased to say that we remain on track for most of the metrics. I've talked to safety in MPS. Market share was impacted by local shopping due to New South Wales and big lockdowns, but pleasingly, this recovered at Christmas as restrictions eased. Smarter Selling benefits remain on track, cash realization was a robust 117% and EBIT was mostly impacted by the COVID-related costs we've talked about already. We will continue to report on our progress with the next scorecard update at our full year results in August. With that, I will now hand over to Leah, who will take you through the financial results in more detail. Leah?

Leah Weckert: Thank you, Steven, and good morning, everyone. I'm now on slide 13, which shows our group results. Sales revenue increased by 1% to $20.6 billion. EBIT of $975 million decreased by 4.4% and was impacted by COVID costs, lower Express earnings and the Other segment, as well as approximately $20 million of project implementation costs in relation to Witron and Ocado transformation projects. These transformation costs were reported in the Supermarkets segment. And in light of the operating environment and what we were cycling last year, we believe it was a solid EBIT result. Net profit after tax decreased by 2% to $549 million, and basic earnings per share decreased by 1.9% to $0.412. As Steven mentioned, the Coles Board declared a fully franked interim dividend of $0.33 per share, which is flat from the prior corresponding period, despite modestly lower NPAT. Turning now to slide 14. I'm pleased to report sales revenue growth in Supermarkets and Liquor despite cycling elevated COVID-19-related sales in the prior corresponding period. In Supermarkets, sales increased by 1% year-on-year and 8.6% on a two-year basis, driven by strong trade over the Christmas period, growth in eCommerce sales and elevated in-home consumption associated with the Delta COVID-19 wave with lockdowns in Victoria, New South Wales and ACT versus just Victoria in the previous year. I would also like to highlight that we have added an additional metric, gross retail sales, to the segment operating metrics in the results release. This reports the sales for each segment prior to adjustments for concessions and the cost of flybuys points, which is required under the accounting standards. This is reflective of how we think about sales growth internally for management reporting purposes and how we seek to maximize sales density. For this half, gross retail sales for Supermarkets grew by 2%. We have provided more detail on gross retail sales, including prior comparative numbers as an appendix to the results release. Supermarkets EBIT decreased by 0.8% to $896 million. Key drivers of this result were $150 million of COVID-19 costs, which were $45 million higher than the $105 million occurred in the first half of FY21. There was also the $20 million of implementation costs associated with Witron and Ocado. And offsetting these impacts were earnings from higher sales over $100 million of Smarter Selling savings and benefits from strategic sourcing initiatives. Excluding the transformation project costs related to Ocado and Witron, EBIT increased in the Supermarkets segment by 1.3%. In Liquor, revenue growth of 2.7% and 18.2% on a two-year basis was driven by strong eCommerce sales with Liquorland, the strongest performing banner. At a category level, spirits, ready-to-drink and wine performed strongly following recent range activity. Liquor reported EBIT of $99 million, a decline of 4.8%, driven largely as a result of investments aligned with the execution of Liquor's strategy, including investments into customer service and team capabilities. Express revenue declined by 8.4%, but increased 1.1% on a two-year basis. Express revenue was negatively impacted by lower forecourt traffic due to the lockdowns in New South Wales, Victoria and the ACT during the half, as well as cycling strong tobacco sales in the prior corresponding period. Express EBIT of $12 million declined by 62.5% and was impacted by fuel volumes and commissions, which was driven by the reduced mobility as a result of the COVID restrictions during the Delta ‘19 wave. The Other segment recorded net cost of $32 million for the half. Now, as a reminder, Other comprises corporate costs, property earnings and the Coles share of the flybuys JV result. Corporate costs were $43 million versus $39 million in the same period last year, with the increase primarily driven by insurance costs. The corporate costs were partially offset by earnings from property operations of $15 million, which was $5 million lower than for the same period last year and Coles' 50% share of net -- flybuys, net result was a $4 million loss for the half versus nil in the first half of last year. I'll now turn to the operating cash flow on slide 15. Operating cash flow, excluding interest and tax was $2.1 billion with strong cash realization of 117%. This was primarily driven by benefits from a reduction in working capital with higher trade payables primarily from sales volumes, as well as reduced inventory holdings versus the prior corresponding period due to the higher than COVID-19 demand towards the end of the half. This was offset by a reduction in cash flow from provisions largely as a result of the utilization of the Witron transformation project provision in the half. I'll now take you through capital expenditure on slide 16. Gross operating capital expenditure on an accrued basis decreased by $114 million to $418 million. The lower capital expenditure compared to the prior corresponding period was largely a result of the timing of milestone payments for the Witron transformation project, which you see reflected in the efficiency initiatives line, as well as COVID-19-related delays, including some construction delays, which impacted delivery of Coles' new store and renewal programs, as well as some store-based strategic initiatives. Within Supermarkets, capital expenditure was incurred in relation to four new stores that were opened during the half, as well as investments in the store renewal program with 21 stores renewed. CapEx was also spent in relation to in-store investments for the Fresh Produce Easy Ordering program, as well as investments in the Witron and Ocado transformation projects. Liquor capital expenditure focused on new store openings with 7 stores opened in the half and in renewal program, in particular, the new Black & White Liquorland format of which 90 were completed. And finally, we reported a net property inflow of $34 million on an accrued basis compared to a net property inflow of $24 million in the prior corresponding period. Turning now to slide 17, balance sheet. As of the second of January, we reported negative working capital of $1.6 billion, capital employed of $10.7 billion and net assets of $3 billion. We have maintained a strong balance sheet with investment-grade credit metrics, which will provide flexibility for future growth. If I start with working capital of negative $1.6 billion. Working capital improved by $224 million compared to the prior corresponding period. As I already mentioned, this was largely as a result of higher trade payables given the higher sales volumes we had through the business. Trade payable days remained steady, while inventory days marginally improved relative to 2021 as stock availability challenges resulted in abnormally low stock holdings at certain times during the half. Total net assets improved to $3 billion, with the most notable movement being a reduction in provisions due to the utilization of the Witron transformation project provision with the Goulburn DC closure. And there was also a moderate reduction in employee entitlements as COVID-19 restrictions eased and team members utilized leave. Turning now to slide 18 on capital management. Coles retains its existing annual dividend payout ratio target of 80% to 90%, franked to the maximum extent possible. The Coles Board has declared a fully franked interim dividend of $0.33 per share with a payment date of the 31st of March 2022. We reported net cash excluding lease liabilities of $54 million, which was modestly above the prior corresponding period. In August 2021, Coles established a total of $1.3 billion, four-year sustainability-linked loans under its bilateral debt facilities, replacing existing debt commitments. The $1.3 billion SLL draws a direct line between Coles’ sustainability performance and its cost of capital, providing transparency and accountability as we work to fulfill our ambition to be Australia's most sustainable supermarket. And finally, on credit ratings, we remain committed to solid investment-grade credit ratings with both S&P and Moody's. I'll now hand back to Steven, who will make some concluding comments on outlook before we get into the Q&A.

Steven Cain: Thank you, Leah. As on the comp spread through the community in the early part of January, Supermarkets sales were elevated before moderating later in the month and through February. There has been a significant variation in sales performance between states, store locations and on a week-to-week basis as a result of COVID-19 and the floods that we've talked about in South Australia, which have impacted sales, particularly in WA. Coles will continue to focus on providing trusted value for customers, including through our exclusive to Coles product despite increasing cost pressures. While the current operating environment remains uncertain, COVID-19 costs of approximately $30 million were incurred in January, primarily due to the large number of COVID-19-related isolations. These isolations have moderated in February, and we expect them to stay at a moderated level. As foreshadowed at the first quarter sales results, construction delays have impacted our capital expenditure program. As such, we now expect capital expenditure in FY '22 to be between $1 billion and $1.2 billion versus the previously stated amount of $1.2 billion to $1.4 billion, and most of that will be rephasing into FY23. Thank you for listening. We are looking forward to delivering a great value, easy entertaining Easter for Australians and continuing to execute our strategy. I'm convinced there's never been a more exciting time to be in food and drink retail. I will now hand back to the operator for Q&A. Thank you.

Operator: Your first question comes from Ross Curran from Macquarie.

Ross Curran: Congratulations. A great result in a difficult period. Just wondering if you can give some comments around food inflation and what you're seeing at the moment, realize that it's -- we're hearing a lot of suppliers pushing through price changes throughout the start of channel. Any comments there?

Steven Cain: Yes. Thanks, Ross. As you saw for the half, it was net still deflation, and we saw obviously a bit more in packaged. Tobacco, there wasn't much this year. And then obviously, we had produce prices coming down to offset a little bit of what was going on in red meat. We have seen further cost price pressure coming through in the early part of this half, and we expect that to continue based on both local and global input prices and various supply chain costs that are rising, including the cost of oil and so on. So, really what we'll be trying to do is to make sure that we prioritize our customer value position, but continue to adopt the pricing policy we've had for a number of years now around suppliers increasing cost prices, which has to be validated before it can be put through, and then we look at a combination of things ranging from price indices to percentage margins to cash margins and so on. So, that's roughly where we are today. But I'm afraid my crystal ball isn't going to be able to sort of predict exactly what's going to happen over the next six months. But what I would say is that I would expect Own Brand penetration to continue to increase for those who are looking for value. But equally, we should recognize that there's more than $100 billion more in consumer bank accounts than there was pre-COVID. And for a lot that people, there's still plenty of disposable income out there.

Ross Curran: And then just secondly, around the change in your relationship with Ocado. Can you just talk us through whether we should be thinking about that having any impact on the margin you might earn over that relationship?

Steven Cain: Ross, I missed the very end of that question. Would it impact what, sorry?

Ross Curran: Does it impact the metrics that -- the fees you pay to Ocado by you running the front end?

Steven Cain: Yes. Well, just let me go into why we've done it first, and then we can think about the economics. Ben and I were very lucky to go and see Ocado in early January. Very lucky, we got in and out of the UK without catching COVID, but we also got to see their R&D lab. And I don't know whether everyone's had a chance to see it. But the Ocado reimagined video that's on their website is outstanding in terms of how they're looking at the future. And over the last few years, they have made a number of significant acquisitions in robotics and automation. And so that's where they're heading. And as far as we can tell, they remain the leader by far. The reason they’re the leader is that fundamentally they stock twice as many SKUs as anybody else does, and they've got the highest delivered in full on time anywhere in the world, which are two big reasons to shop with Ocado. What's happened at Coles is like in a lot of retailers around the world and other organizations, we've significantly improved our front end. We've launched a unified app now that for the first time brings together eCommerce, recipes and the catalog. And we want to overall adopt omnichannel approach with our customers. We've said many times that an omnichannel customer spends twice as much as an in-store only customer. What we're also very cognizant about is new revenue streams in the future, including things like media, including things like proximity to product in store and all of those type of things and we want everything to be as near to a one-click opportunity for customers to buy something as possible. So, we see this as being the best of both worlds, which is where we see omnichannel shopping going in the future, combined with market-leading robotics and automation, build the range and the best delivered in full on time. I don't think we've ever been too specific about the contract with Ocado in terms of costs and so on. But you'll recall, it's been a fairly capital-light program in relation to Witron. But obviously, any changes that have happened have all been thought through from a business case to make sure that we think it is the best thing for Coles to do in the future. And that's where we've got to so far.

Operator: Your next question comes from David Errington from Bank of America. Please go ahead.

David Errington: Good morning, Steve. Good morning, Leah. And yes, I share Ross' view toward your result, a very good set of numbers, by the looks of it. Particularly, my first question on the cost performance, and I suppose, Leah, well done on your performance as a CFO over the journey, Leah. You've left Coles in a terrific position, net cash, but more importantly, on a very-disciplined cost performance here. Can you go through, please, in a bit of detail, the $150 million of COVID costs you just seem to put into a bucket. Now, I don't like comparing you obviously to Woolworths, but it's pertinent at this stage to do so because Woolworths made a big announcement in December where they highlighted the increase in direct COVID cost. But they also highlighted elevated costs through disruptions to their supply chain. And they also highlighted increased costs to staff. Now obviously, can you go through, please, of that $150 million in your expert manner to which you do, to give us an idea as to what's in that $150 million and to give us a bit of a comparison as to how your supply chain has held up relative to how Woolworths has held up in that first half and whether you've seen the disruptions.

Leah Weckert: Thank you, David. And thank you for those comments. I think, Charlie was noting down cash and so on, Steve. So, yes, $150 million in the half, broadly spread $100 million into CODB and $50 million into the GP line. And in terms of how that breakdown -- and I'll probably maybe just start by saying, I think we feel we've become quite adept at managing the COVID cost efficiently. And what we've had to learn to do over the last couple of years is deal with peaks as waves come through where we need to put additional costs in. But then we are very much on the front foot of moving rapidly as a way of dissipate to take those costs back out. And so, over the half, you do see a substantial fluctuation in the month-to-month amount of COVID costs that we have. Now, during H1, those costs really peaked in September and October when we were really at the height of the Delta isolation. And then, if you looked at November, it really came off very substantially and more than halved versus what we had in the October period. So, we can be very agile in removing those costs out. In terms of what's in the $150 million, so about half of it is due to additional ramp that we have in stores and DCs, and that's a couple of impact. One, as you'll recall, during Delta, there were a couple of states where we needed to put store briefers in to maintain QR compliance at the front of store, so that was an additional cost. And then the other big cost in this half, which was probably different to what we've seen in previous waves if you went back into sort 2020 was the isolation cost. So, we just had a lot of team members that were required to isolate under the health department policies that they had in place. So, a very substantial part of that $150 million is direct from costs. The other significant ones in there, there's rapid antigen costs to administer those. So, we were administering those in the DCs, in New South Wales and Victoria, and Matt's here and he can probably talk to some of that. The other ones are, we did have some additional costs related to the online call center with the scale up there. That's simply volume-driven with the number of additional orders we had during particularly the Delta Wave. And then the other sort of two, ones of note would be what I'd describe as consumables. So, masks, sanitizer, additional security at some stores where we had sort of more high risk situations around the team having to enforce mask wearing and things like that. And then, we did provide some additional discounts for the team throughout the period through an increased team member discount. We include that in our direct COVID costs, that incremental above what our standard discount rate is. Now, what you can see from that list is all of that is directly measurable COVID cost. So, what we haven't thought to do is try and quantify any sort of indirect stuff. And I would say that COVID is becoming a big part of how we do business now. And so, there are indirect impacts to our business. But we see that as just as part of our job to manage that. And so the COVID costs that we report to you are ones that we can directly measure as an input. Matt, do you want to build anything on that?

Matt Swindells: I think, Leah, you've covered all of the key points. The only build I would add is that we've had a dedicated team on COVID now from the very beginning, led by the Executive General Manager for Operations, Kevin Gunn, who's built very close relationships, both an industry and government level. And that continuity of experience means that our decision making is pretty quick. And so, to Leah's point, agility to manage that volatility, I think, is one of the key unlockers for how we manage costs, and that's a credit to that team that continues to be very responsive to COVID.

David Errington: Well done, guys, because you seem to be doing a very good job managing it. And second question to you, Leah, is following on from the cost situation is the Smarter Selling costs. You seem to be doing a really good job there. You're calling out another $100 million in the second half. And you're calling out, if your numbers are right, about $250 million to be gained in 2023. Would you please give us an update as to what we can expect '22, '23 in combination of Smarter Selling and the Witron costs? Because with Ocado, with COVID, the Witron seems to be a bit skewish. So, can you give us a bit of an update as to what costs we can expect to come into the business, like in addition to the ‘20 in the first half, which I believe you could take, if you follow Metcash, Metcash takes that below the line. Congratulations to you for leading the way and taking it above the line. But, can you give us a bit of an update on how we can expect those implementation costs to come through in the next 24 months with the Smarter Selling netting them off, please?

Leah Weckert: Yes. Well, I think you've pretty much got that yourself on the Smarter Selling piece. So, we're expecting in excess of $200 million this year, so FY22, which will cumulatively across 2021 and '22 get us up to in excess of $750 million. So, for the final year of the $1 billion program that we laid out, we are going to close the rest of that gap. And we'll give a more specific update on exactly what those initiatives will look like when we get to the full year. In terms of the Witron and Ocado implementation costs, so we said at the full year briefing that for FY22, it would be up to $75 million in the transformation costs in this year that would hit the P&L. It's likely to be just slightly lower than that, we think on the full year run due to just having to replace some parts of the program because of some of the COVID disruption that we've had. And then next year, we are expecting Witron, Ocado transformation costs to be up to $160 million, which we also shared at the full year briefing. And at this stage, we don't have any further update to that number. Where we are seeing some differences on the Witron and Ocado costs are actually on the CapEx phasing, not on the operating costs. So with the disruption that we had in New South Wales because of construction, one of the milestone payments, one of the large milestone payments for Witron will probably shift from being late in FY22 push into FY23, which is part of what we see in the CapEx step up for the year is that we're saying probably around sort of $80 million to $100 million of that CapEx moving into FY23 related to the Witron payment. Although I do note that even though that milestone payment in is moving, the project is still broadly on track in terms of the delivery dates, and we have managed to mitigate that in terms of the way in which the project will be delivered.

Operator: Your next question comes from Michael Simotas from Jefferies. Please go ahead.

Michael Simotas: The first one for me, I was hoping you could give some comments on how the business has performed in terms of shrinkage. I mean obviously, demand has been quite elevated, but there have also been some difficulties moving fresh products through the supply chain. So, if you could just sort of talk to puts and takes around that, please.

Matt Swindells: Hi, Michael. It's Matt Swindells here. Obviously, on the back of the volatility that we've spoken to with COVID and some of the challenges around availability in fresh food categories, particularly more recently in poultry and in meat. It's been very similar to Leah's articulation of the cycles of cost up and cost out. We've seen some very low levels of waste to mark down through the business where we've had availability shortages. And as a standalone KPI, it looks fabulous. But obviously, it's not the customer offer that we would want. And then, as you recover that supply chain, there is a catch-up that comes through. So, net-net, through the period is broadly in line with where we would expect. And then, on actual loss itself, some of the initiatives that we've been deploying to Smarter Selling in what we turn target hardening, so where we look at our stores and we've got new ways of preventing shrinkage, that's producing results, again, in line with our business case and plans. So, it's another example of the team managing the volatility of the supply chain through the business still delivering a good underlying performance.

Michael Simotas: Okay. So, just to clarify, so through periods where we saw difficult on-shelf availability, was shrinkage low at that point, or was it high because you had wastage, not being able to move products through the supply chain?

Matt Swindells: No, it was low at that point. It's the lack of availability primarily.

Michael Simotas: Yes. Okay. And then, the second question for me is just following on from the earlier one on inflation. So, it looks to me, just looking at shelf prices that there has been an acceleration and some fairly large shelf price increases this calendar year. Obviously, it's not -- it's going to vary by product-by-product. But could you just give some insights on the success to which you've been able to recover input costs so far? And should we think about that in terms of preserving percentage margin or preserving dollar margin?

Steven Cain: Thanks, Michael. I think, I tried to answer something along these lines a little bit earlier. I mean, you're right that there is cost pressure coming through. And it's fair to say that in some cases, the cash margin is preserved, in others, the percentage is and then there's cases where we're wearing the increase ourselves. So, there's no one size fits all. But I would say that as we look for the next six months, making sure that our customer value proposition across the whole group is the number one priority. And then obviously, we'll be looking to the P&L as well in terms of trying to do a good job there for shareholders.

Michael Simotas: Okay. And if we sort of look at it on an average, are you comfortable with what you've been able to recover so far?

Steven Cain: Well, it's been very up and down, as we've said in the report, which is part of what you're seeing or may have seen on shelf prices is that there has been reduced promotional activity at the start of the year because of availability, which is what happened in that first wave of pantry stocking back in March 2020. So, I think it's a little bit early to sort of be discussing current trends because we're not at a steady state yet. And I don't think we'll be at steady state. Well, I'm hoping that we're going to be at steady state by Easter. I mean that's our ambition to make sure that customers have a great Easter. And we're shipping huge volumes at the moment into our stores on the East Coast and increasingly the West Coast to make up for not only the limited stock that's in-stores, but in the DCs as well. So, there's a huge amount of activity every week. And the case load recovery every week is significant. So, we'll definitely have more for you, a bit more -- a few more insights, hopefully, in April when we do our Q3, and then obviously, the detail at the end of the year. But that's about as best as I can offer right now.

Operator: Your next question comes from Grant Saligari from Credit Suisse. Please go ahead.

Grant Saligari: Well done on the result. My first question, I guess, is sort of a general one, Steven. I mean, your result obviously stands in stark contrast to the Woolworths guidance. And what I'm keen to understand is, do you think that result you've been able to pull through this time is a reflection of your starting point, and therefore, you've got a greater opportunity set in front of you than Woolworth might have at the moment, or is it sort of a case of the focus and the strategy in the business? And I guess, part B of that is, do you think that in the absence of these COVID costs, should -- there are initiatives that you would want to be spending more on so that, in some sense, maybe you're sacrificing some opportunity, future opportunity at the moment?

Steven Cain: We would start by saying that we've had a strategy in place for three years, and we've been trying to be fairly clear about what we were trying to achieve and how it will be measured every six months. And we hope that that transparency is understood in the marketplace. We're not trying to shy away from anything. But then as emergencies can -- Matt's talked to how we've tried to approach it, and we're increasingly talking as a team around you've really got three buckets of activity in life now and how do we manage ourselves to do all of them well and at pace. And those would broadly be the emergency bucket where you've got COVID, floods, fires, earthquakes, everything else. You've then got the continuous improvement programs that apply throughout the core of the business and then you've got your strategic transformation. And we do spend some time thinking about who's doing what, which is why that dedicated team for COVID was set up pretty early in the piece. By the way, it's not -- that doesn't mean that the likes of Matt or myself others don't get into COVID every now and then, particularly when there's big changes like vaccination policies and so on and so forth. So, there's a bit of that's how we've tried to approach the change program. In terms of investments, I mean, we've made significant investments in the last few years as well. When you look at where our eCommerce business is today versus where it was two years ago, we've invested a lot, but it's fair to say that there's profitability there. And I might just hand over to Ben, actually, to sort of talk about what we've been investing in from an eCommerce point of view. And what is main bits of focus are over the next 12 months or so. Ben?

Ben Hassing: As Steven said earlier on, I think when we look at our online customers, they still shop in stores. And that was really the reason why a year ago when we talked the eCommerce strategy was centered around an omnichannel business model and a unified shopping experience. So, you talked about the Shoppable app that's in place. We're working to make that fully native. And will merge into a single site, coles.com.au, where we have commerce and content in one place. And then, it's really about just incrementally closing out some of the omnichannel gaps that we have. You talked about Coles Plus. It's a membership product that a lot of other grocers in Australia and around the world look at that just simply as a delivery pass. We've taken a different approach. And so we know our customer and online, they shop in store. And as you had mentioned, we extended the first range of benefits for also their in-store experience. There's a lot of these types of things that we're doing to provide a unified experience and an omnichannel approach. And then, as you mentioned with Ocado, the real long tail disruptive innovation, we've got a great partner there that has a successful model, and they're also investing in innovation long term, so we'll get to take advantage of that when it's the right time for us.

Grant Saligari: Yes. It was a terrific job. My second question is if the customer moves more to value, so becomes more value conscious, you've done a lot of work on our Coles brand ranging and value over the last number of years. But if the customer becomes more value conscious, do you think that's an advantage for Coles relative to the competitor set, or is that going to be a headwind do you think?

Steven Cain: No, I do think it is an advantage because the Coles Own Brand program has been building for, as you say -- well, it's been building a long time, but in particular, gaining a lot of momentum over the last three years. And we think we've got the widest range of Own Brand product in Australia. We've got the most Australian range in Australia, and it spans the entry right to the affordable luxury piece. So, I wouldn't say we've got all the bases covered, but we continue to evolve it, and we still have an aspiration to get to 40% of sales. We're currently at about 32%, I think, but we're making good progress there.

Operator: Your next question comes from Craig Woolford from MST Marquee. Please go ahead.

Craig Woolford: I just wanted to ask about, there was a comment in your release about the profitability of online. I think, it's said eCommerce contribution to supermarket profit increased given sales and media income. Can you give us a bit more color on that? Obviously, earnings will have grown because sales were up, but was margin dilutive. And where are you on that journey around the margin for online?

Steven Cain: I might hand over to the subject matter expert, Ben, on this one.

Ben Hassing: Yes, we are profitable in online, and we certainly get the benefit of growth against fixed costs, but we've also been looking at streamlining variable costs as well. So, we've had good success on that front that's adding to the profitability. And then, we're looking at new profit pools with our digital platform, which has a very high number of traffic. And we have partners across Australia that are looking to invest in their growth with us. So, we've added more capabilities for them. There's a lot more that we have planned to come in the future, but a lot of these are FMCG brands that want to activate their brand on our platform. So, it's been highly accretive to our profitability, but we know that there's a lot more that we can do. If we look at our partner, they have a fairly sizable media business alongside it that's helping its profitability, and there's a lot that we can learn from them as well.

Craig Woolford: It’s profitable. Is it margin dilutive or not prepared to say?

Leah Weckert: It's still a lower margin channel for us than bricks and mortar or -- than the overall business, let's put it that way. But I guess what we were calling out in this result is that it's improved in terms of the margin that it is contributing. So, less dilutive than it was last year.

Craig Woolford: Okay. Thanks, Leah. And probably a follow-up, it might be for you. Just on depreciation in the Supermarkets segment only increased by $4 million year-on-year. Is that just a timing issue around the delays in some of the CapEx programs? What should we expect for that figure over the full year?

Leah Weckert: Yes. It's a good question. There's definitely a significant impact that's occurring because of the delays that we've seen in some of the CapEx. So, the depreciation range that we gave at the, I think, it was the strategy briefing, were probably likely to end up, I think, probably just below the bottom end of that because of the CapEx delays. And the other thing I'd probably call out is that we are seeing an improvement in the right-of-use assets that we've got on the balance sheet, which is the other big driver of depreciation, and that is giving us some benefits as well.

Operator: Your next question comes from Shaun Cousins from UBS. Please go ahead.

Shaun Cousins: Just a question around the change in the deal with Ocado. You've highlighted that you've invested in systems in the last few years. But Coles, and when we look at your CapEx charts over quite a few years, you're probably under rather than overinvested in systems. I'm just curious why at Coles systems better than those at Ocado to manage online stores and were present, because part of the appeal on Ocado was leveraging its systems, which enjoys so much scale than Coles. And then hence, why is this change not actually adding risk to the way you roll out Ocado, which is already delayed at this time. So, I'm just curious if you could talk a bit about why you're confident your systems are able to handle this, please?

Steven Cain: I might hand this one over to Ben. You will note that the primary reason for the Ocado program being delayed in Victoria -- it's not delayed in New South Wales, by the way. But the primary reason for being in Victoria is because of the COVID lockdowns here. And I don't think we're sort of standing up here today saying that our front end is going to be better than Ocado either. What we're saying is we are moving the front end to an omnichannel approach, and Ocado will do what nobody else can do, which is deliver twice the range delivered in-store on time. So, that's the high-level view. But I might hand over to Ben for a bit more detail.

Ben Hassing: Yes. I would say, when systems is a big word, what we're really saying it's really just the digital front end. And to me, it's very much context driven. If you think about Ocado's front end in the UK in their context where there's no stores, it is really a fantastic experience. And I speak to a lot of people that actually used to use that in the UK. But what we're looking to do here is build on our front end, build on our context. And so from a digital standpoint, I think we can do a really good job. We're still dependent on Ocado systems, and we also have other backend systems that enable the full end-to-end experience. But it was really encouraging. I don't know if you had a chance to see the six initiatives that they announced in their reimagined campaign. One of those initiatives called Flex gives more flexibility to the retailer to actually work through and create the front end that they -- the digital experience for customers that they need in their context. So that will be coming later down the track, and we'll plan to take full advantage of that as well.

Shaun Cousins: Okay. That's great. I guess my second question is just around current trading. There's been no sort of comment or no quantification at the moment. Can you just talk whether or not -- in the past you've indicated whether your sales have been greater than where they were in the second quarter. I mean, you did 1.6 comp in the first quarter, you're only cycling 3.3. I mean is that kind of the run rate that you are unconscious that there's volatility, but gosh, there's been volatility for every quarter, every half for the last few gone past? Just curious around if you could provide any sort of quantification. Are you growing faster than the 1.6 comp you did in the supermarket second quarter '22, please?

Steven Cain: Yes. Thanks, Sean, you're not wrong about it being volatile for 2 years now. And obviously, one of the things we're starting to debate internally is the move to 3 year-on-year reporting, because obviously, we're going to be able to get some numbers, some interesting numbers from 2 years ago in March and so on. So 3-year might be a better way of looking at things. In terms of where we're trading. As I said, we had a -- you've told it a strong January, but Omicron fueled in terms of people staying at home and all of that sort of stuff. And our food service would have taken a hit. We are seeing food service beginning to recover across the country, and that will come from supermarkets. I think what I'll guide everyone is to look at the ABS numbers each and every time they come out and then just take a view on whether you think we will benefit from the initiatives we're doing versus the market or the unwind of local shopping. There's no doubt there's still a fair amount of local shopping out there. And if you think about the local shopping effect in half 1, it was more down to hotspots and government-imposed restrictions. In January, the local shopping impact was lots of people having Omicron and not able to leave their houses and lots of people in and around that. The local shopping -- sorry, there's just a bit of background noise. Okay. Yes, the local shopping that's there at the moment is shopping centers haven't yet fully recovered, but they're showing signs of recovery. And obviously, the availability means that people shop around a number of shops to find the product that they might want. And that's obviously not going to carry on forever. So I think I'd sort of look at ABS numbers and then just decide that we're going to be stable versus the market or put down a bit. And that's where we are. But as I said, we could have told you a number for today, but it wouldn't have been a good guide for the half, we don't think.

Operator: Your next question comes from Adrian Lemme from Citi.

Adrian Lemme : Just wanted to firstly discuss inflation in your own cost base. So obviously, packaged grocery prices going up over time. But can you talk about when we'll start to see step-up in inflation in your store and your DC labor costs, please? I understand that there may be lags.

Leah Weckert: Hi, Adrian.So in terms of the inflationary pressure that we have in DCs and stores, in many ways, that's really dictated by the EBAs that we have in place as opposed to the external labor market, because all of our store team are governed under EBA, which is aligned to the GRIA. And so the key thing for us is what the pay rise is that fair work brings down each year, which typically, we work on the basis that, that's going to be somewhere between sort of 2.5% and 3%. And then similarly, the DCs all have EBAs in play, which have cost increases built in on a year-to-year basis. So we probably are not as exposed to that as maybe people that are working from a cost base where they don't have EBAs or they have a lot of contract labor or things like that. But that's not something we have a huge exposure. The other thing I'd probably say is that one of the key reasons that we have the Smarter Selling program in place is to provide us with an offset to that inflation to the cost base. And so as part of the process that we went through to design the $1 billion program, it really was very much grounded in what did we expect that cost base to grow over the period of the 4 years and how much would we need to be effectively offsetting that, but also give us some capacity to make some strategic investments as well.

Adrian Lemme: Yes. Understood, Leah. So my understanding is EBA sort of tend to be like a 3-year type arrangements. So basically it just be a rolling 3 years, is that right?

Leah Weckert: Some of them are 3 years, some of them are 4 years, a lot of the DC ones are 4 years. But in the Supermarkets space, even if the EBA expires, it tends to roll over. And so unless we go back and renegotiate it, it stays in operation.

Adrian Lemme : Okay. And then just a second follow-up question, please. Can I just understand whether with this rollout of the rapid Click&Collect and the delivered food to more stores, is that helping to switch some customers from delivery in those areas? Or is that sort of more replacing sales in store, please?

Steven Cain : I can go ahead and take that. It's basically meeting the customer where they're at. So if they want something that 90 minutes they order and it's available, we did that through Click&Collect. Certainly, delivery will be part of the equation, but it was really about getting products to the customer, making it available for the customer when they need it. We've got a great next-day service. We've added same-day since we spoke last year to 500 stores, and it's just offering that portfolio of service options for the customers. So there's going to be continued innovation here, more to come.

Adrian Lemme : And just to clarify, have you outlined the mix of your online sales between Click&Collect and delivery?

Steven Cain : Yes, we have.

Leah Weckert : Yes, we have shared that in the past. It's currently about 60% delivery and 40% Click&Collect. That has substantially shifted towards Click&Collect over the last couple of years. So if we sort of went back to the -- when we first launched the strategy, it was about 25% Click&Collect, 75% delivery. And as you can see, more and more of the volume has moved to Click&Collect over the last few years.

Operator: Your next question comes from Tom Kierath from Barrenjoey.

Tom Kierath: Just a question on the food gross margin. I think you reported that it went up 20 basis points. I think the gross profit impact from the COVID cost was about $50 million, which my numbers is a bit over 20 bps. So it looks like the underlying gross margin has kind of gone backwards there. Given tobacco has been quite weak or sales are down there, I would have thought it might have gone up. Can you just talk through whether you've made some proactive price investments there or if it's a kind of lag between when the, I guess, when prices have gone up from suppliers to when you're going to -- when you've lifted prices?

Steven Cain : I'll have a quick go on this one, and then I'll hand over to Leah. If you look at the half. I think the description you've given based on the numbers is correct in terms of the movements that's there. Leah has explained that half of roughly Smarter Selling is in gross profit in half is in the cost of doing business or roughly around that. The -- every year, we have an investment amount for investing in values, whether value, whether that be down, downs or everyday pricing and so on. And that the half was no different. So we have an ongoing value program. We also have an ongoing strategic sourcing program. And normally, we hope that one would match the other, not necessarily that they're linked in terms of the individual products, but those are the ongoing programs that are going on behind the scenes. But the sort of calculation as you're doing would lead you to think that there's been an investment in value. We think that our value position is good, but it's an ongoing -- it's an ongoing program. And then the backdrop as well that you just need to contemplate is where promotional activity is in the half as well. But by and large, there is an investment program going on to make sure that we -- our best value with customers.

Leah Weckert: Thanks, Steven. So I think just building on that, Tom, maybe I'll just talk you through the key moving parts in the gross margin line. Would that be helpful?

Tom Kierath: Yes, that would be great I think.

Leah Weckert : So I think, yes, we've obviously, as you said, we've got the COVID costs in there which create a drag. And then the things that we're doing to offset that and improve gross margin is, first of all, the Smarter Selling program, which -- it's about 40% of the Smarter Selling initiatives that we have realized in the half it line. And then the second big initiative that we have in play is our strategic sourcing initiatives. So we do work throughout the year to reduce our cost of goods with suppliers, and that's through strategic arrangements and joint business plans that we develop. We look for ways to build scale across the Own Brand areas, for example. And then the teams have also been doing and doing a lot of good work over the last while around range reviews and working to bring in products that are margin accretive for us. And then as Steven outlined, we do have a bucket that we invest each year, which is to drive proactive value investment as well. So that's sort of the key moving parts that we have in that line.

Tom Kierath: Yes, okay. And just the good promotion part, is that what you say normal in the last 6 months in terms of where it was maybe pre-COVID? Or just maybe talk about the intensity of promotions that you're seeing in the market.

Steven Cain : Yes. What we said on formations is that, over time, we'd like to reduce them to move to a more trusted value position of everyday pricing, whether that be extended down downs or whether it's everyday pricing. What we have seen is that running into the Christmas period or just before the Christmas period, we were back up to sort of pre-COVID levels of promotional activity. And then that's come back a bit in January and beyond due to product availability issues, but our strategy remains in place, which is, over time, finding a way of moving to a lower promotional intensity.

Operator: Your next question comes from Bryan Raymond from JPMorgan.

Bryan Raymond: Just following on from that question. Actually, just around your comment earlier saying your priority is to optimize value for customers through this period of inflation. Just wondering how you're thinking about that. Is it a relative game like looking at your competitor set and making sure your price indexes are in line? Or is it an absolute focus given your downtown program is a big part of our value proposition. Clearly, down-down doesn't work with big step changes in inflation when prices are having to go up on staple items, et cetera. So just interested in how you're thinking about that, and would price investment be a realistic option for you to lead prices down to drive value and drive share?

Steven Cain: Yes. The -- it's interesting. When you speak to the marketing team and you ask what value is, it's a price for a certain quality point is what comes back. And so value is very much in the eye of the beholder at the customer level is a rock lobster at $20 or $24 good value, yes, if you're in the market for that. But at the other end of town is $1 Own Brand pasta good value, the answer is very much so. So I think what we've got to recognize increasingly is that there are different consumers out there who see value differently by demographic and beyond. And our value equation is everyday pricing, as we've talked about, and that's where our Own Brand comes in because there's less promotional activity on Own Brand, it's stable pricing. You've got branded promotional activity taking place. And as I say, we're trying to reduce that over time through things like downtown and so on. And then you've got a layer of things like Flybuys and the continuity programs that we've got. So value is the summation of all those things, but we are conscious that what value means in Bondi versus what it might mean in the western suburbs is very, very different. And it's got to be more personalized over time as well, and that's the view Flybuys arrangements in terms of being able to do that more in the future. And then there's the globally, which, as you can imagine, there's a small industry around who's selling what for what and how does it compare to us, and how do we do a better job on a continuous improvement basis. So it's all of the above, basically.

Bryan Raymond: Okay. So it sounds like you're going to be pretty rational in and nuanced around that. And then just on -- I mean, my next question is just around online. And how are you planning to manage this drive towards immediacy in online? I think Ocado is a good solution for that next-day delivery offer. But for that -- I mean, there's a raft of sort of 20-, 15-, 20-minute delivery offers out there. You guys are on DoorDash. I'd imagine that's pretty small still. Ocado zooms out there. If this is the next leg of how online is tracking, like how are you addressing it? And do you -- or do you disagree that that's not how online is going to track and maybe you've got a different view?

Steven Cain: Thanks, Bryan. I'd hand immediacy to Ben. This is one of his chosen subjects.

Ben Hassing: Well, we test and we learn. And if it's successful, we scale. If we go back to same-day delivery, we weren't certain how -- what the actual appetite was in the market. And we found there's a healthy appetite for people wanting groceries delivered the same day. So we scaled that quick to 500 stores. Like we said, in terms of immediacy, if you want to call 90 minutes in the immediacy offer, that's what we provide to close to 500 stores today through Click&Collect. We've been doing other tests that we can update you on in the future. But it comes back to just meeting the customer where they're at and providing anywhere, anytime, anyhow shopping. Certainly, immediacy is a growing part of the offer in the market. But our bread and butter right now is still through next day.

Bryan Raymond : Right. I'll just -- sorry, just to follow up on that. So the 90-minute Click&Collect got different to a 20-minute delivery. I understand the economics of them are very different. But do you feel that that's not a scalable model in Australia, that sort of immediacy on the delivery front in that sort of really rapid end or not?

Ben Hassing: I think it's too early to call right now. I've had some experience in other markets on that type of model. There's a lot of interest right now. There's a lot of capital that's going to it. But we're keeping all of our options open. That goes back to the strategy before was have optionality for the future, and that's part of our strategy. So we'll be involved.

Operator: Your next question comes from Richard Barwick from CLSA.

Richard Barwick : How do you see your ability to pass through price increases or cost increases without losing your competitiveness? And I guess, where I'm going there is in terms of the way shoppers are viewing Coles today in terms of price competitiveness and also your ability to use shopper data and your Flybuys data to actually manage which SKUs you can adjust and perhaps which skews you can't. So where -- I guess, where do you see yourself on those 2 metrics? Are those 2 tools and your ability to be able to put up prices as and when you need to?

Steven Cain : Okay. Yes. I mean, obviously, we've got a pricing team here and analytics and all the rest of it. And we have a good feel for which products are the most price elastic and which products lead to a better value perception. Obviously, a lot of people would say to you as well that value comes at the checkout when you look at the dockets and you look at what's in the basket or the trolley and you think about whether you've received overall good value. As far as Flybuys is concerned, that's going to ramp up significantly in terms of what we do. I'd sort of say that today, what we've got is a program that -- it's -- we certainly know what you would have bought in the past and are able to sort of send you which of the current promotions are likely to appeal to you. So it's a cross-section of the existing program. We've been looking at in online at how we find you promotional program to appeal to a wider cohort as well. And then on Flybuys, the other thing we've been doing is, obviously, we segment the customer base into different levels of expenditure. And obviously, think about how we incentivize people to spend more money at Coles. So those are the sort of things that are going on today. If you look at what's in store today, the price of red meat versus a year ago is quite different, and certainly very different to what it was a couple of years ago. So there's examples of pricing being pass through to the consumer. Equally, most weeks, we've had avocados down at a $1 or $1-something, and so strawberries and apples and things are relatively inexpensive at the moment. So I'd sort of go to the point I made earlier, which is there's no one size fits all here, and there is a bit of a science to it all, both at a product level and at an overall basket level. But we feel comfortable because we've got a very good range of Own Brand products. And that's what helps differentiate you in the market, both from a quality point of view, in some cases, and from an entry price point of view at the other end.

Richard Barwick : Yes. Okay. I guess I was more thinking about how confident you are. So when you do -- when you make these changes, when you put the price in meat up or you do what, you're doing with the avocados or whatever, that you're confident that you know how the shoppers are going to respond to that. Do you feel like you've got the data, you've got the insights to do what you need to do?

Steven Cain : Yes. There's a lot of sales forecasting goes on based on pricing and promotions, and we think we've got a pretty system on what will drive foot flow and what will drive basket size and what will get consumers into store. And we've had to do that a few times through COVID, where we've lost customers to local shopping. And obviously, we've used Flybuys to get them back into Coles when the circumstances allows. What -- where we're ending though is a little bit different than we've seen for the last decade or so, which is price inflation has really gone above 3%. And in fact, in many years, it's been deflationary. So the impact that some of the cost prices might have on consumers in general and, more broadly, with all the other things that are going on in their lives, that will impact a proportion of the population. And it would be hard to predict exactly how many, but it will change shopping behaviors. And it will change shopping behavior more in discretionary retail than it will in food retail. But in food retail, we need to be prepared to cater for all demographics, and that's what we're planning to do.

Operator: Your next question comes from Ben Gilbert from Jarden.

Ben Gilbert: Two hopefully, just quick ones for me. What level of revenue you guys generated from marketing now? And sorry, what I meant there is, so what -- in terms of digital marketing or advertising in terms of your Coles Media business, so just note, obviously, Walmart was sort of 2 , Amazon's well over 30, Woolworths obviously got that separate business in cartology they split out. How big is that for you today? And how big an opportunity do you set that for Coles Group?

Steven Cain : Look, well, It's not a number we've disclosed in the past, and I don't think we'll be disclosing it any time soon. But the opportunity is quite significant. The companies you've just named there and others have very significant other income lines, whether you call it media income or however it's classified. And once we've set up a team here with a new lead as well shortly that will drive that part of the business in association with the merged teams and Ben's team and so on. But yes, we think it's a significant upside for us, not necessarily next week, but certainly over the next few years.

Ben Gilbert : So would it be fair to say, Steve, it's probably tens of millions.So it could be hundreds as we move forward, say, 3 to 5 years?

Steven Cain: I'd be cautious about hundreds. But it's a lot more than the other end of the spectrum.

Ben Gilbert: Okay. That's helpful. Just the second one for me. I think on that stuff, you're saying around Flybuys all sounds great, particularly given how has been managed to or how they manage the value consumer offshore and actually went out against the discounted over the last sort of 3 to 6 months. But how much pressure are you guys feeling or the need to actually invest independently at Flybuys? And why I say that is why I say that is we effectively doubled their OpEx expectations from, let's call, $50 million to $100 million, they're going to invest in their own branch Analytics Center. What are you guys doing here? Do you think that we're going to need to start looking more about more CapEx going into Coles specifically data capabilities in 6, 12 months' time? What are your plans there?

Steven Cain : Sorry, Ben. I mean, I caught a little bit of that, but a lot of it was a little bit disrupted. I don't know whether you can get a better….

Leah Weckert : I think, Ben is asking....

Steven Cain : Yes, that's a lot better.

Leah Weckert : So Ben, if I understand you, you were asking about sort of is there a pipeline here where we're going to need to invest more or substantially more into advanced analytics like what Wesfarmers has announced. Is that right?

Ben Gilbert : Yes, because obviously, the JV makes a lot of sense and you've got great reach. But at the same time, you're obviously going to areas like API that's speculated things like Tech care, which pretty big and profitable categories and traffic drivers for you guys. And they're investing a lot of money behind it. Do you feel you need to put more money into Flybuys? Do you feel you need to put quite material amounts of money into your own data and analytics capabilities within Coles?

Steven Cain: Look, I think, there probably isn't a retailer in the world, they wouldn't say that not going to spend more on advanced analytics and data and technology in the future. I think the hard part is making sure you focus on what makes the consumer difference first so that it becomes a self-funding as possible. And that's the way we think about everything we do, which is you can have everything moving along together but not create a consumer impact. And therefore, it just becomes a cost, whereas everything we're thinking about is what's going to make the biggest difference to a consumer or what's going to make us more efficient first in the process. But undoubtedly, as we move forward, there will be more money going into analytics technology. The Flybuys thing is a nice thing because it is a JV, and that means that an Wesfarmers share the cost to that one. And from a consumer point of view, it's obviously the biggest opportunity to collect rewards in Australia. So there is some synergy, but we're investing more in Flybuys, and we're investing more in our own part of the business, but it's always -- and that's why Smarter Selling has been important, which is you've got to have a way of paying for the new. And when Smarter Selling comes to an end, you might well see another program starting because you have to have an efficiency program and you have to drive towards self-service in the core to be able to afford the new in a way which is eligible for shareholders.

Leah Weckert: And I think just building on that, I mean, a number of the key initiatives that we've rolled out as part of Smarter Selling have actually utilized our advanced analytics capability that we have internally. So you will recall back to the Strategy Day last June, Matt talked about the Smarter Selling forecasting activity that we are in the process of rolling out. That is all powered by internal advanced analytics. Even some of the mentions that we've got in the smarter selling initiatives that we've called out for this half, so the rollout of the dynamic markdowns into dairy, is another great example of where we're using the internal analytics capabilities that we have to do that. Even going back to the questions that Richard was asking about how much do we understand price elasticity, we've built some really fantastic tools using the base of that data set is the Flybuys data set to assist our category managers to make good decisions about where they should be investing in terms of the type of product and the amount that they invest in promotions to get the best outcomes that we want at the business. So I think we would probably say that we've really done quite a good job on utilizing advanced analytics and AI capability across the business, and that has been somewhat fueled by the Smarter Selling program. And on the go forward, we would expect to continue to see that as a feature of a lot of the efficiency and revenue optimization pieces that we work on.

Operator: Your next question comes from Phil Kimber from E&P.

Phillip Kimber: I just had a question on the supply chain or the transformation cost, which I think you just clarified again, $75 million in FY '22 and $160 million in FY '23. There were some pretty large provisions taken, and I know you used some of the in this half. So I just wanted to check that those numbers are not covered by the provision, so they'll be coming through separate to that.

Leah Weckert: Yes, that's correct, Phil. So the provisions that were taken when we originally did the deal related to 2 key things. The first of all being the redundancy costs associated with closing 5 sheds and opening 2 and having a different skill set in terms of labor that is in 5 of those. And so as I called out, you saw the first utilization of that component of the provision when we closed the gulf in DC during the half. The second component of that original provision that was taken relates to basically lease closure costs, so lease tail, where we have to close the facility before the lease is fully completed in terms of the contract. Now the -- those 2 buckets are very different to what we are talking about as these transformation costs. So these transformation costs are actually the cost of putting the project in place. So it's upscaling team, it's double running costs, it's onboarding of all the suppliers and all the new arrangements that they need to go through those types of costs that we're talking about to get the project live.

Phillip Kimber: And are they a gross cost? So I mean, there must be some benefit over that period as the systems come in. And I guess where I'm really going here is, so what happens in FY '24? I mean, do we get more costs then because there's been a bit of a delay? Or do they just -- the $160 million drops out and you get a big step up in profit? That was a bit I was a bit confused by.

Leah Weckert: Well on WITRON, we did call out that we expect net benefits to start flowing from FY '24. So that's the reason we've given you the callouts in terms of the cost for FY '22 and FY '23 because that's superior during the ramp where we have costs incurred that are hitting the P&L, but we don't have the facility running and realizing benefits for us during that period.

Phillip Kimber: Right. So there's a $160 million swinging there between '23 and '24, all else being equal, because those costs drop out the $160 million that you've called out in '23?

Leah Weckert: It won't be completely $160 million because there will still be some net costs in -- there will be costs in FY '24 related to bringing the project online, but that is the year that we start to see benefits flow through as well.

Phillip Kimber: Yes. Okay. So it's a net number per se. There will be -- it's just -- it flows into a net benefit by FY '24.

Leah Weckert : Yes, that's correct, which is why -- and we've only given FY '22 and FY '23 because we want to have a sort of degree of accuracy to the guidance that we're giving you. But in those 2 years, we don't have the facilities operating and delivering benefits. In FY '24, that situation changes. We will still have some transformation costs to finally bring the facilities online. And Queensland goes first, and then we have New South Wales come online, so you're going to have that kind of overlap period where we've still got New South Wales ramping up, while Queensland is operating and generating benefit.

Operator: Your next question comes from Scott Ryall from Rimor Equity Research.

Scott Ryall : First one, hopefully -- well, first one, hopefully, is pretty easy to answer. In terms of your online e-commerce offer, what do you think customers would notice the most about your relative offer relative to the rest of the market over the last 6 months, please, just in terms of improvements made?

Steven Cain : Ben, would you?

Ben Hassing: I think the MPS kind of speaks to -- shown some of the improvements there, but it's really attributed to delivery speed. So having a same-day offer. -- as well as we talked about the 90-minute Click&Collect, and then we'll continue to innovate on the service front.

Scott Ryall : Okay. All right. And then my next question, I'm just trying to get, I think, Steven, you said before that Own Brand is 32% of sales now in Supermarkets. But I just want to get you to clarify, if it's okay, the stats around exclusive to Coles or Own Brand, you had a comment in the press release that exclusive to Coles sales, they're up by 5%. I'm just trying to get a sense of what the -- either the Own Brand or exclusive to Coles sales are up by just For Supermarkets only? And whether you -- if in an online order, if you substitute a branded product from a supplier with an exclusive to Coles or an Own Brand product, do you report that back to them that, hey, you're out of stock meant that we had to substitute with something else?

Steven Cain : Okay. I'll let Ben answer the second part because substitutes is an emotional subject for dumpers, as you probably know. But I'll answer the first part, which is the number we're talking about is the Supermarket numbers. So that was up 5% to 32%. It's not a group number that one.

Scott Ryall : Okay. And at 32% of Own Brand as opposed to exclusive to Coles?

Leah Weckert : Exclusive to Coles really is Own Brand. We describe it as exclusive to Coles because it includes products in there which may not have the Coles branding on there, but we have the direct relationship with the supplier, they make it exclusively for us to our specifications.

Scott Ryall : Yes. So that's part of it because I see in your definition, you call it exclusive proprietary brand products.

Leah Weckert : That's correct.

Scott Ryall : That's a relatively small part of the pie. Is that?

Leah Weckert : It is. It's a very small part, yes.

Scott Ryall : Okay. Okay. That's fine. But I think of Own Brand, all right, and then the substitution question?

Steven Cain : Yes. And it's good to tidy up the definitions before piling into what happens on substitutions, Ben.

Ben Hassing: Yes. I encourage you to use the service to anyone not using the service. We continue to make improvements. But if you do place an order and there's a substitute, you get an e-mail prior to when the order is delivered. You, as a customer, can customize your substitution settings, you can choose, I don't want a single substitute or in this particular categories. I want the substitutes. So it's customizable. And in fact, one of the trends in this last wave of lockdowns, we saw a lot more of our customers move towards substitutions. So you have the ability to know whether the item has been substituted or not. And then lastly, if it's, let's say, a private label product, it's at a lower retail value -- of course, we give that value back to the customer in terms of savings.

Scott Ryall : So do your suppliers know that you've substituted that? I get it because I do my online shopping. So I understand what I get as a customer. But if I'm a supplier, do I know?

Ben Hassing: No, we don't share that data.

Operator: There are no further questions at this time. I'll now hand back to Mr. Cain for closing remarks.

Steven Cain : Okay. Thank you. And a bit of an extended session this morning, which was nice. So I'd like to thank all my colleagues here in Melbourne, and thank everyone for the questions, and I look forward to seeing you soon. And we don't speak to you beforehand, have a great Easter. Thank you. Bye.

Operator: That does conclude our conference for today. Thank you for participating. You may now disconnect.