Wesfarmers : 2022 Half-year results

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17 February 2022

2022 Half-year results

Highlights

Half-year ended 31 December ($m)	2021	2020	Variance %
Results excluding significant itemsa
Revenue	17,758	17,774	(0.1)
Earnings before interest and tax	1,905	2,171	(12.3)
Net profit after tax	1,213	1,414	(14.2)
Basic earnings per share (cps)	107.3	125.0	(14.2)
Results including significant itemsa
Net profit after tax	1,213	1,390	(12.7)
Basic earnings per share (cps)	107.3	122.9	(12.7)
Operating cash flows	1,556	2,216	(29.8)
Interim ordinary dividend (fully-franked, cps)	80	88	(9.1)
Sustainability highlights
Total recordable injury frequency rate (TRIFR)	9.9	9.4	5.3
Aboriginal and Torres Strait Islander team members (#)	3,791	2,722	39.3
Gender balance, Board and leadership team (women % total)	45.4	42.1	3.3 ppt
Scope 1 and 2 emissions, Market-based (ktCO2e)	574	669	(14.3)
Operational waste diverted from landfill (% total waste)	70	69	1 ppt

1. There were no significant items in 2021. Significant items in 2020 of $34 million pre-tax ($24 million post-tax) relate to Target store closures and conversions in Kmart Group.

Wesfarmers Limited has reported a statutory net profit after tax (NPAT) of $1,213 million for the half-year ended 31 December 2021. Excluding significant items, NPAT declined 14.2 per cent for the half.

Wesfarmers Managing Director Rob Scott said that the solid financial result delivered in such a disruptive environment highlights the strength of the Wesfarmers portfolio, and the capacity of divisional teams to adjust rapidly to meet customer demand.

"The first half of the 2022 financial year was the most disrupted period for our businesses since the onset of COVID-19, with extended government-mandated store closures and trading restrictions in Australia and New Zealand. The Group also made significant investments in the half to support our team members, through payroll support and assistance programs, to help manage the significant personal impacts from extended lockdowns.

"The Group's financial performance was supported by pleasing results from Bunnings and Wesfarmers Chemicals, Energy and Fertilisers (WesCEF)," Mr Scott said. "Bunnings continued to demonstrate the resilience of its operating model and ability to meet its customers' needs in a difficult operating environment, delivering sales growth for the half, despite significant disruptions, temporary store closures and the cycling of very strong demand in the prior corresponding period.

"Strong earnings growth at WesCEF reflected a solid operating performance and higher commodity prices, particularly for LPG and ammonia. It was also pleasing to report continued improvement in the performance of Industrial and Safety.

"Relative to the Group's other divisions, Kmart Group and Officeworks results were more significantly impacted by COVID-related disruptions during the half. Kmart Group in particular was affected by temporary store closures between July and October 2021.

"Across the Group's retail businesses there were around 34,000 store trading days impacted by trading restrictions, representing almost 20 per cent of total store trading days for the half. This included more than 20,000 store days for which stores were completely closed to customers. In addition, operating costs and stock availability were impacted by ongoing supply chain disruptions and elevated team member absenteeism.

Wesfarmers Limited 2022 Half-year Results

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"Wesfarmers accelerated its investment to develop a market-leading data and digital ecosystem during the half, and good progress was made to build the strong foundations necessary for this initiative to deliver great value, convenience and experiences to customers across the Group," Mr Scott said. "This included investment in the shared data asset and scalable customer data architecture as well as the continued development of capabilities within the Advanced Analytics Centre, specialist technical expertise and robust data governance.

"Nicole Sheffield was appointed to the Wesfarmers Leadership Team as Managing Director of a new data and digital division, responsible for capabilities and businesses that support the Group's data and digital ecosystem agenda. This includes the Advanced Analytics Centre, the Group data asset, and the development of a new subscription program, OnePass.

"Earlier this month, the Club Catch subscription program was rebranded and repositioned as a new program named OnePass, at a reduced monthly fee of $4 or annual price of $40. Subscribers will continue to enjoy free delivery on eligible items purchased from Catch, exclusive deals and OnePass-only pricing. This program will form the basis of a broader subscription program with opportunities to provide even greater value and convenience to customers across the Group. Work is underway on a broader set of benefits that will be available to OnePass subscribers when shopping across Wesfarmers' retail businesses.

"In December 2021, the Group's partnership with Flybuys was extended to include Bunnings and Officeworks customers, creating a platform with over eight million members and opportunities for points to be earned on over 120 million transactions each month. Flybuys' operating model was also updated to provide greater flexibility and value to Wesfarmers and Coles, and to provide more opportunities for Flybuys to deliver value for its members.

"The Group also continued to invest in building platforms for future growth, delivering good progress on the construction of the Mt Holland lithium project, progressing the proposal to acquire Australian Pharmaceutical Industries Limited (API), and further developing Bunnings' commercial offer with the completion of the Beaumont Tiles acquisition and the expansion of Tool Kit Depot into Western Australia.

"The Group recognises the alignment between long-term shareholder value and progress on key sustainability metrics, and good progress was made on diversity and inclusion, emissions reduction and operational waste during the half.

"Wesfarmers continued to prioritise team member and customer safety, with increased mental health and wellbeing support to team members impacted by lockdowns and other restrictions. Wesfarmers' total recordable injury frequency rate (TRIFR) increased 5.3 per cent to 9.9 for the half year, in part driven by additional manual handling associated with elevated online sales, which is now an area of increased focus.

"At the end of the half year, the Group employed an additional 1,000 Aboriginal and Torres Strait Islander team members compared to a year earlier, with 3.4 per cent of Australian team members identifying as Indigenous, exceeding Wesfarmers' goal to reach employment parity of 3.0 per cent by 2022. The Group maintained gender balance within the Board, Leadership Team and overall workforce, and remains focused on attaining gender balance across senior management roles.

"The Group's Scope 1 and 2 emissions declined by 14.3 per cent under the Market-Based Emissions Standard, which captures renewable electricity. This progress reflects the impact of strategies to further improve energy efficiency, increased utilisation of renewable electricity and re-investment in abatement catalysts at WesCEF, along with a one-off benefit from the scheduled ammonia plant shutdown during the period. Excluding the impact of the ammonia plant shutdown, the Group's Scope 1 and 2 emissions declined by 9.5 per cent. The Group also progressed its mapping of material Scope 3 emissions, expected to be completed during the 2022 financial year.

"Wesfarmers maintained its longstanding focus on sourcing ethically and deepening the understanding and respect for human rights across the Group's domestic and international supply chains. Internationally, the Group's ethical sourcing programs benefit from significant in-country teams. Across the Group, work accelerated to develop and implement circular economy strategies, including efforts to reduce operational waste to landfill, diverting resources for re-use or recycling."

Wesfarmers continued to manage its balance sheet to maintain a high degree of flexibility during the half, and took opportunities to optimise the Group's debt maturity profile and cost of borrowing, including through the issue of a EUR600 million sustainability-linked bond with targets aligned to the Group's decarbonisation strategies. Following the distribution of $2.3 billion of surplus capital by way of capital return in December 2021, the Group recorded a net financial debt position of $2,615 million at the end of the half.

The directors have determined to pay a fully-franked ordinary interim dividend of $0.80 per share, reflecting the solid NPAT result and Wesfarmers' dividend policy, which takes into account available franking credits, balance sheet position, credit metrics and cash flow generation and requirements while preserving the flexibility to manage continued uncertainty and to take advantage of value-accretive growth opportunities, if and when they arise.

Wesfarmers Limited 2022 Half-year Results

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Impact of COVID-19

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While many practices to manage the ongoing disruptions associated with COVID-19 have become increasingly integrated into the Group's normal operating processes, extended government-mandated store closures and trading restrictions in Australia and New Zealand meant that the first half of the 2022 financial year was the most disrupted period since the onset of the pandemic.

The Group continued to provide paid pandemic leave to team members and continued to pay all permanent and many casual team members through periods of prolonged lockdown, even where there was no meaningful work for them, and when they were required to isolate. This investment, which totalled approximately $37 million during the half, provided much needed certainty to team members and their families, and benefited the Group's businesses as they sought to re-engage teams when restrictions eased.

The Group also maintained the important measures implemented to protect the health and safety of customers and team members, incurring additional costs of approximately $43 million during the half associated with additional cleaning, security and protective equipment.

The Group's retail businesses experienced volatility in sales during the half as a result of COVID-19. Retail sales between July and October 2021 were significantly affected by widespread lockdowns across New South Wales, Victoria, the Australian Capital Territory and New Zealand, with around 34,000 store trading days impacted and periods where almost half of the Group's retail stores were either restricted or closed.

Sales momentum improved as lockdowns and other restrictions were eased before deteriorating towards the end of the half, as cases of the COVID-19 Omicron variant began to rise.

Ongoing constraints in global supply chains led to delays and additional costs, including higher container shipping expenses during the half. Domestic supply chains were also impacted by labour availability pressures as a result of isolation requirements and elevated absenteeism, leading to additional costs and impacting stock availability in some areas.

The Group's investment in digital capabilities over recent years supported increased online penetration across the retail businesses, although online sales growth moderated in the second quarter as customers returned to stores and the businesses cycled periods of strong online demand in the prior year.

Further detail on the operational impact of COVID-19 is provided in the divisional results commentary.

Wesfarmers Limited 2022 Half-year Results

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Group results summary

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Half-year ended 31 December ($m)	2021	2020	Variance %
Key financials
Revenue	17,758	17,774	(0.1)
EBIT	1,905	2,137	(10.9)
EBIT (after interest on lease liabilities)	1,796	2,023	(11.2)
EBIT (after interest on lease liabilities) (excluding significant items)a	1,796	2,057	(12.7)
NPAT	1,213	1,390	(12.7)
NPAT (excluding significant items)a	1,213	1,414	(14.2)
Basic earnings per share (excluding significant items)a (cps)	107.3	125.0	(14.2)
Return on equity (excluding significant items)a (R12, %)	24.8	24.7	0.1 ppt
Significant itemsa
Pre-tax significant items	-	(34)	n.m.
Post-tax significant items		(24)	n.m.
-
Cash flows and dividends
Operating cash flows	1,556	2,216	(29.8)
Net capital expenditure	405	243	66.7
Free cash flows	949	1,964	(51.7)
Cash realisation ratio (excluding significant items)a,b (%)	79	102	(23 ppt)
Interim ordinary dividend (fully-franked, cps)	80	88	(9.1)
Balance sheet
Net financial debt / (cash)c	2,615	(871)	n.m.
Debt to EBITDA (excluding significant items)a,d (x)	2.0	1.3	0.7 x

n.m. = not meaningful

1. There were no significant items in 2021. Significant items in 2020 of $34 million pre-tax ($24 million post-tax) relate to Target store closures and conversions in Kmart Group.
2. Operating cash flows as a percentage of net profit after tax, before depreciation and amortisation.
3. Interest-bearingliabilities less cash at bank and on deposit, net of cross-currency interest rate swaps and interest rate swap contracts. Excludes lease liabilities.
4. Total debt including lease liabilities, net of cash and cash equivalents, divided by EBITDA excluding significant items.

Wesfarmers Limited 2022 Half-year Results

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Divisional earnings summary

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Half-year ended 31 December ($m)	2021	2020		Variance %
Earnings before tax (EBT) excluding significant itemsa
Bunnings	1,259	1,274	(1.2)
Kmart Group	178	487	(63.4)
Officeworks	82	100	(18.0)
WesCEF	218	160	36.3
Industrial and Safety	41	37	10.8
Divisional EBT (excluding significant items)a	1,778	2,058		(13.6)

1. There were no significant items in 2021. Significant items in 2020 of $34 million pre-tax ($24 million post-tax) relate to Target store closures and conversions in Kmart Group.

Performance overview

Bunnings

Revenue for Bunnings increased 1.7 per cent to $9,209 million for the half, while earnings declined 1.2 per cent to $1,259 million.

"Bunnings delivered pleasing sales and earnings results in the context of the significant disruptions to trading conditions during the half and the very strong growth in the prior corresponding period," Mr Scott said. "Bunnings' performance for the half reflected its ability to meet customers' needs through a range of operating conditions and further highlighted the resilience and flexibility of its model. Bunnings continued to incur additional costs to ensure a safe environment for team members and customers, as well as to manage COVID-related supply chain disruptions.

"Bunnings continued to accelerate the development of its digital offer during the half, with improved search performance and greater personalisation for DIY customers, as well as the launch of a new e-commerce platform for commercial customers.

"Good progress continued on the growth of Bunnings' commercial offer, including through the further development of its specialist brands, with the expansion of Tool Kit Depot into Western Australia and the completion of the Beaumont Tiles acquisition during the period."

Kmart Group

Kmart Group's revenue declined 9.6 per cent to $4,917 million for the half, with earnings before significant items declining 63.4 per cent to $178 million.

"Combined Kmart and Target earnings declined 55.8 per cent to $222 million for the half, reflecting the significant impact of government-mandated store closures, which led to the loss of almost 25 per cent of store trading days during the half, as well as higher costs and lower stock availability as a result of domestic supply chain disruptions," Mr Scott said. "The Group's commitment to pay team members where there was no meaningful work during lockdowns and when they were required to isolate also led to additional costs during the half.

"The planned changes to the Target store network were completed during the half and the performance of Kmart stores that have been converted from Target stores continues to be pleasing and in line with the initial business case, after adjusting for the impact of lockdowns.

"Kmart and Target continued to invest in data and digital capabilities, and strong growth in online sales for the half of over 44 per cent reflected ongoing improvements to the digital experience for customers, as well as elevated online demand during lockdowns.

"Gross transaction value for Catch increased 1.0 per cent for the half, and 97.5 per cent on a two-year basis. Lower earnings in Catch reflected the continued investment in team, technology, marketing and capabilities to support long-term growth, as well as higher levels of inventory clearance compared to the prior year."

Officeworks

Revenue for Officeworks increased 3.7 per cent for the half to $1,580 million, while earnings declined 18.0 per cent to $82 million.

"Sales growth was supported by continued strong demand in technology and furniture, which was partially offset by declining sales in higher-margin office supplies and print & copy categories, which continued to be adversely impacted by COVID-related restrictions, including government-mandated temporary store closures," Mr Scott said.