Metcash : 26 July 2019 Annual Report 2019

Investing for growth

Annual Report 2019

Contents

02 About Us

1. Purpose, Vision and Values
2. Chairman's Report

1. CEO's Report

1. MFuture - Five-Year Vision

1. Financial Highlights

1. Food

1. Liquor

1. Hardware

1. Corporate Social Responsibility

1. Our People
2. Our Board
3. Financial Report

1. ASX Information

01

Our Purpose

Championing

Successful

Independents

Our Values

We believe:

Independence is worth fighting for; in treating our people, retailers and suppliers the way we like to be treated; and in giving back to the communities where we live and work.

02 Metcash Annual Report 2019

Our Vision

Best Store in Town

Passionate about independents

A favourite place to work

Business partner of choice

Support thriving communities

03

Rob Murray, Chairman

Chairman's Report

At our strategy day in March we detailed our MFuture growth initiatives, and the related capital investment, which we expect to be able to fund from internal sources. More detail on MFuture is contained in the CEO report and Pillar sections.

Appointment of new CEO Liquor

We were pleased to announce during the year the appointment of Chris Baddock as the new Chief Executive Officer (CEO) of the Liquor pillar. Chris' appointment followed the completion of an extensive executive search

for a successor to Scott Marshall following his appointment as CEO of Supermarkets & Convenience in March last year.

Chris has extensive experience in the Liquor market which includes a strong track record of delivering sustainable growth and working with independent retailers. We are delighted to have Chris join the leadership team.

I would like to make a special mention of Rod Pritchard, who has filled in as interim CEO of Liquor admirably from March last year.

STI bonuses paid to KMP in respect of FY19 ranged from 47% to 62% of maximum, and there will be a 90% partial vesting of the FY17-19 LTI. This is the first time in 12 years an LTI has vested.

The Board believes remuneration outcomes for the year are a fair reflection of the performance of Metcash, our businesses and management.

Last year I advised that we had made a significant improvement in gender pay parity, with the overall gap reducing to less than 2%. I am pleased to advise that we have again narrowed this gap, which at the end of FY19 was 1%.

Our achievements in this important area were recognised earlier this year with Metcash receiving an 'Employer of Choice' citation from the Workplace Gender Equality Agency.

Further detail on our remuneration structure and outcomes for FY19 can be found in our Remuneration Report commencing on page 46.

Board update

The Board has a strong interest in ensuring the company has the right culture and behavioral styles. It was pleasing to see the results of our annual employee survey showed further improvements in culture and behavior across the organisation.

The survey also showed that the Board and Group leadership team have a constructive behavioral style within Metcash, which is important for driving change from the top.

The future

At the heart of our strategy continues to be the championing of our independent retailers. Our priority

is the successful execution of our MFuture plans, which is being well supported by the quality, dedication and passion of our leadership team, the Board and our retailers.

While our markets remain challenging, we are encouraged by the confidence of our independent retailers in

the future and their willingness to continue to invest in their stores. Together, we are improving the quality and competitiveness of our retailer

"At the heart of our strategy continues to be the championing of our independent retailers.

Our priority is the successful execution of our MFuture plans, which is being well supported by the quality, dedication and passion of our leadership team, the Board and our retailers."

04 Metcash Annual Report 2019

Welcome to Metcash's Annual Report for the year ended 30 April 2019. I am pleased to advise that the company delivered a solid set of financial results and continued to successfully execute its strategic initiatives.

The year also included detailing our plans under the new five-year MFuture program, which aims to deliver a pathway to sustainable growth with a balanced approach to revenue growth and cost out.

From a financial perspective, solid earnings and cash flows were delivered by our Pillars despite challenging market conditions, and we continue to be well positioned with a strong balance sheet.

Underlying profit after tax for the year was $210.3m, down slightly on the prior year. From a shareholder perspective, underlying earnings per share increased 1.8% to 22.6 cents, reflecting the benefit of the $150m share buy-back in August last year.

The Board determined to pay a final dividend of 7.0 cents per share, bringing total dividends for the year to

13.5 cents per share - a 3.8% increase on the prior year.

Strategy update

The integration of Home Timber

• Hardware (HTH) is now largely complete, with the delivery of further synergies in the year underpinning strong earnings growth in Hardware, despite softer construction activity. HTH has been a successful acquisition for both Metcash and the broader IHG retailer network. The network is now more competitive and stronger, and well positioned as the second-largest player in the market.

FY19 was the final year of our very successful Working Smarter program, which has helped offset the impact of inflation over the past three years. Total cost savings under the Working Smarter program were ~$125m, well above our initial ~$100m target.

We will continue to have a strong focus on costs under our new MFuture program, which we commenced at the start of FY20. Importantly, the new program also incorporates a strong focus on growing our top line, and includes significant investments to further improve the competitiveness of our Food, Liquor and Hardware retailer networks.

Remuneration

This was the final year of our five-year remuneration transition which has seen a progressive increase in the executive 'at risk' component of Key Management Personnel (KMP) total reward. The Board determined that this was an appropriate time to undertake a further review of the structure of executive remuneration having regard to changes in market practice and feedback from our shareholders.

Commencing in FY20, changes will be made that create an even stronger link between executive and shareholder outcomes. These include the deferral of a component of any STI earned to be delivered as equity, and the expansion of our minimum shareholding policy to include KMP. Our KMP will now have the majority of 'on target',

'at risk' remuneration delivered as deferred equity.

While the salaries of certain key executives are below the peer group market median, no member of the Group leadership team was awarded an increase for the upcoming financial year.

In June, we announced that Anne Brennan had notified the Board of her intention to step down as

1. non‑executive director due to unforeseen and potential conflicts related to her other directorships. Anne will continue as a non-executive director through to our AGM in August, with appropriate protocols in place to address the potential conflicts. I would like to thank Anne for her contribution since joining the Board in March
   last year.

We also announced in June that Fiona Balfour has decided not to stand for re-election at this year's AGM following almost nine years as a non‑executive director of Metcash. The Board sincerely thanks Fiona for her long-term contribution and service to Metcash, which has included providing invaluable insight and guidance

as Chair of the People and Culture Committee since 2014. Helen Nash has been appointed Chair of the P&CC, replacing Fiona.

Peter Birtles and Wai Tang have been appointed as non-executive directors effective 1 August 2019. Both Peter and Wai bring a high level of relevant skills and experience to Metcash and we look forward to them joining us.

networks across Supermarkets, Liquor and Hardware to underpin their ongoing success.

Thanks

On behalf of the Board, I would like to thank all our people, the leadership team, our partner independent retailers and suppliers, and our shareholders for their ongoing support.

To my fellow directors, thank you for your support, commitment and significant contribution to Metcash over the past year. I am excited about our plans for the future and look forward to continuing to work together as a cohesive Board.

Rob Murray

Chairman

05

Strengthening our retailer networks

"I am encouraged by the confidence our retailers have shown in the future of our network by continuing to invest in their stores."

Jeff Adams, Group CEO

CEO's Report

I am pleased to report that the Group delivered a solid financial result in highly competitive and challenging market conditions, while continuing to execute its strategic initiatives.

Our Community Co private label range is now available in all IGA and Supa IGA stores nationally. The range has grown to 280 products, including a number of fresh items, and we are very pleased with how Community Co is being received by our retailers and their customers. We have plans to add more Community Co products to the range in the coming year.

We opened the first of our new small format convenience stores. The store, located at Bondi, New South Wales is branded 'The Fresh Pantry by IGA', and is the first of our small format convenience store trials under the MFuture program.

Liquor

In Liquor, total sales (including charge-through sales) increased

5.6% to $3.67bn, reflecting continued growth in sales to the IBA bannered group and ALM wholesale customers. A high proportion of this growth is value driven related to the continuation of the 'premiumisation' trend to higher quality but lower consumption.

Liquor EBIT increased 1.3% to $71.2m, with the implementation of the new accounting standard having a $1.9m negative impact on the year-on- year movement.

There were a further 81 stores refreshed and 110 cool rooms upgraded during the year. In total, we have completed ~330 refreshes and ~610 upgraded cool rooms.

In private and exclusive label, the number of SKUs across our wine, beer and spirit categories increased to ~80; with private label sales continuing to grow, particularly in the wine category, which was up 20% on the prior year.

Quality stores with localised ranges and personable and knowledgeable service is what differentiates our IBA network and provides us with a competitive advantage.

During the year we invested in, and mobilised, a dedicated 'on-premise' team which is delivering pleasing results. We have historically under- indexed in 'on-premise' sales and our plans include targeting the significant

Hardware

In Hardware, total sales (including charge-through sales) declined 0.9% to $2.10bn. Sales were negatively impacted by the slowdown in construction activity, the closure of unprofitable company-owned stores, and the loss of a large HTH wholesale customer in Queensland. On a like-for- like basis, total wholesale sales to the IHG banner group increased 2.3%, and retail sales through the IHG banner group increased 3.0%.

Hardware EBIT increased by $11.9m (17.2%) to $81.2m, reflecting additional synergy benefits in the year from the HTH acquisition and the benefit from the closure or sale of unprofitable company-owned stores.

From a financial perspective, we reported an underlying profit after tax for the year of $210.3m. This included solid earnings in both our Food and Liquor pillars, and strong growth in the Hardware pillar due to additional synergies from the Home Timber

& Hardware acquisition (HTH).

Underlying earnings per share increased 1.8% to 22.6 cents, reflecting the benefit of the $150m share buy-back in August last year.

Statutory profit after tax for the year was $192.8m. This compares to a loss in the prior year of $148.2m, which included a charge of $345.5m (post tax) related to the impairment of goodwill and other assets.

Importantly, our Pillars continued to generate solid cash flows, which together with our ongoing focus on working capital resulted in operating cash flow for the year of $244.9m. Our financial position remains strong, with net debt at the end of the financial year of $42.9m, which is a gearing ratio of 3.3%.

Operating performance

The Group reported sales revenue (which now excludes charge-through sales due to the implementation of new accounting standard AASB 15) of $12.7bn, an increase of 1.8% on the prior year. Including charge-through sales, Group revenue increased 1.4% to $14.6bn with sales growth in the Food and Liquor pillars, partly offset by a small decline in Hardware.

Group EBIT declined 1.4% to $330.0m, with earnings growth in the Hardware and Liquor pillars being more than offset by a decline in the Food pillar and a higher Corporate expense. In the prior year, Corporate included the benefit from the reversal of a ~$10m provision against the NSW Distribution Centre hail insurance claim that was settled in FY18.

Food

Supermarkets sales (including charge- through sales) were down 0.5% to $7.24bn, with continued growth on the eastern seaboard offset by a decline in sales in Western Australia.

There was some improvement in the still highly competitive market conditions, particularly in the second half of the year, which was evident in the reduction in price deflation for 2H19 to 0.9%, from 1.3% in the first half.

In Convenience, sales increased 4.4% to $1.56bn due to sales growth from major customers, increased tobacco sales and the addition of new customers.

Food EBIT was down $5.6m to $182.7m and includes ~$10m investment in MFuture growth initiatives.

I am pleased with the confidence our retailers have shown in the future of our network by continuing to invest in their stores. This year we had a further 79 stores complete our Diamond Store Accelerator (DSA) store upgrade program, which brings total stores through the program to ~400 with average sales growth of ~10% from these stores. As part of MFuture, we have simplified the program which is expected to help accelerate its roll-out through the remainder of the network.

Warehouse sales to the IBA bannered network on a like-for-like basis increased 1.9%, supported by the ongoing investments to improve the quality of the store network and shopper experience. This is the sixth consecutive year of like-for-like sales growth, reflecting the strength of the IBA network.

opportunity in this segment through better leveraging our existing network and strengthening our alignment with key partners.

06 Metcash Annual Report 2019

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