Interim 2016 Metcash Ltd Earnings Presentation
Nov 30, 2015 AM AEDT
MTS.AX - Metcash Ltd
Interim 2016 Metcash Ltd Earnings Presentation
Nov 29, 2015 / 11:30PM GMT
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Corporate Participants
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* Ian Morrice
Metcash Limited - CEO
* Brad Soller
Metcash Limited - CFO
* Scott Marshall
Metcash Limited - CEO ALM
* Steven Cain
Metcash Limited - CEO Supermarkets
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Conference Call Participants
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* Shaun Cousins
J.P. Morgan - Analyst
* Andrew McLennan
Commonwealth Bank - Analyst
* Michael Simotas
Deutsche Bank - Analyst
* Craig Woolford
Citigroup - Analyst
* Tom Kierath
Morgan Stanley - Analyst
* Bryan Raymond
Macquarie - Analyst
* David Errington
Merrill Lynch - Analyst
* Grant Saligari
Credit Suisse - Analyst
* Richard Barwick
CLSA - Analyst
* Craig Stafford
UBS - Analyst
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Presentation
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Ian Morrice, Metcash Limited - CEO [1]
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Good morning ladies and gentlemen. Thanks very much for your attendance this morning. We do also have a live webcast in [parallel]. So I just wanted to make sure with the people at the back where the webcast is ready to go and we're -- yes, all systems go from the webcast as well.
Welcome to Metcash first half results for FY16. Most of you were at our investor day at the end of September and as a consequence of having had that investor day recently, today's presentation will be somewhat shorter than normal. But we have got four key areas to cover. Obviously, the results in the half just gone and to help you understand some of the underlying movements in our results. The progress against our initiatives and again, I'll really just touch on high level progress points, given the time spent in the investor day on that.
We'll also talk a bit about the Working Smarter program. We highlighted at the investor day that we had a cost reduction program in development and underway. We've settled on a target for that. So we'll take you through our thinking there and then finally, we'll wrap up with an outlook for the balance of FY16.
So let me start with revenues. All pillars grew revenue. Again, when one considers that we've got a highly competitive environment, where many of our competition in all our sectors are putting down a lot of new footprints. Their refurbishment programs are well advanced and they're claiming to be investing hundreds of millions of dollars in price. I think some of the results that we see flowing through are retailers and through into our wholesale businesses, are encouraging in that context.
The EBIT is very much line with expectations, continuing to see growth on earnings from both Mitre 10 and ALM. The MFG result reflects the additional price investment year-on-year because of the timing of Price Match, an introduction of Price Match, primarily and to some extent a softer convenience result, which I'll touch on later. The transformation plan is certainly achieving some important progress. I think the fact we've got over 900 stores actively participating in Price Match. We have over 1200 stores on our -- if you include our Black and Gold Private Label program, then that's incredible support and distribution.
That's what's leading to the 350 basis points uplift. Also in the last half, of course, we -- with the extension of the program to more stores, we were able to go above the line with the Shane Jacobson led campaign and of course that's also helped to give a lift to the sales, retail and wholesale. The DSA refurbishment program remains on track and again, we've flagged in the result here and we continue to see the same sort of uplifts. Working Smarter we're really saying is the next stage of transformation. We understand that we can continue to look forward into difficult and competitive trading conditions.
So it's -- we think it's very important that we continue to revise our cost base and ensure that we've got a plan that is able to withstand the continued and competitive conditions we expect. That's really the background to the transformation stage 2 Working Smarter. It's also though, about making our business simpler and easier to deal with for both our retailers, our customers and our suppliers. If you talk to our retailers and our suppliers, there is plenty of opportunity for us to streamline our activities and be far more efficient as a channel.
I'll talk about Tmall just in passing really, to say that look, it's not a distraction for us, but nevertheless, it is important for us to test new channels and we've taken on a small team to do that and we've got the first of those initiatives underway. So we are content to look at other opportunities for us as a wholesaler. The balance sheet is strengthened through obviously primarily, the sale of the auto business, has allowed us at this point to reduce our debt by over AUD200 million and our gearing is now down around 25%.
So that's a very different position to where we were two years ago and that's very pleasing to be able to do that. We've already signalled that the dividend will be reinvested this year. So there shouldn't be any surprise there.
I do want to touch on Huntingwood because it's almost easy for us to forget how much disruption we've had to our business to contend with in the last half. This is very significant. You see the number of retail stores and supermarkets being delivered out of Queensland or Victoria. You can just imagine what logistics and challenges are involved in doing that.
That's been the case for about four and a half of the six month period. We've now had to Commission four temporary DCs in New South Wales whilst Huntingwood is under reconstruction, as you can see from the photograph here. Those four temporary DCs, that's no small feat.
We've actually had to recruit over 250 new people to man up, to replace what you may recall was pretty much an automated DC we'd just put in place. So it's been an enormous exercise and the patience of our customers has been really quite remarkable and I think our service level that we've maintained has also been remarkable. So I think it's a good job all around.
Having said that, we're now delivering back out of New South Wales as situation normal from a customer's point of view, for the peak season, which is critical. We will get back into Huntingwood mid next year and ultimately our insurance coverage will cover any loss of earnings and consequential loss. Let me pass you across to Brad now to cover the financials and I'll come back with the pillar segment.
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Brad Soller, Metcash Limited - CFO [2]
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Thank you Ian and good morning everybody. I've a relatively short presentation today. What I'll do is I'll focus on the overall group results and also our capital position and then Ian is going to provide some more detail on the individual pillar performance later on in the presentation. So let's start with the P&L account.
As Ian mentioned, total group sales were up 1.4% to AUD6.6 billion. Reported profit for the half was AUD122 million. This is an increase of 20% from the prior year. Reported profit however includes AUD35.1 million from discontinued operations, which most of you are aware includes the sale of our automotive business, which we completed in July. The underlying EBIT was down 12.7% and as Ian mentioned, this is due to the decline in supermarket earnings. As we've previously flagged, there was only modest investment in price in the corresponding prior year period, compared to the full six months in the current half.
It was pleasing to see both liquor and hardware deliver EBIT growth. The positive contribution from corporate reflects the reversal of the LTI provisions and gains in property sales, principally related to the sale of the Mitre 10 distribution centre at Wetherill Park. Finance costs declined by AUD11.2 million, which includes a AUD9.6 million gain, relating to the restructure of the Group's finance facilities and I'll provide a little more detail about that later in the presentation.
The Group's effective tax rate of 28% is in line with the prior period. As I already mentioned, the discontinued operation includes the profit after tax of AUD31.4 million, relating to the sale of the automotive business and also the trading profit after tax of AUD3.7 million for the presales period. Let's now turn to the cash flows. The net cash flows from operations of AUD3.1 million was significantly impacted as a consequence of the damage to the New South Wales DC.
We've estimated this impact at around AUD90 million, which reflects increased working capital levels, due to receivables from our insurers for the outstanding insurance claim, as well as elevated inventory levels. As you can appreciate during the period, we need to carry additional inventory due to the fact that we had limited access to Huntingwood and that we were operating out of four temporary DCs.
Adjusting for this impact, our operating cash flows would have been around AUD93 million. The next cash flow from investing activities in the half of AUD237 million includes AUD240 million inflow from the sale of the automotive business and a further AUD22 million from the sale of surplus [taxes], principally Wetherill Park. The Group continues to invest in the pillars and CapEx in the half was around AUD26 million. As you can see from the slide, during the period we were able to reduce debt by AUD232.5 million.
Let's now look at the balance sheet. In comparing the two balance sheets, it should be noted that the April 2015 balance sheet includes the automotive business. As under Accounting Standards the prior period is not adjusted for discontinued operations. The April balance sheet therefore includes AUD209 million of total funds employed and AUD58 million of net working capital, relating to the automotive business. The movement in equity reflects the retained profit for the half as no dividends have been paid. As I've already mentioned, net debt reduced by AUD232 million to the AUD466 million at the half year end.
Looking now to the borrowings in slightly more detail. We ended the half, as I said, with net debt of AUD435.3 million and that equates to a gearing level of 25%, which is in line with our previously flagged expectation. We have repaid AUD200 million of the USPP debt and also cancelled a further AUD110 million of facilities, reducing available facilities by AUD300 million. We also took the opportunity to refresh our interest rate hedges based on the lower debt levels and in doing so, have lowered the forward looking weighted average costs of debt to 4.2%.
Finally, as you can see from the graph on the bottom right of the slide, we have a well-balanced debt maturity profile over the next five years. So with that summary, I'll now hand back to Ian, who will give you a little bit more colour about each of the pillars.
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Ian Morrice, Metcash Limited - CEO [3]
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Thanks Brad. Okay, let me move through to -- go onto the divisional results. Just by way of context before jumping into the results, just a reminder of our strategy page that we shared with you in September. Really, a reminder that each of our businesses are going through a process of moving from what has been very much a supply led wholesale business to a demand and shopper led wholesale and retail business. Each of our pillars have got clear shopper focussed retail brands.
The other underlying consistency around the strategies focus on organic growth. At this position in the cycle, that's definitely the case in each of the pillars. Each of them have important initiatives that drive organic growth, as well as conversion of other independents into our retail brands. But all of that has to be underpinned by a world class wholesale partnership. That's for suppliers and for retailers. Again, that's -- we're not saying we are world class at this point. We believe we've got room for improvement on the wholesaling side and really think a lot of what we're thinking about with Working Smarter will also aid that.
All of that is then underpinned by our core purpose of supporting successful independents. If the independents are successful then we will ultimately be successful through volume. So the results overview by pillar, Brad really highlighted that. As you can see, sales revenues up in each pillar overall and really an earnings shortfall in the food and grocery pillar alone in this half. So we'll break out those into each pillar.
Let me start with food and grocery, which is made up of supermarkets and convenience. What's encouraging here, I think, is that sales are broadly flat now in supermarkets. I think the underlying trend of wholesale sales, excluding tobacco which we've been calling out for the last 12 or 18 months. You can see that half-on-half-on-half where we're seeing an improvement and hence the reason we've got that graph down the bottom left.
If you -- if we put in the lost sales from the Huntingwood impact in New South Wales, then we'd almost be at a flat position on wholesale sales ex-tobacco. So that's encouraging progress and that actually reflects the impact of price match. That 360 basis points increase in volumes there, we're now seeing that feeding through into the wholesale volumes ex-tobacco. Of course it's important to continue to look at the health of the retailer in the IGA network and again, despite the competitive environment being incredibly intense, they've continued to lift sales in the half, up 0.6%.
In convenience, CSD, which is the primarily fuel convenience store distribution business, continues to grow quite strongly. But it's offset by Campbells. In this particular half Campbells has undergone a lot of rebranding and re-fixturisation in the stores, as we move the offer towards the food service sector, away from the re-seller sector. We're continuing to see decline in that re-seller sector. Not yet offset by food service. Although food service is actually up well into double digits and is now our biggest category.
So we continue to see the long term opportunity there, but it's been a difficult half, particularly for the Campbells business. If we look at the breakdown of EBIT, again we've called out in advance a couple of times now the expectation that we would have a full half year price investment and broader [divert] investment in the supermarkets business. That's come through exactly as we expect it and on track. It's also driving the sales uplifts that we covered earlier.
So I guess the additional callout would be that in the convenience result of that, about AUD5 million of that softness is actually attributable to convenience. So it's a combination of two things there. One is what I talked about in Campbells, which is the biggest single impact and also in our CSD business, which is -- continues to be dominated by tobacco. We have a serious mix issue there because of the 60% plus share of sales in that fuel convenience sector is tobacco. Which actually means the more we distribute the less money we make.
So we're addressing that with our customers and with our suppliers, to adapt that model and ultimately get a broader share of their business in more profitable categories. So, very much as expected there, in terms of earnings flowthrough. Again, the progress points on food and grocery are the continued support for the competitive pricing programs from retailers. Remember, it's not just Metcash who are investing here. Retailers are actually investing some of their margin and are participating in these programs.
The private label development is continuing to progress. Fresh foods, which is -- there is kind of a -- well, it's a several pronged approach there, but certainly the modules that we're rolling out are continuing to get wide take-up. But it's a key attribute of the Diamond Store Accelerator program. It's the biggest game changer in the store, is increasing the fresh participation in the DSA program. That's also driving an in increased team score. Although we don't call out team score, one thing I can tell you, is based on the scan data that we can now run it on, which is almost 1000 stores. Team scores are actually slightly up overall in the half verses last year.
Now we've got that scan data, that's something we can see with accuracy. On the subject of data and using that data, we've now got the vast majority of stores providing us with good quality data, which we are able to then give back to them, with meaningful information about the businesses. The training academy continues to get incredible take-up. It's very important to underpin retail excellence that our IGA retailers are investing in training the people. As you can see there, there is a lot of momentum in that particular program.
The final point really on network investment is we are on track to do 100 stores this year and building on the 50 plus stores that we did last year. The DSA program is not only on track in terms of numbers, but it continues to deliver the sales increases on a consistent basis. Moving onto ALM now. Again, at the top line a number of different numbers and moving parts there, but essentially a continued story of very strong retail growth in the IB network, both at a like-for-like and total level. In total, we actually converted additional stores into our managed retail brands. At a wholesale level, it was also a strong half at revenue level.
Some of that is flowing through into EBIT, as we expect and as we convert more and more stores, then, obviously, that EBIT differential will grow as the stores come into the network.
We're still focussed on driving the margin and the mix in that business though because we do see further opportunities to increase the leverage in our liquor business, going forward. And the programs that are driving organic growth, you can see, are also well advanced in terms of the number of stores, taking up the cool room and refresh projects, in the liquor distribution business.
Mitre 10 Hardware, again, on the surface of it, a tough result; nevertheless, up on last year, but you need to think about a couple of things there. First is that last year we were 11% up. That was a combination of very strong trade performance and some new JVs that came in to Mitre 10 last year.
And we've taken some closures in this half by the run-on effect of some closures in the broader Mitre 10 network. So we're not concerned about that number. We think this is, nevertheless, the underlying trade and joint venture businesses are growing very strongly.
So, as a consequence therefore, you can see the EBIT there looks slightly out of balance with the sales, but that's really a flow-on of the cost reduction. Brad talked about the sales of the New South Wales DC, for example, which is a part of the cost-out program in Mitre 10, as well as a higher contribution from the joint ventures, which are performing ahead of the broader network, it has to be said.
Again, the initiatives to drive organic growth in Mitre 10 -- particularly the Sapphire Store program -- is at its early stages, but we will hit our target of 10 stores in its first year. We've got five complete already, and we'll begin to call out those results as we get more weeks and months of data to talk about in regards to the stores, but the early signs are very encouraging.
Once again, Mitre 10 is investing a lot of time and effort in training their people and in the e-learning program that the team put in place there within the training academy.
Now, just turning to outlook, again, just step through a couple of elements of the Working Smarter program because, in the context of the outlook, I think it's pretty important that we signal that we are intent in our plan to actually reduce our ongoing cost base.
We've got an addressable cost base of about AUD1.2 billion, we think, in this regard, so we're talking about taking just under 10% of that cost base out over a three year period. So, to put it in context, that's the size of the prize.
We've called out there the key areas that we're going to look at in terms of simplifying the organisation. There's a lot of back office efficiencies we believe -- cross pillar as well as within pillars -- and there's further things we can do to be more efficient in both logistics and procurement.
In the logistics sense, it's very much about and end-to-end view of the supply chain. And, remember, we've been very much a supplier led push model, whereas we're moving to become more of a demand driven model. And, therefore, we will ultimately be much more efficient with our inventories and working capital as we put the systems in place to do that.
That's important because it is important to highlight that we also see that we will invest in systems in particular to drive this cost-out program. And, hence, the reason we're expecting this to be something in the order of a AUD50 million cost, particularly over the first two years of the program, being 2017 and 2018.
There'll be a lot of systems investment. We will continue to invest in our people and in our capabilities, and we'll continue to invest in exploring and developing new channels for us as a wholesaler. So this program also helps to not only underpin our earnings over the next few years, but also our investment in those key programs.
It's also important to note that we've -- we're not coming from a standing start. We have actually delivered already some simplification programs during the course of this year. And we do see a run rate of AUD100 million by FY19, but we also would signal to you we don't see any material impact in the FY16 year that we're in now.
So, with that, as some additional context, I think it comes back to what do we expect from the training, going forward. We don't expect anything to get much easier, so we've got to plan for continued highly competitive conditions that will put pressure on margins for us and our competitors. Hence, the reason our program looks to address that.
It's very important that we've taken the steps we have to strengthen the balance sheet. I do commend and thank our shareholders for their patience in supporting us with their hold on the dividends so that we can continue to invest in the business. And I think the transformation plan remains on track. There's very strong support from our retailers, demonstrated by the numbers of them participating in the program and, of course, the lift in sales that they're seeing.
And the Working Smarter program, as a next stage of transformation, if you will, is a very important factor in ensuring that we are preparing for continued difficult and challenging conditions, going forward. We've already said we don't intend to pay a dividend in this financial year, and we intend to use those funds for reinvestment.
In overall terms, when we look at what we believe the market will throw at us over the balance of FY16, that despite the positive results of the transformation program continuing, and we do expect continued improvement there, continued uplifts in ALM and Hardware are also in our forecast and in our plans, but we don't think that that, in total, in this financial year, will be enough to offset the headwinds we've got in food and grocery.
Part of those headwinds in food and grocery, I would remind you, is a reasonable, significant amount of closed stores within our network that we're cycling in this particular financial year. That's about AUD200 million of sales, just to remind you. So that's also part of that background to that statement.
So that completes our presentation this morning for the half year. I would like to now pass over to Q&A. And I would like to, initially, carry out the Q&A in the room. Once we've had some questions from the room we will pass across to the webcast and the telephone lines. We do have a microphone, so if you can raise your hand and then tell us who you are and which firm you represent, for the benefit of everybody online. Then we'll take your questions. So, first question please.
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Questions and Answers
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Shaun Cousins, J.P. Morgan - Analyst [1]
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Hi. Shaun Cousins, J.P. Morgan. Just a question in regards to Working Smarter: can you talk a bit about when the AUD50 million one-off costs will be incurred -- I assume that'll be taken below the line -- and how you see the path of those savings towards AUD100 million coming through? Obviously, nothing in fiscal 2016, but will there be any generated in fiscal 2017, so how you see the path of those, that AUD100 million building please.
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Ian Morrice, Metcash Limited - CEO [2]
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So I might pass to Brad in just a few seconds, just to cover the second part of that question. I think during the second -- during this half we will identify -- we will have identified and firmed up a number of savings that -- and firmed up some decisions that we'll take before the end of the year; as you rightly say, will be taken -- would be taken below the line. But we see the benefits beginning to flow from 2017, 2018 and 2019.
Brad, you might just comment in terms of how we're, at the moment, thinking about the upfront cost base being spread.
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Brad Soller, Metcash Limited - CFO [3]
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Just in relation to the actual phasing of the timing of that saving, I think the easiest way to actually look at it would be roughly a third, a third, a third. We will try and actually push a lot harder to actually get it done quicker. You can put them -- some of them are relatively easy because they don't require investment in new systems and restructuring of our supply chain, so we'll look to get those out in the first -- in FY17. So, if anything, we hope to do slightly better in FY17.
Then, the following year, the FY18 year, will probably be slightly low because -- and then the balance will come in FY19, as you have said, time for some of the investments in new systems and new technology to take hold.
So in terms of the actual flowing of the actual -- the outflows of the one-off costs, once again, they will broadly flow in that sort of order, roughly a third, a third, a third. There'll be some more weighted to the back end as we actually get our new IT systems and new infrastructure. But I think, for the purpose of your modelling, that would be a reasonable assumption.
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Shaun Cousins, J.P. Morgan - Analyst [4]
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Okay. And, maybe just to clarify that, you've obviously spoken about AUD100 million run rate by the end of fiscal 2019, so we shouldn't just assume that you generate, say, AUD33 million in savings in fiscal 2017. That's a run rate at the end of fiscal 2017, so it'll be slightly lowered in that, and we're sort of -- so it's a -- I'm just curious about what you bank in fiscal 2017, and then where you are at the end of fiscal 2017, for instance.
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Brad Soller, Metcash Limited - CFO [5]
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I think, in terms of the actual savings, we're actually looking to actually generate in FY17, I'm actually going a third, a third, a third into -- in that order.
It's important to actually note that these are actually gross savings as well. Please don't forget that. So there are still inflationary pressures within the business in relation to salary cost, through EBA agreements, through rent increases, so the number we're actually quoting to you now is a gross number, Shaun, okay.
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Shaun Cousins, J.P. Morgan - Analyst [6]
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Fantastic. And just a second question: obviously, your cash has been impacted by Huntingwood and the disruption there. Can you talk a bit about what you see the outlook for cash conversion in this business because, to be fair, an underlying 76% cash conversion isn't tremendous. Where should you be going forward? Could you get to 100% cash conversion in this business once Huntingwood issues are worked through?
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Brad Soller, Metcash Limited - CFO [7]
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There are a couple of answers to that. You're absolutely right. Over the long to medium term we should actually be at 100%, and I did say that at the loss results announcement. You adjust for the impact of hail in the mid-70%s.
We do have the drag as a result of the provisions we've actually taken, so at the moment we are getting some protections to the P&L account, but that actually still actually is resulting in some cash flow coming through each year.
You adjust for that and you're probably in the mid-90%s. And, to be fair, I think it's probably where it's going to be for a period of time.
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Shaun Cousins, J.P. Morgan - Analyst [8]
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Okay.
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Andrew McLennan, Commonwealth Bank - Analyst [9]
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Thanks. Ian, it's Andrew McLennan from Commonwealth Bank. You've obviously started to see the momentum improving in sales. And, certainly, from speaking with a number of the IGA retailers are experiencing some good uplifts in certain areas, from the response to the Diamond store investment and price match.
When do you start having the conversation with suppliers about how they're going to support because, obviously, last half, this half, you're seeing significant margin reduction because of your price investment. But, at some stage, from the volume gains, you should be seeing some benefits coming through from suppliers, so could you just talk about that?
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Ian Morrice, Metcash Limited - CEO [10]
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Yes, happy to. We've already started the discussion with suppliers. And a number of suppliers are already supporting the program. That's why our net number is able to be achieved where it is.
So we fully expected to be rewarded for the volume. And we called out at the investor day that we were getting a mid-teens volume uplift from proprietary SKUs within the basket. So we're going through a process with each of those suppliers in terms of securing support, further support, for our everyday pricing programs, not just the promotional programs.
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Andrew McLennan, Commonwealth Bank - Analyst [11]
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And what about the branded guys?
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Ian Morrice, Metcash Limited - CEO [12]
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That is the branded guys.
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Andrew McLennan, Commonwealth Bank - Analyst [13]
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Oh, sorry, that was the branded.
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Ian Morrice, Metcash Limited - CEO [14]
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Yes.
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Andrew McLennan, Commonwealth Bank - Analyst [15]
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Okay.
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Ian Morrice, Metcash Limited - CEO [16]
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When they -- as I said, again, the -- of our price investment, AUD7 out of every AUD10 is in private label, so -- and so that's something that we've had to wear in the short term whilst we adjust our volumes, whilst we adjust our supply base, and we actually get lower cost of goods to flow through.
So the reason that you don't see a significant shift in our prices investment yet from proprietary is it's actually not the biggest part of the cost, if that makes sense.
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Andrew McLennan, Commonwealth Bank - Analyst [17]
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Mm. And the second question, if I could, for Brad, there's obviously a lot of moving parts from the cash flow and balance sheet perspective. The balance sheet looked fantastic this half. I'm just wondering though where do you expect to see operating cash flow and the balance sheet come the end of this year?
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Brad Soller, Metcash Limited - CFO [18]
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So if you look at--
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Ian Morrice, Metcash Limited - CEO [19]
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Can you talk into the mic Brad.
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Brad Soller, Metcash Limited - CFO [20]
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Sorry. So if you look at the actual cash flows for the half, the impact of the AUD90 million -- which we actually called out -- is now in the working capital numbers. So you shouldn't actually get that kind of impact coming in the second half. So if you take the profit forecast -- or whatever your assumptions are for profit for the second half of the financial year -- and you apply that cash conversion ratio that we talked about, you should have much stronger cash flows in the second half of the financial year.
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Michael Simotas, Deutsche Bank - Analyst [21]
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It's Michael Simotas from Deutsche Bank. Just another one on the Working Smarter program: you spoke about it being a gross number and there being some underlying cost inflation in the business. Is that the only way we should think about that? Or is there some other planned use of that savings in terms of further price investment or other sorts of investment in the business?
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Ian Morrice, Metcash Limited - CEO [22]
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Well, as I said, the -- we will be investing in systems. So, some of the investment will be capital, which will then translate into depreciation over time. I talked about further investment in capability and people, and we're absolutely committed to that also. But the way you should be thinking about it is the way that Brad described it, I believe, which is how we're going to try and deliver this is on that staged basis.
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Michael Simotas, Deutsche Bank - Analyst [23]
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Okay. So it sounds like the majority of that -- let's just call it AUD33 million a year -- will fall to the bottom line?
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Ian Morrice, Metcash Limited - CEO [24]
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Well, I think you would -- you'd probably be best to comment on what proportion you think.
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Brad Soller, Metcash Limited - CFO [25]
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The odds are actually, 100% of it will fall to the bottom line. The issue is what else you spend money on. So in terms of initiatives that we're actually looking to actually deliver, there are some initiatives that we need to actually deliver. We are cycling the price investment through on an annualised basis, so -- we don't control the profit -- the price pressures in the markets. Assuming that remains flat, we are cycling a full year of all that investment.
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Michael Simotas, Deutsche Bank - Analyst [26]
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Okay, all right. And then just a question on the liquor business, if I can? Clearly, it's going very, very well at the sales line in what is a pretty difficult market. Historically, that sort of sales growth level would have driven some operating leverage through that business. Was there something that put the brakes on margin a little bit in the first half and we should expect that to lift a little bit in the second half if the sales run rate continues?
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Ian Morrice, Metcash Limited - CEO [27]
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Sure. Let me just pause there. I realised I should have been -- I should have highlighted that we have with us this morning Scott, the CEO of liquor, Mark from Mitre 10 and also Steven from supermarkets. So I'm actually going to pass to Scott just to take that question.
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Scott Marshall, Metcash Limited - CEO ALM [28]
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Thanks, Michael. I think in the first half, certainly, the result's in line with our expectation. You'll notice the increase in the store network and IBA, so I think the result's a reflection of the investment in the first half into the network.
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Michael Simotas, Deutsche Bank - Analyst [29]
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Longer run, the conversion of stores to IBA should actually help margin, right?
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Scott Marshall, Metcash Limited - CEO ALM [30]
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Yes. I think you've seen that in the past, so yes.
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Michael Simotas, Deutsche Bank - Analyst [31]
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Okay. Thanks.
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Ian Morrice, Metcash Limited - CEO [32]
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Thanks Scott.
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Craig Woolford, Citigroup - Analyst [33]
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Morning, Ian. Craig Woolford from Citi. I just wanted to understand the sales result for the supermarket part of the food and grocery business. Do I hear you correctly that there's a AUD200 million drag on sales from store closures? That was in a closing remark you made.
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Ian Morrice, Metcash Limited - CEO [34]
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That's on the full year, Craig, sorry (multiple speakers)--
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Craig Woolford, Citigroup - Analyst [35]
------------------------------
Yes, so for the full year basis, sure. Is that a net figure? Is there store openings we should think about there? Where I'm trying to go with the questioning is to understand the wholesale sales, ex- tobacco, was minus 1.1%.
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Ian Morrice, Metcash Limited - CEO [36]
------------------------------
Yes.
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Craig Woolford, Citigroup - Analyst [37]
------------------------------
What was the -- let's call it a like-for-like, for want of a better term. What was the existing store performance on a wholesale basis once you removed the impact of store closures and store openings?
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Ian Morrice, Metcash Limited - CEO [38]
------------------------------
I don't know, Steven, if we're able to answer that question accurately without checking and coming back to you, but -- I'll just pass it to Steven a second.
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Steven Cain, Metcash Limited - CEO Supermarkets [39]
------------------------------
If you look at the openings and closings, broadly, the closures are double the openings. Broadly, the stores we're opening are better than the ones that we're closing. But I think it's fairly safe to assume that -- I'd say it's about 1%. So if you look at the minus 1%, then if you add that effect in, and then there's the Huntingwood effect as well, then you can draw own conclusions as to where we're at.
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Craig Woolford, Citigroup - Analyst [40]
------------------------------
So it's important to understand the underlying stabilisation that you're calling out. It's not quite a stabilisation yet, but if there's a higher level than normal closures -- which some of the closures were progressive -- IGA, which were larger turnover stores; not necessarily good quality stores, but high turnover stores, that has had a bigger drag. So I'm trying to get at what's the underlying performance at wholesale?
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Ian Morrice, Metcash Limited - CEO [41]
------------------------------
That's really the reason for calling out this particular year. In our plans, going forward to Steven's point, we see further closures will be offset by openings that will be better than the ones that closed. So it will net itself out. In this particular year because of the progressive stores in WA and a couple of other larger turnovers stores that we've lost there's a bigger negative drag on the sales in this particular year. So I think that' what you're trying to --
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Craig Woolford, Citigroup - Analyst [42]
------------------------------
Well if I do AUD200 million divided by AUD7.5 billion or so, it's significant it's over 2% impact.
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Brad Soller, Metcash Limited - CFO [43]
------------------------------
In relation to that I'd actually dial back the AUD200 million number and we'll get you the exact number. I think it's potentially overstated in our thinking. We need to --
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Craig Woolford, Citigroup - Analyst [44]
------------------------------
Alright we'll take that one on notice.
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Brad Soller, Metcash Limited - CFO [45]
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We'll take it offline. We'll get you the actual number.
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Ian Morrice, Metcash Limited - CEO [46]
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So take that in square brackets.
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Brad Soller, Metcash Limited - CFO [47]
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In the half the number was around about AUD35 million in the first half of the financial year. That was the impact of the store closures in the first half of the year. In relation to the full year I need to just -- I don't have the number in my head, I'll get it to you though.
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Craig Woolford, Citigroup - Analyst [48]
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Sure. Thank you. There's another important issue for the Company is the Diamond store accelerator or the refurbishments there. Is it [100 million] actual refurbishments during FY16 or is it going from 50 to 100, in other words an incremental 50 refurbishments?
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Ian Morrice, Metcash Limited - CEO [49]
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It's an incremental 100.
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Craig Woolford, Citigroup - Analyst [50]
------------------------------
Incremental 100 but you've only done 29 in the first half?
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Ian Morrice, Metcash Limited - CEO [51]
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Yes, yes.
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Craig Woolford, Citigroup - Analyst [52]
------------------------------
You're still expecting it on track for 100 for the full year for Christmas -- [in between].
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Ian Morrice, Metcash Limited - CEO [53]
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Yes there's a bit of --well no -- there's a bit of a pipeline effect to build up and it will be second half weighted in terms of completion. That's just the way the lead times of getting retailers signed up, ordering the fixtures, doing the work that's involved.
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Craig Woolford, Citigroup - Analyst [54]
------------------------------
I guess I'm trying to work out whether this is still some reticent by retailers to really sign up for the program. It doesn't feel like they've signed up as quickly as what the Company would like which could be a whole host of reasons but 100 is a good start but you'd probably want to be getting even over 100 if you want to have a normal, what I would consider a normal refurbishment cycle for IGAs.
------------------------------
Ian Morrice, Metcash Limited - CEO [55]
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Yes and we do and the challenge we have particularly at this stage is the time it takes for it to work out with the retailer of what needs to be done in that store, make the decisions and the choices around what we're going to invest or what the retailer is going to invest money in and then ordering the fixtures and fittings and refrigeration and everything that goes with it.
So we're still at the relative early part of that program. That will accelerate as we have a much clearer set of modules that we're buying to that retailers will buy into. We're still 100 stores in this year refurbished is still a big number of stores for something that's still in its second year.
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Craig Woolford, Citigroup - Analyst [56]
------------------------------
Sure. Lastly just quickly is there any reason, after the double negative, is there any reason why we shouldn't expect the normal split of EBIT to be 45% first half, 55% second half? Should we get to a normal EBIT split of what we've typically seen from the Metcash business?
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Brad Soller, Metcash Limited - CFO [57]
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I think Craig when you actually see -- there's been so much noise as you go through over the last couple of reporting periods as you have had the incremental investment and the transformation plan through price investment and other investments. I think as I said, we are now cycling through that noise. So once we actually get through this year end even in the second half we actually got like for like comparisons. So you should get back to a more normalised split absolutely.
------------------------------
Craig Woolford, Citigroup - Analyst [58]
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Okay thank you.
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Tom Kierath, Morgan Stanley - Analyst [59]
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Good day guys. It's Tom Kierath from Morgan Stanley. Just a couple of questions for Brad, good day --
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Brad Soller, Metcash Limited - CFO [60]
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It's a disproportionate number of questions for me. I think you guys should start keep sending them back to Ian.
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Tom Kierath, Morgan Stanley - Analyst [61]
------------------------------
I just want to understand how you're accounting for the insurance claims?
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Brad Soller, Metcash Limited - CFO [62]
------------------------------
Yes.
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Tom Kierath, Morgan Stanley - Analyst [63]
------------------------------
Is it just the extra cost that you're incurring by getting the stock to the retailers? Is it that as well as that lost sales from the out of stocks that you had in the first half?
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Brad Soller, Metcash Limited - CFO [64]
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So we have a comprehensive insurance policy as Ian actually said. So we are insured both for the incremental costs and for loss of profits. We have actually raised a debt as you saw in the accounts. Our plan to date AUD53 million to which we've been paid AUD20 million to date. So we are carrying AUD33 million debtors in the book. The easiest way to actually look at it Tom, is that the results that we actually showed for each of the individual pillars has been adjusted for the impact of how on the basis of all those costs are actually recoverable from the insurance company. So there's no great distortion as a result of the hail.
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Tom Kierath, Morgan Stanley - Analyst [65]
------------------------------
So what was the impact on sales do you think of the outer stocks that happened?
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Brad Soller, Metcash Limited - CFO [66]
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So we haven't actually called that number out but the number would be roughly, correct me -- it's about -- sorry?
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Ian Morrice, Metcash Limited - CEO [67]
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1%.
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Brad Soller, Metcash Limited - CFO [68]
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About 1%, alternatively it's about AUD25 million, yes.
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Tom Kierath, Morgan Stanley - Analyst [69]
------------------------------
Okay 1%, thanks. Secondly, just on CapEx I think six months ago you said AUD80 million to AUD90 million generally for CapEx first half was AUD26 million. Are you still there? Is there a different line of thinking now with CapEx, should it still go back to that AUD80 million to AUD90 million level broadly?
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Brad Soller, Metcash Limited - CFO [70]
------------------------------
I think it's going to come back lower. as you can see. In terms of looking where we stand today, my view on the CapEx is it will actually come closer to the depreciation and amortisation charge. So you should actually see it moving more in the range of AUD60 million to AUD70 million so it will come down Tom.
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Tom Kierath, Morgan Stanley - Analyst [71]
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Sorry and --
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Ian Morrice, Metcash Limited - CEO [72]
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One of the key reasons is that retailers are still self-funding DSA at the moment. So one of our assumptions in that number was that we would be funding -- part funding a fair chunk of the 100 stores but actually the 100 we've got signed up for this year are pretty much all self-funded. So there's a much smaller number in terms of our relative capital going into that.
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Tom Kierath, Morgan Stanley - Analyst [73]
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Then just last one, the AUD50 million one-off cost, is that all expensed or is it going to be capitalised? What's the mix there?
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Brad Soller, Metcash Limited - CFO [74]
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I think it's, so the IT systems if we actually spend it, some of it will be actually capitalised and amortised. So it's a mixture of --
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Tom Kierath, Morgan Stanley - Analyst [75]
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50/50?
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Brad Soller, Metcash Limited - CFO [76]
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Let me reflect and actually come back to you on that number, okay.
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Tom Kierath, Morgan Stanley - Analyst [77]
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Thanks very much.
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Ian Morrice, Metcash Limited - CEO [78]
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No other questions from the floor so at this point we'll go to the phone lines or people on the web and we'll take some questions.
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Operator [79]
------------------------------
Thank you very much. Your first question comes from the line of Bryan Raymond from Macquarie. Please go ahead.
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Bryan Raymond, Macquarie - Analyst [80]
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Hi guys. Quick one just following on from the last question actually -- that funding mix for DSA do you expect that to continue or do you expect that there'd be an increased funding load from you guys on the next wrung or the next load of stores coming on to the DSA program?
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Ian Morrice, Metcash Limited - CEO [81]
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I think we need to expect that ultimately we will invest more than we're currently doing because obviously to some extent we're getting the benefit of low hanging fruit to this point. Having said that, some of our retailers who are investing in the businesses are well funded and there is a growth incentive for them that we pay them for growing the business without us funding it. So we'll continue to expect to have to fund a fair proportion of it and we'll plan for that in our capital plans but in reality we may find that retailers continue to find the funds to do it.
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Bryan Raymond, Macquarie - Analyst [82]
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Okay great and then just one team score, you mentioned earlier it's slightly up year-on-year, how is it tracking in fresh and how does that compare to other categories?
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Ian Morrice, Metcash Limited - CEO [83]
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As I called out certainly in the DSA stores is the biggest impact, single impact on fresh -- both our growth and our team score. Obviously as we roll out more modules like cheese and value added ready meals and so on then obviously that pushes up our team score.
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Bryan Raymond, Macquarie - Analyst [84]
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Right so just to confirm overall then fresh team score, would that be up even inclusive of the impact of DSA or would that still be down?
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Ian Morrice, Metcash Limited - CEO [85]
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I haven't broken out the fresh as it happened so rather than call a number out I would simply say that with what I've called out in the slides and what I've said there, you would conclude that the fresh team score would be up slightly, yes.
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Bryan Raymond, Macquarie - Analyst [86]
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Great, thank you.
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Ian Morrice, Metcash Limited - CEO [87]
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Okay.
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Operator [88]
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Your next question comes from the line of David Errington of Merrill Lynch. Please go ahead.
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David Errington, Merrill Lynch - Analyst [89]
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Morning Ian. Morning Brad. Can I just on the Huntingwood disruption just get the numbers a bit more in simple terms. So it's AUD90 million cash impact from excess inventory in the chain, is that right?
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Brad Soller, Metcash Limited - CFO [90]
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David, that's our estimates of it. It's a mixture of the two adjustments we've actually made there. One is to the insurance receivable which is about AUD33 million and the balance of AUD60 million is our high levelled estimate as to the additional inventory that we've been required to carry due to the fact that we're actually operating out of four DCs and there is some inventory still sitting in Huntingwood which we haven't been able to get access to.
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David Errington, Merrill Lynch - Analyst [91]
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Okay so the AUD33 million is that operational or is that the capital damage?
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Brad Soller, Metcash Limited - CFO [92]
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So it's operational predominant in nature. It's a mixture of some inventory write-offs which have been signed off by the insurance company. Additional line haulage costs as Ian mentioned we are actually fulfilling the New South Wales stores out of Queensland and Victoria so we've got additional trunkage costs associated with that. There's additional labour costs as we actually go through which -- it requires due to, as I said, because we're operating out of those four DCs. So it's predominantly, well it's almost entirely operational, OpEx in nature.
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David Errington, Merrill Lynch - Analyst [93]
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The physical part of it, when does that start coming through?
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Brad Soller, Metcash Limited - CFO [94]
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Sorry can you repeat that David?
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David Errington, Merrill Lynch - Analyst [95]
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The physical cost of replacement?
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Brad Soller, Metcash Limited - CFO [96]
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In terms of the systems -- in terms of the shed or in terms of the inventory?
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David Errington, Merrill Lynch - Analyst [97]
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Yes everything, yes, when does that start coming through?
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Brad Soller, Metcash Limited - CFO [98]
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So in relation to the shed, the shed is obviously not our shed so that actually belongs to the landlord and the cost of actually repairing that are borne by the landlord. We have done everything we can to actually protect the Mustang KNAPP systems. There will be some OpEx costs associated as we are required to actually fire those systems up again. Once again those will be covered by the insurance company. We should have no significant CapEx costs as a result of this claim.
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David Errington, Merrill Lynch - Analyst [99]
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Okay, second question, that was well answered -- second question Ian mentioned I think you've got AUD1.2 billion of addressable costs to take which is where you're going to be having the phase two of the cost savings. What level would that be increasing at Brad? I think you mentioned with EVAs and normal cost inflation et cetera, what sort of level of cost inflation do you see in that AUD1.2 billion?
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Brad Soller, Metcash Limited - CFO [100]
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So the biggest component of that is the labour costs which is set out in our EVA agreement and the other ones are lease which under Australian leases tend to actually only have upward only rent reviews. So the assumption for that should be inflation David. So if you actually use a number of somewhere between 2% and 3% so you take the mid-point to 2.5% you can't be far wrong.
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David Errington, Merrill Lynch - Analyst [101]
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When is your next EVA up for renewal?
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Brad Soller, Metcash Limited - CFO [102]
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Off the top of my head I don't know, I'll have to come back to you. I don't know if one of you guys know?
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Unidentified Company Representative [103]
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(Inaudible).
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Brad Soller, Metcash Limited - CFO [104]
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So my colleagues in the front say it's continuously rolling.
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David Errington, Merrill Lynch - Analyst [105]
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Okay. My third question is more to you Ian, the Tmall direct supplying through Alibaba, that raises my eyebrows because a lot of food producers with the low Aussie dollar are starting to look at direct whether it be that it's a baby formula situation or whether it be honey, meat, even vitamins. I'm interested as to what your stance for this is likely to be and what sort of precedent it sets that you as a wholesaler now may be looking toward importing more into China et cetera rather than direct sourcing or sourcing your customers? So I'm just interested as to where this is going to end up?
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Ian Morrice, Metcash Limited - CEO [106]
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Well at this point David it's really testing the Chinese consumers appetite for Australian brand as an Australian made product. Although there's a lot written about baby formula and so on it's actually for us more broader than that that there is high demand for Australian product. The question is whether we as Australia's largest wholesaler and representative of Australian made and branded product, whether there's a role for us to play in exporting that.
This particular trial is really just to test that as a full turnkey solution with Alibaba so we don't have, there's no requirement for us to have a big team on this. They run the website for us and we have an office that does sourcing up in Shanghai already and they're also managing this particular project at that end. It's very small scale at this point but there could at some stage be a larger scale opportunity for us in exporting Australian product to that market.
You will have read like us, the growth in affluent middle classes in that country is quite extraordinary as is the online growth in that country extraordinary. The desire for products from our part of the world is very difficult to satisfy that demand. So we're really just seeing whether there's a role for us to participate in that growth or not.
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David Errington, Merrill Lynch - Analyst [107]
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Did the Chinese come to you Ian or is this something that you've thought about? What sort of products are you testing at the moment?
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Ian Morrice, Metcash Limited - CEO [108]
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We went to them and if you actually go on the Tmall site and key in Metcash it will bring up our site. We've actually called ourselves Metcash as opposed to IGA and one of the other brands because when consumers then click through to find out whether we're a big company and have got credibility then they go through to our corporate website and the consumer sees the size of Metcash and the businesses we're in. We're selling a very narrow range of consumer products including branded products like TimTams and Maltesers and Weet-Bix and some others as well as Black & Gold. So it's a very narrow range of products that originate from Australia.
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David Errington, Merrill Lynch - Analyst [109]
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Suppliers are happy with this and your customers are happy with this? Is everyone -- it's a fairly radical move.
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Ian Morrice, Metcash Limited - CEO [110]
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Yes it's a very small scale trial and I think everyone --
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David Errington, Merrill Lynch - Analyst [111]
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Yes but obviously you're doing it for it to lead into something bigger.
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Ian Morrice, Metcash Limited - CEO [112]
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Yes but at the end of the day we're a wholesaler and if we can help our suppliers facilitate a growth for them in that market why, not? I mean --
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David Errington, Merrill Lynch - Analyst [113]
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Okay.
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Ian Morrice, Metcash Limited - CEO [114]
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-- the suppliers of Australia have to access that market somehow so rather than doing it through multiple points of contact, why would we not be the main point of distribution. We've got distribution centres at every point of Australia as well both for incoming and outgoing so it just seems to make sense.
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David Errington, Merrill Lynch - Analyst [115]
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Yes, okay thanks Ian.
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Ian Morrice, Metcash Limited - CEO [116]
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Thank you.
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Operator [117]
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(Operator instructions) Your next question comes from the line of Grant Saligari from Credit Suisse. Please go ahead.
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Grant Saligari, Credit Suisse - Analyst [118]
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Thank you. Good morning. I was wondering whether you could actually comment on the basket competitiveness within the IGA system given you've made price investment, obviously price is moving with some of the competitors as well. Is there a measure that you can indicate as to how competitively IGA basket is now?
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Ian Morrice, Metcash Limited - CEO [119]
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Well I'll pass to Steven in a moment to comment about that. We do price check weekly against Woolworths and Coles with the price match basket. So there's a process that sits behind that in order for us to remain with their prices as those prices move. Do you want to make any further comment Steven?
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Steven Cain, Metcash Limited - CEO Supermarkets [120]
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Yes the only thing I'd add to that is obviously our retailers determine what prices they charge across the vast majority of the range. Obviously fresh is almost half the basket these days if you believe the home scan data and there's a lot of the retailers who are in highly competitive situations that are price matching across what could be regarded as most of the store. In other locations it's a different strategy.
What I would say is the number of price competitive products is increasing all the time. What you have to remember about IGA and many of our other customers is they actually don't have a mid-tier private label brand and if you believe that that might be 15% of what's out there then that's still to come for our retailers and that will be happening over the next year or so. So there's a lot of upside for our retailers versus where everybody else is today.
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Ian Morrice, Metcash Limited - CEO [121]
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Thanks Steven.
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Grant Saligari, Credit Suisse - Analyst [122]
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I was sort of hoping that you could provide some sort of metric that includes fresh and obviously the branded goods. Also I think you commented that you are continuing a process of obviously having to reset prices as the market moves. What level of deflation should we sort of or price investment or deflation should we be thinking of over the next sort of six to 12 months based on what you're seeing at the moment?
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Ian Morrice, Metcash Limited - CEO [123]
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So there's a couple of parts to that question again and I'll ask Steven to comment in a minute particularly around deflation. The competitiveness of the basket as Steven says is very difficult for us to measure particularly on fresh. In fact our scan data, we do want to improve the quality of the scan data in fresh but unfortunately the vast majority of our retailers don't break down in enough detail the fresh component of the basket.
So it's very difficult for us to measure that at a scan data basis because obviously one way to check the competitiveness is not just to go around the stores but actually take the data and do it that way. That's one of the significant barriers we've got. Do you want to comment further and also about deflation Steven?
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Steven Cain, Metcash Limited - CEO Supermarkets [124]
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Yes I think as I say it's very much down to the retailer overall and we've got a lot of retailers who are highly price competitive and there's others who have different strategies. So it's I think as I said the last time I spoke there's no such thing as an average in IGA and if I gave you an average that's all it is. The pricing that goes on out there is very different by location. What we know about is the price match lines and the Black & Gold lines.
As far as deflation is concerned, I think it's currently running at around the same levels that we've seen of late which is around 1.7%. Having said that, it is changing quite significantly from a promotional perspective and the thing that we're noticing is the promotional discounts are increasing generally in the trade. So it's not so much every day prices which are coming down it does seem to be overall promotional prices.
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Grant Saligari, Credit Suisse - Analyst [125]
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Thank you. Okay, that's very helpful, thank you.
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Operator [126]
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Your next question comes from the line of Richard Barwick from CLSA. Please go ahead.
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Richard Barwick, CLSA - Analyst [127]
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Hi Ian and team. Just a bit of a follow on question around the Black & Gold and also how that ties in with price match. I just wondered what your plans were for Black & Gold given the move by Coles recently or they've announced their plans to drop their bottom tier private label? Will you be moving to a price match on the IGA Signature skews?
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Ian Morrice, Metcash Limited - CEO [128]
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Well I'll pass to Steven to make comment about that in a minute but we don't have a plan to drop the value tier private label. I think that's an important part of price perception and competitiveness. As Steven said earlier the mid-tier is where there's a big opportunity for us to fill a void that we've left there through fairly probably inadequate IGA Signature offer. Do you want to talk further?
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Steven Cain, Metcash Limited - CEO Supermarkets [129]
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Yes I think that's right. We're working on a new mid-tier own brand range at the moment. We've got I think around 100 controlled brands that have been introduced of late which are doing a good job but we are reviewing our strategy. As Ian said, there's no plans to change anything on Black & Gold, it's already the largest budget range available in Australia also the oldest. It appears to be very successful and have a strong customer base and as I say our focus will be on the mid-tier going forward.
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Richard Barwick, CLSA - Analyst [130]
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You're not concerned at this stage that Black & Gold is losing relevance to the other mid-tier offerings?
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Steven Cain, Metcash Limited - CEO Supermarkets [131]
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There's nothing to suggest that in our numbers, no.
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Richard Barwick, CLSA - Analyst [132]
------------------------------
Okay thank you. The only other question I had was I just wanted to confirm Ian, did you talk to a AUD5 million reduction in the convenience EBIT?
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Ian Morrice, Metcash Limited - CEO [133]
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In the half, yes.
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Richard Barwick, CLSA - Analyst [134]
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In the half. So that must be very close to about half the earnings across that period. Can you give us some colour or just talk to your expectations into the second half and into FY17 and I guess in particular do you see that AUD5 million as recoverable?
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Ian Morrice, Metcash Limited - CEO [135]
------------------------------
Well I think the first thing to say is that the majority of it has come out of, is in Campbells where we've repainted and re-fixtured part of the stores. All the stores have been repainted and rebranded. There's new refrigeration in some of those stores. So the cost of carrying out that conversion work to put in a broader food service offer is factored in there. We also went live with the Campbells online digital platform which again there was costs involved in getting that off the ground and in play.
Then the final component is the reduction in re-seller volume not being offset yet by food service volume. The re-seller volume is at lower margin than food service so there's a changing mix there. So the margins are actually overall strengthening as food service becomes a bigger component.
In terms of looking forward, I guess the difficult thing in forecasting that Campbells business is the pace of which the online platform actually gets take-up with the customers we're targeting at. Certainly Campbells has been through a lot of closures in the recent years.
We've been organisationally behind the game in terms of switching it towards good service. Every other wholesaler in the world had done that several years ago so we're sadly in catch up mode. The question is the extent of which the small 18 wide group of sites of Campbells plus the digital platform pointed towards good service customer. The extent to which we can change that business model is a difficult item to predict in absolute terms.
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Richard Barwick, CLSA - Analyst [136]
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Okay. Alright, great, thank you for that.
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Ian Morrice, Metcash Limited - CEO [137]
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Thank you. I think I had one more question -- sorry two more questions in the room here. It's just coming down.
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Craig Stafford, UBS - Analyst [138]
------------------------------
Hi Ian, Craig Stafford from UBS. On slide 24 I think it is, you've got your store movements, stores coming into the banner, stores going out of the banner. I was wondering whether you could talk to whether or how many stores are coming back onto your management that are being handed back by your customers? Is that included in any of those numbers? Is that number growing or flat on PCP?
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Ian Morrice, Metcash Limited - CEO [139]
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Well actually it moves all the time. Stores coming back to us there's a relatively small number of stores at any given point in time. If you talk about the IGA network for example, we'll have around 20 to 30 stores maximum at any given point in time that are in our hands as opposed to in the hands of retailers. We did get some stores back out of the Aurora Group in New South Wales last year and some of those stores have been now resold onto other retailers and some of them we're still managing and some of them we've actually closed. So that recycling is in the scheme of things quite small.
Liquor would be again a very small number of stores in our hands. So these changes in stores moving into the banner tend to be a net number of retailers that we bring into our banners. Sometimes the reason they leave the banner is because we actually ask them to leave if they're not able to comply with our promotional programs that we commit to our suppliers on for example.
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Craig Stafford, UBS - Analyst [140]
------------------------------
Okay thanks for that. The second part of the question is in terms of the amount you're providing for lease guarantees and so forth, is that trend increasing, decreasing or staying flat would you say?
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Ian Morrice, Metcash Limited - CEO [141]
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Do you want to comment on that Brad?
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Brad Soller, Metcash Limited - CFO [142]
------------------------------
We have looked at in terms of lease guarantees and where we are on the head lease and we've actually very rarely, in fact since I've been on board there is not one instance where we've actually done it. So it's really an historic practice. Where we are -- if we do give any kind of support to retailers going forward, what we actually look at now to make sure we've got adequate security and that we're actually being compensated for a retailer using our balance sheet. So when I tell my colleagues in the front row here that they're going to get charged for it, they -- fire alarm, sorry guys. The answer is we haven't given any material guarantees in the last six months.
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Craig Stafford, UBS - Analyst [143]
------------------------------
Okay thank you.
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Ian Morrice, Metcash Limited - CEO [144]
------------------------------
Unless this is a drill this could well be the end of the Q&A.
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Brad Soller, Metcash Limited - CFO [145]
------------------------------
It's one way to cut the questions down to none.
------------------------------
Ian Morrice, Metcash Limited - CEO [146]
------------------------------
Actually we've just established we have no more questions from the room actually. So just to clarify we will come back on that AUD200 million --
------------------------------
Brad Soller, Metcash Limited - CFO [147]
------------------------------
AUD120 million.
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Ian Morrice, Metcash Limited - CEO [148]
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-- because we also have --
------------------------------
Brad Soller, Metcash Limited - CFO [149]
------------------------------
AUD100 million.
------------------------------
Ian Morrice, Metcash Limited - CEO [150]
------------------------------
-- within our calculations our expectation of competitor impacts and I may have got my wires cross on which numbers (inaudible). We have to go I think, yes sorry.
------------------------------
Brad Soller, Metcash Limited - CFO [151]
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This is a first.
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Ian Morrice, Metcash Limited - CEO [152]
------------------------------
There's a fire alarm. Sorry folks.
------------------------------
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