Half Year 2017 Metcash Ltd Earnings Presentation
Nov 28, 2016 AM AEDT
MTS.AX - Metcash Ltd
Half Year 2017 Metcash Ltd Earnings Presentation
Nov 27, 2016 / 11:30PM GMT
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Corporate Participants
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* Ian Morrice
Metcash Limited - CEO
* Brad Soller
Metcash Limited - CFO
* Steven Cain
Metcash Limited - CEO, Supermarkets and Convenience
* Scott Marshall
Metcash Limited - CEO, ALM
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Conference Call Participants
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* Shaun Cousins
JPMorgan - Analyst
* Craig Woolford
Citigroup - Analyst
* Grant Saligari
Credit Suisse - Analyst
* Adam Alexander
Goldman Sachs - Anayst
* Daniel Wan
Deutsche Bank - Analyst
* Richard Barwick
CLSA - Analyst
* Ed Requellan
Macquarie Bank - Analyst
* Tom Kierath
Morgan Stanley - Analyst
* Ben Gilles
PBS - Analyst
* David Errington
Merrill Lynch - 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, if we could ask you to take your seats please, a shame to turn off that fabulous Paul Simon music but welcome to all of you and thank you for taking the time to either attend here in person in the room or on the conference call this morning. Good morning to all of you.
I wanted to start by introducing a couple of members of the Group leadership team with you this morning on my left, Brad Soller, chief financial officer, you would be hearing from Brad shortly.
In the front row, there is Scott Marshall, the CEO of ALM, good morning, Scott. And in the front row also, the CEO of Supermarkets & Convenience, Steven Cain.
One character missing this morning who will be noteworthy is Mark Laidlaw, and many of you may know Mark as a very keen AFL footy player and was in his day, and he is having an old footy injury operated on.
So he is not actually going to be with us in person but we know he is here in spirit and Brad and I will do our best to deal with your questions on the hardware pillar on the way through.
So I wanted to start with our purpose and vision because each of our presentation starts with this for a very good reason. Our purpose of successful independence is not only -- describes very much what the core purpose of our organization is, but it also describes the moral compass under which we make the decisions we make in business every day and every week.
And the model that sits under that is also important to remember that it is an interdependent model and so we like to call it the three-legged stool but you know, retailers ourselves and suppliers are all dependent on each other to make the independent system work.
And it is our collective success that will enable this successful independence to be achieved.
I just wanted to highlight a couple of areas of the vision that we set out for you over a year ago now. Because you are going to see some of these elements come to life in the results and in the presentation this morning.
The first one being Best store in town. And across all of our pillars, we are going to be calling out what we mean by this Best store in town and showing you what that actually means in reality and particularly focusing on the supermarket sector but also true of our other businesses.
Very much about a differentiated offer that wins locally with the shopper or with the tradesman. And increasing differentiation around our locally sourced -- part locally sourced but certainly very clearly differentiated offer.
The second one I wanted to call out is under partner of choice and not only are we consolidating in the liquor and hardware pillars in particular, but our work to become the world class wholesaler that we aspire to is embedded in again, not only in the strategies but in the results that we are seeing coming through particularly from our Working Smarter program.
The final piece I will comment on is Thriving Communities, giving shoppers choice. It is certainly our belief that communities across Australia want to have choice in all the respected markets we operate in and again, we are going to highlight how our -- the family businesses that we support across Australia's communities are doing that today and creating more vibrant communities particularly in the more outlying areas of Australia.
Turning to the group overview numbers now. You will see the sales are broadly in line with last year, and as we called out at our full year results, there was -- you know, we have been through a period of highly competitive trading conditions, and we saw that coming out of the second half of last year and we anticipated it to continue and it did.
One thing I would say at this point is that if I look back on these six months across the three and a bit years I have been in this job, this is definitely the most intense period of competitive activity.
And the reason I say that is it's -- there has been a combination of factors that have flowed through into this period for all participants in the marketplace, and it's quite sobering actually, as you look at the food and grocery, the supermarket sector, basically 1% like-for-like is the industry storm right now.
And so we have seen footprint growth from ALDI obviously and South Australia and WA. We have seen over AUD1 billion of price investment from the market leader and competitive responses to that as well as continued high deflation environment.
And so against that backdrop in that most intense period, we think that we withstood that quite well actually, if you look at our supermarket business in particular.
The Group EBIT nevertheless was down 4% in the half to AUD128.1 million, a continued story of consolidation and growth from liquor driving not only the total and like-for-like sales growth but importantly, earnings growth too, well positioned going forward.
Hardware EBIT up 8%, that is all going to Mitre 10, there is no EBIT contribution from HTH in that number. And so very solid performance from Mitre 10 in the half, but obviously we have strengthened our competitor position significantly with the acquisition of HTH.
In the food and grocery EBIT, it was down 8% and the supermarkets are impacted by that intense competitive period and not just footprint growth from the competitors but actually closures of -- and sales of stores from some independents in the network as well.
And I will talk more about Campbells when we get to the detailed breakdown later. I think there is a few leading indicators that lead us to feel very positive looking forward though.
One is the independent retailers are investing in growing the businesses through either opening new stores or investing in the existing businesses at a far higher rate than we have ever seen certainly in the last three years. There is a much higher levels of investment going into the respective networks.
Hardware and liquor, through acquisition and consolidation and those respective sectors continue to diversify the group's earnings which is very positive going forward. And the Working Smarter program is progressing very well, we've got great traction there and we are absolutely on track to deliver the savings we called out. And of course, as you will see, we emerged from the periods with the continued strong balance sheet.
So let me hand you across to Brad Soller to take you through some more detail in those numbers. Brad?
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Brad Soller, Metcash Limited - CFO [2]
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Good morning everybody. In line with our previous presentations, what I will do is I will fit you through the overall financial performance of the group. And then I will hand back to Ian who will give you some more details about the individual pillars and also spend some and give you some comments as to the outlook.
I will start with the HTH acquisition, this was completed just prior to the half year close. And therefore, it is incorporated in our disclosures from the half year.
We completed the acquisition of HTH on the second of October, and also adjusting for our net cash and working capital, the purchase consideration reduced from AUD165 million we previously announced to AUD163 million, which we funded through AUD93 million of new debt and AUD70 million of -- I'm sorry, AUD93 million of new equity and AUD70 million from our existing debt facilities.
We are still to finalize the acquisition accounting, we have however, provisionally allocated the purchase price as shown on the table on the right. Given the proximity of the acquisition to the half year, it is important to note that these provisional allocations and it is likely that there will be some adjustments when we finalize the acquisition accounting in the second half of the financial year.
We have provisionally allocated AUD128 million of the purchase price to working capital, AUD26 million related to fixed assets, and AUD8 million to deferred tax assets. And as you can see, we have recognized no goodwill in relation to the acquisition.
Our first half results includes three weeks of trading for HTH which contributed AUD51 million worth of sales, conservatively, as we are still to finalize the acquisition accounting, we have not recognized any material contribution to the earnings from HTH for this period.
We have now have control of the business for almost two months, and during this period, we have been able to get greater clarity around our learning assumptions and importantly, as well as our assumptions with regard to synergies.
It is our expectation that the HTH business will generate EBIT of at least AUD10 million in the second half of the financial year, excluding one off costs, and we have targeted annualized synergies of between AUD15 million and AUD20 million by the end of FY2018.
Ian will talk more about the HTH acquisition later in the presentation. Turning now to profit and loss account.
As you can see, group sales was up slightly 0.3% to AUD6.6 billion and EBIT in the second half declined 4.2% to AUD 128.1 million. With the increased contribution from both liquor and hardware offset by a decline in food and grocery.
Ian will expand on the pillar performance later in the presentation, however, let me touch on a number of other lines in the profit and loss accounts.
Net finance costs reported for the half at AUD12.9 million is in line with the prior year. However, you may recall at first half 2016, included a AUD9.6 million relating to a feasibility restructuring undertaken in that period.
Excluding this gain, finance cost were approximately AUD9.5 million lower at this half, versus loss reflecting the significantly lower average net borrowings.
The Group's effective tax rate for the half was [27.5%] which is in line with the prior year corresponding period. We have separately disclosed two items in the half, transaction costs of AUD4.5 million post tax, relating to the HTH acquisition, and AUD3.4 million post tax of working smarter implementation costs.
At the year end, we will also separately disclose all HTH integration costs. Reported profit after tax declined by AUD47 million at first half 2016 included AUD35.1 million from discontinued operations relating to the automotive business that was sold.
The early headlines in the paper focused on that number but a more appropriate comparison will be to look at obviously our underlying profit after tax which was only down AUD4.1 million.
Looking now at the Group's cash flows. The Group has strong cash inflows in the first half, net cash from operating activities in the half was AUD130.6 million, this compares with AUD3.1 million in the first half 2016. The first half 2016 having been negatively impacted by the destruction to the Huntingwood DC following the major hail storm.
Operating cash flows in the half represent the cash conversion ratio of 123%. The cash conversion ratio was however, boosted by approximately AUD40 million of operating cash inflow from HTH in the three week period post completion.
The large HTH inflow is due to the vendor having paid credited balances pre-completion, and as a direct result, the completion working capital was higher by a corresponding amount. This, together with other working capital adjustments were reflected in the working capital to us to be agreed between ourselves and the vendor.
Adjusting for this, the cash conversion ratio in the period was still a healthy 85%.
Net cash used in investing activities was an outflow of AUD141.6 million and includes AUD154.9 million relating to the acquisition of businesses, almost all of which relates to the HTH acquisition. And CapEx in the half was AUD19 million.
We continue to sell down surplus assets that are non-core and these sales together with a net repayment of customer loans generated AUD30.7 million of cash in the half.
The prior year comparative had a net inflow of AUD237 million, and includes the proceeds from the sales of the automotive business.
As I mentioned earlier, we received a net AUD93 million from the equity raising. The solid cash flows for the half together with the capital raising has led to a AUD77.9 million reduction in our net debt.
Turning now to the balance sheet. As I mentioned, the HTH acquisition is included in the first half 2017 balance sheet, albeit on a provisional basis until the acquisition accounting is finalized. I would like to highlight tow points in the slide. Firstly, excluding the working capital acquired from HTH, net working capital is broadly in line with FY2016, and circa AUD50 million lower than the first half 2016.
Secondly, net debt has declined to AUD197.6 million supported by solid operating cash flow.
Moving now to our borrowings in more detail. The lower debt levels reflect the strong underlying cash flows in the half together with our capital initiatives. We ended the year with net debt of AUD197.6 million which equates to a net gearing ratio of 11.4%.
As I have noted previously, our debt position is a low point at the half year and our average borrowings are higher than what was reflected in our half year accounts. The average borrowing for the half being circa AUD375 million.
Given the reduction in net debt, we took the opportunity to cancel an additional AUD140 million of debt facilities. We also refinanced AUD270 million of existing debt facilities which increased our average tenor to 3.3 years.
The average interest rate on drawn debt has been reduced to 4.1% and the Group has a balanced debt maturity profile with no substantial maturities in FY2017 or FY2018. These metrics highlight that the group is on a strong financial footing and its ability to continue to invest in growth opportunities as well as further efficiency improvements.
I will now hand it back to Ian.
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Ian Morrice, Metcash Limited - CEO [3]
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Thanks, Brad.
So let us start with the overview by pillar and the services -- the sales and EBIT for the various divisions. I'm going to go into the detail of each so the only thing I want to draw attention to from this particular slide is the pie charts in the right hand side continue to -- obviously going forward with the addition of home timber, in particular, will continue diversification of our earnings book in terms of sales and earnings going forward.
So let me get into the food and grocery results now.
Marking conditions I have talked about, I guess, one aspect that hasn't been touched on so far is just is part of the price investment and promotional activity, the loyalty and investment and price behind loyalty -- our relaunched loyalty schemes has been particularly intense, again, in the period to end September.
Against that though, I think it's important to note the amount of reinvestment going in by multi-store owner groups. I can't think of a single owner across the network who isn't reinvesting and we just called out some of the bigger more familiar names there, but we got a number of multi-site owners across all our states who are all investing in their businesses.
And a further 18 new stores opened in the first half, obviously that is a progressive number so a lot of those openings were towards the end of the first half and it doesn't offset the closed and sold stores in this particular period.
But forward of that and 20 additional new stores in the pipeline for the second half to come.
The Diamond initiative is just a recap that the price match investment is reflected in the earnings base, price match will continue to evolve and as you would expect, but nevertheless, we consider that investment to be built into the base now.
190 DSA refurbishments completed, 60 more to come in the balance of the year, still getting fabulous increases per retailers and for us in terms of withdrawals from the warehouse in the midteens.
The Core Ranging program which we also called Mini DSA, those pilot stores have been completed, we have analyzed those results and so now, that gives us much more clarity to move forward and start to make the range changes that we have talked to you about in times of reducing the number of skews in our warehouses but also adding in a number of new skews and in a lot of the growth categories and growth areas.
The working smarter program in food and grocery is delivering significant results and there is more to come in the second half and I will come on to that. Community Co, which is our mid-tier private label, that is in fact, in the last week, has now launched with the consumer and it is on-shelf now starting with just over 20 skews to begin but will very quickly ramp up to 100 over the next couple of months.
And you can see some of the examples of that Community Co-branding on the right of the slide.
In convenience we have completed the CSD contract negotiations, we have worked hard on cost out program within that pillar and we do expect to generate a positive EBIT for the second half from convenience.
So let me now just focus for a second on Best store in town this is happening across all states, and I guess what I would say is and we will probably talk more about this in our one on ones later, but in Sydney and New South Wales in particular, we are starting to see significant reinvestment and remodeling expansion and development of stores which is great to see because New South Wales as a state has probably lagged behind the others in truth and so we are starting to see some great examples here in Sydney of Best store in town.
But across all five states, we've got retailers doing a fantastic job, Dromana and Victoria which is a Ritchies store, just undergone a DSA and it is absolutely stunning and the characteristics of these stores, none of them are the same but what is the same is the approach and under IGA, you will see we have put it in the appendix on page 29, and there are really three components to differentiating an under IGA.
Number one is to develop the individual character of the store, and what we mean by that is about encouraging storeowners to be famous for something, in fact, in many instances, famous for several things locally, in areas that cannot easily or indeed, at all, be replicated by the competition.
The second piece is Service with soul and most of the competition in this sector are reducing service and part of the mix in independent retailing is being able to still deliver that local service, even knowing the names of their customers.
And number three, of course, is Heart of the community and if you remember, on average, these are smaller stores than the chain stores we are up against and they are very clearly differentiated on a local basis with local supply.
So that is the precursor to the breakdown of our sales results and then our EBIT results. You would have noted that we have gone as transparent as we can on both of these pages so that we give you as much accurate information as possible to work out what is happening in our underlying business.
Total sales declined 1% but if you take into account the sale of Supabarn and other closures, which hit us hard in this first half, that is 1.5%. So you see that called out later on in the slide -- on the same slide.
There is definitely an increased weighting of tobacco in the sales mix which is reflective of that 10% plus excise increase. We think that that is also evident in all the competitors' numbers. Those, the stock cigarettes, anyway.
And again, some of these impacts that we've seen in this particular period were predictable and the sale of store is certainly one of those, as was the rollout of competitive footprint in South Australia, and WA.
What I would comment on that is that the rollout of that competitive footprint has pretty much had the impact that we had anticipated, so it's not been a greater impact than we had anticipated in our calculations.
Partly offset by our strategic initiatives, the diamond initiatives and the effect of one or two new stores coming through, but deflation still at a pretty inflated level at -- sorry -- deflation at a high level of 1.8%. You can't inflate deflation, can you now?
Teamwork score pleasingly maintained at 70%. That's an important measure for us, obviously, internally, and I guess the fact that the market has seen this intense competition -- there's been so much price investment put in by the major chain stores -- for our retailers to be still up, like-for-like, against that sort of intensity, we're pretty pleased with that outcome.
And that's the fifth straight reporting period of like-for-like growth.
The other thing I'll pause just for a second to call out is that our like-for-like is an all-in like-for-like. What I mean by that is we don't strip out stores that have had a new competitor open, we don't strip out stores where a new IGA store has opened in the neighborhood.
We don't strip out any of that stuff. And we know that not everyone calculates the like-for-likes the same, but ours is what we would call an all-in like-for-like number.
In convenience, sales declined 2%. We did get an increase in CSD sales in the half just gone, but that was more than offset at a top line level by a continued decline in Campbells' revenues.
What I would say about the Campbells' revenues before I go on to earnings is that in -- certainly in the later part of the half and in November we've seen a much-improved trajectory from Campbells.
In fact, before I move off it, I would also say under the sales that we've also seen a much-improved trajectory from IGA during the November month than we saw in October, September particularly, so we're encouraged by that.
Again, transparency is important here because it's really important that you get an understanding of the moving parts in our business. There are no shortage of moving parts, but in the supermarkets business, to see earnings decline by AUD2 million in the period, with a AUD4 million drop -- sorry, 4% drop in sales ex tobacco, is quite a robust performance.
There was further margin pressure because of that change in sales mix and because of the promotional intensity. But Working Smarter, early indications are that it's proving to be quite an effective offset to some of that margin pressure.
In convenience, we will not and cannot hide a disappointment at convenience -- particularly on the earnings front. And you can see there that we've taken some more write-downs, but it was half and half. You look at that AUD4.3 million, it's about half and half between write-downs and the effect of sales decline in Campbells.
The CSD contracts, which are particularly with 7-Eleven and BP, they have been completed and we will see the positive impact of those come through in the second half.
We haven't really seen them in the first half result here, but we will in the second. And once again, Working Smarter savings, we're well underway with quite a significant cost out program in the convenience business, including the combination of the Campbells and CSD management teams.
Moving on to liquor. Again, a continuing story of the trends in this marketplace with less volume consumption but more people trading up into better quality products and a particular focus on that.
But also a continuation of the trend of smaller, more frequent purchases playing to our strengths of being locally located, conveniently located stores.
Of course, there's still a high level of competition, particularly from the big box retailers, in this sector as well. But against that, we continue to grow ahead of the market, particularly in our managed banner groups, under IBA.
And again, there's a story of continued investment from the retailers in that sector in improving the offer for the consumer.
But we're also -- we've adapted our category plans to take advantage of the trends and the changes in demand for different types of products that I called out earlier. The private label, predominantly in wine, but it's also a very important factor, not just as a price factor, but to drive margin for us and for the retailers.
And the consolidation strategy continued. Thirsty Camel, you may know, we already have in our portfolio in Queensland, so we've added New South Wales and Tassie in September. We've also -- or we're going through the process of acquiring Big Bargain in Tasmania.
Those of you who are familiar with Tasmania will know Big Bargain, and that's going to come through during the second half. But this story about independent retailers investing in improving the stores is also very much part of the program in liquor.
We just called out there a recent Roy Morgan study where Cellarbrations came out with an extremely high satisfaction score from consumers at 93%. Again, these local operators really know how to do it right.
In terms of the financials, total at 1.6%. IBA, which is the retail bannered Group up 6.1 percentage points, up 2.5% like-for-like. We've now got 55% of our sales coming through that IBA bannered network.
EBIT leverage is still improving, so up 4.6% to AUD27.1 million, and there's a couple of combined factors that play there. We're working very hard to be -- continuously be the partner of choice for independents in this sector, by simplifying our business model.
We've recently put in some electronic ordering that really makes us a much easier business to do business with, for both the retailers and the suppliers. And of course we continue to improve our cost measures in that business as well.
Now on to hardware. It's been quite a significant change period obviously, in this sector, and there's been a fair bit of disruption with the liquidation of stock from Masters -- coupled with some unseasonal slow start to the warmer season.
Very solid performance from Mitre 10, continuing their programs of investment in the network. But really, the big story here is obviously the Home Timber & Hardware acquisition.
We're absolutely delighted to have landed Home Timber & Hardware. Brad covered earlier a number of the detailed components of that particular acquisition, but it's absolutely firmly in line with our strategy to be the leading wholesaler in all the pillars that we operate in.
Doubled the size of the pillar overnight, so it's now a AUD2 billion business. We are very pleased with the positive response from, not just Mitre 10 members, but also Home Timber & Hardware members out there.
There's been a huge amount of contact and communication with the broader network, and I think they're all genuinely positively looking forward to the opportunities that we can create together as a bigger business.
The integration is not only commenced but well under way. Three key components in terms of consolidating the support office and distribution -- the various distribution facilities, starting with Dandenong in Victoria.
The inventory review core ranging will be where we work with the suppliers and the members to get a core range that is much more efficient for us to supply and of course, provides better opportunities for suppliers and savings for members.
And finally, the systems integration will probably take the longest of the lot, because with systems nothing is that straightforward. So, for the next 18 months those are the three components.
Brad said earlier, AUD10 million in the second half expected, and because we've now had that opportunity to look at the business and how those synergies will unfold, we're calling and we're comfortable to call out a larger number of AUD15 million to AUD20 million, to come from hardware.
In the first half, there were sales, but no EBIT from Home Timber. We only had the business for just over three weeks, but we did call out the sales there. And in Mitre 10 itself, if you cycle -- we're cycling the effect of some closed stores and the K&D stores in Tasmania that left the network, so like-for-like up 1.7%.
And you can see all of that EBIT coming through is actually from Mitre 10. No contribution yet from Home Timber. So up 7.8%, and that's the flow-on of the Working Smarter savings that we implemented in the second half of last year.
The final thing from this slide is to all out the new name we're giving the pillar, which important for all the members in particular, that they're now being supplied by the Independent Hardware Group.
The Independent Hardware Group is, very much signifies the coming together of Mitre 10, and Home Timber, in every way, shape and form, and that's gone down particularly well with Home Timber members, as you might imagine.
Working Smarter. It's been a feature of this presentation all the way through, but achieving great traction. We will deliver our annualized target savings. We're now confident that we will overachieve our year one target. And four key components called out there.
But one of the reasons you see a big flow through into supermarkets and convenience from this program is there's not just the realignment of the business models in supermarkets and convenience, but also there's a distribution savings.
And most of those distribution savings are actually attributed and will hit the -- positively hit the P&L of supermarkets and convenience, going forward.
We've also called out there the likely one-off implementation costs for the full year, so that you're clear on those.
And now to the outlook statement. Just a reminder that this year for us there's a 53-week year. That's four trading days in April -- four extra trading days, that is. And really set out for you here what our expectations are, going into this second half.
The liquor pillar will continue its positive momentum. We've got -- not only got the plans in place -- we've got a number of those consolidation activities flowing through into the second half. The hardware pillar obviously starting to see the benefits of Home Timber & Hardware come through, as that gets put together within the Metcash Group.
And in the food and grocery pillar, despite the significant headwinds, and although I don't expect the competitive environment to ease in a material way in the second half, we certainly don't see deflation continuing at the levels that we have seen it in the first half, due to a number of factors, not least of which the fact that the deflation on produce and fresh goods is -- fresh food is moderating somewhat, as we come towards the end of this calendar year.
And we expect second half 2017 earnings to be greater than the second half of 2017 for the supermarket and convenience pillar. Three key things we're calling out that will drive that. One is the effect of that addition four trading days. The Working Smarter program, as you would expect, gathers momentum over time and so therefore we'll see a bigger impact of that in the second half than we saw in the first half.
And we're increasingly confident about the repositioned convenience business, the combined one wholesaler business of Campbells and CSD being able to not only improve the trajectory of sales for Campbells, but also, more importantly, fundamentally change the earnings trajectory. So, we're expecting a positive EBIT in the second half.
We've already guided that we're -- there's not going to be a dividend for FY2017, but we do expect to recommence the dividend in FY 2018.
I suppose a final comment from me is that as a Group we continue to focus on successful independence and supporting Australian Independent Retailers to be the best store in town.
That concludes our presentation for this morning. I'd now like to hand over to begin questions from the floor. If you could raise your hand, then we'll come to you with the microphone. And if you could state your name before your question, so that -- particularly for people not present in the room -- they know who's asking the question.
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Questions and Answers
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Ed Requellan, Macquarie Bank - Analyst [1]
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Thanks. It's Ed [Requellan] from Macquarie Bank here, Ian. I think given the intensifying conditions, it's a pretty good outcome, but I'm just wondering if you can provide some color just in terms of the cost out, particularly in the supermarkets side? You said it's second-half weighted, but what kind of contribution came through in the first half?
And also, Huntingwood, obviously, back online. Can you just explain what the benefits, if there's going to be a continuing benefit from an operating cash flow perspective, but also, I think from memory, in terms of the Working Smarter program, Huntingwood benefits weren't actually included. If you can just confirm that?
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Ian Morrice, Metcash Limited - CEO [2]
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Yes. There's three questions there and I'll pass to Brad for the Huntingwood component of that question.
I think, as far as Working Smarter savings are concerned, basically what we've called out is that we're looking to offset the margin pressure we're getting from the -- emanating from all the top line and deflationary pressures that we see.
I mean, when we've got deflation running at 1.8%, we have to run harder and faster to stand still, so Working Smarter is absolutely targeted at offsetting as much of that as we possibly can. What we're not doing, though, is breaking out the -- we're not breaking out the financials around working smarter, as attributed to that particular pillar, at this stage.
Do you want to comment on the Huntingwood?
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Brad Soller, Metcash Limited - CFO [3]
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Yes. Just in relation to the cash flow -- you rightly called that loss so that there was elevated working capital because we had to run a number of DCs. There was a combination of inventory stored in multiple places and we also called out the fact that there was a debt on -- in relation to the insurance claim.
We've continued to progress the insurance claim. We've made significant progress, but there is still an amount outstanding in relation to the insurance claim -- not that it won't be paid, but the level of debt -- the balance outstanding is about the same as it was in the corresponding prior year period.
Obviously, we have worked hard to get the inventory down and now, as we back in Huntingwood, one of the benefits of the cash flow was the reduction in inventory -- this office as well.
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Ian Morrice, Metcash Limited - CEO [4]
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But also confirming that nothing in our Working Smarter AUD100 million is attributable purely to Huntingwood. There are some distribution savings that are the nature of the way in which we run our distribution centers, but nothing specific due to the automation of Huntingwood, if that's what was behind the question.
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Ed Requellan, Macquarie Bank - Analyst [5]
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Yes. No, exactly, so you have to go back a few years, when we're talking about the potential opportunities from Huntingwood.
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Ian Morrice, Metcash Limited - CEO [6]
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Yes.
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Ed Requellan, Macquarie Bank - Analyst [7]
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But I'm just wondering whether you've had the opportunity to revisit the longer-term opportunities of efficiency improvements, et cetera? And what that could mean.
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Ian Morrice, Metcash Limited - CEO [8]
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That's a good question, and because we were due to do a post-amendment rotation review when the roof fell in, on the building, we've really, literally, just got it recommissioned, so, once it's fully up and running we will review its performance against its -- against what the business case was many years ago, and take a view at that point.
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Ed Requellan, Macquarie Bank - Analyst [9]
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Thank you.
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Tom Kierath, Morgan Stanley - Analyst [10]
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Morning. It's Tom Kierath from Morgan Stanley. I've just got a couple of ones on food and grocery and one on hardware. I think you're saying that the impact of store closures in supermarkets about negative 1.5% in the first half. How should we think about that in the second half? I think you're saying 20 -- an extra 20 stores. Should it be flat?
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Ian Morrice, Metcash Limited - CEO [11]
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Brad, do you want to take (multiple speakers)?
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Brad Soller, Metcash Limited - CFO [12]
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Yes. The closures of supermarket stores sample is actually at the back end of the financial year, so the impact in the second half of the financial year should be broadly similar to what it actually impacted in the first half, on us.
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Tom Kierath, Morgan Stanley - Analyst [13]
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Okay.
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Brad Soller, Metcash Limited - CFO [14]
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On a half-on-half basis, yes.
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Tom Kierath, Morgan Stanley - Analyst [15]
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Okay, but you're not prepared to say what the drag will be or the uplift will be from stores in the second half?
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Brad Soller, Metcash Limited - CFO [16]
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No. The key thing in relation to the drag from closed stores, the largest being Supabarn, you should assume will be the same.
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Tom Kierath, Morgan Stanley - Analyst [17]
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Okay. And 1.5%? in the second half, you're seeing, Brad?
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Brad Soller, Metcash Limited - CFO [18]
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Yes.
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Tom Kierath, Morgan Stanley - Analyst [19]
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And then the difference between supermarket sales growth and -- which was negative 1% and ex tobacco was about 3%, so I think it was negative 1% to negative 4%.
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Ian Morrice, Metcash Limited - CEO [20]
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Yes.
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Tom Kierath, Morgan Stanley - Analyst [21]
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The gap has widened, which implied that your tobacco business has accelerated. I know that there are excise increases that have gone through, but that's happened in the last three or four years now. Why did the tobacco business accelerate and grow?
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Ian Morrice, Metcash Limited - CEO [22]
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Well, there are two components there, and I might ask Steven to comment as well, about the gap between the 1% and the 4%.
But tobacco -- it's fair to say tobacco sales have held up very robustly, given the fact that they went up by over 10% in the excise increase. If anything, we were surprised how well tobacco held up.
But when you look at the difference between the 1% and 4%, it's a combination of those factors we set out. Steven, do you want to make a specific comment around any of the factors that pull us from 1% to 4%? The microphone's there.
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Steven Cain, Metcash Limited - CEO, Supermarkets and Convenience [23]
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Yes, there has been growth in tobacco. I think we've done a slightly better job this year in terms of trading with the retailers. And I think we've probably -- I think most of the tobacco companies would say we've got the best offer out there in terms of service on tobacco, particularly with regard to where the competitors might be turning what were tobacco kiosks into customer service desks.
And I think from -- certainly from the tobacco company point of view they appreciate the fact that you can get served very quickly in most of our stores.
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Tom Kierath, Morgan Stanley - Analyst [24]
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Thanks. And just the last one on hardware, just the AUD15 million to AUD20 million of synergies, that excludes any turnaround in the Company-owned stores. So, the way that we should think about it is any improvement you get in those Company-owned stores -- I think it's about half the store network -- should be on top of the AUD15 million to AUD20 million in cost synergies?
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Ian Morrice, Metcash Limited - CEO [25]
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Well, I think it's fair to say that we haven't banked on an improvement in those stores in our business case, for the business going forward, so we're not reliant on those stores lifting performance. And if -- as we expect -- over time we do lift that performance, we'd expect, yes, further improvement from the business. But whether it's -- whether you see it in synergies or whether you see it in the underlying earnings of the business, over time, we'll have to address that with you when it happens.
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Tom Kierath, Morgan Stanley - Analyst [26]
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Thanks again.
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Brad Soller, Metcash Limited - CFO [27]
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(Inaudible, microphone inaccessible) actual retail operations as well. So, as Ian says, the result of the synergies will come through there as well.
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Ian Morrice, Metcash Limited - CEO [28]
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Brad, can you talk in the microphone for the benefit of the people on the phone.
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Brad Soller, Metcash Limited - CFO [29]
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Sorry. I'll come closer.
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Ben Gilles, PBS - Analyst [30]
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Hi, it's Ben [Gilles] from [PBS].
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Ian Morrice, Metcash Limited - CEO [31]
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Ben.
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Ben Gilles, PBS - Analyst [32]
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Just a question around the grocery EBIT. Now, do you say this is the base period in terms of we should start to see that year-on-year improvement -- obviously, you said second half, but looking beyond that? And just following on from that question around Price Match Two, there's been a lot of talk around the trade that you guys are potentially looking at Price Match Two -- how that would fit into that dynamic too?
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Ian Morrice, Metcash Limited - CEO [33]
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Yes, thanks. [You've trapped] me with the second part of that question, but I'll come back to that.
Well, let me start with Price Match Two, which is basically an evolution of Price Match. Nothing's forever -- but us maintaining our prices at the best of Coles and Woolworths is something we've put in place as part of our pricing proposition.
Price Match Two you've heard talked about is simply an evolution of what that actually means, which products are in the basket, how we deploy the Price Match program. It's as simple as that. It's not another additional wave of price investment from our perspective.
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Ben Gilles, PBS - Analyst [34]
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So, from a funding perspective it's not another big hit to Metcash in terms of needing to fund it. It's just engaging with suppliers, talking about which categories we might put a bit more money into those sorts of things?
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Ian Morrice, Metcash Limited - CEO [35]
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No. That's not what it's about.
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Ben Gilles, PBS - Analyst [36]
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Okay.
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Ian Morrice, Metcash Limited - CEO [37]
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And the second thing, about how do we look at the business going forward -- it's very difficult to predict more than six months out, given what we've just seen in the last six months in terms of competitive activity. We know what we know, but we don't know what we don't know.
I guess what I would say is that when we look forward into the six months we're already in and trading in, we're calling out we believe we can lift our earnings performance in that six months. What we're not prepared to do at this point is make predictions or forecasts further out than that at this stage.
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Ben Gilles, PBS - Analyst [38]
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And a second one from me. Just how much capacity have you got in your distribution at the moment? Particularly as you look forward to all 18 months when you do all the work around ranging?
I suppose, there's probably a general consensus that you guys have probably got one of the best supply chains to clear out single [PCs] things to do capabilities like online or partnering with a strategic partner, be it Amazon or someone like that.
Is that something you guys looked at, in terms of trying to leverage online in a bigger way to get more fixed cost [fractorization] out of your DCs? And how much capacity do get in there?
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Ian Morrice, Metcash Limited - CEO [39]
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Well, we continue to look at opportunities to leverage the distribution facilities. There's no question about that. And from a capacity point of view, certainly, as we change the ranges, we'll increase the amount of capacity we have.
We have got capacity in certain states at the moment, but in other states we're actually at or ahead of capacity -- if you take South Australia, for example. Which is why we're looking at a new distribution center down there, so it's not a one-size answer to that particular one, if you look across the states.
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Ben Gilles, PBS - Analyst [40]
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Would you ever look at a strategic partnership with someone, say, in the New South Wales or Victoria, to really beef up the capacity and get that fixed cost leverage through the DC?
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Ian Morrice, Metcash Limited - CEO [41]
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We certainly could do, or would do, depending on what the medium to long-term impacts of that might be. We'd certainly take that medium to long-term view very carefully, as well.
David.
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David Errington, Merrill Lynch - Analyst [42]
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Hi. David Errington. One general question, and then one on the cash flow, if I may. You made comments about 1.8% price deflation, following on from Ben's comments, et cetera. How is this going to be sustainable, do you think? What's going to happen with the industry, do you think, going forward? You made comments that you're expecting it to be better in the second half. I'd like you to elaborate on what gives you that confidence.
And how can you -- what can you do if the major competitors keep going down this crusade of taking prices down to the bottom? What can Metcash do? Because my understanding is that price deflation's a killer of a wholesale type business.
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Ian Morrice, Metcash Limited - CEO [43]
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Well, certainly deflation, in many respects, does affect us more materially on the surface of it, because we don't have the labor costs and all the other offsets an integrated retailer has.
I think there is a requirement for a lot of our competitors to invest in the stores, as well as invest in lower pricing. And I think, from our perspective, it's about continuing to differentiate the offer and be less absolute head-to-head competitive with the other participants, going forward.
I mean ultimately, best store in town is about taking the business in a very differentiated path. And increasingly we will be better differentiated and better insulated from just pure battle on price.
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David Errington, Merrill Lynch - Analyst [44]
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How was the form? You talked about promotions. My understanding was it's very targeted promotions, using customer loyalty cards and going super aggressive on that. How can you guys go to battle with that? I mean, Coles has basically said that they're going to struggle to compete against that. How do you compete against that?
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Ian Morrice, Metcash Limited - CEO [45]
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Well, they've got -- I mean, the two chains both have very sophisticated loyalty programs that we don't have and others in the market don't have either, to that extent.
But those tend to be fairly short-term, tactical promotional impacts. We've got to focus on what we're doing, which is about differentiating the offer and continuing to win on fresh and with people in those local catchments.
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David Errington, Merrill Lynch - Analyst [46]
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You said second half was going to be higher than -- or second half 2017 was going to be higher than second half 2016. And you said that that's dependent though on what the price deflation would be.
And you said it would be abating. What number are you thinking it has to be for your second half 2017 to be above second half 2016?
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Ian Morrice, Metcash Limited - CEO [47]
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I didn't actually call out the deflation and one of the reasons why we think that number's going to be greater. I think -- we called out the 53rd week, the (multiple speakers).
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David Errington, Merrill Lynch - Analyst [48]
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But you did say it was going to abate and put (multiple speakers).
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Ian Morrice, Metcash Limited - CEO [49]
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My -- our belief is that deflation will abate overall, primarily because the fresh produce and fresh foods deflation in some categories is now back to inflation, because of the supply and demand component in that category, so as a natural consequence that's going to happen. We do expect continued high competitive intensity.
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David Errington, Merrill Lynch - Analyst [50]
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But if deflation stays at 1.8%, will second half 2017 be above second half 2016?
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Ian Morrice, Metcash Limited - CEO [51]
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I don't think we can really comment specifically on that single point of reference, because deflation does drive -- and you can do the calculations yourself, if you get our P&L out in terms of what a 1.8% deflation does. It just increases the size of the offset we've got to find. It's as simple as that.
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David Errington, Merrill Lynch - Analyst [52]
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Okay, can I -- Brad, on the cash flow, you lost me on the explanation of the cash in HTH and the AUD40 million. Can you go through that a little bit more?
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Brad Soller, Metcash Limited - CFO [53]
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Sure.
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David Errington, Merrill Lynch - Analyst [54]
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As a dumbed down thing. And the second thing -- the asset sales on the AUD30 million, how many more of them have you got? What are they? And did you make any profits on the sale of the asset sales and if you did, where are they? Were they taken above the line or below the line?
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Brad Soller, Metcash Limited - CFO [55]
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Yes. I'll answer the second question first, because it's easier. In relation to the asset sales, we continue to cycle non-core assets. They are held on the balance sheet, but separately disclosed as assets held for resale.
And we have about AUD17 million, David, left in that category of assets we still wish -- we're looking to sell.
In relation to the profit that we've made, we did make a profit on selling down a shopping center in Noosa. That's reflected within the corporate line and one reasons why the corporate line is what it actually is, is because it includes AUD4 million gain on the sale of that profit.
That's the answer in terms of the assets.
The more difficult one, in relation to explaining the cash flows from HTH, what actually happens on HTH, there was a target (inaudible) it was a target working capital -- a number, as in any completion account, in any acquisition.
When we came to the completion date what had happened, the vendor had paid out a whole lot of creditors just immediately prior to completion, so round about AUD40 million.
That AUD40 million flowed back immediately post -- because we didn't have to run that creditors run. They paid those creditors on our behalf. And obviously, the working capital's balance on completion would go up, because your creditors' balance was effectively lower.
The economic impact of it is zero, all right. We just -- they paid the creditors. We effectively paid it back to them through the working capital completion statement.
That's the key thing. The challenge we had that flows through the P&L account is operating cash flows, and therefore we called it out separately, so everyone can understand that. Does that help?
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David Errington, Merrill Lynch - Analyst [56]
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(Inaudible - microphone inaccessible)
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Brad Soller, Metcash Limited - CFO [57]
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A little bit.
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David Errington, Merrill Lynch - Analyst [58]
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(Inaudible - microphone inaccessible).
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Brad Soller, Metcash Limited - CFO [59]
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Net no benefit. It's zero. No benefit whatsoever. It's effectively AUD40 million came through operating cash flows. We give it back to them, net of other adjustments -- I stress that -- net of other adjustments, so the working capital true up when we get to completion.
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David Errington, Merrill Lynch - Analyst [60]
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So [130%] cash realization, you take that AUD40 million off that then?
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Brad Soller, Metcash Limited - CFO [61]
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Correct.
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David Errington, Merrill Lynch - Analyst [62]
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To get what -- to get to the 85%?
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Brad Soller, Metcash Limited - CFO [63]
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Correct.
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David Errington, Merrill Lynch - Analyst [64]
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And then what about the benefit from the DC? The lower -- I think Andrew asked the question -- that you had a benefit then on lower inventory because of the DC?
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Brad Soller, Metcash Limited - CFO [65]
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Yes. Correct.
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David Errington, Merrill Lynch - Analyst [66]
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So what would your cash realization net of a low [six]? It looks a bit low to me, if that's the case.
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Brad Soller, Metcash Limited - CFO [67]
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In relation to them, there's always going to be movement, David, in terms of the working capital positions in any particular half. If you look at the overall net working capital position, which I called out on the balance sheet slide, and you look at the working capital at the half, it was AUD93.7 million, versus the prior year comparator AUD56.9 million.
So, there's no doubt there was some benefit in relation to the inventory --
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David Errington, Merrill Lynch - Analyst [68]
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It just seems like the cash realization from the underlying business would have been under 70% if you strip out the DC coming back on and the effect of the HTH. It just seems, we can take it offline I suppose, but it just seems like the cash realization it looked a little lean this first half.
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Brad Soller, Metcash Limited - CFO [69]
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We'll work that through with you. But there are always going to be movements in that working capital balance. But we'll work it through with you offline.
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Shaun Cousins, JPMorgan - Analyst [70]
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Shaun Cousins, JPMorgan. Just a question on the second half [7% to 8%] EBIT guidance to grow in food and grocery, some rough math based on an extra week was just under 4% contribution, it's only a four day not a five day week. That should give you maybe an extra AUD2.73 million EBIT. Do you grow second -- can you grow food and grocery EBIT in the absence of the extra week?
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Ian Morrice, Metcash Limited - CEO [71]
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The answer to that would be yes.
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Shaun Cousins, JPMorgan - Analyst [72]
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Fantastic. And then just could you talk a little bit about price match? You've had price match going for some time, you've had volume growth in that area. Have you got any better buying terms on the back of that? Have you been able to offset some of that investment that you've made early on?
And I guess if you could answer that with reference to both the Black & Gold price investments that you've made where you're probably a bit more important, whereas to -- as well as the branded product where you've also taken prices down of your own accord.
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Ian Morrice, Metcash Limited - CEO [73]
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Well I think the short answer to the supplier support is that across Black & Gold and propriety suppliers, yes, we have increasingly got support for those price reductions either through volume increase or through the supplier actually actively wanting to participate with us in the price match program.
So the short answer is yes, Shaun we have got supplier support on both sides for that initiative.
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Shaun Cousins, JPMorgan - Analyst [74]
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And finally what are your corporate costs going forward Brad? If you've got a AUD4.9 million, further to David's question about, you had a AUD4.9 million after tax -- oh sorry, pardon me corporate tailwind on the back of an asset sale you've only got AUD17 million left.
Does that imply that you're roughly a AUD1.5 million corporate cost business? Or is it a little more than that because it certainly flatters your underlying profit when you include a profit or an asset sale above the line.
It's not exactly the highest quality contributor to a EBIT -- a source of underlying EBIT. So could you maybe talk a bit about what your underlying corporate cost is going forward, particularly once we assume I guess that this asset held for sale is sold?
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Brad Soller, Metcash Limited - CFO [75]
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It's the same answer I gave last time in relation to corporate cost. So we charge all our corporate costs back into the businesses so they're allocated across the operating businesses. What we look -- usually leave behind is some way between AUD1 million and AUD3 million worth of costs hence to actually be left with the corporate [separate report] within corporate before any offset of which is largely almost entirely asset sales.
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Shaun Cousins, JPMorgan - Analyst [76]
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And that was AUD1 million to AUD3 million a half?
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Brad Soller, Metcash Limited - CFO [77]
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No for the full year.
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Shaun Cousins, JPMorgan - Analyst [78]
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For the full year, okay, great. Thank you.
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Ian Morrice, Metcash Limited - CEO [79]
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In the front.
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Craig Woolford, Citigroup - Analyst [80]
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Morning Ian, Craig Woolford from Citi. I just wanted to clarify; you said that the cost savings for Working Smarter are looking better than your expectations. What is the source of that higher than expected cost saving?
And can you just clarify that that is an amount the greater than AUD35 million is an actual benefit during the period of FY2017 and not a run rate figure?
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Ian Morrice, Metcash Limited - CEO [81]
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Well first of all it is both an improvement in 2017 and a run rate figure to some extent. There are some costs in FY2017 to achieving those benefits, so we've called out what the -- we are anticipating a total of AUD15 million of Working Smarter costs to get our hands on those costs but the forward run rate is going to improve. The back end of FY2017 will have improved savings in both the supermarkets and convenience business pillar and in distribution, so in our logistics area. Those are the two main areas.
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Craig Woolford, Citigroup - Analyst [82]
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Right, because you could -- could do my own back of the envelope as to what the first half 2017 cost savings. I know you're not going give us a figure, but I just want to be really clear as to whether we will be able to reconcile or observe whether the AUD35 million or greater than is achieved. Are you going to provide further transparency on that at the full year?
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Ian Morrice, Metcash Limited - CEO [83]
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Well we'll certainly at the full year tell you what we believe we have achieved and how much is run rate and how much is in the year. We'll certainly be giving you good information around that once we get to that point.
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Craig Woolford, Citigroup - Analyst [84]
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Okay. And is the source of saving, just to clarify, is this -- in the accounts the staffing costs were down about 12% I think it was on employee line, but any other things we should be noting?
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Ian Morrice, Metcash Limited - CEO [85]
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Well transport, transport is a big area of saving for us not just this year but in the years to come. If you look at our total, Working Smarter of AUD100 million there's quite a big component within that is in logistics and in the transport part of logistics as well as operating our DCs more effectively.
If you take our Campbells business we've taken a, what we call internally, a swat team approach to each of the different distribution centers within Campbells of 17. And we've actually been able to take costs out of pretty much every cost of doing business line in those -- in each of those sites.
It adds up to quite a significant number in the context of that particular business unit. So there's a -- it's not necessarily predominantly targeted at one particular line of cost.
Some of these by the way, and you don't see them on our overheads line you see them as -- it's actually that we report as part of our margin calculation, but there are some costs and overheads that go into the margin calculations.
So we'll try our best to help you understand what that means once we've finished the full year.
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Craig Woolford, Citigroup - Analyst [86]
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You mentioned in your commentary around the food and grocery segment you think the independents are investing more than they have typically. How are you measuring that? Is that a financial observation?
Is that about the number of refurbishments or some other metric as to why you say the independents are investing more than they have for a long time?
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Ian Morrice, Metcash Limited - CEO [87]
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I think it's a bit of both. But I'll ask Steven just to comment on that in a second. And we are particularly calling our multi-site owner groups, because they're the owner groups that also tend to have the bigger format stores and are potentially more competitively challenged.
But we are seeing both in financial terms and in number of stores an increasing appetite from those retailers to invest.
Steven?
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Steven Cain, Metcash Limited - CEO, Supermarkets and Convenience [88]
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Yes. Obviously, we sit on the Board of a few and we can see what's being invested. The second is if you take particular spots where you'd say that our estate isn't, as good as it could be and if you focus on Sydney in particular, then you'll see quite a few changes going on here.
So if you look around obviously we've got the [MLC], which is a new small format store from the [Ramos]. They're also about to finish Summer Hill and that's trading very well and will be finished by December.
They've just taken over Doonside, which was one of our biggest trading stores in New South Wales. They took that over last Monday, and the early response has been magnificent.
Look at Karellas, he's just opened Tramsheds, which, don't know whether everyone's been to, but that's a fantastic store in a fantastic location. And he finishes Rose Bay this week. So when you look all around the harbor there's a huge amount of money going in to improve the quality of the asset base, and that's beginning to be reflected in the sales.
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Craig Woolford, Citigroup - Analyst [89]
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It's a loaded question but 100 refurbs is that the right run rate of refurbishments across the IGA network?
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Ian Morrice, Metcash Limited - CEO [90]
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Meaning what? It should be higher or lower?
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Craig Woolford, Citigroup - Analyst [91]
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Well since you've got 1,500 or 1,400 odd stores so it's a 14 year cycle. To me the investment hasn't changed that much because the refurb run rate that I've -- since I've been covering, the stock has been about 100 stores a year. Maybe the quality of the refurbs is better, but it doesn't feel like you've energized IGA retail as enough to refurbish and invest more to find those points of difference.
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Ian Morrice, Metcash Limited - CEO [92]
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To some extent the 100 per year is -- we are 200 through it already, so we've -- and we haven't got 1,400 stores that are equal in IGA, we've got 250 IGA expresses within that. And if you look at the IGA [banner group], we've consistently said we see that probably over time being less IGA backed stores as some of the poorer performers at the tail end of that network going to come out of IGA.
So we do think it's the right speed at this point.
And the other thing I would say about the (inaudible) our other groups is that Ritchies on the one hand is doing very cost effective refurbishments like Mt Waverley in Melbourne they've spend AUD500,000 or AUD600,000 but in [Dromana] they spent AUD5 million because they've added 40% more selling space to the store.
So it's the quantum of investment and the scale of the improvement.
The Karellas family -- it's been a long time coming the Rose B refurb. If you've ever been to Rose Bay, you'll know what I mean by that. But to be fair to them it's a structural refurbishment.
It's going to cost about, including landlord input, it's going to cost over AUD5 million for that store to be turned into a showpiece differentiated IGA store. So there is a material change in the size of investment.
And also the other thing I would say Craig is that we've not be opening new space as a general principal for the last three or four years, because we've had our heads down a little bit. So it's really more about reflecting the fact that there are more and more retailers actually actively looking for new space and not just about the rate of scale of the reinvestment program.
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Craig Woolford, Citigroup - Analyst [93]
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Thank you.
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Ian Morrice, Metcash Limited - CEO [94]
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Thank you Craig. Any other questions from the room? One more question at the back and then we'll switch to the people on the phones.
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Unidentified Audience Member [95]
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Thanks (inaudible). Just following on from the store refurbishments and the like if you look across your [fleet, I guess] the stores what percentage would you say would be the Tramsheds and Romos style premium product? And then what would be sort of more the more ordinary IGA kind of store?
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Ian Morrice, Metcash Limited - CEO [96]
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Well it's a bit of an unprosaic (sic) judgment that one, and Steven you may want to think about what your response would be to this one.
But what I would say is that when we started on the Diamond program, when we assessed the performance of those stores in financial terms and in sales per square meter and in competitive terms, we had about a quarter of the state that we would have put as Diamond stores.
And a quarter of the state is 300 to 400 stores that are differentiated, achieving high sales per square meter that are competitive with the other participants in the market. So it's a lot of opportunity and upside opportunity to get the rest of the state up to that Diamond level.
And what we've done is 190 refurbishments since then. And that 190 includes actually some of those Diamond stores also being invested in. So somewhere between, I would say, 300 to 450 of the estate are probably in that clearly differentiated IGAs that are performing well.
Steve, perhaps you'd comment.
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Steven Cain, Metcash Limited - CEO, Supermarkets and Convenience [97]
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Yes that's about right.
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Ian Morrice, Metcash Limited - CEO [98]
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Sounds about right apparently. Okay, so we are going to flip across to now take some questions from people on the conference call.
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Operator [99]
------------------------------
(Operator Instructions). Grant Saligari, Credit Suisse.
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Grant Saligari, Credit Suisse - Analyst [100]
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Good morning. Thanks. There's been a bit of talk around, quite a bit of talk around the numbers from Working Smarter this morning.
But I was wondering whether you could actually outline exactly or the sort of changes that were made in the first half under the Working Smarter program please.
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Ian Morrice, Metcash Limited - CEO [101]
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Well we kind of called them out on the way through the presentation Grant. If I turn to slide 21, which is the Working Smarter summary slide, the redesign alignment of the supermarkets operating model.
Beginning the distribution center efficiency program and corporate cost savings, those would be the three biggest areas of early traction that we would attribute the benefits of the first half to.
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Grant Saligari, Credit Suisse - Analyst [102]
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And what was the operating model change other than consolidation of some of the state functions?
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Ian Morrice, Metcash Limited - CEO [103]
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Steven, do you want to talk about the operating model change?
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Steven Cain, Metcash Limited - CEO, Supermarkets and Convenience [104]
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Yes. Well that was the main change, but -- and headcount in supermarkets is down. But there were four or five centers that have moved to centers of excellence. So rather than having resources spread in every state across the country we've brought them together, not all in Sydney I might add.
So customer service is based in Queensland and credit is based in Victoria. And then there were three other centers as well that are now operating in many cases longer operating hours.
Obviously, it's not been without its changed management issues, but by and large, it's gone down very well given the scale of change that's come through. So we are happy that the change -- with the changes that have been made.
Obviously, there's some efficiencies, there's still further work to do. And there's still a lot more opportunities in the pipeline. So nothing that anyone else hasn't done, but certainly a big change for Metcash.
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Grant Saligari, Credit Suisse - Analyst [105]
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Okay, thanks for that. Just a clarification if I could, the number of liquor stores decreased by 100 compared with April.
Could you outline what that happened?
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Ian Morrice, Metcash Limited - CEO [106]
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Okay. I will just get Scott to the microphone to answer that one for you, Scott.
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Scott Marshall, Metcash Limited - CEO, ALM [107]
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Yes, thanks for the question. I think if you look at our network in two parts in the tier one stores we grew. Most of those stores that came out were in our second tier and it really is about consolidating and tidying up the network.
So from where we sit now I think we've got a further stronger base to build on moving forward.
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Ian Morrice, Metcash Limited - CEO [108]
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But to be clear Scott those stores that have come out of that tier are still customers of ours, contract customers but no longer IGA would that be correct?
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Scott Marshall, Metcash Limited - CEO, ALM [109]
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Correct. And the other movement you'll see is we did the banner which we've said we we'd do [banner IGA Liquor] in WA and converted those stores to Cellarbrations to give us better scale in that marketplace.
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Grant Saligari, Credit Suisse - Analyst [110]
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Okay that's helpful. And just finally, from me just the customer loan impairment increased quite a bit in the half, could you just outline that please?
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Brad Soller, Metcash Limited - CFO [111]
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So just looking at the actually impairments they were -- in relation to the numbers it was, the total impairment (inaudible) were broadly in line what they were in the previous period.
If you look at it as a percentage of our total portfolio it's a relatively small proportion of what we actually [carried] both in relation to the turnover we are actually doing and also in relation to the balance [as we are carrying SV and] (inaudible) period.
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Grant Saligari, Credit Suisse - Analyst [112]
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Okay, because I thought the allowance for impairment loss increased around AUD7 million in the half.
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Brad Soller, Metcash Limited - CFO [113]
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Let me reflect and come back to you and [exactly we know] that number.
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Grant Saligari, Credit Suisse - Analyst [114]
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Okay. All right, that's it from me. Thanks very much.
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Ian Morrice, Metcash Limited - CEO [115]
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Thank you Grant.
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Operator [116]
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Adam Alexander, Goldman Sachs.
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Adam Alexander, Goldman Sachs - Anayst [117]
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Good morning Ian. I just wanted to touch on the margin outcome for Mitre 10 it was very good during the half.
Just wondering whether there was an impact from the Masters liquidation in that number like additional promotions etc. And if you had clear air would you have actually seen a larger improvement from some of those cost efficiencies you talk about.
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Ian Morrice, Metcash Limited - CEO [118]
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Yes, we didn't really see the effect on the EBIT line so much from that. I guess our sales line being up 1.7% like-for-like at wholesale we think that number would have been higher if we hadn't had that liquidation in the first half and as a consequence we would have had a better flow and of margin from those sales.
But it would have actually been attributed to having higher sales in the underlying Mitre 10 business.
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Adam Alexander, Goldman Sachs - Anayst [119]
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Okay. And then the synergy numbers that you've broken out those of AUD15 million to AUD20 million just remind us of the major buckets and how they will come through the P&L in terms of timing.
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Ian Morrice, Metcash Limited - CEO [120]
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Well the first thing is that you'll see the majority of this come through in the FY2018 P&L. So whilst there might or there will be some in the second half of this year we will keep you informed of that as we go through. But the majority of those synergies will be in the FY2018 year and beyond.
We are giving ourselves an 18 month timetable to get the whole synergy and integration plan in place and completed. Now obviously there will be a flow-on into the 2019 year as well.
But as we step through it I guess what we are really saying when you look at the FY2018 year run rate you can build AUD15 million to AUD20 million now into that number, having -- and that remember we've undertaken to share a number of those synergies back with members. So that's the amount that's left after sharing a component back with the members.
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Adam Alexander, Goldman Sachs - Anayst [121]
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Great, thanks.
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Ian Morrice, Metcash Limited - CEO [122]
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Two more questions.
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Operator [123]
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Daniel Wan, Deutsche Bank.
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Daniel Wan, Deutsche Bank - Analyst [124]
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Hi guys. I just wanted to focus on a couple of the headwinds that were called out. So first of all on food and grocery, given Aldi built up through the half I was wondering if you could comment on how much worse the headwind was at the end of the half versus the beginning of the middle.
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Ian Morrice, Metcash Limited - CEO [125]
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Well as I said on the way through the presentation if you look at the impact that we expect in South Australia in WA from that new space movement it was pretty much as we expected it to be in the half. And so it's pretty much in line with what we expected.
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Daniel Wan, Deutsche Bank - Analyst [126]
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And were you expecting --.
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Ian Morrice, Metcash Limited - CEO [127]
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(Multiple speakers) as they'd increase -- it increases as time goes by because more and more stores open gradually over time. So you can only really measure whether what you'd expected the impact to be and whether it was either below or greater than your expectations.
And what I'm really saying is that it was pretty much in line with what we expected it to be before the openings took place.
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Daniel Wan, Deutsche Bank - Analyst [128]
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Right, then where you expecting a much bigger impact, let's say double the impact as it was during the period looking at the run rate towards the end. Or are you able to quantify how much more you were expecting as Aldi ramped up?
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Ian Morrice, Metcash Limited - CEO [129]
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You know we are not going to find either of those really. Really what we are saying is that its back to the question I got earlier about what do you predict is going to happen in the next six months.
Obviously, we've got a number in our minds based on what the effect of that new footprint against us will mean in those two states. And based on what we've seen and observed in the first half of this year we expect the second half to be in line with our expectations on that particular headwind.
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Daniel Wan, Deutsche Bank - Analyst [130]
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Yes okay. And I appreciate that your like-for-like is, as you call, all-in. I was wondering if you could strip out the effect of tobacco from your like-for-like just to try and bridge some of the distance between the like-for-like number and the wholesale number, which is ex-tobacco obviously.
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Ian Morrice, Metcash Limited - CEO [131]
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Well I think there's a couple of ways you could look at it, but that particular number is not one that we focus on. But if you look at the like-for-like in retail as being up 0.3 and our total sales being down 1 those are -- that's a comparative number. So in other words both of those numbers include tobacco.
And so -- and what I did say about our sales decline is that our sales decline if you put back in the sale of Supabarn and store closures it would actually be up 1.5 which would be a 0.5 positive against a like-for-like point 3 positive for retailers. So that's the way I would encourage you to look at it therefore.
If you then look at the 4% and say well what's the extent of which that reflects the retailers like-for-like including tobacco I think there's certain things in there which don't -- which are not tobacco effected, particularly the effect of Diamond initiatives, new stores on the positives. And then -- and obviously deflation at wholesale was 1.8 but again we don't measure deflation at retail. And I suspect in this period deflation at retail has actually be higher than 1.8 for retailers.
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Daniel Wan, Deutsche Bank - Analyst [132]
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Okay, thank you.
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Ian Morrice, Metcash Limited - CEO [133]
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(Multiple speakers) final question. Final question I think.
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Operator [134]
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Richard Barwick, CLSA.
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Richard Barwick, CLSA - Analyst [135]
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Hi Ian. Just focusing a little bit more on that 0.3 like-for-like, are you able to give any sort of color how that varied across the store formats. For instance, were IGA format stores tracking ahead of the 0.3?
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Ian Morrice, Metcash Limited - CEO [136]
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Yes I would certainly give you that input. The IGA stores generally in that sweet spot of IGA were performing ahead of that, and that's offset by some of the bigger more competitive stores.
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Richard Barwick, CLSA - Analyst [137]
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And how does that dovetail into some of the information you've given around the multi-store owners investing for growth? Where we are seeing new stores being added into the portfolio are they going to be skewed more towards your super IGA end or back in that mid-market IGA format?
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Ian Morrice, Metcash Limited - CEO [138]
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Well again your going to actually see quite a mix coming through there. So Steven touched on the Romeo Group who opened a small format in the MLC building. They've got a couple of stores underway in Sydney of around 800 square meters.
But they've also got a couple of stores underway in Sydney in the 2,000 square meters plus. In fact, Doonside is one of our largest footprint stores that we've got in New South Wales.
So it is a mix. It's not skewed to one particular part of the other. And in fact, even within the multi-store owner groups then, you take Rose Bay, which is the Karallas store we talked about I think it's going to finish up about 1,200 internal, and the [time shares] is 2,000.
So it's not all targeted at one size fits all.
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Richard Barwick, CLSA - Analyst [139]
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And how do you encourage that sort of investment? Doesn't it make sense for Metcash to be offering more incentives for expansion and refurbs within that IGA rather than at the super IGA?
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Ian Morrice, Metcash Limited - CEO [140]
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Well I think we are encouraging investment in differentiating the offer full stop. From our perspective the more effective that a store can be in being famous for something, that distinguishes it from its competition in that location almost agnostic of size.
I'll give you a great example being the Dromana Ritchies store, which was an expansion from about 2,000 square meters to just over 3,000 square meters. And the fresh department in that store is almost 2,000 square meters alone.
So it's quite a significant step forward in that particular location. And the trading performance is more reflective of the [Chapli's] frugal experience when you do that, if it's very clearly differentiated from the chains.
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Richard Barwick, CLSA - Analyst [141]
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Okay. And just a last quick one on liquor if I can. You talked about IBA now representing 55% of the total liquor sales. I just wanted to get some indication of where you see that actually moving to.
And can you talk to what that means for the margin impact so between presumably a higher margin on an IBA sale rather than non-IBA sale. I just wanted to get some color there if we could.
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Ian Morrice, Metcash Limited - CEO [142]
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Yes, I'll just pass to Scott in a second. So there's two aspects to the question. One is where can we go from 55% and the second one is what might the margin or EBIT leverage impact to that look like.
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Richard Barwick, CLSA - Analyst [143]
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Yes.
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Scott Marshall, Metcash Limited - CEO, ALM [144]
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Yes, just to give some color around the consolidation there's a lot of other obviously independent banner groups out there that we would love to work to into the future, so where that could get to I'd say there's a fair bit of headroom in growth there. I'm not sure that I'd call out a specific number, because Ian might put it in my KPIs, but there's definitely growth.
What I would say is as we move forward and get better plans in place with those stores and our suppliers we are seeing better leverage in the earnings.
So that's absolutely what you've seen happen over the last three years in particular. And we plan for that to continue.
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Richard Barwick, CLSA - Analyst [145]
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Right, so basically plenty of scope for margin expansion.
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Ian Morrice, Metcash Limited - CEO [146]
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It continues [Danny] it continues as to what you've seen so far in that.
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Richard Barwick, CLSA - Analyst [147]
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Okay, thank you.
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Ian Morrice, Metcash Limited - CEO [148]
------------------------------
Okay that concludes the questions from the conference call. And just remains for me to thank all of you again for coming along and attending the call this morning. Thanks very much indeed.
Thank you.
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