Thank you for standing by, and welcome to the Coles Group Conference Call. All participants are in a listen-only mode. There will be an opening remarks followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Steven Cain, Coles Group CEO. Please go ahead. Okay. Okay. Good morning, everybody. I'm joined by Charlie Elias today, our CFO. We've obviously announced that we've agreed to sell our fuel and convenience business, Coles Express, to Viva Energy this morning, which will lead to an early conclusion of our alliance agreement, which was scheduled to end in 2029. As you'll have seen, there's only two requirements. One is an ACCC approval, and the other one relating to FIRB, which we would normally expect in the first half of calendar 2023. From our perspective, we think this is a win-win for both businesses. From a Coles point of view, clearly, we wanted to make sure there was a great deal of certainty for the business and for the team going forward with regards to future investment. It obviously means that we'll be able to focus more of our effort on driving our omnichannel business in supermarkets and liquor. It also, in that longer term, will help with our ambition to be the most sustainable supermarket group in Australia. From a customer point of view, the market-leading offer remains, which is the AUD 0.04/L, access to Flybuys, and access to Coles' own-brand products. As many of you will have seen and know, Viva has been expanding its network in fuel and convenience over recent years and had made a declaration that they were interested in taking the business back at the end of the agreement. They've got a very clear ambition to be the number one in this sector and continue to invest and grow the business, which is good for them and should be good for Coles' customers. We will continue to be very much a strategic partner of that business. From a financial point of view, the proceeds are around AUD 300 million. From a lease perspective, there's about AUD 816 million coming off our balance sheet. We will record a small gain on the business, which we've owned for 19 years, as many of you will know. We'll update all of the financials accordingly once the transaction is completed at the appropriate results announcement. With that, I might hand over to questions. Thank you. By the way, I am conscious this is a long weekend for those, a very long weekend, in fact, for those in Melbourne, and apologies for pulling out a deal on long weekend eve. Over to you. Thank you. Thank you, Mr. Cain. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up a handset to ask your question. Your first question comes from Adrian Lemme from Citi. Please go ahead. Good morning, Steven and Charlie. Just a question on the gearing. It looks like a bit under-geared now. Any thoughts on target gearing, please? Thanks. Yes. So Adrian, not specifically. To go back and remind everyone, clearly, our aim and goal is to ensure that we continue to have a strong balance sheet, ensuring a solid investment-grade rating, and obviously continue to deliver value for our shareholders, including a leading payout ratio of 80%-90%. That's our focus, Adrian. This clearly removes AUD 816 million of leases off our balance sheet and clearly provides us flexibility to continue to invest in growth going forward. Thank you. Thank you. Your next question comes from Shaun Cousins from UBS. Please go ahead. Hi. Good morning. Just a question regarding the valuation or the price received. I mean, Viva are calling out 11%-18% EPS accretion. On our numbers, particularly when you think about 2023 and 2024, which are recovery years, you're buying it at maybe, pardon me, you're selling it at, say, 2x fiscal 2023 EV / EBIT or 6x fiscal 2023 EV / EBIT on a pre-AASB basis. Why is this price, particularly when we think about the AUD 143 million, why is this price a good price for Coles shareholders? And then secondly, within that, what are the convenience optionalities that you're foregoing in terms of this, particularly given the benefit of these stores from a last-mile sort of logistics or sort of points of presence perspective, please? Thanks. Yeah. So perhaps I'll take that one. With respect to the valuation, Shaun, as you're aware, I mean, the EBIT for FY 2022 was AUD 42 million. AUD 42 million. million. Implicit in that was obviously coming off that was AUD 38 million of imputed interest that relates to the leases. So on an earnings pre-tax level, it is low single-digit millions. If we also look at the yeah in the context that the alliance was due to come to a natural conclusion in 2029, this still provides certainty not only for our team members but for both organizations. It's sort of important. So the AUD 300 million plus the AUD 816 million of leases coming off our balance sheet really need to look at the total in terms of determining the impact of the particular deal. Great. And to be fair, fiscal 2022 also incorporated a period where you had very low mobility in the first half of 2022. I'm just curious, why wouldn't you even look at, gosh, prior years or even other years? I mean, it's just a very low multiple that you're receiving. Shaun, we have, yeah. So if we look at 2022, the average weekly fuel volumes were 54.4. So you realise even as we came out of mobility in Q4, for example, the average fuel liters was about 57 million liters per week, which was about the average in sort of 2021. I can't comment on what Viva's EPS numbers or fuel volumes, but I think that relates, as my understanding, to fuel volumes having reached 70 million L. We haven't hit 60 million. We've hit 60 million L, I think, 3x probably over the last 36 months. And so I think in terms of recovery, Shaun, that's perhaps where I'll leave the sort of volumes as such. Yeah. Understood. And then maybe just the broader strategic question around convenience is an increasing sort of desire for consumers in your effectively with this transaction, not only bringing forward your exit of convenience but also foregoing the opportunity to renegotiate a reshaped deal in 2029. Why is it in the best interest of shareholders to exit this last-mile sort of opportunity and this convenience opportunity, please? Yeah. Good morning, Shaun. I hope that answered the question on the price side of things. We think this is. Yes, it did. Thank you. Thank you, Steven. Yes. A good price for the business. It is our lowest, you'll recall that the last time we met, we spent a lot of time talking about shareholder returns. This is our lowest return on capital business in the group. Now, we expect, as you would say, we did expect that to improve in the future as fuel volumes improve. But this gives us, I think, greater focus, and the returns we can get out of supermarkets and liquor and omnichannel, in our opinion, are far greater. So this, I think, will enable us to go faster in the call. When it comes to the immediacy type question, you'll recall that back in 2003, when this deal was done, what we did was we tried to pick the fuel stations that were closest to a Coles. So the franchisees that transferred at the time were mostly Metro franchisees because that's where most of our store estate is. So most of the other franchisees and independent operators that were within the Shell Group at the time, they remained independent. And those were mostly rural and sort of Middle Australia type venues. So what we tried to do was marry as best we could the Shell estate with the Coles estate. So most of the Coles Express are located very close to Coles. And so from an immediacy point of view, again, you'll have seen in our latest set of results, we are able to offer an immediacy offer from both Coles and Coles Liquor at the moment. And of course, that would be with a wider range of products as well. I think we're covered from an immediacy point of view, notwithstanding that there is an immediacy opportunity within Coles Express as well. And that's delivered today through DoorDash and so on. But that's not, in the whole scheme of our AUD 3 billion e-commerce business, it's not significant. Okay. Thanks so much, Steven. Thank you, Charlie. Okay. Cheers, Shaun. Thank you. Your next question comes from David Errington from Bank of America. Please go ahead. Morning, Steven. Morning, Charlie. It seems like an outcome that was ultimately inevitable and one that probably needed to be brought forward. Otherwise, the business would languish, in my view. But my question is, I'm trying to understand what the underlying glue will be in the relationship going forward. So my question is, one, how important is retaining the AUD 0.04 voucher for Coles? And then how important is it with the Flybuys? And then how important will it be? Because following on from Shaun's point, you basically now become a wholesaler to Viva. So it's sort of like I'm trying to understand from Viva's perspective too the benefit to them because they need you as a supplier, if you like. But you now become a wholesaler to those sites, which adds a cost burden to you. So I'm trying to work out the quid pro quo, the positives and the negatives of you guys retaining this relationship going forward. Obviously, the positives are the AUD 0.04 discount. How big a positive is that? How big a positive is the Flybuys? But then how big a cost will it be by you just being suppliers as opposed to now being the full benefit of the retailer of that? I don't know if that question was asked very well, but hopefully, you get where I'm going with that. I'm trying to understand the nature of how strong the relationship will be going forward because that's got ramifications for Viva shareholders, as I suppose it's got for Coles shareholders as well. Yeah. Well, I thought your introduction was excellent, David. I'm going to get you in to start writing some of our headlines for us. That was a very good introduction. But if you start doing introductions the day before a four-day weekend. I don't want to drop. I had other things to do this afternoon just quietly. A game of golf was on the books this afternoon, Steve, and that's now been eliminated. So thanks for your offer. But no, thanks. Very, very good. All right. Well, look, just working backwards, we've said that the new arrangements will not have a material impact on the P&L. And so you should take that as we don't see it as a net-net. It's not a cost. And that's probably nothing to worry about in reality. Certainly, we're not worried about it. And as far as the rest is concerned, there's no doubt that the fuel dockets have had some ups and downs in their time. You'll recall that in 2003, one of the reasons why Coles purchased this business was our competitor had a fuel docket arrangement and Coles didn't. That resulted in this transaction of five Shell franchisees at the time being merged into one by Coles and the fuel dockets being offered. And that did drive sales into Coles supermarkets as well as improve the profitability of the business. The profits in those days were zero. And I think in its peak, it reached almost AUD 200 million in terms of profit. And that peak was associated with, or pretty closely associated with, higher discounts on the dockets. And you'll recall that at some point in time, it got to about AUD 0.18/L, at which point the ACCC started to pay a bit of interest. And obviously, the dockets then were brought back to AUD 0.04 /L. And then since then, there's been additional discounts offered through purchases in store, which have proved to be quite popular. If you look at where we are today, fuel docket redemption is less than when it started and less than at its peak. It still is in the multiple 10s, if you like, of redemptions. And a lot will depend on how that changes over time. At the moment, it's certainly valuable to us as Coles and as a supermarket customer. It's about to be fully digitized in terms of linking it to the Flybuys app and so on, which makes redemptions a little bit easier, but to some extent, it will depend on the prevailing fuel price, and obviously, we're at a point of fairly high fuel prices at the moment, but anyway, we thought it was valuable enough to continue with as a value offer for Coles and Coles Express customers, and with Flybuys, Flybuys is an important part of our ecosystem, so to speak. We think it'll get more important over time rather than less, and to be a part of a customer's wallet, having the fuel in there, given how much fuel is of customer wallets, it's an important thing in terms of driving data and loyalty within the overall network. So we've, again, both sides felt that continuing with Flybuys was important. So to go back to your opening line of what's the glue in the relationship, I think since we reset the relationship back in 2019, we've enjoyed a very good working relationship with Scott and the Viva team. We have quarterly reviews together. The team are constantly talking to each other about the right way to invest in the future in terms of site upgrades or shop upgrades or digital upgrades. So it's a strong working relationship and one that we would like to see go from strength to strength on the back of Viva integrating their assets and most likely investing more money in the business than we could have done given that 2029 termination date. Just to finish on, to elaborate, the redemption rate you said is in the tens. Is that what percentage of so of all transactions? It's only about, what, between 10% and 20% redemption. Is that right? And what did it get to at its peak? I said multiple 10s. It's come down quite a bit since its peak. I've got Michael Courtney here, who is our subject matter expert. He's the Executive General Manager of Coles Express. Michael, don't say anything that isn't too much in the public domain, but just give an indicative what's happened over time. I think that range that Steven gave is something where it's fluctuated on over time, so between the 10% and 20%, and the times that it's gone over, that has been the times where Steven had previously stated when there were higher discounts available. Thanks, Mike. You've been well trained. Thanks, Steve. Thanks, and I hope you get at least nine in. We'll try and keep this call brief for you, David. You've done that, Cain. Well, you've got four days of it. Thanks, guys. Appreciate it. Thank you. Your next question comes from Ross Curran from Macquarie Group. Please go ahead. Hi, team. I'm just asking the SG question. Presumably, this transaction materially reduces your tobacco exposure. Are you able to talk about how that looks going forward? Yeah. Well, yeah, it's certainly a point. Clearly, we anticipate that we'll still be helping with that in the future, but certainly from a retail point of view. In terms of Coles Express, the top three products are fuel, tobacco, and coffee. I think we're probably the best at coffee now. But yeah, that's the pecking order, Ross. At a group level, though, you're still continuing to provide the tobacco on a wholesale basis, or are you not going to provide it going forward? No, we expect to continue providing it, yeah. Okay. Great. Thank you. Thank you. Thank you. Your next question comes from Tom Kierath from Barrenjoey. Please go ahead. Morning, guys. Just a couple of questions on the food supply contract. Can you just maybe elaborate on how long that contract is? And then secondly, I'm just surprised, just to the answer to Errington's question, that it seems like it's kind of break-even. Why would it be break-even? Why wouldn't you make a margin on the—I think it's about AUD 1 billion of retail food sales that goes through that business? Just given the buying scale that you guys have got, it's obviously a lot more than what Viva has. Just surprised that you're not making money on that contract. So thanks, John, for the question. I think on the very last point, and clearly, we didn't use the word break-even. Can I just be very clear? I think the word is, yeah, we obviously expect the net impact of these arrangements not to be material from a group perspective. So we haven't given a guidance as to what that number is. We'll obviously work at that going forward. I think in relation to the product supply agreement, we have not disclosed what that term is in terms of a commercial nature between us and Viva and the remains. As we've said earlier, there is a product supply agreement that will be in place, and that is to continue, which includes not only the products that are there today, but also the Coles own-brand products will continue through that agreement. Right. So how do you determine pricing of the products that you charge Viva? Again, we won't specifically go into the pricing mechanics of that particular agreement. I mean, again, as we've sort of guided, what we expect is the net impact of these arrangements not to be material from a group perspective. But yeah, there is a product supply agreement in place with, as you would expect, pricing and volume and other aspects to deliver so that the Coles Express business enjoys what it enjoys today. Yeah. Okay. All right. Thanks. Thanks Thanks very much. Cheers. Thank you. Your next question comes from Bryan Raymond from JP Morgan. Please go ahead. Thanks for taking the question. Can you just remind me on the fuel discounts again, just to finish off on this? Just the dollar impact of that in terms of the accounting. Is that going to switch into being a supermarket element? Just trying to understand if there's any changes in the way we should be thinking about accounting across the divisions with the business now sold. Yeah. So in terms of Bryan, the short answer to that is no. There's no changes in terms of how you should be thinking about it from an accounting and other perspective. Right. Okay. And then just on the 6,000 staff that are moving across or being offered roles with Viva, you're sort of looking at, given there's about 700 sites, you're looking at sort of high single digits per site in terms of staff members. I'd imagine that includes your head office staff as well. Just trying to understand any potential for stranded costs at head office or any diseconomies of scale we should be thinking about as this business comes out of the Coles business? Yeah, well, Bryan, look, in any sort of extraction or demerger, if you will, of a business, there'll always be sort of elements of that. Our job is to ensure that those things are as minimal as possible as we sort of go forward. But again, I reiterate, we expect the net impact of these arrangements to be positive and not material from a group perspective. Right. But just thinking about the Coles Express business, how many of the, I mean, in terms of in-store staff, there'd be obviously far less than eight or nine people in a store. I'm just trying to understand how much would be at head office of that 6,000. And is that 6,000 an FTE or just a total with a lot of part-timers in there? Just trying to understand the absolute cost base attached to this business. Yeah. Morning, Bryan. The vast majority of the 6,000 are out in the field, in the operations, so to speak. And it's a combination of full-time, part-time, casual type arrangements, as you'd expect. There are a relatively small number of people in the support function here in Tooronga. But that's about, I think, as much as we can say today. Okay. Great. Thanks, guys. All right. Thank you. Thank you. Your next question comes from Grant Saligari from Credit Suisse. Please go ahead. Oh, thank you. Two if I could. First, just specifically on the current supply chain in the convenience, could you just outline physically how that works at the moment? And how does that fit into the new supply chain sort of structure with automated WITRON distribution centers and the like? Just trying to understand whether those supply chain arrangements are really sustainable over the long run. Yeah. Thank you. It's Michael here. So the simplest way to think about our supply chain currently is that we procure some product, a fairly significant portion of our product, through Coles, which we then control cross-docks for, which then dispatch the stocks to our sites. And then there's a portion of our stock that is on direct-to-store delivery from suppliers. So there's the element that we control through our cross-dock and our logistics partnerships. And then there's direct-to-store from suppliers, is the two main buckets of how you should think about it. Are the cross-docks something that in the absence of Coles Express you would otherwise utilize, or are they specific to Coles Express? You should think about those as specific to Coles Express the way it has been over time. Okay. All right. That answers that. And just a quick second one. Are there any non-compete agreements in this? For example, can you open a Coles Local next door, 50 m down the road? In terms of where we're going to a very specific system, it does not impact our ability with respect to supermarkets or Coles locals or any of those particular arrangements granted or. Okay. Thank you. Thank you. Your next question comes from Ben Gilbert from Jarden. Please go ahead. Morning, Steven. Just a quick one from me. Just a clarification. Just on the agreement in terms of wholesale distribution, is that just for two years, or does that extend beyond the two-year transition period? The two years that are cited in the agreement specifically relate to transitional services in order for Viva to be able to establish their services. We have not given a timeframe, Ben, at all on the product sale agreement. Okay. But obviously, that's an important thing for you, and you're probably presumably looking to take that longer. Ben, that's an important part of the arrangements for both parties, and we haven't given a term on that product supply agreement. Okay. And just a second one from me. Just in terms of the other core parts of the business, do you continue to see liquor as core to the business, or has it been used to explore investments or sale of that? Yeah. Thanks, Ben. I think as we talked about last week or the week before on the session we had, I view liquor as strategically important. We're now the only integrated food and liquor offer of scale, and we'll be providing that offer in Ocado as well. So no, I do see liquor as a competitive advantage for Coles. And outside of food, it's still probably the nearest adjacency for many half of Australians. So we are investing significantly in that business, and it's responding well, and we still think there's plenty of opportunities ahead. Great. Thank you very much. Thanks. Thank you. Your next question comes from Darshana Nair from Goldman Sachs. Please go ahead. Hi, team. Thanks for taking my question. A quick one regarding the arrangements with Flybuys. So now with the transition of ownership, will you be able to directly access the data for Coles Express, or will this have to be done through Flybuys? I actually wouldn't be too fascinated by this one, but the way Flybuys works as an enterprise is you have access to the Flybuys data if the Flybuys customer is a customer of yours. So in this particular example, the Viva team would have access to Flybuys customers who are swiping at Coles Express. We would have access to customer information where they were a Coles customer and also a Coles Express customer, but not customers that are unique to Coles Express. And that's just the way the data works, is that the vast majority of Flybuys customers are obviously Coles customers. Coles is by far and away the biggest issuer and redeemer of points in the Flybuys network. But the way the data sharing is that to access customer information, they need to be a customer of your brand. Okay. Thank you. And also a second one, if I may. How should we think about the transition cost over the next couple of years when Coles will be offering back-end support for Viva? Is there any impacts? Yeah. So again, what we said, Darshana, in terms of the earnings impact of not just only the product supply agreement, but the ongoing arrangements and as we transition through is not expected to have a material impact from a group perspective. Again, those transitional arrangements have been obviously factored into those financial impacts. So we don't expect them to have a negative impact on the group. Okay. All right. Thank you. We expect them to be positive. Yeah, clearly. Positive earnings impact, but we've said not material. Understood. All right. Thanks. Thank you. Your next question comes from Craig Woolford from MST Marquee. Please go ahead. Good morning, Steven and Charlie. I know there's lots of questions on this fuel discount, but just to clarify, as it stands before this announcement has been made, who's paying for the AUD 0.04 discount? Is Viva paying any of that AUD 0.04 discount at the moment? I don't think we've ever. Good morning, Craig. I don't think we've ever discussed who pays for what. But I think the main thing to take going forward is just what Charlie has kept saying this morning, which is net, net, net, net, net. This is a benefit to Coles, but not anything significant from a group point of view. Okay. So the other question that would relate to that is, so there's no change in how that fuel discount cost will actually be incurred between Coles Group and Viva? Again, we're not specifically, Craig, going to call out individual transactional items or transitions. I think, as Steven has just really said, there's a number of various agreements and transitional services and others. We expect this to be a positive impact, but not material impact on the group. Okay. Understood. And then from the Viva release, just wanted to clarify the cash proceeds, just the information that's come out of the Viva release. Just wanted to understand the cash proceeds to Coles. There's obviously the AUD 300 million announced, but it looks like there might be a working capital net off of maybe AUD 60 million. And then there's a payable that Viva had back to Coles for 2029 of AUD 98 million. Craig, thank you for the question. It's really simple. We will receive AUD 300 million of cash proceeds. I can't comment on what the net impact on the Viva balance sheet is. I guess that's what they're trying to sort of highlight in their release. But we will be receiving AUD 300 million of cash proceeds. Okay. Great. Thanks, Charlie. Your next question comes from Scott Ryall from Rimor Equity Research. Please go ahead. Hi. Thank you very much. I just wanted, Steven, if I can clarify, make a statement, and hopefully you tell me whether I've picked it up correctly or not. Given we're talking about 1% of your enterprise value, you've got plenty of stuff to spend CapEx on, so these outlets are not strategically important for you, but they are for Viva. So there's probably a better ownership structure to be done, which you've done. You're saying it's not hugely important to you in terms of the online channel going forward and the ability to get groceries into the hands of consumers. And therefore, again, you may as well not own them. Is there anything else I'm missing? We can discuss whether you got the right consideration at another time. But strategically speaking, that's essentially what you're saying, right? Yeah, and also the fact that we've tried to keep what's important to Coles customers in there as well. And so. Yeah. Sorry. That was the third point. Yeah. Yeah. Great. So it's ongoing continuity for Coles customers. It's certainty of investment for the business going forward. And from our point of view, greater focus on where we think we've got higher return on capital and higher growth opportunities from our perspective, which is going to be different to Viva's perspective. And I think that's why it's a win-win. They're going to integrate and grow the business. And I'm sure it will be. I'm pretty sure it will be successful. But equally, this does provide us with greater focus to invest in omnichannel, both in terms of time and investment as we go forward. Okay. Thank you. That's all I had. Thank you. You have a follow-up question from Grant Saligari from Credit Suisse. Please go ahead. Grant, you might be on mute. Yeah. Sorry. Just a quick follow-up. Viva's citing a AUD 300 million gross transaction value and 143 net, which seems to net off a payable dating back to 2019 and some other numbers to working capital. What's the right number for us to think about in terms of cash to Coles? And sort of what are these differences related to? Grant, really, thank you for the question. Really, again, really simple. Coles will receive AUD 300 million of cash proceeds at completion. So we will receive AUD 300 million of cash proceeds at completion. That's the number you need to work through. Again, to be very clear, it's AUD 300 million of cash. We will de-recognise or not recognise AUD 816 million of leases. So in terms of, and that obviously continues to improve and enhance balance sheet capacity going forward. Again, I can't comment on what Viva might be including in terms of their net impact for them on their balance sheet. But for us, it's AUD 300 million of cash and AUD 816 million of debt, being the lease liabilities that come off the balance sheet. Thank you. Thank you. There are no further questions as of now. I will hand back the conference to Mr. Cain for closing remarks. Look, I'm going to get off this call as fast as I can, particularly given the warning from David earlier. But the things that I take away from this is this has been, over 19 years, a successful company for Coles. It's paid back its acquisition price many times. We think it has a very bright future and Viva ownership. It's ranked number one by customers in Australia through Canstar. But what we've tried to do is look at also what's in Coles' best interests. And we believe that we can achieve better shareholder returns focusing on food and liquor and on the channel. And obviously, going forward, we've also, in everything we do, applied a strong sustainability lens to things as well. So it's a win-win situation as I see it, as Scott sees it, as our respective boards and management teams see things. And apart from that, look forward to catching up in four weeks' time when, believe it or not, it's the bell for Q1. So looking forward to that. So have a good long weekend for those who are going to enjoy one. And I'll see you soon. Thanks. Bye. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.