Woolworths Group Limited (WOW) Earnings Call Transcript

Thank you for standing by, and welcome to the Woolworths Group FY '21 Half Year Earnings Announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Brad Banducci, Managing Director and CEO. Please go ahead.

Good morning, everyone, and welcome to the Woolworths Group F '21 Half Year Results Briefing. Joining me for today's briefing are Stephen Harrison, our CFO, who will present our financial results a bit later; Amanda Bardwell, Managing Director of WooliesX; Natalie Davis, Managing Director of Woolworths Supermarkets; Teresa Rendo, Acting Managing Director of BIG W; Claire Peters, Managing Director of B2B and Everyday Needs; Steve Donohue, Managing Director of Endeavour Drinks; Bill Reid, our Chief Legal Officer. The agenda for today's briefing will include an update from me on the key highlights during the half and the progress against our F '21 strategic priority. Steve will then present our financials before handing back to me to finish with current trading and outlook. For those of you who have our presentation in front of them, I was going to just start with a brief summary of the first half of F '21, and that's on Slide 4 for those who are actually using the slides. But in summary, as per our results announcement, we had a strong start to F '21 due to the amazing efforts of our team who have delivered our customers safe and convenient experiences whether in-store, online or in our venues. This effort was reflected in strong customer brand and reputation metrics during the half. A particular highlight for me was the strength of our customer care metrics in December, in particular, in Christmas week. COVID continues to influence customer shopping behavior during the half with elevated in-home consumption contributing to the group's strong sales growth of 10.6%. This was further supported by good execution of seasonal events, including record Christmas trading, and continued strong demand for our e-commerce services. Australian Food, BIG W and Endeavour Drinks all reported sales growth well above trends during the period. The material scaling up of our e-commerce capacity and services to meet customer demand resulted in H1 group e-commerce sales growth of 78% and in the case of WooliesX, 92%. Digital traffic across all platforms within the group also increased significantly with visits to group digital assets up 62% to 20.2 million customer visits per week. We're seeing more and more customers start their shopping journey with us digitally, and I don't think it will be long before digital businesses exceed physical businesses to our stores which, as an aside, they already have in BIG W. BIG W was a particular highlight for the half with H1 EBIT up 166% to $133 million driven by strong performance across all aspects of the business: sales, gross profit margin improvements and good cost control despite the incremental COVID-related costs. Finally, [ in spite of weaker ] trading over the half and a challenging operating environment, it was particularly pleasing to see an improvement in team safety for the half, with a 16% reduction in total recordable injury frequency rates compared to the same time last year. Our team's commitment to delivering a COVIDSafe Christmas despite record volumes and localized outbreaks was a practical demonstration of us living our purpose of creating better experiences together for a better tomorrow. Turning to our progress against our key strategic priorities. For those again with the slide presentation in front of you, on Page 5, you will see the group strategy path. But it is a reminder of all the things we are setting out to achieve during the year. And despite being an incredibly busy half for our team on the trading front, we made strategic progress against all of our strategic priorities. Slides 6 and 7 outline some of our achievements against each priority in the first half, and I would like to touch on some of these briefly in my summary. And the ones I'd like to emphasize are as follows. Firstly, scaling up e-commerce capacity and services across the group was an incredible achievement by the team across -- by our team across all of our X businesses, whether it's Australian Food, New Zealand Food, WooliesX arm, BIG W X or EndeavourX. In Australia -- in food, we opened new CFCs in Notting Hill, Victoria; Lidcombe, New South Wales; and Wellington, New Zealand, and commissioned our first micro performance facility using Takeoff technology in Carrum Downs. We've actually now opened our second unit in New Zealand in Penrose. One of our priorities for the second half is to better optimize this capacity to deliver better customer experiences and operating efficiencies. But the focus in the first half understandably was on just lifting our overall capacity, and there were some particular highlights. In terms of our Australian Food customer proposition, we continue to differentiate that with record sell-through of seasonal products during the period as well as the successful execution of our fresh campaigns, including summer with a healthy twist, fresh ideas for you and the launch of the new Healthier Options online tool. We also continue to evolve our in-store experience with new store concepts landing at Crows Nest, Park Sydney, Cabramatta, Mt. Druitt and Anderson amongst others. Trading momentum in Endeavour Drinks was particularly strong during the half with good progress in digital and e-commerce. Hotels, whilst still down year-on-year, also performed more strongly than we had anticipated. Preparation for the separation of Endeavour Group is well progressed. And as we outlined in our separate announcement this morning, we are targeting June for a separation most likely through a demerger. And finally, while COVID has slowed some of our progress in supply chain, now known as Primary Connect, volumes in MSRDC continued to grow, and we successfully opened our Melbourne Fresh DC during the half and received DA approval for our material Moorebank development in Sydney. Slide 8 is a reminder of the Woolworths Group food and everyday needs ecosystem. I've covered some of the highlights in some of the areas already. But in summary, we made good progress in our core businesses and adjacencies during the half. Turning to Slide 9. In November, we also launched importantly for us our group 2025 sustainability plan, which is underpinned by 5 guiding principles and organized into 3 focus areas of people, planet and product. For each focus area, we have over 40 commitments that we are aiming to achieve by 2025, including: establishment of the Woolworths' Future of Work Fund, which is our commitment to deploy funds towards identifying skills and capabilities for the future and putting in place programs of work that will support the upskilling and re-skilling of our team; sourcing 100% renewable energy to power our business by 2025; and having zero food waste going to landfill from our operations. We also aim to achieve net positive emissions from our operations by no later than 2050. And then on the product side, a number of initiatives around packaging. But also, I just wanted to call out our commitment to increasing healthier choices in our customers' baskets. Since its launch, we have continued our progress with the solar -- with the rollout of solar across our network, a total of 174 sites by the end -- at the end of H1. We're also making it easier for our customers to choose products that are healthier, sustainably sourced and responsibly packaged. By the end of the half, we had removed 20 tonnes of saturated fat, 71 tonnes of sugar and 5 tonnes of salt from our Own Brand products when compared to equivalent Own Brand products in -- since F '18. And finally, we were also delighted yesterday to achieve -- actually this morning [ before our quarterly ] to achieve a WGEA Employer of Choice for Gender Equality citation, which was a focus and is a focus for us as part of our 2025 plan. So good progress both on the trading front and on our overall strategic priority. I'd now like to turn it over to Stephen Harrison to talk about H1 financial results, and then I'll come back and talk about our outlook in H2. Over to you, Steve.

Thanks, Brad, and good morning, everyone. I'll start this morning on Slide 12 with our F '21 half year group results summary. As you can see on this page, group sales were $35.8 billion, up 10.6% on the prior year with strong sales growth in half 1 driven by a continuation of COVID-related in-home consumption as well as strong execution with above-trend growth in each of Australian Food, Endeavour Drinks and BIG W. Sales growth in New Zealand slowed in Q2 with lower market growth rates impacted by a reduction in international tourism. In Hotels, sales trends improved over the half but were below prior year due to continued COVID-driven operating restrictions. EBIT before significant items increased by 10.5% to $2.092 billion. NPAT before significant items increased by 15.9% with greater leverage now evident between EBIT and NPAT due to lease interest being reported below EBIT post the implementation of AASB 16. There were no significant items in the half, so any reference is to significant items related to the prior year. The group's H1 '21 statutory NPAT attributable to shareholders, including significant items in the prior year, increased by 28% to $1.1 billion. Turning to Slide 13 and looking at EBIT by business unit. Starting with Australian Food, EBIT was up by 13% for the year -- or for the half to $1.329 billion. Half 1 EBIT growth was driven by strong trading momentum over the half due to COVID, a strong Ooshie program and the successful execution of our key Christmas trading period. E-comm sales grew by 91.8% in the half, while store originated sales remained strong with 7.2% growth. Gross margin increased 11 basis points to 29.2% with stock loss gains and mix benefits somewhat offset by higher e-comm costs and investment in Everyday Rewards promotions and personalization activity. Australian Food CODB group decreased 1 percentage point -- 1 basis point, sorry, to 23.6% of sales. While lower [indiscernible] sales due to sales fractionalization, a portion of the CODB increase was due to incremental COVID-related costs, which I'll talk to on the next slide. CODB in Australian Food was also impacted by volume increases impacting costs across supply chain, team costs as well as ongoing investments in technology and digital. The increase in e-commerce penetration saw further capacity added in half 1 to support the rapid growth in e-comm, which drove some adverse mix impact in CODB. Supply chain costs also increased due to the Melbourne Fresh DC transition with modest benefits achieved in MSRDC in half 1 somewhat impacted by COVID restrictions in Victoria. New Zealand half 1 EBIT increased by 4.4% on the prior year in New Zealand dollars with earnings ahead of sales despite modest sales growth and COVID costs. BIG W delivered a very strong result with EBIT growth in half 1 of 166% as a result of strong sales growth, gross margin improvements and good cost control despite higher COVID-related costs. Endeavour Drinks half 1 EBIT increased by 24.1% driven by continued elevated in-home consumption, trading up and strong Christmas trading. Higher CODB was a result of salary and wages increases, investments in digital and e-commerce as well as some one-offs from the review of digital and IT asset lives and incremental salary remediation costs. Hotels sales and EBIT continued to be impacted by varying level of operating restrictions by state. Pleasingly, Hotels returned to profit in half 1 with EBIT of $122 million, which was a decline of 45.4% compared to the prior year but a material improvement on the loss of $52 million in the second half of F '20. Excluding Hotels, EBIT before significant items increased by 18%. Central overheads were $92 million for the half, and this includes incremental COVID-related costs, the cost of additional risk and compliance resources supporting our pay remediation efforts as well as higher insurance costs. For the full year, Central Overheads are expected to be in the range of $165 million to $175 million before Endeavour Group-related separation costs. The Endeavour Group separation costs in half 2 are expected to be in the range of $45 million to $50 million, taking the total separation costs to around $275 million, in line with our previous guidance. Turning to Slide 14 and covering group COVID costs. Total COVID costs in half 1 were $277 million, which is approximately 0.8% of sales. COVID costs moderated in Q2 as restrictions eased across the country and the group became more efficient in operating in a COVIDSafe way with these costs including a conscious investment in a COVIDSafe Christmas. COVID costs are expected to moderate further in half 2 but remain difficult to predict precisely given localized outbreaks. Turning to Slide 13 and covering some of our key balance sheet metrics. Average inventory days declined by 3.1 days on the prior year due to strong sales growth driving faster inventory turns despite higher inventory levels held across half 1 to mitigate both supply chain risk and to support elevated sales. Return on average funds employed on a rolling 12-month basis declined by 25 basis points compared to half 1 of F '20 due to the reduction in Hotels EBIT. Excluding Hotels, ROFE for all other businesses increased, and compared to F '20, ROFE increased by 74 basis points to 14.4%. Turning to Slide 16, which is just a reminder of our capital management framework. As you can see on this page, we've continued to generate strong cash flows in half 1, which we're using to fund both sustaining and growth CapEx, to pay down debt and to distribute profits to our shareholders through increased dividends, and I'll go through the details of this on the following slides. Turning to Slide 17 and our cash flows. EBITDA increased by 8.7% to $3.415 billion due to strong trading across the group. Working capital and noncash movements contributed $358 million due largely to the timing of creditor payments. I'll cover CapEx on the following slide. Dividends and share payments of $525 million declined in the half, reflecting a lower F '20 final dividend compared to the prior year. And free cash flow generated was $1.027 billion, an increase of $978 million on the prior year, which flowed through to reduction in net debt at the end of the half. Our cash realization ratio for the half was 115%, which benefited from some creditor payment timing and seasonality. For the full year, we continue to target cash realization of 100% or above. Moving to Slide 18. As a reminder, sustaining CapEx includes spend in areas such as maintenance, safety, store renewals, IT and supply chain spend and investment in productivity initiatives to sustain and improve the efficiency of our business. Growth CapEx refers to spend in areas like new stores, e-commerce, digital and other projects that are expected to either drive higher sales growth and increase margins over time. Operating CapEx for the half was $835 million driven by an increase in renewals, IT and spend across digital and e-commerce. Including property development, gross CapEx in half 1 was at $1 billion with higher property sales in half 1, leading to a net CapEx for the half of $784 million, slightly above the prior year. F '21 CapEx is expected to be in the range of $1.8 billion to $1.9 billion driven by investment in e-comm, digital and supply chain. Turning to supply chain on Slide 19. I just want to briefly give you an update on our supply chain, which, as Brad mentioned, we now refer to as Primary Connect. At MSRDC, carton throughput continued to ramp up during the half, albeit more slowly than we originally planned due to COVID restrictions in Victoria. We're pleased with the progress and operation of the site with over 2 million cartons now consistently being shipped per week, and we have plans in place to transition remaining volumes from other Victorian sites in half 2 to further increase carton throughput. A contingency site in Somerton in Victoria operated throughout the half and was closed in January, which will assist with scaling MSRDC to capacity in the second half. The fresh -- Melbourne Fresh Distribution Center opened ahead of schedule in August 2020 with the Mulgrave temperature-controlled distribution center closed in December, and the transition of remaining 3PL volumes is expected to be completed in Q4. Our Heathwood temperature-controlled DC in Queensland remains on track for completion in October '21 and is expected to go live in February '22 post-Christmas. And as Brad mentioned, our New South Wales supply chain transformation is progressing to plan with a full DA approval for both the Sydney RDC and the NDC at Moorebank being received in December. And then finally, turning to Slide 20 on capital management. The Board today has approved an interim dividend of $0.53 per share, which is a 15.2% increase on the same time last year, broadly in line with our NPAT growth of 15.9%. Looking at debt and funding in the half, U.S. senior notes and yen-dominated European MTNs matured and were repaid. These maturities had been prefinanced through the issue of Australian MTNs in May 2020. So in summary, the group's sources of funding and liquidity remain strong, and we're well positioned to get that credit metrics with an ongoing commitment to a solid investment-grade credit rating. And so with that, I'll hand back to you, Brad.

Thanks, Steve. Turning to Slide 51 on the back end, the first 7 weeks of the H2 half. Group sales for the first 7 weeks have remained strong, benefiting from continued at-home consumption, Australians not traveling abroad and a weaker prior year where sales were impacted by bushfires in the East Coast of Australia. However, growth rates have generally continued to moderate over the period in line with the overall market. COVID costs for the first 7 weeks have also continued to moderate as restrictions have eased. In Australia, food sales increased by 8% in the first 7 weeks, with New Zealand Food's total sales remaining subdued at 1%. BIG W and Endeavour Drinks' total sales growth has slowed moderately compared to Q2, which remains strong at 18% and 14%, respectively. Hotels sales are tracking 12% below the prior year but with a lower rate of decline in Q2. Turning to the outlook. We expect sales to decline over the March to June period in all of our businesses as we cycle the first phase of COVID, with the exception of Hotels where venues were closed for much of the final 4 months of last year. However, we also expect COVID-related costs to be materially below the prior year. Hotels' H2 EBIT is expected to be well above H2 last year when the business reported a loss of $52 million. And while we will continue to spend what is required to be COVIDSafe, all of our businesses have an enhanced productivity focus for the second half. Increases in e-commerce capacity across the group in the first half will put us in a position to continue to meet our customers' demands. And as growth rates slow in the second half as we cycle peak COVID demand, we have an opportunity to optimize e-commerce at scale to improve the customer experience and deliver further efficiency. We haven't yet seen material flight to value amongst our customers, but we expect value to become more important over the next few years as we emerge from a period of unprecedented stimulus. We are focused on trying to personalize value for our customers through our various rewards programs and through our increasingly differentiated store propositions. Turning to Slide 52 of the document. It shows the sales growth by business for the second half of F '20, so that you can see by month the COVID-driven impact of sales that we will fight for in H2. In closing, while living our purpose, we have had a strong first half for all of our stakeholders. And while we are fortunate that COVID continues to be well-managed in Australia and New Zealand, we will continue to do what is necessary to remain COVIDSafe. Thank you, as always, to our customers, team and partners for their support and for continuing to choose Woolworths Group businesses for their shopping needs. I will now turn the call over to the operator to answer questions. [Operator Instructions]

[Operator Instructions] The first question today comes from Ross Curran from Macquarie.

Congratulations on a great result. I was wondering if I could get a bit more color around the current trade in the first 7 weeks. How much of that is a reversal of the 3Q '20 numbers for [indiscernible] 13.8% comps versus 0% and 10.3%. How much of the H2 3% gap we're seeing across both of them is explained by closing debt versus just market share gains that you're privy at the moment?

Sorry, Ross. It's a really bad line. So let me take a crack at it, and if we haven't got it right, you can come back and elaborate. So my apologies. Look, as always, it's very hard to disaggregate a result. But clearly, we are cycling weaker numbers last year, so that is to our benefit. No question about that. So that is a contribution in fact. So I think that's important. But that said, when you look at what strikes us about our business, and we talked about in the media call, is we've got really nice consistency across all of our businesses. And so every state has got relatively similar momentum. You see ups and downs depending on when we have a lockdown, the more recent one in Victoria or the one that we had in Perth. But it really is a consistent trend across the business. So it's consistency that I would call out that is the hallmark of what you're seeing. And then we have seen our sales results moderate in line with moderation in the overall marketplace. So that is the, I think, the highlights I would call out, slightly softer number last year, so we should always keep that in mind. But good consistency and good rhythm and momentum in the business right now.

The next question comes from Michael Simotas from Jefferies.

I've got a question on inflation. So you obviously saw inflation taper off during the quarter, and you've sort of attributed a lot of that to the base. But looking forward, a lot of macro thought leaders are starting to have some concerns about pretty serious global inflation. How do you think your business would be positioned to pass price through to consumers if they do prove to be correct? I know you've had some issues with red meat passing input costs through, but I'd just be interested in your comments more broadly, please.

Well, Michael, thanks for asking such a hard question. Incredibly challenging one, as you know. And it's always a hard question to answer, but it's particularly hard given what we're cycling. And just remember, the share volatility that we're cycling from last year where there were periods of time where we had to actually stop our promotional program just given the surge demand we had in our ford. And so we have to cycle that, which will be challenging in the reported number, but that's just really a function of the market brands. So there's immense volatility out there. So any comments I need -- make need to be caveated by that. There also needs to be -- but just let me give you a few thoughts, if I may. Firstly, we're all aware that there is input pressure in general. And in particular, now we've seen a material increase in sea freight costs across the globe. So those are there. That said, where the A dollar is, actually we're starting to see a bit of a hedging instead, and we'll need to work through how that plays out. So there's a lot of input pressures in general, and there's a lot of cost pressure coming from imported products into Australia driven materially through some of the very material step-ups we've seen in sea freight. But then we've got the A dollar touching $0.80. So we're just needing to work our way through that given it's priced in U.S. dollars. So there are some hedges there. If I then come into Australia, specifically in product made in Australia, we need to obviously separate fresh from long life. We do expect to see continued meat price increases, and meat has been very challenging, as you know. And really, we've seen with the rains we've had that a lot of cattle has been kept on the land or whatever the right expression is. And so there will be continued meat price pressure coming through in the short term given that there's a 6-year cycle in growing conditions on these things for red meat. We will need to actively work on getting efficiencies in that part of our business, and we're making some progress and being very thoughtful on how prices come through. That said, with grain -- the grain crop being pretty good, we should actually expect to see some moderation in products that have grains in that part of the business. So we'll see how that plays through. But there, again, might be a bit of a hedge there. In fruits and veg, very importantly, actually we do expect to see -- we've been going into a more deflationary period of late. This was surprising to me given we fought some of the later shortages, but actually not really when you think about the drought previously and then the bushfires. And so we've got quite a large demand coming in at once. So we do expect to see some just demand/supply driven deflation both in fruit, but actually interestingly enough in vegetables. And so generally, in fruit, we manage to offset deflation with increased demand, but that's not so in vegetables. So that -- we'll have to continue to watch that, but we do expect to see some deflation. We're expecting very large crops, for example, on the fruit side in avocados across the country, including New Zealand. So we'll need to monitor those prices. So a lot of going on there. So there will be possibly continued -- whether the meat inflation offsets the deflation in both fruit and veg is something we can't talk to, but we'll work it through. On our long-life products, actually we still have material cost input pressure. And we generally have been accepting, as we always do, cost increases that are legitimately verified, and you've seen that manifest in shelf prices. How that then manifests, though, in net price through promotions is something we'll just all need to monitor going forward, and that is going up and down. It's very messy, as I say, given what happened with changes in promotional programs last year. So that just makes it very challenging to be definitional. But if you just go to core grocery, there is still modest inflation if you just look at it in total. So in general, I don't think we'll be confronting what we did a couple of years ago on the material deflationary drag we had on our business, Michael. How much net-net inflation is delivered into the market, though, is a question given all these factors that better minds than mine can probably opine on. So have I suitably confused you through the answer to my question? But that just gives you a sense both of the ups and downs, and there's quite a lot of them moving through our business.

The next question comes from Grant Saligari from Crédit Suisse.

Terrific results. So congratulations to the team on that. My question is really around your ability to reduce the rate of operating cost and D&A growth cost going through 2021. And I'd just context by saying, I mean it obviously shows in the result today that the additional investment in e-commerce, the additional promotional spend, the capital spend has driven some really good top line and bottom line outcomes, but we are going to have a lower level of sales growth in '21. So I'm just interested if you could pull apart some of the cost drivers a little and just talk about your ability to slow the rate of cost and D&A growth through '21 and what some of the puts and takes there maybe we should consider.

So thanks, Grant. I'll make some introductory comments, and I know Stephen Harrison is looking forward to provide more detail to the question. The most important thing we caught in our results clearly has been our COVID costs. And as per previous results, we've had [indiscernible] investment we've made in keeping our customers and our team COVIDSafe. We do, however, expect to see that unwind, and you've seen that in our cost structure. And you -- if you look at our sales announcement, you can see how the unwind has taken place as -- with COVID cost as a percentage of sales in Q2 going down to 0.6% from 1% in Q1, and that's continued into the first 7 weeks of the new financial year. And as you know, some of the costs we incurred, they are quite sticky. So we did a lot of overflow warehouse commitments because of the reduced productivity we had in our own warehouses in Victoria around being COVIDSafe in there. So those take a bit of a while to unwind, but they're all unwinding in regards as we're continuing to see the step down as well as a number of processes. We're automating around people counting or just getting smarter on how we do cleaning and a series of things. So we do expect that trend line to continue, and that is possibly the most important factor in how we manage CODB going forward. Then secondly, unlike in previous halves, Grant, we've often talked about the improved efficiency of e-commerce means that it hasn't been a net rate to our results. We actually made material investments in the first half, in particular, going into Christmas in e-commerce capacity. That means you see that baked into our results, and we do expect to be able to better leverage that in the second half. Just to call out, we opened 2 new manual CFCs in the month of December and they're really material commitments to us and they will be the right strategies in the long term. But you see that cost in our first half results, and that's really in both in Sydney and Melbourne, Notting Hill in Melbourne and Lidcombe in Sydney. So we do need to work very hard to get the efficiencies in one set of those CFCs. And we're very glad we have that because it was really important with what happened on the North Shore in Sydney in the lockdown. So we're still working -- running them at slightly to get to the right capacity run rates on those facilities. So that's the second that we need to work on. And then the third that we need to work on is we have made good progress with MSRDC in Melbourne and commissioning our new shared MFC and MSRDC. But the efficiencies right now, we need to make sure that we deliver them in the store. And that will make life a lot simpler for us and that will be a particular focus in '22. Understandably, the focus to date has been to get the facilities to work, and we're starting to see really pleasing progress, particularly on our labor cost per carton, but we do need to then make sure we deliver simplicity in-store on the back end of that. But Steve, I know you have been prepping for this question overnight, so over to you.

Look, just a couple of builds. Obviously, a big part of the cost growth in Australian Food is the sales and volume that attaches to it, so increase in costs, increased volume throughput through cartons throughout the supply chain. Interestingly, high transaction costs as customers really move away from cash to really paying by credit card. So there's a bunch of volume costs that will fluctuate based on sales and growth of sales. And obviously, we've signaled given what we're cycling in the second half, there will be challenges in terms of sales growth. So we're going to manage those costs that attach to volume very carefully. I think on the depreciation question, depreciation has been increasing consistently over time through, as you rightly pointed out, our conscious investments in both long-dated and short-dated assets. We'll continue to have long-dated investments as we announced with our New South Wales supply chain, which obviously won't start depreciating until they kick in. But increasingly, we're investing more in digital and e-commerce, and we're conscious that those are typically shorter life cycle assets. And so some of that depreciation increase you see reflects just that mix shift into some of those shorter-dated investments. I think probably the other point just to call out, so Brad reinforced the MSRDC and our focus on delivering benefits from our investment. I think just a general call out that we're not in the practice of calling big numbers on productivity or cost savings. But actually, in the half, our productivity agenda went actually relatively well considering that some of the restrictions and conditions with COVID and actually our productivity more than offset inflation in Australian Food in the first half. So they are, again, a few builds on Brad's comments, but we're very conscious of needing to manage our costs very carefully and focus on end-to-end efficiency in the second half as we face a more modest sales environment.

The next question comes from David Errington from Bank of America.

Brad, a good journalist needs names; a good analyst needs numbers. And basically, what you said there is really good stuff. But can we put some numbers around the costing costs that you've won in this first half? Now I know COVID -- effectively, we can see the COVID costs, and we've got that. But can you call out what sort of negative impact in terms of these investments that you did need to make to meet the short-term spike in e-commerce? Yes, how much of a drag was that on your first half? I think, Steve, you called out in that thing that you're running 2 DCs with MSRDC. I think you have to run -- was it Oakleigh? You had to run a dual DC duplicated. What we're trying to work out is just how much was your first half result held back by costs that should come out going forward. And that's, I think, where the questions are coming from. Now you've given some really good rhetoric as to what. But can you give us a bit of substance as to how much did you have to invest in your e-commerce in that first half? Because I remember, Brad, you saying you brought 5 years forward of work in 6 months. Now that must have cost a fortune, physical picking. How much -- so can you help us out with some numbers? Because as I said, words don't really go much in our models. With all due respect, it's a great explanation, but it doesn't really help us much understand how much your first half result was held back by these elevated costs.

Thanks, David. I don't think I honestly can do justice to the eloquence of your question, but let's give it a shot. Obviously, the COVID cost is the big one. And David, I would refer you to -- I don't know what page in the company's presentation it is, but it's -- results on Page 16. And I think this is really important to numbers, and we'll talk about some of the other ones subsequent -- what pages are these?

It's on 14, Brad.

Page 14. Thanks, Steve. I think this is an important part of it because when you look at this, David, you're looking at these material -- I mean we're talking about in the first half $277 million of COVID costs. I'll come back to the e-commerce one separately, if I may, and how we wound them off. So a lot of the comments you made on supply chain, which are very legitimate, are actually committing to, David, price facilities which we felt we needed just in a very practical sense given our demand. And it's that number that you see there of $61 million of supply chain costs which is slowly unwinding and eventually -- we will, hopefully, finish completing unwinding by the end of January. I mean -- sorry, we're in the process of finishing end of February. So that's the big one. I think the cleaning and the PPE, you could see the trend lines on how they're coming down. They'll continue to come down as we get more thoughtful and smarter in how we deal with them. The contractors and security really were about worries about safety for our team and for some of the surges in some of the customer behavior. Actually, our customers are behaving very well. We're all in the rhythm. So we expect to see that coming down. Team discounts, incentives, recognition payments, we deliberately write a 10% discount for our team until the end of December, and we felt that we could have unwounded earlier. But just given the aftersales team involved that clearly, we wanted to do that. We have now wound that back to our standard 5 plus 10% on Own Brand in general plus [indiscernible] on business. So that's -- so that came back materially. So those costs right now, we're feeling comfortable that we'll continue to manage them down. As we say, we have a full-time support that manages the COVID outbreaks. And now that they're more localized, it really becomes a more localized response, and we're just much better attuned and all. And so the trend line in those numbers is good, David. It's all caveated, though, that we will do what it takes to keep our team safe. If I then come back to your second question -- and I think -- so you've got to model those through. And I mean those are massive numbers. They've never cease to amaze us by the size. So we don't resolve from the underlying activities, but the size of them, I guess. If you look at e-commerce, this was an unusual half as per the previous question, where normally, the growth rate and -- the efficiency more than offsets the growth rate as a part of our composite. This was not true in the half, and that should be understandable given the incredible growth we've had. But then in particular, anxiety going into Christmas, that we wanted to have enough capacity there to keep customers COVIDSafe. And as I say, we deliberately, therefore, invested more than we perhaps might have, but we -- they're all the right investments. We don't really break it out in great detail, but it is implicit there. I would also like to just call out that we don't quantify either, but it really is important. Not only did we have to write our sheds COVIDSafe in Victoria, which we did with the COVID outbreak and then the agreements we got to with the Victorian government on how we manage shifts and in and out. So we had to particularly do -- solidified our CFC in e-commerce, and we continued that longer than we did in the rest of our supply chain, and that's because we felt that even our CFCs, we just didn't want to create any risks for them. And at some point, we can bore you with the detail of what that means. But it actually created somewhere in the order of a 20% impact in the efficiency of those sheds. So we have the investment capacity plus the way we wanted to operate COVIDSafe, which, of course, changes as we go forward. So those are the -- we'd like to give you more numbers on it. But I mean you can see the big numbers. But those are the -- that's where we are on the e-commerce side. We think it puts us in a very good position in the second half. We need to deliver against it, as you know, because we do expect to see the tailoring off on sales. Then on the question you rightly challenged us on many times, which is our investments in supply chain, David, and we are very cognizant of our commitments to deliver on that. Actually, we had a first -- good first half as well. We've called out our various facilities. We've talked to you before about trying to get to the right volume through MSRDC and do it consistently and then get our cost of carton down there. Actually, very good progress, and Steve can talk to you on that. A reference that I made in the previous call was to the need for us to now deliver the efficiencies in-store, which really is an F '22 conversation. But we are over the 2 million cartons a week, and that is starting to deliver the right cost per carton. And we are still hoping that we'll get the efficiencies now, but it's a precious little too early in terms of consolidating. We'll finish that. I don't if there's anything you want to add to that, Stephen. I don't know what other numbers we can provide or comfort we can provide there.

No, I think that's good color. I mean just a few observations. We called out $168 million of COVID costs in the Australian Food section of our announcement. That costs grew 10.5% and it'll be food. That's just under 3.5% of it. Volume is over half of the remaining. And I think the other one -- big ones we called out, which are relatively similar in magnitude, are depreciation, which Grant asked about earlier, some of the investments in digital and IT, relatively similar sort of magnitude. So I think probably other ones I'd call out.

So we can't give you the exact numbers you're looking for, but hopefully it gives you a sense of the color of the potential that lies ahead for us and that we're working hard to deliver and actually in the first 7 weeks have got off to a good start in doing so.

The next question comes from Shaun Cousins from JPMorgan.

Just a question on market share in Australian Food. If we look at and recognize ABS data can be a little tricky. But the December quarter, I think the growth was 8.8%. You've grown at 8.3% and Coles at 7.3%. Do you -- can you sort of -- can you kind of confirm there that you think while you're definitely gaining share at the expense of Coles, it seems that the remainder independents are gaining share? And do you stand by the comment, I think you might have made in August, that you see local as a tailwind that's still somewhat temporary and some of those customers won't speak? Or is there the prospect now that some consumer habits have changed and some of this local tailwind that supported sales could continue on? Could you just talk a little bit about market share composition?

Shaun, thank you. And we think we could share some slightly different metrics and not why the ABS ones have -- just caveat, we look at it slightly differently. But the hallmark for the business in December and January was just great progress and good growth across all states that we operate in, and that was -- that really struck us was this consistency of execution. And for the numbers we look at, it would appear as if we made good progress on growing share across all states. Now where the share came from varies on a state-by-state basis with the new Costco facility in Perth. And so it doesn't necessarily come at the expense of Coles. It becomes much more situational and specific. So it was really pleasing momentum across the group. And so I think that's important. Within that, what we're foreseeing, Shaun, is that the freestanding or neighborhood stores, our food growth is proportionately best. As with the market reverting back to a more normalized growth rate, we're starting to see a rebalance. The rebalance itself, though, is happening very -- in a very volatile manner because a lot of the lockdowns we've had sort of started to bounce back. So you sort of see -- you get another lockdown to Victoria and again, everything goes back to the neighborhoods until it comes back. So it's volatile. But neighborhood stores is -- are still growing faster than malls are. But actually, we've seen the inversion to be in general, except outside of the city malls that we've talked about and then depending what happens in the lockdown. So we've seen this reversion to mean, and that correlates with my comments around where we saw and get some of the share growth from. Similar with last year, I don't know, Natalie, if there's anything you would like to add to this. I mean it's very noisy, I guess.

I think the momentum has been very pleasing throughout the half and into January, and that's, Brad, as you say, across all states and also across fresh and packaged. And it's, to me, a reflection of the great work our team has done in stores really looking after our customers, but also our whole team really working end-to-end on a very strong trade plan and working with WooliesX on continuing to satisfy that demand for very convenient services, whether that's delivery or to the boot services, which have grown very strongly over the half.

So yes, sure, we're always talking very dramatic effects in this market. You know as well as we do, habituality is really an important element to what we do. So I think it tends to happen slowly. So the reversion back to a normalized shopping pattern is happening slowly. The one thing that we're not seeing revert as of yet, though, as we've talked -- called out is e-commerce, and that's not surprising given that it's been a longer-term trend. But otherwise, this is the slow normalization that's taking place. For those who are interested, all of the toilet paper and all the elevated categories are still continuing to trade above normalized sales. That is probably to do with people still staying at home. But it's just again habituality. Even those have taken a while to normalize, but you would have assumed pantry stocks and whatever else means that they may have normalized by now, but they've not. They're still trading slightly up on what the normal long-term run rate would be.

The next question comes from Andrew McLennan from Goldman Sachs.

I thought I might ask a question on Hotels. The revenue line didn't look to be too much of a surprise, but EBIT certainly was. Very, very strong performance there. Can you talk about a couple of things? I guess maybe talk around sort of gaming capacity and how that changed over the period. You've obviously spoken to some premiumization in the mix of sales on on-premise, but can you also talk about cost control? It's been a much better recovery in profitability versus the prior half than we expected.

No. I think I'll make some comments, then I'll get Steve Donohue to dive into the detail. Firstly, I just wanted to reinforce your comments on cost control and what the team have done a really good job of simplifying the operations of the business. And so this real simplification, which is a topic we talk about a lot as a group, has really been exemplified by what the Hotels team have done on simplification. Secondly, I think a very important feature of our business is we do have a lot of natural hedges in our business in terms of on-premise to off-premise or from city stores to neighborhood stores. But another thing that really strikes you in our venues is they are very neighborhood-driven venues. And so in the time of lockdown actually, a general location of our venues plays to where those venues are located and also tend to be larger venues. And therefore, when you come to the social distancing aspects, it's easier to execute with them and as long as you simplify your offer. So it is a more robust -- inherently more robust structural business than may first meet the eye. But I'll turn to Steve to talk more specifically to some of the comments around what percentage of gaming machines are operating. Any other comments you wanted to make?

Yes. Thanks, Brad. I mean it's hard to talk to the specifics of gaming machines because they're all state-based and the changes or the restrictions imposed by various state governments meant that you had a lot of ins and outs, if you like. But we're at a relatively normalized position now with a sort of 1 and 2 square meter rule playing out across most markets with a sort of a couple of notable exceptions, including Victoria. The gaming numbers have been, overall, I'd say, pretty resilient. But they are somewhat linked to the other elements of the Hotel. So just going back to the cost control question. The reality has been for us that we haven't been able to put entertainment into our venues, and we are one of the largest entertainment providers when it comes to live music and stand-up comedy and the like. And obviously, a lot of those events haven't been able to be conducted. And equally, in the area of foodservice, a lot of hotels had discretion previously to sort of set their own specials and those sorts of things, which were great from a customer standpoint, but actually added a lot of cost on the way through. And customers are increasingly demanding just the basics of a hotel menu, and that's menu -- we're not investing in some of those extra specials and that sort of thing. So there's been a focus from the team on cost, but there's also been this natural removal of costs related to COVID.

And I just want to call out, though, the real volatility and uncertainty it's created for a lot of team members working on the business, in particular, in Victoria where they're working and operating in that whole region, it's clearly been tougher for the team, quite frankly.

The next question comes from Aryan Norozi from UBS.

Just on New Zealand. If you look at -- to your average sales growth for the quarter-to-date, first 7 weeks, it's running at 2% to 3%. I mean is this how we should be thinking about Australia moving forward? Australia is running at 4% to 5% at the moment. But are there any differences that suggest that New Zealand would have slowed down more materially than Australia?

Yes. I mean I think it's a great question and one that we've been looking at, of course. There are -- what seems obvious are some of the -- actually the material differences. The major material difference actually in New Zealand -- and we can come back to long-term immigration. But just looking at short-term net number of people in the country, actually, Australia turns out to have more people in the country in December and January than normal just because of the overseas tourism patterns, where New Zealand actually gets a real bump in December with a number of overseas tourists who come. So actually, they had less people in New Zealand right now than they normally do, and it's quite a material difference. So you have seen both the product of a market that essentially hasn't been in the COVID lockdown as a nation, except for what happened back in March, and there's been a little bit [ shudder ] there, but in truth, there hasn't been. So they never got into habituality of home consumption to the same extent. And so the foodservice sector and those -- the store sector is quite different. But outside of that, you do see differences by sheer numbers of people in the country at any point in time consuming food or buying food from supermarkets, and it's a very different tourism pattern in New Zealand -- in particular, New South Wales and New Zealand. So when we look through our New Zealand business and just look at our tourism index chart, which actually tend to be at airports in New Zealand if you're interested in -- from the airport or across which airport. Queenstown Airport, you'll just see huge declines in sales. So it's just a very different profile. I wouldn't extrapolate from that into Australia in the next 12 to 18 months.

The next question comes from Ben Gilbert from Jarden.