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Executives

Richard Goyder – Manager Director

Ian McLeod – Managing Director, Coles

John Gillam – Managing Director, Home Improvement and Office Supplies

Stuart Machin – Managing Director, Target

Guy Russo – Managing Director, Kmart

Anthony Gianotti – Managing Director, Wesfarmers Insurance

Stewart Butel – Managing Director, Wesfarmers Resources

Tom O’Leary – Managing Director, Wesfarmers Chemicals, Energy & Fertilisers

Olivier Chretien – Managing Director, Wesfarmers Industrial and Safety

Terry Bowen – Finance Director, Wesfarmers Limited

Analysts

Michael Simotas – Deutsche Bank

Shaun Cousins – JPMorgan

Craig Woolford – Citigroup

Phillip Kimber – Goldman Sachs

David Errington – Merrill Lynch

Ben Gilbert – UBS

Tom Kirk – Morgan Stanley

Andrew McMillan – Commonwealth Bank

David Thomas – CLSA

Grant Saligari – Credit Suisse

Daniel Broeren – CIMB

Wesfarmers Limited (OTCPK:WFAFF) F4Q 2013 Earnings Call August 14, 2013 11:30 PM ET

Operator

Ladies and gentlemen, thank you for holding. And welcome to the Wesfarmers’ 2013 Full Year Results Briefing. Your lines will be muted during the briefing; however, you will have an opportunity to ask questions immediately afterwards and instructions will be provided on how to do this at that time. This call is also being webcast live on the Wesfarmers’ website and can be accessed from the homepage of wesfarmers.com.au.

I would now like to hand the call over to the Managing Director of Wesfarmers Limited, Mr. Richard Goyder.

Richard Goyder

Well, thank you and welcome everyone to the Wesfarmers’ 2013 full year results briefing. I’ll commence by covering the group’s performance highlights, then I’ll be followed by the Group Divisional Managing Directors who will each provide a performance summary and outlook for their respective divisions. And then Terry, cover up on the balance sheet, cash flows and capital management. And I’ll conclude with a brief outlook. And as usual, at the end we’ll have plenty of time for questions once we’re done with the formal part of the briefing.

So, on slide four, in terms of group performance highlights, we think the overall result for the group is a pleasing one, once again showing the benefit of health and government structure, five of the non-divisions achieved strong earnings growth. And despite a significant fall in contribution from the resources division as a result of lower Cole prices.

And the disappointing earnings results of Target, the group has reported net profit after tax up 6.3% to AUD2.261 billion driven by solid earnings growth of group’s retail businesses and significant increase in earnings in the insurance division and continued reduction in financing costs. Solid growth in operating cash flows of 8% to AUD3.931 billion reflected the cash generative nature of our businesses and a continued focus on working capital.

Net capital expenditure of AUD1.672 billion was 28.9% below last year. Ongoing organic investments including in our retail store networks in the ammonium nitrate capacity expansion in the chemicals business was supported by increased property disposals of AUD659 million for the year.

Free cash flows therefore increased a very pleasing 47.5% to AUD2.171 billion despite the prior years in closing of AUD402 million of proceeds from the solid – the Premier Cole price, the engine business and a number of smaller divestments. The board today has declared a fully paid file dividend of AUD1.03 per share the full year dividend is therefore AUD1.80 per share, an increase of 9.1% on the prior year.

And finally, on highlights, it’s very pleasing to recommend to shareholders, subject to follow ruling by the ATO, the Wesfarmers makes a capital return of AUD0.50 per fully paid ordinary share and partially protected share including a proportionate share consolidation. This capital return which would total AUD579 million demonstrates the group’s commitment to prudent capital management and Terry will provide more detail regarding the capital return later in the briefing.

Moving on to slide five, in terms of highlights, we showed strong growth in retail in a challenging external environment. And our focus is to provide the range, price and experience that our customers want. Coles and Km, both recorded strong results reflective of the positive momentum generated in those divisions through their turnaround plans.

During their respective turnarounds today, team capabilities and counters have been transformed and the businesses have successfully delivered efficiencies that are being reinvested in significantly improved merchandize office and better value for customers.

Earnings achieved another very strong result with growth across all key business segments driven by good improvements and value rise and service. And as network used to pipeline also strengthen during the year. Pleasing earnings growth was achieved with office works despite challenging market conditions and continued deflation in technology related categories.

Target’s results for the year, was disappointing and below expectation, with earnings affected by necessary stock clearance activity and increased costs.

Strong earnings growth in insurance division was a highlight and good reward for the insurance team given their reference in recent years in dealing with unprecedented catastrophic claims and the work done in improving risk selection in the underwriting business.

The growth industrial divisions were collectively operating a very difficult external environment with the resources division negatively affected by lot of export Cole prices. Within the chemicals, energy and fertilizer division increased product demand and good planned performance drove increased earnings in the chemicals business, but offsetting this were (inaudible) from the fertilizers business due to poor harvest and dry June and the expected lot of contribution from plain guests. A lot of our industrial business activity and cost cutting by customers affected our industrial inside division’s results.

Whilst we are pleased with the earnings performance achieved during the year, slide 7, briefly focuses on very importantly the long term earnings growth and shareholder value creation achieved by the group.

As seen in the chart, if we look in 10 years to today the growth is a little bit compound annual growth and net profit after tax of 11.2% per annum. The strong profit growth is being reflected now performance of the market and delivering compound annual growth and total shareholder return of 12%, 29% above the rate of TSR growth achieved by the I6200 out of the same period.

Now, moving to divisional earnings on slide eight, as I mentioned early on, we’re pleased to have highlight the nine divisions to two strong earnings growth, at the end as we’ll talk more to the respective earnings outcomes in their presentations.

We feel that operationally, we’re in pretty good shape in all business at the moment other than the Target, where led by Stuart, we’re pushing through some big changes.

On slide nine, now in terms of returns on capital, we continue to have a very strong focus on return on capital throughout the group. And this is demonstrated by our cash generation.

During the year, we saw good improvements in return on capital in a number of divisions including Coles Office Works and Kmart. Some of our divisions experienced low returns during the year, and in some cases due to challenging external market conditions which have affected earnings for example the industrial sector division. But also as a result of investment in growth platforms such as our retail store networks and the production capacity increases such as the (inaudible) which is being built to meet customer demand.

I’m not going to spend time on strategic growth initiatives on slide 10 and 11 because the division managing directors will talk to that. But in terms of overall outlook, we continue to invest in all of our businesses, the growth level, we’re also heavily investing in strengthening our human resource capability, growth end divisions. And what I believe is a critical Cole confidence of the growth.

Our balance sheet strengths and improvements in capital efficiency afford the growing opportunity to invest and towards our retained capital to shareholders when this is in the interest of our shareholders. Obviously, we continue to maintain a very strong focus on delivering satisfactory shareholder returns.

Given some recent media attention and group’s relationships with suppliers both domestically and offshore, I thought appropriate that I reiterate that maintaining our reputation what I also call is critically important to the group.

As you’ll see evidence in our operations there are considerable efforts and initiatives throughout the group to continue to improve stakeholder engagement and very importantly to support and contribute to the advancement and development of our customer supplies and the communities in which we operate.

We set high expectations for ourselves in this area and there is always room for improvement. We will continue to focus on improving stakeholder management consistent with our group. My philosophy of best practice is management and continuous improvement to drive the delivery of satisfactory returns to shareholders and the crashing of value for our stakeholders.

Now I’ll pass to Ian McLeod, who will talk about Coles.

Ian McLeod

Thank you Richard. I believe these full year results demonstrate that we have yet again delivered strong improvement against all key metrics. Despite difficult trading conditions we’ve continued to drive cost savings, and best in quality service and value as well as gross margin and return on capital.

We’ve also built around foundations for future growth has been tested and ensure to be robust and sustainable. The result, I’m very confident that we’ll continue to drive across transformation for years to come to benefit both customers and shareholders alike.

I’ll now turn to the financial highlights on slide 14. Coles, revenue increased by 4.9% or AUD36 billion in FY13, AUD1.7 billion more than the previous year. Earnings before interest and tax increased more than twice as fast as revenue up 15% on the prior year to AUD1.5 billion, doubling the amount earned in FY08.

Our food and liquor business is growing strongly and profitably with sales revenue up over AUD1.3 billion to almost AUD28 million and EBIT increased to AUD1.4 billion, a margin increase of 30 basis points in the prior year.

Comparable store sales grew 4.3% or 60 basis points improvement than the prior year and our convenience business Coles Express, also performed well during the year with revenue growth of 3.8%. We also delivered good fuel volume growth and a strong control of cost which enabled EBIT growth to AUD165 million.

I would now like to share a brief summary of our financial performance across the five years of the Coles turnaround by tons in slide 15.

Toward the turnaround we’ve remained focused on driving top-line growth of our existing store network by improving our operating standards, building better stores and lowering prices. This has resulted in the food and liquor business outperforming the market every quarter for the past four years and recording 20 consecutive quarters of comparative store sales growth.

We’ve attracted and retained the strong combination of existing customers and lapse customers that are coming to Coles building loyalty with those customers and being rewarded by to do more of their weekly shop with us. In fact, our customer transaction grew throughout the year and quarter for particularly has never been stronger.

Our profit growth has consistently outperformed our sales growth demonstrating the significant progress we’ve made in improving efficiencies for our business to reduce our cost base as well as investing in value. We anticipate this trend of growing profit and of sales to continue.

Good top and bottom line performance has not however been expense of the terms. We’ve held our capital base relatively flat over the past five years, while at the same time investing AUD4.5 billion in new stores in our initiatives. This has been possible through a combination of working capital savings, reinvestment and operating cash flow and recycling capital such as ISPT transaction recently announced. I’m pleased to say that return on capital has grown from 5.1% when we started the turnaround to 9.5% in the last 12 months. We’re pleased with the progress we’ve made and it gives us the confidence to do more.

I’ll now turn to our implementation slide 16. The cost of lending remains a significant issue for millions of people trading with us. We recognized these five years ago and what progress to lower the cost of fresh food and groceries for our customers. Throughout the year we invested in lower prices, our customers can trust, including the start of this year, having hundreds of new Coles and branded products onto the Down-Down Campaign. This was followed up in the second half with a number of iconic issues in international brands also during the Down-Down Campaign.

We’ve been working hard to provide further benefits to the 7 million active advice members, benefits including a tail of mix of valid meal, tail voucher send to their homes and more recently capital facility you choose. Initiatives such as these enabled experience to save over AUD1 billion over the last year compared to 2009. We estimate that’s on average of about AUD450 per year per family.

We’ve also invested significant same resources in capital to deliver better quality fresh food in our stores. This will continue to be a key pellet of our growth in the years ahead and we invest further in building a sustainable fresh food supply chain.

In addition, we’ve also reinvigorated our efforts to introduce new and exclusive costs on products. This week catalogue allowing us 20 products which are mutual was including some of our new simple gluten free range. These initiatives have resulted in customers choosing to shop more frequently of course and spend more of their refill budget with us. In addition of sales growth in fresh food continues to grow ahead of other categories.

I’ll now turn to slide 17, to discuss how efficiency savings have helped fund these investments. Our ability to lower prices and grow profit ahead of sales has been profitable for the company with the productivity programs. As an example, we opened a new distribution sector at Queensland and Victoria this year this enabled to practice much of our landing in the last few years in a single large location.

Our plans to improve the control and visibility of our transport network continues to take shape, this included the trial of in-house load planning tools which enabled to increase truck utilization, reduced cost and importantly better to more reliable service to our stores.

Combined with this we’ve also maintained to make progress in optimizing the roots of districts we take, knowing this will reduce the attainment driver needs to be on the roads, but also enables escalation of products on the back half and being lowest to our DC.

Initiatives such as these have enabled us to increase the demand of each truck categories by around 15% over the last few years. Efficiencies in our stores also continue to improve as we further invest in user technology and enhanced clearing. This year we added up 1,400 sales count units taking the total to almost 4,200 units and almost many stores reduce skews with our customers.

I’ll now turn to slide 18 to discuss how we’re growing our network and trying these formats for future growth. Our network strategy remains very focused on optimizing the quality of return profile of our stores and absolutely quality of our stores. We’ve continued to optimize our network through closure of small located stores and replacing with larger more efficient stores. In the last 12 months we have increased store space by 2.5% making it 1.6% when effects of store closures and resizes are included.

We’re encouraged by the fact that we add new space and we are still delivering growth and sales to the industry as well. The stores we opened are typically 50% bigger than those we closed and these larger stores withdraws as large accomplishment has enabled us to offer a bigger range of fresh food such as in-store bakeries, fish canters and better equipped dairy and meat departments.

Our pipeline of new storage remains strong and secure as we aim for around 2% on this space growth each year. We started a new program continues unbeaten during the year, with stores in the new format representing about half of the network. But new approvals will also continue throughout the network and indeed we may also look to revisit stores where we’re viewing them about five years ago.

The focus will remain on ensuring an investment reaches our term’s criteria and investment in more space allocation to fresh food continues to pay dividends.

As discussed in our recent strategy briefing, we’ve opened two consent stores during the year. One larger format and safe lines in Melbourne and one smaller format store in Perth. Elements of these concepts will feature in our renewal program to maintain our buyers for in-store renovation.

I’ll now turn to slide 19 to discuss the progress made in the liquor business. I’ve been encouraged by the improvement in the liquor business throughout the year. While sales growth was lower than our liquor business and our food business, profitability in liquor improved. Better performance has been driven by new store openings and more profitable sales mix, stronger promotions and better customer communication.

The store network restructure as we have watched on over the last five years is well advanced. We now have a much stronger mix of co-located stores which generally performed better than free standing stores. Some of the swift markets will continue to reinstate our store network. The free standing stores that are better positioned in higher traffic areas.

We have also invested in improving the customer experience through child formats for both larger and small format stores, and the results are encouraging and we look to roll parts of these concepts during the course of FY14. Of course much work remains to be done but few progress have been made during the year.

I’ll now turn to slide 20 to comment on our fuel strategy. Through a strong focus on our core products and paid control of costs, our convenience business performed well. Our customers are going well to Premium fuel and diesel offers and fuel discount offers remain popular redemption rates higher than ever before.

These discounts are seen in swift markets, customer with over AUD180 million of savings off the pump price during the year. However, we’ve recognized and need to improve the performance of our shop sales and are encouraged by a better performance during the same half.

Shop sales have been supplemented now by a broader level of import promotional offers as well as lay in price and suite markets Down-Down lines such as bread and milk.

While we are pleased with the growth and profitability of our convenience division, it remains a low margin business. In fact, it’s the lowest margin set in the country. Given an outlook of further market volatility in global oil prices and exchange rates as well as increased competition, we anticipate this year’s profit growth to moderate.

I’ll now turn to overlook on slide 21. The past five years have been successful in coming around more licenses to keying business. This success has been delivered by 100,000 loyal and dedicated team members in Australia. And I greatly appreciate that continued hard work and efforts to save our customers to the best of their ability.

As I’ve said previously, there are still many opportunity to growth at Coles and with many efficiency benefits also. The cost of living surely remains at the forefront of our customers minds, consumer sentiment remains below the 20 year average and may this year suffer the single largest monthly declines in the depths of the global financial crisis.

Australia has been one of the very few areas where prices have been lowered over the last year, I’m still convinced that people are paying much for certain products that can be bought for less in other countries. As such our folks and lowering prices will continue throughout the year. You may have seen, we had a good start already with fresh meat products added to Down-Down and a new campaign of unreal deals on weekly specials.

Whilst the quality of our fresh offers, improve significantly there are still many years that can still improve the trend. Investment and development of our team members and the culture will remain a priority to ensure that our ambitious growth aspirations can be successfully delivered.

I’ll now hand over to John Gillam.

John Gillam

Thanks Ian, good morning, good afternoon to all. I’ll kick start with Bunnings and I’m starting at slide 24. The ideal performance of Bunnings across the year was pleasing, our customers received more value, better service and exceptionally water range.

We made things better for our team and for the communities we serve. Our longer term growth plans were well advanced and we delivered good financial results. As you can see, revenue grew by 7% and earnings lifted by 7.5%. Return on capital is industry leading and we expect that number to lift as property investments over the last four years are converted in the stores. And we see the benefit of capital management initiatives like that announced last week.

Our trading margins held steady as a result of productivity work that felt strong value creation and we have good trends and our safety performance.

Moving to slide 25 and focusing on the highlights in the year. We have a multi-throng growth focus designed to improving the customer offer in value, services and merchandizing. The quality of the growth achieved was pleasing, coming in, consumer and commercial areas as well as in all catering regions and in all merchandizing categories.

I was also pleased to see the right of growth lift across the year. Slight back from research and say this metric shows customers like what we’re doing and that matches the positive sales and participation rates being achieved. Our expanding network and our digital presence continue to deepen our brand reach in beneficial ways.

We implemented good changes in how we invest in our teams to right products and project knowledge and provide more development opportunities. And this helped lift already high retention and engagement levels.

The picture on the bottom right of this slide is a snapshot from our recent product which is a trade fair we run in annually to help our team learn about new products. Our exports ran at seven sites across as far in New Zealand and 12,000 of our team attained as a cost dice. This is just a small example of the tremendous supply support that helps us give customers the best offer.

Turning to slide 26, network development activity continued with 23 locations opening in the year. Across the past four years we’ve opened 88 new locations. Our network development activity also enclosed upgrading and reintegrating existing stores and ensuring our entire network can benefit from new and expanded merchandizing concepts. Great work was done along these lines and the year just gone with much more to come in the 2014 year.

I wanted to take this opportunity to reaffirm some important guidance from the recent May briefing. As it’s growing on, we’ve invested at a higher rate in development opportunities post the GFC. CapEx in the last four years now totals AUD2.1 billion. Having built a strong news to our pipeline, it logically follows that we’ll convert land into trading stores at a higher rate than historically achieved. We’ll open at least 20 new warehouse stores in the 2014 financial year and this will represent a 10% increase in new floor space.

We expect to repeat the 10% net floor space increase in the 2015 financial year. And as I pointed out in May the 10% uplifts are doubled the average rate of increase in net floor space across the past decade.

The longer term property plot we announced sits at around 85 warehouse sites and at the start of this week, we had 20 stores on the construction and we’ve already opened three stores this year.

Turning to outlook in slide 27, in the year ahead, we anticipate further uplifts in both consumer and commercial volumes driven by our multi-throng growth agenda. We have a DVA plan with an intention to focus in areas where we help build more growth momentum or support growth by further strengthening core business elements. I talked to this work in the May briefing day and we’re pleased with progress already being made.

The uplift in store openings will increase store opening costs relative to prior years and as a result we don’t expect sales growth and earnings growth to be so closely matched in the year ahead.

In summary, from a volumes perspective, I’m pleased with the fantastic clean effort that’s underpinned these good results and it’s positioned the business to continue to perform in a robust manner into the future.

I’ll now turn to the office works results and I’m on slide 28. The overall business performance of office works across the year was good with market share guidance achieved. As you can see, all the performance measured list have improved with the standouts being the strong earnings growth of 9.4% and the uplift in returns.

Macro can take pride in conditions continue to be challenging for office works with small and medium business sectors under pressure and deflationary forces within key categories continuing. And given that backdrop the business traded well relative to the market and competitive performance.

Turning to slide 29, there are a number of highlights. Across the past few years, the office works team had built an impressive fully integrated offer across every channel, stores, online and direct. This every channel presence underpins this, pleasing trading results.

Although sales growth was modest, strong growth levels were achieved in underlying customer participation, as measured by transaction numbers and units sold. The lift in participation levels came from good work improving the customer offer and this was leveraged across every channel. Online sales growth was particularly pleasing.

The highlights of the offer improvement work where investments and service and services, range expansions and continued enhancement to the office works were improved. The strong uplift in earnings came from the increased customer participation as well as good work in merchandizing, reasons affecting these actions and disciplined cost management.

The store network expanded with 30 new stores opened in the year and investments in all the stores improved the quality of the existing network. And in June, the business celebrated terrific milestone with the opening of the 150th office work store. It was pleasing to see RSC levels lift by 14% and good stock management was a contributor to that outcome.

Moving to slide 30, the outlook for office works is for modest levels of top line growth given ongoing competitive pressures on sales and on margins. Mark Ward in the office works team has a good strategic work plan that will continue to grow the business and lift returns.

Central to that way plan is the focus on continuing to improve the customer offer in stores, online and direct in a fully integrated way. Enhancing and leveraging office works, every channel capability builds on the core strength of the business.

I’ll now hand over to Stuart Machin.

Stuart Machin

Thank you, John. I will start on slide 32. I arrived to Target four months ago and we are now embarking on a top to toe recovery and transformation program after a tough year for Target.

EBIT of AUD136 million was 44% down from last year, return on capital dropped to 4.6% from 8.4% last year and total sales were down 1.7% with comparable sales down 3.3%.

Trading throughout this year was quite erratic with significant swings in performance and particularly in quarter four, where trading was affected by high levels of inventory resulting in high levels of clearance and the slow start to winter.

Slide 33, the decline in earnings has been the result of some big routed issues within the business as well as some large cost impacts. The price deflation was driven by high levels of clearance activity and the continued price decline in entertainment categories.

Excessive inventory particularly impacted quarter four as we commenced clearing through the buildup of spring summer apparel and other distressed inventory. The life start to winter also impacted sell-through of full margin lines.

The shrinkage result was higher than expected due to changes in our operating modeling our stores, impacts of our sourcing and supply chain initiatives which are under review. Finally increased costs also affected earnings, in particular significant consulting expenditure and the restructuring of our stores support office.

Slide 34, since joining the business in April, I’ve been focused on both tackling the short term issues that are impacting the performance today and building a transformation plan to make Target’s growth again.

I’ve been listening to customers, team members and our suppliers reviewing and resetting the direction of the business, taking action to improve inventory control, restructuring the store support office and recruiting the leadership team. This is a long-term plan and it will take time to transform and improve the business. And we have a lot of work to do to progressively improve earnings.

Slide 35, FY14 is very much about getting back to basics, with a lot of challenges to face into as we revise our business. Our activities as detailed on this slide will be focused on improving our service in stores, reducing our skew count, improving our product style, quality and pricing, arresting cost growth and ensuring the right theme and organizational structure is in place for future success.

Slide 36, the challenging trading environment experienced in the fourth quarter of last year is expected to continue into financial year 2014 due mostly to high levels of winter inventory that will require continued clearance.

Trading will also be affected by late launch to spring summer product transition and the non-repeat of high level significant promotion activity in the prior year. The new leadership team will be in place by Christmas to leave the Target transformation plan.

While the business will take time to get back to an acceptable level of performance, I’m encouraged by the passion of our customers and our team members towards the brand and the collective desire to see Target succeed and once it again be a great business. Thank you.

I will now hand you over to Guy.

Guy Russo

Thank you, Stuart and good morning everyone. It’s my pleasure now to run you through the Kmart performance summary on slide 38 and also give you some insight from the main highlights for our year and where we see Kmart generally progressing in the short to medium term.

Kmart’s revenue for the year was AUD4.2 billion with comparable sales growth of 2.1%, excluding the impact of removing Christmas lay-bys from toy Sullivan, comparative sales growth was 3%.

For the fourth quarter, Kmart sales increased by 0.2% to AUD1 billion while comparative store sales declined by 0.7%. The removal of Christmas Lay-by from the toy Sullivan impacted sales in the final week of the year, excluding this impact. Comparable store sales of the fourth quarter increased 2.8%.

Quarter four, represented the fourteenth consecutive quarter of growth in transactions and units sold, underlying sales growth for the quarter was driven by volume lines and enhancing ranging and improved inventory management. Apparel performed particularly well however entertainment products continue to provide a challenge with maturing categories such as music and DVDs.

Kmart’s low prices continued to resonate with our customers with improvement in store execution and product availability also contributing to sales growth across the year.

EBIT grew to AUD344 million, an increase of AUD76 million or 28.4% over last year. This represents the fourth year of double digit earnings growth and reflects the outstanding work of all the teams in the continued turnaround of Kmart. EBIT margin of 8.3% increased 165 basis points and return of capital of 25.9% was up 700 basis points on last year.

Slide 39, we have now achieved four consecutive financial years of double digit earning growth. We are continuing to be a retailer that provides all families with the lowest prices on everyday items. This year, we were more disciplined with our range assortment, inventory quantification and store execution. We had continued strong performance from our everyday core ranges as well as strong seasonal trade by contributing to earnings growth for the year.

Working capital management has remained a focus and has contributed to a strong cash position. Investment in our network has also continued with six new Kmarts opened and 10 major refurbishments during the year. Kmart order opened five new service centers also last year.

Slide 40, Kmart’s performance is expected to continue as Kmart delivers on its growth strategy, underpinning our strategy our four areas of focus and they ought to be volume retailer, operational excellence, having adaptable stores and a high performing culture. These four areas will ensure we are setup to continued growth.

We have realigned the mid-year toy Sullivan to bring in into line with our overall business strategy with every data availability and irresistible lower prices every day we have removed Christmas Lay-by from our mid-year toy Sullivan. As mentioned earlier the removal of this event impacted sales in quarter four and is also expected to impact sales in quarter one. Profit and benefits are expected across half one financial year of this 2014.

Kmart will also maintain safety as a high priority, closely manage exchange rate impacts and continue to enhance our ethical sourcing program. At Kmart, we make low prices, irresistible.

Thank you for your time today. I’ll now hand over to Anthony Gianotti, of Wesfarmers Insurance.

Anthony Gianotti

Thanks, Guy, and turning to insurance performance summary slide on slide 42. The insurance division saw a strong return to profitability during the 2013 financial year. The EBITDA increased to AUD218 million, a significant increase from the AUD17 million reported in the previous corresponding period which included AUD108 million impact from increases associated with the February, 2011 Christchurch earthquake.

Across the division, total revenue increased by 8.8% to AUD2.1 billion and return on capital increased to 14.7%. Earnings from underwriting activities increased to AUD136 million with the combined operating ratio improving to 95.3% from 111.2% in the prior year.

Earnings from or breaking operations increased by 8.9%, AUD86 million off the back of 9.7% increase in revenue to AUD293 million.

Turning to insurance highlights on slide 43. Firstly, in our underwriting operations, the significant improvement in earnings was driven by the continued focus on disciplined underwriting and the flow through of premium rate increased achieved in the current and prior year as well as favorable claims experienced across most classes of business.

Despite a generally favorable claims environment, claims from natural pail events were broadly in line with our internal expectations for the year.

Strong growth in gross written premium was achieved during the year reflecting higher premium rates and strong growth in volumes across most portfolios particular Coles personal lines, motor and rural costs.

Strong customer interest in Coles Insurance continues to drive substantial increases in sales of motor and home products with more than 200,000 policies in force at the end of the year.

Changes in reinsurance arrangements in 2013 together with improvement in underlying loss ratios have also benefited underwriting earnings across most classes of business.

Deterioration in our run-off builders warranty portfolio was offset by releases from our premium liabilities reflecting further improvements in profitability in the underlying portfolio. Investment yields continue to trek lower during the year in line with falling interest rates.

And New Zealand operations continue to support our customers through the Christchurch claims prices, having settled more than 60% of outstanding claims ahead of the industry average of 53%. Our reserve increase event remained broadly in line with our position at 30 June, 2012.

Turning to our growth in operations on slide 44. We continued to see further growth on the prior year in both revenue and earnings across our growth in operations. Our New Zealand growth business achieved strong revenue in earnings growth with the FMI and ATM acquisitions fully integrated and performing ahead of expectations and new business growth benefiting from increases in premium rates.

Revenue and earnings growth in (inaudible) have been more challenging reflecting continued difficult trading conditions in the SME sector. As flagged earlier in the year, we have continued our investment in the replacement of brokering systems in New Zealand, with higher expenses associated with the investment resulting in a small decline EBITDA margin for the year.

I’ll now turn to the insurance outlook on slide 45. Across our underwriting operations and subject to weather events, we expect to see further improvement in underwriting earnings, benefiting from a continued focus on disciplinary selection and operational efficiencies.

However, the high level of premium rate increases that we have experienced over the past two financial years are likely to slow across Australia and New Zealand. Further expansion of the Coles insurance offer is expected to provide strong premium growth in our personal lines portfolio during the year.

The current low interest rate environment will put further pressure on investment yields and this is likely to adversely impact investment earnings in the current year.

Across our growth in operations, we will continue to pursue growth through targeted recruitment both on acquisitions and improvements in productivity. A greater focus on customer attention will help offset the challenging conditions that are expected to remain in the Australian SME sector.

While further growth in earnings from growth in operations is expected, our investment in the planned upgrading brokering systems will continue to constraint margin in the short term.

Overall, the division has delivered a strong result flowing from a continued focus on disciplined underwriting and targeted growth. The division is now well placed to enter the new financial year with a solid platform for further growth. Thank you.

And I’ll now hand over to Stewart Butel.

Stewart Butel

Thanks Anthony and good morning everyone. I refer you to slide 47. Our operating revenue at AUD1.54 billion was 29% below last year, reflecting the tough conditions being experienced in the export marketplace.

The major effect is contributing to this reduction, this evenly lower Cole process with average middle Cole process down 30% and thermal Cole process down 20%. Continued high export, high exchange rates offset by a higher export sales volumes following the completion of mine expansions last year.

Royalties for the full year were AUD261 million, down AUD107 million or 29% on last year, reflecting lower export process. This stand at royalty at AUD154 million was AUD65 million lower than last year.

Mining and other cost was unevenly lower than last year, due to a major focus on cost reduction and control. Earnings before interest and tax of AUD148 million, was down 66% on last year, reflecting the previously described difficult export market conditions.

I now refer to you slide 48, results and highlights. Following our ongoing focus on safety, total recordable entry freight continues to fold. As previously stated export revenues have significantly declined this year reflecting the difficult trading conditions being experienced.

Lower export process plus the high Australian dollar resulted in a significant decline in export revenue. However, on the positive side, production time cost was significantly down. Unit cash costs had fallen by 30% from the peak and first half in a financial year ‘12. Second half costs this year are down 9% compared to the first six months of this financial year.

Reduced contract for activity with contracted numbers at (inaudible) down by 400, equipment and supplier rationalization plus mine planned optimization have delivered significant cost reductions to account the impact of high development growth in low Cole process.

I refer you to slide 32 of the supplementary plan, where more detail on cost reduction is provided.

Current financial year FY13 manageable coal production was impacted by a scheduled mine shutdown over the Christmas New Year period and the optima of certain Oswald.

I now refer you to slide 49, results of development. Current variable manageable coal demand and lower export process provide for a difficult short-term outlook for the division. The export coal marketplace remains challenging.

We expect coal prices for the first half of FY14 to continue to remain low. Stock prices remain below recently settled term prices. Coles’ manageable coal sales volume is forecast to be in the range of 7.5 million to 8.5 million tons for 2014 financial year subject to the usual mine operating performance and restructure constraints.

Standalone royalties are escalated to be in the range of AUD100 million to AUD120 million for this year. Wesfarmers’ focus and our focus as a division continues on cost reduction and control as we build on the positive performance in this area over the last financial year.

I’ll now hand over to Tom O’Leary from chemicals, energy, fertilizer division.

Tom O’Leary

Thanks Stewart. Looking now, Wesfarmers chemicals, energy and fertilizers performance summary on slide 51. And starting with safety performance at the foot of the slide, I’m pleased to report an improvement in our loss time injury frequency rate for the division this year. I spoke at the Strategy Day in some detail about the work we’re doing in safety and it’s pleasing to say this reflected in our performance.

We’ll continue to have that focus on improving safety across the division and finding different ways to ensure that safety is front of mind for all of our people.

Turning to financial performance, earnings were AUD249 million, a decrease of 3.5% on the previous year, which included a one-off positive earnings impact of AUD9 million which we called out last year, from the termination of the highest industrial gas supplier grant in 2012, and earnings from businesses divested that year.

Divisional earnings performance was driven by strong results in chemicals offset by a decline in fertilizer as well as a further decline in client hay gas in line with our expectations. Return on capital is lower than last year but resulting quite the impact of the capital associated with the ammonium nitrate expansion and that will continue to put downward pressure on retail and capital until the plant is operating in the first half of calendar 2014.

Turning to highlights on the next slide, the expansion of our ammonium nitrate production capacity at (inaudible) continues to make good progress. Construction is well advanced with all major modules delivered to site and in place and the project remains on track to be operational on time and within budget in the first half of next year.

At an operational level, our chemicals businesses have benefited from good production performance which together with strong product pricing in ammonia, ammonium nitrate and sodium cyanide resulted in solid earnings uplift for these businesses.

Earnings from the ammonium nitrate to adventure, was significantly ahead of last year, which included a major shutdown and some client issues. The de-bottlenecking of our sodium cyanide production capacity is well underway, in fact the expansion is expected to be completed by the end of the 2013 calendar year.

As anticipated Australian vinyl had an another challenging with higher input costs relative to PVC selling prices and a strong Australian dollar impacting margins and subdued construction activity dampen volumes.

Quinine gas earnings continued to reflect declines in LPG production economics and earnings were below the previous year but in line with expectations. LPG production for the year was 3% lower than last year due to lower LPG content in the damp year to natural gas pipeline.

In March this year, Quinine gas launched a natural gas retailing business providing competition for the first time in the south west of Western Australia. Early performance of the business is in line with expectations.

Fertilizer earnings were below last year as of poorer harvest together with a very dry June resulted in lower sales volumes. And the combination of softening international prices, lifestyle to the selling season and saw a compression window all led to lower margins.

Turning to outlook on slide 53, there remains an ongoing focus on the successful completion of both the ammonium nitrate expansion and the sodium cyanide de-bottlenecking which are intended to underpin growth and earnings from those businesses.

Our predictions for explosive great ammonium nitrate usage in Western Australia remain in line with lows with head in place and disclosed over the last couple of years. And as I’ve said in the past, I don’t support the construction of further ammonium nitrate capacity in Western Australia beyond their, own expansion.

As others projections have softened such as they are more in line with their own projections, we’re pleased that our expansion is underpinned with strong off-take contracts.

Demand from the raise sector is expected to support strong performances from the ammonia and ammonium nitrate businesses, although higher gas costs and lower international ammonium pricing will partially offset that.

Also planned shutdowns at one of the nitric acid ammonium nitrate plants and the ammonium nitrate drilling plant during the year will affect earnings. Quinine gas, LPG earnings continue to be dependent on international LPG prices as well as content in the damp pipeline.

In fertilizers the Western Australia had one of the driest Junes on record and this has reduced yield potential in much of Western Australia. Recent rains though have heralded recovery in many part of the state that the fertilizer business earnings in the 2014 financial year remained dependent on a good seasonal break in the second half and farmers terms of trade.

I’ll now hand over to Olivier Chretien.

Olivier Chretien

Thanks, Tom and good afternoon. I will now cover the industrial and safety division. On slide 55, the (inaudible) that’s continued to be impacted by the market slowdown. Operating revenues fell by 2.5% to AUD1.65 billion. Earnings fell to AUD165 million, a decrease of 13.2% and return on capital decreased from 16% to 14.7% while safety performance continued to improve.

Looking at some of the key highlights of the year on slide 56, the results were driven by reduction in business activity and increased cost control across our customer base, predominantly in the resources sector offsetting these downturn regions to a good growth in the specialty service offerings, including industrial gas.

In response to these challenging market conditions, our division has strengthened its focus on realigning its cost base, saved cost from programs on their way, include to date tighter control of discretionary costs, work force flexibility as well as recent freight and energy tenders, restructure of Blackwood protection in New Zealand and total fasteners in the last quarter.

Our network review including the announced closure of 13 small locations between June and October this year, and we performed on capabilities and service levels to customers have been maintained.

Currently new platforms have been developed to drive growth. This included realigning of our business activities around three customer focused streams last October as you can see in the appendix, last structure of the account and category management processes across industry sectors to drive faster and unification.

New energies of house ones, including work way, supported by a new distribution center in Shanghai. The year, on tight services for example vending machines, the launch of gas distribution from selected Blackwood bunches and the launch of online businesses in Australia and New Zealand.

Now turning to the outlook for the industrial and safety division on slide 57, the market is expected to remain subdued in full year ‘14, the division is well placed to respond to any recoveries and irrespective of market activities. There are good opportunities to grow market share.

Share growth will come from both leveraging the existing strong contract base and service levels, as well as new product and services additions. The team has been availing contract renewal lately.

In addition, profitability will be supported by continued focus on lowering our cost of business, concentrating outsourcing with strategic suppliers and our home brands as well as investing in technology.

Finally, the division also continues to aggressively explore approximates to diversify returning streams, both organically and slight position. Thank you.

And I will now hand over to Terry Bowen.

Terry Bowen

Thank you, Olivier. Good morning or afternoon everybody. I’ll now provide an overview of the performance of the group other businesses as well as cover off on the balance sheet, cash flow and capital management.

Turning to the group’s other businesses on slide 59, you can see the result from associates was above last year and as private equity losses reduced to AUD11 million compared to the AUD55 million loss last year.

In addition, the group’s investment in the BWP trust generated earnings of AUD27 million compared with AUD16 million for the same period last year. This increase contribution from associates was partially offset by decline in interest revenue and this was due to lower levels of cash on deposit during the year as well as lower deposit rates progressively over the year.

We reported nine non-trading items this year compared to a net expense of AUD15 million last year and the details I reported in the information that you’ve got. At the bottom of the table is other, the movement in this area between the year mostly reflects the non-repaid of last year’s depreciation credit associated with taking premier mine as an asset for sale into corporate. And then we also had higher tax cost this year associated with our investment in Q&P.

Corporate costs were up AUD7 million year-on-year and this is largely reflected of increased corporate sponsorships.

Turning to slide 60, and the operating cash flow performance of the group, overall operating cash flows increased across most divisions which was pleasing and a result of solid overall growth of 8% to AUD3.9 million for the group or a cash realization ratio of some 118%. This strong cash flow generation which was ahead of earnings growth reflects another year – good year of good working capital management.

This is looked at on slide 61, the net working capital you can see decreased across the group by AUD542 million compared to last year and it was driven by the retail businesses that reduced by AUD577 million collectively.

Within this result, the payables at the end of the year increased and this reflected increased turnover across these businesses as well as store network and other ongoing improvement sorting arrangement.

Inventory days, it’s pleasingly also improved. Overall dollars were similar to last year but this really reflects the efficiency of inventory was able to pie for some significant new store growth that we had during the year.

We’ve provided further information on working capital and key balance sheet movements on the supplementary packing on slides 47 and 48 and I would refer people to that.

Turning to capital expenditure on slide 62, net capital expenditure for the year of AUD1.672 billion was 28.9% lower than last year. Within this growth capital investment was AUD2.33 billion and that AUD295 million lower than last year. This largely reflects lower expenditure in the resources division following the completion of the Cole preparation plants last year both expansions at (inaudible).

Major growth capital investments this year was similar to last year including ongoing retail network improvements particularly in Bunnings and Coles and expenditures associated with the expansion of ammonium nitrate at Quinine.

Disposal proceeds for the year increased by AUD384 million to AUD659 million. Our network says more of our retail property pipeline into the stage where the group could optimize the outcomes from on lease back.

Looking towards the 2014 financial year, we anticipate our net capital expenditure for the – to be between the range of AUD1.5 billion and AUD1.9 billion but this will as usual be dependent upon freight haul property activity, particularly sale on lease backed activity which is shown on slide 63 has been increasing.

Within this results, in order to optimize the cycling of balance sheet of a significantly greater amount of free held property than we’ve historically carried. The group has worked on introducing some more innovation in (inaudible) structures in support of our traditional approach. In doing this, our goal was to give the group greater flexibility in order to optimize outcomes but also create other benefits such as more control over site development and facilities management.

An example of this approach during the year was the joint venture established between Coles and ISBT for where we put in a portfolio of 19 Coles shopping centers and released about AUD400 million worth of capital of balance sheet.

We do expect ongoing high levels of property recycling this year and we’ve started off the year well as John, as discussed in relation to the sale of 10 warehouses to the BWP trust and really releasing a debt of AUD271 million.

Turning to the group’s funding cost on slide 64 the group’s effective earning cost decreased 118 basis points to 6.6% during the year. These lower financing costs are reflective of a lower spread cost and this follows, successful refinancing initiatives as well as generally lower cash rates that we now benefit from given that a number of our pre-GSE swaps in our reaching maturity.

Importantly for the 2014 financial year, we expect our effective cost debt to a gain for reasonably significantly to around 5.8% for the year.

Slide 65, shows that the group has in recent years established good access to a diverse number of tech markets and also managed to debt maturity probably follow to a comfortable level of debt meaning refinancing on anyone.

During the 2013 financial year contained in the group was again very active and we had three separate fund raisings as well as negotiating new bilateral arrangements now on around half of our think date. All of this activity is consistent with our strategy to pre-fund debt maturities when conditions are favorable in the markets.

On to slide 66, with the balance sheet in a strong position and solid growth in earnings and cash flow, the group’s credit metrics have improved and their fixed charges cover increased to 3.0 times and cash interest covered to 12.2 times in line with the strong credit metrics by S&P and Moody’s right to the group, accounting at A minus and A3 respectively.

Turning to slide 67, as you can see from the chart, strong growth in operating cash flows is also over the last five years, funded the group significant capital expenditure program as well as increasing dividend payments which have been maintained at a high payout ratio.

As Richard mentioned earlier, the directors of the trade, our final dividend for the year just ended of a AUD1.03 per share, fully Frankton brings to full year dividend to AUD1.80 per share and this is an increase of 9.1% on last year. The record date for this final dividend is the 26, August and the dividend will be payable on the 27, September.

In line with our recent practice, the group will continue to provide shareholders with the option to participate in the dividend investment plan, I just can’t put apply to the allocation price and this program will not be underwritten. Shares issued under the plan will then be accord on market to neutralize any dilutive effects.

As shown on slide 68, neutralizing the DIP continues our recent practice which when added to purchasing employee shares on the market means that the group would have spent over the last five years more than AUD1.6 billion in neutralizing the otherwise dilutive impacts of these activities.

In addition, we have announced today as Richard said, that the directors are recommending to shareholder that the group takes further capital management in the form of AUD0.50 per share capital return together with a proportionate share consolidation.

The capital return which would total approximately AUD579 million is being made to return surplus capital to shareholders and also ensure that we maintain an efficient capital structure. And importantly in making this return, the group maintained a very strong balance sheet and a lot of financial flexibility and we don’t believe in any way that this compromise is with time as growth objectives or opportunities in the future.

Turning to the mechanics of this return on slide 69, the capital return of AUD0.50 per share will apply equally to Wesfarmers’ ordinary and partially protected shareholders and will be subject to a final rolling body ITO on the tax rate of this return.

We have received the positive draft class rolling from the ITO that confirms that this distribution will be capital and not income and if this is confirmed under issue, it will confirm there will be no immediate tax liability for the vast majority of our shareholders. The capital return will be accompanied by an equal and proportionate share consolidation.

The combination of a capital return and share consolidation, we think provides an earnings per share outcome similar to that which would result from a share buyback. Importantly though, the outcome will be equitable for all investors and shareholders as all shareholders will receive an equal cash distribution per share. And the share consolidation will be implemented in a manner that ensures that the proportionate interest of Wesfarmers shareholders remain unchanged.

In order to properly reflect the impact of the capital return and share consolidation on the value of the embedded option in the Wesfarmers’ partially protected shares, the floor pricing conversion ratio attaching to these shares needs adjusting and that would be adjusted to AUD34.32 and AUD1.256 respectively.

Shareholders will consider this proposal to the company’s IGM, which will be scheduled to be held on November, early November 2013. The group will issue a detailed explanation of the proposal ahead of that and confirmation of the time table will be included with the IGM notice of meeting.

The final ITO ruling we do expect before the IGM and should all conditions be made – we’d expect shareholders would receive their payment in early December 2013.

And I’ll now hand back over to Richard.

Richard Goyder

Thanks Terry. It’s just reiterating what Terry said in terms of the capital return. These are capital returns, it’s not a special dividend, they are significantly different taxation implications and other implications, a number of media groups are carrying reports at the moment as special division which it is not, it is a return of capital subject to the ITO approval and shareholder approval.

I’ll be quick on outlook, so that we can get to questions. Just a couple of quick comments. Wesfarmers is about creating value as we’re currently doing within our businesses and permitting to our customers. We’re also providing increased opportunities for our employees and for our suppliers to innovate and grow with us as we invest in all our businesses.

We are also very pleased to providing opportunities for the communities in which we offer for employments and tax payments and many other contributions that we make.

It’s important for you to note that growth employment is up by more than 4,000 people from this time last year. In regards to outlook, the group’s outlook remains positive despite more subdued forecast for the Australian economy and challenging conditions for number of the group’s industrial divisions.

Our primarily objective is to provide satisfactory returns to shareholders and the cash generative nature of the group. Our balance sheet strengths and the strong focus on return on capital are expected to enhance future shareholder returns.

We’ll now open up to questions. Terry and I and the divisional managing directors will be happy to answer.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question today comes from the line of Michael Simotas from Deutsche Bank. Michael, please go ahead.

Michael Simotas – Deutsche Bank

Hi, thanks very much for taking my questions. Could you just talk about the Cole division, please? The margin expansion in the second half is you said 21 basis points online under the property it’s a bit lower than what we’ve seen over the past three years. Was there any one objective installing in that result or is that a sort of trend we should expect going forward?

Richard Goyder

Yeah, I don’t think you initially shoot out the trend. I think the overall. Our profit growth still had the sales and across the year we still expect that to continue. We’ve recognized we need to deliver margin both in terms of margin percent expansion and obviously we are still confident that we can deliver that.

And what we try to do as a business is make sure that we continue to manage the business for the long term as opposed to the individual short term positions. And we’ve seen for the half on half base in differences in margin before and I guess that might even happen again in the future. But from our point of view, we’re very confident and especially we’ve got – we’ll continue to see margins grow but we’re out there delivering improvements in our efficiency and continue to invest in value.

And that will continue encouragingly our transaction growth in quarter four following the strongest year. So, I wouldn’t believe that’s an indication of any sort of slowing down of our position. I think the transformation is still very much on track and I expect to continue.

Michael Simotas – Deutsche Bank

Okay. And then, just a second question, on the value-adding transactions. So I think one in Cole, one in learning from the suggestions that there may be another one in running coming. Obviously that the return implications that hopefully expected from the questions and just talk about what the impact would be on margins for the Planning and the Cole division?

Terry Bowen

Thanks, Michael. Seriously, the indications are very solid. We saw energy relates to our suite that we talked about another transaction that’s in the final stages of negotiation and it’s a transaction that hopefully what is just slightly larger than the one we announced through DWP.

In terms of the mechanics, it’s something we’ve been doing for a long-long time. The way that we run our business internally, we all have profit and losses for every store and the way we think about our business EBIT includes rent. And so, there is now adjustment in any of our internal thinking in anyway shape or form for this transaction, it’s just capital management.

Obviously, the big picture that’s running the group, there is obvious change between what happens with borrowings, the interest costs and where rent is, internally that’s how we run the business, there is no change at all. We’ve had that discipline for two decades.

Michael Simotas – Deutsche Bank

Okay, and maybe just very quick follow-up on that. If I look at the exit EBIT for the planning division, I think you made a comment that EBIT gross margin will be slower next year than sales growth is sort of large property related to that transaction, how is the rating for that?

Terry Bowen

No, not at all Michael. And the reasons are that we are dragging forward significantly larger numbers of store opening costs relative to the prior year.

Michael Simotas – Deutsche Bank

Right. That’s helpful. Thank you.

Operator

Your next question today comes from the line of Shaun Cousins from JPMorgan. Shaun, please go ahead.

Shaun Cousins – JPMorgan

Thanks, good afternoon guys, just a question regarding Coles again. When we back out the provision release, the provision cost that you got last year. It appears that you’ve only got 5% EBIT growth. I’m just sort of curious, the extent to which the increased petrol discounting that you embarked on in the second half 13, right on the right is EBIT that you reported in the half. And can you just confirm that all the increased petrol discounts, the AUD0.16 the AUD0.40 etcetera was both in the Coles, food and liquor division rather than convenience? Please.

Richard Goyder

Well, I’m not going to go into the individual phases that we do in terms of how we allocate our costs across the individual divisions. But in more general terms Shaun, we are very happy with the way that fuel docket has worked for us. And we will phase and change depending on how markets operate and where we think it’s appropriate strategically.

So, it’s part of our overall investment mix. What we’re seeing actually is, a strong uptake on we’re doing particularly when Target did a larger basket shoppers, the rewards of loyal consumers in stores. And we get our response in terms of improving, in terms of fuel volume as well. So we will continue to use fuel docket phasing and as we go through the year and as we see that as being appropriate to our business, overall.

Shaun Cousins – JPMorgan

Did you get any benefit from no longer liquor discounting in the manner that you did before?

Richard Goyder

Yeah, we’re pleased with the overall liquor performance. I think because of the way that it’s operated more broadly in terms of the way that we’ve managed our promotions, managed our ranging and improved our overall offer and mix within the product ranges, we’ve seen improvement in profitability there. And the market is relatively flat, so against our backdrop where we’re pretty encouraged by our liquor performance.

Shaun Cousins – JPMorgan

And just a question for Terry or Richard. The Easter Coles return on capital at 9.5% above your cost to capital, and not excluding they don’t see if you get a 0.5% borrowing cost I don’t want you to tell me whether you’re – what exactly your cost to capital number is. But there was a very weak acquisition some time ago. And I just want to get an understanding of whether or not this business is washing its size for the shareholders? Please.

Richard Goyder

Well, Terry can answer specifics, but I’ll tell you it’s absolutely watching its phase for shareholders if you look at the outlets but in general ever since we’ve acquired the business. And Terry, do you want to talk about the cost to capital?

Terry Bowen

I think if you tax effect the number, it would be marginally below, still on a calculated basis. But I think you can look within those numbers because obviously we’re carrying more property under development now than we would have did it once upon a time because of the changing three-hold strategy and obviously don’t get earnings through that during the development stage, so some of that in Coles. So, I think what you – I think you got to look at the board of transaction I think which is possible.

Shaun Cousins – JPMorgan

Okay, thank you.

Richard Goyder

Thanks, Shaun.

Operator

Your next question today is from the line of Craig Woolford of Citigroup. Craig, please go ahead.

Craig Woolford – Citigroup

Good morning, guys. I just want to start with a question clarification. Did I hear correctly that Ian McLeod said that cost perpetual discounts were AUD180 million in FY13?

Ian McLeod

That was the total investment that we saved based on if you look at the retail price that was at the pump of the time and the level of discount that was returned and that was the savings for the consumer.

Craig Woolford – Citigroup:AUD180 million?

Ian McLeod

Yeah.

Craig Woolford – Citigroup

Okay. And so, how do you see perpetual discount as something that’s good for the long-term. Its spectacle emotional strategy and obviously works for the wakes when it’s on. But how do you ensure that you retain the customer beyond that perpetual discount?

Ian McLeod

I mean, petrol is up a bit for a number of years now. And it is part of our broader reward for loyalty and particularly for larger basket shoppers. So, when you’re doing these kinds of territories, you’re looking at what is happening in the competitive marketplace. You’re looking at where consumers are increasing their concern about fuel price and particularly when you got fluctuation price driven by external global factors. So, all that fill into when you choose to provide these offers and indeed what level of offer you’re providing and who you target them with.

So, there is quite a lot of signs and it seems in terms of these activities particularly operate for us. But in the range where we’re encouraged by the overall performance and what it does for our business.

Craig Woolford – Citigroup

Okay. And lacking out would be, I mean, obviously at the heath promotional events in FY14 as well?

Ian McLeod

Well, in spite of having health Craig, we’ve been cycling stronger performances every year for the last five years and that’s part of the challenge in retail. We restated that over time that we’re going to continue to grow, more and more customers coming through our doors and that’s true to the case I said, our transaction growth in quarter four was a strong business then we’re probably outing of numbers of customers that we – from we were.

So, we’re starting to see numbers of customers coming through our door, high levels of transactions improvements in terms of overall mix. So, we’re confident that the business’s strategy is robust and sustainable.

Craig Woolford – Citigroup

Yeah. My other question was just around the currency impact both Guy Russo, who came out mentioned it’s a large part is covered. But what was Wesfarmers then came out through to do with currency when those hedges were lofted in FY15. Would you expect closing prices to rise?

Guy Russo

Well, obviously the currency dropout will affect not just Kmart but I’m sure you’re aware that everyone imports their products from overseas. But then we’ve got is, we do it directly through our own chain. But we’ll monitor the currencies we have over the last four or five years. And our focus for our team will continue to the fact we want to ensure that we win on lowest price. But if the process of the currency continues to do what it’s doing, there is a lot more in our business that we focus on than just currency and that is we’re at about low cost operator.

So, I guess, with currencies dropping that brings the question of what happens to prices and it’s something that my team needs to consider very, very – consider very seriously as we move forward. But winning on our process is also very, very important for us in this very competitive world.

Richard Goyder

It’s a good question but I’ll take a sort of wrong to just sort of calculative impact based on Linea, reduction in exchange rate because there is a lot of other things going on which we benefited from Kmart in through the great sourcing model. If you end up with better arrangements with particular factories around the place, and I think that in many ways can mitigate some of these impacts. So, we’re alert to it and that’s a big part of what’s going on the business at the moment.

Craig Woolford – Citigroup

Sure. Thank you.

Operator

Your next question today comes from the line of Phillip Kimber of Goldman Sachs. Phillip, please go ahead.

Phillip Kimber – Goldman Sachs

Hi, a question on Bunnings, most pretty strong lockers out in the fourth quarter. I was just wondering if you could talk a little bit about whether that was driven more from the commercial business. And that if you’re seeing the housing market is starting to improve and that’s helping those numbers?

Terry Bowen

Yeah, thanks. If you recall back to the strategy breaks and the slide where I talk about the market and how the hides, there are some comments on the drivers of the market. And in particular housing churn and housing value are really important. I think often people forget something, it’s not when 29.3 million drillings in Australia and you can add on the New Zealand number as well versus whatever the housing stats number are.

And sure there is an obviousness of that housing stats having more intensive product than what might we spend on the renovation. But just what happens with existing homes is really important for our business is a massive thing. And the fact that churn is improving of really quite dramatic lows when you go back 12 to 18 months, is a good thing. And so, there are – we since better external factors.

Our commercial market presence is really improving but lot commercial and heavy commercial and you can see that in the right part that we’ve achieved. I think the last four years we’ve had growth rates of over 10, over 5, nearly 7 and now almost 10 again in percentage terms. So, we play to that but it’s a much smaller part of their business. And the strong performance in the last quarters come about really wide momentum we build across the yield, what we’re doing with consumers and that’s all around services range and what we’ve driven on value.

Phillip Kimber – Goldman Sachs

And the second question on target. I see as the third quarter sales that you’d mentioned inventory in the dollar sense was about 16%, about the previous year. I couldn’t see an outside common inventories out, are you able to give a sense of how much inventories like at the end of year embark?

Terry Bowen

Yeah, thanks for it. The overall in a total sense inventory is much under control now following the clearance work we did on spring summer in quarter four. The issue we have going into this quarter in the first half is mainly around winter apparel. So, we do have a significant challenge on now clearing autumn winter. And also we are lower than last year on spring summer. So, although in total terms it’s only slightly up on last year there out to issues as we face into the first half.

Phillip Kimber – Goldman Sachs

Okay, since more of competition than last year?

Terry Bowen

Yeah, it’s a mix.

Phillip Kimber – Goldman Sachs

Yeah, yeah.

Operator

Your next question comes from the line of David Errington of Merrill Lynch. David, please go ahead.

David Errington – Merrill Lynch

Thanks for that. Good morning guys, good afternoon for me. Following from Target Stuart, I’ve got two questions, one on Target and one on the cash flow capital management for Terry. But Stuart, the first question on Target and then I suppose whether you did it deliberately or not. But your overview was quite pessimistic and it almost seemed like you needed to break the business down to rebuild it back up again.

I was coming away when you made the announcement with the provisions that you’re making particularly for the inventory and the inventory for the winter and the summer that you were taking that one-off provision, it was going to hit 2013 earnings. And then you could revise the business and go forward, in other words, a fair bit of those costs would be regained in ‘14.

I’m not coming away with the impression that maybe this new level of earnings, the 135-136 is probably the base because the challenges of the company or the business still layer if you liked. Am I coming away with the right impression Stuart or what makes me try to get across because I kind of like picking that Target was in fact pretty the growth in business?

Stuart Machin

I think your overall summary David is quite accurate. If you go back to the session we had in May, albeit I was only six weeks in. The issue we had there was spring summer clearance. And I did my reference to the fact that looking at receipts of autumn winter that could be some issues as we faced into Q1 and the first half of this year and that has come to fruition. So, I mean, really the summary you’ve just provided is exactly where we’re up to.

David Errington – Merrill Lynch

So, really, to get back to where you were in ‘12 or ‘11, that’s not really realistic in ‘14, you’re probably looking at ‘15 and ‘16, is that fair?

Stuart Machin

Yeah, I think that is fair David. I mean, this year FY14 would be a very bumpy ride as I indicated in May.

David Errington – Merrill Lynch

Okay, thanks Stuart. Terry, on the cash flow, I noticed you had an exceptionally good working capital outcome. And it was largely driven by payables. Can you elaborate further on that how you actually got that – is it because of net investment in the inventory, as going so brutal or how did you actually get that AUD500 million released, is it sustainable?

And CapEx, I mean, CapEx is coming down but still it’s still at a fairly strong high level, I mean, you’re still paying I think probably – I mean, when you look at your – your CapEx to depreciation, you’re still operating nearly two times. So there is obviously still a lot of growth CapEx going into the business. So, can you elaborate on where that CapEx is going to go because you expect that that is still at fairly high level?

Terry Bowen

Yeah, thanks David. Certainly in relation to working capital first, I mean, as the balance sheet shows, inventory broadly flat and payables is where a lot of the working capital rates come from. I think that implies actually what is going on inside the business really because we are seeing obviously much stronger sales come through. There is a mix issue when you look at the total group results but you’re seeing stronger results come through retail as particularly Bunnings and Coles.

And while the inventory levels in a kind of not moving as much so they are reasonably flat improving a bit in – that you’re getting a good solid stock turn improvement off the back of that that you do get the credit in terms. So you’ve got some increase in credited terms as we call it through activity, you’ve got increase in credit, you didn’t go on top, of that having to roll out the extra stores so there is increased credit in terms to do with that inventory going in.

And then finally we’ve got changing supply terms. The nine areas that occurs still continues to be in the direct sourcing businesses where we’ve been managing to get longer terms across the board. And so, that’s really the makeup. In terms of if it’s sustainable going forward, I mean, I’ve said before, I think in some aspects we are well out performing our internal targets in some of these areas. And I think we’ll continue to see improvements and efficiencies.

But in terms of the kind of release we’re seeing at the moment, I wouldn’t be modeling that going forward. And I would be anticipating that next year at least from an optics point of view, because we will price on 30 June, on a Monday on a credit to run four calls in particular that will have a 400 million circular adjustment just from that one day time difference. And we’re obviously going to pie a lot of creditors, whereas this year closing on a Sunday, we’re effectively at paid credit point in the weekly cycle.

In relation to CapEx, I mean, what you’ve seen come through is still very solid growth in quad-line expenditure and network expenditure in the reach-out businesses, David. So, and my anticipation at least is for the next couple of years two to three years, we’re going to continue to see that coming out of Bunnings and Coles by some commentary that you’ve heard today.

So I don’t think there is going to be any slowdown in the top of that activity we’re seeing in those businesses. Because the resting Coles really is the renewal program and that’s been running at about 100 stores a year and we’re still in that kind of guidance range.

The area where we would say subject kind of major changes at the group level that slow down these, we will get to the end of the IN3 expansion in chemicals which has obviously dried up a fair bit of capital this year, so that will come out and normalize.

And keeping in giving the guidance, we’ve given you is really saying that the poppy recycling that we started now continues for a while and it’s not going to be linear year-to-year and not going to be potentially even and that and it will be a bit bumpy along the way. But the property that is going on to the balance sheet which is at the end of 30 June was around AUD3 billion. If you look at the accounts, at some point in time the vast majority of that will cycle up the balance sheet.

Stuart Machin

That’s right. The 100 basis point reduction and the interest Terry, I mean, that’s a fairly deep drop in what you had in interest this year.

Terry Bowen

Yeah, yeah, but we had a little celebration when the IPO 2008 U.S. Bond matured, and we replaced that with the rising at the time which was in the order of 300 basis points lower and that was on AUD700 million so obviously that had an immediate impact.

The other thing is we’ve guided on Cole, when we get the Coles transaction because it was bank debt founded at the time, with regime times, we did have to put in long dated hedges. I know these hedges meant that as interest rates declined over a number of years, we were fixed. And what we’re seeing is that those hedges now have come, started to roll off and we’ll see a bit more of that next year. And if you do the message broadly 35% the effective hedges rolling off this year and the rest of that was refinancing. And as I said, we’re guiding towards the pretty big reduction next year and that really reflects.

We’ll see some improvements in over probably the next couple of years, we would hope in terms of if you look at ways spreads are now in refinancing that next year’s reduction really shows the full effect of the hedges in the mine rolling off.

David Errington – Merrill Lynch

Thanks, Terry.

Operator

Your next question today comes from the line of Ben Gilbert of UBS. Ben, please go ahead.

Ben Gilbert – UBS

Hi, good afternoon. Just first question just on Coles, I know, you have given an exclusivity on gross margin cost. But I was wondering if you could give us an idea in terms of contribution to the margin for the year in Coles with largely driven by Coles to GM. And looking forward, how much of an opportunity is there to take cost out of this business or is it really more of a leverage story now and a mix story?

Ian McLeod

We don’t try to disclose any of that where it comes from in terms of GP and of course to investment is spread. No, we’ve obviously got a view on our gross profit line and how we want to see that tracking overall. Ultimately it’s the combination of all flow exclusive margin expansion are the bottom line in terms of EBIT growth.

As I said before we expect to see that continue both in cash dollars, we’re also in the same thing. With the sales certainly lots more opportunity we believe in course of doing business, we’re not where we need to be and not where we want to be, we made some really good progress but there is certainly more opportunity as we see it, whether it be in store volatility, whether it be in more efficiencies and sales trend I mentioned before. There is more to give I think in terms of improving our store close and markdowns where we made some really good progress last few years.

And then looking at supply chain, I think there are some real opportunities there within our distribution centers. And in terms of where we flow our product around the country as well. And I touched on that in the presentation. So, from that point of view in terms of improving our efficiency and our cost to do business there are certainly plenty of opportunities for us as growing.

Ben Gilbert – UBS

Thanks very much. And one just on the insurance division, as the combination operating ratio is around 95% mark and then this is sort of where you’ve sort of guided us to medium term. Is that sort of the area to think of, what do you think that that could come down even further particularly in the context of talking about growth into next year?

Terry Bowen

I think as we did provide guidance around that sort of mid-90s range, we would look to see potentially some improvement to that as we move forward but it largely depends on obviously what happens in terms of national perils. And also depending on how quickly we accelerate the Coles insurance program and impact on profitability. So, certainly our underlying position is sitting around that mid-90s which is where want to be and potentially looking to reduce that over time.

Ben Gilbert – UBS

That sounded like a bit of a mix benefit as well as Coles coming through obviously being a little bit lower, that’s fair?

Terry Bowen

Yeah, that’s fair. Because you got to remember that more than 50% of that portfolio is new business, and new business obviously is more costly as compared to renewals, as that Cole volume achieves and a percentage of the mix is merged more towards retention and renewal and that belongs to help the combined operating ratio.

Ben Gilbert – UBS

Okay, thanks very much.

Richard Goyder

And I think another thing about combined operating ratio, which I know actually grew, is when things are going well, it actually goes, everything goes your way because your liabilities, future liabilities is reduced because of inclined record. And when you get a series of clients going against you then all of a sudden, nor only do you have the impact but you see in a year if you like of claims events but you then have in terms of your future liability adequacy testing.

The actual rate is not as same or you got to increase your provision. So that – the guidance sample has given us right but then it can swing around a bit based on new claims experienced.

Ben Gilbert – UBS

I think that’s during the flat number?

Terry Bowen

Yeah.

Richard Goyder

Yeah, exactly.

Ben Gilbert – UBS

Yeah, great. Thanks very much guys.

Operator

Your next question today comes from the line of Tom Kirk of Morgan Stanley. Tom, please go ahead.

Tom Kirk – Morgan Stanley

Good afternoon guys. I actually had a question on the impact of bon right on the provisioning I think in 2012 was AUD100 million headwind across the group and about 50 or so in Cole. Can you just provide an update for FY13?

Terry Bowen

So, in terms of that we saw I think it was 210-basis point movement last year this year, it’s gone the other way, while that’s 68 basis points somewhere in the order of that 27% flying across the same provisions that you’d expect. So, workers comp we had provision and a bit of long service leave.

In terms of, so the impact that we have calling, its specific divisions would be in that kind of order. I think that the thing to bear in mind, I mean, there is – there is always movements going on and clearly Cole out last year, these elements if you look through our P&L this year that have gone much bigger movements than this and you’re going to look at utilities line for instance on what the group had to absorb there in higher electricity costs year-on-year to dwarf the kind of numbers that this is referred that we’re just talking about.

Tom Kirk – Morgan Stanley

Sure, sure. And just a question for John on Bonnings, I mean, if you look at the market share growth over the last year, it looks massive like 150 bps or something. I was trying to get to the point that some of those kind of new categories where you’re tapping out of the market share kind of opportunity or is it still kind of heaps more to go?

John Gillam

Thanks, Tom. Look, basically a lot more is front of us than what we thought across a number wise. Firstly, the things we’re doing in the newer stores that are really getting right customer attraction, we just can’t wait to get them back into our existing store network and that’s a huge focus for the store team and operations and mission obviously to support across these 12 months.

Secondly, within the broader home improvement and absolutely spice, there is a lot of areas that are doing exciting things that we have very large share and we’re just getting traction into some of the ways that we can really site customers and broaden their participation with this.

And when I talk about grand reach, the things that we’ve been doing digitally, the things that we’re doing with our services and the things that we’re doing in our stores to tile that in, very similar to what the office works business does with fully integrated offer across every channel. There is, very similar philosophies there. They are exciting for us. So, from where I see it, the runway has got a long way in front of them.

Tom Kirk – Morgan Stanley

Great, thanks.

Operator

Your next question today comes from the line of Andrew McMillan of Commonwealth Bank. Andrew, please go ahead.

Andrew McMillan – Commonwealth Bank

Hi, thanks very much. Just in relation to the petrol winds, the cause express category. You’ve seen significant margin uplift immediately it is relatively light margin business as you’ve already alluded to. Can you just spill out what the driver of that margin improvement was, was it in relation to your offer, like I can imagine that given how more aggressive you’ve been with the fuel discounts, it just seems as though this part of this division is actually is in position of those costs?

Ian McLeod

Yeah, I think what we’ve seen is the combination of fact within express seen it improved this year. Clearly, we were a bit concerned about the slow business of the sales stores and the shop sales and we’ve worked hard particularly in the second half to improve that. And it’s good to see some of those improvement initiatives bearing fruit in terms of performance.

But also in the fuel part of our business, we’re seeing good volume growth coming through and also better product mix with stronger performance through the Premium offer of the part and also increasing development of sales within diesel.

And the team of sales that we are tied on productivity improvements to try better levels of efficiency and good quality control, so combination of those factors in terms of growing the business and improving costs has delivered stronger profit growth. So, it has been a good year. But as I said before, it’s pretty – it’s a pretty volatile market, we’re seeing global factors influenced whether that be wholesale price or exchange rate.

So, and this is increasing competitive as well, and despite you might otherwise believe. So, I think it is going to be a challenging year this year as well.

Terry Bowen

And I want just add to Ian’s comments as well, just as I said, we’re not going to talk about how we allocate the various profit between the fuel deal between swift markets and express. But it’s fair to say, and its straight force installed then it’s pretty consistent. But when you got various offers going on at various times, you have to make some cold around how to allocate that investment for better word. So and that obviously plays between the way the various numbers could spill out as well so it’s not increment. It’s as quite as we can get up but it’s not necessarily an exact time to where we’re getting repays what in so much space.

Andrew McMillan – Commonwealth Bank

So, the other thing in relation to the Cole’s performance it’s obviously been tremendous for long period for now but particularly in the fourth quarter considering that we are outside in the physical stimulus from last. So, did you, in addition to the fuel batches, did you take any to the tactical considerations around definitely maintaining a very strong sales momentum during this period, potentially at the cost of much?

Ian McLeod

Well, I think again, it’s a mix of what we do across the fees. And we want to make sure that the benefit so we can flow through with our cost and return to investing in value, when we’re going to do that. We will make sure that we continue to offer in what in just about fuel but it was also about other aspects what we’re doing particularly in terms of loyalty that we’re doing and fly bite. And underlying offer turns are weekly offers and Down-Down program to continue to pull through each individual quarter as well.

So, I think as far as the consumer is concerned, during the sort of the final quarter, I think based on confidence we were working hard to make sure we maintain and didn’t lose it. But I think it’s part of our overall plan and we’ve continued to do that now for five years, which is about driving further levels of efficiency in our business so that we can invest in value and drive more volume, drive more customers and improve our underlying profitability and see that margin expand. So, that are phasing aspects to it but underlying we believe that the business is still strong and we can continue to maintain that momentum.

Andrew McMillan – Commonwealth Bank

And just sorry, just a quick follow on to something you mentioned earlier, you were talking about supply chain in terms of some stage. Obviously, it’s a very long lead time changing around DC infrastructure. Can you give us any idea of when you lock me to see some improvements from our distributions in our upgrades?

Ian McLeod

Well, some of those the change that are coming now I think there is a slide in the pie, which proves in getting in terms of costs per carton in our particular area deserves a level of DC consolidation is already occurred in one or two states, where integration of our supply to more mainstream distribution centers as occurred. And there are number of different performance improvement programs that we’re putting in through the DC. So, we’re really seeing some improvement really there are opportunities to improve still further as well.

Andrew McMillan – Commonwealth Bank

Okay, thank you very much.

Operator

Your next question today comes from the line of David Thomas from CLSA. David, please go ahead.

David Thomas – CLSA

Hi, the first question around Bunnings. I think earlier you mentioned that there would be 10% space for us in 2014 and 2015. I was wondering firstly if you could just confirm those numbers are still correct? And secondly maybe if you could talk to cannibalization and what your expectations are around that such a big store roll-out program?

Terry Bowen

Yeah, thanks David. My strategy briefing I think you’ll find a quite precise guidance on net selling price growth for ‘14 and ‘15. And when I was walking through the presentation earlier I framed the guidance that we – that Guy given briefing guidance very broadly. And it’s just raw growth net space will be up 10%. And we think on that increased number will be up 10% again in 2015.

In terms of cannibalization, I know there is a lot of concern amongst yourself and some others of that. I’ll just take you back to the second story – second Bunnings warehouse we opened we cannibalized our first store. And I don’t say that be suspicious, I said that to make you think about for 20 years we’ve been managing cannibalization. It’s a really important forward process we go through and we think about our network, the disciplines we have in place around what we model, why we will, why we won’t.

When we expand a store or when we replace a store they are all, very embedded long term practices that in part and parcel how we think that what we’re doing. When we can expand the market we’re participating in through merchandizing innovation and really grow the market and that evolution from a hardware market to home improvement and to living market, we’ve been a big catalyst for and driven some big trends, that decrease is quite significant an impact of cannibalization as well.

So, hopefully you’ve got enough thoughts in there to get your head around the fact that we’re now pulling you, but disciplines are very strict. And we think we will manage any cannibalization risks with the pace of roll-out that we’ve got.

David Thomas – CLSA

Okay, thanks. And the second question is probably a bit more philosophical just in regards of the resources division. And obviously 2013 was a tough year and 2014 started out that way. But looking through the cycle and retain on capital is being generated out in this division this year, obviously 10%. Is there a level where perhaps the longer term vision from both yourselves that you think is except for return of capital within this division given the volatility and the risk that you would work towards?

Richard Goyder

David, I’ll go first, just I want to add I’d say look out the long revenues this reasons and terrific returns have been a great investment for our shareholders and for the shareholder. And when we think in a really difficult environment, the division had a good performance this year particularly in terms of production and costs.

And I think the work we’ve done to expand the mines seem in good position going forward. And the current environment afford some opportunities, for us to look to see how we can make the business more efficient one way or another. And Stuart and the team will be doing that. So, the business has been very, very good for us and we will look to invest in it to grow the business in the times ahead. I think as the performance, the operating performance of the business – of that business probably has never been better than it’s been in the last 12 months.

Guy Russo

Yeah, I’ll also just make a quick comment as well though. Clearly there is a number of moving parts at the moment with the division in terms of exchange rate and Cole process. I do think we are advancing around the bottom of the market at the moment. It’s a bit hard to tell when the market will turn.

But if you look at demand, demand is still growing, albeit it is slow. But we’ve got an environment where the market is over-supplied. But given time that will rationalize itself fast, so hopefully over the next year or so we’ll see an improvement in the market. And that’s probably as much as I’m prepared to forecast at this particular point in time. But I think we are advancing around the bottom of the marketplace.

David Thomas – CLSA

Okay, that’s fine. Thanks guys.

Richard Goyder

Thanks David.

Operator

Your next question today comes from the line of Grant Saligari from Credit Suisse. Grant, please go ahead.

Grant Saligari – Credit Suisse

Thank you and good afternoon. Richard, I’ve been interested in your perspective as to where usually the biggest opportunities for Wesfarmers over the next two or three years?

Richard Goyder

Grant, the biggest opportunities we’ve got taken need to grow our existing businesses right now. As always we look at group level to see where we can manage the portfolio to hedge our returns to shareholders and we’ll – and if something comes along and does that fine. But then the focus on the group is to enhance the earnings in the businesses, I think as I said earlier, there is a big advice of being conglomerate.

Each of the businesses we’re investing heavily in, we think there is an earnings growth in every one of the businesses as we move forward. And that over the next few years that’s our expectations, we got it all together and we think that will lead to good outcomes to shareholders.

Grant Saligari – Credit Suisse

And I wouldn’t want to overstate the capital return component. What is the size about the opportunities that you foresee there for in organic growth and sort of the return metrics may or may not be picking up at the moment?

Richard Goyder

That’s a good question Grant. And if you look back over many years at Wesfarmers when we’ve got an opportunity to do this sort of thing and return capital shareholders, we’ll do that rather than having an efficient balance sheet. That’s precisely why we’re doing it on this occasion. If we come along with something that we think make sense for our shareholders and we need that the capital will come last we have asked I don’t think it says anything about growth.

And as in that divisional managing directors actually talked particularly Ian and John, and Terry has been significant investment in the businesses over the last few years, in growth capital AUD2.3 billion as last year, AUD2.6 billion the previous year, we’re budgeting for more than that. The shear time will tell how much we spend.

So, there is no lack of opportunity to grow within the existing businesses, but I think we’ve done a really good job on managing our cash flows and the shareholders will benefit from that hopefully with a nice Christmas present.

Grant Saligari – Credit Suisse

Great, all right. Thank you.

Operator

Your next question today comes from the line of Daniel Broeren from CIMB. Daniel, please go ahead.

Daniel Broeren – CIMB

Thanks, good afternoon. I’ve just got a question on Wesfarmers. You’ve obviously got the extra IN capacity coming through in the current year. So Tom, can you just talk a little bit about the anticipated utilization rates for that facility for the next couple of years, and also can you just talk about how that might change when Burrup ramps up as well? And maybe just give us some indication as to the margin profile going forward, that would be very helpful. Thanks.

Tom O’Leary

Yeah, thanks for that. Look, there is no real change to the utilization rates we’re expecting from those which I aligned in the strategy days over the last couple of years because prior to kicking off that project, we spent a lot of time working with potential customers on setting up long-term off-take arrangements.

So, what I aligned in the past is that we’ve got contracts in place that the majority of our expanded capacity, that is to – IN trade coming on. And that is sort of contractual take of around 80% to 85% in the 2015 to ‘17 period. And with one of that contract is potentially expiring at the end of calendar 2017. If that did come off, then contracted volumes fall to around 65% in 2018. And if that did happen, then we’d be looking to place excess tons into other markets whether on the East Coast or internationally.

And as I’ve implied before we also got the opportunity with our fertilizer business to put around 100,000 tons into the liquid fertilizer market here in Western Australia.

Daniel Broeren – CIMB

Okay. And that would be lower returning offtake, would it, if it went into the fertilizer or if you were looking for other uses for the IN?

Tom O’Leary

Yeah. I think it’s fair to say that. It’s difficult to say exactly because prices do make around make a lot.

Daniel Broeren – CIMB

Okay, thanks. And I just had one other question as well on pricing. And Brian’s spoken a little bit already about the likelihood of upward pricing in his business reflecting the currency. So this question is for Ian. Can you just talk a little bit about how that thinking transposes to supermarket? And when you talk about keeping prices down, how does currency come into that thinking? You know, is it fair to say that suppliers have got a legitimate case for cost recovery and hence that some inflation is likely to come through the industry over the next 12 months?

Ian McLeod

We always look at what pressures that might be in relation to supply cost ratios. The overseas factor I guess incurs in terms of raw materials but I guess what we’re going to lookout is what percentage of the total cost mix release of those individual factors as they move around. But we obviously look very openly at the total cost structure when we’re looking at accepting price increases which we do when they are proven to be legitimate.

The extent to which it’s going to impact on overall inflation within the business is obviously a difficult one to predict. You always have it going in different directions, a bit like we’ve got on produce which is probably got up to double-digit deflation. And you think of it some of the years we’ve got on self-rate where we’re up against the Bundaberg floods last year and abundant supply this year we’re seeing things like capsicums and tomatoes with 40% deflation. So that can have a beating on your overall inflation therefore you’re in line of sales as well.

So, whilst you’re seeing some categories have underlying cost pressures, all those they were using. And therefore we can – we adapt both of them, what’s important to us really is looking at driving to our underlying efficiencies to make sure we can continue to invest in volume.

Daniel Broeren – CIMB

Right. Thanks for that.

Operator

Your next question comes from the line of Shaun Cousins from JPMorgan. Shaun, please go ahead.

Shaun Cousins – JPMorgan

Thanks again, just a question regarding Target. I think David asked regarding the re-basing of earnings there. So just to be clear, should we look at AUD136 million of EBIT as the low? I’m just curious given and I’ve also got a question regarding the extent of the provision release, I think the AUD40 million provision that you raised in the second half ‘12, how much was used in the second half ‘13 and will that all be used in say, the first half ‘14? I’m just really curious to get a confirmation about where you see the base of earnings in Target, please.

Terry Bowen

Yeah, I might answer that one. So, in terms of the 136 what we said is obviously a number of impacts in that result that would have otherwise seen up. But given the year, particularly the half trading we’re talking about which is going to have some ongoing heavy clearance activity like spring summer selling season and also non-cycling of a lot of promotional activity that occurred last year because it’s just not in the room in the stores given the other clearance that obviously – that will impact earnings on a like-for-like basis that would have otherwise been positive last year.

So that then brings the first half of these earnings down and we basically saying, assume it offsets the other things that we’ve told to you about. In terms of and progressively as a new chain comes on board and obviously with the claims starting by I expect progressive improvement over time from that point out of the business.

In terms of the provision and the way the mechanics will work, is that we took up a AUD40 million supply chain provision as we said we used about AUD20 million of that on the mainly on the closure of the major distribution center in Melvin so that left 20 unutilized because of obviously management changes. And we had a review of this under accounting laws or standards you kind of keep your provision why that’s going if there is uncertainty as to whether it’s ever going to be used. So we had to release that back.

In relating back, we recognized that in hindsight, some of our other provisions around inventory particularly net realizable value, we’re probably on the skinny side so we took an opportunity to which offset the 20 positives that we have otherwise occurred. So hopefully that helps.

Shaun Cousins – JPMorgan

Okay, but just further to your points, Terry, you’re making a comment there that looks that obviously the first half ‘14 is going to be much lower than the first half ‘13. But are you suggesting that fiscal ‘14, given the skew in this business for the first half that fiscal ‘14 EBIT could actually be the low rather than fiscal ‘13?

Terry Bowen

Well, certainly we’re guiding each to expect a difficult first half in that. In terms of once we get to that half result, we’ll obviously have a view around the second half and we’ll be able to give you further guidance at that point in time that we’re completely giving you so a pretty good steering around the trading for this first half.

Shaun Cousins – JPMorgan

Okay, and just in regards to the Coles meat provision, can you just talk about the quantum on that on an EBIT, and just remind us when that actually rolls off, please?

Terry Bowen

The quantum impact was AUD70 million this year in the results. And in terms of rolling off, it finishes in 2015 so the end of growth doesn’t sort of fees.

Shaun Cousins – JPMorgan

Fantastic. Thank you.

Operator

The last question today comes from the line of Ben Gilbert from UBS. Ben, please go ahead.

Thank you, so just one more question from the fuel side. The AUD180 million, I just wonder if you can give us a feel for what that level was in the PCP. And secondly, just how you think about the investment in that business from a return perspective, your major competitor says that there’s one marketing pool and pull it in things like fuel discounts that will go into television or price, just how we should think about it from that perspective?

Terry Bowen

Yeah, Ben, I think it’s a calculation based on the overall position. So, we haven’t got it broken down into individual quarters. And the extent to which it impacts on each quarter will really depending on what the circumstances are at the time, certainly on a broad base, this integral part of our volume investment strategy. And much of it is probably towards our key loyal shoppers and the larger basket as reward for that loyalty shopping in Cole. So from that point of view we do see the benefit going through into fuel but it’s actually something which is there more constructively to reward loyalty within the course of supermarket operation.

Ben Gilbert – UBS

But the PCP, was that AUD180 million sort of close to AUD100 million? Was it at that sort of material, the step up?

Terry Bowen

Well, I think again, as you see the price moving up at the top, then you’re getting some additional benefit is coming through and more people are buying into it because we see the benefit of offsetting it. So, we’ll move around but essentially it’s a calculation around what they would otherwise appear relative to the discounts that they received as a result of using the materials.

Ben Gilbert – UBS

Got it. Thanks very much.

Terry Bowen

Okay. Thanks.

Richard Goyder

All right. Thank you all very much for your time. And have a good day.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all disconnect.

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