WFAFF - Wesfarmers Limited (WFAFF) Q4 2023 Earnings Call Transcript

2023-08-25 04:14:08 ET

Wesfarmers Limited (WFAFF)

Q4 2023 Earnings Conference Call

August 24, 2023 10:00 PM ET

Company Participants

Rob Scott - Managing Director

Anthony Gianotti - Chief Financial Officer

Ian Hansen - Managing Director of Wesfarmers Chemicals, Energy and Fertilizers

Michael Schneider - Managing Director of Bunnings Group

Sarah Hunter - Managing Director of Officeworks

Ian Bailey - Managing Director of Kmart Group

Nicole Sheffield - Managing Director of Wesfarmers OneDigital

Emily Amos - Managing Director of Health

Conference Call Participants

Peter Marks - Barrenjoey Capital Partners

Michael Simotas - Jefferies LLC

David Errington - Bank of America Merrill Lynch

Lisa Deng - Goldman Sachs Group, Inc.

James Wang - Citi

Shaun Cousins - UBS

Bryan Raymond - JPMorgan Chase & Co.

Craig Woolford - MST Marquee

Ben Gilbert - Jarden Limited

Richard Barwick - CLSA Limited

Phillip Kimber - E&P Capital

Ross Curran - Macquarie Research

Scott Ryall - Rimor Equity Research

Presentation

Operator

Ladies and gentlemen, thank you for holding, and welcome to the Wesfarmers 2023 Full-Year Results Briefing. Your lines will be muted during the briefing. However, you will have an opportunity to ask questions immediately afterward, 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. Rob Scott.

Rob Scott

Thanks very much, and welcome, everyone, to the 2023 full-year results briefing. And I'm joined here in Perth today with all of our Divisional Managing Directors and our CFO, Anthony Gianotti.

To begin, I'll provide an overview of the group's performance, provide some comments on the positioning of our portfolio and our progress on strategies, following which Anthony will provide some more detail on our financial performance. And then I'll make some comments on the group's outlook, and then Anthony and our Divisional Managing Directors, and I will welcome any questions that you have.

So I'll start on Slide 4, which will be familiar to most of you. It sets out Wesfarmers corporate objective, which is to deliver a satisfactory return to shareholders. We define satisfactory as a top quartile total shareholder return over the long-term. And we acknowledge that we can only achieve this if we continue to anticipate the needs of our customers, look after our team members, treat suppliers fairly and ethically, contribute positively to the communities where we operate, take care of the environment and act with honesty and integrity.

So turning to Slide 5. I wanted to highlight three key takeaways from our results. Firstly, I'll start with our financial performance, and it's pleasing to again report a strong set of results for the year with net profit after tax increasing 4.8% to $2.5 billion. Importantly, the group's profit result was underpinned by a 12.9% divisional earnings growth as our operating businesses continue to execute well and respond well to the market conditions.

And you'll note that the difference between the divisional and group earnings is largely related to the change in non-cash property revaluations. There was strong growth in cash flows and the quality of the profit result have enabled the Board to resolve to pay a fully-franked final dividend of $1.03, bringing the total dividend to the year to $1.91, representing a 6.1% increase on the prior year.

The second point I wanted to highlight was the group's portfolio of high-quality businesses provides both a mix of resilience and growth. And this gives us confidence as we look to the future. Our businesses are benefiting from their strong value credentials on everyday products. We are well progressed with proactive productivity and efficiency initiatives, and we will have new earnings streams coming online this year as our lithium business ramps up the sale of spodumene concentrate.

And finally, as always, the group remains – maintains its long-term focus on value creation. Having worked to establish significant platforms for growth, the focus is now on executing these strategies to expand our operations in lithium and health, two businesses that will benefit from strong demand over the decades ahead. And we are also proactively progressing a strong pipeline of growth opportunities across our existing divisions that you will hear about today. And we maintain our focus on strengthening our climate resilience and pursuing opportunities that will contribute to global decarbonization and responsibly support the energy transition.

Turning to Slide 6. And the strong divisional earnings result for the year, which underpinned the group's performance. The divisional results are accredit to the 120,000 team members across the group who have maintained their focus on meeting customer needs and their commitment to the group's objectives. While divisional earnings growth for the year include the benefits of cycling lockdowns in the first half, it also reflects the benefits of strong execution within the retail businesses leveraging their leading value credentials and omnichannel offers to meet changing customer needs and also the industrial business is benefiting from strong plant availability.

The delivery of incremental growth as our divisions entered into new categories, enhanced ranges and expanded their operations has been another important contributor. And then realization of productivity and efficiency benefits from proactive initiatives in recent years. This includes supply chain modernization projects, the digitization of operating processes and the increasing use of AI and predictive analytics.

It's important to note that we have achieved earnings growth in Bunnings, Kmart and Officeworks, whilst retaining our lowest price positioning. In fact, it's our commitment to lowest prices that allows these businesses to be successful delivering a win-win outcome for customers and our shareholders.

Turning to Slide 7. I'll use this slide to speak to some of the divisional highlights, and then Anthony will give more detail on the financial results. Bunnings delivered solid sales growth, reflecting the resilience of demand across its offer and strong execution of its strategic agenda. Bunnings again demonstrated its capacity to grow its proposition and addressable market whilst maintaining strong returns.

During the year, this included the successful Pets launch and continued advancement of their Whole of Build commercial strategy. Bunnings also continues to make significant progress on its digital agenda with increasing engagement through the PowerPass app, Bunnings Marketplace and OnePass and Flybuy programs, along with improvements in its educational and social content.

Kmart Group delivered significant sales and earnings growth this year. The strong underlying trading performance in Kmart reflected successful execution of pricing strategies and operating initiatives in addition to the benefits from a normalization of trading.

With value continuing to become more important to households, Kmart's lowest price positioning is resonating strongly, attracting new customers during the year. Following actions to simplify Target's operations in recent years, and we've continued to maintain a low cost base, and this has contributed positively to the Kmart Group earnings result for the year. And as recently announced, this year, Kmart Group will pursue opportunities to leverage the strength of Kmart's technology platforms and selected Anko ranges within Target.

WesCEF delivered record results for the year and continue to make good progress in the development of its lithium business and in its evaluation of incremental growth projects within the Chemicals division. The excellent operating results, plant reliability and safety focus from WesCEF are a highlight for the group. Significant earnings growth in Officeworks reflected benefits realized from productivity investments in recent years as well as improved back-to-school trading, growth in B2B sales and continued above-market growth in technology categories.

Industrial and Safety again improved its performance with the final deployment of Blackwoods' ERP system in the first half a highlight for the year. The Health division continued to advance its transformation plan with investment in supply chain capabilities, improvements to the customer offer and network changes to strengthen the competitive position of API and its pharmacy partners.

The health team has also progressed attractive digital health opportunities, including the acquisition of InstantScripts, which completed early July this year. The investments made in recent years to develop the group's data and digital capabilities are gaining traction and delivering value across the operating divisions and through the OnePass program in the group shared data asset.

It's worth reflecting that e-commerce sales across our divisions, excluding Catch, have grown by 150% or more than $1.4 billion since the 2019 financial year. Our businesses have also continued to develop and trial more sophisticated analytics models, which are delivering improved outcomes in areas such as demand forecasting, product design, in-store and online availability and marketing effectiveness. And last year was the first year of rollout for the one – our first year of rollout for the OnePass membership program, which is adding value to customers in our divisions with more to come this year.

As I noted at the first half results, Catch's performance for the year was disappointing. Changes made throughout the year have supported improvements to performance in the second half with losses reducing and progress on key operational and customer metrics. Encouragingly, Catch continues to attract and retain a younger and digitally native customer cohort with strong engagement through the OnePass program. The Catch team remains focused on ensuring that financial and operating results continue to improve with clear plans in place for the year ahead.

And it's worth noting that the investments made in Catch over recent years are being leveraged across the group to provide some centralized e-commerce fulfillment capabilities and to strengthen digital marketing programs.

Turning to Slide 8 and the progress with our sustainability agenda. Recognizing it's linked to long-term value creation, we continue to build climate resilience in our businesses. Our divisions achieved a 2.4% decrease in Scope 1 and Scope 2 emissions, making good progress towards their net zero targets. And progress was made to better understand our dependencies on nature through pilot participation in an emerging TNFD framework.

As the largest admitter of the group, WesCEF continues to make pleasing progress, taking actions aligned with its net zero road map, reflecting on our commitment to provide a safe and fulfilling work environment for team. Improvements in safety results were recorded across most businesses. At a group level, TRIFR increased on the prior period which was largely attributable to Bunnings, where results were impacted by a change in injury classifications to better align with the group measures as well as some increases in manual handling injuries.

The group remains a proportional representation with approximately 3.3% of Australian team members identifying as Aboriginal or Torres Strait Islander. The focus in the last 12 months has turned towards measures to support career progression of indigenous leaders across the group, and we've had over 100 team members participate in the Wesfarmers Indigenous Leadership Program.

Turning to Slide 9. You can see the summarized performance for the group, but I'll hand over to Anthony now who can talk about the financial performance in more detail.

Anthony Gianotti

Thanks, Rob, and hello, everyone. I'll start on Slide 11, which provides detail on sales and revenue growth across the group. I'll speak to sales and earnings performance for each of the divisions on the next slide. But at an overall level, we were pleased with the solid sales result across the group for the 2023 financial year.

As customer behavior continued to normalize and its value has become increasingly important, our retail businesses benefited from the everyday and value-focused nature of their offers as well as from good execution of their strategies during the year. As we noted in February, first half retail sales growth reflected both strong underlying demand together with the impact of cycling COVID-related lockdowns in the prior corresponding period. In the second half, we saw some moderation in retail sales growth, but overall, trading conditions remained robust with solid sales growth in Bunnings and strong growth within Kmart and Officeworks.

Turning to divisional earnings performance on Slide 12. In Bunnings, sales growth of 4.4% was supported by growth across both consumer and commercial segments. Bunnings continued to demonstrate the resilience of its operating model with all trading regions delivering sales growth for the year despite the impact of prolonged wet weather across the East Coast during the 2022 spring trading season. Bunnings sales were supported by continued building activity and robust demand from commercial customers, which was offset by slightly lower consumer sales in the second half.

Bunnings has seen some good consumer demand continued for necessity products that support recurring home repairs and maintenance and for smaller scale DIY projects. But compared to the second half last year, consumers have demonstrated a more cautious approach to bigger ticket purchase decisions and the commencement of larger projects. Overall, Bunnings earnings of $2.2 billion represented an increase of 1.2% or 1.9% after excluding the net impact of property contributions. This result continues what has been a remarkable period of growth for the business, with earnings up 42% since 2019.

Kmart Group delivered record earnings for the year of $769 million, an increase of 52%. The result reflects a combination of strong underlying consumer demand, solid execution of pricing strategies and operational plans as well as benefits in the first half from a normalization of trading conditions versus COVID affected results in the prior year.

As anticipated, we have seen a continued strong response from customers to Kmart's lowest price positioning, with comparable sales growth of 14.5% for the year and 12% in the second half. Kmart delivered sales growth across all categories as well as growth in units sold and transactions relative to the prior year.

Target sales results were broadly in line with the prior year, but with more variable performance across categories, particularly in the second half. Target continued to trade well across its apparel range, but with more challenging results in toys and home, highlighting the opportunity for the division to leverage the strengths of Kmart's Anko range in these areas.

Kmart Group continued to leverage its direct sourcing capability and progress proactive productivity and cost control measures, which helped to mitigate cost pressures from inflation, increased shrinkage and ongoing exchange rate volatility during the year.

And finally, as announced in July, the division is working to further integrate back-office sourcing and merchandising functions across Kmart and Target, which will deliver further long-term efficiencies.

WesCEF delivered revenue growth of 8.7% and earnings growth of 23.9%, lifting earnings to a record $669 million for the year. A significant increase in earnings in Chemicals was supported by higher average ammonia prices, strong customer demand and continued excellent operating results for the year. The Chemicals result also benefited from a temporary pull forward of earnings associated with the time lag in pricing of customer contracts as ammonia prices declined in the second half.

In Kleenheat, earnings were impacted by a lower Saudi contract price and higher WA natural gas costs during the year. And earnings for fertilizers decreased as a result of lower commodity pricing and a later seasonal break. As Rob has mentioned, construction of the Mt. Holland mine and concentrator was completed during the year and commissioning of the concentrator is now underway ahead of the first planned sales of spodumene concentrate in the 2024 financial year.

Officeworks performance was pleasing with sales growth of 6% and earnings growth of 10.5% to $200 million for the year. Sales were supported by improved back-to-school trading, significant growth in B2B sales and above-market sales growth in technology.

As we noted in release, Officeworks second half results included a sales benefit from the back-to-school voucher program in New South Wales. More broadly, over the year, it was encouraging to see increased demand as more normal trading conditions returned in categories that were most impacted by COVID, including stationary, art, office supplies and Print & Create. Highlighting the benefits of proactive actions taken over recent years, Officeworks strong earnings growth this year was enabled by ongoing investments to drive productivity and efficiency across stores, supply chain and in the support center.

Industrial and Safety dived another improvement in performance with earnings growth of 8.7%, supported by sales growth across the division and a modest gain in the first half from the sale of the Greencap consulting business. Despite an improvement in performance, earnings were impacted by inflationary cost pressures and the timing lag in changes to customer contracts in Blackwoods.

In Wesfarmers Health, sales were supported by new customer acquisition, elevated demand for COVID-19 antiviral products in the wholesale business and solid sales across the Priceline health and beauty categories, albeit with sales moderating in the second half. Earnings of $45 million reflected increased investment in the acceleration of transformation activities. The costs associated with the transition to the new Sydney fulfillment center and the impact of higher operating costs in Clear Skincare. The result also included $13 million of non-cash amortization expenses associated with purchase price accounting adjustments.

Catch reported a loss of $163 million, including restructuring costs of $40 million relating to inventory provisions, team member redundancies and asset write-offs. As Rob has just reiterated, it's clearly a disappointing earnings result and the focus on actions to improve performance is ongoing. The underlying loss for the second half of $48 million was a reduction on the $75 million recorded in the first half. This reflected restructuring initiatives to reduce headcount and exit unprofitable first-party products as well as improvements in supply chain and fulfillment costs.

Turning now to Slide 13 and covering our other businesses and corporate overheads, which reported a significant reduction in earnings with a loss of $206 million compared with earnings in the prior year of $7 million. The key driver here was the impact of negative property revaluations in BWP Trust and BPI, which while non-cash in nature, accounted for $164 million of the reduction in earnings.

Other corporate earnings were also impacted by a decrease in dividend revenue due to the progressive sale of the group's interest in Coles, a lower group insurance result, the benefit of the Homebase equity distribution in the prior period and higher corporate overheads, which included further investment in the groups' cybersecurity capabilities during the year.

Finally, we continued to invest in the development of the OnePass membership program and the group's customer and data insights capabilities through OneDigital with a net cost of $82 million which is broadly in line with $80 million in the prior year. We expect a net cost of approximately $70 million for the 2024 financial year.

Turning to working capital and cash flow on Slide 14. Divisional operating cash flows increased 45.6% for the year or 40.7% if you exclude the Health division, which only contributed a partial year of cash flows in the prior year. Strong divisional earnings growth as well as normalization in the businesses working capital positions, supported an increased individual cash generation to 101%.

The group's inventory balance at the end of the year includes the impact of lower commodity pricing in WesCEF and the reduction of inventory buffer levels at Kmart, partially offset by the impact of unit cost inflation across the retail businesses and investment in stock availability within our Health division.

Overall, we are comfortable with inventory positions across the group with good stock availability in the retail divisions, lower seasonal holdings versus the prior year and inventory cover ratio is having now returned to be broadly in line with our pre-COVID levels.

At a group level, operating cash flows increased 81.6% to $4.2 billion for the year, reflecting the higher divisional operating cash flows as well as lower tax paid due to the timing of payments. Free cash flow for the year increased to $3.6 billion, reflecting higher operating cash flows, proceeds from the sale of the group's 2.8% interest in Coles and the impact of acquisitions in the prior period, partially offset by higher capital expenditure and lower proceeds on the sale of property.

Moving to capital expenditure on Slide 15. The group invested gross CapEx of $1.3 billion during the year, an increase of 12.6% on the prior period. This was largely driven by development CapEx of $394 million and capitalized interest of $42 million relating to the covalent lithium project, along with continued investment in data and digital and the addition of the Health division. Proceeds from the sale of PP&E declined for the year, reflecting reduced Bunnings property activity.

For the 2024 financial year, we expect net capital expenditure for the group to be in the range of $1.1 billion to $1.4 billion. And this estimate includes around $370 million to support the ongoing development of the covalent lithium project as well as CapEx associated with a number of expansion projects in WesCEF, including ammonia and sodium cyanide capacity expansions and ammonium nitrate debottlenecking. These projects remain subject to approvals.

WesCEF's share of total CapEx for the Covalent Lithium project remains in line with prior guidance of between $1.2 billion to $1.3 billion in nominal terms and excluding capitalized interest.

Turning to balance sheet and debt management on Slide 16. The strength of our balance sheet continues to provide the group with significant flexibility and capacity to support investment in growth initiatives and to take advantage of value-accretive opportunities that may arise. We continue to actively monitor the group's debt mix and manage exposure to variable rates. The average cost of funds for the year increased from 3.1% to 3.3% with a weighted average term to maturity of 4.4 years.

Total finance costs increased to $135 million as a result of higher average debt balances resulting from the funding of acquisitions and CapEx associated with covalent lithium. At the end of the financial year, the cost of drawn debt was around 3.7%, and the group had available unused bank financing facilities of around $2.6 billion. Our strong investment-grade credit ratings from Standard & Poor's and Moody's were maintained and the group retains considerable headroom within its key credit metrics.

And finally, to dividends on Slide 17. As Rob mentioned, the Board has determined to pay a fully-franked final dividend of $1.03 per share, which brings our total dividends for the year to $1.91 per share. This is consistent with our dividend policy which considers available franking credits, balance sheet position, credit metrics and our cash flow generation.

And with that, I'll now hand back to Rob to cover off the outlook for the group.

Rob Scott

Thanks, Anthony. On Slide 19, before I get to the outlook, I just wanted to talk about how the portfolio is positioned for the future. In summary, our operating divisions have emerged out of COVID in much stronger shape and the quality of our major divisions provides an opportunity for attractive returns from incremental capital investment. This provides a great platform for value creation, providing both resilience and growth.

Our retail divisions benefit from the value orientation of their offer, leading market positions and their focus on everyday and essential products. We have strategic domestic manufacturing capabilities in WesCEF supporting customers in critical industries, where Australia has clear competitive advantages.

The Health division provides a platform to build on our capabilities and increase our exposure to the structural demand growth in health and well-being sectors. And across the group, we are pursuing opportunities that support global decarbonization with actions that strengthen our businesses and also through the development of new businesses such as covalent lithium.

So turning to the group outlook on Slide 20. This year, we are very focused on the successful commissioning of covalent lithium and the sale of product, spodumene product in the second half of this financial year. This is an exciting and important new earnings stream for Wesfarmers and will help to offset the lower earnings expected in WesCEF as a result of the recent decline in ammonia prices and higher gas input costs.

In the retail divisions, we are confident that their market-leading value credentials make them well placed to meet changing demand, acquire new customers and to profitably grow share in an environment of elevated inflation and higher interest rates.

For the first seven weeks of the new financial year, sales growth for Kmart Group has continued to benefit from strong trading results in Kmart, but growth has moderated from the second half of last financial year. Sales growth in Bunnings remained in line with the second half of last financial year with continued growth in both Consumer and Commercial segments year-to-date. Officeworks sales for the first seven weeks have been in line with the prior year.

Cost pressures are expected to persist across Australia and New Zealand, driven by inflation, labor market constraints, higher wages and domestic supply chain costs. Wesfarmers larger businesses are benefiting from their capacity to leverage their scale and sourcing capabilities, which, together with benefits from proactive productivity and efficiency initiatives provides confidence in the group's capacity to adjust costs in line with trading conditions.

Looking ahead, Wesfarmers will continue to develop and enhance the portfolio by making disciplined investments in existing operations, the development of long-term avenues for growth and to strengthen climate resilience of the portfolio.

That's the end of our presentation, and we'd now be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Peter Marks with Barrenjoey. Please go ahead.

Peter Marks

Hi, guys. Just a question on Bunnings and the impact of the Pets launch, I think it was in March. Has that helped your sales materially either through, I guess, sales in that category? Or just getting more foot traffic into stores on the back of it? And I'll notice your consumer business is back into growth in the start of the first half 2024. Is that the key driver there?

Michael Schneider

Thanks, Peter. Look, one category alone is never going to define the breadth of the Bunnings offer. What I think is really pleasing about pets for us is on a couple of fronts. When we talked at the Strategy Day about growing the market, growing our ability to participate in the market. This is a very clear demonstration of that. It was our most significant category expansion in close to two decades. It also sort of demonstrates the capability of the organization to execute at scale and pace, our ability to sort of launch a new category very, very quickly with some solid market research behind it has been really good, and it's absolutely brought new customers. We can see that through customer data to brought new customers into the business. So pleasing for us. We've never seen more customers shopping our stores and seeing positive transactions is really important. And I think very strong value proposition for the four-legged member of the family is a really important thing.

Peter Marks

That's great. And like, if you had to have a guess at what's driven the improvement in the consumer both in the consumer business?

Michael Schneider

As Rob said, the trend of the second half has sort of carried into the first half. I think the reality is that Australians and New Zealanders are still working at home more. There's still things to do around the home. And I do think that when things are going tough, there's absolutely a flight to value, but it also means you need to find things to be doing a little bit more perhaps around the home than away from the home. So I think we're well positioned across the categories to be able to do that. And we're always doing things to our home, I guess, so that will continue.

Peter Marks

Great. Thanks.

Operator

Your next question comes from Michael Simotas with Jefferies. Please go ahead.

Michael Simotas

Good morning, everyone. My question is on costs, and in particular, your outlook commentary on costs. You've seen quite a bit more comfortable than most retailers we've heard from about your ability to mitigate underlying cost inflation. So just interested in any more color you can give us on what underpins your confidence there. And related to that, there's been a lot of media about restructuring activities in Bunnings. So maybe you could touch on that and also whether there were any costs associated with that taken above the line in the Bunnings result in the second half, please?

Rob Scott

Hey Michael, it's probably worth hearing directly from Mike, Ian and Sarah on this. And the high-level comment I'd make is that all of our retail divisions have been very proactive over the last year or so on the productivity and efficiency side. So that productivity phasing into opportunities to improve costs, improve efficiency means that we're coming into this new financial year with some momentum. But I'll let each of the MDs talk to their specific divisions.

Michael Schneider

I might start, Michael. It's Mike here. So for us with Bunnings, it's all about being fit for the growth we want to enjoy in the year ahead. So we've long looked at the opportunities between our Australian and New Zealand business to leverage our investments into technology to make it more efficient to purchase product and support our team. In other parts of the business, we'll continue to shape and evolve to meet the evolving needs of the business. We've invested a lot and we've talked about this, both at results days and strategy days, I guess, for the last few years in technology to improve productivity. We called out at Strategy Day, I think, something like 2.4 million hours of productivity improvements across our store network, which allows us to invest more in frontline service and make our stores easier to run. And we've been listening very strongly to our store teams saying that they want a deeper sense of engagement with the business, and that comes through having some flatter reporting lines.

I will set the changes in the context of two other things. We employ close to 56,000 people in Bunnings. So these are very, very small changes. Then in no way, shape or form do they affect our frontline. And in fact, in F 2023, we employed 12,000 new people. So making sure that the business is optimized for growth is really important. But we're just as focused on that not only in terms of how we structure and design the organization, but also the process to simplify to take those costs out. But also in COGS, we're always working really hard to make sure that we are lowering the cost of goods because all of these things combined really underpin the credential of our lowest prices policy. I don't know maybe hand to Ian.

Ian Bailey

Yes. Thanks, Mike. I'd say first off, the business model is our greatest strength. And we have two elements within there, which I think separates us from the market. The first one is our sourcing model, which is obviously very mature and good as the ability to ensure that any cost reductions that occur in cost of goods flow immediately through to the P&L and ultimately through to customers.

The second one is our scale and our scale gives us the ability to obviously fragment costs to a greater extent than others can, particularly around technology. And the technology that we've been implementing over the last few years is now delivering results. It's helping us on the revenue line and it's helping us through productivity. And those two things mean that we can offset some of the costs, which are coming through with our final margins.

Sarah Hunter

And Michael, from an Officeworks perspective, look, I think very similar to Mike and Ian. We've been talking for a few years at Results and at Investor Strategy Day around our proactive investment in productivity and ways to improve and modernize and simplify our business. A great example of that is the work we've done in our supply chain. We opened a new CFC in Victoria late in 2021. And for example, that is absolutely delivering in line with business case, in fact, increasingly better than business case with a cost per line of well lower than 20% – well, sorry, I should say, a cost per line improving by a reduction of over 20% on the prior facility.

So we continue. We have opened recently a new IDC in Victoria. And later this year, we'll open a new CFC in WA. We're also continuing to invest in our store team with new technology to reduce and improve efficiency, but also improve the customer experience. So recently, we've invested in new self-scan print and copy facilities and also new photo kiosks and both of those have improved NPS and improved efficiency for our team.

Michael Simotas

Thanks. And the restructuring costs in buying, how should we think about that?

Michael Schneider

They're immaterial, Michael, there are really just some alignments around structure. So nothing that's going to sort of make a noticeable impact to the P&L.

Michael Simotas

Okay. Thank you.

Operator

Your next question comes from David Errington with Bank of America. Please go ahead.

David Errington

Hi, Rob. Hi, Anthony. If I could ask Ian Hansen a question on his division. It's sort of like a bit of gaining an understanding as to how we can factor in or what we can look for in earnings in the next couple of years. And if we're looking at – there's three parts to this question. The first part is, I'm assuming 50,000 tons of spodumene in the second half. Most mines, we've done a bit of work on it. The mine similar to yours, you're looking at a cash cost, including royalties or all up costs of about $1,000 a ton maybe a bit under, is that the sort of thing that we can expect from your mine or for spodumene? Or will you have a bit of ramp-up costs there? I'm just trying to get an understanding of what second half is. And then going into FY2025, can you give us a bit of an idea as to what the split we can expect from spodumene and hydroxide, can we expect any hydroxide coming in, in 2025? Or is it still largely going to be spodumene?

And the third part of my question, if you don't mind. I'm intrigued with this gas, I asked you at the Investor Day about the gas costs and that there was this issue that you were talking about were some of the Western Australian gas providers were delaying and it was causing a significant increase in cost of gas. Given the AFR article that we mentioned, you're paying about $6.50 a gigajoule more for your gas by the sounds of it. And my rough numbers is that you use 40 gigajoules of gas for a ton of ammonia. I don't know if that's about the right rate, but that's about $70 million of headwind if these producers aren't supplying gas. And I suppose I thought the Chairman of Wesfarmers and the Chairman of Woodside were [mates]. So I'm wondering what's going on in the whole part over there is that as I said, they don't share a bottle of wine and this sort of stuff out. So I'm just wondering what's going on with that whole gas market over there.

Ian Bailey

Hi, David. Let's start with the covalent questions or lithium questions. We're expecting to sell 50,000 tons of spodumene in the second half of this financial year. That's based upon our assumption that the concentrator will be commissioned over the next few months, and we start producing concentrate around October, November, which then gives us product to sell for the following six months of the first half of calendar year 2024. You might recall that our concentrator has a nameplate capacity of 380,000 tons per annum of which our share at full rates would be 190,000 because of the 50-50 joint venture arrangement. So we're saying we're going to have 50,000 in the second half of this calendar year based upon a ramp-up following commissioning, but not a full ramp-up over the following six months. In terms of – sorry, is that clear in terms of volume?

David Errington

Yes. The one is – that's your share 50,000, but the costs most mines are around 900, including royalties. Is that ballpark for you guys? I don't know – I know you don't want to give too much, but is it a ballpark that we can expect in that second half?

Ian Bailey

I think if you look at other operating costs, then when we're at the same sort of rates as they are, we should be in a similar position. But I think you have to appreciate that during a ramp-up and commissioning, there are generally additional costs associated with that. So it might be that there are higher costs associated with our sales in the first half of next year.

David Errington

Yes. Thanks. And the spot – and the FY2025 and gas?

Ian Bailey

So well, I'll get to gas. In terms of the hydroxide split, where we're planning to commence commissioning of the hydroxide refinery late in calendar year 2024, which would deliver product. And by commission, there's a fairly protracted commissioning timeline. So we have product for sale in early calendar year 2025, early to mid-calendar year 2025. So we're hoping to get hydroxide sales and therefore, earnings in mid-2025, early to mid-2025. But it is very dependent upon how construction goes over the next 12 months and then how commissioning goes. In the interim, of course, we'll be hoping that the concentrate ramps up to full production rate, and we'd be continuing to sell that excess concentrate that's not needed to feed the refinery until such time as it is required in the refinery.

David Errington

Yes. So we can expect full ramp-up of spodumene by 2025 and maybe a little bit of hydroxide?

Ian Bailey

Yes, by calendar year 2025.

David Errington

Calendar second half FY2025, yes.

Ian Bailey

Yes. Now on to gas. Gas in Western Australia is interesting at the moment. What we've seen in the short-term is a number of supply issues associated with existing fields, that are short-term supply issues. But what we've also seen is an increase in demand in gas in Western Australia at the same time as some of the fields in the longer term are reducing their generation of gas as they get older, so you get less gas coming out of it. And there are some delays of what we consider delays in gas coming online, not so much because people are withholding gas, more that the approvals process is in WA, along with approvals processes for things like lithium mines and lithium concentrators and lithium refineries and other chemical processes and other mines are taking a long time, and that's probably a factor of there being a lot of activity in Western Australia seeking approvals, new projects and very tight labor conditions.

So not just does that impact the projects themselves, it probably impacts the regulators who are trying to provide those approvals. So the lack of approvals delaying the gas coming on, combined with a short-term blip in demand or lack of supply has resulted in a movement in gas supply demand balance, which has seen the gas price move up into double-digit here in Western Australia. And if you go back prior to the Ukraine invasion, gas wholesale prices in WA were around $3 to $4 per gigajoule according to the ABS.

In 2019 – sorry, 2020, 2021, they're up around the $5 to $6 per gigajoule, and they've continued to increase since then. And our concern is that unless we get more capacity coming on here in Western Australia at a time when there is more conversion to gas-fired electricity generation from coal-fired, then we'll see high prices. Over top of that, there is a question about the domestic gas reservation policy and whether that's being applied equally across all of the LNG export projects. And I do congratulate the state government in initiating an inquiry into the dom gas reservation policy.

David Errington

Well, maybe your Chairman can ring his best mate and say, hey, what are you doing? Give us a bit more gas.

Rob Scott

Hopefully, we can sort it out without that, David.

David Errington

Thanks, Rob. Thanks for answering it. It's very thorough. Thank you.

Rob Scott

You're welcome.

Operator

Your next question comes from Lisa Deng with Goldman Sachs. Please go ahead.

Lisa Deng

Hi. It's a question relating to Kmart. So I wanted to maybe get some directional guidance or discussion around the margins going into 2024. So we're merging the back end with Target. But I assume there's probably some global freight benefit coming through, but then also the Aussie dollar is working against us a little. So how should I think about the margins of Kmart going into 2024? Thanks.

Ian Bailey

Yes. I think first of all – so first of all good morning, Lisa. I think if you look at the work we're doing to bring the two businesses in line, so two brands, one operating model that work will effectively be cost neutral as we go into next financial year. So there will be some costs, but there will be some benefits and the two net off as we go through next financial year. And then the value that we get through efficiency, productivity of having one operating model really starts to flow in FY2025 and a little bit more in FY2026.

I think when you look at the margins themselves, we already jointly sourced in a number of areas. We run one sourcing team, and we have done for a number of years. So I don't see too many fundamental changes. What we will get though is we will get the benefit of incremental volume through the Anko products that move into – move into Target. It's approximately 25% of the Target range will be Anko going forward, 75% will be unique to Target, and that's in apparel, soft home and toys. And that will give us a benefit because of that additional scale that we put through because obviously, those Kmart products make good margin within the Kmart business already, and that will now be shared across Target. So if you're looking at it over a time period, the greater benefits land in 2025, 2026. Bearing in mind, this is on a much smaller business. Target is about 20% of the revenue relative to the 80% of Kmart. So yes, so the effect on the overall group will be modest.

Lisa Deng

And what about like the actual global freight prices coming down, but netting off potential headwinds from the Aussie dollar? How do we think about that?

Ian Bailey

There are lots of movements out there. I think they affected – first of all, they affect everybody. What we have is we have complete line of sight to all of those costs. We've – we work very closely with our international shipping partners, of course, as well as our suppliers. We hedge on the currency to ensure that we've got knowledge around what our exchange rate is going to be when we do price our products. And we're confident we can continue to hit the lowest price in the market and make good margins, which are appropriate for our shareholder returns, and other two dynamics that we look at. So how do we make an adequate return for our shareholders, how do we maintain our lowest price position? And we feel like we have enough levers at our disposal to be able to continue to do that.

Lisa Deng

Okay. Thank you.

Operator

Your next question comes from James Wang with Citi. Please go ahead.

James Wang

Good morning guys. I have a question on Bunnings. So this is the past consecutive half where the EBIT margin decline for Bunnings. I'm not asking for exact number, but over that period, what's the rough breakdown between how much of that decline has been through GP as the business mix shift, sales mix shift between DIY and commercial? And how much of that was in [indiscernible] please? Essentially, should we expect further long-term decline in the margin as sales mix shifts more towards commercial?

Michael Schneider

Look, I think – thanks, James, for the question. When you sort of look at our long-term EBIT margins, it's not something we're particularly focused on. We're really focused on long-term returns, both for team customer and shareholder. It's a pretty immaterial change in the mix between commercial and consumer. It's still sort of broadly sort of 37, 63 commercial to consumer. The type of commercial customers we've talked about at many strategy days is very much a small to medium-sized builder handy person where the shopping patterns and margin profiles are not dissimilar to a DIY customer.

I think if you look at our EBIT margin over time, it is actually pretty consistent. It does cycle a little between first and second half, and there's a little bit of abnormality with a spike in growth during COVID. But I don't think there's anything in there that should be causing anyone any concern?

James Wang

Okay, great. Thanks Mike.

Operator

Your next question comes from Shaun Cousins with UBS. Please go ahead.

Shaun Cousins

Thanks. Good afternoon. Just a question for Ian at Kmart. The result seemed to benefit from market share gains and some of the work on costs coming to fruition. I recall Kmart indicated in the past that its sales maybe one-third across each low middle and high-income customers, while one of the [indiscernible] at the Investor Day in April 2021, I think, was the ambition to get customers to shop multiple categories, it's too few to do that. Can you discuss the performance of the consumer generally and how you're seeing that play across different income and age groups and the extent Kmart winning share on trade-in? And then the degree to which Kmart being able to get customers to shop more categories as they seek out value, please?

Ian Bailey

Yes. Thanks, Shaun. Good afternoon. You're right, roughly one-third, one-third, one-third, not surprising because the way we categorize the income levels. So of course, each business will categorize mid, low and high probably differently. We're seeing all three groups growing with us. They're growing in terms of absolute numbers, and they're growing in terms of their average spend, whether it's over a 12-week period or whether it's over a 52-week period. So we're seeing growth in all three. The growth is greatest in middle and high not surprisingly because we already get a big share of wallet from the lower-income customers, but all three are currently in growth.

Why are we growing share within each of those customer groups is because of what you just called out, they are shopping across categories, and we're being increasingly successful of encouraging customers to move into adjacent categories or into new categories within our stores. And I think that's a combination of our product offer continues to improve. The price proposition at the moment is continuing to strengthen. So our metrics would suggest that our lowest price positioning is stronger now than it was even six months ago with customers. And then, of course, we've got much improved customer data, which means we can do a better job of serving up the right types of products to the right customers at the right time. So I'd say at the moment, well, that gives us the sense that we're growing market share and certainly just trying to assess ABS data and other data sources that would imply that we are being successful at the moment.

Shaun Cousins

Great. And my follow-up question is just around theft. That was a big issue for the Coles result, and you've called out a little bit of that in your remarks regarding Kmart Group. Can you discuss maybe the impact of that? And we've had some questions around the checkout and center of the store, how that works in terms of making a trickier potentially impacting theft as well? But maybe just touch on that issue, which is quite a global problem, but one we've seen sort of play out in some of the results more recently?

Ian Bailey

Yes. Just touching on the registers in the middle of the store. They've been there for about 10 years. So it's not a new dynamic. Yes, we did call out shrink because of the year-on-year movement. If you look at it on an absolute level relative to history, that is still within the normal range of shrink, certainly at pre-COVID levels, but shrink did reduce through COVID for all sorts of reasons, including store closures. And now, of course, we've had a full-year of store openings, that's been played through. We count our stock in the second half, so that's when our inventory loss crystallizes and so it was movement year-on-year, more so than in a completely abnormal result.

Shaun Cousins

Fantastic. Thanks so much.

Operator

Your next question comes from Bryan Raymond with JPMorgan. Pleas go ahead.

Bryan Raymond

Thanks for that. My question is actually about the impact of weather on Bunnings and probably to a lesser extent, Kmart. Just in terms of the trading update, obviously, we’re cycling a very wet winter from last year. I think you can pull that out. And it's been quite dry along the East Coast and relatively warm as well. How much is that helping your business? I know it's impossible to unpick completely, but just in some of those weather-dependent categories, are you seeing better performance year-on-year? And is that meaningfully contributing to the result in Bunnings? And then winter sell-through in Kmart, how is inventory looking and the impacts that might have into the first half 2024? Thanks.

Michael Schneider

Thanks, Bryan. Mike here. Look, we called out weather last year, and really don't like using weather as a reason for trading performance. That's much a message for my team as it is for you. But it is important that when it's prolonged, it will shift customer behavior and we saw that last year. We were very optimistic last year about spring trading really off the back of two years of sort of impacted ability to sort of sell across all states and geographies because of the lockdowns during COVID. So having a long wet spring was frustrating.

The outlook for this spring is to be a warmer dry one. As you quite rightly pointed out, and we anticipate seeing some good growth off the back of that. It's still a little bit early in the season. It's still a little bit too cool, you really need to sort of soil to warm up in the markets where traditionally, you're seeing spring come early, so I think North Queensland. The business is behaving as we would expect it to behave, but we're probably six weeks short of having a much clearer picture on that.

Ian Bailey

Yes, Bryan, the winter sell-through has been good. Winter came quite early. So although it's been a warmer backend to winter, we do get some cold weather early, which always helps. We sold through very effectively in both Kmart and Target on our winter apparel ending the half cleaner than we were this time last year. The products continue to move through pretty effectively despite the weather. And if anything, we get the benefit of the new season, the summer product that's landing. And we've seen some pretty positive sell-throughs as we look at, again, Queensland and the warmer states where obviously people are starting to think about shorts and shorts and dresses more so than jumpers and jackets.

Bryan Raymond

Just as a follow-up on that one then, if it's not a bit of clearance activity around some of those winter lines, looking at your margins in the second half, down about 40 basis points year-on-year or 30 basis points of EBIT. You sort of shrinkage there, but you said it's not overly concerning. What is it then if it's not clearance that's driving a bit of softer margin is just normalization or something else in there?

Ian Bailey

Well, we've called out some of the factors that are in there. So shrink is one, the movement year-on-year because when you do the percentage on EBIT for the second half and you compare it, it's not that many dollars when you add it all through. So shrinkage is one component. We took a bit of extra provisioning in target associated with the categories we're going to be exiting. So that's a second element that we put in there. None of those items are big enough to call out in terms of dollars as a one-off because they're modest in isolation, but of course, they add up to a total. That would be the two I'd call out.

Bryan Raymond

All right. Thanks.

Operator

Your next question comes from Craig Woolford with MST Marquee. Please go ahead.

Craig Woolford

Good afternoon or morning Rob and team. Can I just ask a question about the, I guess, the approach you take about adjusting costs in line with trading conditions. At what point would there be a constraint? Or would you reassess the situation in terms of debiting the customer proposition? Or should we expect that you can do that under most economic circumstances?

Rob Scott

Yes. Craig, might let Mike kick off talking about that. I think he'll give a good context on the broader thinking across retail businesses, but Ian and Sarah could add to it as well.

Michael Schneider

Yes. Hi, Craig. Just to sort of kick off. I think any retail store will have a fixed base, which is certain administrative costs, leadership costs, those sorts of things. But a lot of the labor that sort of flexes from there is quite variable and rostering patterns and models allow us to sort of adapt and cope. And I sort of look back over the last 15 or so years, we've seen a range of different trading cycles. And that can be trading region to trading region and that can be something relating to weather, for example, where our ability to sort of flex up and flex down is very strong. So I think – there's clearly a base at which you want to stop that starts with the safety and well-being of the team. And then secondly, it's about the sort of practical operation of a site. But particularly from a Bunnings context, we got a very large warehouse with very large weekly trading volume. So our ability to sort of handle that flex is very good, and it's well proven and our operations team don't need a lot of guidance on that. They know exactly what they've got to do to, to do that and our investments in not only our new EBA but also our new rostering system, which has been now rolled out across our Australian stores is going to give us even more flexibility on that.

Ian Bailey

Yes, building on Mike's comments. If I put it into three buckets, first one, labor, which Mike touched on is exactly right. There's a fixed cost to run a store, and over the years, we've been figuring out how to make that fixed cost a smaller number so that variable becomes a bigger component. And that's through various productivity measures through technology is through looking at management structures in lower-volume stores and other tactics that we've applied. So that gives us some – a bigger proportion of variable costs over time.

The second one would be leases, and we've been doing increasing work with our landlords to ensure that as revenue goes up and down that the lease adjusts appropriately versus it's a one-way street where leases only go up, and we've got increasing number of leases, which have that mechanic now embedded in them.

And then the last one, of course, would be clearance in a business like ours because we purchase a lot of inventory upfront. So ensuring that we've got good intel, good quantification and we're adapting very quickly to changing customer behavior really helps us by the right amount of inventory at the right time. We've also put a lot of work now in to reduce the lead times on our products coming out of our sourcing supply out of Asia. A combination of those things means we can adapt more quickly and have better intel from our demand sensing approaches, which means that we have less risk of over quantification.

Sarah Hunter

And just building on Mike and Ian's comments, the only thing I'd add is I'd echo Mike's comments in terms of store environment and labor management in terms of our supply chain. So certainly, across our supply chain. It's a very similar approach. As we see a shift between stores or online, we're able to flex up and down our variable costs to make sure that we are still delivering a fantastic customer experience, but we are meeting the demand in the right way of managing our costs in line with it. So very similar to our store model, we apply the same logic into our supply chain as well.

Craig Woolford

All right. Thank you.

Operator

The next question comes from Ben Gilbert with Jarden. Please go ahead.

Ben Gilbert

Good afternoon here. Morning over there. Ian, just a question for you. I just was looking at the podcast you did the other day, and you're talking about potentially growing 10% into next year, albeit you got to work or 15% better. A lot of the discretionary retail dispose a flat result would be a pretty good outcome. Is that sort of how you guys are thinking actually, I think the tools and the plans you got in place could provide scope to see you came out earnings grow 10% next year?

Ian Bailey

Thanks, Ben. Well, thank you for listening to the podcast. It's nice to know that someone listens. I mean, clearly, the podcast is it's more of a philosophy than it is a forecast for the next period of time. But just trying to give an indication that for a business to continue to improve when you got the scale of a Kmart or Kmart Group, you've got to be thinking about being 50% better over the course of a three or four year time horizon. And really the way I tell that story is to try and break that down into something that's a little bit more tangible. It wasn't intended to be a forecast number for FY2024.

Ben Gilbert

If we think about what you guys are doing at the moment, but can you through a bunch of costs or price cuts in Kmart recently as well. Do you still even with this backdrop in the costs, it sounds like you've had a pretty good start to the year as it's still considered you think you can grow off this big bases that you've established after cracking in fiscal 2023?

Ian Bailey

Yes, absolutely. It's so much yes. Yes. I mean if I was in my trading meeting on a Monday, there are so many opportunities that we see where we could have done better in any given week. And then we've got some new categories which we're exploring, which I think we covered some of those at the Strategy Day, things like cosmetics, youth fashion, storage are examples where we're going into those categories in a bigger way than we have previously, and we're seeing some great results out of that. So now, I feel very confident there's lots of market opportunity out there. I think customers are really tuned into value. And I think going back to Shaun's question earlier, that really opens up our opportunity to connect with categories with customers we haven't historically. And we're working really hard on apparel in both Kmart and Target, and we're seeing some good results because we feel like we're delivering better value than the majority of players in the market, and that's encouraging customers to come to us.

Ben Gilbert

So you guys must be seeing growth in the apparel leagues. Most of the markets to find apparel pretty tough at the moment, but you’re seeing some growth in apparel?

Ian Bailey

We're seeing good – we're seeing solid growth across all the main categories within Kmart.

Ben Gilbert

Fantastic. Thank you.

Operator

Your next question comes from Richard Barwick with CLSA. Please go ahead.

Richard Barwick

Hi, all. Can we just talk about trading down? You obviously, you referenced that and you have done across some of the different retail formats. Can you provide some color perhaps by business, what this might mean for EBIT margin? So in other words, is there a sort of a margin mix impact from trading down? So I guess if there is that trading down? Are they coming down into lower or higher margin categories?

Ian Bailey

Hi, Richard. Ian here. I think, first of all, in Kmart, everything we sell is the lowest price, irrespective of the price point it's at. There is – its the lowest price for the equivalent item. So when we use words like that, we're thinking about all the products we sell versus there's a shift in mix necessarily within our own box. So I'd say it's more of a comment on a market dynamic than it is on a dynamic within our stores. So I wouldn't be looking at customer behavior through a lens of there's a fundamental change in the mix of our products that we sell or the margins that we generate.

Michael Schneider

And maybe just to add to that, Richard, Mike here. When we look at our consumer category in particular, discretionary necessity exists in that. Ultimately, we may see a mix in type of replacement, like Volvo battery or things for the garden, but our ability to manage margin across all the different price points in our product diamond is really, really strong. So we wouldn't see that being margin dilutive.

Sarah Hunter

And I guess, just building on that. Similarly, as a house of brands, it is about ensuring across our offer, we have a range of choice for customers at Officeworks. And what we are seeing, though, is the investments that we've made in private label certainly performed strongly over this period. We're seeing across stationary education and art, our private label grow at about 3x the rate of national brands. So which is on the back of a strong investment around private label and really broad building great quality products at great prices to create choice for customers.

Richard Barwick

Okay. All right. Thank you. And just one follow-up, so sort of related for Ian. Expansion of the Anko brand, I know it's early days, be talking about global customers. But as that progresses, and I guess the sales there, how does that compare – what's the margin you're making compared to the sales you'd be making across the rest of the Kmart Group?

Ian Bailey

You're right, Richard, very early days, and I'll probably be saying what's my aspiration versus what's the result is because of where they are. But we enter that business with a view that we should be – we aspire to a very similar final margin, an EBT margin that's equivalent to what we have within the existing business.

Richard Barwick

Okay. So we shouldn't be thinking about that being either dilutionary or expansion rate to the margin, even.

Ian Bailey

Correct. It's a different cost model not surprisingly. So it's a different first margin, but it's a very different cost base or cost of doing business to support that. And the intent though is a final EBT margin, very much in line with what we generate from our retail business.

Richard Barwick

Okay. All right. Great. Thanks very much.

Operator

Your next question comes from Phil Kimber with E&P Capital. Please go ahead.

Phillip Kimber

Hey guys. I just had a question on the WesCEF business. And I'm really looking at Slide 36 there. So if we put the lithium to one side, the ammonia price and some of the other key prices are sort of heading back to the levels they were in 2017, 2018, 2019, 2020. And if I go back and look at the business, the earnings of the business back then our $400 million to $450 million of EBIT. I mean, is that a sensible way to think about the WesCEF business excluding lithium? Or have there been other sort of structural changes along the way that makes that not the way to think about it?

Ian Hansen

Hi, Phil, thanks for the question. I think it's a sensible way to look at it given that whilst our production may have changed slightly in the last few years, it hasn't significantly altered in terms of the volumes either in ammonia, ammonium nitrate or sodium cyanide, and they are the key drivers of earnings in the chemicals sector. And you're right, the ammonia price has dropped significantly. Current ammonia price at the end of July was 334 you compare that back to July 2022 when it was 956. So that's a rapid decline in global ammonia price, that's CFR U.S. dollars.

The other thing to consider is that we have benefited in this last financial year with the three-month price lag. So as the prices come down, we're pricing three months prior but buying on the current lower price as the price decreases. If the price starts to move up over the next 12-month period, the reversal happens. So we'll be pricing on a previous period, but buying on the current period when the price is moving up. But I think fundamentally, your suggestion of looking back prior to the peaks of ammonia in particular and perhaps Saudi CP to some extent is something worth considering.

Phillip Kimber

Great. Thank you.

Operator

Your next question comes from Ross Curran with Macquarie. Please go ahead.

Ross Curran

Hi, team. I suppose it’s one for Emily. Just on Wesfarmers Health. You've got a couple of new acquisitions coming into this business over the next year. So how should we think about success in help over FY2024 in terms of both EBIT?

Emily Amos

Thanks. Yes, sure. So I think from a growth perspective, the new acquisitions are designed to be earnings accretive to help us improve our return on capital. As we said at the Strategy Day, the business is in a turnaround. And most of – a lot of our activity is really focused on investing for the long-term. So over the last year, we've had great earnings growth. We've had a very modest revenue earnings uplift. And so a lot of our activity is really about continuing to invest in efficiency measures, which is all aimed at reducing our costs, which will add to our earnings profile in the medium term.

Ross Curran

And just as a follow-up, do you think that the move to 60 days scripts will be a major headwind for you guys?

Emily Amos

Look, there's two impacts to 60 days. The main one for us is on our wholesale business. So we do see a reduction in our wholesale markup on those particular drugs that move to 60 days. But the government has actually stepped in to compensate the wholesalers which is really a reflection of the fact that, that part of the business is low margin. So that will buffer a lot of the impact. The other impact actually is on our pharmacy partners who will see a reduction in their dispensary revenue. But from our perspective, our Priceline brand has a very strong sort of front of store. So really some opportunities to work with them to enhance both the services and their front-of-store benefits, but there definitely will be an impact which will play out over time for the pharmacy for our pharmacy partners.

Ross Curran

Thank you.

Operator

Your next question comes from Lisa Deng with Goldman Sachs. Please go ahead.

Lisa Deng

Hi. Thank you for taking a follow-up. I'm actually trying to get some clarity on sort of group like corporate group overall investment priorities around supply chain and digital because it's hard to read across all the different divisions. Can we get an update or a direction on the group spend on CapEx and OpEx on supply chain? And digital, whether it's 2023 or some direction into 2024 as well? Thank you.

Rob Scott

Lisa, it's Rob here. So the way to think about supply chain investment is very much at a divisional level rather than a group level because the investment is very much driven by divisional needs, and there's a combination of investment in new capacity, further automation and efficiency investments and so forth. And look, I think the best marker of that is really what we discussed through the Strategy Day. And I think each of the divisions have signaled that reasonably well. At a group level around – and I should also note a lot of the ongoing investment in data digital technology is also happening at a divisional level. The areas of future investment at a group level, at a corporate level in the data and digital space have really been called out by Anthony around the OneDigital net loss cost, which we gave a forecast for the year of $70 million. So that's down on the $80 million incurred this year. And that really relates to the investment that's being made across the development of OnePass, the shared data asset, some other data and digital projects at a group level. So that gives you some good guidance for FY2024.

Lisa Deng

Yes. Thanks. Just a follow-up on that, like, if I look at the $1.1 billion to $1.3 guidance, sorry, $1.1 billion to $1.4 billion guidance for CapEx next year or 2024, how much of that would be roughly in supply chain? And then the second follow-up is on the OneDigital loss of $70 million. It seems small to me if it's basically building a big corporate capability around a lot of the data and the personalization and potential loyalty that we need to do. Is that because we're sort of managing to like a profit envelope? Or is it because we actually don't see the need to just spend at this stage?

Rob Scott

Yes. Look, I just – sorry, just on that point, Lisa, there's a lot of – as I said, a lot of cost that is embedded within the divisional numbers. So a lot of the ongoing investment around developing out the divisional data capabilities, digital platforms, also the costs around Flybuys points, for example and obviously, that number. The $70 million number doesn't include the ongoing investment we're making in some Flybuys related activities. I should note that we're really pleased how Flybuys is traveling and moving up to over nine million active members is a good step forward. So we're quite happy with the investment, the level of investment, recognizing that we've been – there has been a fair bit of investment in recent years. I'll let Anthony talk more to the breakdown of the CapEx forecast for the year.

Lisa Deng

Thank you.

Anthony Gianotti

Hi, Lisa. Yes, so in terms of what is in the $1.1 billion to $1.4 billion guidance, there is obviously supply chain activity that occurs periodically across all of the businesses at different points in time. And a good example is – there's a new WA DC for Officeworks, for example, in FY2024. There's a new DC that we're building in Queensland for health. So those costs will be in there. And look, in total, they might be across all of the businesses that might be $50 million to $100 million depending on what level of activity is going on in each year. There's no – what I would say there's no major supply chain activity in terms of the bulk of spend in that $1.1 billion to $1.4 billion is probably the best way to describe it.

Lisa Deng

And is there a bulk spend in digital at all in that $1.1 billion to $1.4 billion?

Anthony Gianotti

In terms of – no. So look, there's a level – as I think we've talked about, there's a level of CapEx spend associated with data and digital across all of the divisions. But in total, it doesn't make up a bulk of what's in that $1.1 billion to $1.4 billion.

Lisa Deng

Okay.

Rob Scott

Especially, Lisa, just given that a lot of the ongoing investment in the digital and data space is often Software-as-a-Service and...

Anthony Gianotti

And I think we've been making some comments about that, Lisa, over the last few years, where that spend is shifting more into OpEx as opposed to CapEx as we move to Software-as-a-Service. And of course, as the accounting standards have changed, which require that to be OpEx.

Lisa Deng

And there's no bulky OpEx EBA coming up that we should know about across all the businesses related to digital, I guess?

Anthony Gianotti

No.

Lisa Deng

Okay. Got it. Thank you.

Operator

Your next question comes from Scott Ryall with Rimor Equity Research. Please go ahead.

Scott Ryall

Hi, thanks very much. This is for Ian Hansen, please. I was just wondering if you can talk about decarbonisation at CSBP, which Rob mentioned in the initial remarks, I think if I read your website correctly, you're about 11% below your 2020 baseline. And I think you did catalyst abatement upgrades first. I was wondering if you could just tell us what's left for the rest of the decade can you stay ahead of the safeguard mechanism baseline reductions? And what are the opportunities you see just for that business because I get that you've got a lot of other businesses that are tied into decarbonisation. But what are the opportunities you can see for that part of the business? If you're successful at decarbonizing ahead of perhaps your plans or in line with safeguard?

Ian Hansen

So Scott, I assume you're referring to our ammonium nitrate business. Is that the question?

Scott Ryall

Yes, the ammonia, obviously.

Ian Hansen

Yes. Okay. So yes, you're correct, we're at 11% below our FY2020 baseline. And in fact, we should be potentially further below that in FY2024 because we're replacing one of the catalysts today in one of our nitric acid plants, its life has expired, and the performance needs to be improved. So we're putting a new catalyst in there. So that should give us greater abatement for the next 12 months in that plant. We have a target of reducing our current level of emission in fact, our FY2020 level of emission by 30% by 2030, and we believe we are on track to meet that. That will require us installing tertiary abatement into our ammonium nitrate facilities. But we're planning on doing that progressively over the decade. In terms of the safeguard mechanism, we believe that subject to the FY2027 review by the federal government, we should be okay with respect to the safeguard mechanism until 2030.

Scott Ryall

Okay. And then opportunities that you see in the market for lower carbon products?

Ian Hansen

Look, we're starting to have discussions with our customers now about lower carbon products. But to be honest, they haven't been terribly willing to engage. I think they see their priorities in other areas to reduce their carbon footprint relative to the carbon that our products deliver to their operations.

Scott Ryall

Okay. Thank you. That's all I had. Thank you.

Operator

Your next question comes from Craig Woolford with MST Marquee. Please go ahead.

Craig Woolford

Hi, Rob and team. Just a follow-up on space or store growth was quite modest for – certainly for Kmart and Officeworks. Can you give us a guidance for what you expect for FY2024 by the retail brands as well as the funding specifically, can you give us an indication of what space growth was in FY2023, referring to square meter growth as opposed to store count?

Michael Schneider

Yes. I'll start. I think we set a strategy over the next few years, sort of looking at 10% space growth. I'll need to come back to you on exact space growth for FY2023. So we'll do that. But to give you an example, in the new stores that we opened, we were picking up quite considerable spaces. So one in Victoria gave us 4,000 square meters additional space, Preston in Victoria also gave us sort of 6,000 square meter space. So our outlook for FY2024, no net new stores for Bunnings, but lots of opportunity to optimize space between bigger and smaller stores and regional and metro stores. We've got three Beaumont Tiles opening in Western Australia, and we'll expand by about another 10 in the Tool Kit depot fleet over the next 12 months. So – but I'll circle back, Craig, on the exact space growth for 2023.

Ian Bailey

In Kmart, Craig, we're pretty much in network optimization with Australia. So it's a small number of stores when new catchments become available or consolidate catchments to get a better economic outcome. New Zealand, there's a little bit more opportunity and we're still opening stores, but it's a relatively small number in that market as well. So again, we've called out pretty much it's five or less over the course of the next few years – per year.

Craig Woolford

Sorry, I was just going to ask is K-Hub likely to shrink further?

Ian Bailey

Well, every store is based upon its economic merits, we're quite happy with the returns that we're generating out of the majority of the K-hubs, but we've got roughly 50 of them. There'll be some stores which perform better than others. And if we don't think there's an adequate return from a store, then obviously, we'll assess it in that time. But at the moment, we're pretty happy with the performance of the stores.

Sarah Hunter

Great. And Craig, from an Officeworks perspective, look, over the last couple of years, we've been working really hard to optimize our property portfolio, as has been the trend in recent years for Officeworks. So we expect in FY2024 to open five net new stores, and we'll have one relocation. And our property strategy has been well established for a number of years now, and we're continuing on that basis. Equally, similarly to Mike and Ian, we're always looking at opportunities to optimize space and sales per square meter. And that's part of one of the key drivers of our reflow programs that we've been running over the last couple of years as we improve adjacencies, we improve a range review processes that sales per square meter return, and that's how we think about it at Officeworks.

Craig Woolford

All right. Thanks Sarah. Thanks team.

Operator

Next question comes from Ben Gilbert with Jarden. Please go ahead.

Ben Gilbert

Thanks for taking another question. Just a quick one to you, Rob. Just on Flybuys, it's obviously it's a great program. But I imagine there's probably some testing discussions internally around rolling out to other brands such as Bunnings. How do you see that on a five to 10-year lens on some of these privacy – the Privacy Act review and some ambiguity that might occur around, whether it's 1P or 3P data? And is there any optionality in that separation agreement for you guys to take that back to 100% at any stage? Or do you think about building more internal capabilities around loyalty with the view that on a longer-term range is probably going to have to have it in-house?

Rob Scott

Yes. Thanks, Ben. So firstly, we're pleased with the benefit that we see within our divisions from Flybuys. And you're right, it took a while to arrive at a framework that worked for particularly our EDLP retailers. And certainly, Bunnings and Officeworks that are now in the program are leveraging Flybuys as well. It's resonating well with their customers. clearly which businesses like Bunnings, Officeworks, Kmart, use Flybuys is different to how a supermarket uses it. But that seems to be adding value. And obviously, it's great for Flybuys members to have the benefit to earn points and redeem points across a much broader category of spend. So if you're a Flybuys member, you're much better off by virtue of being a Flybuys member today than you were five years ago. And that's what's driving the increase in membership and increasing engagement and NPS scores. So we're quite pleased with it.

I think on your question of data privacy rights and how that might evolve. I think what we're going to see is that as the regulations tighten up, it's going to really demonstrate the benefit of these types of programs where there is a very transparent arrangement around the data rights and the benefits for customers. And I think that transparency and simplicity customers knowing exactly what's happening with their data, what's not happening with the data and the benefits they're getting will play to the strengths of well-established programs such as Flybuys. And there are things that we can do in Flybuys that we can't easily do within our existing businesses. And then there are things that we just have to do in our existing businesses that can't be done within Flybuys. And I'm sure that Coles would probably have a similar answer to that. So we'll continue to invest in Flybuys and the capabilities in our divisions and see it as adding value for all parties at the moment.

Ben Gilbert

But does it make sense, Rob, to have a JV with someone that you're increasingly competing with as you look at API and Priceline is a big chunk of the supermarket, we've just gone into pet. I presume we'll see more consumables coming into Bunnings, catch, a lot of cleaning these sort of products, health as well. It just – I understand why I did it with the merger, but it seems like a bit of a funny – not funny but a partnership that doesn't make a lot of logical sense on a multiyear view?

Rob Scott

Yes. Well, look, one point I should note is that we've deliberately kept the Sister Club program and the Priceline loyalty program outside of Flybuys. That's important to note. But the other point I'd say is that, look, there's always a degree of overlap between different businesses. Even if you – between Officeworks, Bunnings, Kmart, there's a degree of product overlap, but it's really at the margin. And I think it would be wrong to get hung up with all the 1% areas of overlap. The bottom line is that we are not in the business of being a supermarket and supermarkets aren't in the business of selling apparel or home improvement products. So there's far more complementarity and benefit from leveraging that broader scale then there are issues getting worked up with some of the 1% differences.

Ben Gilbert

All right. Thanks, Rob. Appreciate it.

Operator

Thank you. There are no further questions at this time.

Rob Scott

Okay. Thanks, everyone, for your time and your questions. Any further questions, please follow up with Simon and the team. Otherwise, have a great weekend.

Operator

That concludes our conference for today. Thank you for participating. You may now disconnect.

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Wesfarmers Limited (WFAFF) Q4 2023 Earnings Call Transcript