Coles profit down down for the first time in 10 years

Richard Goyder, CEO of Wesfarmers, talks about their profit result, and the headwinds that Coles faces.

Introduction: Coles profits down for the first time in 10 years

Ross Greenwood: Welcome back to Money News right around Australia. The profit today that came out from one of our largest companies and largest employers, Wesfarmers, was all about coal. Not coals C-O-L-E-S it was actually all about Coal, C-O-A-L. With the messy spike, you’ve seen in the coal price over the past 12 months, it’s more than doubled.

You’ve actually seen that there’s overcome in many ways the downturn in profit at Coles. Which is the very first time since Wesfarmers has owned Coles that the earnings before interest and tax at Coles has gone backwards.

It was basically the profit overall up by 22%, $2.87 billion. Coles earnings before interest and tax $1.61 billion. There is a really good story here because, for years and years, many analysts have argued that this group, Wesfarmers, should be split out. The coal assets go one way, maybe Coles goes another, maybe Bunnings goes a different way and let the shareholders pick which of those assets.

The company however and its management has always said, no, we believe it should stay together. Because in tough times in one, it might be the other division helps to pick it up. That’s certainly the story as to what’s taken place here. Let’s go now to Richard Goydon the Chief Executive of Wesfarmers. Of course, he’s leaving that position in the near future. Richard as always, we appreciate your time.

Interview: Richard Goydon, CEO Wesfarmers

Richard Goydon: Yes, Ross nice to be with you as usual.

Ross Greenwood: Okay, do you believe this is vindication of that portfolio style of management of these assets that Wesfarmers always employed?

Richard Goydon: You stated better than I could say, Ross. We are a conglomerate, happily so and the reason we think we’ve been able to have a long term credibility for shareholders is because of the capacity that gives us to invest through cycles. Protect businesses, when they need protection and not jump to what people think we should do in the short term and call as a great example of that. It’s really gratifying for the shareholders that we’ve had the turnaround we have.

Ross Greenwood: One of the things you do, and now that you spend a lot of time internally looking at this and making certain that each of your divisions is accountable, is you look at the return on capital employed. Now overall, the group over the last year had a return on equity of 12.4%. It was 9.6% last year. When you go into the various divisions and look at the rolling return on capital to June 30, you get that Coles is 9.7%. That’s a big wedgie of business. If it’s coming down, that affects the overall return on the capital.

Then you go and have a look at Burnings in Australia or New-Zealand, 41.8% which is phenomenal, out of control. Kmart, 43.7% off the charts. Then you go and have a look at Resources which is the Coal division, 69% and thrown in there because it obviously isn’t going so well. Target, minus 1% is not good. Bunnings in the UK and Ireland is small and now it’s just beginning.

It’s this idea of continuing the look at the return on capital, that shareholders often miss but that’s the key to judging a good business.

Richard Goydon: It’s been the key to how we’ve run Wesfarmers as a conglomerate for more than three decades now, Ross. Because at the end of the day, our role is to invest shareholders money in those businesses and to try to return that. That enables us to return major shareholders and also to grow and expand and employ more people and do those things which are good for us all.

You’ve called out a few things, the Burning’s return on capital is phenomenal. It’s just one of the great Australian success stories. We’re really disciplined at Wesfarmers, about how where we invest capital. We’re not happy with Target, but we’re a heck a lot of happy than we were 12 months ago. We can see a pathway where we’ll make additional return on the shareholders’ investment in it. If we end up with businesses where we just don’t think we can make a return over time to shareholders, then that’s when we’ll make a decision to exit.

One of the things we’ve been able to do as a conglomerate is, for example, support Bunnings with a new competitor to come into the market. Provide capital so that it can expand and likewise, we had insurance business some years ago, went through difficult times, we invested in it and we were able to exit it down the track at a really significant value for shareholders. You’ve really capturing the casings about Wesfarmers.

Ross Greenwood: Okay, so then take me to your supermarket division. Which you and I have gone back and forth over the years since it was acquired at the heart of the global financial crisis. You and I both agree that it’s probably been at the wrong price and not the return on capital. Does it stick in your craw because you are not so mean with the capital and really want to make certain that the capital is used for good purpose? When the supermarket division comes and says we need tens or hundreds of millions of dollars to throw into making prices cheaper, doesn’t that as the overall Chief Executive stick in your craw just a bit to say, “Why on earth are we doing this?”

Richard Goydon: No, because of the market context we’re in, Ross. You know at the end of the day, as you said, that business contributed $1.6 billion of earnings and threw off a lot of cash last year. In a context where the major competitors spend about $ 1 billion on investing in price and service and the Gemini LD expanded into western and South Australia’s. In fact, I’m really supportive of what John Durkan and his team have done at Coles which is said, we need to invest a little bit ahead of the curve to ensure that we maintain a value proposition for our customers in this marketing environment.

Support us and we’ll make sure that in the years ahead, we get the savings and the business and we’re able to recapture it gross. Both in terms of earnings but also in terms of revenue and the likes. It’s a challenging environment and again it’s a time when we can wrap our arms around business and say we’ll back you to do the right thing over the medium to long term.

Ross Greenwood: Alright. We’ve also talked in the past about the problems at Target. Well, Kmart is a phenomenal success and that 43.7% return on capital is the startling example of that. You got Target going backwards and you’ve tried to put it through another resuscitation. Do you think you’re anywhere near turning the corner so that that business can survive?

Richard Goydon: I think we are. In underlying basis, we break even for the year which is better than last year. Regardless of the time, it’s sub-scripted back now. We’ve got an expense based which is much better for that business and is a phenomenal attracting great talent to the business and should we get the product assortment right in that business on trend, women, children, women’s fashion, children’s fashion and homeware.

I think we can be confident that we will get the turnaround and in the meantime as you say, Kmart going from strength to strength. The Australians are falling in love with Kmart which is what they’ve done with Bunnings and that’s great.

Ross Greenwood: Just another one because it’s obviously been highly topical in recent times. That is the whole notion of weekend penalty rates. I know organizations such as Wesfarmers, Coles, Target, Kmart even Bunnings would have had enterprise bargaining agreements in place. Does it really affect a big company such as you as compared with say smaller operators on the high streets around Australia?

Richard Goydon: Ross, it affects some of our businesses. We have had ABAs and those other benefits that employees get. It certainly would be helpful I think to tidy up this area and tidy up some other aspects of employment arrangement just to make it simpler and easier for us on the employment side of things. Our ambition, my ambition always has been to pay for even more, not less. We want to build the company, grow the company and I’ve always said Australia is a high wage country, we should aspire to continue that.

We should move out of the ways of businesses like ours and small businesses impediments to employ more people and things like penalty rates on weekends can do that. Say for Bunnings, we employ people on an annualized hour basis. Our people at Bunnings are employed well above the national award rates and enjoy the rewards of that through the success of the business.

Ross Greenwood: Tell me, when do you actually pack up the desk at the box ads, stick all of the trophies and everything else in it and head off and start looking after the AFL at a more permanent basis?

Richard Goydon: [laughs] Well, my last days at an AGM in the middle of– 16th November I’d say which is actually not only a nice day because a lot of long term shareholders will be there at our AGM, it’s a bit of a festival. It will be a nice way to exit.

Ross Greenwood: I’ve got to say, I’ve always enjoyed having a chat with and you’ve always been so forthright and upfront about it and also given me great knowledge about the Australian economy as well. I’ll tell you what, good having you on the program as well. Richard Goydon, the Chief Executive of Wesfarmers. Been there for a long time and as he says, last day will the annual meeting. We might track him on just before that as well. Richard always great to have you on the program.

Richard Goydon: I love to do that Ross, thanks very much.

 

 

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