Announcing the Metcash FY25 half year results, Group CEO Doug Jones said: “Our diversified portfolio strategy continues to deliver in the face of a challenging external environment. Conditions were difficult for all our pillars, but particularly in Hardware where the decline in trade activity accelerated in the second quarter.
Despite this, Group sales were up significantly, with growth in the Food, Liquor and Hardware pillars.
The independent value propositions continue to resonate with shoppers in a highly value-conscious environment, underpinned by the improved quality of those offers, including competitive pricing positions.
Importantly, market shares were held in the Food and Hardware pillars, and grew materially in Liquor.
Food earnings increased substantially, reflecting the addition of Superior Foods from June this year, as well as growth in our Supermarkets and Campbells & Convenience businesses despite a further large decline in tobacco sales.
Pleasingly, Superior Foods has continued to perform well as part of the Metcash Group, winning new contracts and delivering strong sales growth. Our Food business is now much larger, more diversified and resilient, and positioned with significant growth opportunities.
The Liquor pillar delivered another strong result with independents outperforming the chains, led by the IBA network. Their tailored, localised and competitive offer has again driven strong performance.
The rapid decline in trade activity led to a challenging half for our Hardware pillar, particularly in retail stores where lower volumes placed pressure on their margins. The business is responding to the current conditions through aggressive cost initiatives and accelerating growth plans in both the Trade and DIY segments.
Looking forward, as the leading wholesaler and service provider to independent businesses across Australia, our more diversified Group provides an ideal base for future growth. Our Food and Liquor pillars are well positioned for structural growth, while in Hardware we remain confident that the long-term market fundamentals remain positive for both IHG and Total Tools. These businesses are ideally positioned to capitalise on an improvement in activity levels,” Mr Jones said.
Results overview
Group reported revenue, which excludes charge-through sales, increased 8.1% to $8.5bn (1H24: $7.8bn). Including charge-through sales1, Group revenue increased 6.3% to $9.6bn (1H24: $9.0bn) with growth in the Food, Liquor and Hardware pillars, partly buoyed by acquisitions.
Group underlying EBIT was broadly flat at $246.1m, with growth in Food including the addition of earnings from Superior Foods being partly offset by lower earnings in Hardware and Liquor. In Hardware, a further slowdown in Trade activity weighed on earnings, while in Liquor there was a small decline in EBIT related to reduced strategic buying with lower wholesale price inflation.
The Food pillar again performed well delivering strong earnings growth, with the quality and competitiveness of the independents’ offer continuing to resonate with shoppers in a highly value-conscious environment. The Superior Foods business was acquired on 3 June 2024 and has delivered strong growth underpinned by new contract wins. Earnings increased 17.9% to $119.9m reflecting growth in both Supermarkets and Campbells & Convenience and the addition of Superior Foods.
The Liquor pillar again performed strongly, underpinned by the independents’ localised offer and the improved execution of the business’ diversified customer strategy. Earnings were down $1.7m to $49.1m reflecting the strong trading performance, offset by the impact of reduced strategic buying.
In Hardware, total sales increased reflecting the impact of acquisitions in IHG and new stores in Total Tools. The further softening in Trade activity, particularly in the second quarter, placed increased pressure on retail margins. Earnings declined 15.1% to $93.9m reflecting the weaker Trade activity, increased cost pressures and intense price competition in the professional tools market in the first quarter. Both IHG and Total Tools have maintained their market share and taken strong actions in response to the current conditions.
Group underlying profit after tax decreased 5.5% to $134.6m reflecting lower earnings in the Hardware and Liquor pillars, increased finance costs and increased depreciation and amortisation. Statutory profit after tax increased 0.6% to $141.8m. This included a $15.0m gain arising from the reversal of a previously impaired loan to an associate (Dramet Holdings Pty Ltd), put option valuation adjustment gains and acquisition costs of $7.7m (net gain), Project Horizon implementation costs of $8.7m and mega DC transition costs of $6.8m, all post tax.
Operating cashflow for the first half was $164.0m and resulted in a three-year average cash realisation ratio of ~86%, in line with the Company’s guidance of 75% – 85%.
Net debt at the end of the first half of the financial year was $725.0m (FY24: $251.9m), with average net debt $791m (FY24: $582m). The debt leverage ratio (DLR) at the end of the first half was 1.26x (FY24: 0.45x). The increase in debt largely reflects the purchase of Superior Foods in the first quarter. Metcash expects to be in the mid to upper end of its target DLR range (1.0x to 1.75x) in FY25 and FY26.
The Board determined to pay an interim dividend for FY25 of 8.5 cents per share, fully franked, in line with the target payout ratio ~70% of underlying profit after tax.
Review of trading results
Food
The Food pillar is now larger, more diversified and more resilient, underpinned by the competitiveness of the independents’ offer and the addition of Superior Foods.
Total Food sales (including charge-through and excluding tobacco) increased 18.8% to $4.2bn, reflecting growth in both Supermarkets and Campbells & Convenience and the inclusion of Superior Foods from 3 June 2024. Including tobacco, total Food sales increased 10.0%.
In Supermarkets, the independents’ offer continues to resonate in an environment of heightened value-conscious shopping. Wholesale sales excluding tobacco were up 3.1% reflecting volume growth and a low level of inflation. Foot traffic into stores was in line with the prior corresponding half, and items per basket declined reflecting cost of living pressures on household grocery budgets and shoppers’ increased propensity to visit multiple stores. Sales of private label products increased 9.0%, and sales of items on promotion continued to grow faster than those not on promotion.
Sales of tobacco declined 16.5% (1H24: 12.2%), primarily driven by acceleration in illicit tobacco trade, even as Metcash Food’s share of the legal market increased.
Wholesale price inflation for the half moderated to 1.8% (1H24: 6.5%), with October lower at 1.2%. The teamwork score increased 0.3ppt to 70% (on an ex-tobacco basis).
The IGA retail network continued to invest in growth and remains healthy and confident. There were 15 new stores in the half, five closures and six stores transferred to non-IGA independent brands. The new stores were mostly medium size formats. Retail like-for-like sales in the IGA network increased 2.2% ex-tobacco.
In Campbells & Convenience, total sales excluding tobacco increased 4.1% underpinned by customer growth and a wider product range being shopped.
Superior Foods performed well, as expected, delivering strong sales growth of 6.1%. The growth reflects an increase in underlying performance and new contract wins. The rate of growth moderated towards the end of the half due to the cycling of a number of larger contract wins.
Food EBIT increased 17.9% to $119.9m, reflecting the strong trading performance (ex-tobacco) and the addition of Superior Foods. Supermarkets and Campbells & Convenience EBIT increased 3.8% to $105.6m, and Superior Foods EBIT was $14.3m. The EBIT margin increased 15bps to 2.3%, reflecting good cost management, the change in sales mix associated with the decline in tobacco sales and the addition of Superior Foods.
Liquor
The Liquor pillar continued to outperform and gain market share in a challenging market. Total sales (including charge-through) increased 2.1% to $2.5bn, with growth in sales to independent retail and contract customers more than offsetting a small decline in on-premise sales.
Liquor’s strong sales performance has been underpinned by the independents’ localised and competitive offer, as well as the improved execution of the business’ diversified customer strategy.
Wholesale sales to retail and contract customers increased 2.4%, reflecting increased shopper preference for the independents’ tailored local range and convenience. There continued to be signs of recovery in the on-premise segments with sales to on-premise customers down 0.6% compared with a 2.6% decrease in the prior corresponding half.
The highest growth categories were value RTDs, spirits, beer and wine categories, with cost-of-living pressures driving shopper preference for lower-priced, better value choices.
Liquor EBIT decreased 3.3% to $49.1m, reflecting the contribution from the business’ strong trading performance, the impact of reduced strategic buying with lower wholesale price inflation and increased costs. The EBIT margin was 10 basis points lower at 1.9%.
Outlook and trading update
Total Group sales have been strong with growth in the Food, Liquor and Hardware pillars, partly buoyed by acquisitions.
Total Food revenue has increased significantly buoyed by the acquisition of Superior Foods. Supermarkets sales ex-tobacco continued to grow, reinforcing the business’ resilience in a highly value conscious environment.
Superior Foods is continuing to win new customers and perform in line with expectations.
In Liquor, the independents are continuing to win market share, led by the IBA network. This is being underpinned by the network’s tailored, localised offer and convenience.
In Hardware, soft Trade activity continues to place pressure on volumes and retail store margins. In IHG, a strong focus on costs and accelerating growth initiatives is expected to provide earnings benefits in the second half of FY25. In Total Tools, competition remains strong, albeit at more normal levels. The business expects trading in the second half to be stronger than the second half of FY24.
Metcash remains well positioned with the plans, platform, capabilities and diverse business portfolio for future growth and strong returns through the cycle.
