Releasing the Metcash FY2024 Annual Report, Metcash Group CEO Doug Jones said, “Our strategy has been in place for some time now and has resulted in a portfolio and a platform that not only continues to deliver pleasing financial results, but also positions Metcash well for the future.
“While each business is subject to the market conditions of the sector in which it operates, each one has a clear strategy and a structure that underpins these sustained results; and these remain in place.
“This year the Food and Liquor pillars delivered another year of superb results and are now structurally positioned for enduring growth. They sell products which are essential for everyday living, and they could be described by some as the defensive elements of our portfolio; and they’re poised for continued structural growth,” he said.
“The Hardware pillar is proving resilient in a volatile economic climate and continuing to maintain its strong market position. The Hardware and Professional Tools businesses are more cyclical, being more dependent on market conditions. I am pleased that these businesses have held margins and protected profits in the current operating environment. They remain ideally positioned to benefit from an improvement in trading activity,” Mr Jones said.
“Logistics and wholesaling are at the core of the Metcash Flywheel and this strategy has proven to be an effective investment in our retailers and their businesses, their financial health, their overall margins, their operating capabilities, and the quality of their offer. We have continued to prioritise volume over margin expansion as this is what keeps our Flywheel spinning. This investment is paying off, evidenced by shoppers continuing to find our offer relevant in the face of the most value conscious environment in recent memory. Australian and New Zealand families and businesses are facing many challenges, evident in the sales of private label and in the trends towards promotions and discounts, and to less premium, better value choices. Customers are shopping promotions more, with smaller baskets and more frequent visits,” he said.
“In the case of our building trade customers, they have reduced their advanced ordering as the visibility to future projects becomes less clear. Both these customers and our Hardware suppliers tell us they are experiencing a slowdown in activity and of course retailers, members and franchisees are facing the same challenges. However, they remain positive about the anticipated increase in building projects in the medium to long term.
“Within our business we are responding to the economic climate in which we operate. Costs have been well managed, and we’ve delivered savings to offset cost of doing business (CODB) inflation ahead of those committed. We have delivered excellent cash conversion, underpinned by strong working capital management.
“In that context, I am proud of our FY24 results; while we do not control the external environment, our team has controlled what we can superbly. These results are an indication that our strategy is working and continues to deliver improved resilience and diversification in the portfolio. We have performed at or better than the market trends in the markets we compete in. The portfolio results are as planned and as we would expect in these conditions, if not better.”
Group financials
Group reported revenue, which excludes charge-through sales, increased 0.7% to $15.9 billion. (FY23: $15.8bn). Including charge-through sales, Group revenue increased 0.7% to $18.2bn (FY23: $18.1bn) with growth in the Hardware and Liquor pillars more than offsetting a small decline in the Food pillar, driven by lower sales in tobacco. Group underlying EBIT decreased by 0.9% to $496.3m due to earnings growth in Food and Liquor being more than offset by lower earnings in Hardware and increased corporate costs. All pillars were supported by good operating discipline and the success of strategic initiatives, including acquisitions in Hardware. Superior Foods will be incorporated into Metcash’s FY25 results from 3 June 2024 and will be reported within the Food pillar.
Group underlying profit after tax decreased 8.2% to $282.3m, reflecting lower earnings in the Hardware pillar and increased finance costs. Statutory profit after tax decreased 0.7% to $257.2m and includes the impact of $25.1m (after tax) of significant items in relation to Project Horizon, put option valuation adjustments, business acquisition costs and mega distribution centre transition costs.
The Group’s cash flow performance was again a standout with operating cashflow increasing $109.9m or 29.5% to $482.6m (FY23: $372.7m), with the cash realisation ratio ~102% for the year. This results in an average three-year cash realisation ratio of ~90%.
A strong focus on working capital was a key driver of the result. Net debt at the end of the financial year was $251.9m (FY23: $349.6m), with average net debt $582m. The debt leverage ratio (DLR) at the end of FY24 was 0.45x (FY23: 0.62x) or 1.03x on average. After the end of the financial year the Company paid $390m for the purchase of Superior Foods (with a potential additional $22.3m earn-out due after the end of Superior Foods’ financial year). Metcash expects to be in the mid to upper end of its target DLR range (1.0x to 1.75x) for the next two years.
The Board determined to pay a final dividend for FY24 of 8.5 cents per share, bringing total dividends for the year to 19.5 cents per share fully franked, in line with the target payout ratio of approximately 70% of underlying profit after tax. This represents the Company’s strong cash performance balanced with its desire to invest in future growth opportunities.
Pillar financials
Food
Total Food sales (including charge-through and excluding tobacco) increased 4.6%, with strong growth in both Supermarkets and Campbells & Convenience. Including tobacco, total Food sales declined 0.5%. In Supermarkets, the business continued to perform well in an environment of increased value-conscious shopping. Wholesale sales excluding tobacco were up 4.7%, underpinned by further improvement in network competitiveness and inflation.
“The differentiated offer provided by the independent network continues to resonate with shoppers, who have retained IGA in their shopping repertoire even as they increasingly shop around in their search for value,” Mr Jones said. Foot traffic into stores increased for the year, although items per basket declined. Sales of private label products increased 15.5%, and sales of items on promotion grew faster than those not on promotion. Sales volumes were positive for the year, with growth in the second half more than offsetting a small decline in the first half. Wholesale price inflation continued to moderate with inflation for the year at 4.8% (FY23: 7.6%), and fourth quarter inflation down to 2.4%. The teamwork score ex-tobacco increased 1.6 percentage points to 69.7% and was flat at ~74% including tobacco.
“The IGA retail network continued to invest in growth and remains healthy, strong and confident,” Mr Jones said. There were a record 26 new store openings in the year, and 15 closures. Retail like-for-like sales growth in the IGA network was +2.2% ex-tobacco. Tobacco sales declined 13.9% in the year due to an acceleration in illicit trade and the shift to alternatives.
In Campbells & Convenience, total sales excluding tobacco increased 4.0% reflecting stronger sales from major banner group customers. “I am delighted to report that in late June Campbells & Convenience won a new supply agreement with Ampol Foodary for the provision of grocery products to their retail stores,” he said. “This is a vote of confidence from an important new customer and bodes well for our business.” Food EBIT increased 3% to $210.1m, reflecting the strong trading performance ex-tobacco, continued strong support from suppliers and the effective management of costs. The EBIT margin increased 7bps to 2.2%, largely reflecting the change in sales mix associated with the decline in tobacco sales, as well as good cost management.
“The strong earnings performance and small margin expansion is pleasing under current conditions and is another year of evidence that this is a sustainable, robust business, operating within a healthy and successful independent network.”
Liquor
The Liquor pillar continued to outperform in a more challenging market with total sales (including charge-through) increasing 1.7% to $5.2bn, with growth in sales to independent retail and contract customers more than offsetting a decline in on-premise sales.
“This really is an exceptional trading performance once again for the Liquor pillar, delivering stellar sales and EBIT results,” Mr Jones said. “This is a market-leading sales result in an economic climate characterised by de-premiumisation, downtrading to better value choices and categories, and increased competition. In the face of all of that independents took share.”
An increase in cost-of-living pressures continued to drive shopper focus on value, lower consumption and a decline in on-premise sales. Wholesale sales to retail and contract customers increased 2.2%, resulting in further market share gains. “Sales growth was underpinned by continuation of the increased preference for localised offers, providing shoppers with conveniently located stores, tailored ranges, competitive prices and local friendly service,” he said. “Sales to on-premise customers declined 1.9% in line with market trends, albeit some improvement was evident in the second half. The highest growth categories were again RTDs and beer, with cost-of-living pressures driving shopper preference for lower priced, better value choices.”
“Like Food, EBIT margins are underpinned by a strong trading result, good cost control, and excellent merchandising,” he said. Liquor EBIT increased 4.9% to $109.2m, reflecting the contribution from the business’ strong trading performance, strategic buying and good cost management. The EBIT margin increased 6bps to 2.1%.
Strategic acquisitions
“I’m pleased to advise that we’ve now completed all three strategic acquisitions – Bianco Construction Supplies and Alpine Truss in March and Superior Foods at the start of June,” Mr Jones said. “Superior further strengthens the Food offer and opens new growth opportunities in the adjacent food service market.”
“The acquisitions of Bianco and Alpine support IHG’s Whole of House strategy and strengthen our market position. Superior is on track to earn a full earnout and is performing well.”
Looking forward
“Looking ahead to FY25, our immediate priorities are integrating and extracting the synergies from our recent acquisitions, completing and moving into the new distribution centre in Truganina, Victoria, and progressing on our core technology programs, including Horizon where we’re making steady progress and costs remain well-managed,” he said.
“This does remain a large and complex program, and we continue to be focused on balancing cost, time, quality and risk to deliver the project.
“So, together with the team I’m pleased to share where we are, the position we are in, and I’m thrilled and excited by the opportunities before us.”