2014 Metcash Limited Annual Report SUCCESSFUL INDEPENDENTS Metcash Limited ABN 32 112 073 480 Who We Are 1 Chairman’s Report 2 Financial Highlights 3 CEO’s Report 4 Consumer Insights 6 Review of Operations – Metcash Food & Grocery 8 Review of Operations – Australian Liquor Marketers 10 Review of Operations – Hardware & Automotive 12 Corporate Responsibility 14 Our Board 16 Key Management 18 Corporate Governance 19 Financial Report 29 Directors’ Report 30 Notes to the Financial Statements 70 Directors’ Declaration 133 Auditor’s Independence Declaration 134 Independent Auditor’s Report 135 ASX Additional Information 137 Corporate Information IBC WHO WE ARE OUR PURPOSE OUR VALUES OUR VISION INTEGRITY IS THE FOUndation GROWING OUR MARKETS SUCCESSFUL OF OUR VALUES: AND DELIVERING VALUE to OUR StaKEHOLDERS INDEPENDENTS SUPPORTING OUR CUStoMERS AND SUPPLIERS DISTRIBUTION AND MERCHANDISING EXCELLENCE OUR PEOPLE ARE EMPOWERED AND ACCOUntaBLE REtaiLER AND CONSUMER CHAMPIONS ADDING VALUE IN OUR COMMUNITY SUCCESSFUL AND PASSionatE INDEPENDENTS OUR MODEL OUR MARKETS FOOD & GROCERY H S R A E C T T A E I L M E LIQUOR DELIVERING R VALUE HARDWARE SU PPLIER AUTOMOTIVE Metcash is Australia’s leading marketing We support independents in creating that and distribution company, operating in offer and to be highly successful by: the wholesale grocery, liquor, hardware – Focusing on the customer – ours and automotive industries. and those of our customers; Our business divisions – Metcash Food – Providing merchandising and & Grocery, Australian Liquor Marketers distribution excellence – our (ALM), Hardware and Automotive – investment in automation and robotics employ over 5,500 people, and support is allowing us to set new standards in more than one million people via our supply chain efficiency; and independent retailer network. – Leveraging the buying power We believe Australian shoppers – trade of our network – to negotiate and retail – want a local, convenient offer. better prices for our customers. Metcash has the capabilities, the drive, and enthusiasm to ensure independent retailers have a bright and sustainable future. Right now, we are investing in this future with a transformation plan that will secure sustainable growth for Metcash, our independents and our shareholders. Metcash Limited Annual Report 2014 1 CHAIRMAN’S REPORT The year was characterised by significant In past years, the Board has authorised In November 2013, the Board appointed changes in the Company’s leadership higher payout ratios, reflecting its Mick McMahon, CEO of ASX listed and the development of the strategic desire to return funds to shareholders Skilled Group, an experienced CEO with transformation plan announced to if the business had no alternative extensive retailing and supply chain the market in March 2014. The Board use for it. Currently, it is important management experience in supermarkets was heavily involved in the strategic that management has access to the and convenience, food, grocery and review and is confident that Metcash appropriate levels of capital required to liquor. In June 2014, the Board appointed has a strong, renewed management return Metcash to earnings growth. Tonianne Dwyer. With a background as a team, with the capability to deliver the lawyer and investment banker, Tonianne In this transitional year, the Board has disciplined execution the transformation brings significant experience, including set the full year dividend at 18.5 cents plan will require. multiple directorships of ASX100 and per share and reintroduced the Dividend international companies. She currently In Financial Year (FY) 2014, sales Reinvestment Plan (DRP). The DRP holds independent directorships on the revenues grew by 3.2%, to $13.4 billion. will provide balance sheet support boards of: Dexus Funds Management However, other metrics were depressed and enable Metcash to continue to Limited, Dexus Wholesale Property by challenging market conditions in the invest in the business and implement Limited, Cardno Limited and Queensland group’s core Food & Grocery business its transformation initiatives, while Treasury Corporation. and the cost of the group’s transformation maintaining a prudent capital structure. initiatives. Reported profit after tax fell After 16 years of service, Dudley Rubin 17.9% to $169.2 million. Underlying will retire as a Non-executive Director profit after tax fell 10.9% to $250 million. The capital cost of the at the forthcoming Annual General Underlying earnings per share (EPS) was transformation initiatives Meeting. A former Chairman of the 28.3 cents per share, a decline of 13.2%. across the Metcash Audit, Risk and Compliance Committee, Dudley has provided the Board with Although ongoing price deflation business is forecast to be consistently strong independent advice. hampered performance in Metcash up to $675 million, spent On behalf of the Board, I thank him for Food & Grocery, transformation in this his insightful contributions to strategic business is now well underway and initial over the coming five years. decisions and his dedicated service. results from pilots are encouraging. The non-food pillars delivered solid results, During the year, Metcash delivered To the dedicated Metcash staff, with good sales growth playing through operating cash flows of $388.7 million, independent retailers and suppliers, into strong earnings before interest, tax a growth of 29.7%. This growth the Board acknowledges and thanks and amortisation (EBITA) performances. reflected, underlying earnings, tight them for their support and hard work These businesses are also executing their working capital controls and a timing throughout FY2014. own strategic plans, driving network benefit of approximately $80 million, due In a year of significant change and growth and consolidation within their to the proximity of Easter public holidays challenge, shareholder support to the respective markets. to the group’s year end. In March 2014, company has, and continues to be, Metcash refinanced its $400 million core The capital cost of the transformation greatly appreciated. debt facility, which would have matured initiatives across the Metcash business is in December 2014. The new facility has forecast to be up to $675 million, spent two tranches: $200 million maturing over the coming five years. Part of the June 2018; and $225m maturing in June required funding will be met by Metcash 2019. The company’s relationship banks targeting working capital improvements have been supportive in this refinancing from the Food & Grocery transformation and no debt refinancing will be required initiatives. However, to fund the until FY2016. Peter Barnes Chairman remainder of this game-changing investment the Board has had to make Board renewal continued during FY2014, some difficult capital management with two new appointments and one decisions. As advised in March, the retirement. As a result of these changes, dividend payout ratio has been set to the majority of the Board will have tenure 60% of Underlying EPS. of less than four years’ service. 2 Metcash Limited Annual Report 2014 FINANCIAL HIGHLIGHTS PAT (Underlying) EPS (Underlying) DPS – 18.5 cents Sales up 3.2% EBITA (Underlying) down 10.9% down 13.2% Payout ratio to $13.4bn $406.7m to $250.1m to 28.3 cents per share of 65.4% 13,392 280.7 460.4 34.1 33.4 451.2 32.6 12,976 28 28 32.0 262.5 27 438.0 256.2 26 250.1 12,605 28.3 244.9 12,364 406.7 401.2 18.5 11,517 86% 82% 81% 81% 65.4% 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Five Year Review 2014 2013 2012 2011 2010 Financial Performance Sales ($m) 13,392.7 12,976.6 12,501.1 12,364.0 11,517.4 Underlying EBITA ($m) 406.7 460.4 451.2 438.0 401.2 Finance costs, net ($m) 57.2 61.6 67.6 66.3 49.3 Underlying profit after tax ($m) 250.1 280.7 262.5 256.2 244.9 Reported profit after tax ($m) 169.2 206.0 90.0 241.4 227.6 Operating cash flows ($m) 388.7 299.8 284.3 142.5 294.7 Cash realisation ratio (%) 162.6% 112.9% 196.9% 48.4% 107.4% Financial Position Shareholder equity ($m) 1,594.0 1,624.2 1,335.1 1,442.8 1,377.6 Gearing ratio (net hedged) (%) 32.5% 30.7% 40.5% 32.1% 28.4% Return on funds employed (%) 16.7% 20.0% 20.6% 21.1% 21.4% Share Statistics Fully paid ordinary shares 888,338,048 880,704,786 771,345,864 768,853,644 765,644,031 Weighted average ordinary shares 882,676,013 859,742,607 770,441,432 767,676,470 765,178,865 Underlying earnings per share (cents) 28.3 32.6 34.1 33.4 32.0 Reported earnings per share (cents) 19.2 24.0 11.7 31.5 29.7 Dividends declared per share (cents) 18.5 28.0 28.0 27.0 26.0 Dividend payout ratio (%) 65.4% 85.9% 82.1% 80.8% 81.3% Other Statistics Number of employees 5,412.0 5,794.0 5,166.0 5,638.0 5,773.0 (full-time equivalents) Metcash Limited Annual Report 2014 3 CEO’s REPORT The Financial Year (FY) 2014 was an & Automotive pillars. Once this discipline 1. TRANSFORMING METCASH FOOD important transition year, as Metcash is replicated across our Food & Grocery & GROCERY undertook a strategic review and business, we are confident Metcash Our first priority is to return Metcash developed a transformation plan to will return to its previous levels of Food & Grocery to revenue growth by address the structural challenges performance. transforming its traditional model away within the business. Evidence of TRANSFORMation PLAN from a supply-led wholesale business to these challenges was apparent in a consumer-led, retail-oriented operation. the underperformance of our core The last 12 months provided evidence to Metcash Food & Grocery has bought Food & Grocery pillar, which led support the case for change at Metcash.