2016 Annual Report Wesfarmers 2016 Annual Report 3 Overview

WESFARMERS ANNUAL REPORT 2016 DELIVERING VALUE TODAY AND TOMORROW OVERVIEW CONTENTS FINANCIAL REVIEW AND OPERATING About Wesfarmers About this report OVERVIEW 2 CHAIRMAN’S MESSAGE The primary objective of 4 MANAGING DIRECTOR’S REPORT SUSTAINABILITY From its origins in 1914 as a This annual report is a summary 6 PERFORMANCE OVERVIEW Western Australian farmers’ of Wesfarmers’ and its subsidiary Wesfarmers is to provide cooperative, Wesfarmers has companies’ operations, activities 8 EXECUTIVE LEADERSHIP TEAM grown into one of Australia’s and financial position as at a satisfactory return to largest listed companies. 30 June 2016. In this report OPERATING AND FINANCIAL REVIEW 10 OPERATING AND FINANCIAL REVIEW With headquarters in Western references to ‘Wesfarmers’, ‘the its shareholders. Australia, its diverse business company’, ‘the Group’, ‘we’, ‘us’ 20 RETAIL BUSINESSES operations cover: supermarkets, and ‘our’ refer to Wesfarmers 20 COLES liquor, hotels and convenience Limited (ABN 28 008 984 049) 26 HOME IMPROVEMENT GOVERNANCE stores; home improvement; unless otherwise stated. 32 DEPARTMENT STORES department stores; office References in this report to supplies; and an Industrials a ‘year’ are to the financial 34 – TARGET division with businesses in year ended 30 June 2016 35 – KMART chemicals, energy and fertilisers, unless otherwise stated. All 38 OFFICEWORKS industrial and safety products dollar figures are expressed in and coal. Wesfarmers is Australian dollars (AUD) unless 42 INDUSTRIALS Australia’s largest private sector otherwise stated. 44 — CHEMICALS, ENERGY AND FERTILISERS employer with around 220,000 All references to ‘Indigenous’ 46 — INDUSTRIAL AND SAFETY employees and has a shareholder REPORT DIRECTORS’ people are intended to include base of approximately 530,000. 48 – RESOURCES Aboriginal and/or Torres Strait Islander people. 50 OTHER ACTIVITIES Wesfarmers is committed to reducing the environmental SUSTAINABILITY 51 SUSTAINABILITY footprint associated with the production of the annual report and printed copies are only GOVERNANCE 60 BOARD OF DIRECTORS posted to shareholders who 62 CORPORATE GOVERNANCE OVERVIEW have elected to receive a printed STATEMENTS FINANCIAL copy. This report is printed on environmentally responsible DIRECTORS’ REPORT 66 DIRECTORS’ REPORT paper manufactured under 71 – REMUNERATION REPORT ISO 14001 environmental standards. FINANCIAL STATEMENTS 85 FINANCIAL STATEMENTS 91 NOTES TO THE FINANCIAL STATEMENTS SIGNED REPORTS 132 DIRECTORS’ DECLARATION REPORTS SIGNED 133 INDEPENDENT AUDITOR’S REPORT SHAREHOLDER AND ASX INFORMATION 134 ANNUAL STATEMENT OF COAL RESOURCES AND RESERVES 137 SHAREHOLDER INFORMATION 138 FIVE-YEAR FINANCIAL HISTORY 139 INVESTOR INFORMATION 140 CORPORATE DIRECTORY INFORMATION ASX SHAREHOLDER AND 141 WESFARMERS BRANDS OVERVIEW OVERVIEW BACK CHAIRMAN’S Wesfarmers is a great example of this in practice. inefficient or inferior competitors. In our view such FINANCIAL REVIEW AND OPERATING MESSAGE In the mid-1980s there was constant worry about a provision would discourage competition to the how we could cope with increasing competition detriment of consumers, would increase uncertainty in the fertiliser business, which contributed around and create a field day for lawyers. We have expressed 80 per cent of the Group’s profit. Today that business our disappointment to the Government that, despite remains strong but has itself evolved also to be a extensive opposition from the business community, substantial industrial chemicals supplier. Fertilisers the Productivity Commission, the Federal Opposition It is with great pleasure that I introduce Wesfarmers’ annual now contributes around the same dollars of profit and previous reviews of competition policy, the report for 2016. It was a real privilege for me to have been as it did then, but that represents only a very Government is now taking steps to introduce the small proportion of Group earnings. Continuous proposal. It is another regrettable instance of regulation SUSTAINABILITY invited last year to return as Chairman of the company from diversification and adaptation has enabled threatening the competitiveness of Australia and which I retired as Chief Executive Officer 10 years earlier. Wesfarmers to remain relevant and to provide Australian companies. superior shareholder returns over the long term. There is, we believe, too little appreciation of During the last year, the company made its the contribution companies make to Australia’s I take this opportunity to pay particular tribute to first significant move offshore with the purchase prosperity, as evidenced by the readiness with which Bob Every AO, who retired as Chairman during the year. of the Homebase hardware business in the arguments against company tax cuts during the recent Bob served the company with distinction, focused at United Kingdom and Ireland. Entering any new election campaign were accepted by some. That all times on protecting shareholder interests, ensuring country is always challenging – and there are many 80 per cent of working Australians are employed by ethical behaviour and guarding the Wesfarmers culture. examples of Australian companies which have tried companies represents just one benefit. In Wesfarmers’ We thank him for his significant contribution. GOVERNANCE and failed – but this investment was only made after case, we pay our 220,000 employees over $8 billion, The 2016 year was one of mixed results for the company, a very extensive analysis of the business, the market our suppliers more than $45 billion, our landlords with very strong performances from the larger businesses and the prospects. Bunnings looks forward to $3 billion, our shareholders more than $2 billion and offset to some extent by difficult trading conditions in applying the skills it has acquired in understanding the Government over $1 billion in taxes. The health some others. Underlying profit after tax fell 3.6 per cent customer needs, supply chain management and of the Australian economy is inextricably linked to the to $2,353 million. After accounting for the impairments merchandising, and the size of the Homebase health of Australian companies. of Curragh and the Target retail business, as well as investment, while not small, is very manageable Sustainability restructuring costs in Target, statutory net profit was given the Group’s balance sheet. This, I believe, $407 million compared with $2,440 million in 2015. is a very good example of the growth philosophy Long-term value creation is only possible if we play a positive role in the communities we serve. This year, of ‘logical incrementalism’ which has proven REPORT DIRECTORS’ The Board declared a final dividend of 95 cents per share successful for the company over the years and while we continued to focus on keeping our people safe (2015: 111 cents), bringing the full year payment to the success of such a venture is never guaranteed, and reduced our total recordable injury frequency $1.86 per share, a reduction of 7.0 per cent on the the Bunnings team will give it their best shot. rate by 15.2 per cent. As Australia’s largest private previous year, broadly in line with free cash flow sector employer, we believe we are able to provide for the year, excluding the acquisition of Homebase. Closer to home, one of the big challenges facing Indigenous people with greater opportunities to all companies is the modest rate of growth of the participate in sustainable employment and have The impairments of Target and Curragh resulted domestic economy and the difficulty of achieving increased the number of Indigenous employees predominantly from poor trading results and a reduced meaningful economic reform at the federal level to more than 3,300. Wesfarmers is committed to outlook in the former case and a significant fall in current of government. As the recent election result minimising our own environmental footprint and to and projected coal prices in the latter. The accounting demonstrated, populism triumphs all-too-often delivering solutions which help our customers and the STATEMENTS FINANCIAL impairments, of course, had no cash flow effect and the over rational policy development. While the level community do the same. We reduced our greenhouse Group continued to generate very substantial free cash of Commonwealth Government debt in Australia gas emissions by more than two per cent in the last flow. Our balance sheet is conservatively geared and, is quite low in comparison to that in many other year and have decreased the emissions intensity of with a strong credit rating, we are well placed to take developed countries, this situation can change rapidly our business by more than 30 per cent since 2012. advantage of investment opportunities as they arise. in times of economic downturn – as we saw in Ireland Outlook Wesfarmers continues to maintain the particular and Spain in 2007 to 2010 – a debt blowout giving rise strengths for which it has become well known, namely: to drastic fiscal remedies and high unemployment. Your Board considers the outlook for the company to a clear focus on shareholder wealth creation rather Australia has now enjoyed an unprecedented 25 years be strong. Notwithstanding the challenges described than on empire building; strict disciplines around without a recession and, given the past and forecast above and economic concerns around the globe, REPORTS SIGNED the achievement of return on invested capital and deficits at a Commonwealth level, the Government’s the Wesfarmers businesses generate

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