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Speaker 1: Welcome to Fearing Greed Q and A where we ask

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Speaker 1: and answer questions about business, investing, economics, politics and more.

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Speaker 1: We's Farmers, the owner of Bunning's Camart office works, among others,

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Speaker 1: has reported a jump in sales for the December behalf

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Speaker 1: and a better than expected net profit of one point

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Speaker 1: six billion dollars, but the results came with a warning

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Speaker 1: about challenging market conditions, including households and businesses under pressure

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Speaker 1: from higher costs and subdued residential construction. Rob Scott is

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Speaker 1: the managing director and CEO of a West Farmer's role.

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Speaker 1: Welcome to Fear and Greed.

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Speaker 2: Thanks you, Sean.

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Speaker 1: Let's talk about household spending upfront, and particularly your commentary

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Speaker 1: about times being a bit tough. The Reserve Bank's telling

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Speaker 1: us that household spending's picking up. You're saying that what

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Speaker 1: you're seeing through your retailers things are a bit tougher.

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Speaker 1: Is there a disconnect or have things gotten better in

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Speaker 1: twenty twenty six, which is what the Reserve Bank's talking about.

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Speaker 2: Well, Shaw, we benefit across our businesses of being able

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Speaker 2: to see what is happening on a daily basis, so

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Speaker 2: we have observed the trends leading up to Christmas, after Christmas,

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Speaker 2: and then following the recent interest rate increase, so that

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Speaker 2: gives us a level of visibility which is really really current.

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Speaker 2: And then also through a lot of the customer data

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Speaker 2: insights we have, we're able to look at different customer

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Speaker 2: cohorts and that is also quite informative. So what I

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Speaker 2: would say, and what I totally agree with the Reserve

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Speaker 2: Bank on, is that that aggregate demand, so overall demand

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Speaker 2: it's holding up reasonably well. But that is as a

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Speaker 2: result if we have relatively low unemployment, we've had a

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Speaker 2: bit of population growth, there's a bit of inflation there.

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Speaker 2: So when you look at nominal growth in spending, it's

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Speaker 2: been going up. But when you actually look at how

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Speaker 2: different household cohorts are faring, if you're in a low

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Speaker 2: income household, then the impacts of inflation are having a

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Speaker 2: much more severe effect on your disposable income, especially when

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Speaker 2: you think about a lot of the heavy inflationary pressure

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Speaker 2: has come in areas such as housing, food, energy costs,

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Speaker 2: the real basic essential essential costs. So our cautionary comments

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Speaker 2: are more that as a result of this ongoing inflationary

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Speaker 2: pressure and interest rate pressure, we are starting to see

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Speaker 2: particularly the lower income households be far more discerning with

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Speaker 2: their spend simply because they have less disposable income to

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Speaker 2: spend each week.

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Speaker 1: Okay, you mentioned residential construction in there as well. Obviously

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Speaker 1: Bunnings would fit into that one. Things still slow there.

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Speaker 2: Well, look, I should note that Bunnings really benefits from

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Speaker 2: having a diversity of products and so forth, and on

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Speaker 2: our commercial business. Residential construction is one of the components,

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Speaker 2: but frankly the more furial part of our commercial business

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Speaker 2: in Bunnings, there's a lot of the trade spend and

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Speaker 2: you know, there's a lot of ongoing repair and maintenance

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Speaker 2: activity in the trade side which benefits Bunnings. But we

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Speaker 2: you know, it is quite ironic. Perhaps you might say

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Speaker 2: that we're a country of abundant land. We've got a

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Speaker 2: growing population, but we have a severe shortage of housing

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Speaker 2: and that is really starting to have an impact on

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Speaker 2: costs of living. So housing as a component of inflation

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Speaker 2: is a big component and that is really a pressure point,

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Speaker 2: particularly for renters new home buyers. So the more sluggish

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Speaker 2: growth around new residential starts is a drag on some

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Speaker 2: of Bunning's commercial business. We think it is something that

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Speaker 2: it obviously needs to revert at some point, and I

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Speaker 2: know that various state governments are trying to lean into

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Speaker 2: things to try and encourage more more new home starts,

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Speaker 2: making zoning more flexible. You know, there's also some shortages

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Speaker 2: and some key trades as well, so there are a

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Speaker 2: few challenges but also opportunities. But that you know, that

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Speaker 2: is an area as well shown that it's an economic

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Speaker 2: challenge for our country. It's both a challenge and an

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Speaker 2: opportunity for our businesses. But we are really once again

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Speaker 2: leaning into what can we do within our Bunnings business

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Speaker 2: to create more affordable solutions for existing homeowners are looking

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Speaker 2: to renovate for new homeowners. Bunnings has just invested in

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Speaker 2: some modular modular construction units to create additional living space

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Speaker 2: around the home. So look, it's just a it is

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Speaker 2: a challenge, but one that we focus on very closely.

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Speaker 1: Okay, I think something related to that. So revenue was

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Speaker 1: up about three percent if I'm reading this right, net

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Speaker 1: profit was up nine percent, So therefore or something's going right.

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Speaker 1: Is that a productivity issue? And if so, where's AI

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Speaker 1: fit into it at Bunnings?

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Speaker 2: Yeah, Well, you're right, we did have good operating leverage

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Speaker 2: across our result growing profit more than sales. So there's

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Speaker 2: really I think two stories to that. If I look

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Speaker 2: at our retail businesses, particularly Kmart and Bunnings, we did

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Speaker 2: grow profits slightly higher than sales growth, and that was

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Speaker 2: very much driven by a lot of productivity initiatives. Now

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Speaker 2: a lot of our productivity initiatives are driven by what

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Speaker 2: we call digitizing business processes better leveraging technology. There is

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Speaker 2: a bit of AI andenergentic solutions being brought to bear there,

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Speaker 2: but to be frank we're only at the very early

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Speaker 2: stages of embracing a lot of the breakthroughs in AI

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Speaker 2: for productivity. The other big driver of profit growth really

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Speaker 2: goes to the benefits of the investment that we've made

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Speaker 2: and new businesses such as lithium and health, where we

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Speaker 2: benefited from stronger turnaround in performance of our listium business

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Speaker 2: now generating a profit following the construction project, and some

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Speaker 2: good growth in health. So they were really the drivers.

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Speaker 2: But I would emphasize that if you step back and

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Speaker 2: think about inflation, inflation creates a challenge for consumers, it

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Speaker 2: also creates a challenge for all businesses. We could see

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Speaker 2: this pressure building. That is why, as a leadership team

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Speaker 2: across all of our businesses, we have really focused in

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Speaker 2: on productivity. Everyone at West Farmers understands why productivity is important,

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Speaker 2: what it means. It's about working smarter, not harder. It's

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Speaker 2: about leveraging the best available technology, is being really disciplined

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Speaker 2: with our spending, and we've seen some really good gains there.

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Speaker 1: Okay, let's move on to some of the businesses. The

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Speaker 1: business which of course no one ever thinks about with

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Speaker 1: butt Well, sorry, I'm sure you think about it all

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Speaker 1: the time, but many of us don't think about it.

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Speaker 1: It's the chemicals, energy fertilizers business. Relative to earnings, you

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Speaker 1: spend a lot of money in that business, and you

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Speaker 1: mentioned lithium, so I think your CAPEX spend on that

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Speaker 1: is far great as a proportion of earnings. What does

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Speaker 1: that tell us about where you think that business is going.

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Speaker 2: Well, the very nature of the chemicals, energy and fertilizer business,

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Speaker 2: including our lithium joint venture, is that you need to

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Speaker 2: invest a lot of capital in productive plants that then

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Speaker 2: can operate for twenty thirty forty years. So we have

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Speaker 2: invested a fair bit of capital obviously in the lithium project,

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Speaker 2: which was a greenfield development. We've also been investing incremental

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Speaker 2: capital in expanding our ammonium nitrate plant and our sodium

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Speaker 2: cyanide plant. Now that has served West Farmers very well

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Speaker 2: over the years. Although these are capital intensive businesses, they

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Speaker 2: have generally delivered very good returns on capital. So excluding

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Speaker 2: our recent lithium investment, well the westf businesses we call

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Speaker 2: it has been generating about a thirty percent return on

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Speaker 2: capital and as I said earlier, we're really pleased to

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Speaker 2: see the lithium business after developing the project, start to

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Speaker 2: be profitable. So look, we are we believe that we

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Speaker 2: have some very unique capabilities in chemical manufacturing and processing

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Speaker 2: and with position the business in some areas where Western

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Speaker 2: Australia has some unique geological and export industry competitive advantages,

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Speaker 2: So in lithium in you know, providing ammonium nitrate to

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Speaker 2: the iron ore sector, providing sodium cyanide to the gold

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Speaker 2: mining sector, and then providing fertilizers to the broad a

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Speaker 2: agriculture sector. So you know, WA is a great place

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Speaker 2: to do business and we play a really important role

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Speaker 2: in that and we're happy to put our capital behind

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Speaker 2: it where we see the opportunities Kmart Andko.

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Speaker 1: We've talked about plenty of times on the show, one

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Speaker 1: of the great Australian retailing stories in it years without

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Speaker 1: it out. Congratulations on that. The flip side is Target.

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Speaker 1: Why do you keep it going because at the end

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Speaker 1: of the day, Kmart seems to be doing really well.

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Speaker 1: It's a bit hard to work out exactly how much

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Speaker 1: of the result this Target is came up and obviously

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Speaker 1: reason it's for that, But why keep Target going?

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Speaker 2: Well? Look, from a financial point of view, Target is

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Speaker 2: performing really well now like we Unfortunately it is a

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Speaker 2: much you know, it is a much smaller part of

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Speaker 2: the Kmart group and Kmart is you unquestionably the star performer.

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Speaker 2: But just to put it into perspective, as a result

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Speaker 2: of a lot of the restructuring we did to Target,

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Speaker 2: we now have a smaller but far more profitable business.

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Speaker 2: So Target, if you know, if we did strip out

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Speaker 2: the profit of Target, it would compare very favorably, if

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Speaker 2: not a lot more favorably or in profit terms, to

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Speaker 2: many other retail businesses. I guess the issue is that

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Speaker 2: we see the Target proposition as being a more nuanced proposition.

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Speaker 2: If you think of about it. Kmart is the lowest

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Speaker 2: price largely owned brand Ancho brand. It appeals across the

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Speaker 2: whole market. We find that Target really resonates in the

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Speaker 2: slightly more affluent postcodes and areas. You know, it's hard

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Speaker 2: for Target to compete with Kmart at the absolute lowest

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Speaker 2: price point, But in areas like apparel and soft home,

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Speaker 2: when you're dealing with you know, a bit higher quality

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Speaker 2: of product, more style, more of a fashion element, Target

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Speaker 2: does actually perform pretty well. So look, we're still generating earnings,

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Speaker 2: we're still optimistic for the business, but you're correct, it's

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Speaker 2: a much smaller part of the portfolio than it.

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Speaker 1: Was and office works just very quickly. It's a turnaround.

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Speaker 1: Well not a lot of investment going into office works.

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Speaker 2: Yeah, that's right. And look, office works has been perform performing, Okay.

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Speaker 2: I was looking at the longer term results. So in

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Speaker 2: twenty nineteen we delivered about one hundred sixty million a profit.

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Speaker 2: Last year we delivered over turner and ten million a profit,

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Speaker 2: so it's growing. I guess the issue is that we

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Speaker 2: see office Works isn't really operating at the same degree

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Speaker 2: of performance that we see in businesses like Kmart and Bunnings,

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Speaker 2: So we've decided to face into some of that those

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Speaker 2: issues undertake some restructuring. We've got a new managing directory

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Speaker 2: and office works that used to be the CEO of kmart. So,

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Speaker 2: you know, a bit of hard some hard yards at

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Speaker 2: the moment with the restructuring, but we're very optimistic for

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Speaker 2: the future.

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Speaker 1: One final question, Rob, when you're an eighteen year old

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Speaker 1: and finishing high school, did you think you'd end up

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Speaker 1: running a company that's got mining and chemicals and retailing

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Speaker 1: and all that sort of stuff.

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Speaker 2: No, No, I didn't. I didn't, But like it's hard

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Speaker 2: to predict how your life's going to play out. But

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Speaker 2: I feel like I've got one of the best jobs

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Speaker 2: in the world, working with the best team in the world.

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Speaker 2: So I'm very happy the way things have worked out.

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Speaker 2: But we've still got a lot We've still got a

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Speaker 2: lot of work ahead of us. There's still a lot

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Speaker 2: to do in West Farmers.

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Speaker 1: Rob, thank you for talking to Fear and Greed.

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Speaker 2: Thank you very much, Sean.

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Speaker 1: That was where's Farmer's Boss? Rob Scott? I'm schan Almer

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Speaker 1: and this is Fearing Greed here and day