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WESFARMERS
ANNUAL REPORT
2018
About Wesfarmers
About this report
From its origins in 1914 as a Western
Australian farmers’ cooperative,
Wesfarmers has grown into one of
Australia’s largest listed companies.
With headquarters in Perth, its
diverse business operations
cover: supermarkets, liquor, hotels
and convenience stores; home
improvement; department stores;
office supplies; and an Industrials
division with businesses in chemicals,
energy and fertilisers, industrial and
safety products and coal. Wesfarmers
is Australia’s largest private sector
employer with approximately 217,000
employees (including more than 5,200
Indigenous team members) and is
owned by approximately 495,000
shareholders.
This annual report is a summary
of Wesfarmers and its subsidiary
companies’ operations, activities and
financial performance and position
as at 30 June 2018. In this report
references to ‘Wesfarmers’, ‘the
company’, ‘the Group’, ‘we’, ‘us’
and ‘our’ refer to Wesfarmers Limited
(ABN 28 008 984 049), unless
otherwise stated.
References in this report to a ‘year’
are to the financial year ended
30 June 2018 unless otherwise
stated. All dollar figures are expressed
in Australian dollars (AUD) unless
otherwise stated.
All references to ‘Indigenous’ people
are intended to include Aboriginal and/
or Torres Strait Islander people.
Wesfarmers is committed to reducing
the environmental footprint associated
with the production of this annual
report and printed copies are only
posted to shareholders who have
elected to receive a printed copy. This
report is printed on environmentally
responsible paper manufactured under
ISO 14001 environmental standards.
CONTENTS
Overview
2
2018 year in review
4
Primary objective
5
Group structure
6
Performance overview
8
Chairman’s message
10
Managing Director’s report
12
Leadership Team
Operating and financial review
14
Operating and financial review
26
Retail businesses
26
Bunnings
32
Coles
40
Department Stores
42
–
Kmart
44
–
Target
46
Officeworks
50
Industrials
52
–
Chemicals, Energy and Fertilisers
54
–
Industrial and Safety
56
–
Resources
57
Other activities
Sustainability
58
Sustainability
Governance
66
Board of directors
68
Corporate governance overview
Directors’ report
72
Directors’ report
77
–
Remuneration report
Financial statements
97
Financial statements
103 Notes to the financial statements
Signed reports
145 Directors’ declaration
146 Independent auditor’s report
Shareholder and ASX information
152 Shareholder information
153 Investor information
154 Five-year financial history
155 Corporate directory
156 Wesfarmers brands
Wesfarmers 2018 Annual Report
1
2018 YEAR
IN REVIEW
DIVIDENDS
PER SHARE
$2.23
GOVERNMENT TAXES
AND ROYALTIES
$2.1B
PAYMENTS TO
SUPPLIERS
LARGEST PRIVATE
SECTOR EMPLOYER
SALARIES AND
WAGES
COMMUNITY
CONTRIBUTIONS
DIVESTED CURRAGH
COAL MINE AND
HOMEBASE
ROB SCOTT BECAME
WESFARMERS’ EIGHTH
MANAGING DIRECTOR
217K
TEAM MEMBERS
DEMERGER OF
COLES PROPOSED
2
Wesfarmers 2018 Annual Report
$9.3B
$47.2B
$148M
Bunnings
Continued growth in
earnings and sales delivered
through strong execution of
customer-focused strategy
26
Coles
Customer metrics,
sales momentum
and earnings
performance
improved over
the year
Department
Stores
Record earnings
delivered for the
year
32
Officeworks
Continued
growth through a
relentless focus on
price, range and
service
40
Industrials
Increased earnings
from continuing
operations
46
Sustainability
Improvements in
safety, emissions
intensity, ethical
sourcing and
community
contributions
58
50
Wesfarmers 2018 Annual Report
3
THE PRIMARY OBJECTIVE OF
WESFARMERS IS TO PROVIDE
A SATISFACTORY RETURN TO
SHAREHOLDERS
We believe it is only possible to achieve this over the long term by:
anticipating the needs
of our customers and
delivering competitive
goods and services
looking after our
team members
and providing a
safe, fulfilling work
environment
engaging fairly with
our suppliers, and
sourcing ethically
and sustainably
supporting the
communities in
which we operate
taking care of the
environment
acting with integrity
and honesty in all of
our dealings
4
Wesfarmers 2018 Annual Report
GROUP STRUCTURE
RETAIL
BUNNINGS
COLES
DEPARTMENT STORES
Bunnings
Coles*
Kmart
Coles
Online
Kmart Tyre
and Auto
Service*
OTHER
CORPORATE
BUSINESSES
INDUSTRIALS
OFFICEWORKS
Chemicals,
Energy and
Fertilisers
Industrial &
Safety
Resources
BWP Trust
(24.8%)
CSBP
Blackwoods
Curragh*
Gresham
Partners
(50%)
Coles
Express
Australian
Vinyls
Workwear
Group
Bengalla*
(40%)
Wespine
Industries
(50%)
Vintage
Cellars
Australian
Gold
Reagents
(75%)
Coregas
First
Choice
Liquor
Queensland
Nitrates
(50%)
Greencap
Liquorland
EVOL LNG
NZ Safety
Blackwoods
Spirit
Hotels
Kleenheat
Coles
Financial
Services
Quadrant
Energy*
(13.2%)
Target
Officeworks
* In March 2018, Wesfarmers announced its intention to demerge Coles and the completion of the sale of
the Curragh coal mine. In August 2018, Wesfarmers announced that it had entered into agreements to sell
Kmart Tyre and Auto Service, its 40 per cent interest in Bengalla, and its indirect interest in Quadrant Energy.
Wesfarmers 2018 Annual Report
5
Overview
PERFORMANCE
OVERVIEW
CREATING WEALTH AND ADDING VALUE
$47.2b Payments to suppliers
$ 9.3b Employees (salaries, wages and other benefits)
$2.1b Government (taxes and royalties)
Wealth creation1
Value distribution
$69.9b
$15.7b
$7.0b Payments for rent,
$0.2b Lenders (borrowed funds)
$2.5b Shareholders (dividends)
$1.6b Reinvested in the business
services and other external costs
1
Includes discontinued operations.
Group performance
Key financial data
2018
2017
Results from continuing operations¹
Revenue
$m
66,883
64,913
Earnings before interest, tax, depreciation and amortisation
$m
5,259
5,352
Earnings before interest, tax, depreciation and amortisation (excluding significant items)²
$m
5,565
5,352
Earnings before interest and tax
$m
4,061
4,177
Earnings before interest and tax (excluding significant items)²
$m
4,367
4,177
Net profit after tax
$m
2,604
2,760
Net profit after tax (excluding significant items)2
$m
2,904
2,760
Basic earnings per share
cents
230.2
244.7
Basic earnings per share (excluding significant items)²
cents
256.8
244.7
Earnings before interest and tax
$m
2,796
4,402
Earnings before interest and tax (excluding significant items)³
$m
4,288
4,402
Net profit after tax
$m
1,197
2,873
Net profit after tax (excluding significant items)³
$m
2,772
2,873
Basic earnings per share
cents
105.8
254.7
Basic earnings per share (excluding significant items)³
cents
245.1
254.7
%
11.7
12.4
Operating cash flows
$m
4,080
4,226
Net capital expenditure on property, plant and equipment and intangibles
$m
1,209
1,028
Free cash flows
$m
3,422
4,173
Equity dividends paid
$m
2,528
1,998
Operating cash flow per share
cents
360.1
374.1
Free cash flow per share
cents
302.0
369.5
Dividends per share (declared)
cents
223.0
223.0
40,115
Results including discontinued operations¹
Return on average shareholders’ equity (R12) (excluding significant items)³
Cash flow and dividends (including discontinued operations)¹
Balance sheet and gearing
Total assets
$m
36,933
Net financial debt
$m
3,580
4,321
Shareholders’ equity
$m
22,754
23,941
Fixed charges cover (R12) (excluding significant items)3
times
3.0
3.1
Interest cover (R12) (cash basis) (excluding significant items)3
times
30.4
25.0
1
Discontinued operations relate to the Curragh coal mine and Bunnings United Kingdom and Ireland (BUKI) which were disposed of during the year. 2017 balances have been
restated where necessary to reflect these discontinued businesses.
2
Significant items for continuing operations relate to Target’s non-cash impairment of $306 million pre-tax ($300 million post-tax).
3
2018 excludes the following significant items pre-tax (post-tax) amounts: $931 million ($1,023 million) of impairments, write-offs and store closure provisions in BUKI; a
$375 million ($375 million) loss on disposal of BUKI; $306 million ($300 million) of non-cash impairments in Target and a $120 million ($123 million) gain on disposal of Curragh.
6
Wesfarmers 2018 Annual Report
Overview
Operating and
financial review
The 2018 financial year was one of significant change for Wesfarmers,
with decisive actions taken to reposition the Group’s portfolio to deliver
sustainable growth in earnings and improved shareholder returns.
Divisional performance
Bunnings
12,544
11,514
Earnings before interest and tax
$m
1,504
1,334
Segment assets
$m
5,025
4,846
Segment liabilities
$m
1,875
1,785
Capital employed (R12)
$m
3,045
3,192
Return on capital employed (R12)
%
49.4
41.8
Capital expenditure
$m
497
367
2018
2017
$m
39,388
39,217
Coles
Revenue
Earnings before interest and tax
$m
1,500
1,609
Segment assets
$m
21,180
21,140
Segment liabilities
$m
4,561
4,245
Capital employed (R12)
$m
16,386
16,586
Return on capital employed (R12)
%
9.2
9.7
Capital expenditure
$m
762
811
20181
2017
8,837
8,528
Revenue
$m
Earnings before interest and tax
$m
660
543
Segment assets
$m
3,617
3,928
Segment liabilities
$m
1,482
1,423
Capital employed (R12)
$m
2,013
2,253
Return on capital employed (R12)
%
32.8
24.1
Capital expenditure
$m
293
222
2018
2017
2,142
1,964
Earnings before interest and tax
$m
156
144
Segment assets
$m
1,452
1,401
Segment liabilities
$m
532
488
Capital employed (R12)
$m
939
980
Return on capital employed (R12)
%
16.6
14.7
Capital expenditure
$m
45
36
2018
2017
Revenue
$m
5,269
5,161
Earnings before interest and tax
$m
867
915
Segment assets
$m
3,500
4,229
Segment liabilities
$m
758
1,125
Capital employed (R12)
$m
3,295
3,393
Return on capital employed (R12)
%
26.3
27.0
Capital expenditure
$m
167
169
Industrials (including Curragh mine)
The 2018 earnings before interest and tax for Department Stores excludes Target’s pre-tax non-cash impairment of $306 million.
Wesfarmers 2018 Annual Report
7
Shareholder and
ASX information
1
Signed
reports
$m
Financial
statements
Officeworks
Revenue
Directors’
report
Department Stores
Governance
2017
$m
Sustainability
2018
Revenue
Overview
CHAIRMAN’S
MESSAGE
MICHAEL CHANEY AO
CHAIRMAN
8
Wesfarmers 2018 Annual Report
The 2018 financial year was one of
significant change for Wesfarmers,
when we took some difficult, but
important decisions to restructure
the Group’s portfolio of businesses in
the interest of long term shareholder
returns.
On a statutory basis, net profit after
tax fell 58.3 per cent to $1.2 billion
as a result of impairment charges
and closure costs for the Bunnings
United Kingdom and Ireland (BUKI)
business and a further impairment
of the Target business, partially
offset by a profit on sale of the
Curragh coal business.
Excluding significant items and
discontinued operations, net
profit from continuing operations
rose 5.2 per cent to $2.9 billion, a
pleasing result which reflected a
strong performance in the Group’s
businesses, particularly in Bunnings
Australia and New Zealand, and
Department Stores.
The directors declared a fully-franked
final dividend of $1.20 per share,
bringing the full-year dividend to
$2.23 per share, the same as in 2017.
The succession from Richard Goyder
to Rob Scott as Group Managing
Director in November 2017 was one
of a number of changes in senior
management during a year which
also saw Anthony Gianotti appointed
as Group Chief Financial Officer
and new leaders appointed in the
Industrials division and in Business
Development. Wesfarmers has also
announced a number of further senior
leadership changes that will occur
in the first half of the 2019 financial
year. The Board is confident that the
new team assembled by Rob is well
equipped to continue the company’s
record of success. Our great thanks
go to the retiring executives for their
dedication and outstanding efforts on
behalf of Wesfarmers.
These management changes
have paralleled a restructuring of
the conglomerate’s portfolio of
businesses. The BUKI operations
and Curragh coal mine were sold
and the proposed demerger of Coles
was announced during the 2018 year.
Further, the sale of Kmart Tyre and
Auto Service, our 40 per cent interest
in the Bengalla coal mine, and our
indirect interest in Quadrant Energy
were announced in the months
following the close of the year. The
Coles demerger is scheduled to
be completed in November 2018,
subject to shareholder and other
approvals.
These disposals reflect the
determination of the Board and
management to prioritise the
achievement of Wesfarmers’ stated
Overview
has been extraordinary. His first
involvement with the Group was as
principal advisor to the Wesfarmers
Cooperative in 1977 in its protracted,
company-making takeover of
the fertiliser company CSBP and
Farmers Ltd. James has provided
advice on every strategic move
by Wesfarmers since, initially in a
professional role, but over the last 20
years in his role as a director. It is no
exaggeration to say that the financial
success of Wesfarmers described
above has been due in no small
part to James’ involvement. We are
delighted that the shareholders of
Coles will benefit similarly through
his role as Chair as it begins its
journey as a re-listed company.
We welcome Sir Bill English to
the Wesfarmers Board and look
forward to his contribution; and
we acknowledge with thanks the
substantial contribution which
Archie Norman has made as advisor
to the Board and management
since the Coles takeover in 2007.
Archie will continue as advisor to the
Coles board and we look forward to
welcoming David Cheesewright as
advisor to our board and Wesfarmers’
nominee on the Coles board.
In closing, I pay tribute to our
hard-working team, led by Rob Scott.
We look forward to overseeing their
efforts to ensure the continued
success of the company.
Sustainability
Governance
Directors’
report
Michael Chaney AO
Chairman
Financial
statements
Signed
reports
Wesfarmers 2018 Annual Report
9
Shareholder and
ASX information
such areas. But committee members
and the committee chair need to be
careful to ensure that they do not
default to acting in a management
role: employees report through the
management hierarchy, not to a
board committee.
As for the suggestion that focusing
on financial outcomes is incompatible
with good corporate citizenship,
we couldn’t disagree more. The
reason listed companies exist is
to provide their shareholders with
financial returns. People buy shares
in Wesfarmers because they hope it
will provide them with better returns
than if they buy shares in another
company; but that does not give a
company licence to put profit before
good behaviour. The simple fact is
that unless a company behaves as
a good corporate citizen, it will not
achieve financial success over the
long term. Poor behaviour will cause
many people not to buy shares or
to sell their holding, customers will
desert it, it will result in fines or bans
for the company and the company
will not be invited to join in profitable
opportunities. In short, the company
will lose its ‘licence to operate’.
That is why at Wesfarmers we have
always qualified our single financial
objective with the words you see
on page four of this report; words
describing our commitment to take
care of our employees, customers,
suppliers, the environment and the
communities in which we operate.
The fact that Wesfarmers has
adhered to such principles explains
why it continues to prosper more
than a century after it was formed.
It also explains why it has been so
successful since its public listing in
1984. A $1,000 investment in the
company at the time of listing, with
dividends reinvested, is now worth
$420,000, compared to $38,000 for
a $1,000 investment in the ASX 50.
Notwithstanding the uncertainties
facing all businesses in our complex
world, and the inevitability of making
suboptimal decisions, hopefully as
well as good ones, we are determined
to continue that record of success.
Achieving that will require a competent
and dedicated board and management
team, and I believe shareholders have
reason to be confident.
I take this opportunity, on behalf of
my fellow directors, to thank our
outgoing directors Paul Bassat and
James Graham for their efforts on
behalf of the company. Paul has
provided valuable insights during
his time on the Board, particularly
in respect of issues around digital
disruption; James’ contribution
to Wesfarmers over 40 years
Operating and
financial review
objective ‘to provide a satisfactory
return to shareholders’. They will
result in a reduction in the size of the
company but leave it with a group of
strong businesses each with good
growth potential and, importantly, a
very strong balance sheet.
That financial strength does not mean
that we feel any urgency to make
new acquisitions. Apart from the fact
that there are many opportunities for
growth in our existing businesses,
new investments will only occur if
we assess them to have the potential
to deliver superior returns to our
shareholders over the long term.
The Group Managing Director
has reiterated this point on many
occasions since his appointment.
External events, including the Royal
Commission into financial services,
gave rise during the past year
to extensive commentary about
corporate reputation and the role of
company boards and management.
These have ranged from the
suggestion that company directors
should be more involved in the details
of management; to the contention,
on the other hand, that boards are
overwhelmed with information;
that the establishment of board
committees has blurred the lines
between governing and management;
or that the focus of corporate
objectives on financial outcomes is
incompatible with good corporate
citizenship. Your company’s directors
have firm views on these issues.
The role of directors is to govern, not
to manage. The most important aspect
of the role is the appointment of the
chief executive officer and ensuring
that the CEO assembles a competent
management team. Directors whose
involvement is part time cannot
possibly be across the detail of the
business. They delegate the running
of the company to management; but
the second vital role directors play
is holding management’s ‘feet to the
fire’ – ensuring that the company’s
policies and procedures are directed
towards achieving desired outcomes,
that management understands and
communicates the company’s values
and codes of behaviour, that bad
news travels upwards as fast as
good news, that unacceptable
behaviour is dealt with expeditiously
and that employee rewards are aligned
with performance.
Board committees are an important
element in achieving these goals.
They allow directors to gain a deeper
understanding of issues, including
audit and risk matters, human
resources, safety practices and so
on; and to give management the
benefit of their own experience in
Overview
MANAGING
DIRECTOR’S
REPORT
ROB SCOTT
MANAGING DIRECTOR
10
Wesfarmers 2018 Annual Report
It is my pleasure to provide the
2018 financial year update, my first
as Managing Director.
This was a year of change for
Wesfarmers, with good progress made
to reposition the portfolio and ensure
we have the right settings in place for
sustained value creation. The changes
we have made and those in progress
have been guided by a steadfast
commitment to our core objective
to provide a satisfactory return to
shareholders.
Through these changes, our businesses
delivered a strong financial result, with
earnings from continuing operations
and excluding significant items growing
5.2 per cent. R …
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