Richard Goyder - MD & CEO Terry Bowen - Group Finance Director John Durkan - MD, Coles Michael Schneider - MD, Bunnings Australia & New Zealand PJ Davis - MD, Bunnings UK & Ireland Guy Russo - CEO, Department Stores Ian Bailey - MD, Kmart Mark Ward - MD, Officeworks Rob Scott - Deputy CEO, Wesfarmers Limited and MD, Wesfarmers Industrials

Craig Woolford - Citigroup David Errington - Bank of America Merrill Lynch Andrew McLennan - Macquarie Ben Gilbert - UBS Grant Saligari - Credit Suisse Richard Barwick - CLSA Phil Kimber - Evans & Partners Michael Simotas - Deutsche Bank Shaun Cousins - JPMorgan Tom Kierath - Morgan Stanley

Welcome to the Wesfarmers 2017 half-year results briefing. [Operator Instructions]. This call is being webcast live on the Wesfarmers website and can be accessed from the homepage of Wesfarmers.com.au. I would now like to hand the call over to the managing director of Wesfarmers Limited, Mr. Richard Goyder.

Well, welcome everyone to the Wesfarmers 2017 Half Year Results briefing. For your information, we're a bit spread out today between Melbourne, Perth and London, so through the Q&A I'll act, if necessary, as a bit of a conduit in terms of directing questions. In terms of the way the briefing will work, it's pretty much the same format as usual. You'll notice obviously, that we've now got Michael Schneider talking about Bunnings, Australia and New Zealand and Peter Davis, who will talk to Bunnings, UK and Ireland. To begin with, I'll cover off on the Group's performance overview, following which Terry will provide commentary on the Group's other businesses, balance sheets and cash flow and then each of the divisional managing directors will provide a performance summary and outlook for their respective businesses. And to conclude, I'll provide an outlook for the Group and there will be plenty of time for questions at the end of the briefing. Turning to Slide 4, as you'll have seen, the Group reported net profit after tax of just under AUD1.6 billion for the half which was up 13.2% on last year. I know you'd all expect me to say this, but it absolutely does demonstrate the benefit of the Wesfarmers' conglomerate structure and the diversified nature of the Group Our retail portfolio, with the exception of Target, delivered good results, reflecting the strong market positions that each business has established. Target is in transition but there are some positives in the result. Our industrials division delivered a substantial increase in earning which was supported by growth across all three businesses. Earnings per share were 12.8% higher than the prior year at AUD1.40 per share and return on equity on a rolling 12 basis improved to 10.2%. In light of the earnings and the strong cash flow generation during the half, the Board has declared a record fully franked interim dividend of AUD1.03 per share, up 13.2% on the prior period. Turning to Slide 5, the Group's cash flow management was a highlight for the half with free cash flow up 34% on the prior corresponding period. Of course, as a consequence of that, the Group's balance sheet remains very strong. Terry will talk a bit more about that shortly. On Slide 6, each of the divisional managing directors will cover their performance in more detail, as I've already said, but I want to comment on a couple of things. We announced today that we're undertaking a strategic review of Officeworks. We acquired this business in 2007 with the Coles acquisition and since then, the Officeworks team, under Mark Ward's leadership, has successfully executed a turnaround plan and doubled earnings. In light of this performance, options to monetize the value created for shareholders, including via an initial public offering, are being evaluated. Importantly, this business will be retained if divestment options do not meet Wesfarmers' valuation hurdles. Also, as we previously disclosed, the Group is evaluating strategic options for the resources business. This process is ongoing and at the appropriate time, an update will be provided to the market. Turning to Slide 7, in terms of return on capital, the Group continues its strong focus on generating acceptable return on capital, to deliver satisfactory returns to shareholders. Note that in this chart, the EBIT and capital employed are on a rolling 12-month basis. The majority of our retail portfolio and the Wesfarmers chemical, energy and fertilizer division continue to deliver strong returns, driven by solid earnings growth and disciplined capital expenditure. In particular, Bunnings and Kmart continue their stellar returns generation through disciplined capital recycling and effective working capital management respectively, in addition to their strong earnings. I will now hand over to Terry, who will talk through the Group's balance sheet and cash flow for the half.

Thanks Richard. Hello everyone. I'll start with an overview first of our other business. So, I'm on Slide 9. In total, other businesses and corporate overheads reported a net expense of AUD39 million for the year compared to an expense of AUD10 million last year. The major variance in this result was due to last year's earnings from associates which at AUD31 million this year, were AUD27 million down due to lower property revaluations in BWP. Corporate overheads, interest revenue and other were all managed broadly in line with last year. Turning now to operating cash flows on Slide 10. The Group's cash flow during the half was a highlight, as Richard said, with a 10.1% increase in operating cash flows to AUD2.6 billion. Improved cash flow performance reflected not only the growth in earnings but also higher working capital inflows during the period. Better inventory management was achieved across all of our retail businesses and particularly in Target. This was partially offset by higher receivables in resources following significant coal price increases. Further information on our balance sheet and working capital is, as usual, included in the supplementary pack on Slides 4 and 5. Turning now to capital expenditure, on Slide 11. The Group retained very strong capital disciplines in respect of capital expenditure which includes our property development activities where, since 2011, cumulative retail property acquisitions have now been matched by property divestment. Net capital expenditure of AUD400 million for the half was AUD275 million or 40% below the prior year. Within this gross CapEx of AUD924 million, was 12.7% lower than last year due to fewer store openings in Bunnings and reduced investment in Target. Proceeds from disposals were AUD140 million higher than last year due to the sale of Coles' interest in a number of its joint venture properties to ISPT and the sale of the Bayswater land by our WesCEF division. Collectively, higher operating cash flows and lower net capital expenditure resulted in an overall 34% increase in free cash flows to AUD2.2 billion for the half. For the 2017 financial year, full financial year, we currently expect the net capital expenditure for the Group to be between AUD1.1 billion and AUD1.3 billion but as always, this will be dependent on the level of freehold property activity. Turning now to Slide 12 and the Group's financing. During the half, strong cash flow resulted in a strengthening of the Group's balance sheet. At the end of the period, net financial debt finished at AUD5.4 billion which was actually in line with the prior year despite the debt funded acquisition of Homebase in February 2016 and subsequent investment in working capital in this business. During the period, we repaid AUD500 million of domestic medium term notes and we did this utilizing existing cash facilities as well as some bank facilities. The Group's financing costs of AUD149 million were below last year and this reflects now, an all in effective interest rate cost of 3.95% which 68 basis points lower than previously. And this reflects, again, the good work that our treasury team continues to do. The Group, as a result, maintained very solid credit metrics with cash interest cover at nearly 19 times, fixed charges cover at 2.7 times and our credit ratings unchanged by both S&P and Moody's. And it's fair to say we expect those credit metrics to improve by the time we get to June. Post the period end, on February 1, we announced the completion of the sale of the Coles' credit card book to Citi. The proceeds from the sale, from this sale, of approximately AUD900 million, have been used to repay debt associated with the credit card receivables which further strengthens the Group's balance sheet. Following the sale of the credit card book, as you would appreciate, Coles' Financial Service earnings will be down, as is capital employed, by approximately AUD10 million to AUD15 million worth of earnings compared to the first half, albeit at the Group level, this will be partially offset by lower Group interest costs given Coles was charged a higher arms-length funding cost by our treasury team. Turning to Slide 13 and the dividends. As Richard mentioned, the Board has declared a fully franked interim dividend of AUD1.03 per share, representing a record interim dividend for the Group and reflecting strong earnings growth as well as the cash flow. This will be paid on March 28 to shareholders on the Company's register on February 21, being the record date. The Group will again provide shareholders with the option to participate in the dividend investment plan. With that, I will now hand over to John Durkan.

Thanks Terry. The half has been a busy one for us at Coles. We've invested more than ever to maintain a leading customer offer in a market where growth was sluggish and competition has intensified. I'm confident these efforts mean we've become a better business throughout the half and I would like to thank our 100,000 team members for their hard work which culminated in a Christmas period where I believe we've made a real difference to the 20 million customers that we serve weekly. Whether it's better value in key products such as beef and lamb or the doubling down of our Christmas service [Technical Difficulty], the focus of our team is providing Australian families a better shopping experience than ever before and what an important time of the year. I believe that the best way to drive sustainable growth over the long term is to focus on improving our customer offer day in and day out. Investing to improve our business has never been more important than in this environment. I'm also keen to do so, regardless of [Technical Difficulty] increased competition and below average market growth. I'll now turn to the results, Slide 15. Total revenue was broadly in line with the previous year at AUD21 billion. EBIT decreased 2.6% to AUD920 million as our EBIT margin of 4.6% was lower than the prior comparable period. Food and Liquor revenue increased 2.3% to AUD16.9 billion and our headline sales grew by 2.2% and comparable sales grew by 1.3%. Deflation for the half was 4.9% making this the 23rd consecutive quarter of lowering prices for customers. Convenience revenue was 11.5% down on last year. Our convenience store sales continued to perform strongly, increasing 6.4% over the half. This was more than offset by a decline in fuel sales which was driven by a decline in comp fuel volumes of 13% and lower fuel prices. I will now turn to Slide 16. The market dynamics in food retailing have changed over the last year, where total market growth is noted to be below long term average and competitors have made price adjustments and expanded their footprint nationally. We believe our strategy of continued investment in our customer proposition is the right strategy to position Coles for the long term sustainable growth. So, we've continued to invest in price, service, availability, quality and a better store network. This investment has seen our key customer metrics improve which has driven continued comp sales growth despite cycling a period of very high growth. Through the period our EBIT margin contracted and I've consistently said that EBIT margin will be an outcome. That is true in periods of strong sales growth and in lower sales growth. It is imperative that we maintain a long term approach and preserve a leading customer offer. We have invested in lower prices to provide customers with better value and maintain a compelling price position in a highly competitive market. Over time, we maintain that our simplicity programs will fund the investment in our customer offer, but given the changes we have seen in the market, we decided to pull forward investments in our offer, putting downward pressure on EBIT margin. The vast majority of our investment was in the second quarter and at a minimum we anticipate this trend to continue through the second half. As always, cash flow remains a key focus and cash realization of above 100% is always a pleasing result. I will now turn to Slide 17. A key component of our investment in the customer offer through the half, was through our shelf margin. However, I don't want to give you the impression that our investment in the customer offer is one dimensional. In terms of service, our incremental service investment through the half was over 60% larger than the previous year. This investment gives the customer another reason to shop with us more often. Over Christmas, we doubled down on our Christmas service promise from last year, to have all checkouts open at key times. It's a prime example of a cost that we could easily have cut at the end of the period if short term earnings were our focus. I'll now turn to Slide 18. We remain unapologetically customer centric with a focus on continuing to improve the offer. Through the period, we've seen evidence of our customers rewarding us for this investment and we're confident that they will continue to do so in the long term. If I look at our key performance metrics, we have continued to see positive growth in comparable transactions, basket size and sales density. These metrics have translated into continued comp sales growth through the second quarter and whilst food comp sales growth of 1% is lower than what has been achieved in previous quarters, I think that the continued growth, whilst the business cycles growth of 5% last year, is a positive sign. Turning now to new services and channels on Slide 19. We're always looking for more ways to give customers exceptional value and more choice regardless of how they choose to shop. Coles Online continues to grow strongly with double-digit transaction and sales growth as customers respond positively to our offer. We remain focused on growing the business and investment into what is an important channel by which we can reach our customers. Flybuys continues to grow, with now over 6 million Australian households which are active flybuy members. Flybuys has continued to offer our customers a consistent and reliable rewards program, whilst innovating and extending our value proposition through new partnerships for service, such as our partnership with Virgin Australia and the Velocity program. During the half Coles Financial Services struck an agreement with Citi for the distribution of the Coles' credit cards. This benefits the Coles Financial Service customer base by matching Coles' strong brand with Citi's global expertise in this space. I will now turn to Slide 20. The liquor business continues to execute its transformation plan with positive momentum driving its fifth quarter of positive comparable sales growth. The business remains cautiously optimistic as customers continue to respond well to the changes implemented thus far. Over the half, we continued to optimize the quality of the liquor network, closing six under-performing stores and opening 13 new ones. Furthermore, we have renewed over 92 Liquorland stores through the half and we're on track to deliver a total of 200 renewals in FY17. The business is focused on making it easier and simpler for customers to shop and all brands now offer click and collect services. Liquorland in particular, launched a 30-minute click and collect offer where customers can now make an order online and pick it up in store within 30 minutes across the network. It's a brilliant example of how the team is making shopping easier for our customers. The Liquor Market trial within the First Choice business is still in its early stages. We will expand the trial and continue to monitor the progress before deciding on our next steps. Whilst there are encouraging early signs, there is still significant opportunity within our liquor business. Our focus is on executing these opportunities whilst maintaining the positive customer momentum that we have generated to date. I will now turn to convenience and Slide 21. In Coles Express, convenience shop sales continue to be driven -- growth continues to be driven by our improved and expanded food to go range and our strong value proposition. The convenience shop delivered its eighth consecutive quarter of price deflation, excluding tobacco, as we create trusted value through the continued roll-out of the every day value offer. Coles Express is committed to maintaining a competitive fuel offer despite headwinds facing the business. These headwinds are from slowing market growth of fuel and under-indexing in sites openings versus our competitors which continue to weigh down on the fuel volumes. As I mentioned, in the first quarter there have also been changes to our commercial terms with our alliance partner. Turning now to our outlook, on Slide 22. The food retail sector in Australia has become very competitive but I am convinced that the strategy which puts the customer first always, is one that will prevail in a backdrop of lower market growth and increased competition. We responded to the change in market conditions by pulling forward investment, in order to maintain a market leading customer proposition. This has led to margin compression through the period. The margin investments were more pronounced in the second quarter and these will persist through the second half. I have consistently said that the margin will be an outcome and I am undeterred by the short term as the investments we're making today will deliver success over the long term. There remains a significant opportunity to realize simplicity benefits within our business and this half has provided evidence of that as these benefits funded some of the investment in the customer offering. Over the long term, our simplicity benefits will offset the investment in our customer offer but being customer focused means we will not constrain ourselves from investing in a particular period based on the timing of these benefits. In liquor, we will continue to progress the transformation. There remains significant opportunities within the business and the team remains focused on delivering our five-year plan. In Express, we're committed to delivering trusted value and innovation to our convenience shop offer and will continue to work with our alliance partner or provide a competitive fuel offering. With the Citi credit distribution agreement commencing in February, we expect the earnings contribution, as Terry said, of the financial services business, to decline in the second half. Thank you. I'll now hand over to Mike Schneider.

Thanks John and hi everyone. I'll start on Slide 24 with an overview of the home improvement division result before I comment further on the Bunnings Australia, New Zealand result. Revenue for the division increased by 27% to AUD7 billion for the first half, driven by the inclusion of Homebase sales as well as a strong contribution from the Bunnings Australia and New Zealand team. EBITDA was up by 7.3% and return on capital on a rolling 12 basis for the division, remained above 30% which includes 10 months of Homebase results. Moving on to Bunnings Australia and New Zealand and I'll stay on Slide 24, our results across the first half were pleasing with consistent performance and improvement across each of the growth drivers within our strategic agenda. Actions to make our business stronger and healthier have delivered good outcomes for the half. As you can see, this has resulted in a AUD457 million increase in revenue, to AUD6 billion and EBIT at 9.8% was also very strong. The results reflect the strong teamwork across the business and the focus within the team which was pleasing given the well reported disruption in the market during much of the half. Moving to Slide 25 and we were pleased with the store-on-store sales growth of 6.5% for the half given that we were cycling strong numbers from the last year, in addition to the Masters' liquidation and wet weather impacts in the current period. The result was underpinned by revenue increases in every single trading region and from both our consumer and commercial customers. There continues to be good improvements in our safety results but there is always more work to do on that front. If we now move to Slide 27, the growth in trading EBIT was driven by a combination of disciplined cost management and productivity improvements. Property divestment outcomes, under favorable market conditions, continue to be pleasing. As you'd recall, in August last year we announced an agreement with Home Consortium to acquire leasehold interest in 15 ex-Masters' sites which involved up to 11 closures of existing Bunnings' stores. Based on the current status of landlord negotiations, we have taken up store closure provisions of approximately AUD30 million during the half, with these costs reflected with in the band's trading results. Return on capital improved to 39%, mainly as a result of the growth in earnings and continued property recycling activity. There's an ongoing strong focus on investing in the existing store network to facilitate growth and to ensure consistency for our customers. Turning to Slide 28 and good work is being done in product innovation, range enhancements and ongoing improvements in service and services. These are providing us with ongoing positive customer engagement trends. All of these activities, of course, span across our consumer and commercial customers. Work to strengthen the core of the business continued, with good outcomes in safety, stock availability and operating efficiencies. A key focus of the agenda is eliminating complexity for our teams so that they can execute on convenience for our customers. Continued reinvestment in price is assisting even stronger value creation. Our digital investments and the network development work are delivering well for us. Another nine new trading locations opened in the half and we're setting new records in terms of online customer engagement. We're pleased with the progress across the agenda and more is expected here in the year ahead. I also thought it was worth noting just how strong our commercial performance continues to be. The opportunities in widening our addressable markets through range innovation, leveraging our digital platforms and customer engagement, is providing solid growth opportunities and coupling this with network redevelopment, is ensuring we're able to constantly improve and innovate our offer. I was reminded of this yesterday when we opened our new Cannington warehouse in Western Australia. The way a new offer in a market we've operated in for close 20 years is received by customers is really impressive. It shows that the combination of an array of our growth drivers working together continues to create positive momentum for the business. Before I hand over to PJ, I'll just quickly talk about our outlook. It's really clear that our competitive landscape is both dynamic and active. I don't think we've yet been able to clearly understand all the impacts from the Masters' liquidation but what is clear, however, is our continued strong focus on investing both our offer, in terms of network development and value creation for our customers. I'll now hand over to PJ for the Bunnings UK and Ireland update. Thank you.

Thank you Mike. Just to move to Slide 30 if we can. As we have previously outlined in the acquisition overview, we're focused on building strong business foundations in our phase 1. We're delivering good retail basics by introducing higher stock weights and wider assortments of core home improvement and garden products whilst also investing in price. The first stages of team development the cultural changes required are well progressed with the majority of store management completing key leadership programs. In addition, we've built the infrastructure to develop and operate the first tranche of pilot stores with the St Albans opening earlier this month and at least three more to follow by the end of June 2017. The pilot, like the majority of Homebase network, is right sized for the market with stores able to support warehouse merchandising principles so we can leverage a lower cost base to our advantage. We're looking forward to opening and operating more pilot stores this year and I'll chat about that shortly. Let's now move to Slide 31. We've made solid progress on phase 1, transitioning Homebase and opening our first pilot. Sales are broadly in line with the rebased business and post a number of restructuring costs and costs associated with a pilot, the business recorded an EBIT loss of GBP28 million. We have repositioned Homebase to Always Low Prices, to offer customers better value and develop a clear position for the business which enables it to perform better over the three to five-year transition to Bunnings. The transitioning of Homebase to all about building a strong foundation as a step towards creating the new Bunnings Warehouse business in the UK and Ireland. We have established core ranges of home improvement and garden and removed ranges of soft furnishings and bedroom furniture. The clearance of non-core ranges is now largely complete, enabling us to roll back a number of new ranges into the Homebase stores over the next 12 months. There has been further investment in stock with new ranges, the additional Bunnings Warehouse ranges and seasonal increase to ensure the business is better positioned for the important 2017 spring, summer trading period. We have also see transactions increase by 9.1% on a like-for-like basis across the period. This number has obviously been positively impacted by the significant clearance activity we've undertaken. However, we're also encouraged by the customers' response to the new and expanded ranges we have now introduced. If we can now move to the next slide. As we commented at the June strategy day, our leadership team in the UK is now well established and we're supported by an advisory board which is assisting us with strategic insights to the local market. In addition to a number of leadership development programs, we've conducted service training for over 10,000 of our team members. Additionally, what we've really invested in is making sure our store teams know that we care and we want to empower them to do a great job into the future. Our supplier base is now engaged with our business, supporting the new expanded ranges and now rolling out product knowledge and accredited training programs. As we expected, there's been substantial disruption in the process of integrating Homebase into Bunnings and the Wesfarmers Group which involves transitioning and separating Homebase from its previous owner. Separation is well advanced, with the majority of the transitional services terminated, with three large projects remaining in home delivery, including a call center and IT system. We will continue to see trailing transitional costs until August this year. Agreements have been reached with all concession holders for an orderly exit and the process of physically removing the concession is ongoing. The agreements to remove concessions means that we can rapidly move to phase 2 of our three to five-year strategic agenda. Negotiating a rapid exit of concessions has been challenging but successful and we're clearly focused on preparing for the roll-out of Bunnings Warehouse throughout the United Kingdom and Ireland. If we could now move to the next slide, please. There are a lot of things that are going to hold us in good stead, but one thing stands out with the effort; that the effort has gone into engaging with our store teams and supplier base, inviting them to be part of something that's very exciting. We've had great support from our supplier base, both locally and internationally which has enabled us to deliver the widest range of global market leading brands. Proof of pilot is obviously a critical step to further investment and we will take our time to get this right. The first of these stores open on February 2 as part of the plan to have at least four pilot stores opened by the end of June. We have had great customer feedback and the early results are pleasing. We've talked about our long term ambitions; we've talked about the three-phase plan and we're still in phase 1. This is a period of consolidation and trial. As we reset Homebase, we're working hard to establish market leading Bunnings Warehouse stores and the success of these stores, it is an absolute precursor to any further investment in the roll-out of our network development plan. I think in summary we've seen a solid start. Much has been achieved through hard work by our team. Thank you. I'd now like to hand across to Guy.

Thanks PJ. And turning to the department store divisional financial performance summary on page 36. For the half, the department stores divisions recorded a total revenue of AUD4.6 billion and earnings of AUD387 million. On an adjusted basis, earnings were up AUD28 million for the half which represents a growth of nearly 8%. We're pleased with the continued growth from Kmart and the strong execution by the Kmart team under Ian Bailey's leadership and I would also like to acknowledge another strong performance for the half by the Kmart Tyre & Auto team lead by Adam Pay. I'd now like to talk to Target's financial performance and give you further insights for Target's transitional year, on the next slide. Target's revenue for the period was AUD1.6 billion, a decrease of 17.7% on the prior corresponding period with an EBIT recorded of AUD16 million. Excluding the AUD13 million recognized for additional restructuring costs, following binding commitments in relation to the relocation of Target's support office, earnings for the half were AUD29 million. In regards to safety, Target recorded a pleasing 32% improvement in rolling 12 months lost time injury frequency which reflects a very strong safety commitment across the business and ongoing improvements in team member culture and engagement. Now turning to Target's overview. Target's performance in the first half, reflected a difficult trading period as well as significant transition underway within the business. Total sales for the half decreased 17.4% and comparable sales decreased 18.2%. For the second quarter, total sales decreased 17.6% with comparable sales declining 15.6%. While underlying trading during the half was challenging, sales were further affected by deflation resulting from the conversion to every day low prices which included the cessation of the toy sale event. Buying programs and inventory levels were also significantly reset which, due to lead times, affected the availability of seasonal stock and the levels of fashion in women's and children particularly. Improved merchandise disciplines and planning processes supported by investment in systems, delivered SKU reductions and lower levels of inventory. Good progress was also made to reduce costs across the business, partially offsetting the lower gross profit recorded for the period. Improved working capital management and moderated levels of capital expenditure resulted in higher cash flows for the half. We opened one store during the half and closed three, including two conversions to Kmart. Now turning to the outlook slide. As we mentioned at the strategy briefing day in June of 2017 financial year, this year will reflect a year of transition. Sales momentum in the second half is expected to remain challenging. We expect to continue to improve our merchandise disciplines and will continue to focus on resetting our cost base through supply chain and store productivity improvements. Earnings in the second half are expected to be materially above last year, due to restructuring costs and provisions incurred last year not being repeated. I will now hand over to Ian, who will talk to Kmart's performance.

Thanks, Guy. Kmart has continued to deliver strong growth in earnings and return on capital in the first half of 2017 and I'm glad to be here today to share our results. We've seen good improvements in safety performance in the half, with lost time injury frequency rate decreasing 10% on last year. Kmart delivered revenue of AUD3 billion for the half, up 8.9% on last year, with comparable store sales growth of 5.7%. Earnings grew 16.3% to AUD317 million for the half, driven by sales growth and improved margins. The strength of EBIT margin reflects the team's continued focus on cost of goods savings and provides the ability to continue to invest in price going forward. At 12.4%, it is at the high end of where we'd expect long term margins to be for the first half. Return on capital improved 490 basis points on last year to 41.5%, driven by profit growth and a continued focus on working capital management. I'll now turn to the overview slide. Sales growth was strong for the half, a good outcome given we were cycling double-digit growth throughout the period. Growth was driven by unit growth as customers responded well to further investment in price. All categories contributed to the sales growth, driven by everyday ranges sold at full price. Inventory quality at the end of the period improved over last year, benefitting from early structured clearance activity and reduced inventory levels. Earnings were up 16.3% as a result of the increased sales, combined with continued improvements in sourcing and supply chain costs. These benefits more than offset exchange rate headwinds experienced in the half. Return on capital increased to 41.5%, with reduced capital employed, as stock turn continued to increase. We continued to invest in our network by opening five new stores, including two Target conversions and completed 15 major refurbishments. This takes the number of stores we have in our Plan C format to 118, covering 55% of the fleet. Turning now to outlook. Customer expectations will continue to increase and we're focusing more on understanding what matters most to our customers so that we can continue to deliver on a great customer experience. Our focus remains on driving sustainable growth through our two strategic pillars, being a great place to shop that's simple to run and better products at even lower prices. To ensure that we continue to own lowest price, we're relentless in our pursuit of lowest costs as we seek to reduce our cost of doing business further. The need to move our stock faster is an operational imperative to facilitate our continuing sales growth while ensuring we control costs, as well as supporting cash flow and return on capital improvements. We will continue to invest in our store network, with six new stores and 18 refurbishments expected to be completed by the end of the financial year. Sales growth in the third quarter is expected to moderate from recent levels, given that we'll be cycling exceptional sales growth of 18%, fuelled by abnormally high clearance activity last year. The quarter will also be impacted by the timing of Easter which falls into quarter four this year. Finally, I'd like to take this opportunity to acknowledge and thank our team members and congratulate everyone for the strong results we've just delivered for the half. Thank you for your time today and I'll now hand over to Mark Ward.

Thanks, Ian. I'm on slide 46. The results achieved in the first half are very pleasing. While the market continues to be competitive, we've maintained a clear focus on our Every Channel strategy and improving our offer. All key measures are in good shape. Revenue up 5.9%, a 5.1% lift in EBIT and a 14.7% improvement in safety as well as another strong lift of 140 basis points in our return on capital to 13.9%. The results are very encouraging on the back of recent periods of strong growth. Turning to slide 47, you can see from the charts that our revenue earnings and RoC growth remain strong as we continue to focus on increasing the strength and breadth of the customer offer and extending our Every Channel reach. The next wave of merchandise layout and design changes were implemented, with early positive signs, whilst ongoing investment in our website continues to make it even easier for customers to shop online with us. New and expanded product ranges in art supplies, teaching aids and retail supplies delivered positive results. We continue investing in price so we're seen to be providing the best overall offer in the eyes of our customers. Our commitment to delivering great service to help customers achieve their big ideas also continues to be a key focus. Our focus on giving customers real choice in how they shop with us, anywhere, anyhow and any time, is clearly resonating, with sales and transaction growth in stores and online. We're seeing strong momentum in the B2B market as we invest further in our B2B team and expand our offer instore, online and on the road, as well as productivity improvements together with disciplined capital and inventory management that have delivered another healthy improvement in EBIT and our return on capital results. Turning to slide 48, we started the second half well, with strong results achieved in the critical back-to-school trading period. As a one-stop-shop for students and households, this is a natural space for Officeworks to play in. Our team prepares for it 12 months out and we're intent on improving our offer every year. We expect the competitive intensity to continue to place pressure on sales and margins. However, we have done a lot of work to prepare for the critical trading periods ahead and we believe we're well-placed to drive continued growth. Our focus remains laser-like on executing our Every Channel strategy, with further investment in stores, online and most importantly, our team. I'd like to acknowledge and thank the Officeworks team for delivering another solid result. I'll now hand over to Rob Scott.

Thanks very much, Mark. I'll start on slide 50. It was a much-improved half for industrials, with all three businesses delivering improved earnings and return on capital. The improved performance demonstrates momentum with our strategic agenda in each business. EBITDA increased to AUD469 million for the half and EBIT increased AUD355 million to AUD377 million. I'll run through each of our businesses in more detail, starting with chemicals, energy and fertilisers on slide 51. Safety has been a key focus for Ian Hansen and the team in chemicals, energy and fertilisers and we're seeing the results with our lowest-ever LTIFR this half. The headline EBIT growth of 80% for the half includes two one-off items that we've specifically called out. Excluding the one-off items, EBIT still grew a respectable 23% on the prior corresponding period. These one-off items included a AUD22 million gain on the sale of a remediated former fertilizer site in Bayswater, WA, whilst last year there was a one-off item of AUD30 million in costs associated with the closure of our PVC manufacturing facility in Victoria. These one-offs show the benefit of active capital and portfolio management within this business. I'd also like to call out the strong cash flow generation of this business. On an R12 basis, we've generated free cash flows of AUD448 million in the last 12 months and then CapEx of AUD60 million. So this generates a strong underlying performance in WesCEF. Return on capital increased by 9.5% to 25%. Now turning to the overview on slide 52. Chemicals earnings grew strongly in the half. Ammonium nitrates saw increases in both production and sales volumes, benefitting from significantly lower ammonia import pricing which will be passed on to customers in the second half. The ammonia plant experienced a series of unplanned shutdowns during the half which had minimal impact on overall earnings, given the low price of imported ammonia. Pleasingly, the issues have now been rectified and the plant is running at full production. We've made some good progress through the half in securing longer term contracts to replace ammonium nitrate volumes that will be rolling off in the coming years. We've also been successful in securing a new contract for the supply of AN emulsion with a large mining customer. This provides a new market opportunity for our chemicals business as we move into more value-added areas of AN. In Kleenheat, earnings improved on the prior year, mostly driven by the continuing strong growth in our natural gas retail business in WA. This was partially offset by lower Saudi CP and lower LPG and LNG sales volumes. Fertilizer's earnings were mostly in line with the prior year, with WA farmers benefitting from yet another strong harvest in WA. Turning to industrial and safety on slide 53. Industrial and safety EBIT increased by 44% to AUD52 million and underlying EBIT excluding last year's one-off restructuring costs of AUD5 million increased by 27%. As I mentioned, this signals a directional change in performance for WIS after a number of years of declining earnings. Revenue was soft at 4.6% lower to AUD884 million, predominantly due to lower sales in Blackwoods, that I'll talk to in a minute. Safety also improved in the half, with improved performance in most areas of both lost time injuries, reportable injuries and the severity rate of our injuries. Turning to slide 54. On a positive note, the business integration and branch mergers associated with our Fit for Growth program had minimal impact on sales and were able to retain all major customers. However, the ongoing subdued investment in the traditional mining and resources customers segment continues to impact Blackwoods sales. The improvement in earnings for the half was largely driven by lower operating costs achieved through the simplification of our business model, better category management and pricing disciplines which improved margins. We also achieved higher sales and earnings from our Coregas industrial gas business which was pleasing and we did also see some improved performance in the Workwear Group as a result of their own turnaround activities, focusing on reducing costs to serve and improving merchandising capabilities. Blackwoods is now moving to the next phase of its transformation to become more customer-centric and competitive in the market. We're rebuilding many aspects of the Blackwoods business. During the half, we realigned our sales team to customer segments, launched a new online platform for SME customers called Blackwoods Express and we continued to upgrade our merchandise and supply chain processes. Now turning to resources on slide 55. Resources reported an EBIT of AUD138 million for the half, as we signalled earlier to the market. I'll talk to the key factors impacting performance on slide 56. Total revenue increased 24%, mainly as a result of the significant increase in metallurgical and thermal export coal prices. The benchmark hard coking coal price of $92.50 per tonne in Q1 increased to $200 a tonne in Q2. As we signalled at the full year results, the benefits of this higher pricing was partially offset by the large carryover tonnage we carried forward from last financial year. Sales mix was largely in line with our prior guidance, so the EBIT increase of AUD256 million to AUD138 million was pleasing, given the carryover tonnes, but also factored in AUD45 million of locked-in hedge book losses and also reflected the wet weather disruptions in Q1 which materially impacted Curragh's production and led to higher unit cash costs for the half. The EBIT for the half was ahead of guidance that we provided earlier in the half, largely due to two key factors that I wanted to call out. Firstly, we achieved very strong production in Q2, supported by our new mine planning process and also opportunistic use of additional contractor fleet to take advantage of the higher prices. This led to reduced unit mine costs and we also benefitted from some additional shipments that we were able to achieve in the quarter. Pleasingly, our Q2 production rate at Curragh was at an annualized rate of around 9 million tonnes per annum for export tonnes. Secondly, the litigation commenced by Stanwell back in May 2015 relating to the interpretation of reference coal price used for assessing our export rebate was settled in November 2016. The terms of this settlement are confidential, however, the settlement was on terms that were more favorable than what we had conservatively provisioned and this resulted in a one-off provision reversal of AUD35 million. We're also pleased that this settlement provides ongoing clarity to the calculation of the rebate and removes a significant distraction from our business. I will now turn to the outlook on slide 57. In chemicals, energy and fertilisers, we're focused on maintaining the strong operational performance achieved in the past year which will be important to offset a number of headwinds for the remainder of this financial year. As I mentioned, the impact of the lower ammonia pricing experienced in the first half will flow through to our end customers in terms of lower pricing to the end customers. On the fertilisers side, we're cycling some very strong results from 2016 financial year which will be challenging to repeat. In addition, many of our segments are experiencing increasing competition from domestic and global suppliers. Now, whilst our businesses are always exposed to the volatility in international commodity prices, exchange rates and a number of seasonal factors, we continue to focus on delivering strong cash flows and return on capital through the cycle. On industrial and safety, as I said, the new investment activity in mining and manufacturing remains fairly subdued and this does provide some challenges to the revenue side. However, through improving customer service and sales effectiveness, we do see a path for further market share gains and growth in new sectors and importantly, our new model is very scalable. It will take time to continue to get sales growth traction, but this will be a focus in the six to 12 months ahead. Meanwhile, there remain many opportunities to improve our capabilities and performance across the areas of sales, merchandising, supply chain and digital and this will support earnings growth in the second half. Now turning to resources on slide 58. Full year earnings will be dependent on export coal pricing and exchange rates. The third quarter quarterly benchmark price was settled at $285 a tonne which was pleasing, although we have seen, in the last few months, spot pricing decline. Recently we've seen hard coking coal spot prices move into around $160 a tonne level this week. A key uncertainty around pricing relates to ongoing Chinese Government policy measures and also domestic supply response. In the first half, we obviously talked to the drag effect that our carryover tonnes had and the negative impact of quarterly pricing in a strongly-rising spot market. As we move into this second half, the benefits of quarterly pricing will start to flow through and given the weighted average pricing that we have achieved, particularly as it relates to carryover tonnes, we no longer see our carryover tonnage being a negative and, indeed, is likely to be a positive for earnings in a declining spot price market. We reiterate our earlier guidance that the full year metallurgical coal sales volume will be in the range of 8 million to 8.5 million tonnes, subject to mine operating performance, weather and the usual caveats. Curragh will continue to implement further productivity initiatives under its revised mine plan. The aim is to maintain the production and cost momentum that we've achieved through the second quarter this year and continue this for the rest of the calendar year. The full year result will continue to be impacted by locked-in hedge losses of AUD47 million for the second half and the adverse impact of the ongoing obligations to Stanwell. Because of the higher export prices, we do expect the Stanwell rebate to increase to between AUD90 million to AUD110 million for the full year, with the final amount largely dependent on our fourth quarter pricing outcomes. I'll now pass back to Richard.

Thanks, Rob. So now turning to slide 60 on the outlook for the businesses. The outlook for our retail businesses is positive and we're confident of our ability to grow each business within their respective markets. We will continue to deliver value to customers through innovation and productivity improvements. Ongoing merchandise innovations, investments in store networks and digital engagement will continue to support growth through greater brand penetration. We remain confident of the growth prospects of the Bunnings UK and Ireland acquisition. Once we have proven the new store format and have evidence of its success, we're confident that Bunnings can replicate the successes it's had in Australia and New Zealand and create shareholder value over the medium to longer term. As previously disclosed, 2017 is the transitional year for Target. The business has made significant inroads on its turnaround with progress to date supporting our positive outlook for the business. As Guy said, Target's earnings in the second half will be supported by not having the restructuring costs and provisions from the previous year. The outlook for our industrials businesses remain positive, with resources expected to benefit from the higher prices Rob just talked about over the second half and continued cost improvements and the chemicals, energy and fertilisers business will continue focusing on its strong operational performance, with earnings, like resources, as always, subject to commodity prices, exchange rates and seasonal conditions. Again, as Rob just said, the industrial and safety division is well-placed to mitigate subdued market conditions, with an increasing focus on enhancing customer service and expansion into new markets. Turning to slide 61, the Group will continue to progress the strategic reviews of Resources and Officeworks, but will only proceed where shareholder value can be created. Wesfarmers is in good shape and we'll continue to retain a strong balance sheet, allowing us to be opportunistic as growth opportunities arise. We will continue to build and invest in our people, ensuring we have sufficient capability and capacity within the Group as required. On people, let me congratulate Rob Scott again on his employment yesterday as Deputy CEO and he'll take over from me after the AGM later this year. As we said yesterday, Rob will run the industrials division through to the end of the financial year. But he will also, in the meantime, join our divisional boards and be involved in the strategic planning and budgeting processes for the next financial year. Rob will join us to meet with investors after the full-year results. As also we announced yesterday, Anthony Gianotti will step up into the Deputy MD role at the industrials division to cover for Rob's absence when he's not there. So thanks, that brings us to the end of the briefing. Terry, the divisional managing directors and I will now be very happy to take any questions anyone has.

[Operator Instructions]. Our first question today comes from the line of Adam Alexander from Goldman Sachs, please ask your question. Hello, Adam, your line is now open, please go ahead. Hello Adam? We might have a few technical issues with Adam's line, we'll just go to the next question today. Our next question today comes from the line of Craig Woolford from Citigroup, please ask your question.

Afternoon Richard, Terry. Firstly, congratulations on a great career at Wesfarmers. We'll no doubt get to talk more over the coming months, but congratulations on everything you've achieved. My question is on Coles, I'm sure there's no surprises there. I'm interested, I think John Durkan made a comment that there was a pull forward of price investment. I just want to clarify the words used there. Such that the second quarter price investment was more significant and therefore shelf margins came under pressure and that that should continue into the second half. I just want to understand why the Company reacted that way and what the intention of pulling forward price investment was?

Thanks Craig. John, do you want to respond to that?

Yes, I'll take that, thanks Craig. Well, we've always said that we're going to be competitive in the marketplace and we saw an increased level of competition in the second quarter over the first quarter in the market. As I said, we're determined to be price competitive and value competitive as well as service and quality and availability. Therefore, it's important that we maintain that. So we will always take the decision for the long term benefit of this business, in the fact that we will make sure that we continue to maintain our price competitiveness. And as I said, the majority of our investment was in the second quarter where we saw a market that was far more competitive. And as I said, I think that -- I can't quite talk to the fourth quarter this year, because we can't see that far, but certainly Q3 looks like Q2.

So just to be clear, I guess the result that you had in the second quarter was a slowdown in comps. So was it a reaction to slower sales growth or additional price investment from the likes of Woolworths and Aldi?

Well we saw additional price investment in the marketplace be -- we were up against stronger comps year-on-year, so we were up at close to 5% comps for Q2, one of our strongest periods and Q3 looks like Q2 of last year. So we were always going to have to invest more to do that. But we saw additional investment going on because of the competitive nature of the marketplace. And we've seen a price adjustment over the last six to nine months by a major competitor and also a geographical movement from one of the other competitors across the country. As I said, we're always going to maintain competitiveness in that sense. So it was more about competition rather than slowing sales.

Okay. One other question, if I may, it's probably for Guy on Target. In dollars, the costs for Target fell by AUD291 million. We can't see the granularity between gross profit or cost of goods and operating costs -- wish we could -- but it is a 15% drop in total costs for Target. Can you give some clarity as to how costs could have fallen that much for the business in the first half?

Yes, well thanks Craig. I was very pleased with the cost base reset that we achieved in that first half and as you'd expect there's still more to do. Maybe I'll just turn you to what I'd said back in June, that this will be a transitional year for the business. So it was a difficult trading period but it reflects the decisive steps that we have taken to reset the business. So in the half -- some of this will answer to your question about costs -- we removed the toy sale event which end-to-end has a significant cost with no benefit to profitability. There was a significant reduction in our inventory levels by more than 20%, the SKU reduction was dropped by over 40% and we obviously diluted unprofitable ranges, invested in price and increased direct sourcing. So a lot of those elements, Craig, as we reset and ensure that the sales that we're providing or that we're operating within Target were costly and we hence got the benefit as we pulled those out. But you'll see that those sales that we removed, for the most part, were unprofitable. We also spent a lot of time during this half, more so probably in the second quarter as we gained momentum, working closely with our teams across Australia, Asia and the stores and the office in improving merchandise disciplines. And where the costs came out even more so during that half was in stores, the DCs, offices and also our businesses in Asia. The progression to EDLP was working better in the second quarter than the first. The first quarter was a little stronger. And we reduced that a little bit as we realized that as we want to move to EDLP, maybe it should be a slower move than the strength that I really wanted to do in the first part. But that second quarter did have lower promotional activity than the same -- the second quarter had lower promotional activity than the same quarter last year, also a cost reduction. We had some missed opportunities though which I'm happy to call out, particularly in summer seasonal product and our levels of fashion in women's and children in particular. So I guess once I'm happy that we've got all departments' inventory levels, pricing, fashionability right, we'll turn our focus to profitable growth. So the way I look at it is we've made some difficult and definitive decisions for the business and its operating model. But my leadership team and I are really confident that we'll improve Target over time and return Target's profitability to an acceptable level. So hopefully that gives you some granular or more specific information about costs. But also an indication of what I'm doing, as we want this business to go back to a high quality, fashionable retailer with low prices.

Our next question today comes from the line of David Errington from Merrill Lynch, please ask your question.

John, a follow-up question to Craig's there. When you mentioned -- this is John Durkan, Richard. I've got two questions, one on Coles and one on Homebase. The first question on Coles, the step-up in competitiveness. Woolworths burnt AUD1 billion off their EBIT to step that up. Generally, what I'd like to see with the step-up in competitiveness, ultimately as shareholders, is a step up in productivity so as that those productivity savings can fund it. Now if there's going to be a step up in competitiveness, John, without that step up in productivity, the industry's doomed from an earnings perspective and for us shareholders it's going to be a pretty sad state of affairs. So my question is, what are you doing to sizably step up productivity to insulate this increased competitiveness? Because it was a game-changing event when Woolworths invested AUD1 billion plus. And, secondly, what are you doing to grow the industry so as that you're just not selling the same old stuff? Can you grow? And, thirdly, just reducing SKUs, is that going to get the job done? So it's a pretty long question and I apologize for that. But I am concerned, as an investor, when I'm hearing you're saying that you're going to have to continue to go into the second half after a tough second quarter, where this leads us in terms of shareholder returns.

Thanks David. I hope the industry isn't doomed.

So do I, yes.

I'll answer your question. In the context of our business -- so we've always endeavored to match our investment in our business, whether that's service, whether that's quality or prices, with simplicity savings as we describe them. And broadly we've done that over the journey. When we've seen a one-off price adjustment and a lower market -- and we've got to remember, it's the softest market we've probably seen in the best part of 30 years in terms of growth. And all markets go through cycles. But the events that we've seen and you've described all coming at once, for us to remain competitive we had to further invest. So when I talked about pulling forward, what I meant was that we'd planned a series of investments throughout the year. When we saw the competitiveness of the market and we needed to compete, we decided we'd invest further. And within the number that you see as the EBIT number, there's a sizeable simplicity saving that's in that number already. So our gross investment was higher than that and clearly the investment was partially offset and sizably offset by our simplicity savings that we see coming out of the business. I think this is a strong industry and I think, over time, it will continue to be a strong industry. There aren't just -- the market isn't just constrained to us and our competitor. It's quite a broad market, remembering that a significant number of our customers still don't buy fresh food from us. So there's still an opportunity to grow. So talking about growth, there's still plenty of opportunity for us to grow and the market to grow. And over the long term, the Australian market should grow in terms of population growth and income growth. I think we're going through a short term cycle and short term to be defined not by us but by consumer sentiment more than anything else. In terms of simplicity savings -- this goes to your SKUs -- there's a raft of cost savings that we've got planned over the next five years, one of which is reducing our range size. Which will have a significant effect when we get to a sizeable quantum of SKUs coming out of the business across the nation. But it is only one of the cost savings. And there are many other cost savings in our business that we will employ and deploy over the next few years, that will bring our costs down that we'll invest back into our customers. Our model is -- as I've described, we're not changing that strategy and I think it's the right way forward.

The simplicity -- like this brings forward of investment, I mean you're one and a half quarters in effectively. How long could this last? You're going through a transition, how long do you think this will last? That, you know, you -- sorry?

No, no, you -- I'll let you finish your question.

No, that was basically how long is this -- is this a transition that you're looking at or how long do you think this could last for?

Well, we'll be competitive forever is the one thing I'd say, David. We're never going to give up on that. I think there's plenty of models around the world that show when you start to increase your short term margins and become uncompetitive what happens pretty quickly. I do maintain this is a rational market for sure and I -- the two things I can't tell you -- I can tell you our investment is going to be and we've got a planned investment that is rational over time. I can't tell you what our competitors are going to do in Australia and also I can't tell you what the macroeconomics of the market are going to look like. They're the two that are completely out of our control but we have a plan that over time pays for all our investments through our simplicity savings.

Yes, fair answers. Richard -- thanks, John. If I move on for fullness of time, I don't want to take up too much. But UK home improvement, a loss of AUD48 million in the first half. Clearly that has to be a concern to you or probably given that you're going to be leaving in six months and John Gillam's going to be leaving in six months I'd like to know whose concern that's going to be. That's probably a cheeky shot. But a AUD48 million first half loss and AUD29 million of that, trading loss. Can you give a bit of color as to why that is? Because the full year earnings of Homebase was AUD40 million profit. How -- where did that loss come from? That sort of like came out of the blue for me. I always used to remember John Gillam saying you never run a business at a loss, a business should never make a loss. I'm wondering why in the first half that loss really did come out.

Before I pass on to PJ I think Bob Buckley used to say that about insurance too, you never run insurance at a loss. Occasionally --

That was an underwriting loss. He used to say you never run an underwriting loss.

The arrangements with John Gillam, he and I'll sit down now with Rob later in the year and determine whether they continue or not. So there's no definitive timeframe around that. I'll get PJ to answer the question but I'll kick off by saying I think the person who likes making losses least in the Company is probably PJ but we'll do what we need to do in this business for the long term. As I said in my closing comments on outlook, I'm as confident now as I ever have been. As I said yesterday one of my regrets about moving on is I'm not going to be around to see the success of this business directly but I'll be around indirectly. PJ, do you want to go to the question about the performance of Homebase?

Yes, thank you, Richard and you're 100% right. I don't like making losses. David, thank you for your question. Look, we previously advised that as we rebase the sales we'd lose about GBP200 million turnover on the old business. We also did foreshadow that this acquisition -- during the acquisition and transition there was going to be a lot of disruption as we fundamentally repositioned the business. Now we're going through this at the moment so we can build a really strong foundation for Bunnings Warehouse throughout the United Kingdom and Ireland. It's a large market. We're very excited about the prospects that we're seeing but there is a lot of change and there's cost involved in those changes as we build higher stock weights, wider assortment, we've invested as we had to do in price within Homebase. So it is there, the strong foundation, as we build the business over the next five years. We've always said, early part will be significant transitional costs and swings.

But a AUD50 million loss in the first half when you've done one store and you've got another 254 to go and in a market that's really slowing and in a lot of trouble -- I mean Treasury Wines' result yesterday, they highlighted the UK as in real troubles. What's the risk that this loss just doesn't blow out of control?

I won't comment on the wine industry but there's been significant restructuring costs. We've moved out of -- we're moving out of concession, we're in transition. The underlying trading performance of Homebase is getting stronger all the time. We saw 9.1% increase in transactions. We're getting good feedback from customers. But that 9.1% too was driven largely by a lot of discounting activity where we had to clear out a lot of stock at very low prices.

Very low prices. So transaction growth's immaterial really. It's a no number. I'm just worried about the AUD50 million loss in one half that I'm worried about could blow out significantly as you really do have to transition this business in a weak market.

David, we're not seeing it weak in home improvement. It might be weak in wine. We saw borrowings for housing at record highs in December and we're expecting the market to grow. If you have a look a bit deeper, the Government's recently announced a rollout of a large housing investment in public housing. We're just resetting the cost base at the moment. We won't finish the transitional services agreement until August. They're quite a drag on earnings at the moment and we've got to re-set up -- as you know set up new IT systems, new deliver platform and we're rebasing the costs around our call center right at the very moment. So this is a pretty big transition that we're going through.

Sorry, just one other thing on Homebase. There is a seasonality to it so we would expect the half we're in now as PJ alluded to in his comments going through the slides, going into spring and summer we'd expect that to be a stronger performing season than the half we've just been in.

Our next question today comes from the line of Andrew McLennan from Macquarie Bank. Please ask your question.

If I just start on Bunnings Australia and New Zealand, I think during the presentation there was mention of a AUD30 million restructuring charge. Can you confirm that was actually incurred in the half for the ANZ business? Because if that is the case then it will just effectively imply that excluding property sales your margins increased by about 50 basis points. Can you comment on that?

Yes, we took that up in the half and as I said in my comments the really pleasing thing for us in the half was also the ability to drive some very strong cost disciplines and productivity improvements as well.

Okay so this is during a period -- sorry, I'm getting some repeating on the line here. But this is during a period where there was pretty intensive price pressure. Was the profit improvement or the margin expansion coming through in particular from the second half as opposed -- sorry, the second quarter as opposed to the first quarter?

I think as you saw in our first quarter results we were certainly impacted on trading by a particularly wet, cold start to spring. We saw a reversal of that in the second quarter and it's worth bearing in mind that Masters were out of the business -- out of the market by December.

Okay. And now just turning to the UK, there's been some interesting articles around price positioning, PJ, in the UK where independent parties have looked at the pricing of your competitors and Homebase post the Wesfarmers transaction and now the new Bunnings store. It was pretty favorable for yourselves but I'd just like your thoughts on where your price position is on the key value items for both Homebase and how Bunnings sits in comparison to Homebase in the market.

Thank you Andrew. Look, we know that we must deliver a strong price position for this market to be successful over time. Our positioning for Homebase is a little different to that of Bunnings. Our assortment in Bunnings is far wider which enables us to be more aggressive in the areas that we wish to and over time as we rebase the Homebase business it'll enable us to make sure that we get a good return from that business as we transition it. I'm actually pleased with what we've received back from the market since the opening -- the feedback received from not just the market but customers since we opened our first store. The trading has been very positive and the feedback more importantly has been positive. You've just got to -- you've got nowhere to hide in this world on price so you've got to go there and you've got to get your business rebased to those prices which is the market and then you've got to go hard on driving out costs and making sure that we establish Bunnings here for the next 20 years. That's why I'm here.

Has there been -- after you've established your price position for both brands what's been the response from your major competitors?

Look, I don't like to talk too much about competitors but the strategies are very different. I think the industry recognizes that. Bunnings Warehouse is a new and exciting format for the UK and that's the way it's being seen. I think you've seen from the commentary as you just referred to that not just the -- not just our customers but the wider industry sees this as a new and exciting format. I think people will position or companies will position themselves differently. We're very much about very wide assortments of market leading brands and innovation in product and all the other things that you see that has led to the success of Bunnings in Australia over time. Getting a strong base for that is a task that the team here are very much focused on but we've got to get through this restructuring period and the transition. We've got transitional services and a number of other things that need to be cleaned up over the next little while.

If I could ask just one quick final one of Terry. Operating cash flow was strong but when you compare it to December 2015 it looks like in addition to what you've mentioned around receivables that the biggest increase was from extension of payables. Can you just comment on what's going on here and why?

From December you'd have payables of -- obviously we've got the Homebase business which wouldn't have been in there previously, so that would be the biggest portion of that. In terms of terms I don't think we saw any term changes, if anything faster terms in some businesses. It's as reflective as anything of also a bit of faster stock turn and a pretty good Christmas in most of our business as well. We really geared up in some of our businesses for Christmas and did well so therefore a higher creditors' balance obviously as you pay those creditors in January. A few things going on but nothing -- Homebase would be the most significant part.

Our next question today comes from the line of Ben Gilbert from UBS. Please ask your question.

Just the first question for John at Coles if I could. Sorry, I know this has been harped on a bit but just in terms -- I suppose back late last year we were talking about the fact that you'd sort of continue to invest as planned in pricing and that -- weren't going to react to short term variances in competitors' strategies. But obviously it's sort of pulled through -- forward some of that investment. I was just wondering was that around what customers were telling you from a perception standpoint or did you start to see Coles' pricing tick up relative to peers? I suppose what I'm getting at is, is your increased investment or pull forward, are you concerned that we're going to see another leg of investment from your major competitor and Woolworths and Aldi looking to maintain that pricing gap in the market?

Obviously I can't give you an insight into what's going on in our competitors. What we saw was -- we weren't increasing our prices at all. We saw further investment across the period, so it wasn't just short term investment. This was quite a number of weeks. And therefore, we decided that actually we needed to make sure that we were going to be competitive for the long term because it looked more than just short term activity. We won't just react to very short term activity, but if we see it's going to be sustainable then we will absolutely make sure we're in the right place. It was more of the latter than the former. I can't tell you what our competitors are going to do, but I can just reiterate we have a plan in terms of customer investment that we're aiming to stick to. But if we see competitive forces, then we will obviously make sure that we're going to be in the right place.

So, in the absence obviously of the produce inflation which we've seen a bit of coming through in the last quarter, do you envisage ex that, deflationary pressures at least continuing at this sort of run rate that they are today, around that 1% for the next few quarters?

Yes, the short answer to that is probably yes. I don't see us moving off that. We're seeing some pressures on meat cost pricing that we saw in Q2 and we're still seeing a bit in Q3. Lamb prices at the moment are particularly high and they are also short on volumes, so it obviously drives the price up. So we're seeing certainly some elements of that. Veg, we've seen some strong cost price inflation in that area, but we're then seeing offset in other areas in terms of deflation. So net-net I don't see us diverting from that materially in the next while.

And just a final one from me just for Michael on Bunnings Australia. The margin piece, I know just -- Ian was talking about within Kmart that they're probably at the upper end of their long term targeted margins at that sort of around 12%. And Bunnings, if you exclude that, that property charge looks like it's about 12.7% for this half. I understand you don't manage the business for margin, but surely that must be pushing towards the upper end of what you guys want to achieve in that business. And how do you think about that long term in terms of the trade-off in investment and price versus margin?

Margin, we manage it for customer value and that's what we keep focusing on. So that's driving the strategic agenda to create our value, grow the market and innovate on range and other things we're focused on. And that just becomes an outcome of good work.

So I suppose you're still comfortable, particularly if you have a more rational marketplace with no Masters next period and sales continuing to grow, I suppose in theory that margin could go higher.

Incredibly competitive. I think it's always one of the big misconceptions that one player is going to dominate the market one way or another. We compete every day with a range of players, traditional and online and the market's competitive. So we just keep driving that agenda as hard as we can.

Our next question today comes from the line of Grant Saligari from Credit Suisse. Please ask your question.

And I just wanted to explore a bit further the line of questioning that David raised earlier on Bunnings UK if I could. I mean, my take on it is that as you put through the EDLP changes in the first half, it obviously caused a trading profit drop. I would have assumed that any of the stock liquidation would have been provisioned for in the acquisition accounting, so I can't see how that would have actually exacerbated the loss. As you move into the second half, it looks to me actually like a lot of the concession revenue is still there, based on the GBP600 million of revenue in the first half. So I would have thought even with the seasonal swing revenue falls in the second half, as the concessions come out and then you annualize the EDLP changes. So we're going to be left with a business at the end of fiscal 2017 that could be losing GBP50 million or more before obviously you start to put the Bunning stores in or see how they trade. But I'd just be interested in your take on the drivers and how that's likely to evolve through the period and where we may be incorrect or too bearish on those sort of assumptions and outlook for the Homebase side of the business please.

There's a lot of seasonality as Richard has touched on. We're going through some significant changes as we went through the first quarter of this year. And obviously losing Habitat and Argos sales had a pretty big impact on the overall business. We're transitioning through the TSA, it was part of the acquisition modeling and we're also now better prepared as we move forward for the season in front of us. A lot of the products sold in the previous business were very seasonal themselves. So as we moved into November and December, without the furniture and other products to offset those losses in sales, it did have a bigger impact. If that makes sense.

And are you still guiding to the GBP1,200 million -- or the GBP1.2 billion of sort of sustainable revenue because the first half was about GBP600 million. So that does suggest that obviously you still need to rebase as you go through second half and then first half 2018.

Yes, we're and obviously we hope to grow that as we move forward. Yes, we're.

Our next question today comes from the line of Richard Barwick from CLSA. Please ask your question.

My first question is for John Durkan, going back to the same subject, apologies John. But I was just interested to hear the way you describe, you call it -- it's a rational market but it does sound like you were caught a little by surprise by Woolworths and their price investments. And it also sounds like that pull forward of your own investment will likely lead to going backwards across FY17. What confidence do you have that you'll be able to achieve EBIT growth in FY18 and beyond in the context that you said ultimately sustainable long term growth is what the ambition is?

Yes, thanks Richard. You know it's worth reflecting on 2016, the softest market we've seen in a while, a sizeable price adjustment and a competitor that's moved across into two new geographies, all of which we will cycle through this year. And the majority in this half actually, some still into Q1 of next year. I do think it's a rational market and I think over time, as I've said, we should be able to see continued sales and comp growth and therefore profit growth out of the back of that with a strong cash business. I see the future looking like that and I don't see any reason to change. The two things I can't give you an answer on are what's going to happen to the market itself, so what does the macro part of the market looks like and two, what our competitors do or don't do. But from where we sit, with the plans that we've got, we're looking at a strong business over time.

Okay. And John, maybe I misheard but the divestment of the credit card business, is that a AUD10 million impact by half and therefore is that AUD20 million per year?

So it's a -- as Terry said it's AUD10 to AUD15 million that we won't get in the second half versus the first half.

And how much seasonality is in that credit card business?

There's very little in credit cards.

All right, so we can just double that. Okay and thank you. And a question for you, Richard. Interested in sort of the rationale behind the strategic review of Officeworks with it doubling earnings or more than doubling earnings since you actually brought the business out of the Coles Group. But it's not the only Coles Group business that you've doubled earnings in, so why are you not contemplating the sale of Coles for instance or Kmart for that matter?

Yes, thanks Richard. We're having a look at it because Officeworks is a really discrete business. It's like all our businesses I guess easily separable, but it is truly easily separable. It's of a size and in a market sector that people have said to us would be very attractive in the current market and we're having a look and see whether that's an opportunity to monetize the value that's been created for our shareholders. As I said, we're having a look. There's nothing definitive or certain about it. But we knew as soon as we went down the process of looking at this, that it would become public, so we just thought we'd get it out there today. And the reason Mark's in Melbourne is because he is talking to his team today about the possibility that this will happen.

Right. Do you -- maybe this is a stretch, but do you consider the potential arrival of Amazon into Australia, any of these sort of considerations in terms of businesses that you want to own or not own?

I think if you did that then you'd be running up the white flag and we're going to do quite the opposite, Richard which is as all the divisional MDs have talked about getting their businesses more focused on costs and in every channel. We intend to be as good as anyone in the world and be able to take on anyone in the world. That's our plan. And we see Officeworks as quite different and also with a significant online presence now in any case. So Officeworks, as I said earlier, is very well run by Mark and the team. There's been great product innovation and the every channel strategy is working. Its market sectors we think are the SME sector, so it's a good business. There's the possibility that we'll be able to reflect a good return to shareholders if this comes off. If not, we'll happily leave it in the stable.

Okay. And if it did -- if it was sold or IPOed, do you have the funds where that might end up earmarked for any particular purpose?

It's way too early to sort of even think about that, Richard.

Our next question today comes from the line of Phil Kimber from Evans and Partners. Please ask your question.

Just a quick question on Coles and you talked there about pulling forward investment and continuing to invest. Seven or eight years on from the main refurbishment program, I'm just wondering if looking forward there's turnaround and start doing a major refurb program again or how are you thinking about the refurbishment activity in Coles.

Yes, thanks Phil. So we're -- as you know we've refurbished quite a considerable part of the estate already. We're actually refurbing a number of stores that we did eight years ago. It's a constant investment in keeping your estate in the right order, so this is never ending and it's imperative that we keep doing that. We have -- we've put if you've been to our Coburg site, we've now put that in a couple more locations and that's the current evolution of our reset plan. And as we either find the right new sites or we have the right sites in terms of being able to get the returns that we need out, we will put that model into the sites. And they're fewer but bigger and bolder investments in each site rather than small investments because we're broadly through the estate in terms of making sure they're up to the right spec.

So we shouldn't assume sort of 100 plus type a year refurbishments.

No. And at the Strategy Day we'll be able to give you a better indication on where we're going with that over the next five years.

Can I ask another one? I know you don't release petrol and liquor, but we've obviously got the overall Group's decline in profit. Were they materially different in terms of percentage decline or increase in profit? I know they're smaller parts of the business but I would have thought for example the convenience and petrol business given what you said would have -- potentially could have actually seen a quite material drop off in profitability.

So they actually offset each other in the half. None of -- neither of them are what you would describe as material changes. But we saw a slight decline in our Express business and a slight increase in our liquor business and one offset the other.

Our next question today comes from the line of Michael Simotas from Deutsche Bank. Please ask your question.

Just another question on Coles for John if I can, just interested to know how you're thinking about market share. Coles has obviously gained a reasonable amount of market share over the last few years and it looks like it's starting to give a little bit back. Is the rational thing to do to let that happen or do you need to sort of fight a little bit harder on price to try to maintain or even pull back a little bit of that market share?

So it's not a metric that we spend our time looking at. It may sound odd, it's always an outcome for us. We spend our time thinking about how do we drive the sales per square meter of our -- either our current assets or any assets that we can buy or get hold of. And invariably if we get that right, it tends to end up in a market share improvement. But that's what we focus on. We focus on improving that because of a raft of things. But more than anything the higher sales densities obviously that we can drive out of our portfolio, the better our costs become and we can invest more back in the business. But as I said, market share will always be an outcome for us. One thing and I'll keep saying it, is that we will always be competitive, so we're never going to give up on that. And we don't do it though to maintain our market share, we do it to make sure that we're driving the business for the long term.

Okay. No, I think that's sensible. And just I guess a somewhat related question. For the past few years, Coles has really driven the value agenda for customers. Do you still feel like that will be the case for the next sort of six to 12 months or has your pull forward of price investment really just been meeting what others in the market have been doing?

No, so we continue to drive to be price leader in this marketplace. That hasn't changed and it won't change. We're going to carry on doing that. We think it's the right strategy for our business, so that's important to us and we're not going to give up on that. I don't see this changing in the short to medium term. Certainly, with the level of consumer confidence I think it's really, really critical at this point that we carry on doing it.

Commenting, Phil and Michael and John, you might want to add to this. But we're incredibly disciplined across the Group on capital at the moment. You've seen the outlook and -- sorry, the outcome in terms of cash flow and what Terry and his team drive. But Terry's also ensured across the Group that we've got real discipline in our capital expenditure at the moment across all the businesses. And for example, in Coles we're really, John, only investing where we're going to get improvements in sales per square meter and we're not sort of doing any in-fill type stores or the like. I don't know if you want to add any more to that, John, but it's a very strong discipline in the Group at the moment.

Yes, no we're even more disciplined now Richard on that. You're exactly right. We're absolutely leaving sites that look marginally attractive and only picking up on the sites that are -- that we know will have the right sales per square meter over the medium to long term. And if we can't see a line of sight to that, we don't -- we won't open them even if others will.

Our next question today comes from the line of Shaun Cousins from JP Morgan. Please ask your question.

Just a question for Guy at Target. Can you talk a little bit about how in the first half and into the second half 2017, you've gone about generating store traffic, because that seems to have been something that as you shifted to EDLP in the first quarter, you didn't engage a lot with the customer base and that seemed to be a problem. And just where that EDLP shift is at because you've started to do things like 40% off Target which seems to be a little inconsistent with that. So I'm just curious about how your customer offer is and how you're going about communicating that to customers to generate store traffic and ultimately sales.

Yes, thanks Shaun. I guess what -- one thing that you can factor into your numbering here is that the sales as I've now outlined for this half and talking about the challenging half come up is we've now got a projected new base sales for Target. In regards to your question specifically about the EDLP, the promotional activity in the second quarter was still there and still has the reflections of a model that was a hybrid model. So as I mentioned in June, Target had another, the last 100 meters to go to switch to EDLP. So it always had a huge amount of promotional activity as it tried to figure this last piece out. I have reduced a significant amount of promotional activity in the first quarter which I called out. I reduced -- the team and I have also reduced a significant amount of promotional activity in the second quarter. But going straight to EDLP which is what you're referring to, is not the right answer. You can't -- you've got to do it right and you've got to do it commercially right. So what you're -- what you saw was correct but it was less promotional activity, the discounting, the percentage offs was less than the same corresponding quarter in the previous year. So we'll take our time on it. EDLP's not the whole end game with Target. I mean it's a piece of it. Getting fashionability right in better and best is very, very important. And if you think about product, reducing that level of product the way we did in that first half by a couple of hundred million dollars, reducing SKUs buy 40% just allows us to operate the model at a much -- a lot easier. Not only for us, from a commercial point of view, but for customers to be able to see what we're selling. I'm happy -- talking about product -- where we've got the good part of good, better and best. It's the better and best that will take us time and also will help us return Target to its heritage of being obviously a fashion retailer with quality products at low prices. So expect to see the promotional activity continue. And as we go closer -- better direct sourcing which will happen over time and improve product quality and fashion, I'd love to get those prices to a real simple model like a lot of great retailers have around the world. But that won't happen until inventory levels drop and the buyers and the designers have nailed fashionability and that we've also, importantly, located some really good quality factories to deliver that fashionabilty that I want to be known for in Target.

And can you get all that done in fiscal 2017, the transition year? Or is some of that going to flow through, in terms for you to make reasonable progress, such that fiscal 2018 or say first half 2018, is not also classified in time as somewhat transitional?

I won't get all that done in six months. We'll take our time and return Target back to its real fine heritage. There's a lot of players that have come into the market over the last eight years, players that I've spent time studying and now admire. We've mentioned them before, there's Zara and Uniqlo and H&M and a raft of others. And we're, unfortunately, getting some players that are also leaving the market, unfortunate from their team members' perspective. But if we position this business right and aspire to be as good as my competitors but with better prices, we'll have a very solid business that returns to shareholders. But not possible to do in six months. We'll take our time doing this and make sure that we're commercially responsible to shareholders with the business I've got. And taking into consideration that we've got a few businesses here -- or two in Australia, with Kmart and Target under Ian and my control -- that we want to make sure department stores, when you add the two together, have got very strong returns to shareholders. So you can expect the sum of the parts will be better, but Target will just take a little bit of time for it to stand on its own and for everyone to admire.

Okay and maybe a question for -- thanks Guy -- a question for John Durkan. Just going back to Coles, on second-half 2017, is what we're seeing in terms of -- because your EBIT declined at 7.6% on an underlying basis once you back out all the property. Did you actually -- in the first half -- did you actually bring forward promotions into the second half -- sorry, the second quarter 2017 -- that, as you would have introduced them in the second half 2017, you had cost reductions, be it sort of new checkouts, labor rostering or range reduction, to help such that it wouldn't be as damaging or should we anticipate often -- and obviously adjusting for the financial services? Or should we anticipate an EBIT decline in the second-half 2017 just as similar as what we've seen in the first half, if not worse?

So it wasn't promotions, we invested in every day price as well as promotions. I mean I don't want to give you a forecast and I'm not going to give you a forecast for the second half. But I would anticipate the investments that we've made in Q2 will be at least equal in Q3 and potentially Q4. So I don't see much change from that.

Yes. And you've spoken at the investor days, that you talk about this as being a rational industry. Do you think that's a way to define an industry where people are going back and forth on a tit-for-tat basis on price investments? Because we've seen in other markets that's been an effective way to destroy industry profitability. I'm just sort of curious about -- I recognize you want to have a value-proposition for customers. But Wesfarmers still paid an enormous amount of money for the Coles Group acquisition that had a dramatic impact on return on capital. I'm just curious about how you think about continuing price investment and delivering value to customers, relative to actually generating a return on capital that's attractive for shareholders?

I go back to the fact that I think it's been an unusual year in the fact that we've seen the size of price adjustment we have, the rollout of a major competitor into different geographies, plus the softer market. I mean I can't say that won't happen twice, but it would be unusual. What I do see is that there's plenty of room to grow in the marketplace for all players. Because, after all, it's not just us and one other, there's plenty of other players in the market. And I've said many times, our share or fresh foods is nowhere near where it needs to be and there's a whole raft of players out there that are way beyond us. So there's plenty of room for us to grow within that, grow our sales, grow our EBIT and be a good cash-generative business on the back of that. And that's how I see the future.

Okay. And just finally from me, just on Bunnings UK. Has the Company affirmed and is still comfortable with the target to hit an 18% return on capital in five years? Just recognizing obviously at the start, EBIT losses make that a little harder, but five years is also a long way away as well. But is that still the target, 18% return on capital for Buckey please?

Richard, it's really easy for me to say, as I look at Rob Scott, that's absolutely the target. But, in reality, we've seen nothing at this stage that would alter the views we had when we made the acquisition.

Our next question today comes from the line of Tom Kierath from Morgan Stanley, please ask your question.

Good day guys, I'll try and be quick here. Just a question for John Durkan at Coles. Can you just comment on where you're seeing price gaps, versus Aldi and Woolworths at the moment? And kind of how that's changed over the last 12 months, obviously with all the price investment that everyone has put into the market?

Yes, it's a good question. Our price indices versus our major competitors have changed in that. As I said, there was a price adjustment that brought our major competitor closer to our prices. And we've maintained the same discipline and rigor that we've always had, versus our other competitor. And other competitors in the marketplace, as I say, it's way beyond those. So that hasn't changed dramatically. The dramatic change is the price adjustment down towards our prices.

And then just a second one on the same topic. Can you quote where dry grocery inflation is running at, either in the second quarter or in this quarter, just stripping out the big inflation that we're seeing in fruit and vegetable prices?

I don't think -- I mean I might have to come back to you on this. I haven't seen a material change in grocery deflation over the previous quarter or half. It's a bit mixed in fresh food, up and down. But, if anything, I think with the second quarter we would see a bit more deflation overall in grocery than we would have seen before. But I'd need to come back to you on how material that is.

There are no further questions at this time. I would now like to and the conference back to Mr. Goyder.

Thank you all very much for your time. If you've got any follow-ups, please come to Alex and we'll endeavor to clarify anything. Otherwise, have a great day.

Ladies and gentlemen, that concludes our conference for today. We thank you for your participation, you may now disconnect.