Wesfarmers : 2016 AGM Chairman's Address and Managing Director's Address

 CHAIRMAN'S ADDRESS AND MANAGING DIRECTOR'S ADDRESS TO ANNUAL GENERAL MEETING THURSDAY, 10 NOVEMBER 2016, 1:00PM PERTH TIME CHAIRMAN'S ADDRESS

Good afternoon ladies and gentlemen.

On behalf of the Wesfarmers Board, I'd like to welcome all of you here to our 2016 Annual General Meeting.

Welcome also to all those joining us via webcast.

The AGM is always a special day for our company and, once again, we have a great number of shareholders in attendance. Thank you all for coming along and I hope you are enjoying the experience.

May I thank Dr Richard Walley OAM for his Welcome to Country on behalf of the Noongar people, the traditional owners of this part of Western Australia. Thank you Richard.

I'm satisfied a quorum is present today and so I officially declare the meeting open.

I'd now like to introduce my fellow directors. There are four retirements by rotation this year, and you'll be hearing from those retiring directors a little later in the meeting when we'll be asking you to support their re- election.

But, for the time being, I'd like all of my director colleagues to stand and face the audience while I introduce them.

On the stage here with me and our company secretary Linda Kenyon is, of course, Wesfarmers' Managing Director, Richard Goyder.

In the front row is Terry Bowen, who has been our Finance Director since 2009 and continues to perform outstandingly well in the role. Thank you Terry.

Now, I'd like to introduce James Graham. James is our longest serving board member having been on the Board since 1998 and who is in his last term.

Next to James is Tony Howarth, who joined the Board in 2007 and is Chairman of our Audit and Risk Committee.

Next to Tony is Diane Smith-Gander, a board member since 2009.

Wayne Osborn joined the Board in 2010 and is Chairman of our Remuneration Committee. Next to Wayne is Vanessa Wallace, a board member since 2010.

Standing beside Vanessa is Paul Bassat who joined the Board in 2012. And, then Jennifer Westacott, who was appointed as a director in 2013.

I would like to take this opportunity to pay special tribute to Dr Bob Every AO, who retired as Chairman during the last financial year. Bob served the company with distinction, focused at all times on protecting shareholder interests, ensuring ethical behaviour and guarding the Wesfarmers culture. Bob is here today with his wife Sheryl and we thank him for the significant contribution he made, with Sheryl's support, to the company.

It was a real privilege for me to have been invited last year to return as Chairman of the company from which I retired as Chief Executive Officer 10 years earlier. It is a great company and I have been delighted to see that the strong shareholder focus, for which it has always been renowned, is alive and well.

Also with us are the Group's current senior executives, including the Managing Directors of the divisions. I welcome them and, on your behalf, thank them for their efforts during the year.

As you would have seen coming into the meeting, all our businesses are well and truly represented here today.

So, if you have any particular matters you wish to raise that go to the detail of any of those operations, please make contact with those people after the formal meeting.

As you'd be aware from the Notice of Meeting, there are five items of business to be discussed when we move into the formal part of the meeting.

But before that I'll make some general observations about the last 12 months and then Richard Goyder will provide us with a trading update and business outlook. I will then return to open the formal proceedings.

The 2016 financial year was one of mixed results for our company, with very strong performances from the larger businesses offset to some extent by difficult trading conditions in some others.

After accounting for some value impairments in the Curragh coal business and the Target retail business, as well as restructuring costs in Target, statutory net profit was $407 million compared with $2,440 million in 2015.

Underlying profit after tax before those impairments was down just 3.6 per cent, at $2,353 million; and the Board declared a final dividend of 95 cents per share, bringing the full-year payment to $1.86 per share, a reduction of 7.0 per cent on the previous year. This was broadly in line with free cash flow for the year, excluding the acquisition of Homebase.

The impairments of Target and Curragh resulted predominantly from poor trading results. We faced a deteriorated outlook in the former case and a significant fall in current and projected coal prices in the latter.

The accounting impairments, of course, had no cash flow effect and the Group continued to generate very substantial free cash flow. Our balance sheet is conservatively geared and, with a strong credit rating, we are still very well placed to take advantage of investment opportunities as they arise.

As I mentioned, Wesfarmers continues to maintain the particular strengths for which it has become well known: namely, a clear focus on shareholder wealth creation rather than on empire building; strict disciplines around the achievement of return on invested capital and investment analysis; the development of high performing people; rigid adherence to high standards of behaviour; and a determination to make meaningful contributions to the communities in which we operate.

As always, there are many challenges. Every business faces competition from existing players and new entrants, from new technologies and new regulations, but in my experience it has never been any different. The pace of change has stepped up but we have all been saying that for three or four decades.

The key to long-term corporate success is evolution - looking for new ways to do business, for new businesses and new geographies to operate in. One of my own exhortations has always been: 'If it ain't broke, get ready to change it'.

Today we hear concern expressed about how our biggest business, Coles, is going to cope with increased competition in its markets.

In this regard it is instructive to look back to the mid-1980s, when there was constant worry about how Wesfarmers could cope with increasing competition in the fertiliser business.

At that time, fertilisers contributed around 80 per cent of the Group's profit. Today that business remains strong but has itself evolved into a substantial industrial chemicals supplier.

Fertilisers now contribute around the same dollars of profit as it did back then, but that now represents much less than 10 per cent of Group earnings.

Continuous diversification and adaptation has enabled Wesfarmers to remain relevant and to provide superior shareholder returns over the long-term; and that process continues.

During the last year, the company made its first significant move offshore, with the purchase of the Homebase hardware business in the United Kingdom and Ireland.

Entering any new country is always challenging - and there are many examples of Australian companies which have tried and failed - but this investment was only made after a very extensive analysis of the business, the market and the prospects. Bunnings looks forward to applying the skills it has acquired in understanding customer needs, supply chain management and merchandising in a new geography; and the size of the Homebase investment, while not small, is very manageable given the Group's balance sheet.

One thing shareholders should be very clear about is that this is a long-term investment. It will take years to get the Homebase chain into the shape we want it in; but we are not daunted by that. As we have seen in Bunnings, if you get the formula right you can enjoy decades of profitable growth in this business.

Shareholders may have seen the announcement last week that the first conversion of a Homebase store to a Bunnings store will occur at St Albans next February.

The UK expansion is, I believe, a very good example of the growth philosophy of 'logical incrementalism' which has proven successful for the company over the years.

A really important question for us, and for all companies, is whether 'logical incrementalism' will be sufficient to meet the challenges of the digital age. Every business we operate is faced with some form of digital disruption. The challenge is to anticipate what that might be and to position our businesses so that they can prosper in the digital world. It can also mean acquiring new businesses or disposing of some.

In the meantime and closer to home, one of the big challenges facing all companies is the modest rate of growth of the domestic economy and the difficulty of achieving meaningful economic reform at the federal level of government.

As the recent federal election result demonstrated, populism triumphs all-too-often over rational policy development.

While the level of Commonwealth Government debt in Australia is quite low in comparison to that in many other developed countries, this situation can change rapidly in times of economic downturn - as we saw in Ireland and Spain in 2007 to 2010 - a debt blowout giving rise to drastic fiscal remedies and high unemployment.

Australia has now enjoyed an unprecedented 25 years without a recession, but, given the past and forecast deficits at a Commonwealth level, the Government's armoury to counter any economic downturn is limited. It is essential that the task of fiscal repair is tackled with urgency.

Another subject in which some politicians have stirred populist dissent over the last year is that of free trade, with the suggestion that it is harmful to local interests.

It is very obvious to any student of history over the last two millennia, whether in the Middle East or Far East, Europe, America or Australia, that free trade leads to increased prosperity - to an increase in employment, general standard of living and the ability of governments to look after the less-advantaged.

It is also clear that restricting free trade leads to a reversal of those things - to stagnation.

Of course the benefits of free trade are no clearer to anyone than to all the people in this room with a farming background. It is vitally important that we speak out on this matter.

A third area in which there is much misconception and too little appreciation is in regard to the contribution companies make to Australia's prosperity, as evidenced by the readiness with which arguments against company tax cuts during this year's election campaign were accepted by some.

That 80 per cent of working Australians are employed by companies represents just one benefit. The health of the Australian economy is inextricably linked to the health of Australian companies like Wesfarmers.

In Wesfarmers' case, in 2016 we paid our 220,000 employees nearly $9 billion, our suppliers more than

$45 billion, our landlords $3 billion, our shareholders $2.3 billion and the Government nearly $1 billion in taxes. We invested a further $1.9 billion in our existing businesses, as well as the $665 million on the Homebase acquisition. We also contributed in excess of $110 million in community partnerships around Australia.

We have a particularly concerning example of political populism versus rational economic debate here in Western Australia currently, with the suggestion by the leader of the State National Party that iron ore royalties should be raised for two of the major producing companies, a proposal that would make our royalties seven times higher than those of our main competitor Brazil.

Apart from the fact that such a move would not actually increase the State's income because of the way the GST is shared, its ultimate effect would be to discourage investment and reduce employment in an industry that is already weakened by fallen commodity prices. It is a very bad idea.

Today, more than ever, we need our political leaders to reject the populist approach and concentrate instead on developing policies that create long-term benefits for the community.

As a company, Wesfarmers strives to create long-term value for its stakeholders. That value creation is only possible if we play a positive role in the communities we serve.

In 2016, we continued to focus on keeping our people safe and across our businesses reduced our total recordable injury frequency rate by 15.2 per cent. This is a considerable achievement and I would like to compliment the many people across all our teams who've worked so hard to make our workplaces safer.

As Australia's largest private sector employer, we believe we are able to provide Indigenous people with greater opportunities to participate in sustainable employment and have increased the number of Indigenous employees to more than 3,300. That is a 20 per cent increase on the previous year, and means we have more than doubled our number of Indigenous employees since 2012.

Wesfarmers is committed to minimising our own environmental footprint and to delivering solutions which help our customers and the community do the same. We reduced our greenhouse gas emissions by more than two per cent in the last year and have decreased the emissions intensity of our business by more than 30 per cent since 2012.

Looking ahead, your Board considers the outlook for the company to be strong. Notwithstanding the challenges I have described and economic and political concerns around the globe, the Wesfarmers businesses generate strong cash flows which, in combination with a strong balance sheet and financial discipline, should enable us to cope with competition and take advantage of growth opportunities. We look forward to continuing the company's record of providing satisfactory shareholder returns.

I'd like to pay tribute to our managers and Board. The management team, led so ably by Richard Goyder, comprises individuals with great energy and enthusiasm for the job and a determination to achieve superior returns.

The Board has, in my view, an excellent balance of experience and the skills required for strong governance, and I would like to thank my colleagues for their hard work and support throughout the year.