COLES GROUP LIMITED. — Interim / Quarterly Report 2020

Feb 17, 2020

==> picture [89 x 69] intentionally omitted <==

18 February 2020

The Manager Company Announcements Office Australian Securities Exchange

Dear Sir or Madam

Coles Group Limited (Coles) – Appendix 4D and Half Year Report for the period ended 5 January 2020

In accordance with ASX Listing Rule 4.2A and the Corporations Act 2001 (Cth), I enclose the following for immediate release to the market:

1. Appendix 4D;

2. Half Year Directors’ Report;

3. Half Year Financial Report; and

4. Independent Auditor’s review report,

for the half year ended 5 January 2020.

Coles will conduct an analyst briefing on the half year results from 10.00am AEDT. This briefing will be audio webcast and is accessible via the Company’s website at www.colesgroup.com.au.

Yours faithfully,

==> picture [103 x 44] intentionally omitted <==

Daniella Pereira

Company Secretary

Coles Group Limited ABN 11 004 089 936 800 Toorak Road Hawthorn East Victoria 3123 Australia PO Box 2000 Glen Iris Victoria 3146 Australia Telephone +61 3 9829 5111 www.colesgroup.com.au

Appendix 4D and Half Year Financial Report

For the half year ended 5 January 2020

APPENDIX 4D

Under Listing Rule 4.2A.3

Current reporting period 1 July 2019 to 5 January 2020 Previous corresponding period (PCP) 1 July 2018 to 30 December 2018

This information should be read in conjunction with the Coles Group Limited 2019 Annual Report.

RESULTS FOR ANNOUNCEMENT TO THE MARKET

The Group’s statutory results for the half year ended 5 January 2020 vary significantly from the PCP due to a number of differences between the current and comparative period, namely:

• The adoption of AASB 16 Leases (‘ AASB 16’) in 1H20 with no restatement of comparatives

• The transition to the New Alliance Agreement in Express which involved Coles becoming a commission agent for fuel sales and no longer recognising gross fuel revenue and the associated cost of sales from March 2019

• The recognition of a $146 million restructuring provision associated with the Group’s Supply Chain Modernisation program in 1H19 (presented as a Significant Item in the Half Year Financial Report for 1H19)

• Net profit for 1H19 includes profit attributable to the Kmart, Target and Officeworks businesses up until the date they were transferred to Wesfarmers Limited prior to the demerger of Coles. These entities were classified as discontinued operations of the Group in 1H19.

STATUTORY RESULTS

STATUTORY RESULTS
1H20 27 WEEKS $M			1H19 26 WEEKS + 1 DAY $M
Total revenue from ordinary activities 19,046 down 5.7% from 20,193 Earnings before interest and tax (EBIT) 910 up 60.5% from 567 Profit from ordinary activities after tax 489 up 28.3% from 381 Net profit for the period (including discontinued operations in the PCP) 489 down 33.7% from 738

Total revenue from ordinary activities decreased 5.7% to $19,046 million largely driven by the New Alliance Agreement in Express under which commission income rather than gross fuel sales revenue has been recognised from March 2019. This was partially offset by increased sales revenue for Supermarkets and Liquor from improved trading performance and the impact of an additional 6 days of sales in 1H20 (27 weeks) compared to 1H19 (26 weeks and 1 day).

EBIT increased 60.5% to $910 million primarily due to the impact of the adoption of AASB 16 in 1H20, higher sales in Supermarkets due to improved trading performance and an additional 6 days of trading compared to 1H19 and the $146 million restructuring provision associated with the Group’s Supply Chain Modernisation program presented as a Significant Item in the Half Year Financial Report for 1H19. Partly offsetting this are higher administration expenses due to the additional 6 days of trading in 1H20 compared to 1H19.

Net profit for the half year decreased by 33.7% to $489 million largely driven by 1H19 including profit attributable to the Kmart, Target and Officeworks businesses which were transferred to Wesfarmers Limited prior to the demerger of Coles.

RETAIL RESULTS (NON-IFRS)

Retail results have been provided below to enhance comparability across reporting periods. Further information on the Retail results can be found in the Coles Group Limited 2020 Half Year Results Release. Non-IFRS information is not subject to audit or review.

1H20 27 WEEKS $M 1H191 27 WEEKS $M	CHANGE %
Sales revenue 18,846 18,237 3.3% EBIT (excluding significant items and impact of AASB 16) 725 722 0.4% Net profit after tax (excluding significant items and impact of AASB 16) 498 489 1.7%

1 1H19 Retail results reported in the Appendix 4D for the half year ended 30 December 2018 included sales revenue of $20,867 million and EBIT of $587 million. For greater comparability across reporting periods, 1H19 Retail results have been adjusted as follows: (i) fuel sales revenue has been removed as the Group now recognises commission income following commencement of the New Alliance Agreement in March 2019; (ii) sales revenue and EBIT associated with Spirit Hotels have been removed to reflect the sale of this business in April 2019; and (iii) sales revenue has been restated to reflect the reclassification of the cost of flybuys points as a reduction in sales revenue.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 2

APPENDIX 4D (CONTINUED)

RESULTS FOR ANNOUNCEMENT TO THE MARKET (CONTINUED)

IMPACT OF AASB 16 LEASES

The Group applied AASB 16 for the first time in this half year reporting period. The impact of the adoption of AASB 16 on the Group’s 1H20 results is set out below:

	PRE-AASB 16 1H20 $M	AASB 16 IMPACT $M	STATUTORY
			1H20 $M
EBIT 725 185 910
Financing costs (22) (198) (220)
Profit before tax 703 (13) 690
Income tax expense (205) 4 (201)
Profit after income tax 498 (9) 489

Under AASB 16 operating lease expenses are no longer recognised. Depreciation of the right-of-use assets and financing costs associated with lease liabilities are recognised in the Statement of Profit or Loss. The application of AASB 16 resulted in a favourable impact to Group EBIT of $185 million due to the recognition of depreciation being less than operating lease expenses no longer recognised.

The application of AASB 16 resulted in an unfavourable impact to profit after income tax of $9 million, due to the elimination of operating lease expenses being more than offset by the recognition of depreciation and financing costs associated with the Group’s AASB 16 lease portfolio.

DIVIDENDS

NAME AMOUNT PER SECURITY Current period Interim dividend 30.0 cents Previous corresponding period Interim dividend nil Year end (30 June 2019) Final dividend 24.0 cents Special dividend 11.5 cents Total dividend 35.5 cents Conduit foreign income component: Record date for determining entitlement to the interim dividend: Payment date of interim dividend:	FRANKED AMOUNT PER SECURITY
	30.0 cents
	nil
	24.0 cents 11.5 cents 35.5 cents
	nil
	28 February 2020
	27 March 2020

The Dividend Reinvestment Plan (the DRP) will operate at nil discount. The last date to elect to participate in the DRP is 2 March 2020. In accordance with the DRP Rules, the offer price will be calculated as the arithmetic average of the daily volume weighted average market price of the Company’s shares during the 10 trading days commencing on 6 March 2020.

NET TANGIBLE ASSETS PER SHARE

NET TANGIBLE ASSETS PER SHARE
	5 JANUARY 20201	30 DECEMBER 2018
Net tangible assets per share ($)	0.72 0.76

1 Net tangible assets are calculated by deducting intangible assets from the net assets of the Group. Following the adoption of AASB 16 Leases on 1 July 2019, the net assets at 5 January 2020 include the right-of-use assets and corresponding lease liabilities recognised under the new standard.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 3

APPENDIX 4D (CONTINUED)

ENTITIES WHERE CONTROL WAS GAINED DURING THE PERIOD

NAME	DATE
Coles Export Asia Limited1	Incorporated on 22 October 2019
Coles Trading (Shanghai) Co. Limited2	Incorporated on 6 December 2019

ENTITIES WHERE CONTROL WAS LOST DURING THE PERIOD

NAME	DATE
Tyremaster Pty Ltd	Deregistered on 3 July 2019
Waratah Cove Pty Ltd	Deregistered on 3 July 2019
Now.com.au Pty Ltd	Deregistered on 3 July 2019
Coles Group Finance (USA) Pty Ltd	Deregistered on 3 July 2019

DETAILS OF EQUITY ACCOUNTED INVESTMENTS

DETAILS OF EQUITY ACCOUNTED INVESTMENTS
NAME TYPE	OWNERSHIP INTEREST
	5 JANUARY 2020 30 DECEMBER 2018
Loyalty Pacific Pty Ltd Joint venture Queensland Venue Co. Pty Ltd Associate	50% 50% 50% -

Additional Appendix 4D disclosure requirements can found in the accompanying Half Year Financial Report. The Coles Group Limited 2020 Half Year Results Release also provides further information on the results of the Group.

1 Registered in Hong Kong.

2 Registered in China.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 4

COLES GROUP LIMITED AND CONTROLLED ENTITIES

ABN 11 004 089 936

HALF YEAR FINANCIAL REPORT FOR THE PERIOD ENDED 5 JANUARY 2020

	PAGE
DIRECTORS’ REPORT	6
AUDITOR’S INDEPENDENCE DECLARATION	10
STATEMENT OF PROFIT OR LOSS	11
STATEMENT OF OTHER COMPREHENSIVE INCOME	12
STATEMENT OF FINANCIAL POSITION	13
STATEMENT OF CHANGES IN EQUITY	14
STATEMENT OF CASH FLOWS	15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS	16
1 BASIS OF PREPARATION AND ACCOUNTING POLICIES	16
2 SEGMENT REPORTING	20
3 EARNINGS PER SHARE	21
4 INCOME TAX	21
5 CASH AND CASH EQUIVALENTS	23
6 PROVISIONS	23
7 INTEREST BEARING LIABILITIES	24
8 DIVIDENDS PAID AND PROPOSED	24
9 IMPAIRMENT OF NON-FINANCIAL ASSETS	24
10 FINANCIAL INSTRUMENTS	25
11 RELATED PARTY DISCLOSURES	26
12 COMMITMENTS	27
13 CONTINGENCIES	27
14 EVENTS AFTER THE REPORTING PERIOD	27
DIRECTORS’ DECLARATION	28
INDEPENDENT AUDITOR’S REVIEW REPORT	29

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 5

DIRECTORS’ REPORT

This Half Year Financial Report is presented by the directors in respect of Coles Group Limited (the ‘Company’) and the entities it controlled at the end of and during the half year period from 1 July 2019 to 5 January 2020 (collectively, the ‘Group’ or the ‘Consolidated Entity’).

DIRECTORS

The following persons were directors of the Company during the entire half year period and up to the date of this report:

James Graham AM	Chairman and Non-Executive Director
Steven Cain	Managing Director and Chief Executive Officer
David Cheesewright	Non-executive Director
Jacqueline Chow	Non-executive Director
Abigail Cleland	Non-executive Director
Richard Freudenstein	Non-executive Director
Wendy Stops	Non-executive Director
Zlatko Todorcevski	Non-executive Director

REVIEW AND RESULTS OF OPERATIONS

REVIEW OF OPERATIONS

The Group’s reportable segments are set out below:

SUPERMARKETS Fresh food, groceries and general merchandise retailing (includes Coles Online and Coles Financial Services)

LIQUOR Liquor retailing, including online delivery services EXPRESS Convenience store operations and commission agent for retail fuel sales

RESULTS OF OPERATIONS

The Group statutory results for continuing operations for the half year ended 5 January 2020, and the comparative half year ended 30 December 2018, are presented below:

year ended 30 December 2018, are presented below:
	HALF YEAR ENDED 5 JANUARY 2020 27 WEEKS $M HALF YEAR ENDED 30 DECEMBER 2018 26 WEEKS + 1 DAY $M CHANGE %
Sales revenue from continuing operations EBIT from continuing operations	18,846 20,083 (6.2) 910 567 60.5

The key highlights for the half year ended 5 January 2020 are as follows:

• Sales revenue decreased 6.2% to $18,846 million largely driven by the New Alliance Agreement in Express under which commission income rather than gross fuel sales revenue has been recognised from March 2019. This was partially offset by increased sales revenue for Supermarkets and Liquor from improved trading performance and the impact of an additional 6 days of sales in 1H20 (27 weeks) compared to 1H19 (26 weeks and 1 day).

• EBIT increased 60.5% to $910 million primarily due to the impact of the adoption of AASB 16 Leases (‘AASB 16’) in 1H20, higher sales in Supermarkets due to improved trading performance and an additional 6 days of trading compared to 1H19 and the $146 million restructuring provision associated with the Group’s Supply Chain Modernisation program recognised as a Significant Item in 1H19. Partly offsetting this are higher administration expenses due to the additional 6 days of trading in 1H20 compared to 1H19.

Net assets of the Group decreased by $838 million (25.0%) in the half year period from $3,357 million to $2,519 million. The decrease is largely attributable to the adoption of AASB 16 .

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 6

DIRECTORS’ REPORT (CONTINUED)

REVIEW AND RESULTS OF OPERATIONS (CONTINUED)

Impact of AASB 16 Leases

The Group applied AASB 16 for the first time in this half year reporting period. The adoption of AASB 16 impacted the following items in the Statement of Financial Position on 1 July 2019 (being the date of transition):

• recognition of right-of-use assets: $7,481 million

• recognition of lease liabilities: $8,856 million

• increase in deferred tax assets: $356 million

• elimination of lease related provisions recognised under the previous lease accounting standard: $188 million

The net impact to retained earnings on 1 July 2019 was a decrease of $831 million.

The impact of the adoption of AASB 16 on the Group’s 1H20 results and segment performance is set out below:

SEGMENT EBIT	PRE-AASB 16 HALF YEAR ENDED 5 JANUARY 2020 $M	AASB 16 IMPACT $M	STATUTORY
			HALF YEAR ENDED 5 JANUARY 2020 $M
Supermarkets 637 152 789 Liquor 67 9 76 Express 4 24 28 Other 17 - 17
EBIT 725 185 910
Financing costs (22) (198) (220)
Profit before tax 703 (13) 690
Income tax expense (205) 4 (201)
Profit after income tax 498 (9) 489

Under AASB 16 operating lease expenses are no longer recognised. Depreciation of the right-of-use assets and financing costs associated with lease liabilities are recognised in the Statement of Profit or Loss. The application of AASB 16 resulted in a favourable impact to Group EBIT of $185 million due to the recognition of depreciation being less than operating lease expenses no longer recognised.

The application of AASB 16 resulted in an unfavourable impact to profit after income tax of $9 million, due to the elimination of operating lease expenses being more than offset by the recognition of depreciation and financing costs associated with the Group’s AASB 16 lease portfolio.

SUPERMARKETS

The Supermarkets statutory results for the half year ended 5 January 2020, and the comparative half year ended 30 December 2018, are presented below:

	HALF YEAR ENDED 5 JANUARY 2020 27 WEEKS $M HALF YEAR ENDED 30 DECEMBER 2018 26 WEEKS + 1 DAY $M CHANGE %
Sales revenue EBIT	16,583 15,574 6.5 789 441 78.9

The key highlights for the half year ended 5 January 2020 are as follows:

• Sales revenue for Supermarkets increased 6.5% to $16,583 million driven by successful value campaigns. The 1H20 period also includes an additional 6 trading days compared to 1H19.

• EBIT for Supermarkets increased 78.9% to $789 million driven by the impact of AASB 16, higher sales and the $146 million restructuring provision associated with the Group’s Supply Chain Modernisation program recognised in the comparative half year.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 7

DIRECTORS’ REPORT (CONTINUED)

REVIEW AND RESULTS OF OPERATIONS (CONTINUED)

LIQUOR

The Liquor statutory results for the half year ended 5 January 2020, and the comparative half year ended 30 December 2018, are presented below:

2018, are presented below:
	HALF YEAR ENDED 5 JANUARY 2020 27 WEEKS $M HALF YEAR ENDED 30 DECEMBER 2018 26 WEEKS + 1 DAY $M CHANGE %
Sales revenue EBIT	1,691 1,674 1.0 76 84 (9.5)

The key highlights for the half year ended 5 January 2020 are as follows:

• Sales revenue for Liquor increased 1.0% to $1,691 million largely driven by improved trading performance and the additional 6 trading days in 1H20 compared to 1H19, partially offset by hotel revenue no longer recognised post the sale of Spirit Hotels in April 2019.

• EBIT for Liquor decreased 9.5% to $76 million largely the result of the Group no longer recognising gaming revenue post the sale of Spirit Hotels and the impact of clearance and promotional activity, partially offset by the impact of AASB 16.

EXPRESS

The Express statutory results for the half year ended 5 January 2020, and the comparative half year ended 30 December 2018, are presented below:

2018, are presented below:
	HALF YEAR ENDED 5 JANUARY 2020 27 WEEKS $M HALF YEAR ENDED 30 DECEMBER 2018 26 WEEKS + 1 DAY $M CHANGE %
Sales revenue EBIT	572 2,835 (79.8) 28 47 (40.4)

The key highlights for the half year ended 5 January 2020 are as follows:

• Sales revenue for Express decreased 79.8% to $572 million primarily due to the New Alliance Agreement under which commission income rather than gross fuel sales revenue has been recognised from March 2019.

• EBIT for Express decreased 40.4% to $28 million driven by the move to a commission model for retail fuel sales, partly offset by growth in convenience store earnings and the impact of AASB 16.

The Company’s 2020 Half Year Results Release and the associated 2020 Half Year Results Presentation provide further information on the Retail results of the Group.

EVENTS AFTER THE REPORTING PERIOD

Dividends

On 18 February 2020, the directors declared an interim dividend of 30.0 cents per fully paid ordinary share with a payment date of 27 March 2020, fully franked at the corporate tax rate of 30%. The aggregate amount of the interim dividend to be paid out of profits, but not recognised as a liability at 5 January 2020, is $400 million[1] .

The Group is not aware of any other matter or circumstance that has occurred since the end of the half year reporting date that has significantly affected or may significantly affect the Group’s operations, the results of those operations or the Group’s state of affairs in subsequent reporting periods.

1 Estimated interim dividend payable, subject to variations in the number of shares up to the record date.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 8

DIRECTORS’ REPORT (CONTINUED)

ROUNDING OF AMOUNTS

The amounts contained in the Half Year Financial Report have been rounded to the nearest million dollars (unless specifically stated to be otherwise) under the option available to the Company under ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 . The Company is an entity to which this legislative instrument applies.

AUDITOR’S INDEPENDENCE DECLARATION

A copy of the auditor’s independence declaration is set out on page 10.

This report is made in accordance with a Resolution of the directors of the Company on 18 February 2020.

==> picture [121 x 33] intentionally omitted <==

James Graham AM Chairman

Steven Cain Managing Director and Chief Executive Officer

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 9

==> picture [506 x 198] intentionally omitted <==

==> picture [506 x 199] intentionally omitted <==

==> picture [506 x 198] intentionally omitted <==

==> picture [506 x 199] intentionally omitted <==

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 10

STATEMENT OF PROFIT OR LOSS

FOR THE HALF YEAR ENDED 5 JANUARY 2020

NOTES	CONSOLIDATED
	HALF YEAR ENDED 5 JANUARY 2020 HALF YEAR ENDED 30 DECEMBER 2018 27 WEEKS 26 WEEKS + 1 DAY $M $M
Continuing operations Sales revenue 2 Other operating revenue	18,846 20,083 200 110
Total operating revenue Cost of sales	19,046 20,193 (14,248) (15,579)
Gross profit Other income Administration expenses Other expenses Share of net profit of equity accounted investments	4,798 4,614 76 64 (3,964) (3,971) - (146) - 6
Earnings before interest and tax (EBIT) Financing costs	910 567 (220) (7)
Profit before income tax Income tax expense 4	690 560 (201) (179)
Profit for the half year from continuing operations	489 381
Discontinued operations Profit from discontinued operations after tax	- 357
Profit for the half year	489 738
Profit attributable to: Equity holders of the parent entity	489 738
Earnings per share (EPS) attributable to equity holders of the Company: Basic and diluted EPS (cents) EPS attributable to equity holders of the Company from continuing operations: Basic and diluted EPS (cents) 3	36.7 55.3 36.7 28.6

The accompanying notes form part of the Half Year Financial Report.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 11

STATEMENT OF OTHER COMPREHENSIVE INCOME

FOR THE HALF YEAR ENDED 5 JANUARY 2020

	CONSOLIDATED
	HALF YEAR ENDED 5 JANUARY 2020 HALF YEAR ENDED 30 DECEMBER 2018 27 WEEKS 26 WEEKS + 1 DAY $M $M
Profit for the half year	489 738
Other comprehensive income Items that may be reclassified to profit or loss: Net movement in the fair value of cash flow hedges Income tax effect	(10) 16 3 (5)
Other comprehensive income which may be reclassified to profit or loss in subsequent periods	(7) 11
Total comprehensive income attributable to: Equity holders of the parent entity	482 749
Total comprehensive income from continuing operations attributable to: Equity holders of the parent entity	482 392

The accompanying notes form part of the Half Year Financial Report.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 12

STATEMENT OF FINANCIAL POSITION

AS AT 5 JANUARY 2020

NOTES	CONSOLIDATED	CONSOLIDATED	CONSOLIDATED
	5 JANUARY 2020	30 JUNE 2019	30 DECEMBER 2018
	$M $M $M
Assets Current assets Cash and cash equivalents 5 Trade and other receivables Inventories Income tax receivable / (payable) Assets held for sale Other assets	797 940 582 353 360 462 2,473 1,965 2,429 53 - (78) 106 94 118 63 47 125
Total current assets	3,845 3,406 3,638
Non-current assets Property, plant and equipment Right-of-use assets 1 Intangible assets Deferred tax assets 4 Equity accounted investments Other assets	3,918 4,119 4,201 7,347 - - 1,553 1,541 1,660 772 365 537 221 212 12 118 134 24
Total non-current assets	13,929 6,371 6,434
Total assets	17,774 9,777 10,072
Liabilities Current liabilities Trade and other payables Provisions 6 Lease liabilities 1 Interest-bearing liabilities 7 Other	3,665 3,380 3,991 754 743 703 1,205 - - 8 - - 226 168 233
Total current liabilities	5,858 4,291 4,927
Non-current liabilities Interest-bearing liabilities 7 Deferred tax liabilities Provisions 6 Lease liabilities 1 Other	1,355 1,460 1,630 - - 192 464 598 589 7,556 - - 22 71 62
Total non-current liabilities	9,397 2,129 2,473
Total liabilities	15,255 6,420 7,400
Net assets	2,519 3,357 2,672
Equity Contributed equity Reserves Retained earnings	1,608 1,628 1,631 40 42 51 871 1,687 990
Total equity	2,519 3,357 2,672

The accompanying notes form part of the Half Year Financial Report.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 13

STATEMENT OF CHANGES IN EQUITY

FOR THE HALF YEAR ENDED 5 JANUARY 2020

	ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT	ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT	ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT	ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT	ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT
	CONTRIBUTED EQUITY $M	SHARE-BASED PAYMENTS RESERVE $M	CASH FLOW HEDGE RESERVE $M	RETAINED EARNINGS $M	TOTAL $M
At 1 July 2019 Effect of adoption of AASB 16_Leases_	1,628 43 (1) 1,687 3,357 - - - (831) (831)
At 1 July 2019 (adjusted) Net profit for the half year Other comprehensive income	1,628 43 (1) 856 2,526 - - - 489 489 - - (7) (7)
Total comprehensive income for the half year	- - (7) 489 482
Share-based payments expense Purchase of shares under Equity Incentive Plan Dividends paid	- 5 - - 5 (20) - - - (20) - - - (474) (474)
Balance as at 5 January 2020	1,608 48 (8) 871 2,519
At 1 July 2018 Net profit for the half year Other comprehensive income	2,193 39 - 1,018 3,250 - - - 738 738 - - 11 - 11
Total comprehensive income for the half year	- - 11 738 749
Capital return Share-based payments expense Purchase of shares under Equity Incentive Plan Distributions to Wesfarmers	(538) - - - (538) - 1 - - 1 (24) - - - (24) - - - (766) (766)
Balance as at 30 December 2018	1,631 40 11 990 2,672

The accompanying notes form part of the Half Year Financial Report.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 14

STATEMENT OF CASH FLOWS

FOR THE HALF YEAR ENDED 5 JANUARY 2020

NOTES
	CONSOLIDATED
	HALF YEAR ENDED	HALF YEAR ENDED 30 DECEMBER 2018 26 WEEKS + 1 DAY $M
	5 JANUARY 2020
	27 WEEKS
	$M
Cash flows from operating activities from continuing operations Receipts from customers Payments to suppliers and employees Interest paid Income tax received Income tax paid	20,221 21,695 (18,685) (20,094) (211) (4) - 389 (301) (405)
Net cash flows from operating activities from continuing operations	1,024 1,581
Cash flows used in investing activities from continuing operations Purchase of property, plant and equipment and intangibles Proceeds from sale of property, plant and equipment Proceeds from sale of controlled entities Investments in joint venture Acquisition of subsidiaries, net of cash acquired	(372) (556) 221 88 - 359 (9) (6) - (2)
Net cash flows used in investing activities from continuing operations	(160) (117)
Cash flows used in financing activities from continuing operations Proceeds from borrowings Repayment of borrowings Proceeds from borrowings with related parties Repayment of borrowings with related parties Payment of principal elements of lease payments Distributions to Wesfarmers Redemption of redeemable preference shares Dividends paid Capital return Purchase of shares under Equity Incentive Plan	3,520 3,725 (3,625) (2,095) - 170 - (3,678) (416) - - (320) - 1,322 (474) - - (538) (20) (24)
Net cash flows used in financing activities from continuing operations	(1,015) (1,438)
Net increase in cash and cash equivalents from continuing operations Cash at the beginning of the financial period from continuing operations	(151) 26 940 556
Cash at the end of the financial period from continuing operations	789 582

The accompanying notes form part of the Half Year Financial Report.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 15

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Half Year Financial Report of Coles Group Limited (the ‘Company’) in respect of the Company and the entities it controlled at the reporting date or during the half year ended 5 January 2020 (collectively, the ‘Group’ or the ‘Consolidated Entity’) were authorised for issue in accordance with a resolution of the directors on 18 February 2020.

References in this report to ‘half year’ are the 27 week period from 1 July 2019 to 5 January 2020 (1H19: 26 weeks and 1 day from 1 July 2018 to 30 December 2018) unless otherwise stated.

REPORTING ENTITY

Coles Group Limited is a for-profit company limited by shares which is incorporated and domiciled in Australia and listed on the Australian Securities Exchange (ASX). The nature of the operations and principal activities of the Group are described in Note 2 Segment reporting.

1. BASIS OF PREPARATION AND ACCOUNTING POLICIES

The general purpose Half Year Financial Report for the period 1 July 2019 to 5 January 2020 has been prepared in accordance with AASB 134 Interim Financial Reporting (‘AASB 134’) and the Corporations Act 2001 .

In accordance with AASB 134, the Half Year Financial Report does not include all the notes of the type normally included in an annual financial report. Accordingly, this report is to be read in conjunction with the 2019 Financial Report and any public announcements made by the Group during the half year reporting period in accordance with the continuous disclosure requirements of the ASX listing rules.

The accounting policies adopted are consistent with those of the previous financial year and corresponding half year reporting period, except for the adoption of AASB 16 Leases (‘AASB 16’) as of 1 July 2019 as set out below.

The Half Year Financial Report is presented in Australian dollars and all values are rounded to the nearest million dollars unless otherwise stated, in accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191. The Company is an entity to which the class order applies.

This Half Year Financial Report presents reclassified comparative information where required for consistency with the current half year’s presentation.

KEY JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

The preparation of the financial statements requires judgement and the use of estimates and assumptions in applying the Group’s accounting policies, which affect amounts reported for assets, liabilities, income and expenses. Actual results may differ from these judgements, estimates and assumptions.

The judgement, estimates and assumptions applied in the Half Year Financial Report, including the key sources of estimation uncertainty are the same as those applied in the 2019 Financial Report except for the new key judgements relating to lessee accounting under AASB 16 Leases , which are described below.

NEW AND AMENDED STANDARDS AND INTERPRETATIONS ADOPTED FROM 1 JULY 2019

The Group applied AASB 16 Leases (‘AASB 16’) for the first time in this half year reporting period. The nature and effect of the changes as a result of the adoption of AASB 16 are described below.

Several other amendments and interpretations apply for the first time in this half year reporting period but do not have an impact on the financial statements of the Group. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective.

AASB 16 Leases

The Group has adopted AASB 16 from 1 July 2019 using the modified retrospective approach, under which the reclassifications and adjustments arising from the new standard have been recognised in the opening Statement of Financial Position at 1 July 2019. The comparative information for the 30 June 2019 reporting period has not been restated as permitted under the transitional provisions in the standard.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 16

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. BASIS OF PREPARATION AND ACCOUNTING POLICIES (CONTINUED)

On adoption of AASB 16, the Group recognised lease liabilities in relation to leases previously classified as operating leases under the principles of AASB 117 Leases . These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at 1 July 2019. The weighted average incremental borrowing rate applied to the lease liabilities at 1 July 2019 was 4.68%.

A reconciliation of operating lease commitments disclosed at 30 June 2019 to lease liabilities recognised under AASB 16 at transition date is provided below:

at transition date is provided below:
	1 JULY 2019 $M
Operating lease commitments disclosed as at 30 June 2019 10,577 Less: application of discounting (2,320) Add: adjustment previously made to remove base rent escalations that were considered contingent at lease inception 399
Discounted lease commitments using the lessee’s incremental borrowing rate at the date of transition to AASB 16 8,656
Less: short-term leases not accounted for under AASB 16 in accordance with the practical expedient (5) Add: extension options reasonably certain to be exercised 723 Less: separation of non-lease components (518)
Total lease liabilities recognised under AASB 16 at 1 July 2019 8,856

The associated right-of-use assets for property leases have been measured either on a retrospective basis as if AASB 16 had always applied, or equal to the lease liability. Non-property right-of-use assets have been measured at the amount equal to the lease liability. Right-of-use assets recognised at transition have been adjusted by the amount of any prepaid or accrued lease payments relating to leases recognised in the Statement of Financial Position at 30 June 2019.

The recognised right-of-use assets relate to the following:

The recognised right-of-use assets relate to the following:
	1 JULY 2019 $M	5 JAN 2020 $M
Property Leases 7,339 7,222 Non-property Leases 142 125
Total right-of-use assets 7,481 7,347

The application of AASB 16 impacted the following items in the Statement of Financial Position on 1 July 2019:

• recognition of right-of-use assets: $7,481 million

• recognition of lease liabilities: $8,856 million

• increase in deferred tax assets: $356 million

• elimination of lease related provisions recognised under previous lease accounting: $188 million

The net impact to retained earnings on 1 July 2019 was a decrease of $831 million.

Practical expedients applied

In applying AASB 16 for the first time, the Group has applied the following practical expedients permitted by the standard:

• the use of a single discount rate to a portfolio of leases with reasonably similar characteristics

• reliance on previous onerous lease assessments

• the accounting for operating leases with a remaining lease term of less than 12 months as at 1 July 2019 as shortterm leases

• the exclusion of initial direct costs from the measurement of the right-of-use asset at the date of initial application

• the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 17

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. BASIS OF PREPARATION AND ACCOUNTING POLICIES (CONTINUED)

The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date, the Group has relied on its previous assessment under AASB 117 and Interpretation 4 Determining whether an Arrangement contains a Lease.

Significant accounting policy

Until 30 June 2019, leases were classified as operating leases whenever the terms of the lease did not transfer substantially all the risks and rewards of ownership to the lessee. Payments made under operating leases were recognised in the Statement of Profit or Loss on a straight-line basis over the lease term.

From 1 July 2019, a right-of-use asset and a corresponding lease liability are recognised at the date at which the leased asset is available for use by the Group. Each lease payment is apportioned between the liability and financing costs. Financing costs are recognised in the Statement of Profit or Loss over the lease term so as to produce a constant periodic rate of interest on the remaining liability. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. Payments associated with short-term leases (leases with a term of 12 months or less) and leases of low-value assets are recognised on a straight-line basis in the Statement of Profit or Loss.

Cash payments for the principal portion of the lease liability are presented within financing activities in the Statement of Cash Flows, while payments relating to short-term leases, low-value assets and variable lease components not included in the measurement of the lease liability are presented within cash flows from operating activities.

Lease liabilities are initially measured at net present value and comprise the following:

• fixed payments (including in-substance fixed payments), less any lease incentives

• variable lease payments based on an index or rate, using the index or rate at the commencement date

• the exercise price of a purchase option if the lessee is reasonably certain to exercise that option

• payment of termination penalties if the lessee is reasonably certain to terminate the lease and incur penalties.

As the interest rate implicit in the lease cannot be readily determined, the lease payments are discounted using the lessee’s incremental borrowing rate.

Right-of-use assets are measured at cost and comprise the following:

• the initial measurement of the lease liability

• any lease payments made at or before the commencement date, less any lease incentives received

• any initial direct costs

• any restoration costs.

Key estimate: Incremental borrowing rate

The Group cannot readily determine the interest rate implicit in the lease, therefore it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

The IBR requires estimation when no observable rates are available or when adjustments need to be made to reflect the terms and conditions of the lease. The Group estimates the IBR using observable market inputs when available and is required to make certain estimates specific to the Group (such as credit risk).

Key judgement: Determining the lease term

Extension options are included in the majority of property leases across the Group. In determining the lease term, all facts and circumstances that create an economic incentive to exercise an extension option are considered. Extension options are only included in the lease term if the lease is reasonably certain to be exercised. The assessment is reviewed if a significant event or change in circumstance occurs which affects this assessment and is within the control of the lessee.

Changes in the assessment of the lease term are accounted for as a reassessment of the lease liability at the date of the change.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 18

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. BASIS OF PREPARATION AND ACCOUNTING POLICIES (CONTINUED)

NEW AND REVISED AUSTRALIAN ACCOUNTING STANDARDS AND INTERPRETATIONS ON ISSUE BUT NOT YET EFFECTIVE

There are no other standards, amendments or interpretations that are not yet effective and that would be expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions. SEASONALITY OF OPERATIONS

The financial performance of the Group is affected by seasonality whereby earnings are typically greater in the half year due to Christmas trading.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 19

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SEGMENT REPORTING

The Group has identified its operating segments based on internal reporting to the Managing Director and Chief Executive Officer (the chief operating decision maker). The Managing Director and Chief Executive Officer regularly reviews the Group’s internal reporting to assess performance and allocate resources across the operating segments. The segments identified offer different products and services and are managed separately.

The Group’s reportable segments are set out below:

SUPERMARKETS Fresh food, groceries and general merchandise retailing (includes Coles Online and Coles Financial Services) LIQUOR Liquor retailing, including online delivery services EXPRESS Convenience store operations and commission agent for retail fuel sales

Other business operations that are not separately reportable (such as Property), as well as costs associated with enterprise functions (such as Treasury) are included in ‘Other’.

There are varying levels of integration between operating segments. This includes the common usage of property, services and administration functions. Financing costs and income tax are managed on a Group basis and are not allocated to operating segments.

EBIT is the key measure by which management monitors the performance of the segments.

The Group does not have material operations in other geographic areas or economic exposure to any individual customer that is in excess of 10% of sales revenue.

	SUPERMARKETS $M	LIQUOR $M	EXPRESS $M	OTHER $M	TOTAL $M
Half year ended 5 January 2020 Sales revenue 16,583 1,691 572 - 18,846 Segment EBIT 789 76 28 17 910 Financing costs (220)
Profit before income tax 690 Income tax expense (201)
Profit for the half year 489
Share of net profit of equity accounted investments included in EBIT -
Half year ended 30 December 2018 Sales revenue 15,574 1,674 2,835 - 20,083 Segment EBIT 441 84 47 (5) 567 Financing costs (7)
Profit before income tax for continuing operations 560 Income tax expense for continuing operations (179)
Profit for the half year for continuing operations 381
Share of net profit of equity accounted investments included in EBIT 6

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 20

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. EARNINGS PER SHARE (EPS)

3. EARNINGS PER SHARE (EPS)
	HALF YEAR ENDED 5 JANUARY 2020	HALF YEAR ENDED 30 DECEMBER 2018
EPS attributable to equity holders of the Company from continuing operations: Basic and diluted EPS (cents) Basic and diluted EPS excluding significant items (cents) Profit for the half year from continuing operations ($M) Weighted average number of ordinary shares for basic and diluted EPS (shares, million)	36.7 28.6 36.7 36.21 489 381 1,334 1,334

CALCULATION METHODOLOGY

EPS is the profit after tax (from continuing operations) attributable to ordinary equity holders of Coles Group Limited, divided by the weighted average number of ordinary shares during the half year.

Diluted EPS is calculated on the same basis except that it includes the impact of any potential commitments the Group has to issue shares in the future. For the half year, the potential dilution to the weighted average number of ordinary shares from employee options and performance rights was nil.

Between the half year reporting date and the issue date of this half year financial report, there have been no transactions involving ordinary shares or potential ordinary shares that would impact the calculation of EPS disclosed in the table above.

4. INCOME TAX

The major components of income tax expense in the Statement of Profit or Loss are set out below:

	CONSOLIDATED	CONSOLIDATED
	HALF YEAR ENDED	HALF YEAR ENDED 30 DECEMBER 2018 $M
	5 JANUARY 2020
	$M
Current income tax expense Deferred income tax relating to origination and reversal of temporary differences	248 237 (47) (58)
Income tax expense reported in Statement of Profit or Loss	201 179

1 Calculation excludes the $146 million ($102 million after tax) restructuring provision.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 21

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. INCOME TAX (CONTINUED)

Reconciliation of the Group’s applicable tax rate to the effective tax rate

Reconciliation of the Group’s applicable tax rate to the effective tax rate
	CONSOLIDATED
	HALF YEAR ENDED	HALF YEAR ENDED 30 DECEMBER 2018 $M
	5 JANUARY 2020
	$M
Profit before tax from continuing operations Profit before tax from discontinued operations	690 560 - 509
Profit before income tax	690 1,069
At Australia’s corporate tax rate of 30% (30 December 2018: 30%) Adjustments in respect of current income tax of previous years Share of results of joint venture Non-deductible expenses for tax purposes Non-assessable income for tax purposes Adjustments in respect of demerger clear exit	207 321 - 4 - (2) 1 5 (7) - - 3
At the effective income tax rate of 29.1% (30 December 2018: 31.0%)	201 331
Income tax expense reported in the Statement of Profit or Loss Income tax attributable to discontinued operations	201 179 - 152
	201 331

Deferred income tax balances recognised in the Statement of Financial Position

	CONSOLIDATED	CONSOLIDATED
	5 JANUARY 2020	30 JUNE 2019 $M
	$M
Provisions Employee benefits Trade and other payables Inventories Property, plant and equipment Lease liabilities Cash flow hedges Other individually insignificant balances	100 92 220 215 20 15 46 41 133 127 2,584 - 4 1 23 22
Deferred tax assets	3,130 513
Accelerated depreciation for tax purposes Intangible assets Right-of-use assets Other individually insignificant balances	92 88 - 7 2,204 - 62 53
Deferred tax liabilities	2,358 148
Net deferred tax assets	772 365

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 22

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. CASH AND CASH EQUIVALENTS

Cash and cash equivalents are comprised of the following:

Cash and cash equivalents are comprised of the following:
	CONSOLIDATED
	5 JANUARY 2020	30 JUNE 2019 $M
	$M
Cash on hand and in transit Cash at bank and on deposit	555 530 242 410
Total cash and cash equivalents	797 940

For the purpose of the cash flow statement, cash and cash equivalents includes cash on hand and in transit, and at bank and on deposit, net of outstanding bank overdrafts which are repayable on demand (refer to Note 7).

6. PROVISIONS

	CONSOLIDATED	CONSOLIDATED
	5 JANUARY 2020	30 JUNE 2019 $M
	$M
Current Employee benefits Restructuring provision Lease provision Self-insurance liabilities Other	637 601 6 18 - 7 102 108 9 9
Total current provisions	754 743
Non-current Employee benefits Restructuring provision Lease provision Self-insurance liabilities	85 87 127 150 - 105 252 256
Total non-current provisions	464 598

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 23

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. INTEREST-BEARING LIABILITIES

7. INTEREST-BEARING LIABILITIES
	CONSOLIDATED
	5 JANUARY 2020	30 JUNE 2019 $M
	$M
Current Bank overdraft	8 -
Total current interest-bearing liabilities	8 -
Non-current Bank debt Capital market debt	760 1,460 595 -
Total non-current interest-bearing liabilities	1,355 1,460

On 6 November 2019, Coles issued $600 million unsecured fixed rate Australian dollar medium term notes (Notes), comprising $300 million of seven-year Notes and $300 million of 10-year Notes. The seven-year Notes were priced with a coupon of 2.20% and the 10-year Notes were priced with a coupon of 2.65%.

All interest-bearing loans and borrowings are initially recognised at fair value, less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the liabilities are derecognised.

8. DIVIDENDS PAID AND PROPOSED

DIVIDEND DECLARED AND PAID DURING THE PERIOD

During the half year, the directors declared and paid a total fully franked dividend of 35.5 cents per fully paid ordinary share for the year ended 30 June 2019. This comprised a final dividend of 24.0 cents per fully paid ordinary share and a special dividend of 11.5 cents per fully paid ordinary share. The aggregate amount of the total dividend paid out of profits on 26 September 2019 was $474 million.

DIVIDEND PROPOSED AND NOT RECOGNISED AS A LIABILITY

Since the half year reporting date the directors have declared an interim dividend of 30.0 cents per fully paid ordinary share with a payment date of 27 March 2020, fully franked at the corporate tax rate of 30%. The total amount of the interim dividend to be paid out of profits, but not recognised as a liability at 5 January 2020, is $400 million[1] .

During the half year, the Company established a Dividend Reinvestment Plan (DRP) under which eligible holders of ordinary shares are able to reinvest either all or part of their dividend payments into additional fully paid Coles Group Limited shares.

9. IMPAIRMENT OF NON-FINANCIAL ASSETS

In accordance with Australian Accounting Standards, the Group tests property, plant and equipment, right-of-use assets and intangible assets for impairment to ensure they are not carried above their recoverable amounts:

• at least annually for goodwill

• where there is an indication that assets may be impaired (which is assessed at least at each reporting date).

Goodwill was subject to full annual impairment testing as at 30 June 2019. A review of indicators of impairment relating to goodwill was performed as at 5 January 2020. As a result of this review, no indicators of impairment were identified that would require a full impairment test to be performed as at 5 January 2020.

1 Estimated interim dividend payable, subject to variations in the number of shares up to the record date.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 24

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. IMPAIRMENT OF NON-FINANCIAL ASSETS (CONTINUED)

The financial statements for the year ended 30 June 2019 detail the most recent annual impairment tests undertaken for goodwill. The Group’s impairment tests for goodwill are based on value in use (VIU). VIU calculations are based on the discounted cash flows expected to arise from the asset or cash generating unit (CGU).

The key assumptions used to determine the recoverable amounts for the CGUs to which goodwill relates are disclosed in the 30 June 2019 financial statements.

Detailed impairment testing has been completed for non–current assets where an indication of impairment has been identified. No material impairment has been recognised in the half year ended 5 January 2020.

10. FINANCIAL INSTRUMENTS

FINANCIAL ASSETS AND LIABILITIES MEASURED AT FAIR VALUE

The Group measures certain financial instruments, such as derivatives, at fair value at each reporting date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The fair value of an asset or liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement as a whole.

LEVEL 1 Fair value is calculated using quoted prices in active markets for identical assets or liabilities LEVEL 2 Fair value is estimated using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) LEVEL 3 Fair value is estimated using inputs for the asset or liability that are not based on observable market data (unobservable inputs)

All of the Group’s financial instruments carried at fair value were valued using market observable inputs (Level 2).

For financial instruments that are carried at fair value on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

There were no transfers between Level 1 and Level 2 during the period. The Group does not hold any material Level 3 financial instruments.

CARRYING AMOUNTS VERSUS FAIR VALUES

The carrying amounts and fair values of the Group’s financial assets and financial liabilities recognised in the financial statements are materially the same.

The methods and assumptions used to estimate the fair value of financial instruments are as follows:

DERIVATIVES

The Group enters into derivative financial instruments with various counterparties, principally financial institutions with investment grade credit ratings. Foreign exchange forward contracts and interest rate swap contracts are valued using forward pricing techniques. This includes the use of market observable inputs, such as foreign exchange spot and forward rates, yield curves of the respective currencies and interest rate curves. Accordingly, these derivatives are classified as Level 2.

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 25

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. RELATED PARTY DISCLOSURES

Parent entity

The ultimate parent entity within the Group is the Company, which is domiciled and incorporated in Australia. Prior to the demerger from Wesfarmers and subsequent listing as a standalone entity on the ASX, the ultimate parent entity of the Group was Wesfarmers Limited.

Transactions with subsidiaries

Intercompany transactions, assets and liabilities between entities within the Group have been eliminated in the consolidated financial statements. Transactions with entities transferred from the Group to Wesfarmers have been treated as related party transactions following the transfer of these entities to Wesfarmers. The nature of these transactions is set out below.

Transactions with joint venture and associates

Various transactions occurred between the Group and Loyalty Pacific Pty Ltd (operator of flybuys) during the half year ended 5 January 2020, including:

• reimbursement of costs incurred

• sale of goods to members of flybuys

• purchase of points from Loyalty Pacific Pty Ltd

As at 5 January 2020 there were amounts owing to Loyalty Pacific Pty Ltd of $164.331 million (30 June 2019: $169.811 million).

Various transactions occurred between the Group and Queensland Venue Co Pty Ltd (QVC) during the half year ended 5 January 2020, including:

• service fees paid

• sales to QVC of inventory

As at 5 January 2020 there were amounts owing from QVC of $34.349 million (30 June 2019: $39.905 million).

Transactions with Wesfarmers Limited and its controlled entities (‘Wesfarmers Group’)

Various transactions occurred between the Group and Wesfarmers Group during the half year ended 5 January 2020, including:

• rental income received

• rental expenses paid

• sales to Wesfarmers Limited and its controlled entities

• purchases from Wesfarmers Limited and its controlled entities

As part of the demerger, certain members of the Wesfarmers Group and Coles Group entered into Transitional Services Agreements (TSA) for the provision of services for up to 24 months. All services provided under a TSA are charged at cost.

The transitional services to be provided by the Wesfarmers Group to the Coles Group include services such as support of a merchandise ordering system.

The transitional services to be provided by the Coles Group to the Wesfarmers Group are:

• information technology services

• payroll services and business process outsourcing

• finance services and systems support

• other services including the management and facilitation of telecommunications and other third-party recharge products

In addition, the Company is party to arrangements with third parties which were negotiated on behalf of all subsidiaries of Wesfarmers prior to demerger. These arrangements include amongst others, property leases where the Group is a head lessee and a sub-lessor to its related parties and vice versa. Where these arrangements remain in place, the Group or its related party settles the liabilities on each other’s behalf and subsequently recovers the costs by on-charging without a margin.

As at 5 January 2020 there were amounts owing to Wesfarmers Limited and its controlled entities of $3.365 million (30 June 2019: $6.141 million).

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 26

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11 RELATED PARTY DISCLOSURES (CONTINUED)

TERMS AND CONDITIONS OF TRANSACTIONS WITH RELATED PARTIES

Sales to and purchases from related parties are made on terms equivalent to those that prevail in arm’s length transactions. Outstanding balances at the half year reporting date are unsecured and interest free and settlement occurs in cash. There have been no guarantees provided or received for any related party receivables or payables.

As at 5 January 2020, the Group has not recognised a provision for expected credit losses relating to amounts owed by related parties (30 June 2019: $nil).

12. COMMITMENTS

Capital expenditure commitments of the Group are set out below:

Capital expenditure commitments of the Group are set out below:
	CONSOLIDATED
	5 JANUARY 2020	30 JUNE 2019 $M
	$M
Within one year Between one and five years	267 140 440 514
Total capital commitments for expenditure	707 654

At 5 January 2020, the Group also has commitments relating to lease agreements that have not yet commenced with respect to its Supply Chain Modernisation program and Customer Fulfilment Centres.

13. CONTINGENCIES

From time to time, entities within the Group are party to various legal actions as well as inquiries from regulators and government bodies that have arisen in the ordinary course of business. Consideration has been given to such matters and it is expected that the resolution of these contingencies will not have a material impact on the financial position of the Group, or are not at a stage to support a reasonable evaluation of the likely outcome.

14. EVENTS AFTER THE HALF YEAR REPORTING PERIOD

On 18 February 2020, the directors declared an interim dividend of 30.0 cents per fully paid ordinary share with a payment date of 27 March 2020, fully franked at the corporate tax rate of 30%. The aggregate amount of the interim dividend to be paid out of profits, but not recognised as a liability at 5 January 2020, is $400 million[1] .

The Group is not aware of any other matter or circumstance that has occurred since the end of the half year reporting date that has significantly affected or may significantly affect the Group’s operations, the results of those operations or the Group’s state of affairs in subsequent reporting periods .

1 Estimated interim dividend payable, subject to variations in the number of shares up to the record date

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 27

DIRECTORS’ DECLARATION

The directors declare that, in their opinion:

• a) the financial statements and notes of the Group for the half year ended 5 January 2020 are in accordance with the Corporations Act 2001 , including:

• (i) giving a true and fair view of the financial position as at 5 January 2020 and the performance for the half year ending on that date of the Group; and

• (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001 ; and

• b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

Signed in accordance with a resolution of the directors.

==> picture [150 x 65] intentionally omitted <==

James Graham AM Chairman

18 February 2020

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 28

==> picture [485 x 771] intentionally omitted <==

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 29

==> picture [469 x 770] intentionally omitted <==

COLES GROUP LIMITED | HALF YEAR FINANCIAL REPORT 30