Earnings Call: H2 2021

Aug 16, 2021

Thank you for standing by, and welcome to the GWA Group Limited FY 'twenty one Results Webcast. All participants are in a listen only mode. I would now like to hand the conference over to Mr. Ores Meyihan, CEO. Please go ahead. Thank you, Madeline. Good morning, everyone. Thank you for joining us on the webcast or conference call for GWA's results for the year ended 30 June 2021. My name is Urs Meijerang, ChidaGears Managing Director, and I'm pleased to present the results today. I have not had the opportunity to meet most of you individually just yet. However, I look forward to meeting many of you at least in a virtual capacity over this week and hopefully in person whenever that is possible. Joining me on the call today is Patrick Gibson, our Group CFO. For today's presentation, I will first provide an overview of our Group results and key themes. That will include a summary of our continued focus on safety and sustainability across the company. Patrick will then detail our group financial results for the year, including P and L, balance sheet and cash flow. I will follow with an overview of our business performance, including my initial impressions since joining the company in March. I will also discuss how our strategy is evolving and provide a summary and outlook for the current year financial year 2022. At the end, Patrick and I will then be happy to answer any of your questions. On Slide 4, while financial year 2021 was a challenging year, our operational discipline and improved detached residential construction completion activity enabled GWA to deliver an improved performance in the second half. This led to full year total revenue of €400,700,000 and EBIT from continuing operations of €68,500,000 For the second half compared to the first half, revenue was up 6% and EBIT was up 13% with EBIT margins up 120 basis points. That expansion from revenue to earnings demonstrates the operating leverage we have in the business as markets improve. That also creates positive momentum in financial year 2022. We continue to generate excellent cash flow and our balance sheet remains strong. Operating cash flow increased by 16%, while net debt is 28% below financial year 2020 with the leverage ratio down to 1.4x. That strong financial position has enabled the Board to declare a final dividend of $0.65 per share, bringing the full year dividend to €0.125 fully financed. We continue to execute our strategy, which is focused on sustainable water solutions. Our relationship with merchants are driving core range expenses for both Matson and Chroma products. We have launched new products in sanitary ware and colored tub wear. We also introduced the new GermGuard antibacterial glaze on sanitary ware products, which I will talk about shortly. We consolidated our New Zealand warehouse from 2 to 1. We also divested the Methane China plant in March 2021. That will deliver annualized benefits of €3,000,000 from 2022 onwards. GWA is very well positioned to leverage the expected improvement in market conditions. We continue to see positive momentum for detached housing in 2022, while renovation and replacement markets are expected to be stable to slightly positive. Our commercial order book remains strong and growing. We are targeting key growth sub segments such as Education and Health to partially offset the temporary slowdown in the commercial segment. Nonetheless, we remain well placed if the Commercial segment recovers. However, there's an obvious significant degree of continued uncertainty because of the Wales COVID-nineteen related lockdown, particularly in New South Wales, the ACT and Melbourne and Victoria and the potential impact on construction market moving forward. Moving to Slide 6. Sustainability remains an ongoing commitment across GWA, and we have a particular focus on safety. During the year, we transitioned to ISO 45,001, which is the global best practice safety standard. All GWA sites have been successfully accredited to this standard. This was a significant undertaking to standardized operating procedures to deliver consistent and measurable approach to safety across the group. Following a decline from financial 2018 to 2020, we experienced an increase in total injury frequency rate from 0.9 last year to 4.3 in 2021. Primarily, that was due to injuries relating to manual handling. This is a very disappointing result. We are renewing our focus on behavioral issues and have implemented customized training strategies to address the root cause to reduce manual handling injuries. I am pleased to be able to say that GWIA recorded a medically treated injury frequency rate of 0 for the financial year 2021. We continue to make good progress and promote policies to encourage diversity and inclusion across the company. We conducted 2 audits of our suppliers with no ethical sourcing issues identified. We remain focused on those areas of sustainability where we believe we can make the most impact. For us, that means providing innovative, sustainable solutions for the built environment with a clear focus on sustainable water solutions. For example, over 80% of CaromaTabs are 5 or 6 star value rated, while 95% of CaromaTannitavea's products are 4 star value rated. During financial year 2021, we continued to roll out our intelligent bathroom system, Chroma SmartCommand. It has now been installed in 127 sites, up from 49 just a year ago. I will now hand over to Patrick to go through the group financial results. Thanks, Urs. Slide 8 presents the result first on a normalized basis before significant items and then on a reported basis, which includes significant items. For FY 2021, significant items were $9,500,000 pretax. This includes $4,700,000 related to the new ERP and CRM systems, which in line with the recent IFRIC guidance note, we have expensed instead of capitalizing. Other significant items are associated with the consolidation of the New Zealand warehouses, sale of the China plant and methan integration costs. On a normalized basis, group revenue increased by 2% to $405,700,000 reflecting improved detached residential construction activity in Australia in the second half and continued sales momentum in our New Zealand and UK businesses, partially offset by the decline in the Commercial segment in Australia due to delays caused by COVID-nineteen. Normalized group EBIT was down 5% to $68,500,000 compared to $71,800,000 for the prior year. Primarily that reflects the first half market decline and ongoing weakness in the Commercial segment, partially offset by strong cost control. Normalized net profit after tax was $42,300,000 down 6%. And on a reported basis, NPAT for the year was $35,100,000 which includes significant items of $7,300,000 after tax. As Urs mentioned earlier, our continued strong cash generation and robust balance sheet enabled an increase in the full year dividend to $0.125 per share fully franked, which represents a payout ratio of 78% of normalized net profit after tax and 95% of reported NPAT. On Slide 9, the waterfall chart we typically present sets out the key drivers of earnings over the year. These are normalized results. They exclude significant items I detailed earlier. Volume and mix were impacted by COVID-nineteen, primarily in the first half and from the full year impact of negative sales mix from the continued decline in the Commercial segment in Australia. The Commercial segment is generally a higher margin segment for GWA. That was reflected in Australia with negative mix in sanitary wear, only partially offset by positive mix from good growth in tapware. Volume was positive in both New Zealand and the UK. Price increases of approximately 5% were implemented from August 2020. FX. Through our foreign exchange hedging, we were able to mitigate some, but not all of the impact from the weak Australian dollar compared to the prior year. Our average hedged Aussie U. S. Dollar exchange rate for FY 2021 was approximately $0.69 compared to $0.71 for the prior year. Net cost changes reflect our continued strong operational discipline, which mitigated a significant amount of the earnings decline for the year. This includes successfully delivering $4,000,000 in savings as part of the overall $9,000,000 to $12,000,000 cost out program by FY 2021 and $3,000,000 in net fund synergies in the year. These were partially offset by cost increases of $3,500,000 including the increase in freight charges. As we disclosed previously, it also includes short term cost reductions in the prior year, which were not repeated in FY 2021. For example, these included wage subsidies received in New Zealand in the prior year and the filling of some key vacancies in FY 2021. The final red bar represents costs for staff incentives accrued in FY 2021, but not in FY 2020. Adjusting for the staff incentives, normalized group EBIT margin in FY 2021 was 18.7% compared to an EBIT margin of 18% for FY 2020. On Slide 10, turning now to cash flow from operations. Once again, this is a very strong result. Cash flow from operations was $103,100,000 compared to $88,600,000 for the prior year. And cash conversion remains excellent with a cash conversion ratio of 117%, reflecting our capital light model. While this is a very strong result, I would just point out that to ensure stock availability in customer service, we will build our inventory stock somewhat in the first half of FY twenty twenty two. Capital expenditure and other investing was $8,000,000 in FY 2021, reflecting the timing of some projects given the continuing impact of COVID-nineteen restrictions and the accounting treatment of the ERP and CRM systems, which I mentioned earlier. Our capital expenditure program remains focused on growth initiatives to drive revenue enhancing opportunities and cost efficiencies. This includes new product development and continued investment in Caroma Smart Command. Cash restructuring and other costs of $5,900,000 relate primarily to the ERP CRM project, methan integration costs and consolidation of warehouses in New Zealand, which will provide $3,000,000 in annualized benefits from FY 2022. GWA remains in a strong financial position. Net debt as of 30th June 2021 was $104,800,000 which was 28 percent below the prior year's total of $144,800,000 And our credit metrics remain solid with an improved leverage ratio of 1.4 times compared to 1.9 times at 30th June 2020. Total group facilities are $267,000,000 comprising a multi currency revolving facility of $227,000,000 which matures in November 2023 and a $40,000,000 revolving bilateral facility, which is due to mature in October 2021. We expect to seek an extension of the bilateral facility by the end of quarter 1 this financial year. I will now hand back to Urs. Thanks, Patrick. Slide 13 demonstrates the improvement in revenue in the second half. Overall, revenue improved by 8% in the second half twenty twenty one compared to the second half twenty twenty. Revenue was up 6% in the second half twenty twenty one compared to the first half of twenty twenty one. In Australia, we saw a recovery in builders and merchant sales in the second half. However, this was impacted by the slowdown in the commercial project segment, particularly in South Asia and Victoria. In New Zealand, we benefited from the integration of our sales team and strong stock availability during most of the year. We also benefited from less in the prior year impacted by COVID-nineteen lockdown. Sales for the year were up 14.5%. In our international business, we continued the sales momentum in the U. K. We continued to grow market share and improve our EBIT margins. Slide 14. GWA acquired Neptune in April 2019. The continued delivery of integration synergies and enhanced geographical revenue and earnings diversification reinforces the success of that acquisition. MefFin sales were up year on year with strong growth in the UK providing further earnings and revenue diversity and enhanced scale. Cost synergy targets have been realized with €3,000,000 achieved during the year. That brings total synergies achieved during financial year 2020 2021 to over €6,000,000 and exceeds the original targets. As we mentioned previously, the New Zealand distribution network was consolidated from 2 warehouses to 1, which will improve customer experience. The Meft and China plant was divested in March 2021. Our center of excellence in New Zealand is building a strong pipeline of new products. The market leading Massen showering collection property is being used in Caroma new shower launches this year. Moving to Slide 15. A key focus of our growth strategy remains product innovation. We have established a center of excellence in Auckland and Sydney to leverage our local technical design and sourcing capability in taps, showers and sanitary ware. Our hormone hygiene and posture solution is important, especially in the current environment. For example, we launched GermGuard, which is an antibacterial placing for our sanitary ware and toilet seats. It is capitalizing on consumers' heightened concerns overseas and hygiene following the COVID-nineteen outbreak. Our local design and technology expertise continues to be a key point of differentiation for GWA. On Slide 16, our innovation and distribution center at Preston in New South Wales is a good example of the work we are doing to create truly innovative product and systems focused on both the solutions in the build environment. The picture you can see on this slide is of the new vertical and horizontal test rigs. This enables our team to model the hydraulic impact of water in commercial buildings, which is assisting us to develop new water saving solutions and products. That of course includes our touchless intelligent bathroom system, Comas Smart Command. The system has now been successfully installed in 127 sites across Australia and New Zealand, up from 49 installations in the prior year. While the commercial segment remains subdued, our commercial forward order book remains strong and is 14% ahead of the prior year. Given the temporary slowdown in particular sub segments such as retail and offices, we have continued our focus on areas which provide near term growth opportunities including education, health and commercial innovation and replacements. This category now represents 38% of commercial auto bank compared to 32% in the prior year. On Slide 18, I'd like to take a minute to provide an overview of my first impression of GWA. I joined the company in March initially as acting CEO and then from 1st July as mentioned right as CEO. Since joining GWA, I've had the opportunity to meet with many of our staff, clients and some of our suppliers. My first impressions are very positive. GWA has an experienced and committed leadership team. I'm most impressed by the passion of our staff, not only for our product, but also for our customer and the service we provide. Even before joining GWA, I was aware of the strong brand and innovation capabilities. In addition, I learned about GWA's commitment to quality and ongoing customer service improvement. Our relationship with key merchant partners are strong and our leading position in sanitary ware will provide us with excellent leverage into other categories. Our foundations are solid and provide an excellent platform as we build and refine our next 5 year strategy to improve shareholder value. Over the next few slides, I would like to highlight how we are evolving the current strategy to grow the business. Turning to Slide 20. I would like to start by outlining the key elements of our strategy. Firstly, as a business, we are committed to making everyday water experience extraordinary today and for tomorrow. We respect water as a precious resource. With our long and demonstrated history in the delivery of market leading innovation that has helped to support reduced water consumption in bathrooms. We will look to further this commitment so the water experience that customers happily enjoy today can also help better preserve this resource for tomorrow. In leading this commitment, our strategic mission is to confirm GWA as the respected and leading partner in delivery for sustainable water solutions for bathroom, kitchens and laundries. We have identified 5 key strategic pillars to deliver on this. On Slide 21. Firstly, and given it's at the heart of what we do, we start our strategic focus areas with the need to deliver great customer experience. Our customers want us to be easy to do businesses, so we will be engaging in new approaches as well as digital tools and services to better enhance and enrich the purchase journey of our customers. Our second strategic focus respects the need to better connect with the industry group critical to our business, the Plumbers. Commercial and Residential Plumbers are the link between our products and our customers. So we will be engaging in activities to strengthen relationship and improve our support in these key industries. As mentioned, GWA already had a strong heritage of innovation, and we will continue to innovate through design and partnership, hence our 3rd strategic focus. We will not only use our internal expertise, but also leverage the strong capabilities of our supply partners to offer advanced products in our markets. We also see increased opportunity in supporting customers with comprehensive aftermarket offerings. Our 4th strategic focus, therefore, involves leveraging churn expertise and extending this to grow our support of products and services throughout the entire lifecycle. Finally, we will look to accelerate our business growth by leveraging strategic opportunities that expand our capability and strengthen our overall market presence. I look forward to sharing the progress on this strategy with shareholders as we seek to deliver further sustainable value over the medium term. Turning to Page Slide 23 and the outlook for financial year 2022. We expect continued momentum in residential detached activity in the financial year 2022 from improved customer sentiment, increased dwelling approvals, new housing loans, higher housing turnover and government stimulus such as the homebuilders. Renovation and replacement activities, both residential and commercial, is expected to be stable to slightly positive for the year. However, commercial completions are expected to remain subdued. As confidence and activity increases in the commercial segment, we remain well placed to capitalize on the improvement. The multi residential segment is expected to decline further in financial 2022 as a result of lower net migration resulting from the international border closures and federal restrictions. However, there's an obvious significant degree of continued uncertainty because of the various COVID-nineteen related lockdown, particularly in Sydney, New South Wales, the ACT and Melbourne, Victoria and the potential impact on construction markets. We are continuing to closely monitor and adjust our business operations as required. We will maintain our focus on new product development in new bathroom ranges for Caroma and Neptune shower wear. A key business plan have been implemented with major merchants targeting enhanced product ranging in core categories. Our cost base was further reduced in 2021, and an additional €3,000,000 in supply chain savings will be delivered from 2022. We implemented price increase of about 3% across Australia and New Zealand on 1st July 2021, which together we expect the foreign exchange benefit to largely offset expected increases in freight costs for financial year 2022. GWA maintained strong operational leverage to the market upturn, underpinned by ongoing operational discipline. On Slide 24, let me summarize the key point from today's presentation. While financial year 2021 was challenging, our performance in the second half improved significantly on the first half and that provides positive momentum as we move into financial year 2022. Our cash flow and balance sheet remains strong to support ongoing investment and shareholder returns. We are continuing to evolve our 5 year strategy to generate sustainable shareholder value creation and GWA maintained strong operational leverage to expect the market improvement in financial year 2022. Ladies and gentlemen, that concludes the presentation and Patrick and I are happy to take your questions. Thank Your first question comes from Mitchell Sunnigan with Macquarie. Please go ahead. Yes. Good morning, guys. And Patrick, can you hear me? Yes. Hi, Mitch. Yes. Hi, guys. Thanks for taking my questions. Just first of all, I guess, I was just trying to get a little bit of sense on how you're seeing the specific markets. Obviously, you've talked about detached being a bit stronger and good momentum there into 'twenty two. And also on the resi R and R and commercial R and R. Can you maybe just give us a sense of how you saw that second half and how we should be thinking about that into the full year? Because just the slide in the other presentation, in fact, where you typically spell out how you're seeing the market isn't in there. So any information on those segments on a more granular basis will be fantastic. Yes, Mitch, I'll try and cover that. So look, we obviously in terms of each of the segment, if you start with residential, we flagged back in February, we thought we'd expect to see an uptick in Q4, given the high level of approvals on the back of homebuilder. And look, that was the case. And given the scale of those approval numbers and to some extent, the relative scarcity of supply of trades, we expect the detached residential segment to be strong throughout FY 2022, if that makes sense. Multi res, we think will continue to decline as we've said before until net migration comes back and borders reopen, that one is going to be challenging. The I suppose the good part of it is, it's now only about 8% of our revenue. Look, in terms of commercial, as we said in the presentation, we remain very pleased with our order book being up 14% for the full year year on year. That did come down a little bit since December, but look, obviously, it's the net of what flows in and what flows out, and we did see a few jobs happening at the back end of quarter 4. So look, we think we are very well positioned for recovery in commercial when it materializes. The challenge at the moment is that nobody really knows when that will be, and there aren't many new jobs starting and breaking ground. What we see at the moment is really jobs completing that were approved some time ago given the lags in that segment. Where we have seen a little bit of activity in commercial is probably more in the renovation space as people upgrade commercial buildings. And what we can add, Patrick, if you look at commercial, you clearly see growth in education and health, and that's partly offset by decline that you would expect of offices, hotel and retail. Absolutely. And And look, I think that trend is likely to continue for the certainly for the next 6 months. I mean, the thing that's going to turn commercial around, Mitch, I think is going to be, frankly, business confidence and vaccination rates. And until that happens, it's going to be a little bit slow. But as I said, we've got a good order book. And then look, R and R is the final one you asked about. We saw some growth in R and in the second half, and we would expect R and R to be stable to probably slightly positive in 2022 as well. The If you'd asked me that question 6 weeks ago before recent lockdowns and interruptions, I probably would have been more bullish on it. So again, it's going to be affected a little bit by consumer sentiment and the ability to have trades in house. But nonetheless, given the I think the fundamentals are strong for R and R. There's high saving rates, particularly during knockdowns. There's ready availability of relatively cheap credit, and people can't spend on overseas travel. So one would expect R and R to be pretty resilient during 2022, but again, it's kind of linked to the current COVID situation. Does that help give a bit of flavor, Mick? Yes. Thanks for that. I guess just following on that last bit on the resi R and R, I guess just looking at how strong the ABS data approvals have been over the last 12 months or so. I know there was a bit of a skew to more DIY stuff on that earlier last year, but some big jobs going through. Yes, can you maybe just give us a sense of, I guess, the last couple of months of the trajectory you've seen there? I guess it just sounds like you've been a bit conservative there given the lockdown impacts or potential lockdown impacts, which is understandable. Yes. Look, I'd say it was certainly positive for us in Q4. I think the and I agree with you, the approvals were very strong back sort of on May time. I think the issue is there are also lags here, and an approval doesn't mean a commencement and a commencement doesn't mean a completion. And then you add to that constraints on the supply side of trade is, I think we're going to see longer lags. But look, if the world returns to semi normal, then I would have thought we would see an improvement probably towards the second half of twenty twenty two in R and R, but really very much subject to the availability of trades and people's confidence. Yes. Perfect. Thanks, Patrick. And just a follow on for me. I guess just thinking about the potential for different cost movements in 2022, you put through another price rise there. I guess, can you maybe just quickly run us through the levers there, how you're hedging, sitting and potential freight costs and how you see that balancing out into 2022 from a margin perspective? Thank you. Let me take the first part of the questions and then over to Patrick in regards to FX. If you look at, I guess, freight, it's really quite often in the press substantial increase. You would expect probably our freight costs could go up by about $6,000,000 year on year. That's partly offset by some positives in regard to hedging, and Patrick can talk about that. And so the savings we outlined in the presentation, but clearly, we monitor the market very closely. EPC further cost increases, we always have the option, and we consider a second price increase maybe in the second half of this year. You want to comment on the FX? Yes. Look, FX should be a little bit of a tailwind, Mitch. Actually, at current time, we're at about 55% hedged of our requirements for FY 2022 at $0.76 so versus current spot reasonably, reasonably good. I think, look, it's anybody's guess where FX goes certainly versus the U. S. Dollar. But look, overall, we would expect to see at least a couple of 1,000,000 probably year on year benefit, possibly slightly more depending in FX in 2020. So that's for full year 2022 versus 2021. And then as you noted, we've got another positive with price increase of approximately 3% effective 1st July across ANZ. So those two positives together should offset the freight $6,000,000 that Urs mentioned as a year on year on cost. So look, overall, I think the best guide to EBIT margin at the moment for 2022, we would, I think, expect to maintain the EBIT margin we saw in the second half of twenty twenty one, which was 17.5% or potentially slightly improve it. I think for significant improvement, we'll have to see the return of commercial activity. And at the moment, we're not forecasting significant commercial activity in 2022. Yes. Fantastic. That's all for me. Thanks a lot, guys. Your next question comes from Lisa Hung with Citi. So I just had a question on freight costs. Given you've outlined the 6 mill impact and it's a bit lower than you'd expect, just given at the last result, I think you said freight was 6% of COGS and freight costs are up 2% sorry, 2x year on year. So can you just give us a bit more color on whether you're getting a better contracted rate for freight or what's really driving that? And how much is hedged into this year as well? Sure, Lisa. Look, you're right. It's approximately 6% of COGS. And look, when we last spoke about this, Lisa, we haven't completed our contractual negotiations for 2022. So it really does depend on the mix of contracted volume versus spot. We have now completed those negotiations. So we have certainty that about 80% of our requirements will be at contracted rates with the remainder at spot. So basically, when you multiply that through, that's how we get to the $6,000,000 year on year on costs. And I think last time we spoke about this, we flagged 5 to 6,000,000. Given that we've now locked in the 80% of it, we're fairly firm on that $6,000,000 Now spot prices, just as a caveat, are much higher still at the moment, up to probably 3x where they used to be a year or so ago. So that's why you may be hearing different things in different places. Yes, sure. That's helpful. And I guess in terms of sales momentum, I guess one trend we've kind of seen play out over U. S. Earnings season is a lot of building products companies have called out weaker orders in the retail channel because we saw a big boost in DIY last year. Now that things have reopened, people are spending that recreational dollar elsewhere. I just I know you don't expect any material destocking this year, but I'd be interested in whether you're kind of seeing any similar trends play out in that channel? Look, it's an interesting one. We and to make sure I try and answer that for you, we've seen probably a slightly different shape in our sales into retailers in the second half than we saw in the preceding couple of halves. As you may recall, there was this time last year, there was a significant uptick in that replacement activity, the DIY element. And obviously, this time around, everybody's lapping that and a lot of walls have been painted in Australia and a lot of leak and taps have been fixed. So I think we're not seeing that same uplift anymore in replacement. I think on the positive side though, in the second half, we have seen a little bit more of of trade focused activity come through some of the merchants and some projects. I did mention commercial reno earlier. So it's a bit of a mixed bag. So I wouldn't while R and R may have upside depending on COVID, etcetera, which we talked about earlier, I'm not necessarily I don't think we're going to see the same sort of DIY replacement uptick this year that we saw last year. Yes. And I guess on the flip side yes, it does. It's helpful, Patrick. And I guess on the other side of that, we shouldn't see DIY completely fall apart altogether either, is kind of what you're saying? No, we don't believe so. I don't think so. I think it's just going to turn to more sort of normalized levels. Okay, cool. That's clear. Yes, that's all for me. Thanks, guys. Thanks, Jason. Thank you. Your next question comes from Matthew Abraham with Credit Suisse. Please go ahead. Hi there. Thank you very much for taking my question this morning. My first question just relates to market share and quite a high level question. Just wondering if you could just give a bit of color on market share movements in the Australia and New Zealand region, please? Yes. Thanks, Matt. Probably from a market share, as we just earlier discussed, we're seeing clearly quite a lot of volatility in market size. And even if you look at some of the independent estimates, they have moved quite a bit. So for us, we felt if you look in our sailing context, we don't have we have insufficient external data to accurately measure market data. If I go across the markets, we probably would expect in Australia, we will be sort of on par with previous year, maybe slightly down. But clearly, as you've seen both in New Zealand and the UK, we have substantially improved our revenue and would have expected we are again market share with our markets. Okay, great. Thank you. That's really helpful. And just one more quick one for Mike. It just refers this question just refers to your comment on Page 23 of the presentation where you just mentioned SG and A costs in the upcoming FY 'twenty two. And the comment specifically says that there's no additional investment required in SG and A. I just wanted to clarify that specific comment. Are you then saying that SG and A, I guess, can be expected to remain broadly flat in FY 'twenty two versus 'twenty one? And if so, are you thinking about that in absolute dollars or is that like as a percentage of sales for SG and A? Thank you. Matt, look, I would say we're generally thinking about that as a percentage. And really what it's flagging is that there are no sort of unusual investments required. I mean, one of the things we've talked about before and indeed you see an example of it in the second half numbers where our EBIT margin went up from 16.3% in the first half to 17.5% in the second half is with a cost base that is now 60% variable, 40% fixed. We think we're about right sized and we'll see positive leverage down the P and L once the revenue line takes off in a positive direction. So that was really the intent of that comment. It's not to say we won't continue to invest behind the brands and so forth, but there are no major year on year adjustments to be considered for 2022. Okay. Thank you. Okay. So that's not to say that because there is still that 60% variable, there will be, I guess, uptick in SG and A as revenue is projected to grow as well. Is that a fair summary? Yes. I mean, that's correct. But look, I would encourage you to think of all the levers we have at our disposal. I mean, clearly, we're pretty focused on improving maintaining and improving our EBIT margins and we will look as the year unfolds, how we're doing on gross margin in particular, what's happening with freight FX, how the price is coming through. And then we will also look at discretionary and non discretionary spend in the SG and A buckets and make decisions accordingly. So we'll manage that if you like, we'll manage at the cost base holistically to ensure we continue to either maintain or grow margin over time. Okay, great. That's really helpful. Thank you. Thank you. Your next question comes from Keith Shaw with MST Marquis. Please go ahead. Good morning, Ed and Patrick. Thanks for taking my questions. First one is, you've been in the business for 5.5 months now and I think your first impressions, you made the comment are very positive and there's a solid foundation from which the business can grow from here. Can you confirm for us that you are completely happy with the structure and composition of the assets and there's no resetting of any of the assets or the base of assets for the business going forward? Thanks, Keith. Look, first of all, I think it's the responsibility and the job of any management team to continue to review the assets we have. But after my 1st 5 months, I don't see any major adjustments required. Okay. That's fantastic. The I guess, the follow on on that question is, are you still continuing to review the assets of the business? Or are we set for now? No. Look, as I say, that's an ongoing review. Clearly, Australia and you see it performing very well. We're very pleased to see how the UK has picked up. And this is a in China. We've sort of seen the focus away from showrooms to strong entities and projects. And I guess, in the context of COVID, we will have to review all our business as we go forward. But there's no plan at the moment on the table that we expect any major changes. I mean, Keith, I must add, we've had a history of a number of years of taking cost out, and that's really what's helped us through what's been a challenging couple of years from a market perspective. And the initiatives we've had in I talked earlier about the $12,000,000 now we've taken out over the last 3 years in supply chain and the $6,000,000 in METFIN. It's those sorts of initiatives over the past few years that I think is why us doesn't see, if you like, the stereotypical opportunity that might be there. And then also, as we pointed out in the presentation, that the completion of consolidating those 2 warehouses in New Zealand and the sale of that China plant, we're confident of another $3,000,000 of cost savings coming through in FY 'twenty two incrementally. So it's all of that really that I think we're not, I think, being lazy, but obviously, we'll continue to keep a tight eye and pace any cost investment with growth. That's excellent. Thanks very much. And then the second question on your point around margin expansion through the year and FY 'twenty two margins coming in potentially at or if Fortune favors the company maybe slightly above the 17.5% in the second half of FY 'twenty one. Can we take from that there won't be any negative mix issues coming through in FY 'twenty two? Look, I think no and yes is the answer. So in the sense that we still expect mix to be overall adverse in 2022, and that's because we expect detached resi to be up, which is a lowish margin segment given the buying power of large builders, and we suspect our higher margin segment commercial to be down year on year. So there will be, if you like, a negative drag from those two things. But on the plus side, as we spoke to earlier, there's the $3,000,000 I just mentioned. There's some upside in FX. And obviously, we're taking some price given some of the inflationary pressures such as freight. So that's why overall, we say we believe we'll maintain EBIT margins at around that second half level of 17.5% or potentially improve a little bit depending on the mix. So that's why I say yes and no. We don't think we'll go backwards on EBIT margin, but I think it will be a good result to hold and it will be even better if we manage to put 20 or 30 or 40 bps on it, but it's not going to be a couple of percentage points without commercial coming back into normal. Indeed, it sounds like the freight and POS will be offset by FX and supply chain benefits and then any margin accretion from that will come from price. So I think that certainly makes sense going into the EBIT margin guidance for next year. The other point I just wanted to ask about was the ERP and CRM implementation. I mean, every time we hear those three letters, certainly does flash a bit of risk going into how the business performs or businesses perform as you're going through the transition. So can I just give an understanding of what the existing CRM platform is, which platform you're migrating to, how you're going to manage that process such that the business doesn't incur any, I guess, unintended risk in the transition period? Sure. Look, this is we're currently on a platform called MobX or M3. That's a legacy platform and has been due for replacement for some time. We are going with a new cloud solution, Microsoft Dynamics 365. This is a project that kicked off in anger probably in about January of this calendar year, but actually in terms of selection, negotiations and so forth, probably it was running for about 9, 12 months before that. So in terms of risk mitigation, look, obviously, we have a dedicated project team with key subject matter experts from each function. We have support from implementation partners and obviously also the vendors of the product Microsoft themselves. And we have a very clearly clear sort of PMO and review situation and decision making forum around each gate and what we go through. And so we will be following in a fairly classic, but rigorous process of developing tests, test cases and working through that before any decision to go live and we will have support when we go live for a number of months. So look, I think we're doing everything we can and the product will be tested before we push the button. I can just add a few things. Having been involved in a number of ERP implementation, the biggest lift for any ERP implementation is when you have a lot of customization. So when you use the standard product and you start introducing new company specific requirements, having reviewed the project within GWA, we are more than 95% we stick this out of the box solution. So therefore, that's a substantial lower risk. And dollar thing which gives me quite high level of confidence, about 2 months ago, we completed the solution build. So we tested the product as an offer. We tested the vanilla system. And as I say, over 95% is vanilla out of the box. Yes. That's fantastic. Thanks for the color. And then the last one I had for today is, I was surprised to hear you're not expecting any significant movements in destocking, restocking, given some of the retailers out there are talking about some reasonably high inventory levels. I think you briefly mentioned earlier as to some of the reasons, but can you give us an idea of what you're actually seeing or hearing from customers that provide you with the confidence that there won't be any strange movements in the channel in the coming year? Look, so far, we haven't heard any advice from customers that there would be a destocking. We probably see that one of the merchants in the second half had an adjustment to the way they ordered. That's something clearly we follow very closely and especially we love to depend a bit the impact on COVID-nineteen because the number of the bigger merchants at the moment, they've closed the doors to retail, but they're still operating with trade. So as of today, with the discussions we've had with all our major merchant partners, nothing has been flagged in regards to potential destocking. Okay, that's excellent. Thanks for taking my questions, James. Thank you. Thank you. Your next question comes from Alex Liu with Morgan Financial. Please go ahead. Hey, good morning, guys. So just a couple of questions from me, but maybe first up for you, Urs. Just looking at Slide 21 and just point to where you just, I guess, having a bigger focus on winning with the plumber. So just want to dig into that a little bit further. And I guess, just maybe talk about how the relationship is now and how it's been historically? And I guess, how you why do you think you I guess, you need to improve that, please? Yes. Look, as I said in the presentation, if you look at when you have a repair or replacement for your bathroom, but also in the first person you call is your plumber. If I look at GWA, and especially if I go back in history, as I understand, we've always had an exceptionally strong relationship with the plumbers. We maintain a strong relationship with some of the big plumbers in pound. But as the economic climate change, as we refer to sort of using digital tools, etcetera, we can make it easier with them. So there's a focus on both commercial and residential plumbers. And some of the things you're seeing is we can help you with as they go through the plumber association, as they go through TAFE, we can engage early with them to highlight some of the product advantages over of Karma products and help them on the journey and just make the whole interaction between GWA and the plumbers much more streamlined. And this is it. If you look in today's world, there's a lot of digital tools available, which will help. We see sort of a change from the, if I call it, the old generation department, which we are quite happy to have a big handbook in our youth to the newer generation, the younger plumbers, they like to have being on digital. How do you identify spare parts? How do you install things? How do you order? And I do think with our strong presence and our heritage, we can substantially improve that relationship. Okay, thanks. And just a second question is around lockdowns and obviously, I mean, New South Wales and Victoria. And Patrick, you made a comment about potentially we asked you a question about, I guess, FY 'twenty two, 7 weeks ago, you would have been a bit more bullish. But maybe just talk about the impact from lockdown on the various segments, please? Okay. So if you look at the big contraction sites, clearly, a 2 week lockdown wasn't very helpful, but pleased to report that we've seen them coming back again. What you've noticed is in the probably after the transaction lockdown, while the larger construction sites have come back very frequently for our products, we've seen a slower improvement in some of the smaller construction sites. And part of that is clearly due to some of the smaller construction sites weren't quite equipped to deal with some of the COVID requirements. The feedback we have from our merchants, our while a number of merchants have closed their doors for the public, they are still providing products for the trade. So if I look at sort of the last 6 weeks of sailing in the new financial year, we are fairly fairly close to our expectation. Okay. Thank you. No problem. Thank you. There are no further questions at this time. I'll now hand back to Mr. Meyhan for closing remarks. All right. Thank you, Melanie. Well, once again, thank you all for attending this briefing and looking forward to engaging with each of you as we move forward, and we wish you a safe and successful day. Thank you.