Earnings Call: H1 2021

Feb 15, 2021

Morning, everyone, and thank you for joining us on the webcast or conference call for GWA's half year results for the year ended 31st December 2020. I'm Tim Sault, GWA's Managing Director. And joining me on the call today is Patrick Gibson, GWA's current CFO. On slide 2, before we begin, I just want to draw your attention to this disclaimer as well. For today's results presentation, I'll first provide an overview of our group results and key themes, and Patrick will then detail our group financial results for the half year, including P and L, balance sheet and cash flow. And I'll conclude with an outlook for FY 2021. On Slide 4, I'll begin with an overview of our half year results in the context of what we have seen across the various geographies in which we operate. In terms of the first half result, we have continued our disciplined approach to managing the business during the housing market cyclical downturn in Australia and disruptions across all our geographies due to the COVID-nineteen pandemic. Importantly, we maintained our leading market share position in Australia and growing share in both New Zealand and the United Kingdom. Our focus on operational discipline means we remain on track to deliver the supply chain savings as part of the overall 9 $12,000,000 savings target. Despite the decline in revenue, our Australian New Zealand EBIT margin was consistent with the prior period. This discipline together with our continued strong cash generation means we've been able to declare a $0.06 per share interim dividend fully ramped, which is up from $0.035 paid for the second half last year. We are pleased with both performance of Methvin and how our integration plans have been implemented. Cost synergies remain on track to deliver a total of over $3,000,000 in FY 2021. And as I will explain later, we have now commenced an additional program in New Zealand and the sale of our China plant, which together will deliver an additional $3,000,000 in annualized cost savings from FY 2022. We continue to successfully execute our strategy for growth, which is focused on superior water solutions. Our relationships with merchant partners is driving core range extensions for both Nedman and Karana products, while we've also launched new products in Centurywear and Colored Tapware. Our touchless intelligent battering system, Corona Smart Command, has now been installed in 77 sites with the solid bank of additional projects in the pipeline. We're generating margin accretion in Medford and in the United Kingdom even in a market heavily disrupted by COVID-nineteen. We're consolidating and simplifying our operations in Asia including a new local management team. As a result of these initiatives, GWA is very well positioned to leverage the expected improvement in market conditions. We saw an improvement in the market in the Q2. And as you have seen, lead indicators such as detached housing approvals, home lending and house price points, it points to an increased residential detached completions in Q4 and into FY 'twenty two. Our commercial order book remains strong and growing. However, the current temporary slowdown in some commercial projects being drawn down has required us to pivot towards key growth sub segments in education, aged care and healthcare. Our balance sheet remains robust and given our cost base, GWA has significant operational leverage to an improvement in the building cycle when revenue momentum returns. So in summary, while the market remains challenging for the period, we continue to focus on those elements within our control. As signs of increased market activity are emerging, that has positioned GWA well to capitalize on these improving conditions. On Slide 5, this slide demonstrates improvements in revenue from the Q1 to the second. Overall revenue improved plus 1.6% in Q2 compared to Q1 FY 'twenty one. In Australia, we saw signs of recovery in builders and merchant sales in the 2nd quarter. However, this was impacted by the slowdown in the commercial project segment, particularly in New South Wales and Victoria. We did not experience any material further customer destocking. However, as anticipated, merchant restocking did not eventuate. Sales in the first half FY 'twenty one in New Zealand increased by 3.1% on a local currency basis. We benefited from the integration of our sales team and also from strong stock availability compared to some of our competitors. Sales in the United Kingdom were up 5.7% on a local currency basis in the half one, FY 'twenty one, with our margin enhanced despite the ongoing impact of COVID-nineteen. I think this is a good result and a testament to our team in the UK. On Slide 6, although our slide demonstrated revenue by market, this slide illustrates our first half revenue with our main customers in Australia, our largest market which accounts for around 77% of group revenue. Again, just to emphasize here, customers are shown in random order and notation, so that means that the description A to E does not denote the size of the customer. The key point is those customers with greater exposure to the retail focused merchant channel that performed more strongly than those more exposed to the commercial channel, which has been impacted by the temporary delays to some projects in the same. On Slide 7, our strategy continues to focus on profitably winning market share regardless of market conditions. Clearly, we maintained share in the down market where there has been some pressure on pricing and trading down to lower margin product. The slowdown in residential construction activity in Australia has been well documented and we saw market decline in detached and multi residential construction during the first time. The increase in detached residential approvals in Q2 FY 2021 is encouraging. However, it's important to distinguish between approvals and completions given the normal 9 to 12 month lag between approvals and completions. We've included the slide on this point independence. Delays in commercial project completions resulted in market activity declining by approximately 17% nationally with a significantly greater decline in New South Wales and Victoria. The largest segment renovation and replacements, both residential and commercial, has continued to demonstrate more stability than detached and multi residential housing, with residential R and R stronger than commercial R and R. In total, we estimate a decline of approximately 6% in our addressable market in Australia to December 2020. I'll now hand to Patrick to discuss our financial results in more detail. Thanks, Tim. I'll start with the waterfall chart we typically present to set out the key drivers of earnings over the half. And these are normalized results that exclude significant items relating to costs associated with the integration of Metfin. Firstly, volume and mix. As Tim already mentioned, volumes were impacted by weaker market conditions, particularly in the commercial segment and the ongoing impact of COVID-nineteen. That decline in commercial also adversely impacted mix as the commercial segment is generally a higher margin segment for GWA. Australia is also a higher margin market for us compared to the United Kingdom and New Zealand. So the relative decline in Australia also adversely impacted mix. Price. We took a 5% price increase from August, which partially mitigated the impact of the weaker Australian dollar on product cost purchases in the half. However, we did not realize as much price as we expected due to the slowdown in the commercial project segment that Tim talked about earlier. Foreign exchange. Through our foreign exchange hedging, we were able to mitigate some, but not all the impact from the weaker Australian dollar for the half compared to the prior corresponding half. The average Australian U. S. Dollar rate was $0.69 in first half FY twenty twenty one versus $0.71 for the prior corresponding half. Net cost changes reflect our continued strong operational discipline, which mitigated a significant amount of the earnings decline for the half. And this includes successfully delivering $2,000,000 in savings as part of the overall $9,000,000 to $12,000,000 cost out program by FY 2021 and $1,500,000 in net from synergies in the half. Other tactical cost savings contributed $2,400,000 The final red bar represents an accrual for staff incentives, which was not included in first half FY twenty twenty. Our first half performance in FY twenty twenty one was impacted by the challenging market conditions, but was in line with expectations. Adjusting for the staff incentive, normalized group EBIT margin in first half FY twenty twenty one was consistent with the full year EBIT margin for FY twenty twenty. Slide 10 presents the results on a normalized basis that is before significant items. The revenue decline reflects the weaker construction conditions in Australia, not fully offset by growth in our international business. EBIT margin was impacted by the market decline, COVID-nineteen, sales mix across geographies, segment mix and weaker commercial sales. The EBIT margin for Australia and New Zealand, however, was in line with the prior period. And as I said on the previous slide, group EBIT margin was impacted by the inclusion of an accrual for staff incentives for the half, which was not accrued for in the prior corresponding half. Slide 11 shows the results on a reported basis after significant items. And we've included it here so you can reconcile the result back to the Appendix 4 d. Our ongoing strong cash generation and financial position enabled the Board to declare a fully franked interim dividend of $0.06 per share. And the dividend reinvestment plan will be offered for the interim dividend of 1.5% discount. The DRP is not underwritten. Turning now to cash flow from operations. This is a very strong result. Given the impact of COVID-nineteen, we maintained a particular focus on cash management in the half and that has been reflected in the very strong operating cash flow performance. Cash flow from operations was $49,700,000 compared to $42,200,000 for the prior corresponding half. And cash conversion remains very strong with a cash conversion ratio of 118%. Working capital and debt management is a continuing focus with days sales outstanding at 31st December 2020 improved on the prior corresponding period. Capital expenditure for the half was $5,500,000 That's down on the $8,200,000 for the prior corresponding period and reflects our continued prudent approach to cash management. We remain focused on initiatives to drive cost efficiencies and revenue enhancing opportunities, including a seed investment of $2,800,000 in a 3rd party overseas venture. Cash restructuring and other costs of $900,000 relate primarily to methan integration costs. GWA remains in a strong financial position to manage in the current uncertain environment. And net debt as of 31st December 2020 was $125,000,000 compared to $144,800,000 as of 30th June 2020 with leverage improving from 1.9x down to 1.7x. In November 2020, we completed the refinancing of our syndicated banking facility and that comprises a single 3 year multi currency revolving facility of $227,000,000 which does not mature until November 2023. We also maintain a separate $40,000,000 1 year multicurrency revolving bilateral facility, which matures in October 2021. Our credit metrics remain consistent with investment grade as you can see on the slide. I'll now hand back to Tim. Thanks, Patrick. On Slide 15, our growth strategy continues to be customer and consumer focused, underpinned by internal cost and capability improvements. It's a strategy that supports our purpose of making life better through products, services and technologies that create superior solutions for water. So today, I'll provide an update on our continued progress on the integration of Methode, an overview of innovation driving our brands and an update on Corona Smart Command. We acquired Methode in April 2019 and have been progressing our integration plan since that time. We're pleased with how the integration has gone and the further diversification, scale and capability met and brings to our business. Cost synergies remain on target with $1,500,000 realigned in the first half and we remain on schedule to deliver $3,000,000 for FY 2021, bringing the overall total across FY 2021 to over $6,000,000 We've completed the integration of the sales structure and consolidation of the Australian distribution network. Our focus now is to the final stage of integration. This includes consolidating our New Zealand distribution network from 2 warehouses to 1, which will enable efficiencies and single invoicing to improve our customers' experience. We're also progressing the sale of the Methan, China Acenbu plant, which is expected to complete in Q3 FY 2021. We expect one off costs of around $4,000,000 will be incurred in FY 2021, of which $2,100,000 pretax were incurred in the first half. Annualized benefits of around $3,000,000 are expected to flow FY22 onwards. Our tap and shower west center of excellence in New Zealand is building a strong pipeline of new products with the market leading Methan shower IP now being used in Corona new shower launches this year. The addition of Methan provides us with enhanced geographic diversification, which continues to be a strategic growth opportunity for the group. Around 23% of our revenue now comes from outside Australia. In our international business, we're leveraging Corona product to go to market with a whole bathroom solution. We're also leveraging our IP and technical capability, as Patrick mentioned, with a 3rd party overseas venture, which is at the early stages and we'll be able to talk more about that later this year. On Slide 17, a key focus of our growth strategy is centered on product innovation. We've established centers of excellence in Auckland and Sydney to harness our local technical design and sourcing capability in taps, showers and salchowear. A rolling 3 year innovation and new product pipeline is prioritized against specific market opportunities. And while we launched more than 1500 new SKUs in the last 3 years, around 3,000 SKUs have been removed from the portfolio. Our focus on hygiene and touchless solutions is important in the current environment. For example, we have launched GermGuard, which is an antibacterial glazing for our sanitary wear and toilet seats to capitalize on consumers' heightened concerns over safety and hygiene following the COVID-nineteen outbreak. And we have further touchless tapware innovation planned for half 2 FY 'twenty one. We launched a number of new initiatives under the Chroma brand, including JERMIGUARD sanctuary wear, colored tapware and showers incorporating the Methven IP across both Australia and New Zealand. We've also extended our Methven tap and showering range to take advantage of further identifying opportunities. Our local design and technology expertise continues to be a key point of difference for the grid. On Slide 18, the momentum behind our touchless intelligent battery system, Corona Smart Command, continues and we're encouraged by the ongoing strong reception in the market. In the current environment, the system's touchless features, which offer customers a safe and hygienic solution is resonating well. The system has been installed in 77 sites across Australia and New Zealand. While COVID-nineteen delayed the anticipated rollout into some sites during the half, predominantly in retail and airports, our Corona Smart Command Auto Bank is growing, and we maintain a solid new product pipeline with a number of product, technology and cloud interface enhancements in development. To date, 33 sites have been migrated to our new cloud data captures solution with further migrations expected in the second half. Importantly, this is the 1st small step to create an ongoing fee for service solution. We've completed the 1st pilot installation in Asia with further activity planned over the next year. I'll now provide a commentary for the full year FY 2021. Recently, we've indicated in Australia, the consumer sentiment, dwelling approvals, new housing loans or housing turnover. And federal homebuilder and state government incentives points of increased attached residential completions and renovation and replacement activity in Q4 FY 2021 and into FY 2022. Our commercial order bank remains strong and is 16% above the level at December 2019. When we have pivoted to the key segments of education, health and aged care, our order bank in those segments is up 25% since the end of June 2020. We remain strongly positioned in the commercial segment. However, commercial and multi residential completions are expected to remain subdued in the second half FY 'twenty one. Growth is expected in New Zealand, United Kingdom despite ongoing COVID challenges and Asia. For FY twenty twenty one, our focus remains on generating profitable share growth through customer and consumer initiatives. These include targeting new commercial segment growth opportunities and embedding new products be that sanitary wear and colored tapware with key merchants. It also includes enhanced consumer engagement leveraging our digital communication strategy and channels and the touchless hygiene benefits of Coranda SmartConnect. We'll maintain our focus on operational and cost discipline and are on track to deliver strategic supply chain savings of $4,000,000 and targeted net integration savings of $3,000,000 in FY 'twenty one. In the second half of this year, we will commence the implementation of a new ERP CRM system to improve customer experience and to replace multiple legacy systems. We'll continue to control the controllables with a specific focus on discretionary spend, working capital and capital expenditure. GWA is well positioned given our strong operational leverage to increase market activity in Australia and we continue to capitalize on our momentum across our international operations. Ladies and gentlemen, that concludes the presentation and we are happy now to take your questions. Thank you. Thank you. Your first question comes from Mitchell Sonegal from Macquarie. Please go ahead. Good morning, Tim and Patrick. Thanks for taking my questions. Can you hear me? Yes, very clear, Mitch. Yes. Thanks. Just a quick question first on the outlook. So for the second half, you've talked about the addressable market expectations to be down either 4% or up 2%. Can you clarify that half on half versus PPP? And also just thinking about the second half incorporating all the movements in FX and cost out, how should we be thinking about the second half EBIT margins on that guidance that you provided there? Thank you. Thanks. Sure. I appreciate it. Walt, why don't you talk about the FX cost? Yes. The outlook second half is a year on year comparison. So that's now the change I think we face in the second half is really what we're not sure about yet is when the benefits that we know are coming on detached housing and the renovation when that approvals shift through into completions. And that's why the range is probably fairly broad in the second half. As I said in the presentation, we expect an uptick in quarter 4 based on the significant growth that we've seen in approvals of both Reno and New Buildings literally in December primarily. So that's we think will show up in Q4, but it could move into Q1 FY '22, and that's why we've sort of there's a relatively large range there. In terms of margin, Mitch, for the second half, look, we have included, I think it's Slide 23, some updated assumptions. But basically, FX was adverse year on year, dollars 3,700,000 in the first half. We're forecasting that to be less adverse in the second half. So we think about $5,000,000 for the full year. So we will see some benefit there relative to the first half. In terms of cost out, we delivered the 2 $1,000,000 in the supply chain cost program, which the $9,000,000 to $12,000,000 by FY 2021. We expect that to be $4,000,000 for the year, so the run rate will continue. And similarly, the $1,500,000 delivered on net for integration savings in the first half, that run rate will continue and we should see $3,000,000 there for the full year. I think the other comment is that we would expect to see more price benefit come through in the second half, just predominantly due to the usual life effect in the builder segment, where it takes about 6 months from announcement for that to work through an impact in the marketplace given the contracts builders have with their consumers. So look, I suppose the one offset that we are also seeing is some adverse freight costs due to shortage of shipping and containers. That's really an industry wide, in fact country wide issue at the moment. So we are expecting a little bit of headwind there. But look, overall, when you put it all together, I would subject to any major swings in mix, I would be expecting to see some improvement in margin in the second half. Okay, great. And Patrick, just a quick comment on the gross margins, if you could, from the PCP, sort of down 2 30 basis points. Is that more mix? Or is that going to be some of those freight costs coming in? Can you just step through that a little bit more, please? Yes, sure. Look, in the first half, that adverse margin movement is there's a little bit of on cost from freight there, but that's going to be more of a headwind in the second half than the first half. The real driver there is the adverse mix that I talked to, and that's driven really by predominantly Australia. So there's a couple of building blocks to this. Firstly, commercial segment is down, as Tim talked about, and that's our generally our highest margin business. But equally, the builders segment is up, and that's a significantly lower margin segment for us. So Australia, coupled with, if you like, the volume decline in commercial has proven that. And then as we've seen growth in other geographies such as New Zealand and the U. K, while those markets, the margins are improving, historically, they are lower than Australia. So it really is all mix. It's not about terms drift or anything like that, Mitch. It's a large mix factor impacting that first half. Yes. As we said, Mitch, I think our commercial order vanishes up strongly. So we haven't foregone those sales. They're just delayed at the moment. So we know that we will get those back into the business at some stage. It's just a question, as I mentioned before, when the commercial segment starts to pick up again. So it's a I suppose, if you like, it's a timing or a phasing issue that we face at the moment, particularly in the second half of this year before we see any rebound in that commercial segment. Okay. Great. And just a final one for me, Tim. I'm just thinking about the residential alternate segment. Can you just give us a bit more flavor, I guess, about how you're seeing things state by state and maybe the discussions that you're having with your customers given the improving approvals over the last 3 to 6 months? Like are they starting to get more bullish? Just give an update on how they're seeing things. Yes. I think, as you say, the approvals piece, I think, has gone through. I think it was very significant. And if you look at homebuilder, I think of the 75,000 homebuilder applications up to the end of December, some 20% of those were actually driven by renovation opportunities. So I think there's no doubt that there is momentum there on the back of homebuilder. I think it goes much broader than that, Mitch. So I think it's actually the availability of free money and all those other factors I talked about earlier around housing prices picking up and housing turnover starting to pick up. I think that's what gives us some confidence that the market will pick up into the future. All of those things, I think, are driving some increase in interest in that renovation space. We think that it's probably more in line with HIA. We think that this year the rental activity will probably be up about 3% overall. And really that's, say, in line with HIA and where they're coming from. You're seeing quite an interesting mix there where in New South Wales and Vic, you're seeing a good growth in value of those renos, which I think is interesting, whereas in Queensland, we're seeing quite an uptick in the number of renovations, as you said, in the ABS data. So it's a and the value of the renovations in New South Wales and Vic is quite a bit higher than it is in those other states. So you're seeing a different mix playing through on some of these. So from a customer perspective, a lot of the work that we're doing at the moment has been to and I've talked in the presentation about getting new products into market. So a lot of the work that we're doing around the Caroma colored tapware, around getting new showers on both Caroma and Methven into our customers, getting those ranged and displayed in their showrooms is an important part of what we're doing as we look to take advantage of those opportunities. I think there's good alignment between ourselves and our customers on, A, the opportunity that R and R presents. But I also think that for many of those customers who are also suffering in the sort of weather, the commercial downturn has impacted their business, why they're looking for other growth opportunities. So I think we're well aligned across all our major customers with the need to drive increased activity in the R and R space. And if you were to walk into one of the major big box retailer at the moment, you'd see that we're actually got display there of bathrooms, a complete bathroom solution, which is actually driving really good incremental volume for us and for them for that matter. So there are plenty of things that we're doing in the first half, which we think will give us benefit as we roll into the second half, both in terms of customer ranging but also that new product development rollout that I've just talked about. Perfect. Thanks a lot for it. Tim and Patrick, that's all from me. Thanks, Mitch. Thank you. Your next question comes from Lee Power from CLSA. Please go ahead. Hi, Tim. Hi, Patrick. Just on the $9,500,000 of that FY 2020 short term cost reduction, can you give us an idea of how much of that return in the first half? Yes, look, you'll recall that we said of that 9.5%, I mean it was 6.6% was related to STI. So 3.3% of it, if you like, returned in the first half, which was STI related. And I'd say there's probably, as you saw, we had some other sort of tactical savings. So we probably saved another $2,400,000 from just lower T and E and vacancies and recruitment costs and things like that, that we had thought we would be spending in the first half. So broadly speaking, I'd say really only probably about $4,000,000 came back in the first half of that 9.5. Okay. And then, I mean, the commercial order book, I guess that it's growing and I guess it's always hard to put a timing on when it returns. Do you think that recovery in commercial goes hand in hand with restocking? Are they now so closely tied that we could see 2022 get this double bump of restocking in commercial? I think, Wade, there's no doubt that at some stage, there will be the uptick. And as we've talked about before, as momentum comes back in the market, customers want to make sure they've got plenty of product to take advantage of sales opportunities and that becomes their focus rather than cash flow or sort of working capital management themselves. So I think the answer is yes, we would expect to see an uptick at some stage. I think the really hard thing at the moment commercially is really trying to put a definitive time frame on when that will come back into the market. So in the short term, as I mentioned, what we've tried to do is as we've recognized that maybe offices will be slower in their sort of recovery and maybe same for multi res if you're looking at the projections for those going forward, We've actually looked to pivot some of our focus around aged care, around health and education where we know 2 things. One is that there's going to be increased public spend in that area, but also that the turnaround time for some of those projects is somewhat shorter than they would be for those major commercial developments. So we've tried to reemphasize, if you like, where we're focused, and that's why we're seeing our aged health and education up some 25% from the end of FY 2020 because of the extra effort that we put in there. We've got dedicated people now hunting against opportunities in each of those three segments across New South Wales and Victoria, and that's given us some benefit. So in answer to your question, I think, yes, there will be an uptick at some stage, but what we're not committing to at the moment is when that will happen. I think there's a little bit of time to go before that full confidence in conversion comes back. But what I do know is that when it does come back, we are incredibly well placed to take advantage of it because of, A, the strength in that order bank, but B, the shape of the order bank that we now have as well. Okay. Excellent. And then, Patrick, just on price. So it sounds like is price I guess before it was price was enough to offset FX. Is that still the case or maybe not anymore? Yes. No, I would expect for full year that price will fully offset FX because we will see a higher rate of price recovery in the second half and a lower rate, if you like, of incremental FX on costs. So overall for the year, we should still be good there. Okay. And then just one last one following on currency. You mean with $0.78 now, like how should we think about that in the longer term thinking like 'twenty two? Does it are you going to put that back into reinvestment or are you happy to run higher margins? I think in the past you've talked about like sticking around 100 bps range around margins. So whether that kind of thinking has changed at all? Yes. Look, you're right. We sort of said plus or minus 50 to 100 over the sort of medium term. That sort of metric is still valid. I think what we've seen, frankly, is a bit of a perfect storm with the COVID impact, particularly last year and lockdown, shutdowns in New Zealand and the UK. And then we've seen that impact mix in a confidence in the first half of this year, which has impacted that commercial segment. And then you couple that with the homebuilder stimulus boosting the builder segment, it's a bit unusual. And that's why, as I said to Mitch, that's what's driven that gross margin temporary decline. But look, to answer your question, I would expect margins to improve over time. And we've always talked about maintaining that group margins sort of in the low sort of 20s, and that still remains valid. So specifically on FX, it is going to be still a headwind for us this year. But at the moment, we've got we've lowered our sort of cover for 2022 at the moment on the expectation that most people are forecasting further strengthening. And at the moment, we're 48% covered in terms of our requirements at about $0.73 And look, obviously, we'll continue to roll forward. And if rates stay at $0.77, dollars0.78 that will continue to improve. So we should see a benefit on FX in 2022 versus 2021. Okay. Thank you. I'll leave it there for the moment. Thanks. Thanks, Lee. Thank you. Your next question comes from Raju Ahmed from CCZ. Please go ahead. Hi, Tim. Hi, Patrick. Can you hear me? Yes. I am. Okay. Fantastic. Thank you. So a couple of questions from me. The first one is, if you divvy up FY 'twenty one into 4 quarters, do you feel that you've passed the low point? Or is that low point still to come in quarter 3? We believe that we've sort of hit the low point and there should be some modest upside from here, Raju. And I think a lot of that talks to the recovery that we're seeing in that consumer or med space. So we think that we would expect to see I wouldn't expect a V curve on this a bit more of V shape, but certainly, we'd expect to see modest increases and momentum building as we go into Q3 and into Q4 over this second half. Okay. So I'm not trying to put numbers into you, but what I'm trying to get my head around is given your expectation of potentially better Q4, and I can understand that, then is it a case of saying that the second half revenues and EBIT underlying basis will be both better than the first half? Is that a rational comment? Yes. I think that's a fair assumption. I think also the other place to remember in the second half that we haven't really talked to in areas that the Australian market, I think, is improving and we will benefit from that. But I think it's also worth remembering that we are lapping significant lockdowns in New Zealand and the U. K. Last year as well, Raju. So we will obviously get the benefit of that. And I think as I said earlier, we're trading well in both of those markets anyway in terms of good top line momentum and also winning some share there. So it's actually quite encouraging. So I think then as we go into the second half, it gives us more of a base to sort of springboard from. So we do expect on that basis the second half to be stronger than first and certainly that momentum carrying through. Q3 will be pretty good in obviously New Zealand and the sorry Q4 is probably going to get most benefit actually as well because the lockdowns were in April in New Zealand. So you start to see that playing through a little bit at the end of March, but also into then mainly April and a little bit in May. But just put it just to be 14% of our business in New Zealand and 8% in the U. K. So we still got to make sure that we're doing all the things that we need to do in the Australian market. And that's I think that's where we also feel more confident than we were in the first half. Okay. That's good to hear. The second sort of question group is more focused on the macro. You've talked about seeing demand in the horizon with the homebuilder and the other government stimulus packages. I'm just trying to get a holistic picture whereby if you've got a I mean many builders tell me that there's a pull forward in demand as a result of the homebuilder scheme in particular. If you've got that pull forward now or coming up in the next couple of months, how do we then think about what does the other side look like? And what does that mean for expectations around that restocking you talked about from the earlier question? And also, how do we overlay that with the commercial outlook? When does that demand flow back to in terms of big commercial projects? How do we look at 2021 calendar year given all of the above? Well, that's a $1,000,000 question at least, Raju. But I think the way that we're thinking about this at the moment is that the two parts of the demand that's being driven in the second half, I think one will be around resi detached housing new build and the other one will be around the renovation and replacement space. So I think both of those look as though they're set for an uptick in the second half. I'm I mean, I sort of and this is just to give you our view of the world. But at the moment, if you look at someone like Biz Oxford, they're saying that there's going to be a significant uptick coming in Q4. And I think then a decline setting in beyond that as it's all been pulled forward. I'm probably a little bit less optimistic about this massive peak followed by a massive trough. And I think that labor availability and trade is will actually start to play out on some of this because I think we're going to potentially see a bit of a convergence crunch because the tradies that work on reno's and work on detached new build are not necessarily the same ones who work on multi res. There is some overlap or in commercial with a plumber who works on commercial jobs can't necessarily bounce towards there and go into a detached housing space. So, I think we're going to see a bit of a crunch on availability of labor potentially, which will probably a good thing to dampen down what we see happening in this the end of this year. But converse to that is that I think that will actually be more encouraging as we then move through into the first half of FY 'twenty two. So I don't think we're going to see quite as much of a peak in troughs as perhaps some of the market forecasters are talking about at the moment. And if you've ever done a renovation yourself or attempted to build a house as well, Some of the hoops you have to jump through with local councils and whatever else, I think we're potentially if it's all coming into crunch at one go, I think we're going to see that, that sort of demand for labor and approvals is actually going to put a bit of a natural downturn on which will probably put a bit of a cap on how much acceleration we get in the second half. So I think we will see upside, as I said earlier, from Q3 into Q4, but I don't think it's going to be that sort of bust boom and bust cycle that some are predicting at the moment. The commercial one, I think, is a really is a much harder one to predict at the moment. We're as I said, we expect commercial to remain subdued in the second half of this year because unless something is in the pipeline now or unless it's actually already under development, there will potentially be a lag until we start to see that return. And I would expect that that would be you start to see some uptick for us probably Q1 into Q2 FY 'twenty two, not because of the big jobs that we got in the order bank, but because there are a lot more smaller jobs that we're picking up at the moment that we're changing the mix, as I mentioned earlier. So I'm probably much got more of a view around residential being flatter in terms of the peaks and troughs and then commercial rising slowly from here. And I think hopefully, we don't see a return to lockdown like we've got in Victoria because that down doesn't help anybody in terms of confidence. But I do expect then to see a slow return on commercial over the course of the coming months and quarters, and that's how we're sort of thinking about our business at the moment. Okay. That's very helpful. Thank you. And the last question, this will be a quick one, is you talked about net then margin improvement. Has it been all or mostly on the back of the integration benefits? Or have you seen top line improvements driving margin expansion through operating leverage as well? Yes, it's Patrick. I'd say it's really a combination. We've seen top line growth, as you can see in the U. K. And in New Zealand, on Slide I don't know, number is 3 or 4, I think, and Slide 5. So that's contributed. And then, yes, the integration savings are well on track for that AUD6 million by the end of this year, which is above what we already targeted. And then we've now flagged that we will get additional benefits in 2022 flowing from that consolidation of distribution in New Zealand and changes in that we announced in China. So at last we ended last year somewhere around, we estimate, about a 12% EBIT margin in Methan. And I'd estimate that's up to over 14% now and well on track to get to the high teens that we've always said is our aim by FY 'twenty two, 'twenty three. Okay. That's very helpful. That's it from me. Thank you. Thanks, Roger. Thank you. Your next question comes from Peter Wilson from Credit Suisse. Please go ahead. Thank you. Good morning. If I could start with just a few on costs. To follow your earlier comment, Patrick, around freight rates, can you give us an idea of how much freight is as a proportion of your costs and how much those spot rates have gone up and how you manage that, how much you've contracted versus how much you're exposed to those spot rates? Yes. Look, I'll start, Tim. You might want to speak as well. But look, approximately 6% of our product costs would be freight costs and the majority of that's international freight. And we bring in something like 4,000 TEUs manually, so we're a fairly big importer. Having said that, we do club together with other importers to contract at what we hope are good rates. So the answer to your question really depends on how much is contracted and how much is spot and whether the shipping companies continue to allow people to contract significant volumes. And look, we would probably be contracted, I would say, about 85% currently. But whether shipping companies will offer that as we go forward into 'twenty two, I don't know. So we're not expecting when I say it will be on cost in the second half, I think it will be probably in the order of $11,000,000 or so for our business. I think the big unknown is what does it mean for 'twenty two because spot rates at the moment are already up probably about 5 or 6 times. About 4,500 years to the EU. Versus probably 1,000. 1,000. So and also international, it's not so important for us, but international air freight is probably up from 2 or 3 kilos dollars a kilo, sorry, to probably $8 or $9 a kilo. So look, we're pretty well placed, we think, for second half. What we just don't have a crystal ball on is what will happen in 'twenty two. I think the only thing about this is it's a global issue. It's not a building industry issue. It's not an Australian issue. They're the same issues are happening in particularly on rates from Asia to the U. S. And into Europe and the U. K. At the moment. So look, it's going to affect everybody. So I imagine if it continues and if supply of ships and containers doesn't balance back in the short term, then I suspect it will be inflationary and lead to people needing to price to recover. A bit of a long answer, Peter, but does that help? It does. Unfortunately, I missed part of it due to I think it's a poor quality line. When you're just talking about how much the spot rates are up compared to your contracted rates, can you just I guess give a little Spot rates are up probably 5 or 6 times what contracted rates are currently. Having said that, as I said earlier, the majority of our rates at the moment are contracted. So it's not having a huge impact yet. And we're well positioned on stock as well. And we're well positioned on stock. And we saw some of this coming, and it's one of the reasons we inventory was slightly higher in December than otherwise would have been because we brought more in when there was more availability of shipping. Okay. And so you're 85% contracted this year, what would you be into next year? I don't know because that negotiation doesn't take place until next year and very much will depend on what's available in the marketplace. What we do know is though that to the point Patrick made earlier, it was part of the group that we're part of has got very good global scale. So therefore, we're pretty confident that the rates that we will be able to get will be as attractive as anybody else, if not better coming into market. So I don't think we'll be at a disadvantage either on the price or availability basis as we try and strike this new deal. I mean this is basically will impact anything coming in, in the container into Australia, which at the end of that is most things. It also is impacting it doesn't impact us so much in this regard, but it is impacting export because there's actually less containers available in the right places for people to export in. We did see in the first half, Peter, as I mentioned, but it was to Roger, that we actually got a benefit in New Zealand in the first half because that product's availability was much stronger than many of our competitors. So we've taken advantage of that sort of the supply chain that we've got at the moment and that product's availability to continue to drive benefit with customer and that's been quite useful. We expect that will carry on in the second half as well. Okay. And I guess based on your experience and what you've the kind of the increases in rates that you've seen in markets in the past, Like if you look into FY 2022 and I guess the quantum of the increase in freight costs you expect and then compare that to the relief you're getting on FX, do you think that the quantum we should say the quantum is roughly similar? Or do you think the sorry, the freight rates are going to more than offset the FX tailwind? Look, I can't give you an outlook for 2022 at this early stage, Peter, given this is a market macro factor. I think as Tim said, we'll be relatively well positioned for whatever it is. And as you've said, we will have benefits in year on year FX if things continue the way they are, and we'll obviously have cost out programs as well. But look, I can't give you a crystal ball on 'twenty two freight rates at this point. The reality is, though, we're going to have to pass price through it because as I say, this won't be just a bathroom products or just a building industry issue. This is going to be as Patrick said, it's going to be in Australia and New Zealand issue. So everyone I think will be looking to push price through in the market if we don't see these rates come down. I think the reality is that while we don't know what the future holds at the moment, I think there's a lot of probably height in the numbers and we're obviously, as Patrick said, we brought products in early with an expectation that some of these numbers are going to go up. I don't think Asian supply partners and their governments will actually allow this situation to carry on because it's not going to just put a downturn on Australia, it's going to put a downturn on many economies. So I think there will be a solution that will be found for this. We already were saying in China that they're ramping up production of containers to build availability. So I think it's something that we're very conscious of at the moment, but it's not something that we want to overreact to either because I think we need to understand Patrick's point what the future holds. But certainly it doesn't look good at the moment, but I think there will be remedial to improve essentially. That's right. And hopefully, by August, Peter, we can give you sort of clarity to your question. Gilpin is very aware of this as well, both in New Zealand and in Australia. So I don't think it's not a I don't think it's a surprise for everybody at the moment. I mean, it may be a surprise how quickly it's come on, but I don't everyone's aware of it. So I'm sure there'll be actions taken at a national level. Okay, understood. And then on the a little bit confused on your selling expenses. So selling expenses were down or the $9,000,000 in the first half, so $6,000,000 dollars Little bit confused, I guess, in the context of Lee's earlier question around the non recurrence of the FY 2020 saving and selling expenses. So I guess the question is, the selling expenses in first half twenty twenty, is that a sustainable level or should we still expect more costs to come back in FY 'twenty two? You're looking at the stats, are you, Peter, for that? I am, yes. Yes, there's a number of things in that bucket. I mean a lot of it is, I mean I referred to for example, we had, say, $2,400,000 of tactical cost in the first half. You see that in the waterfall effectively. And that's really savings in coming driven by predominantly not having the T and E that we expected in the first half, having holding on to vacancies, not filling those or managing that and no professional fees and recruitment and so forth. So we've always said as part of that 9.5 percent, we expect that to come back into the business. So I would expect that to happen certainly in 2022. Absolutely. But the other big numbers that work through into that is, as I said, dollars 1,500,000 of savings in integration for Metfen, and that's not all from selling. But we did integrate our sales team across ANZ with the Metfin team and that has driven some of those savings. So those were planned and just part of the $6,000,000 integration related to Metfin. And those will be sustained and will continue. So I guess it's roughly, I'd say, maybe half of it will come back and half of it will stay out year on year. And look, it's probably a bigger slightly distorted comparative here. You're running at 6 months. I think you probably see it sort of less extreme like full year and things even up. Some of that cost came out in the second half last year as well. Okay. And then on the sale of the Methane China plant and the benefits you're expecting, so $3,000,000 benefits. And the one off costs $4,000,000 full year, dollars 2,100,000 this year, were they taken above the line? And are the annualized benefits relative to those one offs or are they on top of the one offs? I'll try and write that down. So in first half this year, you'll see we had one offs of $2,200,000 pretax. And in the second half, you'll see on that assumption, Slide 23, we've set out that we think significance for the full year will be $6,000,000 So it will be $3,800,000 in the second half. And the bulk of that is related to 2 things. 1, the warehouse consolidation that Tim talked about in New Zealand and the sale of the assembly plant in China and the balances related to ERP kicking off. So those are, if you like, below the line and then significant items. And then as we called out that, yes, there will be an annualized saving of $3,000,000,000 in FY '23,000,000 2022, sorry, related to that methan part of that, which was about $3,000,000 out of the $3,800,000 expected in the second half. Does that make sense? Yes, it does. So effectively a very quick payback on those changes that we're making, which will obviously give us long term margin improvement in net finance as we've spoken about. Yes. And you're talking a $3,000,000 improvement versus your adjusted EBIT this year? Correct. Okay. And just last one for me. On the in terms of the market, you spoke about this a little bit before, but in terms of the residential R and R piece, what do you think the R and R growth was in the first half of twenty twenty one? And what are you assuming into the second half and then into FY twenty twenty two? At the moment, I think we've sort of aligned with pretty much where the HIA have come out, which is sort of full year, I think we're forecasting something in the region of a 3% growth. And we think that that will be slightly stronger in the second half relative to the first half. So the first half is plus 1 or 2. Second half will be a little bit strong in that as we said. So that's more aligned to so we're aligned to that one as it relates. But at the moment, I think it's a little bit too hard. If you're looking forward to FY 'twenty two, I think in R and R generally in that resi space, you're normally plus 2, plus 3, minus 2, minus 3. You tend not to see the massive boom and bust in those areas. So HIA are calling it down marginally in FY 'twenty two. I think if it is, it's only down 1% or something like that. So I think it's pretty much going to be holding relatively flat. And I think that's reflecting that same drag forward potentially around homebuilder. But at the end of the day, if not all of that plays through, then we may see a slightly slower growth in the second half and a slightly higher growth into FY 'twenty two. So we think that's roughly where it will end up. But at the moment, it's still, I suppose, a little bit up in the air. Do you not think the sales performance of your major customers just in R and R was, in fact, a bit stronger than that this half? And I guess, you're relatively weaker sales for most of your major customers? No. We're actually very comfortable actually with where we've landed with our major customers because what you've got to look at for every one of our sales is you've got to look at whether that's in resi, whether that's in commercial. And obviously, a lot of the downside that we've had in the first half has been around the commercial sales. If you take some of our major customers, we're very I'm not going to quote their numbers, but we're very confident that we're growing at or ahead of their position within the front of wall. So with major customers, we're actually very comfortable around that. So I think when you look at some of our customers, you've got to split their business up front and wall, back and wall, Walter. And then some other players such as Breeze, for example, have got civils and they've got refrigeration and they've got HVAC and whatever else. So I think you have to look at that business in totality and then try and strip out what they're doing on front of wall. So that's how we try and compare ourselves to market. And certainly, we're confident that we're going okay on that. Why do you think front of wall kind of asset category would be one of the few categories, I guess, which isn't participating in this home improvement boom that we're seeing? I wouldn't say it wasn't participating. I'd say that we're holding our item on what we know. So from our perspective, the customers where we're in that trade area, I'm very confident that we are actually participating in that with them. As I said earlier, don't forget commercial was around 32% of our business. It's come down this year, but that's been a double digit decline in the first half, which has had a major impact, not only on us, but obviously we sell everything that we sell through that to a merchant. So that has a flow through on that. If you look at that commercial versus what we do in resi, our resi, I think with every customer, when I say resi, either merchant sales or residential newbuild sales, we're actually up in the first half. But the challenge has been that in the commercial, that's been the anchor in terms of how we look to how we're performing each of our customers. The slide I'm not sure which one it is, but one of our customers. Slide 6 gives a little bit of an indication of that, Peter. With that, it doesn't matter who's who, but even if you look at customer 1 there, we know that residential sales and merchant sales are strong, but we know that that's been held back by some obviously slowing commercial sales. And then the one at the bottom of the on the left hand side is customer D is obviously a customer which is pretty much exclusively focused on commercial. So it's all to do with where they play in the market and how it plays through the customer. Okay. Got it. I'll leave it there. Thank you. Thanks, Peter. Thanks, Peter. Thank you. Your next question comes from Lisa Huynh from Citi. Please go ahead. Hi all. So I just had a question on the commercial order book. I guess you've talked in length about the weakness in commercial and understand it's fairly uncertain at the moment. Can you just talk to us about what you see as some of the catalysts you're looking out for in your business, specifically in the education, aged care and health space to see some of that order book convert into sales on the horizon? Yes. Good question, I think. A couple of things about it. First one is, I think the whole COVID piece has played out in a way to an advantage of this, because I think it's going to create renovation opportunities in that commercial space in a way that I think will put more of an emphasis on that rental rather than new build. If you go into any public area, whether it's a hotel or whether it's a school or anywhere around Asia, you'll see that most of the facilities are actually touchless, whereas in sort of high end places particularly. Whereas in Australia, whether it's schools, whether it's aged care, whether it's health, there's still actually a lot of touch products that you need to manually flush or turn the taps on and off. So we think that the major short term benefit would be this conversion of around safety and security for patrons, whether that's a person in aged care facility or whether it's somebody visiting a retail shopping center. We're already seeing quite an increasing inquiries and demand for touchless solutions. So I think that's the piece that's going to be interesting across not only age, health and education, but I think more broadly as well. So from my perspective, we're already seeing that playing through. Within our order bank tapware has actually increased as a percentage of our order bank. It's gone from only about 18% to 19% at the moment, but we expect that to continue to increase over the second half. And then I think more broadly, as I said earlier, I think we're seeing a mix shift from those large scale jobs to those smaller jobs, sort of that renovation as opposed to newbuild. And from our perspective, we expect that to continue through with increased inquiries in that space and increased conversion into sales there. So that's why I mentioned earlier, our education, health and age is up about 25% as an order bank versus at the end of FY 2020. And we expect that that conversion to sales to be a lot quicker. So in a way, what we're trying to do between the peaks and troughs and those big jobs actually fit it in with a lot more smaller stuff. So from that perspective, they're the lead indicators that we look for, which is that order bank around some of those areas where we know it's more replacement and renovation and shifting mix within that order bank. And I think we're comfortable with the progress that we've made to date. We've got a lot more to do and we've got new touchless tap ranges coming out in the second half of literally a couple of months' time. And we're going to continue to drive more of those because we think that the market has already made that shift and we need to make sure that we've got sufficient product offerings at different price corridors to capture that opportunity more fully. So that's how we're thinking about the shift in that order bank at the moment. Okay, sure. And I guess that shift towards smaller the smaller projects in terms of the renovation piece. Would I be correct to assume that that's typically higher margin because there's probably less overheads attached to those type of contracts? It's an interesting one. It's very dependent by the individual job to put it bluntly because sometimes in healthcare and aged care, people are willing to pay a premium for a service solution and an ongoing benefit of knowing that you fix problems and that whatever happens, you'll be there for replacements and whatever else. Else. Education may tend to be a little bit more focused on landed price. So I guess it does vary a little bit. But generally, I mean, I think the principle is that commercial is a higher margin segment for us. And then within that individual jobs may vary up and down quite frankly. Some will be above the average in commercial and some will be a bit lower. But certainly we don't expect it to be margin diluted going into some of those smaller jobs. I mean every job is quoted. So it's not like there's, if you like, a standard price book. It depends on many factors. Okay. Sure. Got it. And just last one, just quickly on Methven. I think you might have touched on it before, but can I just confirm that for Methven, the margins were up ex integration synergies? Yes. Margin, I think when we bought it, Metron had a 6% to 7%. Yes, 6% high, sort of 6.8% EBIT margin, closed last year up at about 12%. And at the end of the first half, lease service was in and around 14%. And that's coming not just from integration savings but also from top line growth. And then as I said earlier, we're on track to get to those high teen margins FY 'twenty two, 'twenty three and have line of sight on that now, particularly with those other savings we spoke to Peter Wilson about on the last call. Okay. Sure. I got it. That's it for me. Thanks, guys. Thanks, Lisa. There are no further questions at this time. I'll now hand back to Mr. Salt for closing remarks. Thank you, everybody, for your time this morning. We appreciate it. And obviously, if there are further follow-up questions, we're more than happy to take any of those as we can. And Martin Kohl's here to help us organize that. So thanks for your time this morning. Have a good day, everybody. Thank you.