Earnings Call: H2 2021

May 20, 2021

Good day, everyone, and welcome to the Metro Performance Glass Fiscal Year 2021 Annual Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Simon Mander. Please go ahead. Good morning, everyone. Welcome and thank you for joining our call today. My name is Simon Mander, and I'm the CEO of Metro Performance Brands. And with me is our CFO, Brent Meagland. This morning, we'll provide you with an overview of the group's results for the 12 months to the 31st March, 2021. And then at the end of the call, we'll be happy to take any questions you have. Turning to Slide 2, we've noted our 4 key messages which summarized the year. I'd like to start by recognizing the strength and dedication of our people right across the Metro Glass Group. The emergence of the COVID-nineteen pandemic presented significant challenges for our teams, and their resilience has ensured that we've continued to deliver our market leading products and services to our customers. We have a solid first half in New Zealand, although the COVID-nineteen shutdown impact at the start of the financial year overshadowed our underlying performance in the competitive market. Australian Glass Group progressed well on the turnaround plan with stable operational performance and pleasingly delivered a significantly improved EBIT result. And finally, as a group, Metro Glass has continued to significantly reduce its debt through strong operating cash flows and targeted capital expenditure. Just on to Slide 3, we have our Metro Way graphic. Our strategy and values continue to underpin our culture. And this year, in particular, we've seen this day in, day out as our people keep our business moving forward through challenging, disruptive and uncertain times. Turning now to Slide 4, we outline some of our key successes and outcomes over the FY 2021 period. We continue to focus on our multiyear safety and well-being strategy, making steady progress through the year, implementing standards for controlling hazards effectively and improving early intervention practices. Our teams were resilient and adapted to manage the fluctuating COVID-nineteen restrictions and international supply chain disruptions, which impacted momentum in both New Zealand and Australia. Importantly, we maintained a strong connection and service level to our customers. This is reflected in the strong customer survey results we received in our last survey with customers complementary on our people customer service and project management. On Slide 5, it could be our key financial results for FY 'twenty one. The group achieved a solid set of results this year despite operating in an increasingly competitive market and facing regular externally driven disruptions, which impact on our ability to build sustained momentum. New Zealand revenue of $179,800,000 was down 11% versus the previous comparable period, looking EBITDA for significant items of $19,400,000 down 27%. In New Zealand, we started the financial year and in an alert level for lockdown, recovering well and achieved good out volumes in our retrofit and commercial grading segments. Pleasingly, activity in those segments and a focus on cost control helped to offset the impacts of increased competitive capacity in the window manufacturer segment. Australian Glass Group's revenue grew by 1% to $50,500,000 with strong performance from all states and rebuilding the revenue to offset the exit of non double grading product sales in New South Wales. At an EBIT level, ATG were on track to deliver a modest profit for the year after a positive EBIT result for the first half. However, 2 external factors had negative impacts later in the year. The first was the highly disruptive COVID-nineteen SNAP lockdown imposed in Victoria in mid February and the second of the severe flooding in New South Wales in March. As a result, AGG delivered an EBIT loss of $700,000 in FY 2021, which was disappointing with a significant improvement from the loss of $3,600,000 for the prior year. Group EBITDA of $17,900,000 includes the New Zealand and Australian segmental results as well as group costs of $750,000 You will find further information on this in Note 2 of the financial statements. This result is at the top end of our February guidance of $16,500,000 to 18,000,000 dollars We have continued to strengthen our balance sheet with net debt declining by $18,900,000 year on year to $48,000,000 This was supported by strong operating cash generation for sale and leaseback 2 thirds of our vehicle fleet and a reduction in capital expenditure. I'd like to briefly talk to the New Zealand residential consenting numbers. Now as you can see on Slide 6, on a 9 month lag basis, new residential consents grew 8.1% from March 20 March 21, reflecting strong consent activity despite the onset of COVID-nineteen. In the same period, total floor area consents have increased 3.4%. The mix of consent continues to shift towards multi residential dwellings with detached housing incentives growing 3.3% on a 9 month flat basis compared to 15.8% on multi residential. Non residential contingent value has increased by 5.3% in the 12 months to March 'twenty one compared with prior year. Pleasingly, Metro Glass' commercial glazing forward box remain robust and slightly ahead of the same period last year, reflecting our improved operational performance and acceptance rates. Turning to Slide 7. Metro Glass delivered a solid performance in New Zealand, while COVID-nineteen shutdown impacts overshadowed underlying performance in the competitive market. We responded well with fluctuating COVID-nineteen restrictions and international supply chain disruptions. However, these shocks significantly impacted momentum across the industry. Throughout, our teams mobilized safely and efficiently to maintain operations. Pleasingly, from June onwards, activity in our retrofit and commercial vaping segments was strong. Our retrofit business grew 16% this year despite the lockdown with significant increases in the environment levels and record growth of our forward book. This helped to partially offset the alert level for lockdown and heightened competition in the residential segment. We remain firmly focused on our customers and our team, making good progress with both. I'm particularly proud of progress made on our multiyear safety and welding strategy and our apprenticeship scheme, in which we now have more than 8 year prerequisites enrolled with 15 qualifying in FY 2021. This year has provided further proof of the importance of our strong customer relationships and our continued focus on improving our service model and customer experience. Our 6 monthly customer survey results reinforce that we were on the right track with New Zealand receiving its strongest rating today. Now looking at Slide 8. Australian Blattsburgh is primarily involved in the new detached houses and alterations and addition segments in our key Southeastern Australian markets. Since the middle of 2020, housing improvement numbers have begun to increase, which is flowing progressively through to commencements and completions and increasing glass demand. Moving to Slide 9. The Australian turnaround progressed well with stable operating performance and a significantly improved EBIT result. AGG remained almost fully operational throughout the prolonged COVID-nineteen restrictions and associated disruptions, maintaining momentum on the turnaround plan. The business delivered a revenue growth of 1 percent year on year despite the impact of COVID-nineteen and has offset the exiting of the non BGU market in New South Wales. AGG achieved positive results for the 1st 3 quarters of the financial year. However, Victoria's net lockdown in February and significant flooding in New South Wales in March negatively impacted momentum in the second half. Pleasingly, we continue to see the demand for double glazing increase with the sales increasing by 9% versus the same period last year. AGG is now well positioned for growth alongside the increasing adoption of double glazing. Recent commercial building regulations have increased specification and demand for double glazing products. Similar code changes are scheduled for the residential building segment in 2022, 2023. I'll now hand over to Brent to discuss the financial results in more detail. Thanks, Simon, and good morning, everybody. On Slide 10, we broke out our revenue. And in Zealand, you can see an overall decline of 11%. However, if we exclude the lockdown in April and the ramp up period in May, this reduces to a 2% decline year on year. This decline is largely driven by our residential segment, which declined 17% to $118,000,000 with approximately 55% of that decline attributable to the April May period. Our commercial glazing business declined 8% in absolute terms due to the lockdown period. However, EBIT in this segment improved as we focused on maintaining strong relationships and service, executing projects well and managing our costs. Our retrofit business revenue grew 16% year on year despite the shutdown period with a significant increase in inquiry levels and a record level forward book as many customers elected to invest and upgrade their properties. Slide 11 reflects our full year results. I'll draw you to the segmental results on the right hand side of the page. The impact on New Zealand's gross profit margin was driven by the carrying costs through the April shutdown and May ramp up period, competitive price pressure in the residential segment and incurred an additional incurred cost due to the well publicized disruptions to our global supply chain. In Australia, gross profit margins increased by 12%, benefiting from product mix changes and the restructure of the New South Wales business in December 2019. Turning to the group results on the left hand side. Our net profit after tax before significant items decreased from $9,900,000 to $7,900,000 in 12 months. Statutory NPAT was $8,500,000 benefiting from a $700,000 tax paid one off gain on the sales relating to the lease of our vehicle fleet. I'd like to move on to the waterfall on Slide 12. Moving to the New Zealand EBIT results are shown in the gray shading area where you'll see the dimension of the impacts of April May last year. And New Zealand EBIT result in April May was $10,500,000 lower than the prior year as a result of the shutdown and ramp up periods, albeit partially offset by the New Zealand government wage subsidy. The following two red bars are a consequence of lower revenue increases in shipping related costs and the competitive pressures impacting gross profit. We've been focused on our cost base and achieved some solid cost savings year on year in distribution and glazing and administration selling and marketing expenses during the period. Turning to the Australian performance, which is in the green shaded area of the waterfall. The encouraging story here is the gross profit margin improvement and reduction in administration expenses, which primarily arose because of the restructure of our New South Wales business. Turning to the balance sheet on Slide 13. Net operating cash flows were only slightly below last year with the reduction in overall group earnings. We continue to focus on working capital on F21 through close management of trade debtors and inventory. Safety levels of raw glass inventory being progressively increased at present in response to the ongoing international shipping disruptions. Net debt decreased by $18,900,000 year on year supported by strong operating cash flows, reduced working capital, targeted capital expenditure and the start of lease pack of 2 thirds of our vehicle fleet. Net debt to EBITDA is now at 1.7 times as at the end of March. Slide 14 demonstrates our continued commitment to net debt reduction. We think this has been an important achievement today which ensures the group is well placed to adapt and take opportunities into the future. I'll now pass back to Simon to pick up the next couple of slides and the outlook for FY 2022. Thanks, Brent. Now turning to Slide 15, I'd like to outline the company's capital allocation framework. This framework describes our decision making process on uses of our net operating cash flow. Over the last 2 years, we've been applying net fees cash to debt reduction as Brent has shown on the previous slide. This has been in preference to other alternatives including dividends and CapEx. The combination of a stronger balance sheet, increased confidence in the sustainability of the group's market position and future financial performance has enabled the Board to reassess the company's capital priorities. The Board has decided to prioritize cash firstly and capital expenditure to maintain operational capability, improve efficiency and increase capability where appropriate. Then secondly, on maintaining group leverage within a target range of 1 to 2 times net debt to EBITDA. And thirdly, the reestablishment of a conservative and sustainable dividend. And then fourthly, applying excess cash flows across the base of several competing alternatives. At present, the Board sees merit in pursuing further reduction in net debt towards an underlying net debt to EBITDA ratio of 1. Moving to Slide 16. In November 2018, Metro announced the suspension of dividend payments to focus on debt reduction. The success of Metro Diocese debt reduction means that the group is expecting to be below its communicated target of net debt to EBITDA ratio of 1.5 during the first half of FY 'twenty two. It is the Board's current intention to resume dividend payments alongside the company's FY 'twenty two interim results. Going forward, Metro Glass expects to pay fully imputed dividends of between 50% 70% of net profit after tax before significant items. In determining any dividend, the Board will consider a range of factors including group financial performance, one off or non recurring events providing an anticipated business and economic conditions. Turning now to outlook on for F22 on Slide 17. We have increasing confidence that activity levels across both New Zealand and Australia will be at least sustained at current levels for the rest of the twenty 21 calendar year. Though in New Zealand, industry capacity constraints may limit growth in the near term. The residential segments in New Zealand will continue to be competitive and dynamic. In Australia, we're confident that AGG has embedded the improvements achieved in FY 2021. The level of residential approvals in Australia improved significantly through FY 2021, which will provide some support through the 2021 calendar year. The group remains alert to COVID-nineteen risks and significant disruptions in international shipping, both are likely to continue until the end of 2021. We'll continue to take a prudent approach to managing costs with a focus on essential capital expenditure. And finally, on Slide 18, Metro Glass' strategy and focus remain unchanged as we continue to build resilience and defend our leading position in an increasingly competitive New Zealand market to grow and improve the profitability of our Australian business and benefit from increasing demand for double glazing demand and to ensure our balance sheet is strong and sufficient to cope with future risks and opportunities. Now that brings us to the end of our presentation, and we're really happy to answer any questions that you may have. Thank you. We'll go first to Grant Lowe with Chardan. Your line is open. Hi, Doug. Just a few questions for me. Just around the margin side of things, firstly, in New Zealand. So gross margins were down around 3.2%. I'm just trying to get a handle on how much of that is potentially mixed shift with New Zealand residential down, glass input costs, shipping competition. Can you give us a sort of sense of how much of that sort of falls into each of those buckets? I want to kind of get an idea of how much of that is sort of transitory COVID related that might improve with COVID? Yes, Grant, it's Brent here. Look, I mean, it's fair to say there's a fear that's going on in that particular number. If you look at the second half, which is probably the the more I mean, for the first half remembering that there was an impact there of unrecovered costs through the April, May period, it was sort of talked about. So the second half is potentially comparative. So gross profit margin of 47.4 percent in the second half versus 49.4 percent for the same period last year. So and there's a pivot going on. So I guess that the 2 big things in there is we do have increased input costs. We are particularly in that residential segment competing on price, no doubt, but we also have some things that have gone and helped offset some of that. So the change in mix particularly towards retrofit and a bit more into commercial relative to the residential segment have definitely helped to offset some of those downsides. And then we actually had done some quite good work in the factory space. So there's a couple of negatives and a couple of positives that offset each other. Yes. Okay. In terms of how you're seeing sort of the input costs and the shipping at the present moment. Where is that sort of hitting at the moment directionally? I think it's stabilized, but it is certainly ongoing, if you want to say that. So it's disruptive. But the costs themselves are not significantly increasing from where they were when we're talking in February. That's sort of consistently there, but this is honestly an everyday issue that we're dealing with. Yes, of course. Okay. And in Australia, obviously, you did around $1,100,000 negative for the second half, which I understand 3rd quarter was positive. So that sort of number, at least that number in the Q4. What were you sort of expecting when you gave the February guidance? What were you expecting for the last quarter? Or perhaps how much would you sort of attribute to that flooding and COVID lockdown? Well, I think we were still optimistic at the time that we would get through February March and still be sort of breakeven, if not, maybe slightly negative. But as you said, the late lockdown in February and then the flooding in New South Wales really knocked that business around. But we're still hoping that we would have been posting a break in. Yes. And do you get the sense that you're back in positive territory year to date? F 'twenty two? Yes. Sorry, were you putting calendar year on that? Sorry, F 'twenty two, yes, from a month and a half. I appreciate it's only a short time frame, but post the flooding, have you sort of got that bounce back to positive territory? Look, I mean, sorry, I'm going to Yes, look, it's early days. I think it's only taking years. Yes. Okay. And then just around the margin in Australia, that was up slightly. Obviously, it's been difficult to sort of unpack with COVID and everything else. But with the shift to the higher margin DGUs, what do you think I'm not sure how you might want to approach this, whether you want to talk in terms of a normalized margin or we think margins could have been without sort of COVID impact. We do sort of see that being on a normalized basis from the sort of 24% that you delivered in the year. Yes. I mean, I'd say that our first half is probably a better reflection of where we think at. In Australia, it's a little bit different because we didn't have any impacts of lockdowns in the first half. It was a relative I mean, obviously, it was a disruptive period, but it was probably a better demonstration of where we think our gross profit should be operating at. Got it. Okay. Thank you. That's all for me at the moment. And we have no further questions in the queue. I'll turn it back over to Simon Mandar for closing remarks. Thank you. Okay. Thank you very much, and thanks to everyone for attending today. And if you have any questions that arise during the day, don't hesitate to get in touch with us. Thanks very much. And that does conclude our call for today. Thank you for your participation. You may now disconnect.