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Edited Transcript of CSR.AX earnings conference call or presentation 31-Oct-19 11:00pm GMT

Half Year 2020 CSR Ltd Earnings Presentation

Sydney Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of CSR Ltd earnings conference call or presentation Thursday, October 31, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andree Taylor

CSR Limited - General Manager of IR & Corporate Communications

* David Fallu

CSR Limited - CFO

* Julie Ann Coates

CSR Limited - CEO MD & Director

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Conference Call Participants

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* Andrew Geoffrey Scott

Morgan Stanley, Research Division - Executive Director

* Daniel Kang

Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research

* Keith Chau

MST Marquee - Building Materials & Packaging Analyst

* Peter Wilson

Crédit Suisse AG, Research Division - Associate

* Peter Steyn

Macquarie Research - Analyst

* Sophie Spartalis

BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome. (Operator Instructions)

I'll now hand the call over to Ms. Andree Taylor, thank you. Please go ahead.

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Andree Taylor, CSR Limited - General Manager of IR & Corporate Communications [2]

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Good morning, everyone. I'm Andree Taylor, the Investor Relations Manager at CSR, I'd like to thank you for joining us on the call today for the CSR Results Presentation for the Half Year Ended 30 September, 2019.

Let me begin by making a few introductions about the team joining us this morning. We are very pleased to welcome our new Managing Director, Julie Coates, to CSR who will open the presentation. Julie joined us at the beginning of September, and it's great to have her on board. Our Chief Financial Officer, David Fallu, will then go through the operational and financial performance for the last 6 months. Julie will then take us through the rest of the presentation to leave plenty of time for questions. Also joining us is Sara Lom, CSR's Group Financial Controller, to assist us with questions at the end of the presentation.

I'll now hand over to Julie to begin.

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Julie Ann Coates, CSR Limited - CEO MD & Director [3]

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Thanks, Andree, and good morning, everyone. It's great to be here today to talk to you about the results. I'll start by giving an overview, then David will run through the results in more detail. I'll then talk to you about my initial impressions from my first 2 months and where I see some of the opportunities in the business and then cover the outlook in the second half.

Turning to an overview of the results on Slide 4. Statutory NPAT from continuing operations was down 19% to $68.8 million. EBIT before significant items was down 16% to $113.1 million. The decline in EBIT was largely as a result of our Building Products EBIT being down 18%. The performance of Building Products reflects the slowdown in residential construction activity, which saw volumes across the industry down on average 19%, with detached down 9% and high-density down 38%.

The Board has declared an interim dividend of $0.10 per share and a special dividend of $0.04, both franked at 50%. We have a very strong balance sheet having finished the half with $142 million net cash, which includes deferred proceeds received during the period. And the $100 million buyback is ongoing with $47 million purchased to date.

Turning to safety. This is clearly a top priority for the business and for me. And disappointingly, our performance on one of our key metrics has gone backwards in the first half. So clearly, we have some work to do to improve performance. We've developed detailed plans ahead of the upcoming maintenance period to keep people safe in what is a challenging time for any business in the lead up to shutdown during and the restart post the holiday period.

In terms of emissions. We have met and exceeded our 2020 goals of a 20% reduction per ton of sellable product in emissions and waste, and we've made improvements in processes, and all new investments now have requirements around sustainability.

Turning to Slide 5 to run through the composition of the result. As I mentioned, the performance of Building Products was impacted by the slowdown in residential building. While there's been a lot of good work done to both diversify earnings and improve the cost position in Building Products, the slowdown in market conditions impacted performance in the half.

Pleasingly, we have maintained key targets on ROFE and EBIT margins, which reflect some improvement in the cost structure. The $75 million Hebel facility is in production and a great example of advanced manufacturing. It's an automated plant with greater flexibility of production and the ability to better manage our cost base. Hebel is a fantastic product that has helped the business broaden its relevance in the market, and the new factory positions us well for future growth.

We've also addressed some of our higher fixed costs. During the half, the PGH Brick plant at Darra, Queensland was closed. Production was moved to our plant at Oxley. This has taken out overhead and improved the cost base moving into the second half.

While no EBIT from Property was recognized, there's been good progress on key development projects. The Horsley Park sale we announced today is a great example of the value that lies in our Property assets and our ability to manage large-scale redevelopment projects, and this will deliver significant EBIT in future years.

Earnings from Aluminium were up 10%, reflecting an improved relative cost position and the benefits of our current hedge position on the aluminium price. The Tomago smelter also performed well operationally over the half.

So in summary, whilst it's always disappointing to report EBIT lower than the prior period, given the slowdown in construction activity, we're pretty comfortable with where we sit. The work the team is doing to diversify the business is making us more resilient. And in the current condition, it is good to have a really strong balance sheet.

I'll now hand to David to take you through the detail of the results.

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David Fallu, CSR Limited - CFO [4]

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Thanks, Julie, and good morning, everyone.

Looking at our results for the half, I'm on Slide 7, which summarizes our profit and loss. In terms of revenue, it was down 4% for the year -- for the half year to $1.2 billion. Building Products revenue has held up reasonably well despite the drop in activity across all residential segments during the last 6 months. This was supported by good sales performance in Gyprock and Bradford. EBIT before significant items of $113 million was down 16% half-on-half, which reflects the lower Building Products result and the timing of Property transactions. Our effective tax rate was 28.2% due to the benefit of distributions from associated companies. It is expected the effective taxes will be at similar level for the second half of the year. The reduced Building Products and Property earnings flowed through to net profit after-tax with net profit before significant items of $72 million. Our statutory result of $69 million was up significantly half-on-half as the previous year includes the now divested Viridian business.

Now let's look at the results of each business in more detail. On Slide 8, Building Products revenue was down 5% to $839 million. Gyprock and Bradford volumes and pricing have held up well during the period as they are utilized later in the construction process and have been able to expand into commercial segments.

At the EBIT line, you can see on the table in the bottom left-hand corner that lower volumes have reduced EBIT by around $25 million in the half. The key impact on volumes includes the well-understood slowdown in the New South Wales high-rise market and lower demand out of detach -- out of the detached market that we saw at the start of this calendar year.

In terms of pricing. Whilst the team has performed well offsetting cost increases across the group, this has been most challenging in segments and areas where there has been more material activity reductions, such as the high-rise market. We have taken steps to reduce our fixed cost base, as Julie mentioned. The closure of Darra was finalized in July, providing just over 2 months of benefits in the half. We've also reviewed shift structures in other businesses and reduced overhead in other support areas. We continue to invest in growth, around $7 million for the half year, which is in line with the first half last year. These are products like our Inclose façade system, which are gaining traction in the market but not contributing meaningful -- meaningfully to earnings at this point.

Slide 9 shows activity for the period and how it has come off historic highs in all residential segments on a national basis but, in particular, in the high-rise apartment market. As you know, we've been working to diversify our business into nonresidential markets, and these graphs reinforce the importance of that diversification strategy, with nonresidential activity steady and the commercial segment within that market having grown 3%. We are starting to see a pickup in nonresidential activity with some major projects underway, including the Crown development at Barangaroo, the redevelopment of Darling Harbour and some major hospital and shopping center projects, which provide good opportunities for our Lightweight Systems business in particular.

With that backdrop of the different activity levels, you can see on Slide 10 how this plays through our broad-based Building Products portfolio. Lightweight Systems, including Gyprock and Cemintel fiber cement, have recorded a flat result and maintained margin, with the pipeline of activity and the stage of the building cycle helping demand. But we are also tapping into some larger projects in the nonresidential sector, as mentioned on the previous slide. Bradford has also held up, again with good opportunity for growth in commercial, particularly from its diversification in its decorative products with our -- which our polyester insulation offerings have in this space.

In contrast, Bricks slowed during the period as detached housing activity came off ahead of the election in May. Given the high fixed-cost nature of our brick business, this has had a material impact on Bricks earnings. However, with our increased number of sites post the Boral acquisition, we were able to close our Darra site and consolidate activity at our lower-cost Oxley plant, which became effective in July this year.

Within Construction Systems, the step-down in demand came from a significant slowdown in the New South Wales high-rise apartment market as the backlog of activity has worked through the system along with recent engineering concerns, which has clearly affected demand and buyer confidence in this category. This has impacted AFS and Hebel where New South Wales is a core market, and we've not been able to offset sufficiently our growth in Victoria and Queensland. However, given the benefits these products have from a speed and efficiency of construction perspective, we continue to see opportunity for long-term growth and market share.

Now turning to Property on Slide 11. We've been continuing to execute against our Property strategy, which we've presented to the market an update on June. As you can see on the slide, since that time, we've made material progress on all key development opportunities. In particular, Warner will now be progressing to public exhibition to support its residential rezoning application. Our Chirnside Park project is progressing with 517 lots now sold. And with an eye to securing our operational footprint in the future, we've acquired land outside the Sydney Basin. Most recently, today, we've agreed the sale of our Horsley Park Stage 2. Due to the nature of the sales contracts agreed to and the associated revenue recognition requirements, the Property business, however, will report minimal EBIT for the first half.

Slide 12 provides detail on the Horsley Park Stage 2 sale. You may recall that we divided the site into 3 stages, with Stage 1 and 2 needing to be rehabilitated, geotechnically settled and the associated infrastructure constructed. Stage 1 was sold in 2019, and Stage 2 is now being sold for a total consideration of approximately $140 million, with associated EBIT of approximately $90 million expected to be recorded in YEM21 and YEM23 in accordance with revenue recognition requirements. This sale is subject to further approval. And as with Stage I, CSR will manage the final delivery of the site. Stage 3 houses one of our operating brick plants. And to assist with planning and to provide long-term optionality, a formal DA has been launched for the future redevelopment of this site, which is a prudent measure given the extended lead times that can be typical in these processes. This is another example of CSR controlling the property development process to ensure the best value outcome for shareholders, and we will continue this approach across our portfolio.

Now moving to Aluminium on Slide 13. For the half year, we have seen our cost position, which has stabilized, while volumes and pricing were flat. We've also secured 100% of our alumina requirements over the next 3 years. Our hedging position has helped us in the first half, and we'll also benefit in the second half with the YEM20. We've not materially changed the hedge position in the half as aluminium pricing remains low, but there is some benefit from the Australian dollar exchange rate.

Looking ahead, total energy costs have stabilized, albeit at a very high level. The delivered coal costs should begin to improve as we have seen reductions in the New South -- in the Newcastle coal price index, which should eventually feed into a lower delivered coal cost to Tomago. Clearly, our hedging has enabled a better outcome than would otherwise have been achievable. The challenge is this legacy hedging position unwinds by the end of the year. And with electricity prices at globally higher levels, all smelters in Australia, including Tomago, face a challenging future. As the single biggest electricity load point in Australia, Tomago is uniquely positioned to be able to support the stability of the electricity network as it transitions through the closure of Liddell and the introduction of Snowy 2.0. All our focus is on engaging at all levels to see if this value can be recognized to secure a sustainable future.

Before handing back to Julie, I'll take you through our cash flow and capital expenditure for the half. Our cash performance can be seen on Slide 14. Operating cash flow has improved largely due to the timing of shipments in Aluminium, which impacted working capital in the previous year. We also received the cash settlements for Property and the final deferred consideration for the Viridian sale. We ended the half year with $142 million in net cash. This puts us in a very strong position to continue investing in our business, growth opportunities and our pipeline of Property projects.

We've increased the total dividend by including a $0.04 special dividend on top of the ordinary dividend of $0.10, reflecting the strength of our financial position. Franking has been maintained at 50% as we continue our approach to fully distributing our franking credits.

As I mentioned, our operational performance in cash flow generation also allows us to invest in our business, which has continued this half, as you can see on Slide 15. In terms of capital expenditure, excluding Property, we've spent $45 million during the half year, and this is at a higher level to previous years due to the investment in the new Hebel facility. We've also invested in strategic sites, including land in the New South Wales Southern Highlands. This is a strategic purchase to provide flexibility for future plan expansion away from the residential and industrial encroachment, which is prevalent in the Sydney Basin, and provides flexibility in assessing our Property portfolio requirements. For the full year, including Property and the completion of the Hebel plant, we expect total CapEx to be approximately $150 million for the year.

With that, I'll hand over to Julie, and I'll be here for any questions at the end.

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Julie Ann Coates, CSR Limited - CEO MD & Director [5]

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So thanks, David. Before I talk about the market and outlook, I'd like to spend a bit of time talking about my initial impressions of the business, what my early focus areas will be and my initial perspective on our opportunities.

So turning to Slide 17. As you know, I joined CSR 2 months ago. And during this period, I have met with many of the team while visiting 17 of our factories, a number of our Gyprock trade centers and several of our largest distribution centers as well as our Himmel design center. I formally opened our new Hebel plant in Somersby last month, which is now producing product. I've met with a number of our customers and plan to do more of this over the next few weeks as I have a series of customer meetings organized to learn more about how we can work together for our mutual benefit.

As I've been listening to people and learning the business, the breadth and diversity of our manufacturing footprint has really struck me. We've got everything from our state-of-the-art Hebel plant at Somersby on the New South Wales Central Coast, to the brick plant and quarry near Oxley in Queensland, to our largest Gyprock factory in Yarraville, Melbourne. I've been impressed by the experience and passion of our team and the affection and trust that our customers have in our market-leading brands across both the residential and commercial sectors.

In addition, we have a large and valuable property portfolio that provides significant optionality as we grow and diversify our business with many development opportunities. That being said, market conditions were clearly challenging in the first half, and volumes in the industry are still subdued. We will be very focused on managing the business prudently in the current environment, with cost discipline and productivity being in sharp focus. But we will not lose sight of the broader opportunities, and we'll continue to invest for growth. I am looking forward to working with the team as we look to determine and align on the priorities to deliver the next phase of growth. This includes improving the experience of our customers and working more closely with them and our partners in the industry.

As some of you may know, I have supply chain in my background, so I'm really looking forward to working with the team to bring more integrated end-to-end supply chain thinking across our manufacturing and logistics operations, including the opportunity to optimize our manufacturing footprint. I also see real opportunity to embed more collaboration across all parts of the business so we can realize the full potential of CSR.

Turning to Slide 18. This visually captures the opportunity given the breadth and scale of the business across manufacturing, distribution, brand strength and customer reach. While the business has served the residential construction sector for a long time, we are becoming increasingly well known for our solutions in the commercial market and construction sector. It was great to be able to open the new Hebel plant with some of our key customers, including from Harry Triguboff from Meriton last month.

The highly automated plant enables us to customize our product in a cost effective and sustainable way and as the only producer of aerated concrete in Australia. For our customers, we help to shorten build time, reducing cost and environmental impact, and the product looks fantastic. It's been great to see some really strong pockets of innovation in the business. As you can see on the right, we have some brands that have been around for a very long time and some brands that have brought new innovation to the market. I've been very impressed with the diversity across our business. Our reach and experience has helped tap into new projects with great service and design support.

A good example is the work by Cemintel at the new Western Sydney Stadium, which opened earlier this year. The project used over 5,000 square meters of the Barestone fiber cement, which we manufacture right here in Sydney at Wetherill Park. Barestone met the specifications on the project to capture the raw concrete look with ease of installation. And our extensive distribution network across sales and logistics has enabled us to serve a larger and more diverse customer base across many channels.

Turning to Slide 19. The scale of our property is a huge asset to the business. Our team has very strong development capability with extensive experience in managing large-scale projects, which includes planning and site rezoning, major land rehabilitation and building civil infrastructure. I've been really impressed by the development capability that sits inside the business and also the commitment to a value-led approach to development. This is clearly in evidence in the Horsley Park sale we announced today. As David said, that project has required sizable rehabilitation work on the former quarry site, which is a meaningful part of the value chain. While the earnings from development will inevitably be lumpy, as was outlined at the Property Strategy Day earlier in the year, the value is clearly material.

I'll now spend a couple of minutes talking about the market and our outlook for the second half. So turning to Slide 20. As I've said earlier, over the last 6 to 12 months, we've seen a significant deterioration in residential property activity, while the commercial sector has been more stable. While there has been some recent improvement in credit availability and house prices and interest rates are at historic lows, this has not yet flowed sustainably through to activity levels in residential construction.

Over the medium to longer term, demand for housing in Australia will be supported by strong population growth and improved housing affordability. This will support underlying demand, particularly for detached housing as this remains a more stable component of the market and is a major sector for us. We are seeing some early signs that commercial markets are strengthening, and this represents a good opportunity for us as we continue to adapt our existing products suite to commercial applications.

So finally, to our outlook for the year ahead on Slide 21. In Building Products, we have seen some recent improvement in some of the traditional lead indicators, such as low interest rates and increased credit availability. However, as we have seen over the last year, this has not yet translated into an improvement in building approvals and commencements. Therefore, it is difficult to predict activity over the second half of the year. However, due to the usual seasonality in earnings, the results in the second half are expected to be lower than the first half. That said, longer-term housing activity will be supported by population growth, high employment and improving housing affordability.

In Property, I reiterate that the sale of 20 hectares of land at Horsley Park we announced today will be recorded in 2 tranches, in YEM21 and 23. While work continues on a number of projects, any additional sales confirmed in the second half are not expected to result in material levels of EBIT being recorded this year.

In Aluminium, as we highlighted earlier, the increase in first half earnings reflects the benefit of the current hedge position, which remains at this level for the second half of the year.

So for the CSR Group, there is a wide range of analyst forecasts reported on Bloomberg for net profit after-tax before significant items. As this year is unlikely to include earnings from Property, we expect to deliver earnings between the lower end of the analyst range, which is between $107 million and the median of $133 million.

So thank you. That concludes our presentation for today. And with that, I'll open it up for questions to David and I.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Andrew Scott from Morgan Stanley.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [2]

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Just a couple of questions. Julie, I just wondered if I could ask you to elaborate on your comment from the release that you remain committed to diversifying earnings across residential and commercial construction. Just could you flesh that out for us? How do you see that playing out? Is it acquisition-driven? Is it a shift of emphasis? Just a little bit more color there, please.

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Julie Ann Coates, CSR Limited - CEO MD & Director [3]

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Okay. So I think the business has already looked to diversify the business. And hopefully, that came through in the presentation, and there's been a number of examples of that both in product and systems. In systems, we've got Inclose and Velocity where we've made some investment on construction systems: Inclose for the commercial sector and Velocity for the residential sector. We've also had some investment in Bricks in making it easy to install and a quicker install with a number of options there. And in relation to product, in reference to what I referred to in the Barestone cladding and some other products, the acquisition of Martini, which is the polyester product that's used for acoustic and decorative treatments in commercial, are all examples of things that we've done. And really what I'm saying is we will continue to do that into the future.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [4]

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Okay. Okay. And then just you talked about where you have pulled some levers, Darra being the obvious example, to adjust for the market. It sounds certainly like the second half gets tougher, and certainly, the data would suggest that that's the case. Can you just talk about where the next levers are and what else you have in mind if and when the market does continue to deteriorate, where you can pull those levers to reduce the cost base?

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Julie Ann Coates, CSR Limited - CEO MD & Director [5]

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Yes. Sure. So I think I'd start with that the team has done a good job, which is reflected in the first half. And the sorts of things that -- there's probably 3 things I'd point to there. There's been quite a lot of good work done on shift structures as volumes have come off to rightsize the labor to the requirement. We've integrated the Bradford and Monier business, so there has been a reduction in overhead as a result of that integration. And of course, we've closed the Darra site, which has taken out the fixed overhead. And that production has actually moved to our lowest-cost manufacturer of bricks in Queensland, which is the Oxley site.

Moving forward, to your question, Andrew, it's really about establishing a culture of cost discipline, and we should -- there's an opportunity for us to challenge all discretionary spend in the business. And whilst we will look to take costs out, it's important that we don't compromise the future. And more broadly, which is I think at the heart of your question, the way I think about cost-out is not just from a cost perspective but from an efficiency perspective. So if we can drive efficiency across the supply chain and improve productivity, that actually also sets us up for growth and to drive scale into the future. A lot of that, of course, won't come necessarily in the second half but really sets us up for the longer term.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [6]

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Okay. And David, just a quick one. On the special div, given you've already got the buyback in place and you're not fully franking the ordinary div, just interested in the decision to pay a special while you've already got the buyback there.

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David Fallu, CSR Limited - CFO [7]

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Look, it's just reflective of the strong cash flow that we've received, not just from deferred consideration of property sales but also the Viridian sale. And the policy on franking was really across the total dividend is really distributing the franking credits that we have available. So the capital management program that we have in place is part of that consideration set, and we will continue to have that as a feature moving forward for the balance of the year.

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Operator [8]

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Our next question comes from Peter Steyn from Macquarie.

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Peter Steyn, Macquarie Research - Analyst [9]

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Welcome, Julie.

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Julie Ann Coates, CSR Limited - CEO MD & Director [10]

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Thank you.

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Peter Steyn, Macquarie Research - Analyst [11]

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Just a quick question, to take Andrew's line of questioning on cost just a little further, I was curious just around some of the numbers. So SG&A and overhead savings contributed to $3 million in EBIT, and then there's a bucket of other at $3 million, if we could just get a little bit of understanding of what the other is. And then is there a sort of annualization benefit from what you've already outlined, Julie, around the integration of Bradford and Monier and the shift structure alterations? Just want to get a feel of whether you're gaining pace from a cost-out perspective.

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David Fallu, CSR Limited - CFO [12]

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Yes. I might sort of speak to the sort of detailed results, and Julie maybe, if you want to add anything, jump in. From a -- taking that in sequence, Peter, in terms of other, we've separated that out. It's a range of miscellaneous items but also increased contributions from some of those growth areas that have improved their revenue but don't contribute materially with higher margins, but they have improved half-on-half. It's not really reflective of volume activity in the market, which we're having that called out in that core category.

Okay. So then in terms of annualized savings. I guess most specifically, they're going to come from your -- the plant closures that have occurred during the year. In terms of on a like-for-like basis, I'd be expecting that, that would contribute an additional $3.5 million in the year. But on an annualized basis, it will be approximately $7 million from that. The other range of cost savings will really depend on activity that we're seeing, where the volume is falling and how we respond to that.

Is that helpful?

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Peter Steyn, Macquarie Research - Analyst [13]

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Yes. That's great. And then I was keen to just then pick up on the comment that you made right at the end there just in terms of what you're hearing from your customers more pertinently of the orders on the ground at the moment, one, seeing new home sales just ticking up a little bit. So is there a perspective that gives you some degree of confidence into the next calendar year?

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Julie Ann Coates, CSR Limited - CEO MD & Director [14]

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Yes. I might take that, Peter. So we're 5 weeks into the second half, so it's pretty early days in terms of this current half. The flow-through of the recent positives that we've seen reported in the market will take some time. So deposits on housing lots, there's a lead time on that before the application of our products into the building cycle of about 12 months. So that will take some time to flow through. Look, the immediate outlook for the housing construction business is subdued. And -- but in the medium and longer term, as we've said in our announcement, there's a number of things that are pointing to improving demand for building products over time for all of the things that we listed.

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Peter Steyn, Macquarie Research - Analyst [15]

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Sure. And then last very quick question, just a confirmatory one. David, in terms of the alumina contracting, presumably it's now 100% aluminium-linked?

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David Fallu, CSR Limited - CFO [16]

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Yes. It's a range of both. Peter. You might recall that our previous Aluminium -- alumina supply contract was -- all came off at the one point in time. As we mentioned, we've staggered the alumina supply, so we're not going to be approaching the market in one lump. Again, we'll be doing that on a rolling basis, broadly, 1/3, 1/3, 1/3, as we walk through. And the linkage across those stages has been remained with the linkage to the Aluminium.

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Operator [17]

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Our next question comes from Peter Wilson from Crédit Suisse.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [18]

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Julie, I think in your opening comments, you mentioned that volumes were down 19%, yet the Building Products division reported revenues down 5%. Can you just explain that disconnect for us between the volumes and revenue you've reported?

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Julie Ann Coates, CSR Limited - CEO MD & Director [19]

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Sorry. What was your name?

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [20]

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That's Peter Wilson from Crédit Suisse.

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Julie Ann Coates, CSR Limited - CEO MD & Director [21]

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I might hand it to David in the first instance.

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David Fallu, CSR Limited - CFO [22]

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Yes. So in terms of revenue being down 5%, there's a number of revenue streams, which have come from our sort of newer businesses, which support volume and support revenue but don't contribute meaningfully to EBIT at this point, Peter. And then in terms of where the activity is falling, that falls unevenly across the business. And so where we're seeing most of that has been in the bricks and construction systems area. And so that's why the impact on revenue is slightly different to the volume level.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [23]

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Okay. And then you might partially answer my next question, which is revenue down 5%, EBIT down 18%. So 350% operating leverage is a high amount in anyone's language compared to, I guess, the prior message and previous results, which was that you're going to -- I mean, a, you'll have some margin dampening from reducing imports but also from higher-cost production. So I'm just wondering why you've reported such high operating leverage despite all the talk about costs and lower-margin product?

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David Fallu, CSR Limited - CFO [24]

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Yes. So look, primarily, it is a volume story and where it falls. So you're right, the volume reductions, which we've seen most specifically in bricks, is our highest fixed-cost business. And I guess the full benefit of the actions that we've taken really won't -- haven't flowed through in the half as the closure of Darra became effective in July. And in relation to the volume reductions in the New South Wales high-rise market, which really impact the AFS and Hebel businesses, I guess there's also -- when you have a downturn, that significance of activity, that significantly, you also see pressure on pricing which, I guess, accentuates the earnings impact in that particular case.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [25]

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Okay. And then on price, Slide 8, you've attributed price net of costs and operational improvement of negative $2 million. Can you tell us what the gross impact of cost -- sorry, of price were? And then given that you said, I think, Bradford and Gyprock process are actually positive, I'm wondering what the fall in there, what the other products were and what the falls were.

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David Fallu, CSR Limited - CFO [26]

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Yes. So again, where you saw -- I think broadly across the board, there's obviously more pressure on price during a contraction in activity than in an expanding activity. The challenge we set ourselves is during both more subdued activity levels that we recover cost increases, which we've broadly done across the group. More severe pricing pressure where activity is has had the most material reductions. So as I say, where you're seeing that is in those businesses serving the New South Wales high-rise market, that's people in AFS. Within the balance of the businesses, Lightweight Systems, Bradford Insulation, they're broadly steady. And you've seen probably a bit of pressure within the roofing category as well.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [27]

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Okay. And one last one, if I could, just the fall in, I guess, interest in Hebel, AFS construction systems because of building defects. Can you quantify how large that fall has been, I guess, has sales has gone to 0 or not?

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David Fallu, CSR Limited - CFO [28]

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Just to correct you there, Peter, there's no defects within AFS or Hebel products. What I was referring to is the demand for the New South Wales apartments as a category is clearly being impacted by buyer concerns around engineering concerns, which we see in the marketplace. That's just an overlaying, confidence issue, which I think is specific to this moment in time. It's got nothing to do with our products, which obviously all meet or exceed Australian standards.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [29]

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But there's been no -- I mean in some way, I guess, I'm asking if you get all tarred by the same brush. So no decreased interest in the fast building methods such as AFS.

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David Fallu, CSR Limited - CFO [30]

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So I think long term, that's exactly right. What I would say is when activity is more subdued, the advantage to the builder of completing that project quicker is less because he has less projects to do. But no -- so that's probably just more of a dynamic in the marketplace. Absolutely no impact in terms of the benefit to the customer. And as I've said previously, we see this, AFS and Hebel in particular, as being products that have characteristics that are going to, long term, gain market share in the marketplace.

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Operator [31]

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Our next question comes from Keith Chau from MST Marquee.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [32]

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Two questions. First one, just a follow-up on the outlook for Gyprock and Bradford. Obviously, a commendable result in the period with flat volumes for both of those products. As we look ahead, and you talk about expanding into the commercial sector, is there a prospect of those products or volumes for those products in the next half maybe and into the next 12 months remaining flat relative to the pcp as you run into commercial? Or is the likelihood, given your order book, that those 2 products will fall in the next 6 to 12 months?

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David Fallu, CSR Limited - CFO [33]

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Yes, Keith, I think the key question will really be I think -- yes, everything we sort of see in the run up to Christmas would suggest that those products will continue to track at their existing levels. I guess the key question will be how the market responds on the return from Christmas and the implication that has for the full half year. In terms of offsetting longer-term declines through commercial, that's clearly the opportunity. Overall, we're still less than 20% exposed to the nonresidential space. So there's a lot of territory there to play. But those are typically project-driven wins, and so it will really depend on the timing and achievement of those project wins for the -- to have that falling in the half.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [34]

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Okay. And David, maybe if I just go back to pricing, can you quantify the extent of Hebel and AFS price declines in the period, please?

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David Fallu, CSR Limited - CFO [35]

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I wouldn't want to quantify the extent of it just for sort of commercial reasons. But yes, as I said, fair to say that that's going to be the area where you've seen more material pricing pressure just given the level of activity dropping off.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [36]

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Okay. And then just a question on the alumina linkage. I think you stopped short of giving us some guidance as to what the linkage rate actually is on a weighted average basis. Can you first comment on that, please?

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David Fallu, CSR Limited - CFO [37]

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I think I'll probably repeat what we mentioned from, I think, the full year where whilst our -- I won't comment on what we've achieved. The 5-year average linkage, it was about 18.5%. And that's probably not -- yes, that would be a reasonable expectation of the sort of level you'd be expecting from a longer-term wholesale contract.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [38]

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Okay. And apologies, if I missed this earlier on the call, just around the coal price pass-through to CSR. What are your discussions with AGL? What are Tomago's discussions with AGL at the moment? And what are the prospects of some of that benefit flowing through in the second half?

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David Fallu, CSR Limited - CFO [39]

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Yes. So in terms of visibility of what contributes to the coal cost pass-through and/or the outcome of it, it literally is a cost pass-through of the delivered coal -- cost of coal to Bayswater and Liddell. Unfortunately, we don't get visibility of that. We get the right to audit it through an independent auditor and confirm that the calculation is correct. However, the best lead indicator, I'd say, for that is, and in our discussions, the Newcastle coal price index where you have seen that come off. We've seen the coal cost pass-through to Tomago stabilize in the half. And my expectation would be, as a result of the declines in the Newcastle coal price index, that we should be seeing that -- some relief as we move forward through the year.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [40]

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Okay. So by the looks of it, the lag between coal price movements and the benefit to Tomago is probably somewhere in the vicinity of 6 months.

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David Fallu, CSR Limited - CFO [41]

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It's a hard one to say, Keith, because it's not just the explicit cost of coal. If there are particular logistics or complications around haulage, if that will flow into the delivered cost of coal to Bayswater and Liddell, so it might not be an exact match. But long term, my expectation would be that it should follow.

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Operator [42]

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Our next question comes from Sophie Spartalis from Merrill Lynch.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [43]

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Welcome, Julie. I wanted to ask a more broader strategic question on Tomago. And there certainly has been commentary coming through on the call just around the longer-term viability of the holding. Can you just maybe talk through how you see the Tomago shareholding? Obviously, the aluminium market is exceptionally tough. You've got Alcoa looking to review 50% of its capacity. So where do you kind of see that longer term? Would you be willing to sort of just close that down or like how that sort of decision-making process unfolds given the minority shareholding?

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David Fallu, CSR Limited - CFO [44]

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Yes. I might take that to start. Julie, maybe you can comment over the top. I think important to remember, Tomago as an operating business actually on all operating metrics performs really well other than having one of the highest costs of electricity in the world. And so I think priority one, two and three for us is ensuring that we address the cost of electricity for that business. I think sort of strategically, that then opens up far more options. There's an -- the smelter still performs well, and it performs a very valuable role in the stability of the grid. And so I think for me, the -- all of our focus is on seeing whether we can have the -- find a solution, which recognizes that value and ensures a sustainable future for Tomago. We're not looking at the sort of closure. Any closure decisions would need to be agreed with us in conjunction with our partners.

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Julie Ann Coates, CSR Limited - CEO MD & Director [45]

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And I'd probably just add to that, albeit I'm early days in, but CSR is clearly a building products company, and that's where the growth has come from and will continue to be where our focus is. So I'd just reiterate what David said, Tomago performs well. It plays a role in the stability of the grid. But the #1 issue for us to resolve in terms of the future for Tomago is to have reliable and affordable -- and when we say affordable, we mean globally competitive in energy supply.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [46]

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Yes. But I guess though, when you think about a few years down the track, let's talk in the medium term, the outlook for aluminium pricing is very soft. And so with your contracts rolling over, if you aren't able to secure attractive electricity, it doesn't really matter what benefits you're giving the grid in terms of stabilization. The medium-term economics of Tomago are looking pretty grim, I would think. Can you just sort of just talk to that? Like I get the fact that Tomago is making money today, but you've got significant headwinds ahead of you over the next few years, I would think.

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David Fallu, CSR Limited - CFO [47]

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Look, I don't disagree. If nothing changes, there's going to be challenges to how we approach that. But we'll work through what we can control, and if we can -- and looking to achieve an outcome that ensures a sustainable future for the business. If that can't be done, we obviously have to assess our options.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [48]

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Okay. And what are those options? Sorry to harp on the point, but what would be those options if you had to go down that route? Like are there really that many options given you are a minority shareholder?

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David Fallu, CSR Limited - CFO [49]

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We'd be looking at those options in conjunction with our partners, Sophie. That would be a broad gamut. So -- and we'd do everything in conjunction with our partners. It's a production joint venture that we can work constructively with our partners on.

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Andree Taylor, CSR Limited - General Manager of IR & Corporate Communications [50]

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Any more questions?

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Operator [51]

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(Operator Instructions) Our next question comes from Daniel Kang with Citigroup.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [52]

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Julie, welcome to CSR, and David. A question, Julie, to start on strategy. I guess -- I appreciate that it's only 2 months in, but we've seen a few of your -- the other -- your other rivals domestically have gone offshore. Is offshore, I guess, acquisition or M&A, is that something that you'd consider?

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Julie Ann Coates, CSR Limited - CEO MD & Director [53]

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So thanks for the question. As you said, strategically, there's a number of things that we're looking at. First and foremost is how do we maximize the full potential of the existing businesses, both within each of the business units and across the portfolio. In relation to offshore, if we were going to look at offshore, it would need to be something where we either take the IP or whether there's IP that we could bring back to this market. And that's unlikely to be commodity product and more likely to be construction systems solving issues. So there's no immediate plans for that. Would we look at it? Yes. But as you rightly say, it's very early days for me. So we're just working through, with the team, all the opportunities as it relates to the priorities to deliver growth.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [54]

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Makes sense. And secondly, just on Hebel. Congrats on the opening of the Somersby plant. Can you talk us through the impact from the introduction of plant in the current softer market? Also, can you remind us of, I guess, the utilization rates? Are you expecting D&A impact, et cetera?

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David Fallu, CSR Limited - CFO [55]

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Yes. So in relation to the plant, effectively, as you mentioned it's helped us replace volume that we were currently importing. In terms of utilization, we'll run the plant on 2 shifts for the time being and then grow that as sort of markets recover and volume and market share grows. In terms of the actual sort of the depreciation impact of Hebel, we're largely challenging ourselves to effectively, with the margin that we make on the manufactured product, to replace the margin detriment that we had on imported product. So expectation would be that we shouldn't -- there shouldn't be an offsetting impact on EBIT within the -- on a like-for-like basis with Hebel.

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Operator [56]

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(Operator Instructions) There are no further questions, so I'll pass back to your speakers for any closing comments.

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Julie Ann Coates, CSR Limited - CEO MD & Director [57]

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No further closing comments other than to say I think what we've presented today is a solid result. There's more for us to do. We'll be prudent in the short term while setting ourselves up for longer-term growth. So thank you, everyone, for your questions today. Greatly appreciate it.

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Operator [58]

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Thank you so much. Ladies and gentlemen, that does conclude the call for today. Thank you so much for your attendance. You may now disconnect.