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Edited Transcript of CSR.AX earnings conference call or presentation 8-May-19 12:00am GMT

Full Year 2019 CSR Ltd Earnings Presentation

Sydney Jan 11, 2020 (Thomson StreetEvents) -- Edited Transcript of CSR Ltd earnings conference call or presentation Wednesday, May 8, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alan Robert Harold Sindel

CSR Limited

* David Fallu

CSR Limited - CFO

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Conference Call Participants

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* Andrew Geoffrey Scott

Morgan Stanley, Research Division - Executive Director

* Brook Campbell-Crawford

JP Morgan Chase & Co, Research Division - Analyst

* Daniel Kang

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

* Lee Power

Deutsche Bank AG, Research Division - Former Associate Analyst

* Peter Wilson

Crédit Suisse AG, Research Division - Associate

* Peter Steyn

Macquarie Research - Analyst

* Simon Thackray

CLSA Limited, Research Division - Former Research Analyst

* Sophie Spartalis

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

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Presentation

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Alan Robert Harold Sindel, CSR Limited [1]

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Well, thank you, everyone. It's 10:00, so let's get started. Thank you for coming along this morning, and thank you to those on the call. CSR's results presentation for the year ending March 2019. And thanks to Lee Power from Deutsche Bank for hosting us here this morning. Thanks, Lee. Always appreciate it.

So just quickly on the agenda. As with prior years, we'll move quickly through the presentation to leave plenty of time for questions. I'll provide a brief overview before handing over to David Fallu, our CFO, to talk through the detailed financial performance. And then I'll come back with some commentary both on each of the operating businesses, but how we see the market outlook and all-important housing starts.

So on Slide 4, I'd like to just highlight a couple of points. The first is our very solid performance in Building Products despite some moderation in volumes in the last few months of the year. Pleasingly, we also saw a further improvement in our safety performance. And as we've said, that's always a good indicator of good culture and good organizational behavior. We continue to find significant investments in growth through new product development, and I'll talk to a few of these later. For the group, we delivered NPAT from continuing operations before significant items of $122 million, which is consistent with the guidance we've provided in February.

Secondly, we've optimized our portfolio by exiting the high fixed cost energy intensive Glass business while delivering growth with an expanded portfolio of new products and additional building systems. Our strong financial performance position ensures we take advantage of any new growth opportunities as they emerge. And we maintained the longer-term market fundamentals. The housing in Australia and New Zealand remain very strong.

Quickly on Slide 5, this is the chart of our return on funds, but also EBIT by business unit. And I think the important point here is the sale of Viridian was a really important step as we continue to reshape our earnings profile. Building Products and Property now represent 87% of our earnings, excluding corporate costs, and this is up from 68% 5 years ago. Group return on funds during the same period has gone from 5% in 2013 to 22% today. And improvement has come across -- from across the board including Gyprock and Hebel, expansion of our Bradford businesses and acquisitions in Bricks and AFS. We also delivered greater returns from our enlarged property portfolio, and this is expected to continue for many years. This has made CSR much more resilient to movements in both housing starts and the aluminium price.

At this point, I'll pause, hand over to David to take you through the detailed numbers and come back for more detail in a moment.

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David Fallu, CSR Limited - CFO [2]

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Thanks, Rob, and good morning, everyone. We turn to Slide 7, this summarizes our profit and loss for the year, with the focus on our continuing operations following the successful divestment of Viridian in January this year. In terms of revenue, it was up 4% for the year to $2.3 billion, with revenue growth across most of our products and segments. EBIT was lower largely due to the significant step-up in power, costs in aluminium and reduced property earnings from last year's higher level. As a result, EBIT before significant items was $265 million, down 17%. Our effective tax rate was 28.2%, reflecting the slight benefit from distributions from associated companies with net profit before significant items of $182 million. Significant items for the year primarily relates to Viridian and noncash impairment on Monier Roofing business. Accordingly, total statutory net profit after tax, post significant items, was $78 million.

Looking at the EBIT performance by division on Slide 8. Building Products' EBIT was down 4% for the year to $206.5 million. This is net of $14 million invested in long-term growth initiatives such as our digital platform, CSR Connect, and as we continue to bring new products to market across our portfolio, including the Inclose off-site façade system. Inclose completed its first major project this year at Australian National University in Canberra and is starting work on an inner-city school in Sydney later this year.

Within the Property Group, we developed -- we delivered $39 million of earnings following the sale of Stage 1 at Horsley Park in the second half of the year, and we continue to see strong demand for industrial property in Western Sydney.

Within Aluminium, EBIT was $37 million for the year despite the increases in electricity and raw material costs.

Our cash performance can be seen on Slide 9. Reduced earnings in Aluminium and lower earnings from property in the year saw operating cash flows reduce to $265 million. This included an increase in working capital as we made the decision within Building Products to build stock to ensure we manage effectively through our plant consolidation initiatives and upcoming scheduled maintenance. Separately, Aluminium's working capital at year-end was elevated on historical levels due to the timing of data collections and supplier payments, which have all reversed following year-end. Despite this, we still saw cash conversion at 87%, with our strong cash flow position continuing to support our dividends, investment in growth opportunities and ongoing property projects.

Slide 10 shows how our financial position has enabled us to return significant funds to shareholders over the last 5 years. Our final dividend is $65 million or $0.13 per share, 50% franked.

As you'll see on the chart, the level of franking has fluctuated, which is the result of our policy to maximize distributions of franking credits as they are available. The level of franking for the final dividend has moved back to 50% due to the utilization of tax losses following the sale of Viridian this year.

For the year ahead, we forecast to remain in tax payable position which will support maximizing our franking position moving forward.

If we turn to Slide 11, you can see that we have continued to invest to improve the existing operations and support our future growth aspirations. In terms of CapEx, excluding property, we spent $105 million during the year. This is at the higher level to previous years due to our investment in a world-class low-cost manufacturing plant at Hebel. We've also taken the opportunity to secure and improve our network and support business expansion through the acquisition of key sites for AFS in Melbourne and Bradford in Western Australia. Apart from the completion of the Hebel project, capital expenditure is expected to remain in line with depreciation in YEM20.

Our operational performance, cash flow generation and portfolio reshaping means that we've ended the year in a very strong financial position with $50 million of net cash as set out on Slide 12. In addition, we will receive $188 million in cash proceeds from 2 property settlements and the deferred settlement from the Viridian sale in YEM20. We launched a $100 million share buyback in March where we've purchased $9 million to date. The buyback will continue through the course of this financial year.

While we are able to return our surplus cash to shareholders via the share buyback, we remain in a strong position to continue investing in growth opportunities and our growing pipeline of property projects.

I'll now hand back to Rob to run through more detail on the business performance and outlook, and I'll come back at the end for questions at the end. Thanks.

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Alan Robert Harold Sindel, CSR Limited [3]

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Thanks, David. So on to Slide 14, which is the Building Products one. Revenue, as I said earlier, was up 1% to $1.7 billion, and this is a good outcome as higher pricing and improved product mix offset the reduction in volumes we started to see in the second half of the year.

There are couple of things to point out in terms of the EBIT performance. Firstly, we've increased our volumes through our EBIT margin performance. Firstly, we've increased our volumes of imported products, including solar systems, Tesla batteries and fiber cement facades. In addition, we maintained market share in Hebel and Bradford by importing Hebel panels and glasswool insulation. It's important to maintain our market position there as we ran out of local capacity. So while this supported our revenue growth and provides volume flexibility, these imports are generally at a lower sales margin.

On Page 15, I think this is a really important chart for us because it shows the growth in our Building Products portfolio that happened over the last 5 years. And it goes to that point about the resilience that I made earlier about, the resilience of the portfolio to any changes in residential construction market. So just to maybe focus on a bit of the detail, the red bar is Lightweight Systems, which is a good proxy for construction market, and it's basically Gyprock and Cemintel earnings, and they've actually delivered above growth, expansion of margin and cost reduction. The really important one is the pink bar which represents growth in AFS, Hebel, Bradford, PGH Bricks, which have achieved a compound annual growth of 26% versus a market that's up 5% in the same period.

So as David said, we're operating much more flexible, much more variable cost base, particularly following sale of Viridian and we've invested in construction systems where we see significant scope to grow market share in the commercial market.

Slide 16 illustrates this in another way and really shows the balance of the Building Products portfolio. And this has come from strong growth not only in products, but in new market segments like polyester insulation, permanent formwork and external cladding markets where we had low market positions or new market position.

Hebel and AFS continued to grow by delivering improved speed of construction and more -- much more flexible building systems. Both still have relatively low market penetration, providing what we see as an opportunity to continue to grow above trend. We've also delivered growth, as I said, in Lightweight Systems and Bricks by expanding our product range. In Lightweight Systems, this is through more investment in downstream distribution, our expanded ceiling business. And in Bricks, through new innovative cladding systems that give us the brick look and feel, but don't have the shortcomings in terms of speed of construction.

Moving on to Property on Slide 17. This year, we've delivered $39 million of EBIT, ahead of our 5-year average of $31 million. We think very strong demand for industrial property following the sale of Stage 1 in Horsley Park.

Our Chirnside Park project in Victoria, a residential project, is nearing completion with construction of the final stage underway with further earnings this year. Just to reiterate, this project, since 2015, has delivered consistently on a total of $44 million of earnings. Our competency comes from our team's ability to rehabilitate, rezone and bring to market very complex industrial sites. We see demand for both industrial and residential land, very strong along the East Coast, and there's no reason why this is going to change in the short term.

Calling out a couple of those projects on Slide 18. The first 2 are residential projects in Western Sydney, one being developed today and one a future project. And these are good examples of how our Property business will deliver sustainable earnings over the next several years as we have done at Chirnside Park in Victoria.

For Schofields, the rezoning approval process is on track and expected to be completed within the next few months.

PGH Bricks also currently operates a factory at Bringelly, which includes 92 hectares of land targeted for future residential development.

On Slide 19, I'd like to point out 2 industrial sites. The most immediate of these is the current development work at Stage 2 at Horsley Park. Remembering that we sold Stage 1, we delivered earnings of $32 million on Stage 1 at Horsley Park. As many of you know, Badgerys Creek is a 200-hectare site that is located adjacent to the Western Sydney Airport site. Like Bringelly, this region will take a number of years for the rezoning process to complete, but is well underway by state and local government. And each of these individual projects illustrates the continuing strength of our property portfolio.

Now moving on to Aluminium on Slide 20. Volumes were up slightly as we've continued to do in the last few years, and the Australian dollar realized prices up 11% reflecting higher global prices and premiums. As we highlighted in the last 12 months, supply constraints for more materials in China, including coke and pitch, have increased raw material costs by around $22 million. The rest of the EBIT performance was impacted by the full 12 months of the high electricity-related costs by $61 million, and we'll talk to that further in a moment.

On Slide 21, we've seen the volatility of the Aluminium price, driven by factors including U.S. tariffs and sanctions, coupled with alumina shortages out of Brazil. And each of these external factors has stabilized in the last few months. Pleasingly, we remain well hedged through YEM20 and the opportunity to increase our position in YEM21 as prices continue to fluctuate. Regarding our future alumina supply, a new 2-year contract is now in place for 50% of our alumina volumes linked to the U.S. dollar price providing a natural hedge. A contract for the balance of our requirements is expected to be finalized within the first half of this financial year.

So regarding the market, I'll just talk couple of charts on Slide 23. So we've seen, as I said, general slowing in activity over the last few months, but not significant in our view and which is largely driven by a combination of credit availability and declining house prices. Over the longer term, demand for housing in Australia will be supported by strong population growth, both immigration and the underlying natural increase in population. Both major political parties support investment in new housing stock, which is a positive for CSR. Commercial markets are strengthening and this represents a good opportunity to adapt our existing products to more commercial applications.

Finally, the increase in cost of construction labor, means we're well placed to deliver new building and off-site construction systems of the future like you saw Inclose and many other systems we're developing.

In our final slide, a look at the outlook for Slide 24. So clearly, there is some mixed economic signals making it difficult to predict exact levels of building activity for the year ahead. As a result, we'll continue to focus on the things we can control, managing our operating footprint, our overhead costs to ensure we do whatever we can to mitigate any impact on earnings.

And finally, as you know, I've signaled my intention to step down this year. The announcement of a new Managing Director is expected to be finalized before our AGM next month. I'll be staying on to assist with the transition of the new Managing Director and look forward to watching CSR develop a very successful future over the next number of years.

With that, I'll pause and open it up to David and I for questions. Andrew?

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Questions and Answers

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [1]

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Rob, Andrew Scott, Morgan Stanley. Just a couple of questions on the Aluminium business, if I can. The alumina contract, you've signed the 50%, you should have left a bit of a teaser there. What can you tell us about what the new linkage rate looks like relative to where you have been previously?

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Alan Robert Harold Sindel, CSR Limited [2]

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The linkage to Aluminium price and the spot price has been about 18% to 18.5% over the last 5 years. The contract is commercial, but you can imagine it's that sort of order of magnitude.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [3]

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So step up from where we've been over the last period of the contract?

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Alan Robert Harold Sindel, CSR Limited [4]

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Yes.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [5]

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And expectations for the remaining 50%, you think you'll be able to obtain linkage-based contract?

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Alan Robert Harold Sindel, CSR Limited [6]

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Yes.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [7]

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And then finally, just a coal cost pass-through, is that still in place? And still your expectation over the next 12 months that will remain?

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Alan Robert Harold Sindel, CSR Limited [8]

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Yes, the coal pass-through continues with elevated price of coal globally, and I think the best thing to do there is just assume it runs through next year.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [9]

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Lastly, just David, just outlook for franking. Obviously, back to 50%. Do you expect -- assume we go back to 100% next year?

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David Fallu, CSR Limited - CFO [10]

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Yes, I'm remembering that, that will be on a cash paid basis, so more likely to see an increase in franking on a final dividend next year rather than in the interim.

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Alan Robert Harold Sindel, CSR Limited [11]

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Peter?

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Peter Steyn, Macquarie Research - Analyst [12]

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Rob, Peter Steyn from Macquarie. Just turning to the Building Products phase. If you wouldn't mind just giving us a sense of your basis of planning for the remainder of this year. You've alluded to the fact that visibility is obviously challenged, but builders in Sydney seem to be worried about the second half of this year if we don't see a turnaround in confidence and conversion on sales. Just your perspective on that and how you guys are thinking about it.

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Alan Robert Harold Sindel, CSR Limited [13]

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Yes, so I think -- we think about it in a couple of buckets in the sense of what we're seeing today is strong relatively good underlying demand, as I said, slight moderation in the second half of the year. And we say in our results that April looks similar to that last quarter of YEM19. I think the anecdotal stuff that everyone's talking about is new lot sales and greenfield developments and people through display villages, and clearly, that's taken a hit over the last couple of months. That can turn around very quickly is our experience. The pipeline is still strong. If you see labor government supporting negative gearing in new build and you see price adjustments, and I think one of the core issues is whether APRA is prepared to move on the 7.25% minimum assessment rate, I think that's the issue more so than an underlying mortgage rate. So your guess is as good as mine. There's a lot of analysis out there, but we see housing starts today; the numbers that came out on Friday were still above the 100 for detached and about 70,000 for multi-res on an approval basis.

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Peter Steyn, Macquarie Research - Analyst [14]

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And then maybe just moving from that to operational leverage. You mentioned the flexibility and the increased variable nature of your cost base. But could you perhaps give us a little bit more granular detail on what you've done to date? We all are aware of what you've done in brick business, but what are the sort of next steps for you to essentially get your cost base to a place where you can protect your margin down side?

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Alan Robert Harold Sindel, CSR Limited [15]

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And I think that's the big high-cost variable businesses for glass and bricks. But they're very -- in very -- 2 different very buckets because generally only had one glass plant, so you couldn't consolidate. Whereas what Nick and the team is doing in bricks, for instance, in Queensland, we've now announced the closure of Darra. Our low-cost plant is Oxley. So you're actually reducing the cash cost of production. You still got overhead costs, so that's the second part of any equation, so example, in bricks. In roofing, we've actually just put the roofing business into our Bradford business. That obviously consolidates overhead costs. And the reason for doing that not only is cost reduction, but also, we see ourselves as better able to own the roof space with our insulation offering, our solar offering and obviously, the roof tile offer. So there's a multitude of things that happen, and we have a list of cost down initiatives by business, by state, by product category that we implement as -- if volumes come off. Some of those are already being done. The roofing example I talked about, the bricks example, and there's a series of things, ship productions in plasterboard, ship productions in insulation if required. There's a whole series of things, dropping the imports in insulation, and Hebel is probably more likely than dropping ships at this point.

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David Fallu, CSR Limited - CFO [16]

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And look, I think that, that's the reason as well that you saw that increase in working capital within the Building Products business. So whilst we consolidate into a one low-cost site in Queensland, there is product replication that you need to do between the 2 plants. So we'll manage through that process, but then that realizes our low-cost position out there.

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Alan Robert Harold Sindel, CSR Limited [17]

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And remembering that our exposure to multi-res is about 15 -- 12% to 15%. That's the one that saw 50%, detached housing is off 10%. Simon?

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Simon Thackray, CLSA Limited, Research Division - Former Research Analyst [18]

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Rob, I'm Simon Thackray, CLSA. First of all, before the question, a statement. So Rob, I just want to say thank you for everything you've done as CEO. You've been very analyst-friendly, very market-friendly, done remarkable job at CSR. So thank you very much for what you've done.

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Alan Robert Harold Sindel, CSR Limited [19]

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Thanks, Simon.

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Simon Thackray, CLSA Limited, Research Division - Former Research Analyst [20]

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In terms of questions, I'm going to go to your first comment on Building Products. You're saying it's difficult to predict building activities and notwithstanding what you just said, but you're going to make changes to the operating footprint to mitigate the impact. So you obviously have a view on where you think housing is going to land or your volumes going to land. To understand your previous comments, are you saying you have various plans at various levels of activity that you will switch on? Is that the way to look at it?

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Alan Robert Harold Sindel, CSR Limited [21]

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Yes, that's a better way of expressing it. And some of those things. So if we've seen a 5% drop, then we will have implemented the 5% plan. If we see a 10% drop, detached starts down about 12% year-on-year. So that would require 12% modification of the cost base. Multi-res is down 30% to 50%, so that's a different issue depending on the businesses that are exposed to that.

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Simon Thackray, CLSA Limited, Research Division - Former Research Analyst [22]

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Got it. That's very helpful. So just in terms of market discipline structure which you're reflecting in that plan, why is it that you didn't go to your traditional price rising plasterboard? You sent a letter to your customers for the April price rise saying it wouldn't happen, you're going to absorb costs? And we are looking at a June price rise and we're seeing product base getting stuffed into the channel by competitors. I'm trying to understand the logic of why you can do your annual guide...

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Alan Robert Harold Sindel, CSR Limited [23]

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We've got a very significant price increase in October, which was driven by the paper, the general market paper increase. And our view was, we were a bit ahead of the market in terms of the price. So our intention is not to ever undermine price increases, but give our customers certainty and say, we will give you at least 12 months to put it through the supply chain, put it through your own systems. So from our point of view, we look at the market pricing and our price increase. I think we delivered about nearly 4% price increase from the paper and running out with another 4% in a market where we think we're ahead of the market, we think, was going to be counterproductive.

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Simon Thackray, CLSA Limited, Research Division - Former Research Analyst [24]

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So does that mean you're not going in June? Or you're...

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Alan Robert Harold Sindel, CSR Limited [25]

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No. I think we're going in June, go in June.

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Simon Thackray, CLSA Limited, Research Division - Former Research Analyst [26]

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Okay. That's helpful. That's excellent. The one question I did have for David was just looking at the balance sheet, which is in pristine condition and it's going to get better by the sounds of things with more property prices said to drop in the balance of Viridian, given where we are in this cycle, what are you -- what does the Board think -- what are you thinking about 3-cycle gearing? What's the right level of gearing because if earnings are coming off in the core portfolio, you'll -- the question will be for return on equity for -- in full year earnings. So what's the right level of gearing for this business?

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David Fallu, CSR Limited - CFO [27]

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Yes, so I guess looking it through the -- an overlay one other aspect to that, Simon, which is, I guess, as we've seen over the prior period, the opportunity to invest within the business and to grow the business externally, the opportunities have all -- have primarily been internal and that's why you're sort of seeing the share buyback as well. The opportunity externally over the last 3 years have really seen pricing for perfection, making it very difficult to acquire. I think that opportunity potentially changes over the next 12 months. So there is an element of that pristine balance sheet, as you describe it as giving a sort of optionality to be able to move quickly on those opportunities should we need it. Yes, indicatively, we want to maintain our investment-grade rating, and so we will -- we would still see ourselves not going past that sort of capacity from an investment-grade level.

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Simon Thackray, CLSA Limited, Research Division - Former Research Analyst [28]

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So what is that -- just for the uninitiated, what is that level to maintain investment-grade credit rating?

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David Fallu, CSR Limited - CFO [29]

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So we have an internal policy which we published previously, which is -- that's BBB+ level.

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Simon Thackray, CLSA Limited, Research Division - Former Research Analyst [30]

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Sorry, is there any objective gearing level that I should be thinking about?

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David Fallu, CSR Limited - CFO [31]

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You're effectively through the cycle looking at about 2x.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [32]

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Peter Wilson, Credit Suisse. On Building Products, the comment you gave there on the outlook, you mentioned that volumes in the first months of '20 are in line with the fourth quarter last year. What does that mean on a pcp basis given that you've already said, I guess, volumes moderated in the second half and if I'm right, you'd also expect typically a pickup in volumes at this time of the year versus the quarter just gone?

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Alan Robert Harold Sindel, CSR Limited [33]

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April on April, revenues are very similar. So the price increases of 3% to 4% are probably offset by that level of volume.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [34]

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Okay. So it's a positive price...

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Alan Robert Harold Sindel, CSR Limited [35]

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Positive price, slight negative volume. And there's a whole multitude of state factors that play in there and product factors, but that's broadly what's happened. And I think based on what I've heard anecdotally, revenue is okay. It's protecting the margin which is the important part at the moment.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [36]

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Again, if I could drill down on the Hebel volumes you're expecting, so you said that you expect, I guess, growth above market in Hebel.

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Alan Robert Harold Sindel, CSR Limited [37]

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Yes.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [38]

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Can you give us, I guess, some color on what you're expecting in terms of absolute growth and how that relates to the capacity that you just brought on and that 15% of imports that you had last year?

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Alan Robert Harold Sindel, CSR Limited [39]

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Yes. So Hebel is running 24/7, 4 ships and importing product. That's actually coming off now the imports because the -- that product is for intertenancy walls in apartments and that market in New South Wales is -- has reduced, and the other guys think that's actually found the bottom, but that's a different story. That's a high cost plant compared to our new plant. The benefit of our new plant is not only more Hebel capacity, it's different Hebel capacity. So it's super smooth panels that will have a completely different application in commercial where you can coat those, not with the 3-coat aquatec system. It's a very simple coating process. So there's a whole lot of moving parts. I think the way to think about it is, its core intertenancy wall in residential, the market segments where it's going to is commercial and also residential and also infrastructure. And infrastructure is internal linings. In commercial applications, it's as façades for multi -- for commercial buildings. And in residential, it's actually replacing some of the façade products we've seen.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [40]

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I guess does that mean we should think about the volumes that may come off for taking a chunk out of import volumes not those new volumes which are coming from the new products from the new facility broadly?

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Alan Robert Harold Sindel, CSR Limited [41]

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Yes.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [42]

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And I imagine there was high DNA coming through this year, what is the kind of net EBIT outcome that we're expecting with all those factors you mention?

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Alan Robert Harold Sindel, CSR Limited [43]

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Sorry?

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [44]

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I imagine there was some high DNA coming from the Hebel facility into this year's earnings?

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Alan Robert Harold Sindel, CSR Limited [45]

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Oh, yes. Okay.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [46]

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What's the kind of the net EBIT outcome given all of those factors you mentioned?

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David Fallu, CSR Limited - CFO [47]

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All right. Expectation from our perspective would be that the -- of the margin reduction from the imported product no longer being brought in, will be offset by the DNA in the first year.

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Lee Power, Deutsche Bank AG, Research Division - Former Associate Analyst [48]

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Lee Power, Deutsche Bank. Rob, you mentioned just a range of different plans about where the market goes. What's this around consolidation? What's the kind of the lead-in that you need for each of those plans? I mean, how early do you need to take a view on whether the market is off 5%, 10%?

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Alan Robert Harold Sindel, CSR Limited [49]

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We're pretty good at doing that. We can see our sales every day. So we can tell you -- each of the team members here can tell you what their sales were yesterday by plant, by site, by customer segment. So it's very easy for us to plan and say. Actually, if that happens for 3 days, you're not going to do anything rash, but if that happens for 6 weeks, then you make a different decision. And we're pretty good at tracking both lead indicators, current indicators, current volumes.

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David Fallu, CSR Limited - CFO [50]

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The lead-in time is pretty quick, to Rob's point. The mitigation planning is the piece that you need to work through. So that's the inventory build to manage stock replications, that's managing some of the holding costs that you'll have for sites as you're going through the mothballing process and things like that. But the lead-in time in terms of decision-making is within the month.

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Lee Power, Deutsche Bank AG, Research Division - Former Associate Analyst [51]

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Yes. And then you just talked to, I mean, some of these more modern products like ASF, penetration still relatively low. Can you talk to where that maybe shifted over the last 2 years and where you think it will end up over the next 5?

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Alan Robert Harold Sindel, CSR Limited [52]

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It's one of those, ones that have been growing at that 26% compound, a little stronger in -- when you look at where we started, came off at very low base. It's hard to say we'll grow at 26% for the next 5 years, but there's no reason to believe that the penetration, particularly as other segments of the market go, actually that's -- we can use that, that's faster for us and we're continuing to see that. The innovation is also the important part where you say, where you look at the building system and say, okay, how do we improve that product, so it's got wider applications. And some of the stuff they've done in the corner sounds basic, but the corner, so it's really easy to inspect the steel, place the concrete, and get your approvals, is another sort of innovation, which improves the product. So I think it's got a long runway. What is going to be next year in 5 years' time is more difficult, but our plan is, as David said, we've bought a site in Victoria to expand. We'll announce, I think, in the next few months. We're planning for what that looks like in terms of capital investment, but it'll be a combination of market growth plus penetration by moving into new markets.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [53]

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Daniel Kang, Citigroup. Just a question on energy cost, particularly for Building Products and probably if you can give some color on the YEM as well, the impact it had for YEM19 and your expectations for YEM20?

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David Fallu, CSR Limited - CFO [54]

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Yes, so we go through a fairly proactive process of managing our electricity and gas. We're wholesale operators in both sites. Electricity was relatively flat as a result of our sourcing policies from prior periods. Gas, we had an increase in our gas costs through the year. Expectation moving forward would be that we'll see a flattening of the energy costs that we're receiving, but an absolute reduction in our gas cost is a result of the sale of Viridian because it was a high gas user within the portfolio.

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Alan Robert Harold Sindel, CSR Limited [55]

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We think that's worked its way through the system, both at Tomago and in Building Products. So you won't get an external hit from energy. Quite the opposite, you might see a bit of moderation, particularly as potential electricity prices come down. You look at the forward curve for electricity, New South Wales electricity is $80 a megawatt, the forward curve is $60 a megawatt.

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David Fallu, CSR Limited - CFO [56]

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The one we won't be able to say that will be the coal cost pass-through, which is obviously a difficult one for us to forecast at this point in the year. Thanks, Daniel.

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Alan Robert Harold Sindel, CSR Limited [57]

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I think that's the room done. So on the call?

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Operator [58]

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(Operator Instructions) Our next telephone question is from Brook Campbell-Crawford from JPMorgan.

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Brook Campbell-Crawford, JP Morgan Chase & Co, Research Division - Analyst [59]

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Rob and David, I just had a question on Slide 14. There's a $16 million negative buy there relating to market. Can you just help us understand what that actually relates to? I just sort of thought market activity is more referenced for volumes and perhaps it's mixed and -- but any help would be great.

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David Fallu, CSR Limited - CFO [60]

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Yes, what you'll be seeing there is market is volumes, but it's also share. So there'll be some reductions in volumes that you've seen there, but I guess also there were some categories where you'll have a reduction in share which we saw in roofing for the period.

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Brook Campbell-Crawford, JP Morgan Chase & Co, Research Division - Analyst [61]

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And another one for you actually just on working capital, bit of a build, I guess, in this period, but should we be expecting an inflow from working capital in FY '20 and '21 just given the downturn that's expected in resi?

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David Fallu, CSR Limited - CFO [62]

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I think you should see an inflow from a Building Products perspective. The Aluminium process is -- you've had a -- that revert to ordinary levels. The one thing I would say is we're obviously getting a step-up in some of our supply contracts. So because of the high pricing, you may see a higher level of working capital within Aluminium above historic levels for things like alumina.

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Operator [63]

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(Operator Instructions) Our next question here is from Sophie Spartalis from Merrill Lynch.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [64]

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Just following up on some earlier questions, this is in regard to the Alumina contract, that remaining 50%. You talked about it likely being a linkage contract. Can you just talk through are those alumina contracts both with Rio Tinto?

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Alan Robert Harold Sindel, CSR Limited [65]

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No, they're not. We'll have, we think, 3 different suppliers, and that will roll off at different stages. So we won't go through the same process of a cliff at the end of a contract. So I think we've ended up in actually a pretty good place. There is a fair degree of alumina actually available in the world and more coming on market, and there is a belief that the situation improves post Alunorte. So we want to take a short-term view of that rather than a long-term view.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [66]

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Okay. So just to get some more clarity around that, is Rio part of those 3 suppliers? And can you maybe just talk through the term -- no, the tenets of those contracts then as new contracts?

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David Fallu, CSR Limited - CFO [67]

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Yes, just to be clear, so we have secured 50% of our alumina requirements under a 2-year contract with one party. We're working through with other parties to finalize the balance of the 50%, and Rio may be one of those parties.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [68]

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Okay. Great. And then just a follow-up question on the Building Products business. Given obviously challenging macro environment, where do you see your ability to continue to increase pricing to offset likely reduction in volumes? Obviously, we've already gone through the plasterboard business, but if you could talk through maybe some other products, please?

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David Fallu, CSR Limited - CFO [69]

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Yes. Thanks, Sophie. I'll take that. It's actually a very disciplined industry in the sense that there is generally a small number of competitors with very similar drivers. So we don't envisage price falls across any of our categories. We certainly don't plan for that. Insulation is 2.5 competitors, and we'll ensure that, as market leaders, that we'll look to maintain pricing. From a Bricks point of view, the same, we've had a price increase recently in Victoria, driven by -- it was the sort of a lag in gas cost increases that David talked to. So I think the way we think about it, when the market's going up, we like to get 3% or 4% price increases, 1% above inflation. When the market is flat, our job is to make sure we at least get inflationary increases. And as you saw during the RBA announcement last -- sorry, the inflation print a couple of weeks ago, inflation is pretty low. That's from a employee wages cost point of view, energy point of view and raw material point of view. So I think if we get 2% or 3%, then we'll maintain those margins.

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Alan Robert Harold Sindel, CSR Limited [70]

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I might just add to that. I think the other key component to that is, yes, continuing the dedication through a downturn to continue innovating within the portfolio. You see the money we invest in new product development and long-term initiatives, and ideally, that gives you -- that solves the customer need, and you're unable to get rewarded for that.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [71]

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Okay. That's fantastic. And good luck, Rob, with your next adventure.

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Alan Robert Harold Sindel, CSR Limited [72]

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Thanks, Sophie.

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David Fallu, CSR Limited - CFO [73]

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You should be wishing me good luck.

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Alan Robert Harold Sindel, CSR Limited [74]

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The project on that point. Look, the organization, as I say, it's in a very strong position financially, market wise. And this notion of a downturn, I remember, in 2017, when we said the market had peaked, it peaked 2 years ago. We are 2 years into a downturn already, so the notion that the world is going to end, I think, is incorrect. The population growth in Australia is 400,000 per year. That required 185,000 starts just before anyone does anything. So if it's 12-month moderation in volumes, which is where we saying, I don't think it runs on much longer than that.

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Operator [75]

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There's no more further questions from the line. I'd like to hand the call back to the speakers for any closing remarks. Please continue.

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Alan Robert Harold Sindel, CSR Limited [76]

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Thank you. No further questions in the room? Thanks, everyone. I appreciate you turning out today and look forward to seeing many of you over lunch. Thank you.

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Operator [77]

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Ladies and gentlemen, that does conclude the call. You may all disconnect. Goodbye.