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Edited Transcript of CSR.AX earnings conference call or presentation 11-May-20 11:30pm GMT

Full Year 2020 CSR Ltd Earnings Call

Sydney May 25, 2020 (Thomson StreetEvents) -- Edited Transcript of CSR Ltd earnings conference call or presentation Monday, May 11, 2020 at 11:30:00pm 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 & Executive Director

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Conference Call Participants

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* Andrew Geoffrey Scott

Morgan Stanley, Research Division - Executive Director

* Craig John Woolford

Citigroup Inc, Research Division - MD, Director of Research for Australia & New Zealand and Lead Australian Consumer Sector Analyst

* Keith Chau

MST Marquee - Building Materials & Packaging Analyst

* Lee Power

CLSA Limited, Research Division - Research Analyst

* Peter Wilson

Crédit Suisse AG, Research Division - Associate

* Peter Steyn

Macquarie Research - Analyst

* Simon Thackray

Jefferies LLC, Research Division - Equity 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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Thank you for standing by, and welcome to the CSR full year results briefing. (Operator Instructions) I would now like to hand the conference over to Ms. Andree Taylor, General Manager of Investor Relations. 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. Thank you for that. I'd like to welcome you to our call today for the results presentation for the year ended 31 March 2020.

Let me begin by making a few introductions about the team joining us this morning, CSR's Managing Director, Julie Coates, will open the presentation; then our Chief Financial Officer, David Fallu, will go through the detailed financial performance. Julie will 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 with questions following the presentation. So with that, I'll hand it over to Julie to begin.

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

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Thanks, Andree, and good morning, everyone. I'm starting on Slide 4, I want to begin with a few introductory comments, which will also outline what we will cover today. Firstly, we'll cover the results for the year ended 31 March 2020. Clearly, this year drew to an unusual close with the onset of COVID-19. Prior to the start of the pandemic, the housing market was already slowing as we highlighted at the half year. During the second half, we were planning for a further slowdown. So this has set us up well in the current environment, as we can now apply this work to manage the impact of COVID-19 over the coming months.

Since mid-March, we have worked to operate the business productively in this new environment. Ensuring the health and safety of our team has been paramount, as has been ensuring we sustain the business over the longer term, managing our cash position and working with many stakeholders to ensure our ability to operate. We are monitoring various lead indicators, so we have an agile approach to quickly adjust our production and costs based on changes in demand we may see in the months ahead.

I'll talk more about our COVID-19 response. But first, let's begin with a review of the results for the year to March on Slide 5. Our statutory NPAT from continuing operations was down 10% to $125 million. EBIT before significant items for the group was down 18% to $217 million. We ended the year with a solid result in Building Products, with our revenue down 6%, which was ahead of the residential market, which was down on average 21%. EBIT for Building Products was down 17% to $171 million. This is in line with the trends in the market we saw at the first half. The total dividend for the year will be $0.14, which is based on the $0.10 interim dividend and $0.04 special dividend. The decision not to pay the final dividend is linked to our cash preservation approach due to COVID-19, which David will outline in a moment.

Turning to safety. This is clearly a top priority for the business and for me. We did see a modest improvement this year in terms of lost time injuries, but we have the opportunity to do more in this area. Finally, in terms of sustainability, this is a transition year for us as we have completed the targets set back in 2010, where we have achieved significant improvement in key areas, particularly in reducing our emissions and waste to landfill. For the next 10 years, we have set new targets with a broader base of measurement, increased expectations for improvement and alignment to these goals across the business.

I'll now hand to David to go through the financial results in more detail.

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David Fallu, CSR Limited - CFO [4]

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Thanks, Julie, and good morning to everyone on the line. I hope everyone is safe and well. Looking at our results for the year, Slide 7 summarizes our profit and loss. In terms of revenue, it was down 5% for the year to $2.2 billion. As Julie will talk to in greater detail, Building Products revenue has held up reasonably well despite the drop in activity across all residential segments during the year, which was supported by good sales performance in Gyprock and Bradford.

EBIT before significant items of $217 million was down 18%, which reflects the timing of Property transactions and a lower Building Products result. Aluminium reported higher earnings due to the lower Australian dollar and our hedging position, offsetting softness in spot LME pricing.

From a corporate cost perspective, the significant reduction on last year reflects a one-off unwind long-term incentive accruals and the benefit of leases. It is also relevant to note, we expect to see the transitional services supply to Viridian come to an end. As a result, the expectation would be that underlying corporate costs revert to a more usual historical level moving forward.

Our effective tax rate was 28.2%, consistent with prior period and reflecting the benefit of distributions from associated companies. The reduced Building Products and Property earnings flowed through to NPAT after significant items of $125 million, down 10% on a continuing basis. On a statutory basis, this was up significantly from last year as the prior period included the, now divested, Viridian business.

Turning to our balance sheet on Slide 8. As part of managing the construction cycle and the forecast reduction in activity levels, we made a clear decision to operate with a conservative balance sheet. Whilst this is critical to assist us with managing a downturn, with a COVID-19 overlay, quite simply, strong liquidity became a top financial priority for all businesses. We finished the year with net cash of $95 million. This follows $69 million of shares bought back on market, along with the $0.10 interim dividend and $0.04 special dividend for the year. Following the year-end, we took additional steps to increase liquidity by not declaring a final dividend and securing $200 million of additional debt facilities. We now have total debt facilities of $520 million, with a first maturing in the second half of the YEM22. We also note there remains significant asset backing in addition to our cash and debt facilities with an extensive and valuable property portfolio held at cost-plus CapEx on our balance sheet.

Page 9 sets out our capital expenditure for the year, which has been at an elevated level following the expansion of our Hebel facility, investment in our footprint and developing our pipeline of Property projects. Our focus of ensuring liquidity means we are managing all aspects of cash outflow from the business. And whilst we have the ability to significantly reduce CapEx in the event market activity requires, we will ultimately set CapEx in an agile manner to ensure we are investing appropriately to deliver into key focus areas and market opportunities.

From a Property perspective, the key focus and priority is delivery of Horsley Park Stage 2, which requires a further $6 million of capital expenditure in YEM21 to deliver the first tranche of $80 million in proceeds from that project. Further CapEx will be managed on a case-by-case basis as paybacks warrant.

Our cash performance can be seen on Slide 10. There was a continuation of cash generation despite lower activity due to favorable timing of aluminium payments versus last year, which was impacted by late shipments moving into April 19. The previously flagged deferred consideration from the Viridian and Property sales were received. In addition, we extended the Rosehill lease during the year, along with a portion of Rosehill proceeds to be received in YEM21.

Working capital from our receivables and payables perspective did not see material changes in payment patterns coming into year-end, with better accredited days reflecting prior periods. Whilst we have yet to see an impact from COVID-19, working capital in general will remain a key focus area to ensure we are proactively managing production levels and customer terms to align with activity and appropriately manage cash flow.

The plans we made to enter the year with a strong balance sheet, along with the additional actions we've taken to prioritize liquidity in a COVID-19 environment sets CSR up well to manage both short-term uncertainty and the long-term development of our business and operational network.

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

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

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Thanks, David. So now let's turn to the performance of CSR for the year. As COVID-19 emerged at the end of our financial year, as we've said, we saw very little impact in our trading up to the end of March. What we did see was a continuation of the trends in the first half, particularly the slowdown in high-rise apartment markets and a further decline in detached housing. These trends continue to play out in the second half of the year.

Slide 12 tracks the market on a 2-quarter lag basis. Therefore, this data does not include any impact from COVID-19. Activity for the period has come off historic highs in all residential segments on a national basis. As you know, we have been working to diversify our business into nonresidential markets, and these graphs reinforce the importance of that strategy with commercial activity, up 6%. We continue to build our offering in this space and tapping into some larger projects, including the Crown Casino project at Barangaroo.

On Slide 13, Building Products revenue was down 6% to $1.6 billion. Gyprock and Bradford earnings held up well during the year, as they are utilized later in the construction process and they have also expanded in the commercial market. The key impact on volume was due to the well understood slowdown in the New South Wales high rise market and lower demand out of the detached market that started over a year ago and impacted our brick business, in particular.

In terms of pricing, whilst the team has done well to offset cost increases across the group, this has been most challenging in segments and areas where there's been more material activity reduction.

Looking at our Building Product businesses on Slide 14. Lightweight Systems, including Gyprock and Cemintel fiber cement, have recorded a good result, working through a strong pipeline of activity. Bradford was also steady, with growth in commercial through our Martini acoustic and decorative polyester products.

Bricks slowed during the period as detached housing activity came off last year. Given the high fixed cost nature of our Bricks business, this has had a material impact on average earnings. Within Construction Systems, Hebel has seen some good growth in the Victorian market and specific power patent for facade designs for the commercial market to broaden its offering from its traditional base in the high-rise sector.

Hebel is gaining acceptance across the market, and is in a unique position as the only manufacturer of air-rated autoclave concrete in Australia and New Zealand.

Now turning to Property on Slide 15. We announced a major transaction in Horsley Park back in November. The deal is progressing on track and on budget, and ESR have received for approval. While our Property earnings are lumpy due to the timing of transactions, this talks to the significant value that can be unlocked from our Property portfolio with $53 million of EBIT to be recognized this year. We are still progressing with our other major projects and other opportunities will be assessed as part of our future network plan.

Now moving on to Aluminium. You will see we had a pickup in earnings in the second half, largely linked to the sharp drop in the Australian dollar towards the end of the year. This result was also bolstered by a material benefit from hedging completed in previous years. The drop in the Australian dollar in March enabled us to secure a significant increase in our hedge position for this year, where we are now 63% hedged, up from 16% at the half year.

Our cost position has also improved, with lower input costs and a decline in the coal cost passthrough. While we have benefited from hedging to lock in some favorable returns this year, we cannot rely on hedging to deliver an acceptable return for our investments. Tomago must have a globally competitive energy price in order to be sustainable. This is where we're working with our partners and our participants and regulators to deliver a better solution for Tomago and the energy market in Australia.

I'll now take you through more detail on our COVID-19 response and our approach to planning given the uncertain changes in demand. As COVID-19 evolved quite quickly in March, we acted immediately to focus on the health and safety of our people and to retain CSR's strong financial position. CSR ended the year in a position of financial strength, and we have taken a number of steps to maximize our near term liquidity. In terms of planning for the coming months, we have confirmed all operational levers, which are available to align production to demand across all sites, businesses and support roles. Ongoing monitoring of a range of lead indicators is in place to adjust production and our cost position as needed. Importantly, we have a very agile approach so we can act quickly to changes in demand.

Now turning to Slide 19. You may recall back in November, I highlighted some of my early observations of opportunities at CSR. These included driving supply chain efficiency, delivering greater customer loyalty, optimizing our manufacturing footprint, and as a result, unlocking value in our property assets. We have continued to work on these opportunities during the second half. While our near-term priorities have changed with COVID, we are working through a number of initiatives in the year ahead.

From a customer perspective, we are looking at different ways to provide more complete solutions. An example is a residential facade solution, capitalizing on our complementary materials which combines brick, Hebel, fiber cement and roofing.

We also see opportunities to support customers with technical design and installation advice for better outcomes in relation to certification. So that, for example, fire and acoustic requirements are correctly specified and installed. Whilst our focus is on aligning our manufacturing capacity with the impacts of COVID-19, we continue to work on our optimal footprint to create value for CSR over time. And importantly, we remain confident there is value to be created by more effectively managing our significant investment in transport and warehousing across CSR by coordinating and unlocking efficiencies, whilst enhancing our customer service across all business units. In addition, and more broadly than supply chain, we see an opportunity to streamline the organization to minimize duplication of tasks across the business and operate as one CSR.

And finally, just some comments on current trading on Slide 20. Building Products revenue for the first 6 weeks of the YEM21 is down 3% compared to the previous corresponding period. While COVID-19 has not had an impact on the results to date, we anticipate there will be a slowdown on demand this year, however, the timing and extent is uncertain.

Looking at Property. Demand for industrial sites in Western Sydney remain strong, where we have significant landholdings. And as we noted earlier, we are on track to deliver Horsley Park Stage 2 in the second half of the year.

In Aluminium, as of the end of April, we were 63% hedged for our exposure for YEM21. And as outlined earlier, whilst we anticipate an impact on the YEM21 given the current environment, no guidance can be provided due to this uncertainty.

That concludes our presentation for today. And with that, I'll open it up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Lee Power from CLSA.

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Lee Power, CLSA Limited, Research Division - Research Analyst [2]

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Can you just step through a little bit more your comments around the 6 weeks of YEM21 not really seeing a significant impact? Can you kind of talk across those 6 weeks and then how that's progressed in Building Products? And then also maybe what you're hearing around the remaining pipeline from some of your larger customers, please?

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

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Yes. Thanks, Lee. What we are seeing in terms of that 6 weeks have been pretty consistent since the end of March. And as we've said, 3% down on the prior comparable period. Having said that, that is in line with what we expected pre-COVID-19. So we're still to see any dramatic negative impact on our trading from COVID-19. But having said that into the second part of your question, we are hearing that and we do know that things have slowed down given the restrictions in terms of display homes not being open and a variety of kind of leading indicators, if you like, and so we are anticipating that as we move through the year, there will be an impact on our business.

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Lee Power, CLSA Limited, Research Division - Research Analyst [4]

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Okay. And then maybe just on the Aluminium business, can you give us an idea of any additional coal pass-through benefit that you might get in '21?

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David Fallu, CSR Limited - CFO [5]

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Yes, Lee, David here. I guess in terms of the coal cost passthrough, one of the challenges that we've mentioned before is that we actually -- not only is the absolute cost a challenge, but actually, it's lack of forecastability. If we look at what the Newcastle coal price index was over the course of the year, we would have expected a larger benefit actually in the second half of our year. So whilst that gives us some comfort moving into YEM21, it's not possible to provide a guidance. We only get the forecast effectively during the quarter in which we are operating in.

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Lee Power, CLSA Limited, Research Division - Research Analyst [6]

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Okay. And then just 1 final one. One the Property business, I mean, you've given CapEx for Horsley Park in '21, then '22 and '23, can you give us an idea of what like -- your through-cycle CapEx is for the Property business? Should we just take -- I think you split out for this year, should we take that number, like the $40-odd million?

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David Fallu, CSR Limited - CFO [7]

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So the CapEx is really discrete in terms of on a project-by-project basis. So just a bit clearly, the $6 million identified is in relation to the delivery of the first tranche of the Horsley Park Stage 2 sale, which will complete this year. There would then be CapEx associated with the subsequent tranche in YEM23. The -- so as a result, a through-cycle number for the projects isn't really accurate. It really depends on the scale of remediation requirement and civil and infrastructure works that we are taking. And ultimately depends on how far we take it through each of the -- how far through the development cycle we actually take them. So what we'll do, as I mentioned, is our immediate priority is on focusing on those projects that are delivering, I guess, an immediate return in line with our sort of strong liquidity focus. As we move forward, we'll determine the projects we want to prioritize as we gain a bit more certainty around what the markets we are likely to be delivering those into. The industrial market is still very strong, so our expectation is that we will continue with those projects that are in the industrial space. From a residential perspective, we'll obviously want to see what the impact of the economic environment has on projects in that space.

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Lee Power, CLSA Limited, Research Division - Research Analyst [8]

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Okay. And so it sounds like it's a bit too hard for you now to give an idea of -- I was talking about Property business as a whole as to how we should think about CapEx going forward.

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David Fallu, CSR Limited - CFO [9]

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Yes. Ultimately, it's going to depend on sort of the environment that we see. At this stage, we've obviously got an ability to significantly reduce the $40 million of expenditure that we had this year. But ultimately, we need to balance that decision because that will slow the pipeline of development coming in, in periods subsequent to YEM21.

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Operator [10]

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Your next question comes from Peter Steyn from Macquarie.

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Peter Steyn, Macquarie Research - Analyst [11]

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Just keen to get a more detailed perspective on how you are thinking about capacity management and utilization across the Building Products portfolio? And just give us a bit of a sense of what you've done, how you're thinking about ongoing capacity management in each of the businesses? If you wouldn't mind giving us a bit more detail there, Julie?

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Julie Ann Coates, CSR Limited - CEO, MD & Executive Director [12]

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Yes. No problem at all, Peter. So as we said, the demand is uncertain, and we're looking at a number of different sources of input to what we think is going to happen in advance of it happening. That's the first thing. And what we've done is work through a number of levers that we know that we can pull in order to optimize capacity to the demand that's there. And that -- they include things like reduction in casual and overtime, and we've already taken some action around that as part of our COVID-19 response. We can have a look at our product range and rationalization of those products. And we can also reduce shifts, which we're able to do in some of the larger parts of the business like Gyprock quite easily because those operations run on a 24/7 kind of capacity and have 3 shifts. And so it's pretty easy to remove 1 of those. And we can consolidate lines, which we have done at some of our facilities in the second half of this year as well as shut factories, which we've also done. So there's a number of things that we've done over the course of the YEM20, which we can do more of in YEM21.

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Peter Steyn, Macquarie Research - Analyst [13]

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Julie, if I could sort of push just a quick question around this. If you think about capacity utilization and sort of nameplate aside. But if you think about the current operating environment, how do you -- where -- what level are you trying to manage to? Is it effectively an 80% of active capacity? Or how do you guys think about managing that? And I suppose, at what level do you end up with a real challenge where costs end up stranded and no recovery is possible?

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

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Yes, Peter. Inherent in your question is a recognition of the differences across our business. And so we think about each of the business units differently, and they have different levers that they can pull. I've already touched on Lightweight Systems. And so they work hard at maximizing their capacity because they have the opportunity to either casual, overtime or shift structures to match production pretty closely. In Bricks, that's a little more difficult because of the high fixed nature of the business. And in fact, we need to also think about the inventory that we hold in relation to those businesses, then, if you like, pull the trigger around shutting a factory. And so that becomes quite an important decision in terms of managing what's behind your question.

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Peter Steyn, Macquarie Research - Analyst [15]

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Perfect. Yes, I appreciate it's quite complicated thinking about it on a portfolio basis. And then perhaps also a quick one on the Property side of things, just around your comfort to absolutely secure the cash flows on Horsley Park and some of the conditionality that's still required in that transaction. And perhaps also just interested in Schofields. You mentioned that the zoning is now expected to be completed in June. It's obviously been quite a process for you. Realistically, do you think that Schofields presents any cash flow opportunity in the remainder of '21? Or would you think that's more a '22 issue?

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Julie Ann Coates, CSR Limited - CEO, MD & Executive Director [16]

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I might kind of answer at a high level, and then hand to David to add a bit more color. We remain very confident about Horsley Park in terms of both the YEM21 and also completing in YEM23. And as you say, in relation to Schofields, it's one of the many property holdings we have in Western Sydney, which continues to have demand, as I said, and our view on that is we should look to the timing of some of those transactions based on how we maximize the benefit. And I'll hand to David just to add a few more on that.

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David Fallu, CSR Limited - CFO [17]

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Yes. Thanks, Peter. So in relation to sort of conditionality, all the sort of conditions presence to delivery a completion for Horsley Park Stage 2 are within CSR's control. There is no sort of material adverse change or things of that nature. So hence, the confidence in the delivery of that for YEM21. In terms of Schofields, effectively now with rezoning coming to a conclusion, it's got the opportunity for us to consider how we approach development of that, which we mentioned, Peter, from a value maximization perspective could be, anything from sale all the way through to development. Obviously, the further you take it, the longer the timing. But it would be unlikely that, that would be YEM21 period unless we would conclude an immediate sales on the back of the rezoning.

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Operator [18]

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Your next question comes from Simon Thackray from Jefferies.

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Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [19]

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Just following on from a couple of questions. Just there are some really good stuff in here. I just wanted to explore a couple of things. The monitoring of the lead indicators you mentioned, Julie, what range of outcomes are you planning for, if I may ask in terms of residential construction? And I say that for your modeling, given completions are still sitting at 15% to 17% above where approvals are telling us where we're going over the next 6 months or so. And obviously, you can see that the Lightweight Systems and energy and roofing, which are later in the cycle, are still running ahead of Bricks and construction systems where the revenues are down more sharply. So what sort of range of outcomes are you expecting or modeling for YEM21? And are we to expect from a revenue point of view that Lightweight Systems and energy and roofing will follow the Bricks and Construction Systems?

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Julie Ann Coates, CSR Limited - CEO, MD & Executive Director [20]

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Yes. Okay. Again, so I might kind of start with answering that in terms of maybe providing a bit more detail in terms of the inputs that we do look at before we kind of turn to the range of scenarios that we've modeled. There's a whole range of things that are important for us. I talked about anecdotal feedback from customers, but there's also where they share it with this customer sales data and construction activity more broadly in the market. And also a number of the industry organizations have done quite a lot of work on forecast, which you would have seen, which we also look to and we look at building approval, finance activity and also land and home sales. So there's a range of factors that kind of contribute to or feed into how we see how this might play out. In terms of the range of scenarios, we have modeled a very broad range. And if you go back to the beginning of COVID-19, you will recall that there was some debate about what was -- what would remain open and what would be shut. And actually, we worked pretty hard to ensure that we would be able to stay open as part of that. And we've seen that we've kind of come through that now. And now as we look forward, it's more around the downturn that we think is going to come in. And I know I'm going to kind of satisfy your question, but it's a pretty broad range that we've looked at. I don't know, David, if you want to add anything to that.

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David Fallu, CSR Limited - CFO [21]

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Yes. Just on the broad range that Julie speaks that we were at one stage, faced with potential reality of needing to plan for a scenario of an industry lockdown, which is kind of 0 production, 0 revenue and how we would approach that. And I guess, we've modeled everything in between. In terms of how we set the cadence for the business, we're setting the cadence for the business to the activity as we see it and ensuring that the steps that we're able to take in terms of cost out can be done quickly. So Julie has spoken about the overtime casuals, they can obviously be done a lot quicker than you can sort of consolidate a plan. But there's a whole range of steps in between from share changes and even running through with extended stand-downs during periods of maintenance and things of that nature. So that will be the way that we approach it. But I would agree with your analysis that the starts are obviously reflecting activities from prior period versus what we're seeing from an approvals perspective.

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Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [22]

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That's really helpful, David. So I guess the next question would be, it has been essential services. The building has held up quite nicely, continues to hold up nicely. And we understand, I guess, we can all read the leading indicators. Just in terms of the industry behavior, can we talk briefly because volume has been actually pretty good, can we just talk about the industry behavior with respect to sort of price and what your observations are? And as an adjunct to that question, just so we're clear, what's your sort of -- I know it varies across the business, but the sort of the lead times for ordering that we should be thinking about for you. How much forward visibility do you get to your order book?

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David Fallu, CSR Limited - CFO [23]

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Yes. So in terms of industry behavior, I think that the comment that Julie made around the construction being a lag cycle is reflective of the fact that we're still sort of operating in that environment of meeting existing customer demand. What I would observe is that where you see volume decline, the challenges that the ability to be able to continue to have price offsetting cost increases becomes more difficult. And we've already seen that in areas where we had volumes coming off. The volume coming up in the high-rise market has seen prices challenges within those markets. So my expectation is that, that environment becomes more difficult to reflect the lower level of activities that we expect. But we haven't really seen that playing out in terms of industry dynamic at this point.

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Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [24]

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Sure. Okay. And then just the order lead time sort of roughly (inaudible) to follow.

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David Fallu, CSR Limited - CFO [25]

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Yes. It does vary by segment. What I would say is we've seen a contraction of that order lead time as a result of the fact that we don't have the constraint of labor impacting the pipeline as we have in the past. So previously, we have, Simon, yes we've discussed, in some cases, we've had 12 to 18 months' worth of visibility. That's really coming down to sort of a 3- to 6-month level depending on the business.

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Operator [26]

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Your next question comes from Craig Woolford from Citi.

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Craig John Woolford, Citigroup Inc, Research Division - MD, Director of Research for Australia & New Zealand and Lead Australian Consumer Sector Analyst [27]

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I just wanted to explore the -- I guess, the outlook the company has got on this cost structure, particularly this is -- the variable nature of the cost you're alluding to, you've been prepared for a change in demand. Have you fundamentally increased the variable nature of the cost structure compared to, say, 5 years ago? So are you -- I still believe that there is a significant scope to protect profit margins during the downturn. And I think it's quite interesting in light of what you just said there around the visibility that has reduced. So I'm just interested in understanding how variable you've made your cost structure in recent times.

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David Fallu, CSR Limited - CFO [28]

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Craig, I might touch on the point around the fix versus variable nature of the cost, and we can go from there. So I would say there is a fundamental reshaping of the businesses fixed and variable nature for a couple of factors. One, the portfolio is quite different. The divestment of Viridian business was a 24/7 high fixed cost business operating from 1 site, which created very difficult -- a high degree of difficulty to variabilize your cost structure in that business. So the divestment of that will be a significant difference from prior downturns. Similarly, from a Bricks perspective, which again is a 24/7 production process, prior to the acquisition of the Boral Bricks business, with 1 site essentially operating in each space, your decision in a lower level of activity was to effectively operate uneconomically and hope you make money through the cycle or exit the category permanently by having multiple sites in multiple states. We've now got the opportunity to consolidate as we've done in Queensland, moving from Darra to our low-cost production facility in Oxley, keep the operational leverage within the Oxley plant, and we've multiple the Darra plan. That's the change that we've got. Those steps will in those sort of 24/7 businesses. Those businesses that are, to a degree, trade exposed as well, are the ones where you need to work through them quickly, and we have slightly less optionality in those that aren't the 24/7 operations. Businesses like Gyprock, we stopped those plants every day where we need to. So the ability to be able to variabilize, it would have certainly increased from 5 years ago. And they are the steps that we are currently working our way through.

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Craig John Woolford, Citigroup Inc, Research Division - MD, Director of Research for Australia & New Zealand and Lead Australian Consumer Sector Analyst [29]

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Okay. Yes, that's clear. Another question was just around the decision on the dividend and the balance sheet position you've got. Does the company consider M&A activity outside of Property developments? Particularly given there may be pressure on other businesses in segments that you've been compared to.

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Julie Ann Coates, CSR Limited - CEO, MD & Executive Director [30]

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Yes. I'll kick off with that first, Craig, and then hand to David. I think and what you can see and what we've gone through today that we've been very conscious of managing our liquidity position and ensuring we have a cash preservation approach. And that will apply to M&A activity in the near-term as well as we manage our way through this next uncertain period. Having said that, as you rightly point out, as circumstances prevent themselves that, that is an opportunity for us as we move forward, depending on what we're managing our way through. So David, do you want to...

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David Fallu, CSR Limited - CFO [31]

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Yes. No, I think that's right. I mean the strong position is certainly an advantage in that space to the extent that opportunities present themselves. But, at the moment, we'd want to be understanding what the nature of the outlook is in as much as anything to understand the nature of the opportunity as well.

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Operator [32]

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Your next question comes from Sophie Spartalis from Bank of America.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [33]

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I just wanted to explore some of the topics we've already touched on a little bit more, just in regards to the nimbleness of the operations. We talked about preparing for all situations more on the downside. But if we were to see a stronger-than-expected demand volumes coming out of this? How nimble is your business to turn back on the plants and then get their people back on site?

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Julie Ann Coates, CSR Limited - CEO, MD & Executive Director [34]

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Yes. Thanks, Sophie. You're right. We have focused a lot of what we've done over the last year that has allowed us to respond to the downturn and want to set us up well for the result that we've delivered. In businesses, as I said, like Lightweight Systems, we have quite a lot of flexibility around being able to increase production. As I've said, we've already -- we've cut back on casual and over time, we can put that back. We're not running 24/7 in most parts of our business. So there's an opportunity to do more there. And we've got -- we've multiple some lines. So there's an opportunity to restart those. So I'm not concerned about our ability to respond to an uptick in demand. I think we're well positioned to be able to do that. I think what's important is that we've demonstrated our ability to respond on the downside, which sets us up for what might come.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [35]

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Okay. And then just in terms of input pressure, just given that we've seen, obviously, borders shut down internationally and locally in some instances. Can you just talk about whether that has alleviated pricing pressure for you guys?

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Julie Ann Coates, CSR Limited - CEO, MD & Executive Director [36]

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So the first thing about that is that it hasn't impacted our ability -- our supply chain of raw materials. So we've been able to provide continuity of supply for our customers. In terms of pricing, it doesn't have any material impact on our results today.

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David Fallu, CSR Limited - CFO [37]

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Yes. So Sophie, I guess, in terms of our -- the majority of our raw material supply, we are obviously are very fortunate in the sense that we own a lot of our raw material supply. For the items that we are importing, whether it's brought in lines or some discrete materials, we haven't seen a big interruption ourselves. The production is back up and running in most of the geographies that we're talking to. The biggest implication has been to shipping, but those interruptions have been relatively manageable from a procurement perspective. And my observation would be that the import channels that we compete with have been able to manage that in a relatively similar way. So I'd agree with Julie's comment that we haven't seen a major impact in terms of pricing from an import channel perspective.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [38]

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Okay. But the products that you generally do compete a lot with through that import channel, that's still coming through the country okay [as compared to competition there?]

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David Fallu, CSR Limited - CFO [39]

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And so I think that's been -- my observation would be that's been manageable from a procurement perspective. Certainly in terms of what I'm seeing from competitors and what we've experienced ourselves.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [40]

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Okay. And then just lastly on the Aluminium business. You talked through the hedging increase. But just in terms of -- there's some pretty significant EBIT movement from '19 to '20, can you provide any visibility? I know we've already talked through the coal cost passthrough, but is there any other visibility that you can provide going into '21?

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David Fallu, CSR Limited - CFO [41]

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Well, look, I think that there's -- the obvious visibility is sort of what you see from an AUD and LME perspective. I think the other component has been we've seen raw material cost, particularly from a coke perspective, improve. The only question I would put there is, it would be interesting to see how that, as a byproduct of refinery, and it will be interesting to see how that moves in a low oil environment. But there's probably as much color as we can really provide in terms of the A-dollar hedging position that we've received at this point.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [42]

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Okay. Can you provide any clarity, though, on the pricing of that coke?

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David Fallu, CSR Limited - CFO [43]

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Well, in terms of the -- you've seen the improvement -- predominantly the raw material improvement that you see in the results presentation has been the impact of that for us sort of year-on-year. We're hopeful that, that will continue to be experienced as we move into YEM21. The only outline on that is that, obviously, there's going to potentially be some material changes from a supply perspective. For oil-related commodities.

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Operator [44]

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Your next question comes from Peter Wilson from Crédit Suisse.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [45]

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I was hoping for some more commentary on the Building Products performance up to March, particularly your Lightweight Systems, Bradford, I mean, revenue down 1% and 3% for the full year. I mean, it's often talked about these are late cycle products. But is it just timing? Or is there something else going on there? Because it's -- I mean, it's life cycle, but it's starting to get ridiculous, the performance of these segments.

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Julie Ann Coates, CSR Limited - CEO, MD & Executive Director [46]

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So in relation to Lightweight Systems and Bradford, which both performed really well in the context of what was happening in the market. As we said, residential was down 21% and we were down 6%. And both of those businesses have done a good job in diversifying the base and waste in detached housing. So they are both -- if I talk about Lightweight Systems, they've increased their technical capability and their supply chain capability to win commercial projects because as you would know, with commercial projects, it's not just about the product. It's about what you do to sell it in and how you get it there. And that's truly evident at Crown Casino at Barangaroo. So those things have been important. And again, Bradford has developed product specifically for that market and the Martini business, which is our polyester product, which is definitely in acoustics for commercial fit-out has performed really well in the year. So some of what's behind those results is around that diversification.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [47]

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Okay. Can you try and quantify how much that increase in commercial has added, i.e. of that Gyprock for that Lightweight segment? What was commercial revenue before and what is it now? And the second part of that question would be, given that these revenues are largely project-related, is there a cliff that we should be expecting sometime in the next 12 months?

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Julie Ann Coates, CSR Limited - CEO, MD & Executive Director [48]

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In relation to the first question, we wouldn't go to that level of detail in terms of our disclosure around percentages of each of those. But in terms of the pipeline, commercial has held up pretty well. And we've got a strong pipeline of projects both in Victoria and New South Wales, particularly for the Lightweight Systems business. The Bradford business is a much smaller number, to your point, but our Lightweight Systems is there's more volume in that. And the team are working pretty hard in building that capability and ensuring they're able to sell into that sector.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [49]

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Okay. And another way to ask the question on life cycle, so prior to COVID, the housing market was in the process of creating from about 220,000 starts, say, the 175,000, 180,000, maybe a 20% decline. How -- if you look at these results, how far through effectively that downturn, do you think -- so what kind of housing starts are effectively embedded in the results for the Lightweight Systems and the Bradford segments?

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David Fallu, CSR Limited - CFO [50]

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Peter, I think you would be seeing that the -- they would be a large way through the residential cycle that we're currently experiencing. I think as Julie mentioned, particularly in the comparison for some of our other divisions, some are very focused and have core markets in New South Wales apartment. That's why you're sort of seeing the construction systems having a more material revenue impact. And they also have, as I mentioned, that's we -- not just the volume, but also a price impact. From a Bricks perspective, they are less developed in the opportunity around diversification into the commercial markets. And so I think you're actually seeing a relatively -- the run rate in residential that you're talking about as, by and large, you're seeing reflected in Bradford and Lightweight Systems.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [51]

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Given that we're through, I guess, housing downturn #1 and we're through lockdown #1, with only a 3% revenue decline, like where is the uncertainty coming from? What is it in the outlook that you're concerned about?

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David Fallu, CSR Limited - CFO [52]

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Well, first of all, I think we were always expecting that sort of downturn #1, in your language, was going to continue into YEM21, as I think all forecasters were the expectation of recovery occurring within the sort of back-end of our YEM21 period. But YEM21 still being a period we would need to manage a downturn in equity. And I think the COVID-19 impact, you have yet to see that impact on activity levels as we sit here today in May.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [53]

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Okay. And just to clarify, that tail end of downturn #1, so to speak, is that multi-res in particular at some of those projects complete?

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Julie Ann Coates, CSR Limited - CEO, MD & Executive Director [54]

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Yes. That would be both multi-res and detached. So we were forecasting that, as David said, right through YEM21 right to the back end.

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Operator [55]

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Your next question comes from Andrew Scott from Morgan Stanley.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [56]

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Julie, just a question for you may be on the bigger picture side of things. Conscious, sort of 9 months, you've been there now albeit there's been plenty going on in that period. We haven't had a sort of a sort of strategy session from you. The things you've laid out in Slide 19 of the pack, should we take that as a strategy? And I agree that it was more of a just evolution than revolution, or is it sort of a case of these things of taken some distraction? And were you expecting you to lay out a bigger sort of more comprehensive strategy at some point to come?

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

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Yes. It's actually 8 months and 10 days, but we can round that up if you like. And as you also point out, it's been a pretty eventful 8 months in the time that I've been here. And as you can see from Slide 19, it's really a continuation in a bit more detail around the opportunities that I saw after 9 weeks. And yes, I think you should take those as priorities for the year ahead. You should absolutely take it as an evolution rather than a revolution. But that is not to underplay the amount of value that I believe we can unlock with those initiatives, particularly around supply chain and optimizing the footprint. I think those things, we will continue to work on and we'll be able to quantify benefits at the right time.

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Andrew Geoffrey Scott, Morgan Stanley, Research Division - Executive Director [58]

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And could you just talk about to the extent that you think you can do that organically? Probably less so the optimized footprint in the supply chain, but the new products, et cetera? To what extent is that driven by acquisition versus internal development, innovation, et cetera?

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Julie Ann Coates, CSR Limited - CEO, MD & Executive Director [59]

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Yes. Look, I think there's a lot that's in our control in that space. And part of it goes to how we go-to-market and how we operate as one CSR across our range of products. But as you rightly point out, there may be opportunities to add to the portfolio or develop a capability that would support that. But you start with the customer, what's the solution? And then what is it that we need to deliver on that solution. And we already have a broad range of products that are important to our customers.

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Operator [60]

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Your next question is a follow-up question from Simon Thackray from Jefferies.

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Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [61]

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Pantry stocking is how consumer analyst described March and part of April as we've moved into the uncertainty of COVID. Some of your Lightweight competitors reported an extra boost in volume from stocking trade and DIY channels, particularly on the Lightweight side, as we said, because of the uncertainty. Did you experience any of that? Is anybody in your March volumes or indeed in any of your volumes for the 6 weeks?

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Julie Ann Coates, CSR Limited - CEO, MD & Executive Director [62]

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Yes. So in relation to Gyprock, as others have reported, leading into Easter, in particular, with the threat of what might happen in terms of the shutdown, I think people were inclined to ensure that they were able to secure plasterboard at that time. And so our March numbers saw some of the benefit of that, but it's not material in the context of the overall YEM20 results.

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David Fallu, CSR Limited - CFO [63]

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And Simon, your comment on the hardware channel would be consistent with what we've experienced as well. So it looks like effectively toilet paper and plasterboard are the 2 things people bought during the lockdown.

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Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [64]

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Of course, what everybody needs during the lockdown, David.

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David Fallu, CSR Limited - CFO [65]

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Don't get (inaudible) with you, Simon.

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Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [66]

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No, no, I'll try not to. But in the 6 weeks, I know you mentioned that it's not material in March, but in the 6 weeks, but they continue to advance that tapered off now?

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Julie Ann Coates, CSR Limited - CEO, MD & Executive Director [67]

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We haven't seen a lot of that into April as much as we saw in March. There may have been some -- we certainly aren't seeing it now. And its performance is pretty much in line with what we forecast pre-COVID-19 for that business.

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Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [68]

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Okay. And anything in insulation at all, Julie, just so I'm clear?

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Julie Ann Coates, CSR Limited - CEO, MD & Executive Director [69]

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Similar levels. So there wasn't the same pantry stocking in insulation. But certainly, it also performed well in March and has come back to where we anticipated pre-COVID-19.

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Operator [70]

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Your next question comes from Keith Chau from MST Marquee.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [71]

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Just a quick one for me and a follow-up on a question prior on Peter's question. Just around the strength of the Building Products business. Clearly, taking share or at least shifting industry exposures. But by doing that, you're obviously, I think, taking share from other competitors in the market. So I'm just wondering if you'd able to characterize for us where you think that share is coming from, whether that's from other domestic producers or from imports? And then how much more can you pull that lever going forward? Because to offset the weakness in the resi downturn has been quite a strong commendable effort. But do you see incremental opportunities or quite considerable opportunities going forward from here on in?

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Julie Ann Coates, CSR Limited - CEO, MD & Executive Director [72]

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I might answer the second question, and then hand to David for the first. I think as we move forward, it's a bit to focus question as well in terms of the opportunities that might present themselves as we go forward. It's really important that we're attuned to that, as you suggest, and are able to take advantage of that. Whilst not much of our product compete with product that's imported, there is opportunities where we do to ensure that we continue to gain share. And we're very mindful that depending on what happens, our focus on growing market share is going to be important. So we will continue to look at opportunities for that. Having said that, it's important that we do that in a way that doesn't erode value in the categories in which we operate.

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David Fallu, CSR Limited - CFO [73]

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Yes. And Keith, sorry, I think from an insulation perspective, there's more of a share dynamic gain in that channel or in that product. From a Lightweight Systems perspective, there's, I think, that the diversification has been sort of the larger opportunity. And then just the natural shares that we have, have been in areas of the market that haven't had degree of decline that we've seen. So we obviously outperform in detached versus high-rise, and that's been beneficial for the Lightweight Systems business.

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Operator [74]

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Thank you. There are no further questions at this time. I'll now hand back to Ms. Taylor and the CSR team for closing remarks.

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Andree Taylor, CSR Limited - General Manager of IR & Corporate Communications [75]

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Well, I think that's it. Thanks, everyone, for joining us today. If you have any follow-up questions, please let me know. Otherwise, I think that ends it for the day. Thanks very much for joining.

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Julie Ann Coates, CSR Limited - CEO, MD & Executive Director [76]

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Yes. Thank you for your questions.

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David Fallu, CSR Limited - CFO [77]

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Thank you, everyone.