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Edited Transcript of FWD.AX earnings conference call or presentation 29-Aug-19 1:30am GMT

Full Year 2019 Fleetwood Corp Ltd Earnings Call

East Perth Sep 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Fleetwood Corp Ltd earnings conference call or presentation Thursday, August 29, 2019 at 1:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Wackett

Fleetwood Corporation Limited - CFO & Joint Company Secretary

* Bradley Raymond Denison

Fleetwood Corporation Limited - MD, CEO & Director

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Conference Call Participants

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* Brendan Harrington

Harrington Partners Investment Management - Co-Founder

* Oliver Stevens

Hartleys Research - Industrial Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the 2019 full year results.

I'd now like to hand the conference over to your speaker today, CEO, Mr. Brad Denison. Thank you. Please go ahead.

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Bradley Raymond Denison, Fleetwood Corporation Limited - MD, CEO & Director [2]

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Well, thank you very much, and good morning, ladies and gentlemen. Look, firstly, we understand this is a really busy time of year for most of you so we'll try and keep the presentation today fairly targeted. We'll start off with a brief overview of the results for 2019, and we'll spend some time discussing as well what our forward strategy is and the factors that are likely to impact our near-term results. And I think we'll try and hold questions after the end of the session.

So let's kick it off, and if we could turn to Slide 3. First up, this last financial year has been truly transformative for Fleetwood. We sold the last remaining loss-making business we had from our legacy, which was Caravan Manufacturing, and we recovered $12 million from that sale. And we still hold $5 million in Caravan stock that we're selling down gradually through third parties. We acquired 2 new businesses, and both are performing in line with expectations. And those acquisitions, as most of you know, were funded by a $60 million capital raise.

The MBS acquisition in New South Wales has given us a direct entry into a market that's got tremendous potential. We'll come back to that in a moment. But broadly, the opportunity there is centered around education, which you know has long been a key part of Fleetwood's core competency, and the corrections segment, which is undergoing major capacity improvements in New South Wales and also throughout the states for that matter.

We acquired Northern RV in Melbourne, again, a strong business centered around providing plumbing fit-outs and other services to over 80 manufacturers and importers in the Somerton-Campbellfield area, which is north of Melbourne. And that acquisition has significantly improved return on capital in our Parts and Services business.

In terms of the headline results, group revenue was up 18% to $315 million, and EBITA from continuing operations was up 34% to $25.3 million. We're targeting further EBITA growth again in FY '20. We've also established a clear dividend policy now which is that for future periods, we intend to pay dividends at around 30% of profits. Of course, that will be subject to capital requirements in the group.

So I'll pass it over to Andrew now to speak briefly about the financial results.

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Andrew Wackett, Fleetwood Corporation Limited - CFO & Joint Company Secretary [3]

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Thanks, Brad. Please turn to Slide 4, group earnings summary. Overall revenue, as Brad said, was up 18%, and EBITA was up 34% for the year. First-time contributions from NRV for 11 months, and MBS for 12 months were the main drivers of the improvement. This was partially offset by lower modular demand from Victoria where the state election disrupted the business and continued lower volume from the affordable housing sector following ownership changes at our 3 major customers.

Village Operations continue to see higher occupancy in Searipple as customer activity levels improved. Parts and Services earnings were solid despite difficult trading condition, especially in the fourth quarter. Lower interest costs reflect lower floor plan fin, partially offset by line fee on the increased funding lines. The accounting tax rate of 35% was driven by prior year adjustments.

Discontinued businesses operating losses remain at similar levels to 2018 as the Caravan operation wound down during the year. The sale to Apollo was completed during the year, and the factory has now been closed. Residual caravans and raw materials are expected to be disposed of in FY '20.

Turning to Slide 5 which details our continuing EBITA performance by segment. In Modular Accommodation, we had a strong year in New South Wales driven by corrections work. Importantly, the business generated a solid profit in the second half postdelivery of the most recent tranche of the corrections contract.

Affordable housing demand remained at low levels across the business and impacted results in Queensland, New South Wales and Western Australia. The Victorian business was impacted by the state election, but it has exited the year with a solid order book and strong momentum. While the West Australian business posted improved revenue off the back of increased resource sector work, trading results remained patchy due to an overhang in second-hand buildings.

Village Operations were up strongly, continuing the improvement which began in the second half of FY '17. The business benefited from unusually high levels of customer facility maintenance in 2019 and from no competing villages opening in the Karratha market.

In Parts and Services, NRV delivered a solid result in its first 11 months of ownership as it focused on OEM customers and caravan importers in Melbourne. At Camec, OEM revenue fell in line with broad weakness in the caravan market, and aftermarket revenue remained largely flat. Overheads remained well controlled in this business.

Please turn to Slide 6, cash flow. This slide details our cash flow and movement in net debt. Cash flow from operations again improved substantially despite a net $5 million cash outflow from discontinued operations. This was driven by increased EBITDA and strong working capital management, which remains a continuing focus for the group. Importantly, we still expect the exit from the Caravan business to be cash positive once tax benefits are taken into account. As a consequence of that RV exit, we expect tax payments to remain low in the fiscal '20.

Net CapEx relates primarily to new education rental fleet, Searipple upgrades and the ongoing ERP system project. CapEx is expected to be moderately higher in FY '20.

If you can now turn to Slide 7, balance sheet. Substantial improvement in net working capital was largely driven by the wind-down of the RV manufacturing business. The increase in intangibles is due to the acquisitions of MBS and NRV. We've built our net cash position to $33.6 million due to $20 million in free cash flow and a net $12 million of over-raise in equity to fund the acquisitions. Importantly, the group now has access to $65 million in funding facilities compared to $37 million in June 2018. The reduction in working capital and strong free cash generation meant our capital employed only increased by 10% to $198 million and contributed to return on capital employed increasing from 11% to 13%. This compared to our internal target of 15%.

I will now hand back to Brad to discuss the strategy for the group.

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Bradley Raymond Denison, Fleetwood Corporation Limited - MD, CEO & Director [4]

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Okay. Thanks, Andrew. So If I could just ask you to turn to Slide 8 now and we're seeing forward strategy for the group being fairly self-evident. The modular industry in Australia is in its infancy when you compare Australia to other countries. In Europe and the United States, up to 10% of all construction is executed in a modular format. In Australia, it's actually less than 3% at the moment. So we've spent quite some time learning from these overseas markets and we've started the journey of adapting traditionally in situ built construction projects towards modular across the country. And so far, we've had good success in what we call permanent modular schools, and there are photos of some of those projects throughout the presentation deck.

But Fleetwood also won a worldwide award recently for the best permanent modular school which was Yallourn Primary School (sic) [Yallourn North Primary School] in Melbourne. And again, if you'd like to have a look at some more of our projects, they're all on the website, and that's fleetwood.com.au. We've also started changing the corrections industry with prison upgrades in New South Wales now being executed in a modular format, and this meant that's also gaining traction in other states.

Having said that though and notwithstanding that we have taken this segment of Fleetwood from being a small [dominant] business based in Perth to being now the largest modular construction company in Australia, a lot of the projects are still tendered individually. So we're now turning our attention to how we can improve and stabilize the overall quality of earnings at Fleetwood.

And we're seeing opportunities to do this in the Village Operations segment. About 40% of group earnings came from villages in the 2019 year, and I'd expect that in future years, villages has the potential to comprise an even greater share.

We shouldn't forget Parts and Services which is centered around the RV industry, and we've, of course, got a large presence in that industry, and we're looking to diversify those earnings now. But we'll come to that in a moment.

So if I could ask you to turn to Slide 9 now, and we've designed this slide to demonstrate Fleetwood's presence in the modular industry on a state-by-state basis. And as you can see, the only states we don't have direct exposure to today are the Northern Territory in Tasmania. And while we don't have a branch operation in South Australia, we're delivering into that state from West Australia and Victoria.

The other states have got major publicly announced government and commercial spend. And you can see from this slide that education and corrections are key exposures for Fleetwood. However, we're also seeing increased activity which is good in the mining sector in Western Australia.

And Slide 10 sets out Fleetwood's competitive advantage, which is really the behind-the-scenes factors that have seen this company gain so much market share. Firstly, we run an advanced in-house design function, and we've got designers at all of our key locations, but also, we've got quite a strong center of excellence in the Melbourne CBD. And our design team have literally changed the modular industry, and there are exciting new developments still to come.

Also, we've taken learnings from overseas companies and other industries and rolled out advanced manufacturing techniques. And there's an example of one of those techniques on Slide 11. So the 2 school buildings that you can see pictured side by side here are both projects that we've built in Victoria. And they've both been built from a standardized kit of parts, but they've just been configured differently to produce 2 completely different-looking school buildings. The one on the left is Fairfield Primary School in Melbourne, which is a 2-story configuration with an open plan learning environment, and the other one is Elwood College, which is a 3-story building, and that's being finished up at the moment. Again, no one else in the modular industry is doing this to the same degree.

So if I could ask you to move to Slide 12 now, I'll just touch on villages and firstly, the Karratha market. So as you know, we've got the largest accommodation village in Karratha. And Searipple was built for the last construction boom when there was major iron ore and oil and gas construction projects being built. In the last 4 or 5 years, there's been very little construction activity, and we've been accommodating mostly operational workers. However, in 2019, we did see increased demand from shutdowns.

And the chart on this page really is just a simple depiction of what we estimate are the manning requirements for major capital projects for resource companies which, on current information, should start to ramp up in the coming years. As you can see, there's not enough capacity to satisfy the potential demand. And in addition to utilizing all of the current market supply, it's inevitable that new villages are going to have to be constructed. The main risk, therefore, we see to our earnings is that if any of that new capacity comes online ahead of the construction wave, it could potentially cause a temporary lull in Fleetwood's earnings.

Okay, if we turn to Slide 13 now, I'll touch on the other key opportunity for growing a larger, reliable earnings base. Now modular business provides us with the opportunity to develop new fly-in, fly-out villages at a lower cost than our competitors can, and we have now started bidding some projects on a build-own-operate basis. Aside from that though, there are also a number of other opportunities we're progressing to acquire existing villages in key FIFO hubs, and these are predominantly centered around markets similar to Karratha where there are multiple sources of potential demand.

Okay, if we turn to Slide 14 now, I'd like to touch on the competitive landscape for Parts and Services. And a key issue for this industry is that we're seeing a reduction in products built in Australia and an increase in imports, and this was the main driver behind acquiring Northern RV last year. And this business provides Australian compliance services for gas and plumbing for both the Australian-built and imported product markets. And Fleetwood's competitors in this market generally only service local manufacturers.

And the chart on this page shows the baby boomer demographic in the yellow bars that has driven demand for RVs since the early 2000s. And generally speaking, new retirees tend to buy full-sized caravans, and those are generally built in Australia because it's just not economic to import full-sized boxes of air. The families with young children, however, tend more towards smaller caravans and camper trailers that can be towed with lighter vehicles. So you can clearly see the correlation between Australian-built products in the white line and the baby boomer demographic in the bars. The red line shows total RV industry volume including imports, which we are seeing as being fairly stable. So the key strategy for us is to capture more of the import market through providing services and also expanding our reach into the aftermarket segment. And when we speak of aftermarket, we mean online and in-store retail and trade repairers and the like.

Overall, caravan registrations in Australia are at their highest historical levels. So the challenge for us is to focus on where the caravaners are directing their discretionary spend.

So I'll now hand you back to Andrew to discuss a little bit further about how we see our earnings mix in a desirable future state.

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Andrew Wackett, Fleetwood Corporation Limited - CFO & Joint Company Secretary [5]

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Thanks, Brad. I'm talking to Slide 15, entitled improving quality of earnings. The pie chart on the left highlights our current revenue breakdown and compares to the chart on the right which demonstrates where we're aiming to be in the medium term. Within Modular Accommodation, we are looking to maintain the current large proportion of our revenue base from our panel or preferred supplier positions and reduce our reliance on one-off or bespoke contracts. This is because bespoke contracts must be individually identified, bid, designed and won, making them a relatively less reliable and predictable revenue stream when compared to panel contracts.

Our strategic plan sees us targeting a much greater share of revenue from Village Operations over the medium term. We see good opportunities in this segment, both organically, particularly in Karratha as Brad mentioned, and from potential acquisitions which meet that criteria, both operational and financial.

Finally, in Parts and Services, we see a greater mix in weighting towards the growing aftermarket segments should our strategy prove successful.

I'll now hand back to Brad to discuss the outlook for the group and to wrap up.

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Bradley Raymond Denison, Fleetwood Corporation Limited - MD, CEO & Director [6]

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Okay. Thanks, Andrew. So I'll just briefly summarize Page 16. So a couple of points. Our modular business has got good momentum going into FY '20 and particularly in Victoria. While there could be a short period of lower earnings in villages, market demand looks very strong in the medium term. And while the Australian-built caravans sector is tough presently, we have grown our earnings in this segment in 2019, and we'll focus on imports and the aftermarket as we move forward.

So thanks for listening, that concludes today's formal presentation, and we'd now like to open up the session for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Bradley Raymond Denison, Fleetwood Corporation Limited - MD, CEO & Director [2]

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Okay, it doesn't look as though we have any questions. So just give it a couple more moments in case someone's got one. And we do have a question here.

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Operator [3]

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And our next question is from Brendan Harrington from Harrington Partners.

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Brendan Harrington, Harrington Partners Investment Management - Co-Founder [4]

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Thanks for another good set of results there. Just wondering, looking at the amount of liquidity we've got, obviously, that $65 million debt facility there, the net cash we have, that's a pretty chunky bit of capital. I mean, how big are these projects in the pipeline that you're tendering for?

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Andrew Wackett, Fleetwood Corporation Limited - CFO & Joint Company Secretary [5]

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Thanks for the question, Brendan. We do have -- as we previously announced, there's a significant pipeline of opportunities in both across the education and corrections sector and also in Western Australia, and we've only just raised equity about this time last year. So we're just really waiting to see where that settles. But we have announced today a dividend policy so expect to see dividends come through in the next financial year, and we will look to apply some of that cash in the best possible way, as they returns to shareholders or in working capital or growth CapEx. But we're just assessing our options at the moment, and we expect as these contract bidding pipeline matures to see that -- some of that cash put to use. But I'll also make the point, so [we've done] a lot of the funding lines [have funding lines], which is to fund contracts. So thank you very much.

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Bradley Raymond Denison, Fleetwood Corporation Limited - MD, CEO & Director [6]

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And I'll probably just add there that in the recent history of Fleetwood, I don't think we'd seen a level of tendering activity like we are seeing at the moment probably for 5 to 8 years. It really is quite significant. There are mining projects being tendered at the moment, which is positive, a relieving sign after quite a few years of skinny volume there. Education is really strong, and you can see that announced spend on the East Coast. We intend to fully be part of that program. Corrections is strong, and the affordable and social housing industry is actually looking interesting as well. Even though our 2 clients -- 2 major clients there, Gateway and NLV, aren't doing very much at the moment, we've actually seen some activity with state government stepping in and initiating processes to build quite large volumes of social housing.

So it's clearly a wave that's coming, and we just really want to see how that settles. But yes, you could be -- the balance sheet obviously is very strong, but we just want to see what sort of working capital some of these projects are going to require.

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Brendan Harrington, Harrington Partners Investment Management - Co-Founder [7]

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And what are the payment terms like with the state governments?

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Bradley Raymond Denison, Fleetwood Corporation Limited - MD, CEO & Director [8]

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They're generally pretty standard type of payment terms. You generally get progress claims, like monthly progress claims like you would on any type of contract. Probably the biggest difference when working with state governments is they're very, very reliable clients. They always pay their bills, which is something that can be difficult in other segments at times.

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Brendan Harrington, Harrington Partners Investment Management - Co-Founder [9]

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Okay. And yes, just going back to the dividend policy there. I mean, obviously, with the tax, a lower tax position and high amortization at the moment and further sale of asset, I would have thought -- is that fairly conservative at the moment still?

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Bradley Raymond Denison, Fleetwood Corporation Limited - MD, CEO & Director [10]

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I think so. We haven't had a dividend -- clear dividend policy in a number of years. And I think we see this being a bit of a starting point.

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Operator [11]

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We have another question in queue from Oliver Stevens from Hartleys.

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Oliver Stevens, Hartleys Research - Industrial Analyst [12]

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Just wondering, you've mentioned targeting further EBITA growth in FY '20. With Village potentially having a lull in earnings and sort of Parts and Service probably being flattish, what do we sort of need in M&A to reach that target?

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Bradley Raymond Denison, Fleetwood Corporation Limited - MD, CEO & Director [13]

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Yes. Thanks, Oliver. Look, one of the things that I think we probably want to address is that Fleetwood's earnings, particularly in the Modular Accommodation segment, aren't really very dependent on major contract wins. At any point in time, we've got hundreds of projects on the go. And what we're seeing at the moment is a mix, really, of quite a big tendering pipeline for major projects but also quite a large number of small projects happening, the sort of things that you don't necessarily individually announce.

So look, Victoria looks pretty strong at the moment. We've got pretty clear visibility there, and we're tendering some major projects in other states as well. So we're fairly confident that the Modular Accommodation business has got a really strong forward look ahead.

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Andrew Wackett, Fleetwood Corporation Limited - CFO & Joint Company Secretary [14]

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And can I also, Oliver, just add to Brad's answer? We're not targeting M&A growth this year. When we make the statement that we expect our M&A -- underlying M&A to grow a bit this year, we're targeting growth but not targeting M&A to hit that.

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Bradley Raymond Denison, Fleetwood Corporation Limited - MD, CEO & Director [15]

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You mean acquisition-type growth, yes?

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Andrew Wackett, Fleetwood Corporation Limited - CFO & Joint Company Secretary [16]

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Yes.

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Bradley Raymond Denison, Fleetwood Corporation Limited - MD, CEO & Director [17]

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Right.

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Andrew Wackett, Fleetwood Corporation Limited - CFO & Joint Company Secretary [18]

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So definitely, as Brad said, we're targeting a large pipeline of tenders in the modular business.

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Oliver Stevens, Hartleys Research - Industrial Analyst [19]

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Yes, okay. Because just looking at the second half for modular, you did sort of $4 million which on a run-rate basis suggest otherwise pretty low.

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Bradley Raymond Denison, Fleetwood Corporation Limited - MD, CEO & Director [20]

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Yes, a run -- like, the concept of a run rate in a contracting business is a little bit hard to swallow. It really moves around quite a bit. So I think probably a bit dangerous just taking the second half and doubling it for a year. Likewise, probably, that first half is really strong on corrections work. Victoria came back, and MBS actually continued the year, had a strong year in the second half. But I just think, really, the immediate earnings to have -- try and have a focus on run rate is a little bit dangerous for us, I think.

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Operator [21]

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There's no further questions at this time.

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Bradley Raymond Denison, Fleetwood Corporation Limited - MD, CEO & Director [22]

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So I think that seems to be it. So we'll call an end to the session and look forward to seeing quite a lot of you over the coming weeks as we do our road shows. Thanks, guys.

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Operator [23]

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Ladies and gentlemen, that does conclude the call for today. Thank you for all participating. You may all disconnect. Goodbye.