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Edited Transcript of GUD.AX earnings conference call or presentation 31-Jan-20 12:00am GMT

Half Year 2020 GUD Holdings Ltd Earnings Presentation

Sunshine, Victoria Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of GUD Holdings Ltd earnings conference call or presentation Friday, January 31, 2020 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Graeme Whickman

GUD Holdings Limited - CEO, MD & Director

* Martin A. Fraser

GUD Holdings Limited - CFO

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Conference Call Participants

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* James Ferrier

Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst

* Matthew Nicholas

Crédit Suisse AG, Research Division - Director

* Russell J. Gill

JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand

* Sam Teeger

Citigroup Inc, Research Division - Analyst

* Shane Bannan

Bligh Capital Pty Ltd, Research Division - Head of Research

* Thomas Godfrey

UBS Investment Bank, Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to the half year results of GUD Holdings for the half year ended on December 31, 2019. Your presenters today are Managing Director, Graeme Whickman; and Chief Financial Officer, Martin Fraser. (Operator Instructions) I'll now hand the call over to you, Graeme. Please go ahead.

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [2]

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Thank you, Taylor. Well, welcome to the earnings call for GUD for the results 6 months ended 31st December. As mentioned, I'm Graeme Whickman, our CEO and Managing Director. I'm here with Martin Fraser, the company's CFO.

As a matter of housekeeping, we'll have time at the end of the call for questions and discussions, so if you could hold your questions until then. And a recording of this call, along with the presentation material, will be available later today on GUD's website.

So I'll start the call by running through the overall summary of the group performance in H1 and provide commentary both on our automotive and water businesses, and I'll hand over to Martin to cover some more financial results in a little bit more detail. And then we'll conclude with our outlook for the current financial year, and then get into some Q&A.

Now before I start the results, I'd like to mention for clarity's sake that today and in our released information, we speak to our statutory reported results. However, given we're all transitioning to reflect the new AASB16 changes, we've also included and referred to pre-AASB results to ensure all stakeholders have a clear view of the accurate like-for-like comparisons and the key performance measures of our business. So let's turn to the H1 highlights.

We delivered organic revenue growth of 3%, taking our group revenue to just over $227 million. Our reported underlying EBIT was up by 1.2% to $44.5 million, although this is actually equal to the prior period at pre-AASB levels at the $44 million mark. The reported net profit was down 9% to $26 million and close to half, or pre-AASB, that dropped by 4.9%.

Looking more at the quality of the result, looking at the underlying NPAT, down 6.8%, but at pre-AASB, down slightly by 2.4%, $700,000 to $29 million. Our pre-AASB basic earnings per share dropped marginally by 2.5-or-so percent to $0.334. Now importantly, these results are in line with our expectations. We know that the step change in currency and the domestic cost inflation would have always placed a bit of pressure on the first half as we worked on delivering tangible COGS and overhead initiatives and also a second round of pricing. And in essence, this should be seen as us simply working the plan and all in support of that full year guidance.

Now as we reflect on a few other highlights, I'm satisfied to report our cash conversion continued to improve, and the pre-AASB outcome of 82% would suggest our efforts have been productive. Our dividend, which has been announced and has been released, released in terms of announcement, is $0.25 per share, and that's equal to prior year, and this is fully franked.

And the team remained focused on the core. And the efforts in supplier management and overhead cost control and pricing management all fall under the umbrella of operational fitness. We're also pleased in the confidence shown in GUD by our important lending partners who we're quite thankful for their support in the recently announced and quite satisfying bank refinance outcome.

Now Slide 4, taking a closer look at our auto segment results. The revenue increased by 4%, about $173.5 million, of which all was organic. The revenue growth came from the bulk of the auto businesses which ran from sort of modest to solid, although I'd point out BWI only achieved slight growth versus prior year.

The underlying EBIT pre-AASB dropped by 3% or about $1-and-a-bit million, with a small increase in [DA]. Now the margin reduced by about 140, 150 basis points. And this was driven predominantly by currency and domestic cost inflation. That's really the main story there, with a few other smaller pluses and minuses, and we expect this to improve as the second round of pricing kicks in and we get the full impact of cost-downs as they wash through our COGS in the second half.

Finally, our operational fitness efforts are on track, and this also extends to the AAG integration product.

Now on Slide 5, we quickly reflect on some H1 noteworthy points across our auto businesses. Ryco, we achieved modest revenue growth, which came from additional filtration products and increasing traction with our new combo kits, which feature the Catch Can and fuel water separators. We've spoken about those before. They're tailored for a specific 4 by 4 models. It's actually one of those products in those combo kits that actually drove the recent AFR Most Innovative Companies award that Ryco received, they were the third most innovative manufacturing in the consumer product, which is fantastic.

Wesfil experienced solid growth, a positive first 6 months. And it comes from both filtration and new products that Wesfil have launched into the market. For those who joined us for the Investor Day, you heard about wipers and spark plugs and car care products, and there's been some decent movement there.

IMG and DBA, which is across on Slide 6, both experienced solid to strong revenue growth. DBA, again, with decent export slides -- sales. And IMG seeing the remanufacturing and repair elements of the business.

Now I've already mentioned that AAG's turnaround plan is tracking to our satisfaction, and we're seeing steady improvements as we undertake the more substantive actions around colocation, back-end sharing, ERP commonality. And to be reminded, we're using that as a proof-of-concept for GUD as we push through that proof-of-concept.

Finally, BWI achieved slight revenue growth. And we're seeing mixed performance across the 20-or-so categories of business. Now the key products in the new Narva catalog continue to get good traction, which is encouraging. However, this is being offset by some categories such as truck and trailer assembly and new car sales, which are down, and a little bit of reseller caution on inventory.

Now let me pivot to our water business, so let's turn this on to Davey on Slide 7. Now Davey improved their revenue to $53.5 million, up 2%, and the underlying EBIT pre-AASB increased at more than 3x the revenue growth at 7%. The margin also improved by close to around 50 basis points.

Now the revenue increase was seen across all Australia and our export markets. And this was pleasing, certainly, in Australia, where the latest research suggests that our -- is a contradiction in the pump industry sales of low single digits, suggesting Davey was awarded a little bit of market share through this period.

Now we also saw good growth in Europe, where the new product and the team were pretty proud to receive the Supplier of the Year from SCP, pretty large pool organization in Europe, and they were facing off against global giants like the likes of Grundfos and Penta, so well done to the team at Davey. And finally, we were happy to see some more green shoots in modular water treatment, where the Davey team were able to secure contract in stores at some hospitals, dental facilities and expanded agriculture applications. And this is all beyond the previously announced Dairy industry application, so those green shoots continue.

So at this point, I'd like to hand over to Martin, and he's going to take us through just a little bit more financial information. Over to you, Martin.

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Martin A. Fraser, GUD Holdings Limited - CFO [3]

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Thanks very much, Graeme, and good morning, ladies and gentlemen. I'm Martin Fraser, GUD's Financial Officer, and it's my pleasure to present the half year financials to you in detail.

As an opening remark, I'd like to reiterate one of Graeme's comments. This is the first period where the statutory results adopt AASB16, prospectively, meaning the prior comparable period has not been restated. To assist comparability on a like-for-like basis, the slides and report the first half on both statutory or post-AASB basis as well as a pre-AASB16 basis. More details on those impacts are outlined on Page 16, so removes ambiguity about the impacts at EBIT levels and so on, and we'll touch on that later.

I'd like to take you to Slide 9 which is our statutory or reported result. And this is on a post-AASB16 basis for FY '20. During the half, revenue grew by 3%, and reported EBIT declined by 1%. This year, we reported one-off costs of $1.4 million, which you can see in detail on page -- on Slide 11. That's $900,000 up on the prior year. And overall, this was driven $1 million by Davey due to product outsourcing, but more primarily, to some of the headcount reductions and initiatives in Europe and Australia. And in auto, we also saw an element of onerous lease provision as we cut over to our new Auckland DC and had parallel facilities for a period of time.

If we move on to Slide 11 which reports the half year FY '20 on a pre-AASB16 basis so we can see like-for-like, we can see the underlying EBIT was in line with the prior comparable period. At the net profit level, net profit after tax was down $2.7 million (sic) [$1.4 million] or 9%, influenced by those higher one-off costs, so $900,000, and nonrecurrence of the tax write-back last year of $500,000. Sorry, apologies, I quoted $2.7 million, it's $1.4 million, my apologies.

We also see that the underlying net profit after tax reduced by $700,000 over the period, not reported on this slide, but in some of the other pages. And once you back off that tax difference, it's $200,000 difference. So really, underlying net profit after tax bang on line with last year. An interim dividend of $0.25 per share was declared, which Graeme said, consistent with last year in our cash conversion performance.

So takes us on to Slide 11. I've already spoken to the nonoperating items here, but just gives you a little bit more color, so we won't stop here.

Moving on to Slide 12, where we talk to working capital and cash flow. We can see that the net working capital has increased slightly over the year-end balance, and it really reflects the organic sales growth primarily and a little bit on customer terms. We see inventories bang on, not growing, and this is a profound improvement compared to prior comparable year. And we also see a slight tick-up in payables as we return to perhaps a more normalized level of payables related to our inventory management efforts.

I'd like to take us now on to Slide 13 where we look at cash conversion. And this is really a byproduct of what we saw before in terms of working capital performance. We achieved a number of 82% or 84%, depending on whether you look pre- or post-AASB16, and that's a profound improvement beyond last year. It's actually a little bit ahead of where we have indicated for the full year, and that's what we set out to achieve. And we'll come back to that when we talk about the outlook.

I'd like to take us now on to capital management slide of Slide 14. And as we said before, at the shareholder level, we've got a stable dividend, $0.25. The big news is perhaps around our refinancing exercise, which we -- was completed and announced 2 days ago. It's primarily quite different to what we've seen before. We're seeing a broad funding base. We still have Westpac and National Australia Bank as dominant. We now have 2 foreign lenders in place, and both the foreign lenders and the domestic lenders are very interested in expanding further lending to us to support organic growth or acquisitions. And that has given us the confidence to renew at a slightly lower level than we've seen before. And with that, reduce the impact of the cost of loan lines that have remained idle throughout the prior financing period. And that will reduce our funding costs by about $300,000 at current debt levels.

I'd also like to stress that we have the borrowing documentation in place for further loans from any or all of the lenders. So we've got a lot of flexibility here to support organic and acquire growth. And I'd reiterate Graeme's words that we're very appreciative of their support.

Moving on to Page 15, we stop here and have a look at our financial position. Our net debt is up $7.5 million from the prior comparable period. Our metrics, our gearing ratios, our interest cover remains very strong, and we're in a great position. Graeme spoke before about the new funding members. And I spoke before, that we've got 3 Australian banks. That's down from 2. And we've got to switch between lines on some of those banks. And that necessitated some of our borrowings for the half year to be classified as current. And after the renewal and completion of that on 28th of January, the $94.5 million that's been reported as current has all moved back to noncurrent.

I'd like to move on to Slide 16. We talked before about the AASB impacts. What we've tried to do here on the table at the right is to show you what that looks like against traditional lines of the P&L as well as a summary of what the balance sheet impacts were at the half. And at the bottom, you can see the regional opening balance sheet entries, which were taken up on 1st of July.

So that's been reflected on the balance sheet particularly those assets and the liabilities. We have an uptick in EBITDA, $5.6 million, $500,000 of EBIT and profit after tax of $1.3 million. It's important to stress that doesn't suggest our cash position is any different. There's been no changes in cash as a result of this standard. And I'm sure all of you are pulling you hair out with trying to get your head around this, but we've tried to make it as clear as possible.

Look, it's my job now to hand you back to Graeme to talk about the outlook. But before you do, I'd like to speak to 2 things and perhaps head off what I anticipate might be some questions in the Q&A. So first thing I'd like to talk about is our FX position for the second half of the year and where we are with our hedging. Our auto business is approximately 75% hedged throughout the balance of the year, and that's broadly at around about $0.80.

Davey is primarily -- sorry, $0.70. Graeme's just woken me up. Apologies, $0.70. Davey is primarily naturally hedged. And the part that is not naturally hedged is similarly hedged out through the rest of the year. So that's the first question I anticipate and the first answer. So to reiterate, 75% hedged at $0.70.

The second question I anticipate, which wasn't spoken in Graeme's discussion about the businesses, is corporate costs. Many of you may have noticed our corporate cost reported are about $1 million less than the prior comparable period, and that's largely related to some lower cost accruals that we needed to take in the first half. And I think it would be folly to assume that all of that will repeat in the second half. So we'll see a more normal recurrence in the second half. And just please bear that in mind as you roll forward and make your interpretations of our result for the second half.

Those are the 2 points I wanted to point out. And I'd now like to hand back to Graeme who will speak to the outlook.

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [4]

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Well thanks, Martin. I was about to give you a rise after hedging at $0.80 instead of $0.70. But we'll take the $0.70 anyway.

So in the prior material, I detailed the need to sharpen our strategic direction. And I spoke about the core, I spoke about growth, acquisition, and this focus remains. And much of today's result, I think, has been borne out of each of our business units working on the core part of the business, those elements to ensure that our operational fitness is strong and offsetting some challenging economic conditions and some variables like exchange and inflation. This doesn't come at the expense of our growth and acquisition aspirations, and these work streams continue in the background.

We do expect similar demand to be maintained into the second half. And the second half, we get the benefit of some full half COGS and overhead actions, coupled with some second round pricing outcomes. These actions are all in service of the full year guidance of modest EBIT growth, guidance which is unchanged, along with our expectation on the year-end cash conversion.

So this concludes the presentation part of this session. I'll now hand you back over to Taylor who will coordinate any questions that you may have. Over to you, Taylor.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Matthew Nicholas from Crédit Suisse

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Matthew Nicholas, Crédit Suisse AG, Research Division - Director [2]

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Just a few from me. Obviously there's a lot of swings and roundabouts in the auto business. But I suppose what we didn't address in the presentation, I think was a big factor last year, was just general end market conditions. Can you just give a bit of comment as to what you're seeing or feedback you're getting from mechanics at the service level, whether demand there has returned to more normal levels. I'll get to the price in a second, but just what you're seeing from a volume perspective.

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [3]

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Yes. So thanks for the question, Matt. From the end user, we're still seeing steady feedback. I mean, naturally, January is always an interesting month, so I'll just talk first the first 6 months. But steady, steady sales. If I look at the volumes as opposed to just pure revenue, we're seeing unit sales still trend positively in the majority of our auto businesses. So that would give you a sense of that kind of demand out there, not being driven just purely by pricing-type actions if you look at the revenue line. So it's not an easy environment, let's be clear. And some parts of our businesses such as BWI are being impacted by a larger macro picture, things like auto sales being down. Now not all our business is hinged around that, Matt. But at the same time, when you're purchasing a pickup, as an example, at point-of-purchase, the dealer [fit] around forward lighting and things like that, that's dropped off a little bit. And things like truck and trailer assembly. I mentioned the number of trucks on a daily basis are a little bit lower in terms of production with some of our partners. But some of the businesses like filtration, and certainly, there are more nondiscretionary elements of our business, we're still seeing a pretty steady drumbeat.

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Matthew Nicholas, Crédit Suisse AG, Research Division - Director [4]

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I suppose that's probably a good segue into pricing. It certainly feels like the environment from a demand sense is less unpredictable than it was 12 months ago. Just your assessment as to your confidence as to the price rises it will go through. And maybe if you can give some color as to quantum, if possible?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [5]

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Look, the second round of pricing is largely complete. We pretty much -- all business, bar one, has already announced or, in fact, as in the moment, with increased pricing. In terms of the pricing, without being too specific, it sort of ranges depending on the situation, depending on the competitive set, depending on where our customers are. But it's probably anywhere between sort of 2s and 3s, depending on the business. A little -- a couple of the businesses are a little bit higher. BWI, a little bit higher. IMG, a little bit higher. But it is varied, so it's not easy for me to give you an aggregate of an answer in that regard.

In terms of confidence level, been accepted in the market already as first -- the first round.

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Martin A. Fraser, GUD Holdings Limited - CFO [6]

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And Matt, we've -- they're all done being well received, as Graeme's alluded to, and we're going to make a final decision on Wesfil. Wesfil tends to track the others by 4 to 6 weeks. So very shortly, we'll make a final decision on that.

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Matthew Nicholas, Crédit Suisse AG, Research Division - Director [7]

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Okay. And just final one for me. I mean, clearly, Ryco is part of the price-ups in January or progressively through the second half. Should we interpret that as a sign that the competitive incursions you've seen in Ryco are potentially less bad than what was originally feared?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [8]

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Look, I think that's probably too much of an assumption to draw only because the reality of the pricing -- or the lack of pricing that we took with Ryco in that first round is probably more about the OEM situation than it was perhaps about any potential competitor coming to market. And also a little bit of feedback from the end user. I think it's fair to say, though, your comment around the competitive incursion, so to speak, hasn't proven out to be significant at this point, although we always remain vigilant. But I think the general pricing environment, where the OEMs are, has allowed us all the headroom. And also, we literally passed a pricing round. I think that's a good message to send to our end user, i.e., the mechanics in the workshops, that Ryco remains the brand it always is, which is great -- better than the OEM at a better price.

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Operator [9]

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Your next question comes from Russell Gill from JPMorgan.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [10]

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A couple of questions. Just following on from your last comment on the OEM pricing. New vehicle sales, obviously, have been really tough for 18 months and the hedge books for a lot of these businesses are probably not as extensive as what your own is. But what are your thoughts on the OEM pricing across, I guess, the Ryco equivalent in the marketplace? And where do you see that in the next 6 months where that gives you a decent amount of -- to room -- to move your pricing?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [11]

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I have to be careful talking on behalf of OEMs, particularly with my background, Russell. But I think basic economic sense would suggest -- can you hear us there?

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Martin A. Fraser, GUD Holdings Limited - CFO [12]

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Keep going.

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Operator [13]

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Pardon me. Dropped off the line. So I'll just move on to our next questioner. Our next question is from Tom Godfrey from UBS.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [14]

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Can you hear me okay?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [15]

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Yes, Tom, I can, no problems.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [16]

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Great. Can I just start maybe with acquisitions? It did seem like 2019 was a bit of a go-slow period for GUD. I'm just wondering whether you can step us through how you're seeing the opportunity set coming into calendar ‘20. And where your appetite is near term?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [17]

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Yes. I mean I can understand your question, and thank you for it. I mean the consummation perhaps looked a bit of a go slow, but the courting didn't operate at the same pace. So we worked pretty hard at a number of potential acquisitions. We spoke in the Investor Day in October around 4 particular acquisitions that we ultimately pulled ourselves from, a fifth came post October. So we worked pretty hard on 5. And for varying reasons, whether it'd be valuation or strategic fit, we decided not to push forward into the second round or in fact the final offer, depending on any of those particular ones. So to paraphrase, I'd suggest that through either strategic fit or, ultimately, valuation reasons, it was a barren period. But that was through intentional outcomes because we're not going to pay over the odds. At the same time, we're not going to simply buy organizations or businesses that don't have the right strategic fit. There are categories we don't currently operate in that are an interest to us that we continue to pursue. And if I looked at my desk, as of last night, there's probably 2 or 3 we continue to work on that are separate to those ones. So not a particularly precise response to you, Tom, given the fact that acquisitions are down to timing and it can be moving around a bit. I just want to sort of emphasize that the intent, certainly the funding, and the resource behind it has not gone away. It's a matter of making the right choices at the right time, making sure our shareholders get the right outcome.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [18]

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Got it. No, that's very helpful. Maybe just secondly, turning to the COGS initiatives and the savings you guys are achieving there. Can you just give us a sense of how long you think that sort of process could take or over how many years? And potentially just around the ongoing sort of quantum you can achieve there.

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [19]

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Yes. I'll sort of -- I'll talk around it for a second because the businesses, Martin and my predecessor, had done a wonderful job of bringing some shape to the portfolio, divesting of noncore businesses. And then -- and the start of a process as an acquisition in auto. And that was very useful. We started to get some muscle around that. But then you started to get a few more into the portfolio, and then as economic challenges start to surround you in terms of at a macro level, the attention around leverage, synergy and also cost down has had us pivot a little bit. It doesn't mean that we aren't pushing for growth because, clearly, we are. But that's allowed us with that scale to start to reconsider a few things. And yes, there is a short-, medium- and long-term view. So short term, from a COGS point of view, some of our suppliers had the benefit of the same exchange in reverse. We've had those conversations. We've had supply downs that range from 2% to 4% to 5%. They'll wash through in the second half of the year. That helps us restore our margin a little bit.

Then you have some quicker, what I would call, short- to medium-term overhead improvements. We've taken the decision in a graceful and respectful way to reduce some of our headcount in a number of the businesses, and that's happened in the last part of last year and the first part of this year. And whilst there's some one-offs in that first part, we get the benefit of the overhead relief in the second half. So that rolls through and that will carry through. We're sort of resetting some of those businesses.

And then we've got sort of medium to long term. And we have initiatives right now in our real estate footprints. We have anywhere between $8 million and $9 million of lease in outgoings. At the same time, we've kicked off integration products like AAG into Ryco where we keep the sovereignty of the business, which is absolutely critical, but we actually co-locate. We look at common ERP, and we look at shared services in terms of dispatch, logistics and the like. And then you have longer-term opportunities that we're working on where you might look for further commonality in ERP and start to dip into domestic freight opportunities as well, which is actually rolling through. So it's quite a sort of multitude of items that span both short and long term. But the team have pivot to work through that, and you're really seeing that in the results in the short term. But I would stress, Tom, that that's not going to be at the expense of either acquisition or growth aspirations. And the business units are working very, very hard on levers to pull to ensure our growth is maintained into future years.

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Martin A. Fraser, GUD Holdings Limited - CFO [20]

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So Tom, Graeme's not only answered your COGS questions, he's answered your overhead initiative question as well. And perhaps he didn't sell well enough the COGS initiative he spoke to. We've been able to get anywhere from 2% to 5% very quickly on those suppliers where we're buying in U.S. dollars and their functional currency is an Asian currency that's done well against that, primarily in China.

So that 2% to 5% has been secured. It's been secured typically towards the back end of the half, and where we'll get the balance of the run rate in the second half. And I just sort of wanted to just step into that in case that wasn't entirely clear in Graeme's answer. So that's pretty much, hopefully, a little bit of a tailwind.

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Thomas Godfrey, UBS Investment Bank, Research Division - Analyst [21]

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Yes, that's very comprehensive. Maybe just finally and quickly from me. Seems to be less mention of private label headwinds in this result. I'm just wondering whether you're seeing maybe a stabilization there with some of your key resellers. Or is that something you expect to continue into the future?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [22]

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Look, we spoke about house brands last time. And I might remind some people on the call, but certainly, Tom, new to the result. We talked about home brands, but we said at the time, look, we just have more time and more real estate to talk about the auto businesses because we weren't talking about noncore businesses like warehousing and janitorial. So we took the liberty to give more insight into the business. And the point around home brands -- sorry, this is a bit of a preamble. But the point around the home brands was, in prior years, we could have put home brand comments in there because home brands have been with us, they ebb and flow, it's the normal cycle of business. And so we're not seeing significant home brand impact through the course of this first period. We know that our -- some of our customers have expressed an appetite for home brands. And we don't feel that, given the categories we serve, that we will see significant changes. That shouldn't be taken as we're complacent or arrogant. And we will continue to serve those customers in a way that our value is unequaled, that we bring products that are differentiators, and high levels of customer service and product ranging and the like. So we owe a debt to the hard work of each of the business units and how they go about servicing those businesses. And that becomes a defensive play for home brands. But no, the short answer is not significant change from the home brand front.

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Operator [23]

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Russell Gill is now back on the line.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [24]

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Can you hear me?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [25]

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Russ, are you there?

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [26]

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Yes. Can you hear me?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [27]

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Yes, Russell, we can hear you.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [28]

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Sorry, I do apologize about that. I was speaking into an empty microphone for half a minute. A couple of questions. Hopefully, they haven't been answered before. Just on the -- sorry, the rebates you got in your business. It has ticked up almost a 4 percentage point year-on-year to almost 11% in the auto business.

Can you just give us a feeling? So when you're talking price rises, obviously, that's at a gross level. How should we be thinking about the rebate structure going forward? And I guess from a customer standpoint, do you see that as a percentage of growth increasing over time? Or do you expect it to start flattening out?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [29]

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Look, our rebates, auto moved about $2 million, $2.4 million in absolute terms, went from about $18.5 million to about $20.8 million, I think it was, just from memory. And if I were to sort of cast mine across that type of quantum of move, probably about half of that was just quite simply a reflection of the volume growth, so it just pulled through that in an organic sense. And probably the other half was sort of incremental rebates. And that is a reflection of the commercial terms we have with our varying customers. So if around half, maybe $1 million or so, across $120-or-so million of revenue, probably around 0.6 point of revenue. I don't necessarily think that, that is an indicator of some significant trend. We always will look to provide a win-win scenario for our customers and our partners.

Naturally with growth, sometimes that comes with a little bit of rebate increase. And importantly, that commercial set of terms -- because it's never just about rebate. It's all -- it's a number of different things that we receive and our customers receive. Those terms have been agreed for a 3-year period.

So we've got a constant demand signal in our mind with a set of commercial terms that support it. So we're happy with that, as I would expect our customers to be happy with.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [30]

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Okay. And just going back to a previous question on OEM pricing in the market. Given your prior experience, new vehicle sales have been quite weak for the last 18 months. You've got a probably a much better hedge book than what all these OEMs have in Australia. Can you just talk through the expectation of the OEM pricing on parts that would compete with Ryco, et cetera? Where that's been and where you think that we're going in the next 6 to 12 months, just purely from, I guess, a dealership economics perspective?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [31]

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Yes, sure. I mean many of the OEMs don't really have any significant hedging approaches at a sort of individual country level. And naturally, new car sales being down certainly puts a lot of pressure. You're actually seeing, from a new car point of view, some noises from the OEMs that they're going to have to inevitably have some price increases at the front end. With the new car sales down, just by the way, it does benefit us in another way. I mean the average fleet age has dropped -- is moving from about 10.4 to about 10.8, which means that the ability to service that older vehicle sits in our well, which is useful. At a dealership level, dealership faces the same economics as anybody. Their techs are not cheap. They will expect certain levels of increase in terms of salary or wage increases. Their rent factors change like our rent factors change. So there will be pressure on a dealership to work through how to recover that.

I would expect OEMs and dealerships to think hard, and I suspect, will have pricing pressure. And that will be reflected over the ongoing period. I don't think that they can hold what they have given the ability to penetrate the aftermarket is limited. So there might be an argument that there's a volume-price relationship that they might want to balance. But when a customer is leaving the service lane at a certain point in time, at a certain percentage, it's very hard to pull that back. And that's not going away when you have [right of] repair rolling through and the access to repair information to the independent aftermarket. So I would expect to see some pricing roll into the dealerships, and that just -- that creates the same typical tempo for the likes of the Rycos of the world.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [32]

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Great. And then I guess a final question. Just your thoughts on any restructuring charges or any other expenses that you're going to park below the line that won't form your underlying EBIT number into the second half.

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Martin A. Fraser, GUD Holdings Limited - CFO [33]

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Yes, that's a good question, Russell. Look, we don't have any major initiatives in mind. There might be still a little bit more of the onerous lease cost coming out of New Zealand, particularly when we move the New Zealand gasket business into the combined shed towards the end of the year. But having said that, we're doing a lot of work on our product road map across a number of our businesses, and Davey's, in particular, is quite advanced on that. So I wouldn't want to sit here and give you a watertight assurance that the Davey management team doesn't come to Graeme and I with a compelling business case to do more. BWI, similarly, they're looking at how they can do other things better and smarter. But where we sit right now, I don't, unless Graeme sees it differently, I don't see initiatives sitting in our win box. But we've got pretty invigorated, pretty focused management teams and has made all this progress on supply cost-downs and looking for the next opportunity. So I won't sit here and give you a watertight guarantee. But I'm not sitting here looking at $2 million or $3 million coming down the pipe or even $1 million coming down the pipe, Russell. I hope that answers your question.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [34]

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Great. And just a final one I'll sneak in, Graeme. Just the back end of over the half, we've seen quite extensive bushfires. Could you possibly talk through whether Davey is a beneficiary? Or are you seeing anything from Davey in that business, I guess, deals with the RFS or anything on the irrigation side?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [35]

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Yes, thank you for that question. I mean, Davey -- and firstly, you also recognize just how tragic those circumstances are. And GUD and the Davey team hearts go out to the people so badly affected. But Davey, from a commercial point of view, is really a sort of a net 0 impact. We're seeing firefighter sales naturally increase. But at the same time, we're seeing some of the more traditional agricultural, rural products drop off a bit for obvious reasons. So we're certainly seeing a sort of a mixed bag in terms of operating performance, but from a financial point of view, it's not harmed us.

I'd also like to mention that Davey also announced $125,000, I think, $150,000 amount of product that's being donated by our rural dealers to affected fire areas, just as a sidebar. But Russell, no big impact either way.

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Operator [36]

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Your next question comes from James Ferrier from Wilsons.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [37]

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First question's on EBIT margins in the first half. In the auto business, Graeme, you quantified it in your comments earlier. Is it fair to say that Ryco accounted for all of that? And if you did exclude Ryco, the rest of the auto business, its margins were broadly stable?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [38]

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I'd probably approach it slightly different in my answer, if you wouldn't mind, James, and see if this helps. And I'll see I'll get back to Ryco. I mean the -- if you look at it in absolutes, half versus prior period, we probably had around $3 million, $3.5 million, $3.6 million, $3.7 million worth of FX impact in one fell swoop. And on top of that, inflation was running close to probably 1.7 or so, maybe even 2. And so that was the biggest contributor by far of anything. And before we switch the lights on, we were having to try to find ways to offset that kind of quantum. We spoke a little about rebate. And if you put it into context, you can realize that rebate increases were far less material when you consider exchange and domestic cost inflation. But if you took that to a margin context, the 140 to 150 basis points, it would be somewhere in the region of 80% to 82% of that roll through an exchange and cost inflation. The rest of it was sitting in other bits and pieces, including rebates. So that was really from an auto point of view, the wider auto point. Clearly, with Ryco passing on the first pricing round, they didn't contribute as soundly as some other businesses. But it would be inaccurate for me to suggest or confirm that Ryco was the driver of that, for want of a better word. I mean there were some bigger things at play as you looked at the earnings outcome and the revenue outcome.

I mean, the COGS, as an example, in auto, our COGS increased at a rate of about circa 8%. Revenue was sitting at 4%. So you can see the sort of the net challenge we were facing.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [39]

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Yes, that's helpful, Graeme. So then when we look at the second half then in a similar sense, when you add in the cost reductions on COGS starting to flow through and when you think about Ryco now in a position to benefit from some price increases, do you think it's probable that the auto business can sustain margins at similar levels to the [pcp]?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [40]

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Look, we're expecting some improvement in the margins, as we said. I mean as we've also spoken, the first half, we had the full impact of the headwinds and not the full impact of the tailwinds. So yes, the supply cost-downs wash through COGS more effectively in the second half. The overhead rolls through. And in some cases, it's a little bit better. And yes, we get the benefit of some pricing in, specifically, Ryco.

But I wouldn't want to characterize the second half as going to be a stellar outcome because, at the end of the day, we're still with a firm view that, at a full year level, we will expect modest EBIT growth, nothing more, nothing less. And I also want to be clear on that. And Martin, sorry, you...

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Martin A. Fraser, GUD Holdings Limited - CFO [41]

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Yes. Look, James, we tend to look at it in the absolute dollar senses rather than at EBIT percentage H2 versus H2. And in dollar senses, if you look at the first half of the year for auto and, say, can you -- you'll do better than that, yes, definitely. But I'm not going to -- I don't have the exact H2 versus H2 from a roll forward, but I'll be happy to take that up with you when I see you. But certainly automotive is going to have a stronger second half than the first half. As Graeme said, we've got a little bit more tailwinds on the factory supply downs, we've got prices up, and we've swallowed our staff increases in the first half. Still got a little bit of rent increase in the second half. But there are a number of things that, combined, gives us little net, net tailwinds compared to the first half. But I'll have that H2 percentage last year versus roll forward closer when I see you. We'll make sure I've got that as homework for you, James.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [42]

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And on the sales front, too, of course, in current half, you'll be cycling that destocking issue that some of your customers presented you with. So all things equal, that should boost sales growth in the period?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [43]

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Look, I think there are a number of things that are at play. So one of those, as you pointed out. But some of that isn't necessarily cycling through. I mean there are -- without being too specific, there are some customers that might take -- we certainly have taken a different view on what level of credit we're willing to extend to them. So again, without going into too much detail, so that might have an impact relative to what you just said. Hard, obviously, to talk to our customers and their view of their own inventory positions as well. So I'm sorry, I can't really answer that too precisely.

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Martin A. Fraser, GUD Holdings Limited - CFO [44]

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Look, I'll just add to that, James. Graeme did some talk about BWI and particularly in some of the areas like truck and trailer and dealer fitted at point of registration being a bit softer. So that -- I don't think you can look last year's destocking and just say it's going to immediately bounce because BWI's still facing that particular headwind. In some of the more service-related parts, logic would dictate that might give you a little bit of tailwind, unless they try and take it down a step further. But the way we're looking at it is probably net-net. We're not looking for a net win out of that -- those 2 scenarios.

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James Ferrier, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Industrial Analyst [45]

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Okay. Last question, on your supply chain. We're sourcing product out of China. Is there any impact you've seen at this stage, whether it's to do with the extended Lunar New Year holiday or just the coronavirus issue more generally?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [46]

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So as you would expect or hope, the leadership team already into a coronavirus meeting cadence. So already, earlier this week, we've set the leadership team and stepped through all the facets of what a good business should do, ranging from treatment of people, travel, suppliers, shipping and the like. And the status at this stage, after going through that, and we have a regular night letter that goes out, given that we have a large portion of our product sourced from China, and we have some great partners and suppliers there, we put the typical travel restrictions in all manner of different things. But as it pertains to any impact to us commercially, the biggest suppliers have already communicated to us and we're in daily communications with them around the extension of the new year. And obviously, stop the mass movement of people in China. We expect, therefore, that, that was potentially a week's worth of production at risk. And our supply base capability, one by one, has to make up some of that production. That doesn't hurt us in the short term. Most of our businesses, with their fast-moving goods, are carrying a number of weeks' supply. But we're watching very carefully because it's not just, obviously, the production capability, but it's all also the next step of actually getting it shipped to the location. And of course, we're working with our logistics suppliers.

We don't anticipate anything in the short term. But it's such a moving feast, James, that I think it would be errant of us to suggest that we're over it completely. We're watching it every day. We have mitigation actions and plan. We don't necessarily have geographic dual sourcing in every sense. But we still do have sourcing like filtration from the Middle East and Eastern Europe as well. So moving feast, working that very hard, not sitting on our hands in terms of waiting for these things to occur, and we'll do the best we can with what we have available.

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Operator [47]

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(Operator Instructions) Our next question comes from Sam Teeger from Citi.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [48]

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To what extent is some of the weakness in BWI, ex Narva, a function of rural Australia being in drought and some of the consumers up there not having much money to spend?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [49]

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Not a great deal. I would suggest in that area. I mean, obviously, BWI serves, I mentioned earlier, 20 or so different categories. And so BWI products find their way to trailer assemblies, as I mentioned, sometimes in agricultural applications, but not significant enough to suggest that, that part of the challenge of Australia is challenging BWI in its own right. Where we're seeing that the bigger challenges for BWI is, as I said earlier, the composition of their revenue and their profits where it is tied to either new vehicle sales or truck sales or something of that nature where that's down. We are seeing that being offset. We're seeing -- actually seeing a bit of caravanning improve. We're seeing actually some very decent increments from a sales point of view in a number of our customers in the traditional sort of auto elec trade products, fuses, switches, those sorts of things. And then we are -- and we did show in our recent October Investor Day, the trajectory of some of the key hero products in our Narva catalog, and that trajectory has continued. So I think BWI and its less nondiscretionary parts of its business is certainly being impacted by the challenging economic conditions, just more in general. But there are still some improvements in other parts of this business, but it's just being offset by what I've just spoken to.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [50]

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Got it. And then maybe can you just provide some comments around what you're seeing regarding current levels of orders from your key resellers versus this time last year.

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [51]

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Well, we don't try to talk too specifically to our customers in any specificity.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [52]

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Not any one customer, just in aggregate.

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [53]

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Yes. So in aggregate, obviously, you can see where our sales are. And I mentioned earlier on in some of our business, our unit volume has been increasing, along with our revenue, in more generality. We are still seeing -- and when I ticked through the auto businesses, some pretty reasonable demand. I'm not suggesting, as I said earlier, that it's stellar. But it is, I would say, somewhere in between modest and solid, depending on which particular customer we speak of. You can obviously look at the likes of Super Retail and Bapcor and others and look for their commentary on that, and that's probably the best guide to look for as opposed to me to try to surmise it.

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Operator [54]

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Your next question comes from Shane Bannan from Bligh Capital.

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Shane Bannan, Bligh Capital Pty Ltd, Research Division - Head of Research [55]

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I think most of my issues have been addressed. But just to round out one, Graeme, this is relating to Davey. The change in the circumstance in terms of the market that it caters to, bushfires are being mentioned, but also this other push towards water treatment in a lot of the towns, which are otherwise short of water and having to go to bore water. The prospects there are any incremental line of business?

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [56]

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Well, look, we -- actually, the products we're donating, just as an aside, Shane, are around bore water, having to go deeper to get water. So that's the sort of donations we're making in the rural areas to try help that as an outcome, not to try and commercially leverage that at this stage. The broader water treatment area of modular water treatment is where we've been concentrating. I mentioned earlier around a broader application of that technology and product set. That has now sort of spread into hospital use, dental surgery use, resorts or hotel use in South Pacific. And that's where we see, as I mentioned earlier, sort of the green shoots for Davey. We're starting to see the expansion of that. It is -- we're talking quite significant sums of money. So the installs might range from $60,000 to $70,000 to $100,000 to $120,000 per install. And they're not small in terms of the timing. But more importantly, they're not short in terms of their buildup to the contract completion and agreement. So that's probably a longer cycle of quote to install than we first thought. But we're quite encouraged, though, of the broadening of the industry base we can serve with that modular water treatment.

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Martin A. Fraser, GUD Holdings Limited - CFO [57]

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I'll just add to that, Shane, our New Zealand business for a long time has been involved in township water, and that is not at the modular scale because modulars, you've seen the photographs, they're not [big kit], they're really custom water treatment plants. And we do a lot of that for smaller villages and townships in New Zealand with anywhere from 200 to 800 people in it. So at a technical level, we stand ready to participate in that space should that opportunity come around through the drought. But at the moment, that would probably -- it's probably being planned, but we're not yet seeing it at the invitation to tender level at the sweet spot where our skill level is. If it's a township of 100,000, well, that's beyond our skill level. But we do have this sort of sweet spot with our expertise out of New Zealand, as I said, in the hundreds, less than 1,000 residents. But yes, we haven't seen the tender activity pop yet. It's not to say that it won't. And if it does, the New Zealand -- expertise will be leaned upon.

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Shane Bannan, Bligh Capital Pty Ltd, Research Division - Head of Research [58]

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Great. And Graeme, I hate to ask for a detailed question, just this leasing standard. I can see where the impact is 1.3 pretax, but you sort of mentioned it's 1.3 after tax. There's no sort of tax effect associated with this, [am I correct]?

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Martin A. Fraser, GUD Holdings Limited - CFO [59]

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There will be, but we'll just -- it's so negligible, we'll true it up at the year-end.

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Shane Bannan, Bligh Capital Pty Ltd, Research Division - Head of Research [60]

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Right. So 1.3 pretax is the number?

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Martin A. Fraser, GUD Holdings Limited - CFO [61]

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Yes. Yes. And if you want to get it down to Brass razoo, you can do that as well. But we'll true that up at the year-end.

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Operator [62]

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There are no further questions at this time. I'll now hand back to Mr. Whickman for closing remarks.

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Graeme Whickman, GUD Holdings Limited - CEO, MD & Director [63]

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Okay. Well, thank you, Taylor. Appreciate that. Look, appreciate and thank all the participants on the call. Thank you for your time. Thank you for your attention. Also appreciate the quality and breadth of questions that we were able to receive and, hopefully, we were able to enlighten you as to the nature of your question. It leaves me just to also acknowledge, from a GUD point of view, the leadership teams in each of the business units and also all the employees. We get the benefit and the privilege and honor to represent their efforts on a pretty frequent basis. But I just want to acknowledge and thank their hard work through some pretty challenging times. So thank you to the team, and thank you to the people assembled on the call.