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Edited Transcript of GWA.AX earnings conference call or presentation 19-Aug-19 12:00am GMT

Full Year 2019 GWA Group Ltd Earnings Presentation

Brisbane, Queensland Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of GWA Group Ltd earnings conference call or presentation Monday, August 19, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Patrick A. Gibson

GWA Group Limited - Group CFO

* Timothy R. Salt

GWA Group Limited - MD, CEO & Director

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Conference Call Participants

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* John Hynd

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

* Mitchell Sonogan

Macquarie Research - Analyst

* Peter Wilson

Crédit Suisse AG, Research Division - Associate

* Raju Ahmed

CCZ Equities Pty Limited, Research Division - Equities 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 GWA Group Limited Analyst Briefing. (Operator Instructions) I would now like to hand the conference over to Mr. Tim Salt, CEO. Please go ahead.

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [2]

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Good morning, ladies and gentlemen. Thank you for joining us on the webcast or conference call for GWA's financial results for the year ended 30th of June 2019. I am Tim Salt, the GWA's Managing Director. I'm joined on the call today by Patrick Gibson, GWA's Group CFO.

For today's results presentation, I'll provide an overview of our group results and key themes. Patrick will then detail our group financial results including P&L, balance sheet and cash flow. And I'll conclude with a summary of the continued momentum we're making on our strategic priorities, including an update on Methven, which you recall was acquired by GWA on the 10th of April 2019.

GWA has delivered another solid result. Our continued share growth and ongoing focus on cost efficiency throughout our business has enabled GWA to deliver a solid financial result in a market that declined for the year. This is the fourth period where we have grown ahead of the market.

In Bathroom & Kitchens, our net sales were steady against a market which declined by approximately 1.4% for the year. Our focus on higher margin categories and cost management has enabled us to maintain margins while continuing to invest for further growth. That's driving increased returns to shareholders with normalized EPS up 3.2% and a total shareholder return of 20% for the year.

We have made progress in engaging more collaboratively with customers in targeting specific growth segments such as aged care and commercial renovation with strong year-on-year sales growth in these segments. We continue to gain momentum in our superior water solution strategy. We successfully launched Caroma Smart Command to the market. The system is now installed in 18 commercial sites with a solid bank of additional projects in the pipeline. And our cloud data capture solution is now live.

The acquisition of Methven will accelerate our growth strategy and we're excited about the value our combination of 2 businesses will create.

While we expect the Australian Bathroom & Kitchen Fixtures market to decline in FY '20, GWA is now much better positioned to compete through the cycle. We have been deliberately reweighting the business to the more stable Renovation and Replacement segment over the recent years, and that's now been enhanced with the Methven acquisition, which increases our exposure to this segment from 52% to 59% of revenue globally. Through this acquisition, we also have greater regional diversity of our earnings we are not solely exposed to Australia. Engagement with customers by primary merchants and secondary customers such as builders, developers, aged care providers and the like have significantly improved. And our digital marketing is enabling us to engage directly with more consumers more frequently.

Taken together, this means we have been able to win share which is our focus going forward irrespective of the market. The addition of Methven provides significant scope for further revenue opportunities while we will also capture cost synergies of at least NZD 5 million by FY '21.

Finally, we are continuing to take costs out and we are on track with our $9 million to $12 million program by FY '21 which protects margin and funds investment in growth. So while there is an element of cyclicality to our business, the strategies we have implemented over the past few years plus the recent addition of Methven have repositioned GWA to be in a much stronger position to compete through the cycle.

On Slide 6, this provides an overview of the group results for the year. Just to be clear on this slide, these are group financial results from continuing operations which include the revenue and earnings contribution from Methven from the date of acquisition but exclude the Door & Access Systems business which was sold on the 3rd of July 2018. These are normalized results. They exclude significant items relating to cost associated with the acquisition and integration of Methven. No other significant items were incurred.

Total revenue for FY '19 was $381.7 million compared to $358.6 million for the prior year. Group EBITDA increased by 2.7% to $82.3 million while group EBIT improved by 1.5% to $77.4 million. Net profit after tax was $51.8 million compared to $50.1 million for the prior year.

On Slide 7, this represents the group results excluding Methven and also excludes Door & Access Systems. Once again, this is normalized before significant items. This is a solid result, certainly in the context of a market which declined for the year. Revenue was steady at $358.7 million while normalized EBIT was $76.4 million, slightly ahead of the prior year. And this is consistent with the guidance we've provided at the half year result in February.

As I've said earlier, we have successfully maintained group EBIT margin at 21.3% which is a good result. ROFE, while still healthy, was down on the prior year, and that's due primarily to the high capital expenditure in growth initiatives in prior years which drives an increase in funds employed.

I want to specifically call out the very strong result in operating cash flow. This continues the significant improvement in operating cash flow from the first half. The transition to our innovation and distribution center at Prestons, New South Wales is driving more efficient working capital and inventory management, which combined with good debtor management, has resulted in a 59% improvement in operating cash flow for the period.

The final dividend of $0.095 per share fully franked brings the full year dividend to $0.185 per share fully franked compared with $0.18 for the prior year. And while this payout is higher than the company's dividend policy of 65% to 85% of net profit after tax, the Board believes the level is appropriate and strikes the right balance between immediate returns to shareholders and investment for future growth while expecting that Methven will contribute positively to future earnings growth. And Patrick will go through these numbers in further detail shortly.

Slide 8. Post the acquisition of Methven, the composition of our business has changed and we thought it would be useful to provide you an update with regard to our exposure by segment, brand, category and geography. The key point here is that, as a result of the highly complementary acquisition, we have increased our exposure to the more stable Renovation and Replacement segment, from 52% to 59% globally; enhanced the geographic diversity of our earnings while opening up international markets. We've almost doubled our presence in the taps and showers segment, the largest segment in our addressable market, from 12% to 20% in Australia, and added the leading Methven brands to our portfolio. For these reasons, we believe Methven is a highly valuable addition to the business.

On Slide 9. Our B&K business is continuing to grow revenue ahead of the market. We hold revenue in a market that declined by approximately 1.4% in FY '19. Renovations and Replacement, by far the largest segment, decreased slightly by about 1%, highlighting the resilience of the segment. Detached house completions declined by 3%. Multi-residential dwelling completions fell by around 4%. However, commercial building activity increased by about 1%, and I emphasize that those are market numbers. They compare to our overall revenue in the Bathroom & Kitchen business, which was in line with the prior year. And on that basis, we're continuing to grow share, continuing the share growth trend over recent years.

And I'll now hand over to Patrick to go through the financials.

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Patrick A. Gibson, GWA Group Limited - Group CFO [3]

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Thanks, Tim.

Slide 11 shows the results for group financial results from continuing operations, which include the revenue and earnings contribution from Methven from the effective date of acquisition, the 10th of April 2019. But they exclude the Door & Access Systems business, which was sold on the 3rd of July 2018 and which is reported in discontinued operations. The results are normalized, i.e. they exclude significant items relating to costs associated with the acquisition and integration of Methven. Slide 26 in the appendix reconciles reported to normalized results.

EBIT increased by 1.5%, reflecting the slight increase in GWA plus earnings from Methven in quarter 4 FY '19. And net profit was up 3.2% on the prior year from the lift in EBIT and lower interest and tax. The effective normalized tax rate in FY '19 was 29.7%. Net profit after tax was $51.8 million compared to $50.1 million for the prior year.

On Slide 12, this waterfall chart sets out the key drivers of earnings over the year. And once again, let me stress that we do not look at these levers in isolation. Rather, we look at product mix and price together in terms of driving our growth. We also look at our cost-out program as to how that funds the necessary reinvestment in our growth strategy while also mitigating cost inflation to maintain margins.

Volume and mix. This was largely in line with the prior year despite the declining market, a good result. We have increased volume and mix in sanitary ware partially offset by tapware. And you might recall that last year, we had a significant launch of new products into a major customer, which means we were lapping strong volume in taps in the prior year. We continue to focus on higher-margin segments, such as Cleanflush, which assists mix.

And on price, we benefited from the increases we implemented in September 2018. These increases are necessary to mitigate cost inflation and the expected adverse foreign exchange impact in FY '20 from a lower Australian dollar. We had a slight gain from foreign exchange hedging during the year. And as Tim said, we remain disciplined on costs to address input cost inflation, and we are on track to deliver the $9 million to $12 million cost out program across FY '19 to FY '21.

Primarily, these are in the areas of procurement, warehousing and logistics and offset input cost inflation and fund increased investment in growth in initiatives such as marketing spend, flagship stores and Caroma Smart Command. And we achieved around $3 million of these savings in FY '19, which was in line with our expectations. Our approach to hedging and pricing, coupled with our cost-out program, gives us forward visibility to better plan and pace our business investments appropriately.

Slide 13. You can see that Bathrooms & Kitchens has again delivered another solid result. We had continued growth in sanitary ware with ongoing conversion to Caroma Cleanflush which now accounts for 31% of toilet sales. And as I just said, taps declined due to lap in the new product development in the prior year. You will have seen on an earlier chart that on a pro forma basis, Caroma now represents 58% of our sales. And rightfully, this is the focus of our marketing efforts. And Caroma sales were up 3%.

In Australia, we continued to experience very strong growth in Victoria, up 10%, New South Wales was up 2%, while South Australia increased 3% and New Zealand was up 7% or approximately 4% in constant currency. This was partially offset by declines in Queensland, down 12%, and Western Australia, down 11%, where market conditions continued to be challenging.

EBIT of $90.2 million was slightly ahead of the prior year. As we've said consistently, our aim is to maintain Bathrooms & Kitchens EBIT margin around the 25% mark. And for FY '19, we have achieved this with EBIT margin up slightly to 25.2%.

Turning now the cash flow from operations. This is a strong result. Cash flow from operations in FY '19 was $94.2 million compared to $57.3 million in the prior year. And cash conversion was particularly strong, with a cash conversion ratio from continuing operations of 115%. The innovation and distribution center at Prestons, New South Wales is driving improved service levels for customers and is also assisting in more efficient working capital and inventory management. Strong debtors management also contributed to improved working capital.

Capital expenditure was $4.3 million in FY '19 compared to $11.3 million for the prior year. And the reduction reflects our decision to delay some specific projects given the Methven acquisition. There will be a catch up in CapEx in FY '20, which we expect to be in the range of $12 million to $16 million for the full year. This includes further investment in Caroma Smart Command, investment in new product development, cost-out initiatives, warehouse racking and office fit-outs. Cash restructuring and other costs include $2.6 million related to restructuring and $9.5 million pretax relating to transaction and integration costs associated with the acquisition of Methven.

On Slide 15, you can see that GWA remains in a strong financial position. Net debt as of 30th of June 2019 was $141.9 million compared to $97.7 million for the prior year. The increase reflects the acquisition of Methven, which you will recall was funded from our existing debt facilities. And this was partially offset by the net proceeds from the sale of Door & Access Systems which were applied earlier in the year to reduce net debt.

In April, we increased our 3-year revolving $225 million debt facility which matures in October 2020 by a further $25 million to provide additional financial flexibility for the group. The $250 million facility will be refinanced in the first half of FY '20.

GWA's credit metrics remain consistent with investment-grade, as you can see on the slide. And post the Methven acquisition, FY '19 net debt divided by normalized EBITDA is in line with forecast at 1.6x.

I will now hand back to Tim.

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [4]

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Yes. Thanks, Patrick. Let me remind you of our growth strategy that is customer and consumer focused, underpinned by internal cost and capability improvements.

Slide 18 talks about the continued good progress we've made on these strategic priorities during the year. So let me give you a quick summary. We continue to embed joint growth plans with our key primary merchant customers that's resulting in enhanced ranging of our existing lines and new products, both in showrooms and behind trade counters. We also made progress in engaging more collaboratively with customers in targeting specific growth segments, such as aged care and commercial renovation and we delivered strong year-on-year sales growth in these segments. We have the largest dedicated commercial sales team in the industry with over 40 people seeking out new opportunities in the buoyant commercial segment.

We also made good progress on our consumer-led strategy. We've increased our investment in marketing activities to ensure our brands resonate more effectively with end consumers, particularly in our core market of Residential Renovation and Replacements. And as we said earlier, Caroma sales were up 3% for the year.

Key metrics of foot traffic and sales conversion at our 2 flagship stores in Adelaide and Sydney have improved during the year, providing a compelling physical brand and product experience for consumers and customers, including key influencers such as architects and aged care facility providers.

We're continuing to target cost efficiencies and we're on track to deliver a $9 million to $12 million cost-out program by FY '21, with cost savings of approximately $3 million achieved in FY '19. These cost savings are being used to selectively reinvest in the business and maintain margins. On Methven, we continue to expect at least NZD 5 million in cost synergies by FY '21, and we've got clear line of sight in achieving this target.

Slide 19. One of our most important strategic initiatives is Caroma Smart Command, our intelligent bathroom system that enables GWA to monitor and manage water in commercial buildings. It comprises touchless bathroom fixtures connected by Bluetooth to the cloud or the building management system. This represents a significant milestone to create incremental medium-term growth across our business.

A typical commercial bathroom without showers uses about 300 kiloliters of water per year. The leading global engineering consultancy, Norman Disney & Young, NDY, calculate that upgrading to Caroma Smart Command and its compatible fixtures can deliver yearly water savings of up to 23% in the bathroom. More importantly, a building's total water consumption can be better managed through Caroma Smart Command, and this will reduce annual water consumption of a typical commercial building as the building by as much as 25%.

With Caroma Smart Command, NDY has also stated that commercial offices could receive recognition across major sustainability ratings, such as NABERS Water, Green Star and WELL. Caroma Smart Command can contribute to key ratings requirements, up to 8 Green Star credits can be impacted, all of which can support increased rental yields by up to 5% with commensurate increases to property valuations.

Momentum behind the launch of our intelligent bathroom system, Caroma Smart Command, continues to build. The system has now been installed in 18 sites with a solid bank of additional projects in the pipeline. To date, 4 customers have been migrated to our new cloud data capture solution with a majority of future clients expected to adopt the cloud solution.

We will be launching further complementary products to further enhance the offering over the course of FY '20. We are now exploring international expansion options for Caroma Smart Command through GWA-generated leads and also from leveraging Methven's footprint across Southeast Asia and China.

Caroma Smart Command was awarded the highest award Best in Class in Product Design, Hardware and Building at the Good Design Awards in July 2019; while Caroma's design team was awarded the Design Team of the Year award. Caroma Smart Command will be showcased at Expo 2020 in Dubai. Around 20 million people are expected to attend the expo across the year, which provides significant international exposure for this groundbreaking, superior solution for water.

We finalized the Methven acquisition on the 10th of April 2019. The strategic rationale remains compelling. And I'm excited by the potential of bringing 2 good businesses together. Methven accelerates our superior water solutions strategy and grows our share of the taps and shower category. It strengthens our overall Bathroom & Kitchen market share in both Australia and New Zealand, enlists our exposure to the more stable Renovation and Replacement segment while providing an enhanced platform for international growth.

We operated the 2 businesses in parallel from acquisition up until the 30th of June 2019 to enable us to finalize our integration plans. These are fundamental to capturing cost synergies and revenue opportunities.

We have now implemented the go-to-market strategy with 1 sales team in both Australia and New Zealand selling at a total combined portfolio. For the year-end of 30th of June 2019, Methven's pro forma revenue was $95.1 million compared to $94.7 million for the prior year. Pro forma EBIT was $6.6 million compared to $9.8 million in FY '18. The decline in housing activity, particularly in the second half of the year and delayed NPD, impacted Methven's performance in FY '19. However, we remain confident of growing Methven in Australia and New Zealand through leveraging GWA's scale and customer relationships and combining GWA's and Methven's talent, know-how and intellectual property to develop new products and solutions while growing our new international business.

Turning now to the outlook for the full year FY '20. GWA is now a stronger, more focused business following the sale of Door & Access business and the subsequent acquisition of Methven. We have demonstrated a track record of outperforming the sector, even in challenging environments. And we have strategies to focus on specific areas of opportunity and the required capabilities and solutions to capitalize on those opportunities. In Australia, our largest market, weaker consumer sentiment, credit tightening and falling house prices are expected to lead to a small decline in GWA's addressable market in FY '20 driven predominantly by the residential new build segment in multi-residential and detached housing. However, more recent changes to personal income taxes and interest rate reductions, coupled with relaxation of lending requirements, are expected to make this decline both shallower and shorter than previously anticipated.

The Residential Renovation and Replacement segment is expected to moderate slightly. GWA will continue to execute focused customer and consumer initiatives to generate share growth in this segment in particular.

Commercial activity across both new build and Renovation & Replacement is expected to remain strong primarily on the Eastern seaboard driven by both government and nongovernment spending over the next 24 months in areas including health and aged care, hotels and offices. We are well placed to take full advantage of this segment.

GWA's commercial forward order book remains strong with several major commercial projects secured primarily across the Eastern states. Our priority in FY '20 are focused on driving revenue opportunities to continue to deliver above market sales growth while maintaining cost discipline for margin maintenance and continued investment in medium-term growth initiatives.

In terms of revenue opportunities, we're focused on renovation across both commercial and residential segment, continuing our focus on customer value add and consumer engagement initiatives and driving Methven in Australia and New Zealand by leveraging GWA's scale and customer relationships. We will also drive Methven and Caroma revenue opportunities in Asia and the United Kingdom while continuing to expand and invest in Caroma Smart Command. Price increases are planned across all markets in FY '20 to offset cost inflation in conjunction with other cost saving initiatives.

On cost discipline, we will deliver the second year of our $9 million to $12 million cost-out program and we're also on track to realize at least NZD 5 million of Methven integration savings by FY '21. On hedging, approximately 77% of U.S. dollar exposure is hedged to 30th of June 2020 at USD 0.72. We will provide an update on trading at our annual general meeting on the 25th of October 2019.

Ladies and gentlemen, that concludes the presentation, and we're happy to take your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Mitchell Sonogan from Macquarie Group.

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Mitchell Sonogan, Macquarie Research - Analyst [2]

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Tim and Patrick, just #1, can we just get a little bit more detail on Methven? I guess, just its recent performance. Revenue was pretty flat year-on-year but EBIT was down 33%. So can you maybe just provide some more detail on the key drivers and how we should be thinking about these trends into FY '20 given your outlook for the slightly softer markets?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [3]

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Yes. Thanks, Mitch. I think the first thing just to say is, obviously, we took over the business early April. And first point I'd say is that, since then, everything that I've seen about that business says it was the right acquisition for us from a strategic perspective. So we remain very confident about our ability to deliver the business case that we put forward when we acquired the business. In terms of what happened, looking at our business as we got hold of it, I think it's fair to say a couple of things. One, obviously, they were impacted by the softening of the market in Australia and New Zealand. But also, there was an element of some of the NPD that we expected to land in the second half of the year. It was in fact delayed. And that obviously had an impact on the revenue in the second half of the year. When you look at the business, while there might -- the actual sales year-on-year were pretty flat, the impact that, that had of those -- the NPD that didn't get to market last year meant that a slowing down of Australia and New Zealand compared by the fact that the U.K. grew at lower margins, so you've got a mix issue playing through there a little bit as well. So that's, I suppose, the short and sweet of what happened over the course of the second half of the year from our perspective. Now I think probably the first half FY '19 would be probably a better start point for us as we go into FY '20 about how we're expecting to see that business perform. As I've said earlier, we got clear line of sight on some of the synergy benefits both from a revenue perspective and also from a cost-out perspective as well.

So from that perspective, we think that we should see a bit of momentum over the first half of FY '19 as a good base. Now we've implemented something called Fast Start, which is what we've talked about, bringing the 2 businesses together across both Australia and New Zealand where we're actually presenting to customers as one business for the first time. That only kicked off from early July. So we would expect that -- now the opportunities that we see in that business remain really strong. Methven, historically, had a business that was very focused on one key customer in Australia, for example. We believe that we can leverage the strength that we've got across a number of customers to actually drive that growth faster and harder than they were able to do without us. So that's -- for us, we remain confident about the business that we've bought, disappointed by the second half they had, no doubt about that. But that's, we think, put plenty of opportunities going forward.

The other piece -- I should probably just say that, that is in New Zealand. We've made a decision to put one of the exec team members down there. So from my team, he will be relocating to New Zealand to ensure we get the right level of focus on that business. We've now got a combined business in New Zealand that's sort of around $60 million GSV. So it's a good opportunity for us to make sure that we are growing that business as fast as we can. Linked to that, when we look at the 2 businesses combined, we've got a center of excellence in New Zealand. If I had to choose -- one of the things that's really impressed me is the technical know-how and capability of the Methven team and everything we thought before we got under the covers has played out to some really good technical know-how. So how we leverage that going forward, not just for the Methven brand but also about how we can take some of their IP and put it onto, for example, into Caroma. As well, it's going to be a really important opportunity for us. So we remain very bullish about it, very positive would be the short and sweet on that one.

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Mitchell Sonogan, Macquarie Research - Analyst [4]

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Okay, Tim. And then, just following on from that, you mentioned that the U.K. actually grew sales there. Could you maybe just talk about what you're seeing over in that market and your expectation, I guess, through Methven and the broader business for FY '20?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [5]

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Yes. I mean, look there's obviously a lot talk about what's going on with Brexit and what have you. But I think at the moment, we are still a relatively small business that's under the radar over in the U.K. It grew something like 11%, our business in the U.K. last year. We would expect that momentum to continue this year. There's a good pipeline of work that the team have got over there. They've got some new products that they'll be launching as well. So regardless of the macro environment, we still see that as being a great growth opportunity for us in FY '20. And that's -- the same thing is true as Asia. I mean they're off a very low base. But Asia grew double-digit sales last year and we would expect to see significant growth in the coming year as well. So we're taking the opportunity always up in Asia about a month ago meeting with some of the distributor partners and commercial developers that Methven deal with up there. And I've got to say, there are some very strong relationships up in Asia that give me some good confidence around that opportunity. I think the challenge is how we build the scale of that much more quickly. And then in the U.K., I'm actually leaving on Friday to go over there and have a look at the business over there. So we're spending a bit of time getting to know those businesses because obviously, they are somewhat different from where we've been in the past. But we -- both of those, we think, have got good growth prospects as we go into this financial year.

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Mitchell Sonogan, Macquarie Research - Analyst [6]

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Okay. Great. And just final one for me, in terms of the resi R&R, can you maybe just give a bit more detail about what moderating slightly sort of translates to? And I guess where you're seeing the key parts of caution?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [7]

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Yes. Look, we've always said that, that particular segment will be one of those segments that maybe goes up 1 or 2 or down 1 or 2 either. But we won't see massive sort of boom and bust in that space. And that's what we're really expecting across FY '20. It might be a minus 1, minus 2 sort of segment but certainly not the ups and downs that you're seeing from some of the new build areas. So that's the key for us. It's obviously the largest part of our business in Australia. That's now gone to about 58% and I think globally it's now 59% of our business. And I do like it because of its relative stability and consistency compared to some of the other segments.

The reason I think it will moderate slightly next year is, if you look at existing houses turnover, it's relatively low. The encouraging thing for me, I mentioned in our press just now, that we'd see the downturn being shorter and shallower than we previously expected, and I think that's because we're starting to see a bit of an uptick in existing housing turnover. And I think that always bodes well for the resi renovation segment. The other piece that I don't think we can sort of walk away from is the fact that I think the -- some of the -- the fact that the liberals got back into power, I think, will also help drive, sort of stimulate this particular segment. I think it would've been more challenging had there been an alternate outcome to the election. So all of those things, we believe, whether it's the tax cuts, the interest rate cuts and the loosening of lending requirements, we think, will have a positive impact on that segment and all of the housing market for that matter. It'll just take a little bit of time for that to flow through.

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Operator [8]

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Your next question comes from John Hynd from Wilsons.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [9]

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Tim and Patrick, some great margins coming out of the business this year. Yes, I think at 21.5%, how should we think about the margins going forward into FY '20 for the group considering we've got a lot to, I guess, balance out? And then obviously, with the Methven overlay, and to your point, there was probably some negative momentum in margin in the second half '19. Can you give us some guidance on how we should think the group will look in '20?

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Patrick A. Gibson, GWA Group Limited - Group CFO [10]

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Yes, John. Let me start. Patrick here, good morning. Look, the first -- I think the first thing I would say is you need to probably look at the component parts to drive the group. Slide 25 in the appendix sets out a number of our key assumptions. But I think the first and probably most important one is that, as we said in the press, we expect to continue to keep the Bathroom & Kitchen's EBIT margins at around that 25% level, plus or minus 50 to 100 bps. But as you saw, we actually increased 20 bps last year. So that plan hasn't changed, and we expect to be able to do that through a combination of, obviously, growth and our cost out program that continues to be on track. In terms of Methven margins, we have said that we're on track for at least NZD 5 million of savings by FY '21. And we would expect at least NZD 3 million of that to flow through in FY '20. So I think you need to factor that in, and coupled with the comments Tim made earlier, about probably first half '19 being a better guide to forward momentum than second half. I think if you reflect those things, you should be able to arrive at a good view on the group margin for FY '20. And look, as I mentioned, there are a few other things, just to hopefully assist you on that. Slide 25, in terms of the accounting impact of the amortization largely related with the acquisition, corporate costs and interest and tax. I hope that helps, John.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [11]

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Yes, that does. So I mean, essentially, what you are saying is that there will probably a little a bit of dilution in '20 given Methven drives on a lower margin at the moment. And perhaps you can talk to us about the new products. What sort of impact would you expect that to have on Methven's revenue next year?

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Patrick A. Gibson, GWA Group Limited - Group CFO [12]

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Well, look, I think you're absolutely right. We do expect some dilution of group margin from Methven, but that's absolutely not a surprise and in line with our business case. Having said that, given the synergy program that we have in place across both revenue and cost, we do expect the impact of that dilution to come back over time as we go through FY '20/'21. I think on NPD, probably hand to Tim on that one because there's a number of initiatives on the go in Methven and across GWA in that space.

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [13]

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Yes. Look, John, a couple of -- I mean I suppose the first thing to say about NPD is that we deliberately pulled back on a lot of our NPD in FY '19 because we were conscious we wanted to give some breathing space to make sure we could land Methven appropriately and integrate the 2 businesses together. So as we get into it, we look at it and think we've actually got a whole new business now that we've perhaps expect with this new product that we've got a lot of opportunities to engage better with our customers to drive the new joint portfolio. And specifically though, a couple of things, Methven have actually got some really great valve technology that they're launching. That's going to be kicking off in April. We'd expect that to deliver somewhere around $4 million or $5 million of revenue for the business in FY '20 at margins that are at or slightly ahead of their overall group sort of business margin. So we'd actually expect that to be margin accretive relative to the overall Methven business. Similarly, in second half, we will accelerate our colored tapware, again partially in Methven, but we'll also look to leverage that into Caroma as well. And that is essentially leveraging the center of excellence down in Auckland, where they've actually got their -- they've got a machine to do colored tapware. So we want to be leveraging that not only on the Methven brand but also across the Caroma brands as well. And U.K. has a number of initiatives underway in terms -- including a hot water tap. One of those has already launched to market, and there'll be some direct-to-consumer opportunities for that as well in the U.K. And then similarly it's interesting: In Asia part of how we're thinking about that is that we have to recognize that -- some of what we do. We want to take some of the Caroma products, whether that's sanitary ware, up into Asia. And we've obviously been scoping that out and we believe that's a significant opportunity. Some of the challenges will be just around getting registration requirements sort of done through some of those markets where we just have to apply for licenses and what have you, but we see that as being a -- we're treating that as new product developments as well. But similarly there will be some products up in Asia off a small base, where about 1/3 of them will need to be developed specifically for the Asian market to reflect the different tastes that consumers have up there. So that's sort of an overarching piece.

Then back to Australia. The one area where we're really focusing there, Caroma Smart Command, we still see that, whether it's new products or innovation, the -- you'll see new electronic showers this year. You'll see shutoff valves, electronic shutoff valves, which will actually -- I mentioned earlier about that we can save up to 25% of a building's water usage. And part of that is through managing and understanding leaks which can account for up to 15% of a building's water usage. The technology we're going to put in place actually allows buildings to manage that and cut off water supply. So sort of those sort of things will work for Caroma Smart Command and enhance the offering that we have for our customers in that commercial space. And then the other area that we've called out as being really important for us has been that aged care piece. We'll continue to broaden our aged care range. A year ago, we had about 150-odd specific SKUs in aged care. We've now got over 200. As we move forward, we will see that number increasing to 250, 300 as we look to take advantage of what we see as being a significant growth segment. Our aged care business grew quite nicely in FY '19, and we can expect to continue that growth across FY '20. It's been interesting actually. One of the things that we've been doing there is using Caroma on Collins. And I think there's a slide in the presentation, it's Page 24, which shows just a picture of about 140, 150 architects who attended Caroma on Collins to do -- basically you can get accreditation and points, development points, basically for attending these things. So we're starting to see how we're utilizing a great space that we've got in Caroma on Collins, how we've got a market opportunity or segment with aged care and how we're bringing those 2 things together to grow that. So we're making some good strides in that space, and I think that's another area where we want to really focus our NPD or new product development for FY '20.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [14]

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Okay. And Caroma, obviously another strong point from the results. Can you talk to us about maybe where the -- I'm assuming it's from the Cleanflush but, I guess, where the gains are coming from. Are you getting more traction in the commercial space? And perhaps on the flip side, I mean, I think revenue was largely -- that revenue was largely flat for the segment. Perhaps where the weaknesses are coming from, just so we can cross the Ts there.

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [15]

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Yes. Look, Caroma's growth has -- which -- prior to Methven was around 3/4 of the -- of what was GWA's sales. It's now down to, I think, 52%, 53%...

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Patrick A. Gibson, GWA Group Limited - Group CFO [16]

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58%.

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [17]

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58%, apologies, of the total business now, but it's -- so it's still the major part of what we do. And the growth has come out of sanitary ware, so we've continued to be very strong there. And as Patrick said, that's driven out of Caroma Cleanflush. And as we've talked about, the benefit of that is it improves and enhances our mix and it's good for margins. So that's been a real strength. Cleanflush was up 24% this past year. And it's now, I think, 31% of our toilet sales. So that's been significant in FY '19. In terms of segments, we have continued to leverage the strengths that we have in that commercial space, and that's got a number of facets to it. It's obviously commercial new build, where as I said earlier, our commercial order book remains very strong and has grown over the course of the year. Secondly, in aged care, we've seen that's been an area of growth for us. And similarly we've talked about the need for us to strengthen our business in commercial Renovation and Replacement. And we're starting to see some good improvements there, where the amount of business that we've won over the course of FY '19 was up about 25%. So we're locking in some good growth opportunities within that broader commercial space. From that perspective, R&R, we're pretty much flat to market, the Renovation and Replacement with consumer, which obviously we'd like to grow that further, but from a share perspective we pretty much held. And then obviously the 2 areas that have been in decline over the course of this past year have been the Multi-res segment, where we actually grew share. It's interesting that, as share performance in multi res continues to be strong, as the market -- or that segment contracts, the very fact that we play in the middle to upper end of that segment, I think, has stood us in good stead. So we've never played at the bottom end, which I think is the area that appears to be dropping away as it was at the half year and it was at the back end of last year. So we've made a bit of ground up there, which is good. And then the builders in the resi market is quite challenging at the moment. So detached residential housing is a challenge as a segment. That's declining and it's not as attractive as it perhaps once was, but it's worth remembering that that's only about 20%, 21% of our business now rather than -- obviously the majority of our business is still in the R&R. It's about 58, including Methven in Australia; 59 overall. So that's how the segments have played out, John. I think overall, as you say, our business was flat, but the actual market was down in FY '19. And from our perspective, we can't control what the market does. We're actually focused on making sure that we grow market share and making sure we've got the appropriate actions in place to deliver that share growth.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [18]

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Great. And you're obviously getting -- you're getting more confident around Smart Command. I can feel you banging the table on the other side of the call. Can you talk to us yet about revenue or EBIT within the group or how you're thinking about pricing? I think you said you've got 18 or 19 -- it's operating at 19 places, and you've got 4 clients onboard. That would suggest that you can probably start to talk to some commercial terms.

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [19]

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Yes. Look, at the end of the day, our ability to grow this will be defined by how much value we add to our customer's business, so I think water savings and sustainability is a huge opportunity. I mean I think, from a business perspective, it's great. But the reality is that water is still relatively cheap in this country, so the benefits that we see are much more around how we can add value to -- on the cost side or the value side around the dollars and cents is the yields that people can get from the building with Caroma Smart Command in it. And obviously as a result of that, then the value of that building will increase. It's around how we manage costs within the building in terms of cleaning but also preventative maintenance. So we're seeing, while it's wrapped up in a sustainability agenda, it's actually got a lot more facets to it. And one of those is also we talk a lot about the user experience. We're seeing particularly in retail shopping centers and airports in particular the importance of being able to provide clean and available bathrooms. It's one of the key drivers of people actually wanting to go into a shopping center. Reality is, if those bathrooms are not clean and not available, consumers actually choose to vote with their feet and stay at home and shop online. And I think that's the biggest concern that a lot of the shopping centers have these days. So we actually contribute to improving the user experience when they go into the shopping center. So in short, you're right. We're very, very excited by the potential that Caroma Smart Command has. It's 18 sites at the moment. We've got a very strong pipeline of future works. So we're just finishing our first full buildings. What we found is, to date, that a lot of the places we've put it in, that we've done just one floor of the building to demonstrate the efficiency that this thing actually works in the way we want to. We're now actually working on full buildings, and we've got our first full building going live at the moment. So that again is an exciting development. And we're starting to see some increased momentum not only here in Australia and New Zealand, but also we're starting to explore opportunities up in Asia as well. And we've been met with very good reception up there as well, John. So while it's still relatively small on a revenue perspective, we believe this has got significant potential to be a major, major game changer for us, particularly in that commercial space, in the short to medium term.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [20]

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Okay. And so we're still -- you're still really not talking about a revenue contribution just yet. Perhaps at 12 months time?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [21]

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Yes, look, if -- in 12 months' time, I think we'll -- I'll be very proud to stand here and tell you what we're doing. I think, at the moment, we've built -- as I say, because -- it's in 18 buildings. We've only got 4 on the cloud at the moment. Once we get more established with that, I think what we'll see not only is revenue -- a sizable uplift in revenue, but I also think we're going to see quite a change in terms of some of the revenue models that we can think about that is actually about service fees rather than actually sort of one-off drops and what have you. So we think there are some significant opportunities to look at very different ways of doing business with our customers, subject to how we can add value to their business. And I think that'll be a significant shift. We're exploring that at the moment with a number of customers to see how we can -- so we can shift from being a sort of fixed cost drop to an ongoing revenue stream. And I think that's -- that will be a really exciting development for us.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [22]

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Okay. That's great. Just one more housekeeping from me before I jump back in the queue. Other revenue this year included services and scrap as well. Is that part of the Methven business? Or that's just a little bit of a change there. Can you explain that, perhaps Patrick?

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Patrick A. Gibson, GWA Group Limited - Group CFO [23]

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No significant change, John. And it's certainly not Methven related. I mean we always have some, if you like, scrap sales. And look, the only services we provided was primarily in the first half of the year, and that was to Allegion as part of the transitional services agreement. That finished towards -- or about end of February, so that won't -- you won't see that factor any further as we go forward in FY '20.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [24]

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Okay. So the sort of normalized number is back closer to sort of, I think it was, 600 or so?

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Patrick A. Gibson, GWA Group Limited - Group CFO [25]

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Yes, that's probably about right. And look, I should add that, that TSA revenue was pretty well offset, anyway, in terms of costs of providing those services. So it's kind of a net-net 0.

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Operator [26]

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(Operator Instructions) Your next question comes from Peter Wilson from Crédit Suisse.

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

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So I've had a couple, a few questions answered already, but I'd just like to better understand the second half decline in revenue and profitability for Methven. So on revenue, it looks like on my numbers there was a 5% to 10% decline in revenues second half. You've called out NPD. Could you give us more detail on what exactly that NPD was that was delayed? And what was the revenue assumption for that NPD?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [28]

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Yes, the 2 that were expected to go to market. One was the 2 lots of valves, something called Fastflow, which is a valve that they use to -- in a variable water pressure market like New Zealand where you have high pressure and low pressure, the Fastflow valve is something that is a piece of technology that actually allows the water flow to be consistent regardless of what water pressure is actually coming through. That was an upgrade. They've got a Fastflow I. They were going to a Fastflow II. That has been delayed and will launch in October this year. And similarly, they had another valve called a Nefa valve, where they've done an upgraded version of that. And that is essentially a security valve that's used to manage pressure within hot water tanks in New Zealand, which again was due to launch at the back end of -- or second half of last year and will now launch in, was it -- in quarter 2, early quarter 2 this year. The second -- the third one of those was the colored tapware that I referenced earlier. Again that was due to launch in January, February this year just gone. And then when we obviously got under the bonnet and had a look at that, it was not ready to launch. And it's now going to launch probably beginning of second half 2020. And that was called PVD. So it's sort of you can have all different-colored tapware and whatever else. They were the 3 major launches that didn't get away. And then there was another one that was delayed to the back end of last year, which was part of Fletcher Living group. That was actually delayed until end -- the end of quarter 4. That's now in market, but we really didn't see the benefit of that going in. So all that, Peter, you'd probably say on an annualized basis we'd be looking at something like $7 million or $8 million for those. So probably in half 2, you'd be looking somewhere in the region of about $4 million for some of those things. Now some of that, to be fair, is not all incremental, but that's the sort of order of magnitude that we're talking about.

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

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Okay. And in the absence of that NPD, what's the reason why the underlying business would go backwards other than the obvious like the Australian market?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [30]

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Well, I suppose one of the things that we knew when we bought the business is that they've been declining in the New Zealand market for the last 2 to 3 years, and we factored that into our business case. So really the trajectory that they have exhibited in New Zealand is consistent with where they've been. We believe that we can change around that momentum or negative momentum. As I said, we've actually put one of our exec team members down there to drive the business in New Zealand, and that will be a major part of getting that momentum back down there. I actually think -- and as I say, we've kicked off with one team down there now, and we've actually started pretty well and quite pleased with the way that integration has gone. So that's quite exciting. So I think there was an element of just carrying on a trend, and actually our expectation is to be able to change that trend. From an Australian perspective, they had a challenge in one major customer with relative destocking over the course of the second half of the year. It doesn't really have anything to do with sales out, but there have been some adjustments that some customers have made and that has also impacted their business from an Australian perspective as well. So they'd be the major drivers of what's happening over and above what we just talked about which is the overall relative softness of the market.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [31]

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Okay. And then you -- if you look at -- so from my numbers, it looks like it was barely profitable in the second half. So I mean given what they reported the first half, it looks like the business earned approximately $1.5 million, [you name it], the second half. I mean given it's such a large decline and you said the expectation is for almost an immediate turnaround to more like what they put in, in the first half. I mean other than that NPD, it doesn't seem like there's any nonrecurring items in that. So I mean what's the confidence in that almost immediate turnaround?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [32]

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Well, just so I'm clear: The second half is about $2.5 million, not $1.5 million. But I mean it's first half was about just over $4 million, $4.1 million. In the second half, it's about $2.5 million. So that's $6.6 million per year. So in terms of the turnaround, we've said that we remain confident that we will drive the costs out in the way that we expected to -- that we will deliver against. We set a minimum of the NZD 5 million synergies by FY '21. And now we fully expect to deliver $3 million this year. There's no reason -- we think that $3 million is achievable in FY '21 as well. And then we do believe that there is synergy beyond that as well that we -- as we've got into the business and understood it. So the challenge is more around how we -- how quickly we can get after those costs that we know we can take out of the business. So from our perspective, we think we can turn that around and we'll continue to do so. The challenge will just be the timing of that and how quickly and how aggressively we can go after those costs because, at the end of the day, we bought this as a growth engine and an opportunity to actually have a springboard into other markets. So we've just got to balance that off, but certainly the 3 plus 3 is achievable. And then beyond FY '21, we believe there's probably a couple more as well sitting there for us to get after at least. So we think we can make it a pretty immediate turnaround in some of this, Peter.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [33]

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Okay, sure. And when you say, I guess, recovery to first half profitability levels, is that inclusive of synergies? Or will synergies come on top of that?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [34]

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It could be on top of that.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [35]

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Okay. Great. And then one other question is just on the Australian GWA business. If we look at the major customer revenue, there's a bit of revenue reported there. In particular, one of the customers, previously your third largest customer, now your fourth largest, has had a $20 million or 30% drop in sales. And I take that to be related to the tapware NPD in pcp but just hoping you could give a bit more color on what happened then with that account.

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [36]

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Yes, it's -- yes, I can. Obviously I don't want to be too specific on the phone, but they have been, I suppose, a customer that we had strong tapware growth with. And then we've actually seen a decline over the past year as we've lapped that. And I think a lot of that is down to -- probably the range wasn't the best range that we had in there that we -- that was sort of put in there through a -- through not necessarily our own choice. We're now working closely with them to rectify that range, to get things that we think are more relevant to grow that business. And similarly we now have a much stronger presence in sanitary ware in there as well. And we're starting to see that, that is also turning around the momentum in that business, so I feel positive about the change that we're starting to see within that customer. I mean -- and you mentioned then it was -- I don't know what the number you said, minus $20 million or something. So from my perspective, in Australia it was down about 9%. And just to be really clear: That's on the back of a 9% growth in the prior year. So if you went back to FY '17, it's pretty much flat with that. So tapware took it up, but then actually sort of execution in field has dropped it back down to where it was in FY '17 levels. So it's -- I'm not too sure on the 20%. And I -- my numbers there are quoting the Australian market, to be fair. So we feel good about the opportunity that, that presents coming forward in FY '20. Again, I think there's -- we've got some good momentum. We've got about half of the stores that have got sanitary ware ranged. And we think, when we see that ranging actually increase to full rollout, we'll start to see good traction coming through there over the course of FY '20.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [37]

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Okay. And the other way to think about it is, if you exclude the large decline from that customer, it implies that your revenue from the rest of your business is actually up more like 6% or 7%. I mean, what's, like, actual kind of fair representation of your business? Is it the flat revenue? Is it more like 6%?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [38]

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When you say 6% there, I think, I don't know -- are you including the Methven 3 months as well? Or you -- because I think if you looked at it just with...

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Patrick A. Gibson, GWA Group Limited - Group CFO [39]

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Underlying B&K...

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [40]

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Underlying B&K as -- Bathroom and Kitchen, as we've looked at it, we would say that, that customer would be maybe -- if that were flat, would be maybe 1% to 1.5% growth on our business. So I think, yes, we'd see growth, Peter, but we wouldn't be seeing the growth that I think you're ascribing to it there. From our perspective, though, it would be growth that is still significantly ahead of what the market was actually doing across FY '19 but certainly wouldn't be up in that 5% and 6% region. It would probably be more like 1% or 2% at the moment based on what we're seeing in the Australian market.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [41]

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Yes. Okay. And just lastly, input cost inflation -- or costs generally. Input cost inflation and spending on growth initiatives seemed to accelerate a little bit in the second half. Can you give some -- just some color on what the input costs inflation you're experiencing is and what your expectations are for full year next year?

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Patrick A. Gibson, GWA Group Limited - Group CFO [42]

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Yes, look -- it's Patrick here. We -- you'll see that the bar we showed in that EBIT waterfall was slightly negative, but it is the combination of around about $4 million of savings, approximately offset by about $5 million of costs. So we largely offset that. And some of that cost did include increased investment in marketing and A&P; flagship stores; and as Tim talked about earlier, in Caroma Smart Command. But within that bucket, we largely offset all input cost inflation, excluding FX which you see is in a separate bucket. So going forward in terms of FY '20 and your question, we are expecting a significant [on cost] in FY '20 from the weaker Australian dollar. However, we believe that, that impact of cost inflation will be largely recovered through and indeed offset through a combination of (inaudible) and additional cost savings that we will make in FY '20. So that's the major sort of in and out. And then in terms of other, if you like, cost pressure, wages, distribution, et cetera, we would broadly expect to offset inflation in those buckets through our normal sort of procurement and ongoing initiatives across supply chain. So long-winded answer. So bottom line is, in terms of sort of cost inflation, we expect to offset it. And in terms of FX, there will be an adverse impact, but we intend and expect to offset that also through cost savings and price.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [43]

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Okay. And just to double check: The corporate costs of $14 million to $14.5 million that you've called out, that's EBITDA or EBIT?

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Patrick A. Gibson, GWA Group Limited - Group CFO [44]

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Yes, that is EBIT, again largely in line with -- it was about $13.8 million in FY '19, so pretty similar sort of level as we go forward.

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Operator [45]

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Your next question comes from Raju Ahmed from CCZ Equities.

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [46]

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Tim, Patrick, its Raju Ahmed from CCZ. Just a couple of quick questions. Operating cash flow, you had a pretty solid number there for FY '19. Just thinking through it from a cycle perspective, should we factor in any negative reversion in FY '20? And also, what sort of cash conversion should we be looking at?

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Patrick A. Gibson, GWA Group Limited - Group CFO [47]

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Yes. Look, in terms of operating cash flow, I would expect at this point in time it to be relatively similar to FY '19. Obviously below that we have signaled that CapEx will be higher in FY '20 than in FY '19, but straight operating cash flow should be broadly similar year-on-year. And look, cash conversion was very strong at 115% last year. And I've commented previously that in general we aim to get something like 95%-plus on cash conversion. And that's what we've delivered over the last 4 years other than, I think, in FY '18 where there were specific reasons for that which included various stock builds and things for the innovation center move. And those have now been unwound. So again, expect it to be -- continue to be strong in FY '20, Raju.

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [48]

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Okay. So just to be clear: When you say operating cash flow to be similar, is that sort of indicating it should be around $95 million? Am I reading it too literally there?

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Patrick A. Gibson, GWA Group Limited - Group CFO [49]

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No. That's correct.

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [50]

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Okay. All right, understood. The next question is on Methven. And I noticed here you already integrated the front-end sales team. So the question here is, of the $3 million that you've sort of targeted for FY '20, how much of that is already banked?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [51]

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Well, a lot of that -- I mean, honestly, it's going to play through for the year, but I mean the 2 major areas that comes out off it at the moment because there's -- I suppose the lower-hanging fruit is obviously the listed cost which is banked already. So that's done. The second one was, as we were bringing the 2 companies together, we were holding vacancies open on -- from a people perspective. So -- and we've got line of sight of all of those where we actually won't be replacing people, where there's double-ups and what have you. So to some great extent, that is really -- it's not banked in the sense that we've already sort of got the money in the bank, but it's banked that we've got very clear line of sight in terms of how those savings will come over the course of FY '20. Some of the longer-term stuff that we see playing through will obviously then get into more contractual obligations and how do we manage putting 2 lots of distribution assets together. How do we use procurement in a better way to leverage the scale that we've now got? That will take a little bit longer to come through, but certainly the FY -- that's what we've talked about, opportunities FY '21 and beyond that we can see. But certainly from an FY '20 perspective we've got very clear line of sight on all of that, of the $3 million.

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [52]

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So if I understand it right, would it be too optimistic to say that your $3 million guidance is being conservative?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [53]

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I think it would be fair to say, look, from an FY '20 perspective, I would argue that that's probably realistic because, as I say, it takes time to get some of these initiatives in place. If you had to push me on that, I'd probably -- as I said earlier, I think you'd probably say that our NZD 5 million of synergies over to FY '21 is conservative. And that would suggest that maybe there's certainly another $1 million there, maybe a little bit more for FY '21. But beyond FY '21, I would say that there's probably at least another couple of million as well. So I think, if you look at our overall number, you could argue it's maybe a little on the conservative side. If you look at FY '20, I wouldn't want to commit to that being conservative, as I say, because it's just harder to get it out quickly.

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [54]

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Sure. Okay. 2 more, hopefully, quick questions. Tim, you talked about aged care, and I think you -- the word you used was it's nicely grown in FY '19. Can you just give us some color around what the growth rate up was or even the quantum of revenue lift from FY '18 to FY '19?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [55]

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Yes. We saw a sales growth in the region of about -- I mean, I think it's about 5%, but we actually have seen a growth in the number of projects that we won that was closer to about 40%. So we've got a fair bit of work that is in the pipeline that's coming through that actually hasn't materialized yet, but as I -- growth last year was around 5% within that segment.

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [56]

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All right. And this 40% number, when will the bulk of that come through? Will it be an FY '20 story or FY '21 story?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [57]

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It tends -- look, it's sometimes a bit difficult to be get -- be absolutely 100% clear on that, but we would expect that some of that will come -- some of it will have come through in that -- in the 5% I've just talked about. But some of it, we would expect to come through across FY '20.

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [58]

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Sure, okay. So if we take a step back and step back from all the details around the commercial, residential and R&R across both of them, would it be too optimistic at this point to say that -- and this is excluding Methven. Would it be too optimistic to say that the growth in commercial in, for example, aged care and a couple of other subsectors you talked about, would the growth in there more than offset the softness in other parts of the market?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [59]

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So it's a really good question, and I think that's how we are looking at our business at the moment to try and get a handle on that. I mean I think what we're seeing ourselves is that we can look to see a top line for FY '20 that is at or ahead of FY '19. And I think a lot of that's how do we continue to outperform in Australia relative to the market. Caroma Smart Command is a big part of that. Aged care is a big part of that and -- but it will be -- I think it will be dependent on the degree of drop that we see in the market, but certainly from our perspective we would like to believe that through what we're doing in Australia and New Zealand that we can start to see some momentum coming through there. Coupled with some international growth, we'd see a top line revenue that's ahead of FY '19. That's what we're looking at, at the moment. It is a bit challenging there, Raju, because getting a real handle on where the market is going to go to in FY '20 is the challenging piece, but certainly from our perspective we expect to be -- whatever the market does, we expect to outperform the market. And we expect -- subject to the market being where is it at the moment, we'd expect top line to be slightly ahead of where it was in FY '19 as well overall.

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [60]

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Okay. Very good. And look, the very last one and more of a -- I don't want to call it a crystal ball-type question, but given you've now got some ambitions in Asia and U.K. but noting that they are still very small contributors, as an analyst, how do I think about the geographic spread in revenue maybe on a 3- to 5-year view? Does U.K. 12% -- 6% contribution become 12% contribution? Can you just give us a sense of what that pie looks like?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [61]

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Yes. I mean, look, one of the things that we said strategically is that what was attractive about the Methven acquisition was it gave us a platform to diversify away from the Australian market. That still holds true, and we'd -- so from that perspective I think the U.K. will continue -- we've -- our expectation is that market will continue to grow at mid-single digits over the course of the next, what you said, 3 to 5 years would be our expectation. We've got a relatively low share over there. So it's not like we're hunting in a constrained market from our perspective, regardless of what the macro themes are over there. We're still relatively small. So we would say that being mid- to sort of low mid-single-digit growth -- or mid- to high single-digit growth, rather, in the next 3 to 5 years. The big unlock has got to come in Asia. And we're still finalizing our plans there, but that's where $3-odd million of revenue last year in a business that doubled, we've got to see substantial increases coming out of Asia. And we think that's a real possibility for us.

The trick will be, I think, I'd say, for us to hunt for those opportunities in segments where we believe we can actually win. I've got no desire, and I say it was reinforced when I was at a week up in China recently. I've got no desire for us to even consider going head-to-head with the global big players around that consumer space. We can't win there because we don't have the investment and the deep pockets to actually build a consumer franchise. Where I think we can do particularly well in Asia is actually selectively targeting higher-end commercial opportunities and be that offices, be that sort of education, be that multi-res and actually targeting specific opportunities in that higher end against -- in that commercial space. That's where we have our biggest opportunity up in Asia, and certainly that's the way that Methven has started to look at their business. And I think, given our strength in commercial, we can start to help them expand that and invest at a faster rate with them in Asia. In terms of the dollars, it's pretty hard to put a prediction on where Asia is going to be, but certainly you've got to expect that this business is going to have to double every year for the next 3 years to be even -- it's not a -- $3 million, it's chicken feed at the moment, but it is a good platform to grow from.

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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. Salt for closing remarks.

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Timothy R. Salt, GWA Group Limited - MD, CEO & Director [63]

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All right, I just want to say thank you very much for your time this morning. It's appreciated. And for those of you we're catching up with over the next couple of or the next few days, we look forward to seeing you shortly and talking more about what I think has been a very solid result for GWA. Thanks for your time. Appreciate it.

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Patrick A. Gibson, GWA Group Limited - Group CFO [64]

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Thanks, everybody. Bye.