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Edited Transcript of GWA.AX earnings conference call or presentation 16-Feb-20 11:00pm GMT

Half Year 2020 GWA Group Ltd Earnings Call

Brisbane, Queensland Mar 2, 2020 (Thomson StreetEvents) -- Edited Transcript of GWA Group Ltd earnings conference call or presentation Sunday, February 16, 2020 at 11:00:00pm 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 & Executive Director

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Conference Call Participants

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* Chloe Lim

Crédit Suisse AG, Research Division - Research Analyst

* John Hynd

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

* Lee Power

CLSA Limited, Research Division - Research Analyst

* Mitchell Sonogan

Macquarie Research - Analyst

* Raju Ahmed

CCZ Equities Pty Limited, Research Division - Equities Analyst

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Presentation

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Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [1]

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Thank you. Good morning, ladies and gentlemen. Thank you for joining us on the webcast or conference call for GWA's financial results for the half year ended 31 December 2019. As I said, I'm Tim Salt, GWA's Managing Director. I'm joined today on the call by Patrick Gibson, GWA's Group CFO.

Just before we begin, I want to draw your attention to the disclaimer slide. As most of you will be aware, companies are now required to adopt the new accounting standard, IFRS 16, on leases. We've adopted this standard for this half. We've also restated the results for the prior corresponding period to apply the same standard.

Therefore, unless specified, all results in this presentation include the adoption of IFRS 16, and a reconciliation outlining the impact on results is included on Slide 27 in the Appendix.

For today's results presentation, I'll first provide an overview of the 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, together with an outlook for the full year FY '20.

On Slide 5, let me start with a summary of our result for the half. In the context of what's been a weaker Australian residential construction market, GWA has delivered a solid result. We delivered on our first half earnings guidance provided at the AGM despite the market remaining tough in the second quarter. As some of you might recall at the time of the AGM, we had anticipated that in the second quarter, there will be at least a partial reversal of the trade destocking experienced in the first quarter. That did not eventuate and indeed further destocking occurred across most customers. This destocking and the challenging Australian residential sector impacted revenue in the second quarter.

Outside Australia, we grew revenue, and that demonstrates the increased potential we have to further diversify our revenue base following the acquisition and integration of Methven.

Given the overall weak conditions, we accelerated our cost-saving initiatives and Methven synergies, and together, these efficiencies helped to mitigate a significant amount of the revenue decline in the first half.

Our strategy remains on track. We maintain market share in the form of GWA Australian Bathroom & Kitchen business, while our overall Australian group market share has increased as a result of the Methven acquisition. Our relationships with trade partners continue to improve through joint business planning and core range extensions. And we continue to drive growth in Commercial segments through increased collaboration with secondary customers focused on opportunities, including Aged Care and Commercial Renovation and Replacement.

So while the first half has been challenging, we have made good progress through operational discipline in ensuring the business is more resilient and better positioned for when the Australian market improves, which we anticipate in early FY '21.

We continue to invest in revenue-enhancing and cost-out opportunities. These include the rollout and extension of Caroma Smart Command, continued investment in our core brand portfolio to enhance our engagement with consumers, and particularly, in the key Renovation and Replacement segment. And we also opened new distribution centers in Queensland, Victoria and Western Australia in the first half.

Guidance for the full year, therefore, remains unchanged with normalized EBIT expected to be within the $80 million to $85 million range.

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

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Patrick A. Gibson, GWA Group Limited - Group CFO [2]

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Thanks, Tim. Slide 7 provides an overview of the group results for the year. And just to be clear, on this slide, these are group financial results from continuing operations, which include revenue and earnings from Methven in first half FY '20, but exclude Methven earnings in the prior period when we did not own the business. Continuing operations also exclude the Door & Access Systems business, which was sold on

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2018. These are normalized results. They exclude significant items relating to costs associated with the integration of Methven.

Group EBIT of $38.1 million was within the $37 million to $41 million guidance range we provided at the AGM in October last year. And group EBITDA was up 4.3%, that is due to the inclusion of Methven earnings and slightly higher depreciation in first half FY '20.

Net profit was down 8.2% on the prior period, primarily due to lower earnings and increased interest costs on the debt related to the acquisition of Methven. The decline in return on funds employed reflects lower earnings and an increase in funds employed, primarily goodwill from the Methven acquisition.

Our financial position remained strong, and that has enabled the Board to declare an interim dividend of $0.08 per share, fully franked, which will be paid on the 4th of March this year.

On Slide 8, you can see the result from continuing operations on a pro forma basis. Just to be clear, on this slide, pro forma means including revenue and earnings from Methven in first half FY '20 and also in first half FY '19 as a comparison, even though we did not own the business during that period. These are normalized results. They exclude significant items relating to costs associated with the integration of Methven. Revenue reflects the continued decline in residential new build and renovation construction activity in Australia and also as a result of trade destocking in the first half. First half FY '19 also included a strong Methven Australia result due to pipeline fill. These impacts were partially offset by the ongoing strength in commercial activity and an increase in our revenue in New Zealand and international.

Of the $13 million EBIT impact resulting from the decline in revenue, we were able to mitigate about $8 million through operational discipline by accelerating our cost savings initiatives and through driving higher-than-anticipated synergies from the Methven integration. That has helped to maintain EBIT margin at around 18.5%, a good result in a challenging market.

We have said consistently that our aim is to maintain EBIT margin in the former GWA Bathroom & Kitchens business at around the 24% to 25% level, plus or minus 100 basis points, depending on market conditions. Despite the challenging market in the first half, we have managed to maintain EBIT margin in that target range.

The ROFE decline reflects a combination of lower earnings and the increased goodwill related to the acquisition of Methven.

Slide 9 shows the slowdown in residential construction activity in Australia, which has been well documented, and we saw that particularly pronounced in detached and multi-residential construction in the first half. For the half year ended December 2019, these segments declined 12% and 14%, respectively. Typically, the Residential Renovation and Replacement segment is more stable. However, the significant decline in the number of existing houses being sold was a key factor in the decline in the Residential Renovation and Replacement segment over the period.

Commercial construction activity remains relatively strong, primarily along the East Coast. However, this was insufficient to fully mitigate the large decline in residential activity for the period.

In total, we estimate a decline of approximately 6% in our addressable market in Australia for first half FY '20.

Market share for the GWA Australian business excluding Methven was steady for the period at just under 21%, and our total share of the addressable market, including Methven, is now 23.2%.

Slide 10, segment's group revenue by geography on a pro forma basis. That is, again, including Methven for the prior corresponding period. We've already spent some time discussing the challenging Australian residential construction segment and trade destocking, and you can see the impact on revenue here.

Let me turn now to markets outside Australia, and here, the picture is brighter. At the time of the Methven acquisition, we outlined one of the key benefits being the increase in the geographic diversity of our revenue and earnings. We now have 21% of our business outside Australia compared to 7% prior to the acquisition of Methven.

New Zealand revenue was up on a pro forma basis, and that reflects a solid performance from both Methven and GWA's existing business. Methven is now in growth in New Zealand after going backwards for 3 consecutive years.

And international sales increased solidly across both the United Kingdom and Asia and were up 7% and 26%, respectively, on a pro forma basis.

You will be familiar with the waterfall chart we typically present to set out the key drivers of earnings over the period. And just to be clear on this slide, this includes Methven in first half FY '20, but not in first half FY '19.

Volume and mix. As we've already discussed, volumes were impacted in Australia by market conditions and trade destocking and this was slightly offset by improved mix. We continue to focus on higher-margin segments such as Caroma Cleanflush, which assists mix. Cleanflush sales increased 11% on the prior period and Cleanflush sales now account for 36% of all GWA toilet suite sales.

We took a 2.5% price increase from 1st of November last year and we expect to see more of this flow through in the second half. The average spot Australian-U. S. dollar rate was $0.68 in first half '20 versus $0.73 for the prior period. But through our foreign exchange hedging, we were able to mitigate most, but not all of the impact from the weaker Australian dollar in the first half. And for the full year FY '20, we expect the benefit from price to broadly offset FX costs.

Net cost changes of $8 million highlight ongoing cost discipline across all lines of the P&L, for example, travel, consultancy, head count, et cetera, and also the significant progress we made during the period to accelerate cost savings as part of our $9 million to $12 million cost-out program across FY '19 to FY '21. We delivered $3 million savings in first half FY '20, ahead of the $2 million target.

Together, these savings have more than offset both input cost inflation and enabled increased investment in growth initiatives, such as marketing spend, Caroma Smart Command and warehouse and office consolidations as part of the improvement to our distribution network.

The final green bar on the chart shows the contribution from Methven. I'll talk further about this on the next slide. As I said earlier, synergies remain ahead of target, and this includes around $1 million of synergies captured in the first half, offset by approximately $400,000 in adverse Methven-related foreign exchange impact.

Having just mentioned Methven, let me provide some further commentary. We acquired the business in April 2019 and have been progressing our integration plans since that time. We're pleased with how the integration is proceeding and the further diversification and capability Methven brings to our business. Methven earnings improved 50% from the second half of last year with a solid performance in New Zealand and improved market share in the United Kingdom and continued growth in the Asian business. In Australia, Methven experienced challenges as well as lapping a significant new product development pipeline fill in 1 major customer in the prior corresponding period.

We implemented our go-to-market strategy with a single integrated sales team in Australia and New Zealand, each selling our total combined portfolio, and that is assisting in an increase in ranging of Methven products by leveraging GWA's customer relationships and national presence. And in Asia, we have launched our full bathroom offering. This has been delayed in the United Kingdom due to new regulatory requirements.

Methven synergies are exceeding our initial targets with $1 million captured in the first half, and we expect to deliver $3 million in synergy savings for the full year.

Given the traction to date, we now expect to exceed our initial target of NZD 5 million in synergies and expect to deliver at least NZD 6 million in integration synergies by 2021.

Turning now to cash flow from operations on Slide 13. Again, just to be clear, we have presented this on a pro forma basis, and that is including Methven for the prior corresponding period. Pro forma cash flow from operations was $42.2 million for the first half compared to $56.6 million for the prior period. The decline in EBITDA and also an adverse change in working capital due primarily to the timing of stock build in advance of the Chinese New Year and stock build in preparation for warehouse consolidations in Australia were the main reasons for the decline. However, cash generation remained strong with a cash conversion ratio of 88% for the half.

Capital expenditure for the half was $8.2 million in line with our previous guidance, and the main drivers of CapEx were for 3 warehouse and 2 office consolidations with Methven, continued investment in Caroma Smart Command and IT investments.

Tax payments reduced in the first half due to a top-up payment made in first half FY '19 in GWA.

On Slide 14, you can see that GWA remains in a strong financial position. Net debt as at 31st of December was $156.6 million compared to $141.9 million as at 30th of June 2019, which included the acquisition of Methven in April.

In October last year, we successfully completed the refinancing of our syndicated banking facility. This comprises a single 3-year multicurrency revolving facility of $210 million, which matures in October 2022. We've also put in place a $40 million 1-year multicurrency revolving bilateral facility, which matures in October 2020. GWA's credit metrics remain consistent with investment grade, as you can see on the slide.

I'll now hand back to Tim to take you through the progress we're making on our water solutions strategy.

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

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

So on Slide 17. First, an update on our innovative intelligent bathroom system, Caroma Smart Command. The momentum behind this system continues to build and we're very encouraged by the continuing strong reception in the market. A study by Norman Disney Young (sic) [Norman Disney & Young], a leading global sustainability engineering group, shows the system can save 25% of the water used in a commercial building. In addition, Caroma Smart Command was awarded Best in Class and Design Team of the Year 2019 Good Design Awards. The Design Team of the Year award is considered the benchmark award for design and innovation in Australia.

More importantly, the system has now been installed in 36 sites across both Australia and New Zealand with a solid bank of additional projects in the pipeline for the second half. To date, 16 sites have been migrated to our new cloud data capture solution with further migrations expected in the second half. Importantly, this is a first small step to create an ongoing fee-for-service solution. We are on track to launch additional complementary products to further enhance the offering over the course of FY '20. That includes the intelligent shower that could be programmed for temperature and duration and an intelligent shutoff valve that can detect a water leak and instantaneously shut down the water supply if required. These will launch in Q4 FY '20.

We are working through international expansion options for Caroma Smart Command through GWA-generated leads and also from leveraging Methven's footprint across Southeast Asia and China with assistance from Austrade and New Zealand Trade and Enterprise. Our first international pilot will occur in Asia in Q4. The system will also be showcased at Expo 2020 in Dubai. Around 20 million people are expected to attend the Expo, which provides significant international exposure for this groundbreaking solution.

As I said at the start of this presentation, we continue to implement our growth strategy. Our cost savings initiatives have enabled us to continue our investment behind our core brand portfolio. Investment in new product development, marketing, advertising and promotion increased on the prior period. This is a critical component of our strategy to engage with consumers, particularly in the Residential Renovation and Replacement segment. We launched the Caroma Elvire range, which is a premium bathroom collection supported by an extensive media campaign across outdoor, online and TV.

At our 2 flagship stores in Adelaide and Sydney, the key metric of foot traffic continues to improve, and sales conversion rates continue to exceed our expectations. These stores provide a compelling physical brand and product experience for consumers and customers, including key influencers, such as architects and aged care facility providers.

Methven has launched new products into the market in New Zealand, Turoa colored tapware and the Nefa II and Fast Flow II valves. This is part of Methven's continuing focus on product innovation.

In February, Methven won an International Forum Design award for the Turoa shower, which is a prestigious international design award, which highlights the IP inherent in the Methven shower technology.

Slide 19. Some of you will recall the progress we're making to improve our supply chain: simplifying the business, removing costs and improving service. Last year, we opened a new distribution center at Prestons, New South Wales. To complement that opening, we are consolidating our distribution network to 4 key distribution centers in New South Wales, Queensland, Victoria and Western Australia. This will enable 1 order and single invoicing across the combined GWA and Methven portfolio and improve our customer service, and this provides the base for improvement in operating efficiencies in FY '21 and beyond.

Our superior water solutions strategy remains consistent. For the second half, we're focused on some specific areas and these include, from a customer perspective, to continue joint growth plans with our key primary merchant customers and increasing our penetration with secondary customers in targeting specific growth segments such as aged care, health care and commercial renovation.

We will continue to leverage GWA's strong customer relationships in Australia to further increase ranging of Methven products to grow the business here and increase penetration of Caroma Smart Command. We will also continue to grow our total bathroom portfolio in international markets.

From a consumer perspective, we continue to leverage the increased investment in Caroma brand initiatives and new product development, including Caroma Elvire to drive growth. And we'll continue to drive Caroma Cleanflush, which is delivering mix improvement and drive performance improvement in our flagship stores.

From a cost efficiency perspective, we'll continue the acceleration of our $9 million to $12 million cost-out program, maintain the over-delivery of Methven cost synergies with at least NZD 6 million expected by FY '21, and as I said earlier, to drive operating efficiencies and enhance customer service.

Slide 21 illustrates the progress we've made over the past few years as we have divested noncore businesses and focused on water solutions. Over this period, we've grown revenue and also improved EBIT margins. We're strongly positioned for when the Australian market improves.

On Slide 22, a summary and outlook for the full year FY '20. We expect trading conditions to remain challenging in the short term. However, forward indicators, including population growth, low interest rates, easier access to credit and housing supply and demand moving back into balance are expected to provide a solid platform for growth.

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to see house price increases, improving existing housing turnover and early signs of improving residential housing construction activity, support an anticipated improvement in market conditions in early FY '21.

In the Commercial segment, our forward order bank remains strong and higher than both the prior corresponding period and higher than June 2019. As I said earlier, the continued implementation of our strategy means GWA is well positioned to deliver revenue and earnings growth as the market recovers. That includes enhanced revenue opportunities through continued development and rollout of Caroma Smart Command, growth in Commercial segments and increase the Methven brand availability. We've got additional scope for further cost savings and Methven synergies, which are higher than initially expected. And our realigned cost base and network efficiencies provide increased operating leverage and enable continued investment in growth initiatives through the cycle.

We expect to see our continued growth in our international operations, both Asia and the U.K., in the second half. As we announced at the AGM in October, we expect earnings in the second half will be higher than the first half.

At this stage, we do not expect any material impact in FY '20 from the coronavirus. We obviously continue to monitor the situation closely.

2H FY '20 will also benefit from the price increase of 2.5%, which was implemented from the 1st of November; the continuing delivery and acceleration of the Methven integration synergies; and further acceleration of supply chain and SG&A cost savings. So we're well positioned for when the market improves.

For the year ended 30th of June 2020, the GWA maintains its previous earnings guidance for normalized EBIT pre-significant items to be in the range of $80 million to $85 million.

Now ladies and gentlemen, that concludes the presentation. We are now 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 Lee Power from CLSA.

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

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Just on the destocking. So there's further destocking into the second quarter. You had expected some restocking. What, if any, do you assume in the second half? And what's built into the guidance?

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

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Thanks, Lee. Good question. We, at the moment, are suggesting that there will be minimal destocking in the second half. So the way we explored about it is to assume that, in a way, business will carry on as it has in the first half in the sense that, I think, what we've seen in the second quarter was that there was a further deterioration in market conditions. And as a result of that, I think it's fair to say our merchant partners and customers are looking forward to their business and we're somewhat concerned about what they were seeing as their future demand and

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So I think at the moment, we can expect to see probably minimal rebalance of that in the second half, and that's the basis on which we planned our second half.

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

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Okay. And so just thinking on that basis, I mean, inventories would -- looked elevated. I know you've called out some timing issues. So we should expect them to remain elevated into the back end of the year?

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Patrick A. Gibson, GWA Group Limited - Group CFO [5]

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Lee, it's Patrick. We would expect inventory to broadly end the year in line with where we ended June '19. It's a factor really of those things I called out: the earlier timing of Chinese New Year, the fact ports closed for Christmas in Australia, we brought in a bit more stock earlier than in the prior period and then coupled with those 3 warehouse moves. So we expect that to, if you like, return to similar levels to June by the end of the period.

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

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Okay. So -- and when you talk about no current material impact from coronavirus, was that -- I mean, was it the high inventories that you're already carrying that mitigated that? Or is there something else going on?

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

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I think there's a number of places having that. So obviously, demand was slightly softer than we anticipated in the first half, so that in itself suggests we're carrying a little bit more stock than we anticipated on top of the reasons that Patrick just articulated as well around bringing a bit more stock in because of Chinese New Year.

There are some other things I think that we also get the benefit from, and that is that with our supply partnership model, we will -- as they reopen and start to ramp up volumes, we will get priority with those supply partners, which is a benefit for us. If the market continues to be challenging, in terms of China access continues to be a problem, we can also draw on component availability out of other markets, particularly into Europe, where we can access plastics and shower hoses and the like. So that's a benefit, I think, that we have that perhaps many of our competitors won't have.

The other thing we've talked a lot about over the past few years is the dual sourcing as well and how we think about where we make our products, so we can turn that on as we need to. But at the moment, there's not a necessity to do that. We're waiting to see, obviously, like everybody else, how this -- the whole coronavirus will play out. If that does play out adversely, then we'd go to our plan B and enact some of those changes to our supply chain. So from our perspective, we believe that we're well positioned to manage through the sort of challenging situation at the moment.

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Patrick A. Gibson, GWA Group Limited - Group CFO [8]

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And Lee -- I'd just add, Lee, that while inventory is up versus June, that's the typical seasonal pattern that we see in this business. And actually, if you look year-on-year on a pro forma basis, it's slightly down. So I don't -- I wouldn't say it's necessarily high.

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Lee Power, CLSA Limited, Research Division - Research Analyst [9]

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And then just one more question, if I can. So Cleanflush has been a key driver on the Bathroom & Kitchen side. I mean, sales were 11%, but it looks like that growth rate's slowing. So I think you did 24% sales growth for Cleanflush in FY '19. How should we think about that growth rate going forwards?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [10]

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Look, you're right. I mean, it's like anything, if it gets bigger than its growth rate, it's slowing. From our perspective, we still expect it to be the key driver of growth within sanitaryware. So I think there's 2 parts to this. One is the revenue growth that drives, but also the important thing, as Patrick referenced, was the mix improvement that we see from Cleanflush relative to the rest of our toilet suite range. So from that perspective, we will continue to focus on the Caroma Cleanflush and we would expect to see that continuing to grow into the next year, particularly now as we move a lot of the Caroma non-Cleanflush variants actually into Cleanflush. So it starts to become the norm, if you like, and we would hope that the expectation is that by the FY '21, towards the end of that year, we'll actually have transitioned pretty much every Caroma SKU into Cleanflush. So there's a benefit there that we believe is worth going after.

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Operator [11]

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Your next question comes from Mitch Sonogan of Macquarie.

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Mitchell Sonogan, Macquarie Research - Analyst [12]

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Tim and Patrick, just wondering if you could provide a bit more color, I guess, on the performance of Methven from a revenue perspective in Australia? Maybe touch on the challenges you might be seeing in the outlook in the second half?

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

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Yes. Look, I think the overriding statement, which would be that Methven has been, I suppose, caught up in the challenging market conditions in the first half and that is obviously -- that's played through to the revenue side of things. From my perspective, on that one, I think what we really should look at here is I think the fact that actually in its major customer, which is what I've talked to now, that we're actually seeing the sales out of Methven product out of that customer have actually been growing across the first half, which is a real positive. However, the challenges that we're lapping a significant pipeline fill from FY '19 with new products that went in that, obviously, that inflated the prior year and you don't get the benefit of that in the current year.

So from that perspective, that's been the key challenge, if you like, in terms of the first half.

As related to one of the things that we've talked about with Methven is how do we use GWA's relationships and strength to broaden out ranging or availability of Methven, that's underway as we speak. We've had some progress there, but we would expect that -- to see that accelerate in the second half through some of the customers where Methven previously didn't have a strong footprint.

So from that perspective, we actually think there is some good green shoots in the second half for Methven. And I think the context of what we ended up delivering in the first half was a pretty positive story when you think New Zealand turning around, getting back into growth for the first time in 3 years, we've seen synergy benefits play through. So overall, strength there. And then obviously, in the U.K., continued momentum. In the U.K., in a market which is going backwards 2% or 3%, Methven actually ended up growing 7% over there, which I think is a very strong performance. And similarly, off the low base in Asia, grew 26%. So I think there's some -- there's plenty of good revenue sort of context there. But I'd say, Australia was a challenge, but we expect to see that normalize more in the second half.

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Mitchell Sonogan, Macquarie Research - Analyst [14]

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Okay, great. And maybe just on the R&R market, you've combined the commercial and residential, but maybe down 5%. Can you maybe just give us a bit more color across what you're seeing in the residential market there? And maybe any feedback from what your customers are seeing in the forward expectations?

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

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Yes, it's been an interesting one, actually. And I think in the back of the presentation, we've actually provided a chart on existing housing turnover on -- if we look...

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

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31.

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

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Page 31. Thank you. And I think if you look at that, the -- so existing housing turnover seems to be the best indication of demand for Renovation and Replacement within that Residential segment. And that has been really challenging over the course of the -- pretty much the whole of 2019. House prices declining, people not wanting to move and that's been quite an impost on what's happened in that Residential Renovation and Replacement segment. That's played through, obviously, then to customer and how they're seeing the opportunities within that segment as well. And that's -- I think, partially, the forward look on that is that the destock has driven some of that as well -- or been driven by that, rather.

The encouraging piece, I think, on that one is that we've already started to see a bit of an uptick in existing housing turnover and I think that's on the back of the fact that capital city house prices have started to increase, so we're starting to see some momentum there and that in itself is a positive. So we think that we're probably going to see some uptick in the second half, but it won't necessarily get back up to flat in the second half, but we would certainly expect, as housing turnover increases into Q1, Q2 FY '21, that we'd see some uptick in renovation there.

The piece that I think is also worth just recognizing, as you said at the beginning, this was a -- it's a combined number. We have actually seen pretty good growth in the Commercial Renovation and Replacement segment on the back of a more robust segment, which is obviously one that we've been focusing on. So we see some upside in that going forward. That's been -- that segment was actually slightly up in the first half, and we think that momentum will continue through in the second half as well.

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Operator [18]

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Your next question comes from Chloe Lim of Credit Suisse.

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Chloe Lim, Crédit Suisse AG, Research Division - Research Analyst [19]

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First off, just wondering if you could help me understand...

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Operator [20]

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Pardon me, Chloe. You may have to pick up your handset if you're on a speakerphone, please.

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Chloe Lim, Crédit Suisse AG, Research Division - Research Analyst [21]

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So first off, I was wondering if you could help me understand, on Slide 11, you call out $8 million of cost-outs, which $3 million from your efficiencies and perhaps the $1 million of synergies in there, too. Just wondering if you could help me understand where the other $4 million to $5 million of savings is coming from and whether we can expect this to recur going forward?

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Patrick A. Gibson, GWA Group Limited - Group CFO [22]

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Sure, Chloe. I'll maybe start with that one. So, yes, it has $3 million of savings in there that relate to the $9 million to $12 million cost-out program. It does not have the $1 million that you mentioned of Methven synergy savings, they're included in the $3.8 million bar that depicts Methven. So other savings that we've generated have really come through what I would call just operational discipline, predominantly, which is tight control of really all cost lines in the P&L. So given the market conditions, especially here in Australia, we, if you like, have cut back on certain discretionary spend but also just basic things like travel, consultancy, noncritical vacancies that don't relate to growth in the short term and a whole raft of items like that. So it's basically lots of small items.

In terms of will it continue, yes, we will continue to tightly control cost in the second half and that's obviously part of the reason that we're confident in the guidance that we've given for the full year.

The important thing is that, notwithstanding the positive savings there, we've continued to invest in the strategic initiatives that will drive medium- to longer-term growth. So we have spent more on A&P in the first half than in the corresponding period. A&P is up about $1.5 million. We've invested another probably $0.75 million to $1 million in Caroma Smart Command as we continue to expand the portfolio and the distribution of that. So those are really the main investment items that we continue to drive. So we're really cutting back on things around the edges that won't deflect growth, but will obviously help to offset the difficult top line conditions we have in Australia. I don't know if you want to add anything, Tim?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [23]

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No, that's exactly right.

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Chloe Lim, Crédit Suisse AG, Research Division - Research Analyst [24]

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Okay. Great. That makes sense. But if you are seeing an improvement into perhaps the start of FY '21 or even FY '22, you may see some of those costs come back.

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

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Yes. Look, I think that's fair. Having said that, as you know, the cost-out program goes to FY '21 as well and that's the second sort of 2, 3-year cost out program we've had and doubtless there'll be another one. So we will continue to drive other savings to offset cost and enable investment in the business. I mean, we've always said, as you -- I'm sure you'll recall, that we will maintain our EBIT margins for the business within a fairly narrow band of sort of plus or minus 50 to 100 basis points, and we will continue to do that through flexing, cost-outs, price and levels of investment and obviously recognizing whatever FX on costs we have at the time.

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Chloe Lim, Crédit Suisse AG, Research Division - Research Analyst [26]

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Yes, great. Okay. And then on Methven, on the last call, you previously talked about NPD delays. It seems like they've mostly been rolled out now, I think you called out 3 last time. You previously talked to around $7 million to $8 million benefit from the NPD that you would expect. Should we be looking for step change in volumes or margins into the second half? Or how much did come through the first half?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [27]

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I don't recall that we actually made any statement around what we would get out of NPD -- specifically on NPD. I think what we said at the time was that this time last year, the way we were looking at the business was to improve its EBIT margins from what was roughly 6% to 7% at the end of FY '19 that we would -- we said take the first half, double that and then add $2 million of synergies was the way that we talked about it to get us to about $10 million and about a 10% EBIT margin. We're slightly in some ways behind that by virtue of the challenging Australian market conditions. But certainly, we still see that as our short-term goal to get to that $10 million/10% EBIT margin. So we will see the improvement. A lot of that is driven by the first half. We set out Methven synergy to $1 million, we expect see $2 million coming out into second half incremental and then a further $3 million in FY '21 as well. So we're certainly that -- our longer-term, medium-term goal was to get us to those mid-teens EBIT margins and that's certainly where we expect to be.

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Operator [28]

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The next question comes from Raju Ahmed of CCZ Equities.

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [29]

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Tim and Pat, I've got a couple of questions here. The first one is just going back into the destocking side. Tim or Pat, can you just give us some color on what is -- or what has been destocked in terms of the product types? Is it primarily from Methven or GWA Bathrooms & Kitchens or is it across-the-board?

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

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To be honest with you, it's pretty much across-the-board at the moment. It's not specific to 1 particular brand or 1 particular segment. It's just -- I think our customers are sitting there saying, "Jeez, what does the forward order actually look like? What do they think their demand is going to be over the next few months and then cutting back accordingly?" So I wouldn't point you to 1 specific area. We've seen the impact happen across both Methven and what you'd call the old GWA business. The point I would make is that it's primarily an Australian challenge, not necessarily anything that we've seen happening either obviously in New Zealand or the U.K. to the same extent.

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [31]

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Sure. Okay. Now it's probably too early a question going into the second half, but have you seen signs of restocking restarting? Or has it basically plateaued at current -- at exit levels from the first half?

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

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Yes. Look, to be fair, Raju, I don't -- we've planned that second half and expecting minimal restock because I think until we start to see the market turn, what we're seeing is that stock levels will be reduced and as I say, we're not expecting to see a significant change in stocking levels in the second half. We think that as the market comes back in the first -- early FY '21, that we think we'll start to see a restock then as customers start to look at their forward position, get more confidence about the opportunities that are ahead of them and then start to put more stock into trade to cover their customers' demand. So we think it'll play through in that way, but we're not expecting to see a significant change in stocking levels in the second half of this financial year.

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [33]

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Okay. The second question was around the guidance, $80 million to $85 million. Now you've got a reasonable amount of cost-out or cost management planned. What I'm trying to get a sense of is I suppose what is your confidence with or what is your visibility with regards to the revenue outlook for the balance of this financial year? Put it another way, how heavily reliant are you on cost-out to achieve the bottom end of guidance? Or have you got enough confidence, I suppose, on the revenue side that you might not need to rely too much on the guidance to achieve -- too much on the cost-out to achieve the minimum end of guidance? I know it's a bit of an open-ended question here but just trying to get your sense of it.

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

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Yes. Look, it's a good question. And to be honest, it's one that we look at internally about how we manage that trade-off between revenue and cost-out. And it's -- outside from our perspective, the way we look at it is we'd say, what do we think will happen in the market in the second half, and therefore, what is the implication on that for us, what we think will happen with stocking levels. So from our perspective, in some ways, the second half comps are a lot easier than the first because first half FY '19, the market was actually still growing. It was only around Christmas sort of 2018 that the brakes really came on. So we're starting to see -- we'll be lapping as we go into the second half of this financial year a lot easier comps than we had in the prior half. So from our perspective, we think that the revenue line is a little bit more forgiving, if you like.

We also think that the benefit that we get, hopefully, sort of trade have taken their stock out at the moment. We don't expect that to come play through in the second half in the way it did in the first half.

So we think that the revenue comps are a little bit easier. And then on top of that, we -- as we said earlier, we're taking price -- we took price in November. The benefit of that will play through into the second half as will the strength of our Commercial order bank. So our order bank compared to where we finished FY '19 is actually currently up over 10%. So those jobs will get called off at some stage and that gives us confidence that we'll start to see continued momentum in our Commercial business in the second half.

So I think there are plenty of things working for us with regard to the revenue side. But like anything, we can't control that. And back to what Patrick talked about earlier, the cost discipline has to play through. We have to make sure we're creating space in our P&L. If we do that, we will then -- and we believe that the revenue is stronger, we'll do 1 of 2 things: you either take it to the bottom line on what you do with your cost or you reinvest back in the business for future growth. And that's no different from how we've treated it over the past few years. It's just in -- probably just in a 6-month cycle at the moment versus the full year.

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Patrick A. Gibson, GWA Group Limited - Group CFO [35]

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Controller control.

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

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Yes. I'm sorry, is there anything you want to...

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Patrick A. Gibson, GWA Group Limited - Group CFO [37]

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No. I think that's...

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [38]

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Okay. And the last question was just going back to the coronavirus or COVID-19, whatever it's called now. Just trying to understand the supply chain impact, if any. Tim, you mentioned that you've got the option to source certain parts from Europe, if it ever came to that. And you also mentioned something about competitors not having that ability. Just trying to get a sense so can you provide a bit more color on that: one, what did you mean by that; and two -- I mean, if it came to a scenario where we -- you had to source from elsewhere, I mean, surely, your competitors would be doing the same thing. So there's the supply chain pressure just being moved away from one area to another.

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Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [39]

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Yes, let me maybe try and chunk that down a bit. I mean, the first thing to say, as Patrick said, because Chinese New Year was at the end of January this year rather than early Feb and given how the ports operate in Australia, we knew we had to bring a little bit more stock in before the end of December anyway. So that, coupled with the fact that our revenue was soft in the first half means that we're carrying more stock than we would have expected to otherwise. So we've got the benefit of that, both in Australia and New Zealand. And actually, the same is true in the U.K. So we're sitting on good levels of stock at the moment. I wouldn't say high, but I'd say, good levels of stock, which gives us confidence around being able to meet customers' needs. So that's the -- I suppose the near in -- if the ports remain closed, we could see that carrying us through to the second half of the year okay.

The piece that's happening now, though, is obviously our supply partners, and I stress the word partners, are actually now gearing up, they're going back to work and actually starting to ramp up their factories. Some factories are probably running at 30% efficiency at the moment -- or capacity. Others are probably ramping up to 70% or 80% at the moment, but probably very few of them are running at 100%. But what we do know is that given the relationships we have are long term, and we actually have partnerships rather than just transactional stuff, is that we will actually get priority in those plants. And we've had that reassurance and commitment from a number of our partners that when the ports do reopen that there will be stock available that they can ship pretty quickly. Some of our competitors, and I don't -- I'm not going to talk about who, but some of them may not be in that same situation because their relationships are more transactional. So from that perspective, we believe we get real benefit out of that. And obviously, within those plants, we are exclusive within Australia and New Zealand. So nobody else can go to those same plants and draw down their product.

Even if they could, Raju, the challenge is that the time it takes to create molds and actually do tooling and machining. It's -- you're talking, in cases, it could be 3, 4, 5 to 6 months before you even get to trialing some of these things. So unless you've actually got a contingency plan in place now, you won't be seeing any impact on that for 6 months. So even if somebody did go and find another factory anywhere in the world, they've still got probably 6 months to get the thing into the country so there's some challenges there.

The third piece then is that one of the biggest issues is not so much if you take sanitaryware and you take the system. The issue may not be so much around the ceramics as it will be around the plastics and the components that go in there from the flushing mechanisms and what have you. So we've actually got the ability to change supply source out of Asia and get some of those things made in Europe, should we need to. And that's all part of our dual sourcing strategy, which also means that we have the benefit of having -- take one of our big lines like Care 800, which is our best-selling and very profitable bathroom toilet for the care and aged care sector. We can get that made in China or we can get that made outside China because we already have the capacity and the molds ready to go on that one. We chose not to do that at the moment, but we have that option should we need to do that. So we have an ability to flex where we make things at the moment, be that Vietnam, be that Malaysia, be that Thailand, be that into Europe for supply there as well. So that's what I mean about the difference that I suspect and believe that many of our competitors don't approach their certainty of supply in the same way that we've done over the past few years, and I think that's one of the benefits that we have.

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Operator [40]

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(Operator Instructions) Your next question comes from John Hynd of Wilsons Advisory.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [41]

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On Slide 11, could we just walk through the volume and the mix section? Does that include Methven? And if it does, I guess, what's the component?

And also perhaps within that $11.9 million, could you -- it sounds like the mix was probably better this half, I guess, versus the last half. Was the volume impact worse? Or like did mix offset worse volume impact?

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

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Thanks, John, for the question. No, look, let me say a couple of things. Firstly, there is no Methven component in that $11.9 million that we show. The whole Methven number we've shown as the incremental $3.8 million, and that's really because we obviously didn't have it in the prior period.

In terms of the breakdown of volume/mix, it was predominantly negative volume coming from, obviously, the -- driven by, obviously, the lower revenue in Australia, in particular. So of that $12 million, probably about $10 million would be volume and a couple million would be positive mix helped by the fact that we talked about Cleanflush, for example, driving more profitable product and not discounting any more than any previous period. So bulk of it is a volume impact from Australia.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [43]

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Okay. And I'm just wondering how you expect the -- I mean, looking forward to the FY '20 when you present the same slide, FX has offset the price increases. How much of the price increases rolled through into these numbers so we can sort of think about how it looks again for the full year, please?

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

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Yes. Look, obviously, that price increase on the -- was taken beginning of November. And as you know, it takes a while to ramp up. There's various lags, particularly in the builder segment. But look, for the full year, we would roughly expect about $5 million of benefit from price. So it will be a significant contributor in the second half.

And look, FX for the year, we would estimate to be about probably the same sort of number, $5 million-odd, $5.5 million maybe. We're in a good position, really, because the lowest $5 million, it could have been significantly worse. I mean our hedging, John, as you know, is -- we're about 80%, just over 80% hedged in and around the $0.70 mark. So compared to sort of today's spot rates of $0.67, we're relatively well placed and that's why we're only estimating about $5 million, $5.5 million adverse for the year because of the hedging that we've got in place.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [45]

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Right. And so, just to confirm, that -- now that you're talking about the $5 million, $5.5 million, does that include Methven? Or is that underlying? And the price, sorry, is Methven taking price as well?

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Patrick A. Gibson, GWA Group Limited - Group CFO [46]

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Methven took price in New Zealand in July this year and the benefit of that price is in the $3.8 million. And as I said, when we went through the slide -- touched on, the $3.8 million is actually after $400,000 of adverse FX that's included in that number. So obviously, if FX had been neutral period-on-period, the Methven contribution would have been $4.3 million, $4.2 million.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [47]

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Got it. Sorry, I've missed that. Great. And moving on to Commercial, are you seeing signs in Australia -- you're obviously seeing signs of you taking -- you're starting to take share and perhaps the strategy is working and accelerating. Can you remind us how different margins are? And I guess, how different the profile is in terms of sales, inventory, booking profits between Commercial and Residential?

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Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [48]

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Yes. Look, John, it's Tim here. I'll answer that one. Yes, we've actually been pleased with the progress that we're making in Commercial. And I think it's driven by -- primarily by the Aged Care, which has really ramped up quite significantly as a portion of our business and that's something that we identified about 2 or 3 years ago and we continue to drive that pretty hard.

What you see in that commercial space is that our customers -- and I think one of the reasons we've been relatively successful is because our customers are looking for the reassurance of a long-term solution, not necessarily a quick hit or a cheap fix. So the very fact that we offer quality products that will be there to work with them and solve their problems over the long term has been a real benefit for us.

As a result of that, you do tend to capture slightly higher margins within the Commercial side. So the more of our business that we could shift into Commercial, the happier I would be because there is a mix benefit there because of the type of approach that we -- that the customers require within that segment.

As it relates to the jobs, as we talked about before, I mean, if you're thinking about a new build, looking on [Brand Guru] or something like that, you'd be looking about holding on to a job for 4 or 5 years sometimes before we have to install our products into them. So that the lead time on those things can be particularly long, but they tend -- and they do tend to vary in terms of when the revenue for those things drop, which is why when we talk about the order bank, it's very hard for us to be precise whether they're going to drop in 1 financial year or the next, depending on how it played through. So from that perspective, there's a slight sort of unknown about what the future looks like. The positive, though, is that what we've also started to do is, as we look at the Commercial Renovation side of things and that tends to have much shorter lead times, which gives us greater certainty around when product will drop. So that gives us some confidence that we know that an increasing order bank can actually convert within the year to actually stronger revenue. And obviously, the benefit of that, not only for us, but then for our customers is they need to have the stock available, which is as things start to improve, we'll start to see those stocking levels increase on the back of that increased demand.

So hopefully, that gives you a bit of a flavor for Commercial. It's quite different from that -- from the sort of Resi or the Renovation segment. Does that make sense?

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [49]

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That's very helpful. My last one is for Patrick actually. I can't -- you typically put in a corporate line in your operating segments notes. Can you provide that, please? And also, what your -- it would also help if you could provide the underlying D&A to -- as well, thanks, because I know there has been a bit of a step-up with your right-of-use assets.

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Patrick A. Gibson, GWA Group Limited - Group CFO [50]

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Yes. Sure. Let me maybe start with the D&A. You may not have seen it yet, John, but on Slide 27 in the appendix, there is a chart that shows all the impacts from IFRS 16. So that might be -- may be of some help.

In terms of right-of-use assets, it's about a $7 million impact -- increase in EBITDA in the half and you can double that for the year. And as you can see, in terms of EBIT impact, there's about $600,000 benefit in the half and that should be roughly similar in the second half. And you can see on NPAT that it had an adverse $400,000 impact with similar expected for the second half.

In terms of your question about corporate, one of the things that we've done now that the business is -- following the disposal of Door & Access Systems is now completely focused on 1 segment. We've called that segment Water Solutions, which you'll see in the segment note in the accounts. And as part of that move, we've basically merged corporate into that group because it's not like we're a conglomerate anymore with a separate sort of corporate structure. And so we basically cut out internal administration and recharging and so forth. I think the key thing is when you look at the numbers, you'll see that including corporate or group, and we did put a Slide 21 in that shows you the, if you like, the rebase of all those metrics, you'll see that in FY '19, including corporate, our group EBIT margin was 28.5% and you'll see that it reduced to 18.5% in first half of FY '20 and that's obviously because of the combination of the Australian market and the lower margin mix coming from the Methven business. What I can tell you is, though, if we back out Methven from those numbers and if you look then -- basically look at the old group as it was, excluding, obviously, that Door & Access Systems business, our EBIT margin has actually improved from 21.5% to 21.8% in first half '20. So look, we're in pretty good shape. But look, happy to talk you through that maybe in a bit more detail in due course.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [51]

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Yes. Sure. D&A -- sorry, last one. D&A from Methven, what was that in the half, please? Just so we can help -- I'm just trying to get back to a particular number and I'm assuming that the $3.8 million on the waterfall chart is the full EBIT from Methven?

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Patrick A. Gibson, GWA Group Limited - Group CFO [52]

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Yes. Yes, it is. Look, one of the things as we integrate the business, John, is that we will have great difficulty, if you like, reporting on the old Methven stand-alone basis because we have put that integrated sales force that we talked about, common invoicing, et cetera, and all the back office stuff is merged. So over time, it will be difficult to pull that out for you. But just to give you an indication, Methven D&A in first half F '20 was, excluding IFRS '16, was about $1.3 million and including IFRS '16 was about $2.3 million.

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Operator [53]

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

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Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [54]

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I'd just say thank you very much for joining the call this morning. It's appreciated. And for those of you we'll catch up with over the next few days, we look forward to connecting with you. Thank you for your time.