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Edited Transcript of GWA.AX earnings conference call or presentation 15-Feb-21 11:00pm GMT

·60 min read

Half Year 2021 GWA Group Ltd Earnings Call Brisbane, Queensland Feb 16, 2021 (Thomson StreetEvents) -- Edited Transcript of GWA Group Ltd earnings conference call or presentation Monday, February 15, 2021 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Patrick A. Gibson GWA Group Limited - Group CFO * Timothy R. Salt GWA Group Limited - MD, CEO & Executive Director ================================================================================ Conference Call Participants ================================================================================ * Lee Power CLSA Limited, Research Division - Research Analyst * Lisa Huynh Citigroup Inc., Research Division - Research Analyst * Mitchell Sonogan Macquarie Research - Analyst * Peter Wilson Crédit Suisse AG, Research Division - Associate * Raju Ahmed CCZ Equities Pty Limited, Research Division - Equities Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the GWA Group Limited HY FY '21 Results Conference Call. (Operator Instructions) I'd now like to hand the conference over to Mr. Tim Salt, CEO. Please go ahead. -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [2] -------------------------------------------------------------------------------- Thank you. Good morning, everyone, and thank you for joining us on the webcast or conference call for GWA's half year results for the year ended 31st of December 2020. I'm Tim Salt GWA's Managing Director, and joining me on the call today is Patrick Gibson, GWA's group CFO. On Slide 2, before we begin, I just want to draw your attention to this disclaimer slide. For today's results presentation, I'll first provide an overview of our group results and key themes, and Patrick will then detail our group financial results for the half year, including P&L, balance sheet and cash flow. And I'll conclude with an outlook for FY '21. On Slide 4, I'll begin with an overview of our half year results in the context of what we have seen across the various geographies in which we operate. In terms of the first half results, we have continued our disciplined approach to managing the business given the housing market cyclical downturn in Australia and disruptions across all our geographies due to the COVID-19 pandemic. Importantly, we've maintained our leading market share position in Australia and grown share in both New Zealand and the United Kingdom. Our focus on operational discipline means we remain on track to deliver the supply chain savings as part of the overall $9 million to $12 million savings total. Despite the decline in revenue, our Australia and New Zealand EBIT margin was consistent with the prior period. This discipline, together with our continued strong cash generation, means we've been able to declare a $0.06 per share interim dividend fully franked, which is up from $0.035 paid at the second half last year. We are pleased with both the performance of Methven and how our integration plans have been implemented. Cost synergies remain on track to deliver a total of over $3 million in FY '21. And as I will explain later, we have now commenced an additional program in New Zealand and the sale of our China plant, which together will deliver an additional $3 million in annualized cost savings from FY '22. We continue to successfully execute our strategy for growth, which is focused on superior water solutions. Our relationships with merchant partners is driving core range extensions for both Methven and Caroma products, while we've also launched new products in sanitary ware and colored tapware. Our touchless intelligent bathroom system Caroma Smart Command has now been installed in 77 sites with a solid bank of additional projects in the pipeline. We're generating margin accretion in Methven and in the United Kingdom, even in a market heavily disrupted by COVID-19. We are consolidating and simplifying our operations in Asia, including a new local management team. As a result of these initiatives, GWA is very well positioned to leverage the expected improvement in market conditions. We saw an improvement in the market in the second quarter. And as you will have seen, lead indicators such as detached housing approvals, home lending and house price points even point to an increased residential detached completion in Q4 and into FY '22. Our commercial order book remains strong and growing. However, the current temporary slowdown in some commercial projects being drawn down has required us to pivot towards key growth subsegments in education, aged care and health care. Our balance sheet remains robust. And given our cost base, GWA has significant operational leverage to an improvement in the building cycle when revenue momentum returns. So in summary, while the market remains challenging for the period, we continue to focus on those elements within our control as signs of increased market activity are emerging that has positioned GWA well to capitalize on these improving conditions. On Slide 5, this slide demonstrates the improvements in revenue from the first quarter to the second. Overall, revenue improved plus 1.6% in Q2 compared to Q1 FY '21. In Australia, we saw signs of recovery in builders and merchant sales in the second quarter. However, this was impacted by the slowdown in the commercial project segment, particularly in New South Wales and Victoria. We did not experience any material further customer destocking. However, as anticipated, merchant restocking did not eventuate. Sales in the first half FY '21 in New Zealand increased by 3.1% on a local currency basis. And we benefited from the integration of our sales team and also from strong stock availability compared to some of our competitors. Sales in the United Kingdom were up 5.7% on a local currency basis in the half 1 FY '21 with our margin enhanced despite the ongoing impact of COVID-19. And I think this is a good result and a testament to our team in the U.K. On Slide 6, while the last slide demonstrated revenue by market, this slide illustrates our first half revenue with our main customers in Australia, our largest market, which accounts for around 77% of group revenue. Again, just to emphasize here, customers are shown in random order and notations. So that means that the description A to E does not denote the size of the customer. The key point is those customers with greater exposure to the retail-focused merchant channel have performed more strongly than those more exposed to the commercial channel, which has been impacted by the temporary delays to some projects in this segment. On Slide 7, our strategy continues to focus on profitably winning market share regardless of market conditions. Pleasingly, we maintained share in the down market where there had been some pressure on pricing and trading down to lower-margin product. The slowdown in residential construction activity in Australia has been well documented. And we saw market decline in detached and multi-residential construction during the first half. The increase in detached residential approvals in Q2 FY '21 is encouraging. However, it's important to distinguish between approvals and completions given the normal 9- to 12-month lag between approvals and completions. We've included a slide on this point in the appendix. Delays in commercial project completions resulted in market activity declining by approximately 17% nationally, with a significantly greater decline in New South Wales and Victoria. The largest segment, Renovation and Replacements, both residential and commercial, has continued to demonstrate more stability than detached multi-residential housing with residential R&R stronger than commercial R&R. In total, we estimate a decline of approximately 6% in our addressable market in Australia to December 2020. I'll now hand to Patrick to discuss our financial results in more detail. -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [3] -------------------------------------------------------------------------------- Thanks, Tim. I'll start with the waterfall chart we typically present to set out the key drivers of earnings over the half. And these are normalized results. They exclude significant items relating to costs associated with the integration of Methven. Firstly, volume and mix. As Tim already mentioned, volumes were impacted by weaker market conditions, particularly in the commercial segment and the ongoing impact of COVID-19. That decline in commercial also adversely impacted mix as the commercial segment is generally a higher-margin segment for GWA. Australia is also a higher-margin market for us compared to the United Kingdom and New Zealand. So the relative decline in Australia also adversely impacted mix. Price. We took a 5% price increase from August, which partially mitigated the impact of the weaker Australian dollar on product cost purchases in the half. However, we did not realize as much price as we expected due to the slowdown in the commercial project segment that Tim talked about earlier. Foreign exchange. Through our foreign exchange hedging, we were able to mitigate some but not all the impact from the weaker Australian dollar for the half compared to the prior corresponding half. The average Australian U.S. dollar rate was $0.69 in first half FY '21 versus $0.71 for the prior corresponding half. Net cost changes reflect our continued strong operational discipline, which mitigated a significant amount of the earnings decline for the half. This includes successfully delivering $2 million in savings as part of the overall $9 million to $12 million cost-out program by FY '21 and $1.5 million in Methven synergies in the half. Other tactical cost savings contributed $2.4 million. The final red bar represents an accrual for staff incentives, which was not included in first half FY '20. Our first half performance in FY '21 was impacted by the challenging market conditions but was in line with expectations. Adjusting for the staff incentive, normalized group EBIT margin in first half FY '21 was consistent with the full year EBIT margin for FY '20. Slide 10 presents the results on a normalized basis, that is before significant items. The revenue decline reflects the weaker construction conditions in Australia not fully offset by growth in our international business. EBIT margin was impacted by the market decline, COVID-19, sales mix across geographies, segment mix and weaker commercial sales. The EBIT margin for Australia and New Zealand, however, was in line with the prior period. And as I said on the previous slide, group EBIT margin was impacted by the inclusion of an accrual for staff incentives for the half, which was not accrued for in the prior corresponding half. Slide 11 shows the results on a reported basis after significant items. And we've included it here so you can reconcile the result back to the appendix 4D. Our ongoing strong cash generation and financial position enabled the Board to declare a fully franked interim dividend of $0.06 per share. And the dividend reinvestment plan will be offered for the interim dividend at a 1.5% discount. The DRP is not underwritten. Turning now to cash flow from operations. This is a very strong result. Given the impact of COVID-19, we maintained a particular focus on cash management in the half, and that has been reflected in the very strong operating cash flow performance. Cash flow from operations was $49.7 million compared to $42.2 million for the prior corresponding half. And cash conversion remains very strong with a cash conversion ratio of 118%. Working capital and debtor management is a continuing focus with days sales outstanding at 31st of December 2020 improved on the prior corresponding period. Capital expenditure for the half was $5.5 million. That's down on the $8.2 million for the prior corresponding period and reflects our continued prudent approach to cash management. We remain focused on initiatives to drive cost efficiencies and revenue-enhancing opportunities, including a seed investment of $2.8 million in a third-party overseas venture. Cash restructuring and other costs of $0.9 million relate primarily to Methven integration costs. GWA remains in a strong financial position to manage in the current uncertain environment. And net debt as at 31st of December 2020 was $125 million compared to $144.8 million as at 30th of June 2020, with leverage improving from 1.9x down to 1.7x. In November 2020, we completed the refinancing of our syndicated banking facility, and that comprises a single 3-year multicurrency revolving facility of $227 million, which does not mature until November 2023. We also maintain a separate $40 million 1-year multicurrency revolving bilateral facility, which matures in October 2021. Our credit metrics remain consistent with investment grade, as you can see on the slide. I'll now hand back to Tim. -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [4] -------------------------------------------------------------------------------- Thanks, Patrick. On Slide 15, our growth strategy continues to be customer- and consumer-focused, underpinned by internal cost and capability improvements. It's a strategy that supports our purpose of making life better through products, services and technologies that create superior solutions for water. So today, I'll provide an update on our continued progress on the integration of Methven, an overview of innovation driving our brands and an update on Caroma Smart Command. We acquired Methven in April 2019 and have been progressing our integration plan since that time. We're pleased with how the integration has gone and the further diversification, scale and capability Methven brings to our business. Cost synergies remain on target at $1.5 million realized in the first half, and we remain on schedule to deliver $3 million for FY '21, bringing the overall total across FY 2021 to over $6 million. We have completed the integration of the sales structure and consolidation of the Australian distribution network. Our focus now is the final stage of integration. And this includes consolidating our New Zealand distribution network from 2 warehouses to 1, which will enable efficiencies and single invoicing to improve our customers' experience. We're also progressing the sale of the Methven China assembly plant, which is expected to complete in Q3 FY '21. We expect one-off costs of around $4 million will be incurred in FY '21, of which $2.1 million pretax were incurred in the first half. Annualized benefits of around $3 million are expected to flow FY '22 onwards. Our tap and showerware center of excellence in New Zealand is building a strong pipeline of new products with the market-leading Methven shower IP now being used in Caroma new shower launches this year. The addition of Methven provides us with enhanced geographic diversification, which continues to be a strategic growth opportunity for the group. Around 23% of our revenue now comes from outside Australia. In our international business, we are leveraging Caroma product to go to market with a whole of bathroom solution. We're also leveraging our IP and technical capability, as Patrick mentioned, with a third-party overseas venture, which is at the early stages. And we'll be able to talk more about that later this year. On Slide 17, a key focus of our growth strategy is centered on product innovation. We've established centers of excellence in Auckland and Sydney to harness our local technical, design and sourcing capability in taps, showers and sanitary ware. Our rolling 3-year innovation and new product pipeline is prioritized against specific market opportunities. And while we launched more than 1,500 new SKUs in the last 3 years, around 3,000 SKUs have been removed from the portfolio. Our focus on hygiene and touchless solutions is important in the current environment. For example, we've launched Germgard, which is an antibacterial glazing for our sanitary ware and toilet seats to capitalize on consumers' heightened concerns over safety and hygiene following the COVID-19 outbreak, and we have further touchless tapware innovation planned for half 2 FY '21. We launched a number of new initiatives under the Caroma brand, including Germgard sanitary ware, colored tapware and showers incorporating the Methven IP across both Australia and New Zealand. We've also extended our Methven tap and shower range to take advantage of further identified opportunities. Our local design and technology expertise continues to be a key point of difference for the group. On Slide 18. The momentum behind our touchless intelligent bathroom system Caroma Smart Command continues, and we're encouraged by the ongoing strong reception in the market. In the current environment, the system's touchless features, which offer customers a safe and hygienic solution, is resonating well. The system has been installed in 77 sites across Australia and New Zealand. And while COVID-19 delayed the anticipated rollout into some sites during the half, predominantly in retail and airports, our Caroma Smart Command order bank is growing. And we maintain a solid new product pipeline with a number of product, technology and cloud interface enhancements in development. To date, 33 sites have been migrated to our new cloud data capture solution with further migrations expected in the second half. Importantly, this is the first small step to create an ongoing fee-for-service solution. We've completed the first pilot installation in Asia with further activity plans over the next year. I'll now provide a commentary for the full year FY '21. Recent lead indicators in Australia has been that consumer sentiment, dwelling approvals, new housing loans or housing turnover and federal HomeBuilder and state government incentives, points of increased detached residential completions and renovation and replacement activity in Q4 FY '21 and into FY '22. Our commercial order bank remains strong and is 16% above the level of December 2019. We have pivoted to the key segments of education, health and aged care. Our order bank in those segments is up 25% since the end of June 2020. We remain strongly positioned in the commercial segment. However, commercial and multi-residential completions are expected to remain subdued in second half FY '21. Growth is expected in New Zealand, United Kingdom despite ongoing COVID challenges and Asia. For FY '21, our focus remains on generating profitable share growth through customer and consumer initiatives. These include tighter new commercial segment growth opportunities and embedding new products, be that sanitary ware and colored tapware with key merchants. It also includes enhanced consumer engagement leveraging our digital communication strategy and channels and the touchless hygiene benefits of Caroma Smart Command. We'll maintain our focus on operational and cost discipline and are on track to deliver strategic supply chain savings of $4 million and targeted Methven integration savings of $3 million in FY '21. In the second half of this year, we will commence the implementation of a new ERP CRM system to improve customer experience and to replace multiple legacy systems. We'll continue to control the controllables with a specific focus on discretionary spend, working capital and capital expenditure. GWA is well positioned given our strong operational leverage to increase market activity in Australia, and we continue to capitalize on our momentum across our international operations. Ladies and gentlemen, that concludes the presentation, and we are happy now to take your questions. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Mitchell Sonogan from Macquarie. -------------------------------------------------------------------------------- Mitchell Sonogan, Macquarie Research - Analyst [2] -------------------------------------------------------------------------------- Can you hear me? -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [3] -------------------------------------------------------------------------------- Yes, very clear, Mitch. -------------------------------------------------------------------------------- Mitchell Sonogan, Macquarie Research - Analyst [4] -------------------------------------------------------------------------------- Yes. Just a quick question first on the outlook. So for the second half, you've talked about the addressable market expectations to be down either 4% or up 2%. Can you just clarify, is that half-on-half versus pcp? And also just thinking about the second half, incorporating all the movements in FX and cost out, how should we be thinking about the second half EBIT margins on that guidance that you provided there? -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [5] -------------------------------------------------------------------------------- Patrick, could you... -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [6] -------------------------------------------------------------------------------- Why don't you talk to the market piece, and I'll talk about the FX and cost out, yes. -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [7] -------------------------------------------------------------------------------- Yes. The outlook for the second half is on a year-on-year comparison. So that's -- the change, I think, we faced in the second half is really -- what we're not sure about yet is when the benefits that we know are coming on detached housing and the renovation when that approvals shift through into completions. And that's why the range is probably fairly broad in the second half. As I said in the presentation, we expect an uptick in quarter 4 based on the significant sort of growth that we've seen in approvals of both reno and new buildings literally in December primarily. So that, we think, will show up in Q4, but it could move into Q1 FY '22. And that's why we -- so there's a relatively large range there. -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [8] -------------------------------------------------------------------------------- In terms of margin, Mitch, for the second half, look, we have included, I think, in Slide 23 some updated assumptions. But basically, FX was adverse year-on-year $3.7 million in the first half. We're forecasting that to be less adverse in the second half. So we think about $5 million for the full year. So we will see some benefit there relative to the first half. In terms of cost out, we delivered the $2 million in the supply chain cost-out program, which is in the $9 million to $12 million by FY '21. We expect that to be $4 million for the year. So the run rate will continue. And similarly, the $1.5 million delivered on Methven integration savings in the first half, that run rate will continue. And we should see $3 million there for the full year. I think the other comment is that we would expect to see more price benefit come through in the second half, just predominantly due to the usual life effect in the builders segment, where it takes about 6 months from announcement for that to work through an impact in the marketplace given the contracts builders have with their consumers. So look, I suppose the one offset that we are also seeing is some adverse freight costs due to shortage of shipping and containers. That's really an industry-wide and like country-wide issue at the moment. So we are expecting a little bit of headwind there. But look, overall, when you put it all together, I would -- subject to any major swings in mix, I would be expecting to see some improvement in margin in the second half. -------------------------------------------------------------------------------- Mitchell Sonogan, Macquarie Research - Analyst [9] -------------------------------------------------------------------------------- Okay. Great. And Patrick, just while I've got you there, just a quick comment on the gross margin, if you could, from the pcp sort of down 230 basis points. Is that more mix? Or is that going to be some of those freight costs coming in? Can you just talk to that a little bit more, please? -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [10] -------------------------------------------------------------------------------- Yes, sure. Look, in the first half, that adverse margin movement is -- there's a little bit of on cost from freight there, but that's going to be more of a headwind in the second half than the first half. The real driver there is the adverse mix that I talked to, and that's driven really by predominantly Australia. So there's a couple of building blocks to this. Firstly, commercial segment is down, as Tim talked about. And that's our -- generally our highest-margin business. But equally, the builders segment is up. And that's a significantly lower-margin segment for us. So Australia coupled with, if you like, the volume decline in commercial has driven that. And then as we've seen growth in other geographies such as New Zealand and the U.K., while in those markets the margins are improving, historically, they are lower than Australia. So it really is all mix. It's not about turns drift or anything like that, Mitch. It's a large mix factor impacting that first half. -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [11] -------------------------------------------------------------------------------- And as we've said, Mitch, I think our commercial order bank is up strongly. So we haven't forgone those sales. They're just delayed at the moment. So we know that we will get those back into the business at some stage. It's just a question, as I've mentioned before, of when the commercial segment starts to pick up again. So it's -- I suppose, if you like, it's a timing or a phasing issue that we face at the moment, particularly in the second half of this year, before we see any rebound in that commercial segment. -------------------------------------------------------------------------------- Mitchell Sonogan, Macquarie Research - Analyst [12] -------------------------------------------------------------------------------- Okay. Great. And just a final one for me, Tim. I'm just thinking about the residential [alternative] segment. Are you able give us a bit more flavor, I guess, about how you're seeing things state-by-state and maybe the discussions that you're having with your customers given the improving approvals over the last 3 to 6 months? Like are they starting to get more bullish? Can you just a bit of an update on how they're seeing things? -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [13] -------------------------------------------------------------------------------- Yes. Look, I think as you say, the approvals piece, I think, has gone through -- it was very significant. And if you look at Homebuilder, I think of the 75,000 HomeBuilder applications up to the end of December, some 20% of those were actually driven by renovation opportunities. So I think there's no doubt that there is momentum there on the back of HomeBuilder, but I think it goes much broader than that, Mitch. So I think it's actually the availability of free money and all of those other factors I talked about earlier around housing prices picking up and housing turnover starting to pick up. I think that's what gives us some confidence that the market will pick up into the future. All of those things, I think, are driving some increase in interest in that renovation space. We think that's sort of probably more in line with HIA. We think that this year that reno activity will probably be up about 3% overall. And really, that's in line with HIA and where they're coming from. You're seeing quite an interesting mix there where in New South Wales and Vic, you're seeing a good growth in value of those runners, which I think is interesting, whereas in Queensland, we're seeing quite an uptick in the number of renovations, as you've seen in the ABS data. So it's -- and the value of the renovations in New South Wales and Vic is quite a bit higher than it is in those other states. So you're seeing a different mix playing through on some of these. So from a customer perspective -- and now a lot able work we're doing at the moment has been to talk to in the presentation about getting new products into market. So a lot of the work that we're doing around Caroma colored tapware, around getting new showers on both Caroma and Methven into our customers, getting those ranged and displayed in the showrooms is an important part of what we're doing as we look to take advantage of those opportunities. So I think there's good alignment between ourselves and our customers on, a, the opportunity that R&R presents but also I think that for many of those customers who are also suffering in the -- sort of where the commercial downturn has impacted their business like us, they're looking for other growth opportunities. So I think we're well aligned across all our major customers. We will need to drive increased activity in the R&R space. I mean if you were to look into one of the major big-box retailer at the moment, you'd see that we actually got display there of bathrooms, a complete bathroom solution, which is actually driving really good incremental volume for us and for them. So there are plenty of things that we're doing in the first half, which we think will give us benefit as we roll into the second half, both in terms of customer ranging but also that new product development rollout that I've just talked about. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Your next question comes from Lee Power from CLSA. -------------------------------------------------------------------------------- Lee Power, CLSA Limited, Research Division - Research Analyst [15] -------------------------------------------------------------------------------- Just on the $9.5 million of that FY '20 short-term cost reduction, can you give us an idea of how much of that return in the first half? -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [16] -------------------------------------------------------------------------------- Yes. Look, you'll recall that we said of that $9.5 million -- I mean it was -- $6.6 million was related to STI. So $3.3 million of it, if you like, return in the first half, which was STI related. And I'd say there's probably -- as you saw, we had some other sort of tactical savings. So we'd probably save another, all in all, $2.4 million from just lower T&E and vacancies and recruitment costs and things like that, that we had thought we would be spending in the first half. So broadly speaking, I'd say, really only probably about $4 million came back in the first half of that $9.5 million. -------------------------------------------------------------------------------- Lee Power, CLSA Limited, Research Division - Research Analyst [17] -------------------------------------------------------------------------------- Okay. And then -- I mean the commercial order book, I get that it's growing, and I guess it's always hard to put a timing on when it returns. Do you think that recovery in commercial goes hand-in-hand with restocking? Are they now so closely tied that we could see '22 get this double bump of restocking in commercial? -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [18] -------------------------------------------------------------------------------- I think there's no doubt that at some stage, there will be the uptick. And as we've talked about before, as momentum comes back in the market, customers want to make sure they've got plenty of product to take advantage of sales opportunity and that becomes their focus rather than cash flow or sort of working capital management themselves. But I think the answer is yes, we would expect to see an uptick at some stage. I think the really hard thing at the moment in commercial is really trying to put a definitive time frame on when that will come back into the market. So in the short term, as I mentioned, what we try to do is, as we've recognized that maybe offices will be slower in that sort of recovery and maybe same for the multi-resi if you're looking at the projections of those going forward, we've actually looked to pivot some of our focus around aged care, around health and education, where we know 2 things. One is that there's going to be increased public spend in that area but also that the turnaround time for some of those projects are somewhat shorter than they would be for those major commercial developments. So we've tried to reemphasize, if you like, where we're focused. And that's why we're seeing our aged, health and education up some 25% from the end of FY '20 because of the extra effort that we've put in there. And now we've got dedicated people that are hunting engaged opportunities in each of those 3 segments across New South Wales and Victoria, and that's given us some benefit. So in answer to your question, I think, yes, there will be an uptick at some stage. What we're not committing to at the moment is when that will happen. I think there's a little bit of time to go before that full confidence in conversion comes back. But what I do know is that when it does come back, we are incredibly well placed to take advantage of it because of, a, the strength of that order bank; and b, the shape of the order bank that we now have as well. -------------------------------------------------------------------------------- Lee Power, CLSA Limited, Research Division - Research Analyst [19] -------------------------------------------------------------------------------- Okay. Excellent. And then, Patrick, just on price. So it sounds like -- is price -- I guess before, price was enough to offset FX. Is that still the case? Or maybe not anymore? -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [20] -------------------------------------------------------------------------------- Yes. No, I would expect for full year that price will fully offset FX because we will see a higher rate of price recovery in the second half and a lower rate, if you like, of incremental FX on cost. So overall, for the year, we should still be good there. -------------------------------------------------------------------------------- Lee Power, CLSA Limited, Research Division - Research Analyst [21] -------------------------------------------------------------------------------- Okay. And then just one last one following on, on currency. I mean with $0.78 now, like how should we think about that in the longer term, thinking like '22? Does that -- are you going to put that back into reinvestment? Or are you happy to run higher margins? I think in the past, you've talked about like sticking around 100 bps range around margins. So whether that kind of thinking has changed at all. -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [22] -------------------------------------------------------------------------------- Yes. No, you're right. We sort of said plus or minus 50 to 100 over the sort of medium term. Look, that sort of metric is still valid. I think what we've seen, frankly, is a bit of a perfect storm with the COVID impact, particularly last year with lockdowns and shutdowns in New Zealand and the U.K. And then we've seen that impact mix and confidence in the first half of this year, which has impacted that commercial segment. And then you couple that with the HomeBuilder stimulus boosting the builders segment, it's a bit unusual. And that's why -- as I said to Mitch, that's what's driven that gross margin temporary decline. But to answer your question, I would expect margins to improve over time. And we've always talked about maintaining the group margins sort of in the low sort of 20s, and that still remains valid. So specifically on FX, it is going to be still a headwind for us this year. But at the moment, we've got -- we've lowered our sort of cover for '22 at the moment on the expectation that most people are forecasting further strengthening. And at the moment, we're 48% covered in terms of our requirements at about $0.73. And look, obviously, we will continue to roll forward, and if rates stay at 77%, 78%, that will continue to improve. So we should see a benefit on FX in '22 versus '21. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Your next question comes from Raju Ahmed from CCZ. -------------------------------------------------------------------------------- Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [24] -------------------------------------------------------------------------------- Can you hear me? -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [25] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [26] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [27] -------------------------------------------------------------------------------- Okay. Fantastic. So a couple of questions from me. The first one is if you divvy up FY '21 into 4 quarters, do you feel that you've passed the low point? Or is that low point still to come in quarter 3? -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [28] -------------------------------------------------------------------------------- We believe that we've sort of hit the low point, and there should be some modest upside from here, Raju. I think a lot of that talks to the recovery that we're seeing in that consumer or that space. So we think that we would expect to see -- I wouldn't expect a V curve on this -- or a V shape. But certainly, we'd expect to see modest increases and momentum building as we go into Q3 and into Q4 over this second half. -------------------------------------------------------------------------------- Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [29] -------------------------------------------------------------------------------- Okay. So I'm not trying to put numbers into you, but what I'm trying to get a head around is given your expectation of potentially better Q4, and I can understand that, then is it a case of saying that the second half revenues and EBIT underlying basis will be both better than the first half? Is that a rational comment? -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [30] -------------------------------------------------------------------------------- Yes. I think that's a fair assumption. And I think also the other place, remember, in the second half that we haven't really talked to areas that with -- the Australian market, I think, is improving, and we will benefit from that. But I think it's also worth remembering that we are lapping significant lockdowns in New Zealand and in the U.K. last year as well, Raju. So we will obviously get the benefit of that. And I think as I said earlier, we're trading well in both of those markets anyway in terms of good top line momentum and also winning some share there. So it's actually quite encouraging. So I think that as we go into the second half, it gives us more of a base to sort of sprinkle from. So we do expect, on that base, the second half to be stronger than first. And certainly, that momentum carrying through Q3 will be pretty good. And obviously, New Zealand and the -- sorry, Q4 is probably going to get most benefit actually as well because the lockdowns were in April in New Zealand. So you start to see that playing through a little bit at the end of March but also into -- then maybe April and a little bit in May. But just put it -- just it will be 14% of our business in New Zealand and 8% in the U.K. So we still want to make sure that we're doing all the things that we need to do in the Australian market. And that's where we also feel more confident than we were in the first half. -------------------------------------------------------------------------------- Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [31] -------------------------------------------------------------------------------- Okay. That's good to hear. The second sort of question group is more focused on the macro. You've talked about seeing demand in the horizon with the HomeBuilder and the other government stimulus packages. I'm just trying to get a holistic picture whereby if you've got -- I mean many builders tell me that there's a pull forward in demand as a result of the HomeBuilder scheme in particular. If you've got that pull forward now or coming up in the next couple of months, how do we then think about what does the other side look like? And what does that mean for expectations around that restocking you talked about from the earlier question? And also, how do we overlay that with the commercial outlook? When does that demand flow back through in terms of big commercial projects? How do we look at 2021 calendar year given all of the above? -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [32] -------------------------------------------------------------------------------- That's a million-dollar question at least, Raju. But I think the way that we're thinking about this at the moment is that there's 2 parts of the demand that's being driven in the second half. The first one will be around resi detached housing new build, and the other one would be around in our Renovation and Replacement space. So I think both of those look as that is set for an uptick in the second half. I mean sort of -- this is just -- will give you a view of the world. But at the moment, if you look at someone like BIS Oxford, they're saying that there's going to be a significant uptick coming in Q4 and I think then a decline setting and beyond that as it's all been pulled forward. I'm probably a little bit less optimistic about this massive peak followed by a massive trough. And I think that labor availability and [trades] will actually start to play out on some of this because I think we're going to potentially see a bit of a convergence crunch because the trades that work on renos and work on detached and new build are not necessarily the same ones who work on multi-res. I mean there is some but not all on commercial. A plumber who works on commercial jobs can't necessarily down tools there and go into a detached housing space. So I think we're going to see a bit of a crunch on availability of labor potentially, which will probably be a good thing to dampen down what we see happening in this -- the end of this year. But the converse of that is that I think that will actually be more encouraging as we then move through to the first half of FY '22. So I don't think we're going to see quite as much of a peak and trough as perhaps some of the market forecasters are talking about at the moment. And if you haven't done a renovation yourself or tended to build a house as well, some of the hoops you have to jump through these local councils and whoever else. I think we potentially, if it's all coming as a crunch at one go, I think we're going to see that, that sort of demand for labor and approvals is actually going to put a bit of a natural dampener on it, which will probably put a bit of a cap on how much acceleration we get in the second half. So I think we will see upside, as I said earlier, from Q3 into Q4. But I don't think it's going to be that sort of bust -- boom and bust cycle that's predicting at the moment. The commercial one, I think, is a really -- is a much harder one to predict at the moment. We -- as I said, we expect commercial to remain subdued in the second half of this year because unless something is in the pipeline now or unless it's actually already under development, there will potentially be a lag until we start to see that return. And I would expect that, that would be -- you start to see some uptick for us probably Q1 into Q2 FY '22, not because of the big jobs that we've got in the order bank but because there are a lot more smaller jobs that we're picking up at the moment that were changing the mix, as I mentioned earlier. So I'm probably much -- got more of a view around residential being flatter in terms of the peaks and troughs and then commercial rising slowly from here. And I think hopefully, we don't see a return to lockdown like we've got in Victoria because that doesn't help anybody in terms of confidence. But I do expect then to see a slow return on commercial over the course of the coming months and quarters. That's how we're sort of thinking about our business at the moment. -------------------------------------------------------------------------------- Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [33] -------------------------------------------------------------------------------- Okay. That's very helpful. And the last question, this will be a quick one. As you talked about Methven margin improvement, has it been all or mostly on the back of the integration benefits? Or have we seen top line improvements driving margin expansion through operating leverage as well? -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [34] -------------------------------------------------------------------------------- Raju, it's Patrick. I'd say it's really a combination. We've seen top line growth, as you can see, in the U.K. and in New Zealand, on slide -- I don't know what number it is, 3 or 4 -- Slide 5, 5. So that's contributed. And then the integration savings are well on track for that AUD 6 million by the end of this year, which is above what we already targeted. And then now we've now flagged that we will get additional benefits in '22 flowing from that consolidation of distribution in New Zealand and the changes that we announced in China. So look, last -- we ended last year somewhere around -- we estimate about a 12% EBIT margin in Methven. And I'd estimate that's up to over 14% now and well on track to get to the high teens that we've always said is our aim by FY '22, '23. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Peter Wilson from Crédit Suisse. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [36] -------------------------------------------------------------------------------- If I could start with just a few on costs. To follow your earlier comment, Patrick, around freight rates, can you give us an idea of how much freight, either as a proportion of your costs and how much of spot rates have gone up and how you manage it, how much you've contracted versus how much you're exposed to those spot rates? -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [37] -------------------------------------------------------------------------------- Yes. Look, I'll start. Tim, you might want to speak as well. But look, approximately 6% of our product costs would be freight costs, and the majority of that's international freight. And we bring in something like 4,000 TEUs annually. So we're a fairly big importer. Having said that, we do club together with other importers to contract at what we hope are good rates. So the answer to your question really depends on how much is contracted and how much is spot and whether the shipping companies continue to allow people to contract significant volumes. And look, we would probably be contracted, I would say, about 85% currently. But whether shipping companies will offer that as we go forward into '22, I don't know. So we're not expecting -- when I say it will be on cost in the second half, I think it will be probably the order of $11 million or so for our business. I think the big unknown is what does it mean for '22 because spot rates at the moment are already off probably about 5 or 6x. -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [38] -------------------------------------------------------------------------------- About [4,500 U.S. TEUs]. -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [39] -------------------------------------------------------------------------------- Versus probably... -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [40] -------------------------------------------------------------------------------- 1,000. -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [41] -------------------------------------------------------------------------------- 1,000. So -- and also international is not so important for us, but international air freight is probably up from $2 or $3 a kilo to probably $8 or $9 a kilo. So look, we're pretty well placed, we think, for second half. What we just don't have a crystal ball on is what will happen in '22. I think the -- look, the only thing about this is it's a global issue. It's not a building industry issue. It's not an Australian issue. The same issues are happening in -- particularly on rates from Asia to the U.S. and into Europe and the U.K. at the moment. So look, it's going to affect everybody. So I imagine if it continues and if supply of ships and containers doesn't balance back in the short term, then I suspect it will be inflationary and lead to people leaning to price to recover. A bit of a long answer, Peter, but does that help? -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [42] -------------------------------------------------------------------------------- It does. Unfortunately, I missed part of it due to -- I think it's poor quality line. When you're just talking about how much of the spot rates are up compared to your contracted rates, can you just I guess... -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [43] -------------------------------------------------------------------------------- Spot rates are up probably 5 or 6x what contracted rates are currently. Having said that, as I said earlier, the majority of our rates at the moment are contracted. So it's not having a huge impact yet. -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [44] -------------------------------------------------------------------------------- And we weren't positioned on stock as well. -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [45] -------------------------------------------------------------------------------- And we weren't positioned on stock. And we saw some of this coming. And it's one of the reasons the inventory was slightly higher in December than otherwise would have been because we brought more in when there was more availability of shipping. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [46] -------------------------------------------------------------------------------- Okay. And so 85% contracted this year, what would you be into next year? -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [47] -------------------------------------------------------------------------------- I don't know because that negotiation doesn't take place until next year and very much will depend on what's available in the marketplace. -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [48] -------------------------------------------------------------------------------- All we do know is though that -- to the point Patrick made earlier as part of the group that we're part of has got very good global scale. So therefore, we're pretty confident that the rates that we will be able to get will be as attractive as anybody else, if not better, coming into market. So I don't think we'll be at a disadvantage, either on a price or availability basis, as we try to strike this new deal. -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [49] -------------------------------------------------------------------------------- I mean this basically will impact anything coming in the container into Australia, which at the end of the day, most things. And it also is impacting -- it doesn't impact us so much in this regard, but it is impacting export because there's actually less containers available in the right places for people to export in. -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [50] -------------------------------------------------------------------------------- We did see in the first half, Peter, as I mentioned to Raju, that we actually got a benefit in New Zealand in the first half because that product's availability was much stronger than many of our competitors. So we've taken advantage of that sort of the supply chain that we've got at the moment and our product's availability to continue to drive benefit with customer, and that's been quite useful. And we expect that will carry out in the second half as well. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [51] -------------------------------------------------------------------------------- Okay. And I guess based on your experience and what you -- the kind of increases in rates that you've seen in markets in the past, if you look into FY '22, I guess, the quantum of the increase in freight costs you expect and then compare that to the relief you're getting on FX, do you think the quantum -- we should say the quantum is roughly similar? Or do you think the freight rates are going to more than offset the FX tailwind? -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [52] -------------------------------------------------------------------------------- Look, I can't give you an outlook for '22 at this early stage, Peter, given this is a market -- macro factor. I think as Tim said, we'll be relatively well positioned for whatever it is. And as you said, we will have benefits in year-on-year FX if things continue the way they are, and we'll obviously have our cost-out programs as well. But look, I can't give you -- I haven't got a crystal ball on '22 freight rates at this point. -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [53] -------------------------------------------------------------------------------- Right, Peter. So Peter, we're going to have to pass price through because, as I said, this won't be just a bathroom product or just a building industry issue. This is -- as Patrick said, it's going to be an Australia and New Zealand issue. So everyone, I think, will be looking to push price through in the market if we don't see these rates come down. I think the reality is that while we don't know what the future holds at the moment, I think there's a lot of probably hype in the numbers. And we're obviously -- as Patrick said, we brought products in early with an expectation that some of these numbers are going to go up. I don't think Asian supply partners and their governments will actually allow this situation to carry on because it's not going to just put a damper on Australia. It's going to put a damper on many economies. So I think there will be a solution that will be found for this -- we already were seeing in China that they're ramping up production of containers to build availability. So I think it's something that we're very conscious of at the moment, but it's not something that we want to overreact to either because I think we need to understand Patrick's point on what the future holds. But certainly, it doesn't look good at the moment, but I think there will be remedial actions to improve the situation. -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [54] -------------------------------------------------------------------------------- That's right. And look, hopefully, by August, Peter, we can give you a sort of good priority related to your question. -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [55] -------------------------------------------------------------------------------- [Everyone] is very aware of this as well, both in New Zealand and in Australia. So I don't -- it's not a -- I don't think it's a surprise for everybody at the moment. I mean it may be a surprise that quickly has come on, but everyone is aware of it. So I'm sure there'll be actions taken nationally. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [56] -------------------------------------------------------------------------------- Okay. Understood. And then on the -- I'm a bit confused on your selling expenses. So selling expenses were down -- was it $9 million in the first half -- sorry, $6 million? I'm a little bit confused, I guess, in the context of Lee's earlier question around the nonrecurrence of the FY '20 savings in selling expenses. So I guess the question is the selling expenses in first half 2020, is that a sustainable level? Or should we still expect more costs to come back in FY '22? -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [57] -------------------------------------------------------------------------------- Are you looking at the stats, are you, Peter, for that? -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [58] -------------------------------------------------------------------------------- I am, yes. -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [59] -------------------------------------------------------------------------------- Yes. There's a number of things in that bucket. I mean a lot of it is -- I mean I referred to, for example, we had, say, $2.4 million of tactical cost in the first half. You see that in the waterfall effectively. And that's really savings in -- coming driven by predominantly not having the T&E that we expected in the first half, having -- holding on the vacancies, not filling those or managing that and no professional fees and recruitment and so forth. So we've always said, as part of that $9.5 million, we expect that to come back into the business. So I would expect that to happen certainly in '22, absolutely. But the other big numbers that work through into that is, as I said, $1.5 million of savings in integration from Methven. And that's not all from selling. But we did integrate our sales team across ANZ with the Methven team, and that had driven some of those savings. So those were planned and just part of the $6 million integration related to Methven, and those will be sustained and will continue. So I guess it's a -- roughly, I'd say, maybe half of it will come back and half of it will stay out year-on-year. And look, it's probably a bigger -- a slightly distorted comparator to give you really the 6 months. So I think we'll probably see it sort of less extreme by the full year when things even up. Some of that costs came out in the second half of last year as well. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [60] -------------------------------------------------------------------------------- Okay. And then on the sale of the Methven China plant and the benefits that you're expecting, so $3 million benefits. And the one-off costs, $4 million full year, $2.1 million this year, were they taken above the line? And are the annualized benefits relative to those one-offs? Or are they on top of the one-offs? -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [61] -------------------------------------------------------------------------------- I'll try and break that down. So in first half this year, you'll see we had one-offs of $2.2 million pretax. And in the second half, you'll see on that assumption, Slide 23, we've set out that we think significance for the full year will be $6 million. So there'll be $3.8 million in the second half. And the bulk of that is related to 2 things. One, the warehouse consolidation that Tim talked about in New Zealand and the sale of the assembly plant in China, and the balance is related to ERP kicking off. So those are, if you like, below the line and in significant items. And then as we called out that, yes, there will be an annualized saving of $3 million in FY '23 -- '22, sorry, related to that Methven part of that, which was about $3 million out of the $3.8 million expected in the second half. Does that make sense? -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [62] -------------------------------------------------------------------------------- Yes, it does. -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [63] -------------------------------------------------------------------------------- So there's effectively a very quick payback on those changes that we're making, which will obviously give us long-term margin improvement in Methven, as we've spoken about. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [64] -------------------------------------------------------------------------------- Yes. And you are talking a $3 million improvement versus your adjusted EBIT this year? -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [65] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [66] -------------------------------------------------------------------------------- Okay. All right. And just last one for me. On the -- in terms of the market, you spoke about this a little bit before, but in terms of the residential R&R piece, what do you think the -- where the R&R growth was in the first half of '21? And what are you assuming into the second half and then into FY '22? -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [67] -------------------------------------------------------------------------------- At the moment, I think we sort of -- we're sort of aligned with pretty much where HIA have come out, which is for the full year, I think they're forecasting something in the region of a 3% growth. And we think that, that will be slightly stronger in the second half relative to the first half. So the first half is plus 1% or 2%. Second half will be a little bit stronger than that, as we said. So that's more aligned to -- so we're aligned to that one as it relates. At the moment, I think it's a little bit too hard. If you're looking forward to FY '22, I think in R&R, generally in that resi space, you're normally plus 2%, plus 3%, minus 2%, minus 3%. You tend not to see the massive boom and bust in those areas. So HIA is pulling it down marginally in FY '22. I think if it is, it's only down 1% or something like that. So I think it's pretty much going to be wholly relatively flat. And I think that's reflecting that same drag forward potentially around HomeBuilder. But at the end of the day, if not all of that plays through then, we may see a slightly slower growth in the second half and a slightly higher growth into FY '22. So we think that's roughly where it will end up. But at the moment, it's still, I suppose, a little bit up in the air. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [68] -------------------------------------------------------------------------------- Do you not think the sales performance of your major customers just in R&R was, in fact, a bit stronger than that this half, yes, and I guess your relatively weaker sales for most of your major customers? -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [69] -------------------------------------------------------------------------------- Yes. We're actually very comfortable actually with where we've landed with our major customers because what you've got to look at for every one of our sales is you've got to look at whether that's in resi, whether that's in commercial. And obviously, a lot of the downside that we've had in the first half has been around the commercial sales. If you take some of our major customers, we're very -- I'm not going to quote their numbers, but we're very confident that we're growing at or ahead of their position within the front of wall. So with our major customers, we're actually very comfortable around that. So I think when you look at some of our customers, you've got to split their business up, front of wall, back of wall, water. And then some other players such as Reece, for example, have got civils and they've got refrigeration and they've got HVAC and whatever. So I think you have to look at their business in totality and then try and strip out what we're doing on front of wall. So that's how we try and compare ourselves to market. And certainly, we're confident that we're going okay on them. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [70] -------------------------------------------------------------------------------- Why do you think front of wall kind of asset category would be one of the few categories, I guess, which isn't participating in this home improvement boom that we're seeing? -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [71] -------------------------------------------------------------------------------- I didn't say it wasn't participating. You have to look at share, and I'd say that we're holding our eyes on what we know. So from our perspective, the customers where we're in that trade area, I'm very confident that we are actually participating in it with them. As I said earlier, (inaudible) commercial was around 32% of our business. It's come down this year, but that's in -- being a double-digit decline in the first half, which has had a major impact not only on us, but obviously, we sell everything that we sell through that to a merchant. So that has a flow-through on that. If you look at that commercial versus what we do in resi, our resi, I think, with every customer, we're actually -- when I say resi, either merchant sales or residential new build sales. We're actually up in the first half. But the challenge has been that in the commercial, that's been the anchor in terms of how we look at how we're performing in each of our customers. I think the slide -- I'm not sure which one it is, but all of the customers -- Slide 6 gives a little bit of an indication of that. It doesn't really know who is who, but even if you look at customer 1 there, we know that residential sales and merchant sales are strong, but we know that that's been held back by some obviously slowing commercial sales. And then at the bottom of the -- on the left-hand side is customer D, is obviously a customer which is pretty much exclusively focused on commercial. So it's all to do with where they play in the market in terms of how it plays through the customer. -------------------------------------------------------------------------------- Operator [72] -------------------------------------------------------------------------------- Your next question comes from Lisa Huynh from Citi. -------------------------------------------------------------------------------- Lisa Huynh, Citigroup Inc., Research Division - Research Analyst [73] -------------------------------------------------------------------------------- I just had a question on the commercial order book. I guess you've talked in length about the weakness in commercial, and I understand it's fairly uncertain at the moment. Can you just talk to us about what you see as some of the catalysts you're looking out for in your business, specifically in the education, aged care and health space to see some of that order book convert into sales on the (inaudible)? -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [74] -------------------------------------------------------------------------------- Yes. Look, good question. Really a couple of things there. The first one is I think the whole COVID piece has played out in a way to an advantage of this because I think it's going to create renovation opportunities in the commercial space in a way that I think we'll put more of an emphasis on rental rather than new build. If you go into any public area, whether it's a hotel or whether it's a school or around Asia, you'll see that most of the facilities are actually touchless, whereas -- in sort of high-end places particularly, whereas in Australia, whether it's schools, whether it's aged care, whether it's health, there's still actually a lot of touch products that you need to manually flush or turn the taps on and off. So we think that the major short-term benefit will be this conversion that is around safety and security for patrons, whether that's a person in aged care facility or whether it's somebody visiting a retail shopping center. And we're already seeing quite an increase in inquiries and demand for touchless solution. So I think that's the piece that's going to be interesting across not only aged, health and education but I think more broadly as well. So from our perspective, we're already seeing that playing through. Within our order bank, tapware has actually increased as a percentage of our order bank. It's only about 18% to 19% at the moment. We expect that to continue to increase over the second half. And then I think more broadly, as I said earlier, I think we're seeing a mix shift from those large-scale jobs to the smaller jobs, sort of that renovation as opposed to new build. From our perspective, we expect that to continue through with increased inquiries in that space and increased conversion into sales there. So that's why as I mentioned earlier, our education, health and aged is up about 25% in order bank versus at the end of FY '20. And we expect that, that conversion to sales to be a lot quicker. So in a way, what we're trying to do between the peaks and troughs of those big jobs is actually fill it in with a lot more smaller stuff. So from our perspective, they are the lead indicators that we look for, which is that order bank around some of those areas where we know it's more replacement and renovation and shifting mix within that order bank. And I think we're comfortable with the progress that we've made to date. We've got a lot more to do, and we've got new touchless tap ranges coming out in the second half, literally a couple of months' time. And we're going to continue to drive more of those because we think that the market has already made that shift, and we need to make sure that we've got sufficient product offerings with different price corridors to capture that opportunity more fully. So that's how we're thinking about the shift in that order bank at the moment. -------------------------------------------------------------------------------- Lisa Huynh, Citigroup Inc., Research Division - Research Analyst [75] -------------------------------------------------------------------------------- Okay. Sure. And I guess that shift towards more of the smaller projects in terms of the renovation piece, would I be correct to assume that that's typically higher margin because there's probably less overhead attached those type of contracts? -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [76] -------------------------------------------------------------------------------- It's an interesting one, but it's very dependent by the individual job to put it bluntly because sometimes in health care and aged care, people are willing to pay a premium for a service solution and an ongoing benefit of knowing that you fix problems and that whatever happens, you'll be there for replacements and whatever else. Education may tend to be a little bit more focused on landed price. So I guess it does vary a little bit. But generally, I mean, I think the principle is that commercial is a higher margin segment for us and then within that individual jobs may vary up and down, quite frankly. So some will be above the average in commercial and some will be a bit lower. But certainly, we don't expect it to be margin dilutive going into some of those smaller jobs. -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [77] -------------------------------------------------------------------------------- I mean every job is quoted. So it's not like there's, if you like, a standard price book. It depends on many factors. -------------------------------------------------------------------------------- Lisa Huynh, Citigroup Inc., Research Division - Research Analyst [78] -------------------------------------------------------------------------------- Okay. Sure. Got it. And just last one. Just quickly on Methven, I think you might have touched on it before. But can I just confirm that for Methven, the margins were up ex integration synergies? -------------------------------------------------------------------------------- Patrick A. Gibson, GWA Group Limited - Group CFO [79] -------------------------------------------------------------------------------- Yes. Margin -- look, I think when we bought it, Methven had a 6% to 7% -- yes, 6 -- as high as sort of 6.8% EBIT margin, closed last year up at about 12%. And at the end of the first half, Lisa, it was in and around 14%. And that's coming not just from integration savings but also from top line growth. And then as I said earlier, we're on track to get to those high-teen margins FY '22, '23 and have line of sight on that now, particularly with those other savings we spoke to Peter on the last call. -------------------------------------------------------------------------------- Operator [80] -------------------------------------------------------------------------------- There are no further questions at this time. I'll now hand back to Mr. Salt for closing remarks. -------------------------------------------------------------------------------- Timothy R. Salt, GWA Group Limited - MD, CEO & Executive Director [81] -------------------------------------------------------------------------------- Well, thank you, everybody, for your time this morning. We appreciate it. And obviously, for further follow-up questions, we're more than happy to take any of those as we can. And Martin Cole is here to help us organize that. So thanks for your time this morning. Have a good day, everybody. Thank you. -------------------------------------------------------------------------------- Operator [82] -------------------------------------------------------------------------------- That does conclude our conference for today. Thank you for participating. You may now disconnect.