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Edited Transcript of MPG.NZ earnings conference call or presentation 24-Nov-19 9:00pm GMT

Interim 2020 Metro Performance Glass Ltd Earnings Call

AUCKLAND Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Metro Performance Glass Ltd earnings conference call or presentation Sunday, November 24, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Fraser-Mackenzie

Metro Performance Glass Limited - CFO

* Simon J. Mander

Metro Performance Glass Limited - CEO

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Conference Call Participants

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* Arie Dekker

Jarden Limited, Research Division - Head of Research

* Blair Cooper

* Matthew Allan Henry

Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research

* Stephen Hudson

Macquarie Research - Head of Research

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Presentation

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Operator [1]

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Good day, and welcome to the fiscal year 2020 half year results announcement conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Simon Mander, CEO. Please go ahead.

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Simon J. Mander, Metro Performance Glass Limited - CEO [2]

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Thanks, Melinda. Good morning, everyone. Welcome, and thank you for joining our call today. Firstly, some introductions. I'm Simon Mander, Metro Glass' CEO; and with me is our CFO, John Fraser-Mackenzie. This morning, we'll provide you with an overview of Metro Performance Glass results for the 6 months to the 30th of September 2019, then we'll turn to Q&A at the end of the call.

We'll now start on Slide 2. In the first 6 months of FY '20, the company is focused on its strategy to ensure we remain focused on our key customers, are resilient in a range of market conditions and build a base for improved financial performance into the future. There are 4 primary topics we'll focus on today: firstly, New Zealand performance and local market conditions; secondly, progress we have made in the turnaround of our Australian business; and thirdly, our announced decision to consolidate and refocus our New South Wales operations; and finally, an update on our capital management and expected outlook for the full financial year.

Turning now to Slide 3 in our key financial outcomes. In the half, we adopted the New Zealand IFRS 16 lease accounting standard with no adjustment made to prior years. Key financials for the first half FY '20 are provided on a pre and post basis in the slide deck and on note 9 to the financial statements interim report. Each of the figures I'll highlight are inclusive of the impacts from the new lease standard, unless otherwise stated.

In the half, group revenue declined 3% versus first 6 months last year, and EBIT declined 6%, and net profit after tax declined 15%. These results were driven by challenging and competitive markets in both countries, albeit supported by stable New Zealand performance and Australian double glazing growth. In New Zealand, which is approximately 80% of group revenue, we continue to improve our customer experience and differentiate our offering in an increasingly competitive market. New Zealand revenue of $109.6 million was down 3% versus previous comparable period with an EBIT of $17.2 million, which was up 2%. Broad softness in the residential sector, particularly in the Upper North Island adversely impacted revenue in New Zealand.

Australian Glass Group, AGG, revenue grew in Australian dollar terms, particularly in the key double glazing segment with higher volumes in a soft market. However, lower pricing and adverse foreign exchange movements resulted in an EBIT loss of $2.3 million versus a loss of $1.3 million in the first half of FY '19. We also strengthened our balance sheet with net debt declining by $21.9 million year-on-year to $73.4 million, with $10 million of this over the past 6 months. This was also supported by a $5.3 million reduction of working capital.

Our strategic goals remain unchanged. On Slide 5, we highlight a few areas in which we've made good progress of late, including improved service levels, reduced staff turnover and our recent launch of a new market-leading, high-performance double glazing products.

As you can see on Slide 6, the number of building consents issued have been elevated for some time. The mix of consent continues to shift towards multi-residential with detached housing consents remaining flat on a 9-month lag basis. Multi-residential, high-density dwellings tend to take materially longer to build and typically have smaller floor areas relative to detached housing which does impact the volume of actual construction. In our view, the actual level of construction activity within our core segments has been broadly in line with last year. Feedback from our customers consistently highlight the softness in actual activity and reduced box of forward work. This dynamic has been particularly evident in the upper North Island market.

Turning now to Slide 7. In New Zealand, Metro Glass is operating in an increasingly competitive market. We believe that delivering a consistent experience for our customers is critical for their success and enables us to continue to strengthen these relationships. Our customer service levels continue to improve, and we have increased gross profit percentage from 51% to 52.8% through a shift towards higher-value product mix with more toughened and laminated glass. Our people are also reacting positively to the changes we've made in the business, including a strong focus on safety and well-being, training and continuous improvement. Pleasingly, voluntary staff turnover is continuing to trend in the right direction.

Looking briefly at Slide 8, Australian Glass Group was primarily involved in the new detached houses and alterations and additions segments in the Southeastern Australian markets. Construction activity in these areas have remained relatively consistent with last year. That said, we expect to see the recently publicized deterioration of the Australian housing market to have an increasing impact in the next 6 to 12 months. Countering this, however, we continue to see the penetration of double glazing and our sales of double glazing increase, alongside support of regulatory changes in our target markets.

Now on to Slide 9. In Australia, revenue grew by 1% in Australian dollar terms in the first half of FY '20 versus the prior comparable 6-month period, including 3% growth in our key double glazing segment. Pleasingly, the operational improvements we shared externally in May and July continued with DIFOT up 10% versus the same 6 months last year, and external reworks down 22%. This is reinforced by the feedback we've received from existing, new and returning customers.

Moving on to Slide 10. In May at our annual results release and in July at our ASM, we outlined that we had a clear improvement plan with a clear set of milestones in place for AGG. While positive progress has been made, our Victorian and Tasmanian operations are profitable, the New South Wales business has continued to be loss making. There's a large long-term opportunity in the New South Wales market, particularly as the penetration of double glazing increases. However, these market changes will take time to come through. Today, we have announced that operations at our Sydney manufacturing plant will be consolidated and refocused on supplying double glazing and other glass products to window manufacturers. This means that local production of non-window or processed glass will be discontinued at our Sydney plant for the New South Wales market. We believe these changes will provide an improved competitive position and financial performance over the medium term for AGG. This restructure will regrettably impact a significant number of our Sydney-based staff, and our priority is to support those affected by this decision.

From a financial perspective, in FY '20, the restructure will have a one-off cash impact of $2.5 million in FY '20, of which $1.1 million is already provided for and an estimated asset write-off totaling $3.5 million. The transition is planned to be completed by the end of March 2020.

I'll now hand over to John to discuss the financial results in more detail.

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John Fraser-Mackenzie, Metro Performance Glass Limited - CFO [3]

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Thank you, Simon. Good morning, all. Our group revenue for the 6 months to September 2019 on Slide 11 was 3% down on the prior comparable period at $136.7 million. In the New Zealand market, revenue decreased by 3% to $109.6 million, and EBIT increased by 2% to $17.2 million, which is inclusive of impacts from the new lease accounting standard. Commercial glazing declined by 6% to $22.8 million. This decline was across the North Island as a result of the timing of projects coming on stream after a record second half in the prior year. Nationally, residential declined 2%, impacting Auckland, in particular, with retrofit revenue down 3%.

In Australia, revenue in Australian dollars increased 1%, which we're pleased with and was supported by the operational improvements and marketing efforts in the market. However, adverse foreign exchange movements resulted in a 1% decline in New Zealand dollars to a reported NZD 27.1 million.

Slide 12 reflects our full year results. I'll draw you first to the segmental results on the right-hand side of the page. New Zealand delivered a pleasing gross profit performance with percentage GP, up from 51% in the first half of 2019 to 52% in the first half of FY '20. This result is on the back of our high-value product mix and improved operating performance. Segmentally but benefited from the increased GP percentage, but this was offset by increased costs relating to electricity, distribution and customer service.

In Australia, while our factory costs increased proportionately with volumes, our margins declined as a result of weaker Australian dollar, increase in material costs and impacts of competitive pricing with our reduction in our EBIT as a result. On the left, turning -- the group results, net profit declined by 15% to $7.7 million in the 6 months.

I'd like to move on to the waterfall on Slide 13, which has some additional detail. So the movement in New Zealand EBIT results are shown in the gray shading, which included a healthy improvement in the underlying gross profit margin. As mentioned, it was driven by improved pricing, product mix and savings and material costs, following improved inventory and operational management. Lower revenue and an increase in the number of smaller cost items, such as electricity, distribution and customer service offset this improvement.

Turning to the Australian performance, which is the green shaded area of the waterfall. The main bar on this is the gross profit percentage decline, which is largely as a result of a weaker Australian dollar, impacting material costs and competitive tensions having an impact on pricing. Group costs in the period were higher than the prior period on account of lower long-term incentive costs and professional fees in the prior period.

Turning to the balance sheet on Slide 14. The group achieved significant reductions in working capital for the second successive year with -- and over $5.4 million lower than the -- compared with the prior comparative period. This was achieved through close management of trade debtors and inventory in both New Zealand and Australia.

Reported net operating cash flow doubled from the first half of FY '19. That was driven by the improved working capital performance and supported by reduced tax payments as well as the reclassification of operating lease payments under IFRS 16. Pleasingly, reported net debt decreased by $21.9 million year-on-year, with $10 million of this in the last 6 months. Group gearing decreased from 36.9% in September 2019 to 31.2% in September this year, and our net debt-to-EBITDA ratio reduced to 1.9x from a ratio of 2x at the end of March this year.

Slide 15 gives an update on the cash flow. As mentioned, we're pleased with the reduction on net debt, and you will see we had strong cash generation from operations, which was driven from our -- by our performance in New Zealand. On a constant currency basis, we actually reduced debt by $23.4 million. Although on a reported basis, this was impacted by weaker New Zealand translation on our Australian debt.

I'll now pass back to Simon to pick up on the outlook for the second half of the financial year.

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Simon J. Mander, Metro Performance Glass Limited - CEO [4]

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Yes, thanks, John. And now turning to Slide 16 and our outlook for the full 2020 financial year. In New Zealand, elevated levels of residential and nonresidential construction are expected to continue in the near term. However, we expect further softness in certain regional markets, including Auckland. In Southeast Australia, leading indicators point to softening in residential construction activity in the near term, particularly impacting multi-residential approvals. AGG's key market segments have been less impacted to date, but are also expected to decline looking forward. Market competition has intensified in both New Zealand and Australia, with several glass processes having introduced new capacity to the market in the last 12 to 18 months.

We're confident that Metro Glass is building its resilience by focusing on production reliability, pricing, cost management and by creating stronger relationships with key channel participants. We've made positive progress in Australia and with the announcement today, we are taking clear action to improve AGG's financial results going forward. We're also continuing to focus on strengthening our balance sheet and have made good progress over the past 12 months in this regard.

Given our year-to-date results and our current view of the market, we have revised our guidance for the FY 2020 year down from our previous guidance. We now anticipate group EBIT in the range of $21 million to $24 million, and this excludes 2 items: the impact of changes to IFRS 16, as per the lease accounting standards, which we expect to increase reported EBIT by circa $1.7 million for the full year; and a net abnormal charge of approximately $5 million related to the restructure of New South Wales. That's an asset write-off of $3.5 million and cash costs of $2.5 million, less the $1.1 million already provided for. We maintain our previous guidance on net debt reduction of circa $15 million, which is inclusive of impacts from the restructuring of New South Wales.

I guess it's worth just talking a bit about why we have quite an expanded range on our guidance. Previously, we had a $2 million window, we've just increased that to $3 million. And the reasons for that is, if we look at the first half, we thought we had a good Q1. Q2 has been softer. And we're just being cognizant that with potential disruption in New South Wales as we go through our restructure. Plus, we're seeing the pricing pressure in the upper North Island with just a little bit of instability in the market. And hence, why we've widened that guidance range for now.

I guess -- so I'd like to also just sort of summarize that because while we're really disappointed about debt reduction and our guidance, I think it's important to reflect on that there's been some very positive things in the first half. We're very pleased in New Zealand, how we've continued to improve our customer experience and differentiate our offering. And in Australia, we're very pleased about the growth in our double glazing segment, particularly in New South Wales, which had grew circa about 20% in the year-to-date.

We've also strengthened our group balance sheet which is a key entire strategy of ours, with net debt reduced by $21.9 million year-on-year and $10 million of that over the past 6 months.

That brings us to the end of the presentation. We're really happy to take any questions that you may have. So thank you. Melinda, we're ready for any questions that the participants may have now. Thanks.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll first go to Arie Dekker with Jarden.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [2]

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Just firstly, in terms of Australia, can you just give a bit of color on what the EBIT outlook is for Australia for full year '20? I think you talked about the improvement there being second half weighted. And then also, what -- coming out of FY '20, what that EBIT in Australia would be normalized for the rationalization in New South Wales that you're undertaking?

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John Fraser-Mackenzie, Metro Performance Glass Limited - CFO [3]

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Arie, John here. So we anticipate for this year, Australia having a slightly improved EBIT on the prior year. And just to give that some color, going back to last year, we had a relatively -- we started off okay in the first half. We had a bad second half, and I think we've been pulling back out of that second half with the fundamentals improving. So we anticipate our second half for Australia will be better than their prior comparative period, and that should finish marginally better than last year. Looking forward to next year, I think the kind of refocusing of New South Wales will have a positive impact with effect from next year on the Australian business. And so we're probably a bit too early to call whether we think that Australia will be into a profit by next year, but we definitely anticipate that the financial performance will be improved from this year.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [4]

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Yes. And I think there's reference to Victoria and Tasmania being profitable. So they're both profitable at EBIT level and with their full cost? I mean is there not sort of costs associated with the overall Australian entity that is ignored in assessing that profitability?

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John Fraser-Mackenzie, Metro Performance Glass Limited - CFO [5]

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That's right. They are profitable in their own rights after allocation of a proportion of kind of central costs. Obviously, Tasmania still kind of probably end up not yet at its full potential, but we are pleased with how it's grown. So that will continue to do better.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [6]

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Did you -- you're rationalizing New South Wales. Did you look at, I mean, I guess, it's not a big part of the overall business there, did you look at selling that part of the business that you're rationalizing? Or was it really just a kind of rationalization was the only option you looked at?

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Simon J. Mander, Metro Performance Glass Limited - CEO [7]

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We constantly look at many options there, Arie. And we've landed on what we think is the best option. The growth option in Australia is very weighted to New South Wales, with a very low level of double glazing penetration. We -- the best option for that -- for our business there is to do what we're doing in Sydney, just focusing in on very much so on double glazing.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [8]

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Sure. Just in terms of the CapEx outlook, I think it was just over $4 million back, Simon, in the first half, the CapEx outlook for the full year. And also, what level of CapEx you're undertaking in Australia in FY '20?

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John Fraser-Mackenzie, Metro Performance Glass Limited - CFO [9]

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Arie, so for this year, the CapEx for the full year will be in the region of $9 million. So plus or minus $9 million, of which Australia is approximately $1.5 million, $1.4 million, $1.5 million of that. And that is what we think is our kind of current normalized spend and for the kind of short to medium term, $9 million to $10 million in total, $1.5 million to $2 million of that in Australia.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [10]

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Right. And then just finally, just sort of an update on APL. And in particular, I guess, what you guys are doing ahead of them sort of commissioning the plant and that to -- I mean obviously, you've got your business-wide initiatives that you're talking about. But just specifically with reference to APL's fabricators, what sort of strategies are you sort of taking there to minimize the impact and sort of what you're hearing on that?

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Simon J. Mander, Metro Performance Glass Limited - CEO [11]

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Yes, Arie, I guess I'm a bit reluctant to talk too much about other competitors' strategies, but we understand that there's a delay in that building. And they're anticipating to be at a -- able to start delivering product sometime in the second quarter, calendar quarter. What are we doing to counter that? I just sort of remind you that there's plenty of other glass suppliers in the market already. And what we're doing is just focusing on our customer service, and we're pretty pleased with how we're seeing all those metrics improving. We are doing a lot of things in the market around -- to strengthen our position, and I don't think it's really ideal to talk too openly about the tactics that we're employing at the moment.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [12]

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Sure. And just with reference to that competitive activity in the market, what are you sort of seeing pricing wise?

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Simon J. Mander, Metro Performance Glass Limited - CEO [13]

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Yes, there's quite a bit of instability at the moment. The upper North Island is -- has been -- that September quarter was softer than what everyone was anticipating, which created a bit more activity out in the market. Our volumes, we're comfortable with, but we've seen some other people in the market were sort of reacting to changes in volumes.

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Operator [14]

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And we'll go next to Matt Henry, Forsyth Barr.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [15]

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That last question of Arie's is really what I was kind of interested in. Can you give us sort of any indication around who the antagonist have been in the market? And how significant the volume -- you've called out both volumes and competition as having an impact in the period. Are you able to give us some indication around what the impact of each has been? What do your volumes actually look like year-on-year in a quantity -- from a quantity point of view?

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Simon J. Mander, Metro Performance Glass Limited - CEO [16]

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Yes. I think Arie, our volumes are down a little bit in New Zealand. Some of that is due to us being quite a bit more selective about what we're doing. So you're seeing our gross profits and margins improved. So we're being a bit more selective and sometimes a little bit less volume through the plant -- through your plants as can be beneficial when you're doing a lot of changes. So anyhow, as to pricing, it's really variable. There's a lot of technical pricing happening. So I'd rather not talk too much about the details of that for obvious reasons.

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Operator [17]

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(Operator Instructions) We'll next go to [Darshen Panu], a private investor.

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Unidentified Shareholder, [18]

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Yes. Which year will shareholders see commencement of dividend? That's my first question.

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Simon J. Mander, Metro Performance Glass Limited - CEO [19]

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Yes, sure. As we advised earlier in the year that we will be relooking at the dividend policy when our net debt to EBIT -- trailing EBITDA gets down around the 1.5x. And with -- that will be -- we're anticipating at the moment that, that will be during the next financial year.

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Unidentified Shareholder, [20]

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Next question is, can you explain the customer churn in FY '19? That's in numbers.

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Simon J. Mander, Metro Performance Glass Limited - CEO [21]

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Sorry. Sorry. Can you just repeat that?

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Unidentified Shareholder, [22]

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Can you explain -- please, can you explain the customer churn in FY '19 in numbers? How many customers has Metro Glass lost to the competitors?

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Simon J. Mander, Metro Performance Glass Limited - CEO [23]

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We -- I'd rather not give exact numbers on that, but the -- in FY '19, so you're talking about the last financial year?

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Unidentified Shareholder, [24]

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Sorry, this financial year. This financial year.

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Simon J. Mander, Metro Performance Glass Limited - CEO [25]

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I think this financial year, there's been a net gain.

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Unidentified Shareholder, [26]

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Okay. Question number three, what new products and R&D is happening? What types of new glasses, glass wall, is coming on stream for Metro Glass?

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Simon J. Mander, Metro Performance Glass Limited - CEO [27]

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Yes. Okay, well, we launched the new double-glazed product called Xtreme, which is a Low E product with -- we use for a -- and we supply that with either argon or krypton fill that gives particularly good energy properties, and that's to go up against -- and we both provide a better performance in triple glazing product. That would be the key thing as well as work that we've been doing around monolithics on balustrading and the processes that you go through there to have approved products. And also on the digital front product range with new capacities that we have there and updated machinery in Auckland and New Zealand Christchurch.

As far as the glasses itself goes, there's a range of different glasses that we are always sourcing internationally that those are really at the margin. So we're constantly looking at what's available that's relevant for the market, and that's where we're focusing on Low E products.

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Operator [28]

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And we'll next go to Stephen Hudson, Macquarie Securities.

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Stephen Hudson, Macquarie Research - Head of Research [29]

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Just 3 questions for me, if I could. Just on the guidance range, can you just confirm whether or not the AUD 1.1 million provision that you've already taken is included in that range? So in other words, that range is post that number? Secondly, I just wondered if you could comment on import competition, particularly in the multi-res, window space, balustrade, shower segments. Just what you're seeing there, whether or not there's any intensification or change? And then just thirdly, on float glass costs and glazing costs, can you give us an idea of what the pcp change was there for the 2 segments?

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John Fraser-Mackenzie, Metro Performance Glass Limited - CFO [30]

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All right, Stephen, John here. So I'll just cover in the room. So to be clear, that $1.1 million already provided for refers to long service leave, annual leave and make good provision on the properties we'll be exiting. So those are already in a kind of sitting in our balance sheet. So the $5 million abnormal is net of those, and those have been, I guess, have been a normal part of operations for forever, if that's clear.

And then the second one, I'll just -- and... okay, sorry. So the $1.1 million is -- or, I guess, items that we will have to pay off, but are already -- we already provided for in the normal ongoing operations of the business. So long service leave and annual holiday leave for employees we'll be exiting as well as make good on the 2 buildings that we will be moving out of. So those we've already got a provision -- an existing provision, but we'll obviously get a cash impact on settling those, okay?

And the next one, I'll just talk to on float glass. So the -- we haven't had any change in the pricing of float glass. It's pretty stable. It's been -- there are some -- a couple of movements between things such as mirror and other products. And -- but so across the business, there's been a slight impact in New Zealand from the U.S. dollar to New Zealand dollar change and -- as the New Zealand's got weaker. That's been a bit stronger in Australia. And we've obviously had the benefit of a price increase to offset that in New Zealand, and we haven't had a price increase in Australia. So the kind of international float glass pricing is very stable. And -- but it's really a matter of the currency and kind of how we've done with our hedging.

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Simon J. Mander, Metro Performance Glass Limited - CEO [31]

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So you had a third question there about import competition on -- was wondering if you can talk about process toughened shaft, that toughened glass balustrading. Yes, we -- that is in -- it's increasing slightly, but it's at a fairly low level. Australia has quite a high level of imports. I think the thing with that to recall is that process toughened is that once the glass has been toughened, you can actually alter its dimension or machine it. So being a local supplier into that market gives you that flexibility to address any dimensional issues towards the building in below.

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Stephen Hudson, Macquarie Research - Head of Research [32]

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That's useful, guys. And John, just also on glazing costs. If you can give us a feel for what happened to your glazing costs pcp?

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John Fraser-Mackenzie, Metro Performance Glass Limited - CFO [33]

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So our glazing costs have come down. And really, that's -- a lot of that is on account of the timing of some of the projects. So glazing costs -- so we then -- we kind of report distribution and glazing together. Glazing costs have come down slightly, and distribution costs have gone up slightly against the prior period. And across both of those two together, they're pretty flat.

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Operator [34]

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(Operator Instructions) And we'll go to Blair Cooper, ACC.

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Blair Cooper, [35]

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Just 1 further clarification around the guidance. So am I right in thinking that the $1.1 million that's already being provided for was provided for at that amount in the full half -- in the first half? Is that the correct -- Or had that been provided earlier?

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John Fraser-Mackenzie, Metro Performance Glass Limited - CFO [36]

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That have been provided earlier, Blair.

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Blair Cooper, [37]

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Okay. So didn't impact on the first half result.

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Operator [38]

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And Mr. Mander, there are no additional questions in the queue at this time. I'll turn things back over to you for any additional or closing remarks.

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Simon J. Mander, Metro Performance Glass Limited - CEO [39]

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Okay. Look, thanks, everybody. If there's any further questions later on, happy to take them one-on-one. Thank you very much. Cheers.

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Operator [40]

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And that does conclude today's conference call. We thank you all for joining us, and have a great day.