Metro Performance Glass Limited (MPG.NZ) Earnings Call Transcript

Good day, and welcome to the Metro Performance Glass half year results announcement. Today's call is being recorded. At this time, I'd like to turn the call over to Simon Mander. Please go ahead.

Thank you. Good morning, everyone. Welcome, and thank you for joining our call today. My name is Simon Mander, and I'm the CEO of Metro Performance Glass, and with me is Brent Mealings, our CFO. This morning, we will provide you with an overview of the group's results for the 6 months to 30th of September 2020, and then we'll be happy to take any questions. Moving on to Slide 2. We noted 4 key messages, which summarize the half. I'd like to start by recognizing the strength and dedication of our people right across Metro Glass group. The emergence of the COVID-19 pandemic has presented significant challenges for our teams, and their resilience has ensured that we've continued to deliver our market-leading products and services to our customers. We had a solid first half in New Zealand, although the COVID-19 shutdown impacts at the start of the financial year overshadow the underlying performance. Australian Glass Group progressed well on the turnaround plan, with good operational performance and pleasingly delivered an EBIT positive result for the first half. And finally, as a group, Metro Glass has continued to significantly reduce its bank debt through strong operating cash flows and targeted capital expenditure. Turning now to Slide 3. We outlined some of the COVID-19-related issues we have faced over the first 6 months of FY '21. Sitting here in November, it's vastly different to how we started the financial year, with our New Zealand-based operations closed from late March to the end of April, as we covered in some detail at the ASM in August. We committed early to paying 100% of our staff's contracted wages and salaries for the 5-week period of Alert Level 4. We were very focused on supporting our customers as much as possible, for example, with emergency glazing work and regular communications. We controlled our costs across the group with discretionary costs and capital expenditure down materially. In Australia, restrictions have generally been lease onerous, and we've been able to operate relatively normally throughout this calendar year. On Slide 4, we present our key financial results for the year. Our group results were primarily impacted by the shutdown and subsequent ramp-up period in New Zealand, though pleasingly partially offset by the improved performance in Australia. New Zealand revenue of $89.2 million was down 19% versus the previous comparable period, with an EBIT before significant items of $12.8 million, down 26%. Trading volumes from June onwards were largely in line with the prior year. However, this could not offset the impacts from the Alert Level 4 lockdown with more revenue in April and significantly reduced revenue in May. Australia Glass Group's revenue grew by 3% to $27.8 million, but the big turnaround was at the EBIT level where a $2.3 million loss in the prior comparable period improved to a $0.4 million EBIT profit this half. Our Australian manufacturing plants have remained operational throughout the first half, with the business now delivering strong and consistent operational performance that has been recognized by the market. Group EBIT of $12.8 million includes the New Zealand and Australian segmental results as well as group costs of $0.4 million, and you will find further information on this in note 2 of the financial statements. We have continued to strengthen our balance sheet, with net bank debt declining by $25.7 million year-on-year to $47.7 million. This was supported by a $4.6 million reduction of working capital, the sale and leaseback of 2/3 of our vehicle fleet and a reduction in capital expenditure. We remain committed to reducing the company's leverage ratio to below 1.5x net debt to EBITDA on a pre-IFRS 16 basis. And we are pleased with the progress being made. Once this is achieved on a sustainable basis, the Board will consider the resumption of dividends to shareholders. As you can see on Slide 5, on a 9-month lag basis, new residential consents grew 8.1% between March '20 and September '20 reflecting strong consent activity in the second half of the 2019 calendar year. Since the start of this year, despite the onset of COVID-19, consents have continued to track at a fairly consistent level. Total floor area consented has increased 3.9% from the same period. The mix of consent continues to shift towards multi-residential dwellings, with detached housing consents growing 3.9% on a 9-month lag basis compared with 14.9% in multi-residential. Nonresidential has declined 7.6% in the 12 months to September 2020 compared with the prior year. Seasonally, Metro Glass commercial glazing forward books have increased 29% over the same period, in part due to the shutdown period, but also reflects our improved operational performance and acceptance rates. Turning now to Slide 6. In New Zealand, Metro Glass has responded well to numerous challenges this year, with significant levels of demand uncertainty and volatility, supply chain disruptions, operating restrictions and increased levels of competition. While Metro Glass were able to ramp up sales to similar levels to last year from June onwards, and the receipt of the New Zealand government wage subsidy, this was not enough to offset the impacts from the Alert Level 4 lockdown. We remain firmly focused on our customers and our people, making good progress with both. I'm particularly proud of our apprenticeship scheme, which we now have more than 80 apprentices enrolled. Looking at Slide 7 briefly. The Australian Glass Group is primarily involved in the new detached housings and alterations in additional segments in our key southeastern Australian markets. Following 18 to 24 months of declines, housing approvals have begun to flatten and increase, and we look forward to these intentions flowing through to activity in glass demand. On Slide 8, in Australia, we continue to see the demand for double glazing increasing, with our sales increasing by 18% versus the same period last year in the segment. This increase in penetration has been supported by regulatory changes introduced in June 2019 for new commercial buildings as well as the planned changes to be introduced in 2022, '23 for residential. Overall, AGG's revenue grew 3% year-on-year, inclusive of a decline in sales of other glass products following the restructure of our New South Wales business in December 2019. AGG delivered a positive EBIT for the first half of the FY '21, and we believe that the business is on a strong footing with a positive long-term outlook. I'll now hand over to Brent to discuss the financial results in more detail.

Thanks, Simon, and good morning, everyone. On Slide 9, we break our revenue down in New Zealand. You can see that commercial glazing sales declined by 21% to $18 million, and the residential segment declined 21% to $59.1 million. These declines were primarily driven by the shutdown period and increased competition in our residential segment. Retrofit revenue grew 2% despite the shutdown period, with an increase in inquiry levels as our customers elected to invest and upgrade their properties. Slide 10 reflects our half year results. I'll draw you to the segmental results on the right-hand side of the page. The impact on New Zealand's gross profit margin was driven by the reduced revenue in April and May, with gross profit margin from June onwards, largely in line with the prior year. In Australia, gross profit margin increased to 26.3%, benefiting from the restructure of the New South Wales business in December 2019. Turning to the group results. On the left-hand side, net profit declined by 2% overall to $7.6 million in the 6 months, benefiting from a $1 million one-off gain on sale relating to the lease of the vehicle fleet. I'd like to now move on to the waterfall Slide 11. Movements in New Zealand's EBIT results are shown in the gray shading area where you'll see we've tried to dimension the impacts of the shutdown period. Our New Zealand EBIT result in April was $8.8 million lower than the prior period as a result of the shutdown, albeit partially offset by the New Zealand government wage subsidy. The following 2 red bars are mainly as a result of the May ramp-up period where revenue was 25% below the prior year. We have been very focused on our cost base and achieved some material cost savings year-on-year in distribution and glazing and administration sales and marketing expenses during the period. Turning to the Australian performance, which is an green-shaded area of the waterfall. The big story here is the gross profit margin improvement and reduction in administration expenses, which primarily arose as a result of the restructure of our New South Wales business. Turning to the balance sheet on Page 12. The group achieved significant reductions in working capital, down $4.6 million compared to the prior period. This was achieved through close management of our trade deckers and inventory in both New Zealand and Australia. We do expect some of the inventory working capital savings to unwind in H2 as we are now in the process of increasing our safety stock levels to help manage the international shipping disruptions. Pleasingly, net bank debt decreased by $25.7 million year-on-year, supported by strong operating cash flows, reduced working capital and targeted capital expenditure and the sale and leaseback of 2/3 of our vehicle fleet. Our accounts now reflect $3.3 million of nonbank debt borrowings, which primarily relates to the IFRS 16 accounting treatment of the sale and leaseback transaction. Net debt to EBITDA is now at 1.53x as at the end of September. Also note the restatement of our March 31, 2020, financial statements to reflect a historic $1.4 million annual leave provision era arising from the implementation of a new payroll system in September 2019. We provided details of this under Note 9 of the interim statements. While disappointing, this had no cash impact and no impact on payments or entitlements of our staff. Slide 13 demonstrates our continued commitment to net bank debt reduction. We think this has been an important achievement to date, which ensures the group is well placed to adapt and take opportunities in the future. I'll now pass back to Simon to pick up on the outlook for the second half.

Thanks, Brent. Turning to Slide 14 and our outlook for the 2021 financial year. Reflecting the significant level of uncertainty the group is facing. We now anticipate providing guidance on expected results for FY '21 alongside a trading update in February 2021. However, there are some comments we'd like to make. Firstly, consenting activity in New Zealand has been stronger than we had anticipated in recent months. However, there is some risk that building activity begins to soften early next year as a result of broader macroeconomic factors as well as local issues like extended border restrictions and further weakness in business confidence in labor markets. Balancing that, we have been pleased with the solid results in New Zealand in recent months. Our customers are typically signing good forward books of work through into the new calendar year. The industry is currently experiencing significant disruptions in delays in international shipping, resulting from a surge in sea freight demand and backlogs of key ports. We are monitoring this situation closely and are increasing our safety stock levels as appropriate. However, we are anticipating an increase in shipping-related costs in the second half. These factors will impact the level of net debt reduction achieved by the end of the financial year. In Australia, we remain confident that the improvements in Australian Gas Group's EBIT results achieved in the first half will be sustained through FY '21, though weighted towards the first half given the Christmas and New Year shutdown period. These comments also assume no material change to the prevalence of COVID-19 or related restrictions. Metro Glass' strategy and focus remain unchanged as we continue to build resilience and defend our leadership position, sustain a positive trajectory in Australia and benefit from growing demand for double glazing there, and prioritizing debt reduction to provide increased optionality for the future. So that brings us to the end of our presentation, and we're now really happy to answer any questions that you may have. Thanks.

[Operator Instructions] We'll take our first question from...

Simon and Brent, it's Steve Hudson here from Macquarie Securities. Just a couple of quick ones from me. I think you talked about the reduction in the New Zealand revenues arising as a result of the mix of competition and lockdown. I just wondered if you could give us some idea of perhaps of the split there given one is sort of a recurring issue, I suppose, and one is not, hopefully. And secondly, you also talked about some cost savings that you believe have been made, that we'll be enduring, particularly in New Zealand. I just wondered if you could contextualize those and give us some idea about what nature of those cost savings are?

Yes. So I mean it's a little bit hard to hear at the start of the question. I think were you interested in -- could you just repeat the first part of the question around the revenue? It was a bit muffled, sorry.

Sorry about that. You were just talking about the revenue reduction in New Zealand being a mix of competitive issues as well as the lockdown. Can you give us sort of a split there in terms of one impact over another?

Yes. I think if you just think about -- we showed at the ASM, our April revenue was essentially 0 in New Zealand. So that's 1/6 of a half. And then in May, we were down 25%, just as production started -- the supply chain started back, helping in the industry. So if you have a look at that and do the maths on that, you can sort of see the impact there as we detail on Slide 9. Commercial and residential both impacted about the same. So yes, it's overwhelming, the reduction in revenue is heavily, heavily weighted to that April close and in the May start-up. Though on the cost side...

Cost side. Yes. So I think it's fair to say there is a mixture of one-off impacts that we -- that you would just anticipate through a number of spin controls that we put in place post the April impact. Through May, we haven't differentiated, I guess, from a cost base perspective as we have done in that -- in the slide with the waterfall. But -- so if you think about the admin side of it, we achieved a $1.6 million year-on-year improvement or reduction. And we're talking high level here, but what we're thinking is that we would be -- 0.6 of that I'd suggest would be sort of what I'd call one-off style impacts. But we'd certainly be aiming to lock in $1 million from that into our future business planning. We also had within factory labor, which is partly why we're seeing our gross margin -- gross profit hanging in there and being quite solid. We've had some quite good improvements in the wages efficiency area in the factory. So that's helped to support our margin delivery. And we expect that, that is ongoing and locked in. And anything else, particularly -- I'm just going to think now, anything else on that you're interested in or...

No, that's useful. I suppose, any indication that you've dropped off any sort of unprofitable shifts? Or I suppose you've given us an indication there that -- or to what extent you've -- marketing costs have been -- have come off but are expected to come back onward. I suppose we're just trying to work out what the nonrecurring elements, both in the revenue and the cost line now. So any sort of help in that respect is useful.