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

Good day, ladies and gentlemen, and welcome to the FY '20 Full Year Results Announcement Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Simon Mander, CEO. Please go ahead.

Good morning, everyone. Welcome, and thank you for joining our call today. I'm Simon Mander, Metro Glass' CEO; and with me is our CFO, Brent Mealings. This morning, we'll provide you with an overview of the company's results for the full year to the 31st March, 2020, and the impacts we have seen and are expecting from COVID-19. We'll then turn to Q&A at the end of the call. The 4 key topics we'll focus on for this call are: New Zealand performance and the changes we've made in the year; the Australian performance, encouraging progress has been made against our turnaround plans; an update on our balance sheet and capital management; and finally, our view on the expected economic outlook post COVID-19 and an associated impairment that we've made to New Zealand goodwill this period. We'll start this presentation on Slide 3. Overall, the group had a solid result in the financial year 2020. Despite the closure of New Zealand operations towards the end of March due to COVID-19, we are pleased to have delivered on our net debt reduction target and EBIT guidance. Strong operating cash flows, targeted capital expenditure and cost management supported a strengthened balance sheet, with net debt reducing by $16.5 million to $66.9 million at year-end. In New Zealand, the strength in our customer relationships supported stable performance in our key window manufacturer segment as we reduced our exposure to large-scale commercial glazing projects. Australian Glass Group continued to deliver on its turnaround plan despite significant declines in market activity, achieving revenue growth, sustained strong operating performance and an EBITDA positive result for the second half. Now turning to Slide 4 and an overview of our financial results. In FY '20, we adopted the new New Zealand IFRS 16 lease accounting standard, which has impacts throughout FY '20's financial statements. In our investor materials, we have provided key financial items for FY '20 on both the pre- and post-IFRS 16 basis, and further details are available on note 7 to the financial statements. All the FY '20 figures I'll highlight today are post-IFRS 16 unless I mention otherwise. Group revenue in FY '20 was $255 million, down 5% versus last year, with an EBIT before significant items of $23.2 million, down 8%. EBIT, pre-IFRS, was $21.2 million, which was inside the guidance range we provided in November of $21 million to $24 million despite the impact of COVID-19 late in the financial year. We also strengthened the balance sheet and achieved our net debt reduction guidance by reducing net debt by $16.5 million to $66.9 million. In New Zealand, we delivered revenue of $203 million, down 7% and an EBIT of $28.2 million, down 9%. The decline is predominantly related to the 24% decline in commercial glazing revenue, which resulted from our decision to reduce our exposure to large-scale commercial projects and focus on small and medium projects. Pleasingly, AGG achieved revenue growth of 3% in New Zealand dollars or 5% in Australian dollars and reduced the EBIT loss by $1.2 million to $3.6 million loss. While still not an acceptable level, we are encouraged by the significant changes made during the year and particularly in the second half. COVID-19 has had a significant impact on the group and on the potential outlook for construction activity. In this context, we have recognized an $86.5 million impairment to New Zealand goodwill this year. This is a noncash charge and has no impact on the company's banking covenants. It is presented as a significant item in our financial accounts. On a pre-significant items basis, our net profit after tax in FY '20 declined to $10.9 million from $14.2 million in the prior year. Moving on to Slide 6. We've highlighted some of the group's achievements from the year under each of our 4 key strategic pillars. A few highlights may include our service levels across the group, which were consistently strong. In New Zealand, we delivered 30% reduction in external rework alongside a stable DIFOT. AGG also continued to improve with DIFOT up -- by 8% and external rework down by 18%. Secondly, I'd note our latest customer survey results, which recognize the efforts of all our staff towards delivering market-leading customer service. In New Zealand, we also achieved our goal of doubling our previous numbers this year. We had more than 70 at year-end. We're very excited to support these staff members on their journey towards gaining a professional qualification. I'd also highlight the various and ongoing changes we're making across the business to support our efficiency and align our cost base to demand. These include the New South Wales restructure announced in November and a significant change to the shift structures in our Highbrook plant, which went live straight after the Alert Level 4 shutdown. Looking at Slide 7 briefly. On a 9-month lag basis, New Zealand consents for residential dwellings continued to grow in FY '20. But in our view, supply constraints restricted actual activity levels in our market to remain broadly in line with last year. As we show on the slide, the number of residential consents grew 6% overall. However, the total floor area covered by those consents grew only 1%. As you all know, all flat glass for construction in New Zealand is imported into New Zealand. And from the graph to the right, you see that the amount of glass imported into New Zealand in FY '20 declined 7% on the previous year. Updating on our operations -- New Zealand operations on Slide 8. Metro Glass continues to operate in an increasingly competitive market. We are committed to providing a differentiated and market-leading customer experience. Our strategy to build deeper relationships with our customers has certainly contributed to us delivering a consistent level of sales in our key residential window manufacturing segment this year. We have talked previously around our conservative approach to commercial project selection. In the year, our lower risk tolerance or the segment transition that's forward book of work towards small- to medium-sized projects. This focus presents opportunities for future targeted growth, but means that fewer large-scale projects were completed compared to the previous year. As a result, commercial revenue was 24% down on the prior year. We have continued to adapt and align the business, and this focus has been carried into FY '21. Turning now to AGG in Australia on Slide 9 shows that AGG's key markets of detached housing and alterations and additions in the Southeast has softened over the last 12 months. That said, these markets have deteriorated and -- to a lesser degree than other Australian states in the multi-residential segment more generally. As we've noted, we're continuing to see the increased use of double glazing, driven by the increasing energy efficiency requirements for buildings in Australia. Moving on to AGG on Slide 10. Over the past 12 months, AGG has successfully reset. Organizational and process changes are now embedded and showing through as demonstrated by improved DIFOT and rework levels I noted earlier. The business has a simple and clear strategy and is on a positive trajectory. AGG's revenue growth this year pleasingly included an 11% increase in double glazing sales, which contributed to AGG delivering a positive EBITDA result for the second half of the year. In November 2019, we announced that our New South Wales operations will be reoriented to focus on supplying double-glazed units. Local production of nonwindows was significantly scaled down, and operating costs have materially reduced. New South Wales still represents a meaningful long-term growth opportunity for us as the state continues to have very low but increasing penetration of double glazing. The set of support of legislative changes in the national building code for residential dwellings is anticipated to come into effect in calendar years 2022 and '23. These new requirements were introduced to new commercial buildings during 2019 and the subsequent increased interest and use of double glazing in this segment has been noticeable. I'll now hand over to Brent to discuss the financial results in more detail.

Thank you, Simon, and good morning, everybody. Slide 11 shows a graphical representation of our revenue by segment, and you can see the impact of the decline in the commercial glazing segment, in particular. Our other segments were relatively flat with an encouraging result for our AGG business relative to the previous year. Slide 12 provides a summary of our financial results. But I'd like to move forward to Slide 13, which highlights some of the key movements in our group EBIT result relative to the previous year. New Zealand's EBIT result, which is shown in the gray shaded box, the key movement is the $7.2 million reduction in underlying gross profit driven primarily by our reduced revenue in the commercial glazing segment. This was partially offset during the year by savings made in our cost base. Turning to the Australian performance, which is in the green shaded area of the waterfall. Our Tasmanian operations continued to grow, which was offset somewhat by a mix change in Victoria. We realized $1 million cost saving in New South Wales year-on-year primarily as the result of the restructure undertaken in the back half of calendar year 2019. Slide 14 sets out our cash flow and balance sheet performance. We've continued to make progress in reducing working capital, which declined $2 million this year versus last year. Operating cash flows were also strong and growing despite lower revenue with an $800,000 improvement pre-IFRS 16 year-on-year. Our strategy to reduce net debt has proved to be a prudent one in the current environment, with our net debt declining by $16.5 million this year to $66.9 million. You can see the impact on equity of the New Zealand goodwill impairment, which is detailed on the next slide, Slide 15. We have impaired the carrying value of New Zealand goodwill by $86.5 million this year, which represents approximately 75% of the prior balance. This goodwill initially arose from the acquisitions completed in 2012, 2 years before Metro Glass' IPO. The carrying value of Metro Glass' intangible assets were reviewed as a result of the significant reduction in forecasted construction activity and the increased competitive intensity. The flow-on impact from COVID-19 will result in declines in the construction activity for at least the next 12 to 24 months. Simon will discuss this further when we come to the company's outlook. Appropriately, reflecting the heightened level of uncertainty at present, the impairment review was conducted using a set of conservative probability-weighted future scenarios. The impairment of goodwill is an accounting charge. There are no impacts on cash or on banking covenants. Total significant items for the year were $89 million, of which included the $86.5 million goodwill impairment, $4.6 million worth of New South Wales restructuring costs and a $900,000 positive tax adjustment relating to prior years. After significant items, the group reported a net -- a statutory net loss after tax of $77.9 million in FY '20. I'll now pass back to Simon to pick up on the outlook for FY '21.

Thanks, Brent. Turning to Slide 16 and our outlook for the 2021 financial year. Due to the current level of uncertainty as a result of COVID-19, we now expect building activity to decline in the coming months and remain at lower levels for an extended period. We have developed several potential future scenarios that show a range of plausible outcomes. Our base case estimates a 9-month lag residential consents in New Zealand as that they will decline marginally in FY '21 before declining like 20% in FY '22 and then recovering by about 5% in FY '23. Building activity in New Zealand essentially seeks during the COVID-19 shutdown period and productivity was also impacted under Alert Levels 3 and 2. These events will undoubtedly have an impact on the normal lag between residential housing consents and glass demand. But this lag provides Metro Glass further opportunity to observe market conditions in the coming months and to further refine our plans. While detached residential housing starts in Australia had begun to stabilize and showed an improving trend at the start of 2020, we now expect a 20% decline in housing starts in our key states in FY '21 followed by a 9% recovery in FY '22. Now we're getting new information by the day and these estimates will naturally continue to evolve. To finish off, we remain confident in our strategy and ability to respond to the changing conditions. We'll work hard to support our customers and deliver excellent service. And we will continue to reduce debt through our focus on operational cash flow and capital expenditure. We've already made some progress on our operating and overhead cost base during FY '20, and we've carried this focus into FY '21. This brings us to the end of our formal presentation, and I'm now happy to take any questions that you may have.

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

This is Grant Lowe from Jarden. I just had a couple of questions regarding -- obviously, Australia has been a transition year particularly in New South Wales with the move to double glazing units. I just wanted to get a sense for -- given the growth in double glazing units of circa 11%, the relative profitability of each of the facilities over there. I see EBITDA is profitable -- the business is profitable at EBITDA level. Just wanted to get a sense of which units are profitable. Presumably, New South Wales is yet to reach profitability. Are the other 2 both profitable at the EBIT level? And then how we see run rates for profitability going into next year in New South Wales?

Yes. It's Simon here. Yes, look, if we talk about the 3 states, if we start -- Victoria, Tasmania and New South Wales. Victoria and Tasmania are profitable at the state level. New South Wales is not running at an EBIT profitable level at the moment. But with the trajectory it's on, we expect it to become probably -- in about -- the way it's tracking, I think, in about 12 months' time, we'll see that Sydney plant at a profitable level. We restructured during -- that site during November and effectively halved the footprint as we reorientated it towards being double glazing essentially only, and it's been performing very well since.

That's great. Just another couple of questions around the potential -- or the run rate for cost outs in New Zealand coming out of FY '20 and also opportunities into FY '21. And then just a question around how you're seeing your forward order book and commercial and retrofit, in particular?

Yes. Sure. Look, what we're seeing at the moment is we're going to be giving you more of an update at our ASM on what the future looks like for the business. But right at the moment, our plants, we believe, which is great, and we've got plans that how we can variabilize our cost base that are quite detailed.

Yes. It's fair to say that we're still anticipating, as we've talked about in the slide deck, that there will be a decline. So we need to respond to that decline as and when it starts to hit our markets.

If I just talk specifically about the commercial segment, we've got a strong order book there at the moment. It actually built during the lockdown Level 4 period, which was very encouraging. So that's about execution now. And on retrofit post -- again, our order book actually built during that. And we've also -- you may have seen our TV commercial program that we've been running. It's been -- we've refocused that and changed how we do that, and it's proved to be extremely successful. So we're very pleased with how that campaign is going this year. And we've seen -- compared to last -- this time compared to last year, we've seen a significant uplift in inquiries and conversions there, which has been good.

We'll take our next question from?

Simon and Brent, just a couple of quick ones from me. Just on the debt facility, I think it expires in August '21. I just wondered if you could give us your expectations as to whether or not you expect that to be rolled? Secondly, in terms of your covenant testing, I'd just be interested in how the banks are going to treat your level 4 losses? And then thirdly, could you give us an idea of DG volumes over FY '20 or market share or some sort of volumetric measure for the year just gone by? And then just lastly, your CapEx, I think you're subject to a CapEx cap now. It looks like your CapEx over the last year has sort of been reasonably nondiscretionary and totaling 8.7. I just wondered if you can give us a feel for where you expect that to go over FY '21?

Yes. Thanks, Steve. So I was just checking. You had essentially 4 questions there, if I'm correct. The first -- I'll let Brent talk about our banking and covenants there, and I can answer about the DGU volumes. If you look at what we talked about on our revenue, you'll see, I mean, that reflects that year-on-year, it's been about -- say it's about flat. If you look at glass imports and what we see that we would be relatively -- I think we've probably increased our share in that DGU market, but then that's offset by what we've been -- the reduction in commercial side, which also includes quite a large component of glazing labor in there. So I hope that answers that question. The -- on the CapEx side, it's -- as far as -- last year, we spent CapEx on what we thought was -- as a reasonable requirement. And the only thing on the -- from the covenants from -- with the bank is -- there's only a requirement there about just passing through with them on if there's any specific growth CapExes that we have to specify them there. So we're quite comfortable with that. So I'll just let Brent talk about the debt situation and covenants.

So Steve, you know that from a current facility perspective, it goes through to August 2021. We're obviously working with our banks at the moment to work through a number of options about how we refinance that over the next 18 months. You'll also know that we just released about a month ago this -- some covenant relief that we've agreed with our banking syndicate, moving the debt to equity ratio from 3 to 4 through the end of March 2021. So yes, we're feeling -- obviously, we've got ongoing conversations with the syndicate at the moment, quite positive conversations.

[Operator Instructions] We'll take our next question from?

My name is [ Trevor ]. I've just got a question about -- you're talking to how -- I'd just like to comment on one thing. Your share price has gone from $1 down to next to nothing since I've been an investor. I own 1% of the company. The problem I've got is you've got -- you've gone from 27 people earning $150,000 when I started investing to now you have 44 people earning $150,000 plus a year. So now it's gone to 24 staff earning $200,000 or more a year. Can you comment on that?

Yes. Trevor, Andrew Paterson speaking. I know we've had some e-mails on this in the past. Depending on what starting point you're taking because you've been around for a while. We bought AGG in late 2016, which brought on a number of people. And then depending on the starting time because those numbers include STI payments in the years that those are made. And so -- but those have been [indiscernible].

The report I'm looking this morning at [indiscernible] continue to growing or more. That's not tightening the belt. That's what I'm saying. What I'm trying to say while covering Andrew 30x and obviously, modern technology, no one [indiscernible] anymore, but he has an assistant and then an assistant to the assistant. So what I'm trying to say is, are we addressing this in COVID situation or not? I know you guys are busy. All I'm saying is that shareholders maybe need a break. And yes, we heard you mention the apprentices, but staff morale [indiscernible] but it seems to me that everyone is getting the big juicy pay increases is what I'm; saying. Sales have gone down. Salaries have been up. That's all I'm saying.

Yes. Trevor, it's very hard to pick up what you're saying me, but -- on the call. But I'd just say that as far as pay increases go, the pay increases have only been in line with what you'd see in CPI on wage index of increases. So the...

10% -- sorry, can I -- sorry to interrupt. Yes. 10% of your sales are going to people earning $100,000 or more. That's all I am saying. So yes, we might have everything to talk about, but sales are going down. That's just -- yes. Okay. Yes. I'm just wondering. That's all. I will leave it at that.

Yes. Sure. Trevor, I'm happy to talk to you one-on-one about that. It's very, very hard to understand your commentary there. But happy to talk one-on-one on that.

[Operator Instructions] It appears we have no further questions at this time. I would like to turn the conference back to your speakers for any additional or closing remarks.

Okay. Thanks, everyone. And again, if there's any questions you'd like to direct us one-on-one, please do contact through -- Andrew Paterson through our usual channels. Thank you for joining us today.