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

Good day, everyone, and welcome to the Metro Performance Glass Fiscal Year '21 Annual Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Simon Mander. Please go ahead.

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 our CFO, Brent Mealings. This morning, we'll provide you with an overview of the group's results for the 12 months to the 31st of March 2021. And then at the end of the call, we'll be happy to take any questions you have. Turning to Slide 2. We've noted our 4 key messages what summarize the year. I'd like to start by recognizing the strength and dedication of our people right across the Metro Glass Group. The emergence of the COVID-19 pandemic 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 impact at the start of the financial year overshadowed our underlying performance in a competitive market. Australian Glass Group progressed well on the turnaround plan with stable operational performance and pleasingly delivered a significantly improved EBIT results. And finally, as a group, Metro Glass has continued to significantly reduce its debt through strong operating cash flows and targeted capital expenditure. Just on to Slide 3, we have our Metro Way graphic. Our strategy and values continue to underpin our culture. And this year, in particular, we've seen that day in and day out as our people kept our business moving forward through challenging, disruptive and uncertain times. Turning now to Slide 4. We outlined some of our key successes and outcomes over the FY '21 period. We continue to focus on our multiyear safety and well-being strategy, making steady progress through the year, implementing standards for controlling headwinds effectively and improving early intervention practices. Our teams were resilient and adapted to manage the fluctuating COVID-19 restrictions and international supply chain disruptions, which impacted momentum in both New Zealand and Australia. And importantly, we maintained a strong connection and service level to our customers. This was reflected in the strong customer survey results were received in our last survey with customers complementary on our people, customer service and project management. On Slide 5, we previewed our key financial results for FY '21. The group achieved a solid set of results this year despite operating in an increasingly competitive market, in facing regular externally driven disruptions, which impact on our ability to build sustained momentum. New Zealand revenue of $179.8 million was down 11% versus the previous comparable period with an EBIT before significant items of $19.4 million, down 27%. In New Zealand, we started the financial year on an Alert Level 4 lockdown, recovering well and achieve good volumes in our Retrofit and commercial glazing segments. Pleasingly, activity in those segments and a focus on cost control helped to offset the impact of increased competitive capacity in the window manufacturer segment. Australian Glass Group's revenue grew by 1% to $52.5 million with strong performance from all states in rebuilding the revenue to offset the exit of non-double glazing product sales in New South Wales. At an EBIT level, AGG were on track to deliver a modest profit for the year after a positive EBIT result for the first half. However, 2 external factors had negative impacts later in the year. The first was the highly disruptive COVID-19 snap lockdown imposed in Victoria in mid-February and the second of the severe flooding in New South Wales in March. As a result, AGG delivered an EBIT loss of $700,000 in FY '21, which was disappointing, but it was a significant improvement from a loss of $3.6 million for the prior year. Gross EBIT of $17.9 million includes the New Zealand and Australian segmental results as well as group costs of $750,000. You will find further information on this in note 2 of the financial statements. This result is at the top end of our February guidance of $16.5 million to $18 million. We have continued to strengthen our balance sheet with net debt declining by $18.9 million year-on-year to $48 million. This was supported by strong operating cash generation for sale and leaseback of 2/3 of our vehicle fleet and a reduction in capital expenditure. I'd like to briefly talk to the New Zealand residential consension numbers. Now as you can see on Slide 6, on a 9-month lagged basis, new residential consents grew 8.1% between March '20 through March '21, reflecting strong consent activity despite the onset of COVID-19. In the same period, total floor area consented has increased 3.4%. The mix of consent continues to shift towards multi-residential dwellings, with detached housing growing 3.3% on a 9-month lagged basis compared with 15.8% in multi-residential. Nonresidential consented value has increased by 5.3% in the 12 months to March '21 compared with the prior year. Seasonally, Metro Glass' commercial glazing forward books remain robust, slightly ahead of the same period last year, reflecting our improved operational performance and acceptance rates. Turning to Slide 7. Metro Glass delivered a solid performance in New Zealand, while COVID-19 shutdown impacts overshadowed underlying performance in the competitive market. We responded well to fluctuating COVID-19 restrictions and international supply chain disruptions, wherever these shocks significantly impacted momentum across the industry. Throughout, our teams mobilized safely and efficiently to maintain operations. Seasonally from June onwards, activity in our Retrofit and commercial glazing segments were strong. Our Retrofit business grew 16% this year despite the lockdown, with significant increases in the entire levels and record growth of the forward book. This helped to partially offset the Alert Level 4 lockdown and heightened competition in the residential segment. We remain firmly focused on our customers and our people as we make good progress with both. I'm particularly proud of progress made on our multi-year safety and well-being strategy and our apprenticeship scheme, in which we now have more than 80 apprentices involved with 15 qualifying in the FY '21. This year has provided further proof of the importance of our strong customer relationships and our continual focus on improving our service model and customer experience. Our 6-monthly customer survey results reinforce that we are on the right track with New Zealand receiving its strongest rating to date. Now looking at Slide 8. Australia Glass Group is primarily involved in the new detached houses and alterations and addition segments in our key Southeast and Australian markets. Since the middle of 2020, housing improved -- approval numbers have begun to increase, which is flowing progressively through to commencements and completions and increasing glass demand. Moving to Slide 9. The Australian turnaround progressed well with stable operating performance and a significantly improved EBIT result. AGG remained almost fully operational throughout the prolonged COVID-19 restrictions and associated disruptions, maintaining momentum on the turnround plan. The business delivered a revenue growth of 1% year-on-year despite the impacts of COVID-19 and has offset the exiting of the non-DGU market in New South Wales. AGG achieved positive results for the first 3 quarters of the financial year. However, Victoria snap lockdown in February and significant flooding in new South Wales in March negatively impacted momentum in the second half. Pleasingly, we continue to see the demand for double glazing increase with the sales increasing by 9% versus the same period last year. AGG is now well positioned for growth alongside the increasing adoption of double glazing. Recent commercial building regulations have driven increased specification and demand for double glazing products, similar code changes are scheduled for the residential buildings segment in 2022, '23. I'll now hand over to Brent to discuss the financial results in more detail.

Thanks, Simon, and good morning, everybody. On Slide 10, we break out our revenue. And in New Zealand, you can see an overall decline of 11%. However, if we exclude the lockdown in April and the ramp-up period in May, this reduces to a 2% decline year-on-year. This decline is largely driven by our residential segment, which declined 17% to $118 million, with approximately 55% of that decline attributable to April and May period. Our commercial glazing business declined 8% in absolute terms due to the lockdown period. However, EBIT in this segment improved as we focus on maintaining strong relationships and service, executing projects well and managing our costs. Our Retrofit business revenue grew 16% year-on-year despite the shutdown period with a significant increase in inquiry levels at a record level forward book as many customers have elected to invest and upgrade their properties. Slide 11 reflects our full 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 carrying costs through the April shutdown and May ramp-up period, competitive price pressure in the residential segment and additional incurred costs due to the well-publicized disruptions through our global supply chain. In Australia, gross profit margin increased by 12%, benefiting from product mix changes and the restructure of the New South Wales business in December 2019. Turning to the group results on the left-hand side. Our net profit after tax before significant items decreased from $9.9 million to $7.9 million in 12 months. Statutory NPAT was $8.5 million, benefiting from a $700,000 tax paid one-off gain on the sales relating to the lease of our vehicle fleet. I'd like to move on to the waterfall on Slide 12. Movement to the New Zealand EBIT results are shown in the gray shading area where you'll see we've dimensioned the impacts of April and May last year. Our New Zealand EBIT results in April and May was $10.5 million lower than the prior year as a result of the shutdown and ramp-up periods, albeit partially offset by the New Zealand government wage subsidy. The following 2 red bars, are a consequence of lower revenue, increases in shipping-related costs and the competitive pressures impacting gross profit. We have been focused on our cost base and achieved some solid cost savings year-on-year in distribution and glazing and administration selling and marketing expenses during the period. Turning to the Australian performance, which is in the green shaded area of the waterfall. The encouraging story here is the gross profit margin improvement and reduction in administration expenses, which primarily arose because of the restructure of our New South Wales business. Turning to the balance sheet on Slide 13. Net operating cash flows were only slightly below last year with the reduction in overall group earnings. We continue to focus on working capital on F '21 through close management of trade debtors and inventory. Safety levels of raw glass inventory are being progressively increased at present in response to the ongoing international shipping disruptions. Net debt decreased by $18.9 million year-on-year, supported by strong operating cash flows, reduced working capital, targeted capital expenditure and the sale and leaseback pack of 2/3 of our vehicle fleet. Net debt-to-EBITDA is now at 1.7x as at the end of March. Slide 14 demonstrate our continued commitment to net debt reduction. We think this has been an important achievement to date, which ensures the group is well placed to adapt and take opportunities into the future. I'll now pass back to Simon to pick up the next couple of slides, and the outlook for FY '22.

Thanks, Brent. Now turning to Slide 15, I'd like to outline the company's capital allocation framework. This framework describes our decision-making process on uses of our net operating cash flow. Over the last 2 years, we've been applying net used cash to debt reduction as Brent has just shown on the previous slide. This has been in preference to other alternatives, including dividends and CapEx. The combination of a stronger balance sheet, increased confidence in the sustainability of the group's market position and future financial performance has enabled the Board to reassess the company's capital priorities. The Board has decided to prioritize cash firstly than capital expenditure to maintain operational capability, improve efficiency and increase capability where appropriate. And secondly, on maintaining group leverage off on a target range of 1 to 2x net debt to EBITDA. And thirdly, the reestablishment of a conservative and sustainable dividend. And then fourthly, applying excess cash flows across the best of several competing alternatives. At present, the Board sees merit in pursuing further reduction in net debt towards an underlying net debt-to-EBITDA ratio of 1. Moving to Slide 16. In November 2018, Metro announced the suspension of dividend payments to focus on debt reduction. The success of metro Glass' debt reduction means that the group is expecting to be below its communicated target of new debt-to-EBITDA ratio of 1.5 during the first half of FY '22. It is the Board's current intention to resume dividend payments alongside the company's FY '22 interim results. Going forward, Metro Glass expects to pay full imputed dividends of between 50% and 70% of net profit after tax before significant items. In determining any dividend, the Board will consider a range of factors, including group financial performance, one-off or nonrecurring events, prevailing in anticipated business and economic conditions. Turning now to our outlook on -- for FY '22 on Slide 17. We have increasing confidence that activity levels across both New Zealand and Australia will be at least sustained at current levels for the rest of the 2021 calendar year. Though in New Zealand, industry capacity constraints may limit growth in the near term. The residential segment in New Zealand will continue to be competitive and dynamic. In Australia, we're confident that AGG has embedded the improvements achieved in FY '21. The level of residential approvals in Australia improved significantly through FY '21, which will provide some support through the 2021 calendar year. The group remains alert to COVID-19 risks and the significant disruptions in international shipping. Both are likely to continue until the end of 2021. We will continue to take a prudent approach to managing costs with a focus on essential capital expenditure. And finally, on Slide 18, Metro Glass' strategy and focus remain unchanged as we continue to build resilience and defend our leading position in an increasingly competitive New Zealand market. To grow and improve the profitability of our Australian business and benefit from increasing demand for double glazing. And to ensure our balance sheet is strong and sufficient to cope with risks and opportunities. Now that brings us to the end of our presentation. And I'm really happy to answer any questions that you may have. Thank you.

[Operator Instructions] We'll go first to Grant Lowe with Jarden.

Just a few questions for me. Just around the margin side of things, firstly, in New Zealand. So gross margins were down around 3.2%. I'm just trying to get a handle on how much of that is potentially mix shift with New Zealand residential down, glass input costs, shipping and competition. Can you give us a sort of sense of how much of that sort of falls into each of those buckets? I want to kind of get an idea of how much of that is sort of transitory COVID-related that might improve with COVID?

Yes, Grant, it's Brent here. Look, I mean, to say there's a fair bit going on in that particular number. If you look at the second half, which is probably the more -- I mean, the first half, remembering that there was an impact there of unrecovered costs through that April, May period that we sort of talked about. So the second half was potentially comparative. So gross profit margin of 47.4% in the second half versus 49.4% for the same period last year. And there's a fair bit that's going on. So I guess the 2 big things for me is, we do have increased input costs. We are, particularly in that residential segment, competing on price, no doubt. But we also have some things that have gone and help offset some of that. So the change in mix, particularly towards Retrofit and a bit more into commercial relative to the residential segment that definitely helped offset some of those downsides. And then we actually had done some quite good work in that space. So there's a couple of negatives and a couple of positives that offset each other.

Yes. Okay. In terms of how you're seeing sort of the input costs and the shipping sort of at the present moment, where is that sort of hitting at the moment directionally?

I think it's stabilized, but it is certainly ongoing, if you want to say that. So it's disruptive. But the cost themselves are not significantly increasing from where they were if you -- when we were talking in February, that's sort of consistently there. But this honestly is an everyday issue that we're dealing with.

Yes. Yes, of course. Okay. And in Australia, obviously, you did around $1.1 million negative for the second half, which I understand third quarter was positive, so just that sort of number, at least that number in the fourth quarter. What were you sort of expecting when you gave the February guidance, what were you expecting for the last quarter? Or perhaps how much would you sort of attribute to that flooding and COVID lockdown?

Well, I think we were still optimistic at the time that we would get through February and March and still be sort of breakeven, if not, maybe slightly negative. But as you've said, the late lockdown in February and then the flooding in New South Wales really knocked our business around. But we were still hoping that we would have been closer.

Yes. And do you get the sense that you're back in positive territory year-to-date?

F '22?

Yes.

Sorry, were you putting calendar year or?

Sorry, FY '22. Yes, I know it's only half way. I appreciate it's only a short time frame, but post the flooding, have you sort of got any bounce back to positive territory?

Look, I mean -- sorry you want to?

Yes, look, it's early days, but I think honestly speaking, yes.

Yes. Okay. And then just around the margin in Australia, that was up slightly. Obviously, it's been difficult to sort of unpack with COVID and everything else. But with the shift to the higher margin DGUs. What do you think -- I'm not sure how you might want to approach this, whether you want to talk in terms of a normalized margin or we think margins could have been without sort of COVID impact. Where do you sort of see that being on a normalized basis from the sort of 24% that you delivered in the year?

Yes. I mean, I'd say that our first half is probably a better reflection of where we think out. And Australia is a little bit different because we didn't have any impacts of lockdowns in the first half. It was a relative -- I mean, obviously it was a disrupted period that was probably a better demonstration of where we think our gross profit should be operating at.

[Operator Instructions] And we have no further questions in the queue. I'll turn it back over to Simon Mander for closing remarks.

Okay. Thank you very much, and thanks, everyone, for attending today. And if you have any questions that arrive during the day, don't hesitate to get in touch with us. Thanks very much.

And that does conclude our call for today. Thank you for your participation. You may now disconnect.