Skellerup Holdings Limited (SKL) Earnings Call Transcript & Summary

Good morning, everyone. Obviously, I'm David Mair, the CEO and Managing Director of Skellerup and on my left, your right is Graham Leaming, CFO. Thank you for your time today. First of all, just to reassure everyone, compared to all the other issues that are floating around New Zealand at the moment, all our staff in Auckland, in particular, are safe, and all of their sites are secure. So it's a good result. I'm going to go through the results, and then we'll have some questions at the end. [Operator Instructions] So I think it's just easier if we do it that way. And I should check first since I can see you, [ Jenny ], can you hear me clearly? Yes, just hold your thumb up; there you go, well done. Thank you. I just want to make sure everyone can hear, we had some technical issues the last time. Okay, let's get into it. So look, first of all, obviously, it's been a tricky period over the last couple of years. So from my point of view, it's very pleasing to announce another record Group EBIT. And if you move on to the next slide, Graham, please. I'll just go through the slides carefully. Obviously, we have a lot more detail later and then welcome questions. Here we go. So the key points are really the Group EBIT of $33.5 million, it's up 3% on the prior corresponding period. Record Industrial division EBIT of $21.4 million, obviously, up 14%; and Agri division EBIT of $14.6 million, down 12% on the pcp, and we have separate slides for both the industrial and Agri and we'll dig into that a little bit. And NPAT is down 1% on the record result achieved in the pcp, and we've seen some of the higher interest costs and tax costs eroding EBIT growth. Operating cash flow, round figure is $20 million. So it's up $0.5 million on -- or 3% on the pcp. And we've talked about this in the past. We had a higher level of inventory, and we made a number of strategic decisions, particularly around key raw materials. And of course, we're in the second half of a process that I'll come back to later where customers are now realizing the true demand is a bit lower than they were expecting. So we are, in many cases, experiencing the slowdown that many other businesses are. Having said that, I think we're in good shape because our inventory doesn't perish and it will sell through. And so the kind of the obvious question is when will that happen, and we have a very strong focus on inventory, but we can come back to that later. Pleasing to increase the dividend. It's a small amount, but $0.05 per share increase, bringing it to $0.08 for the interim payment. Our balance sheet remains robust. Our net debt has increased to $39 million, mainly due to working capital investment and it remains 11% of our total assets so no concerns there. We have a strong platform for growth. Our FY '23 NPAT guidance remains unchanged at somewhere between $48 million and $52 million. It's important we continue to invest in people and technology to sustain our growth. We've been doing this throughout the last 3, even more years, and we continue to do that. So we're not slowing down our investment. In fact, the number of opportunities is opening up even more, and I can spend some time giving some examples later on how that's playing out. But I guess in simple terms, I see the next 12 months as being stronger than the last 12 months, and we still have a number of key projects being realized even in the next 6 months, but in some cases in the next 9 or 12 months. So obviously, we see a strong future for the business. And we've started work -- we've been doing some work, but we've started a lot of work to model the impact of climate change on Skellerup really to help us make better investment decisions, but of course, also to meet the reporting requirements. I feel over the past few years, going right back to when I took over as CEO, we made a number of investments -- some are reported in the Annual Reports over the years. And it's accelerating in terms of the opportunities -- the big things are about, obviously, electricity. We're a large user of electricity, for example, in Wigram. We face issues with our UK businesses with energy and those kind of things. So it's just -- it's a really -- energy is a large part of how we think about this. But of course, as an international business with a lot of intercompany trade, the Scope 3 Emissions is going to be an interesting thing to review. And we have a longer-term plan how to deal with that. But just sticking with the numbers, I'm really pleased again through a tough period of time, we had the disruption, particularly of China, going through the opening up and causing issues, particularly for our shipments from China to New Zealand for pretty obvious things these days is footwear. So we've been living hand in mouth. All I can say is I think the team has done another fantastic job in continuing to solve issues and new issues are arising almost daily and we still managed to get through it. So I'm very pleased with how we performed. Next slide, please. So there's a summary of the financial highlights in tabular form. So revenue up $15 million, 10% on pcp. So the numbers there for EBIT and NPAT, the interim dividend I've explained, operating cash flow I will explain, we'll go into more detail, as I said, but that's a useful table for you to work through just the changes on the business. It's key that we -- the last bullet point, we acquired the remaining 65% interest in Sim Lim, which is now wholly owned. We still see, and I've talked about this in the past, liquid silicone is a key material that we have not really had access to. We see a lot of growth opportunities there, and I'll come back to that on the industrial side, in particular, but this is a technology that links with heat-cured silicone and remember silicone is a material is particularly used in health care applications. So in other words, black rubber, you don't really want touching your skin in simple terms, but silicone is in inert. So it's used in a lot of health care applications. So silicone, whether it's heat cured or liquid is a very important material that we need to understand better and be able to produce as part of our products. So anyway, that's enough on that for now. So it's a very small investment, just it's worth pointing out we were looking to acquire bigger businesses, particularly in the U.S. related to liquid silicone. We just couldn't get one, and there was a roll-up happening by a private equity company. So we were just unable to find a suitable acquisition. So really, you should see some of them is very, very small in the scheme of things. It was effectively a start-up, and we now fully own it. But it is now starting to contribute. We have some key customers. They are Gulf U.S. customers. So really it's controlled through Gulf U.S. obviously a bright future for that in the U.S. market in particular. Again, next slide. So let's dig into the industrial division. So again, a very good result and revenues up 13%, EBITDA 14% on pcp. So we had a record first half result. Again, the numbers are there. Where did the growth come from? Particularly, it came from the high-performance foam applications and vacuum system sales. But we also have very good growth from some parts of DEKS. So for example, in Europe, there's been a lot of focus on adopting solar into roofing systems as I'm sure you're aware, and we've benefited a lot from that. But having said that, even in the Australian market, which is particularly tough at the moment, we've done a very good job, I believe, in servicing the market and seeing other ways of keeping our revenue and margins up. There's been a big process in Melbourne, where we have relocated, very successfully relocated DEKS to a much better location. We're clean off the old site. This is a far more industrial area of Melbourne and the team have done a fantastic job there. And of course, it gave us the opportunity to get our layout right. So we see productivity gains. We're also closer to main routes for tracking and things like that. So it's freeing up some of the complications we had from a bad site. And the same in Auckland just for a minute. We did the same in Auckland with our -- we had 3 businesses we consolidated into a new distribution center in Savill, which is an Otahuhu. And that has paid dividends. And of course, it's a relatively new building. So fortunately, we haven't suffered from any of the rain or the cyclone that's gone through. So the lower New Zealand dollar boosted the translation of overseas earnings. So most of our Industrial division earnings are derived from international markets on a constant currency basis. Revenue was up 6% and EBIT up 8%. So the new facilities, both in Auckland and Melbourne, that's not the end of it. We're constantly reviewing our locations because, of course, Skellerup originally was a bunch of businesses with some interesting locations and things like that. But we are still thinking hard about some of the location of our businesses in the U.S., for example. So anyway, overall, very happy with the Industrial division. At this stage, I'll just talk about -- I mean, the obvious question is what's going to happen in the second half and the same when we get on to Agri. Something to think about is usually the cycle is the second half in both divisions is stronger than the first half. And that's not always the case, but that's usually the case. The reality is here, we have a number of new products and new customers in that sense. We see the realization, not just for health care products, but across a broader range, including vacuum systems and foam will continue to grow and those kind of things. We see a lot more applications. I mentioned Sim Lim. We have a large OEM customer there. We will be providing flow control componentry. And that's a great opportunity with a really good OEM business. And also we have continuing growth in infrastructure pipe rings. And we have seen, for obvious reasons in the U.S. growth in infrastructure. So overall, a robust, I'd call it, broad-based growth opportunity, not just for the next 6 months, but over the next 3 years. So very confident about how we've been going there. And again, it's pleasing from my point of view that despite the inability to travel into market, now that it's freeing up and we're reestablishing those key connections face-to-face, I just think more opportunities will come. And in a small way, even Moen, I talked about Moen in the past, and Graham was reminding me yesterday that we've suddenly had a tickle from Moen about maybe some new products. The good thing there is they're coming to us first. So the OEM model heavily relies on [ in effect ] locking customers in but as I've said in the past, customers choose as. What we're finding is we're getting a lot of invites to talk about business. So I see that as really positive. And that's not just the Industrial division, that's also the Agri division. So let's move on to the Agri slide now. Okay. So revenue was up 5%, EBIT down 12% on the previous corresponding period, of course, which was a record. Fundamentally, dairy rubberware sales have been down. Volumes have been down and particularly in Agri, some of that is related to destocking from one or 2 of our key customers. And obviously, the lower production volumes affect our margins. We've had very strong footwear growth. In fact, we've been hand-to-mouth, particularly in the New Zealand market. Of course, we have technical rubber products going into the U.S. market, for example, but particularly in New Zealand, we've been struggling to get containers in. And with the opening up of China, for example, we had 5 containers sitting in [ Shanghai Port ], again, full credit to the team that managed to enable those to arrive here. And almost literally when Bunnings in Auckland and I know it's not all about Auckland, but when Bunnings were almost stocked out, we managed to get some containers in. The issue we have is we still have a shortage of inventory and the factory in China is doing a great job to continue to produce and seen through product. So the footwear has been a kind of a star in the area, particularly for the New Zealand market. But again, we have great opportunities on the dairy rubberware side. So there's been a benefit of the lower New Zealand dollar in the first half, which was offset by hedging. And if we get into the hedging side, I'll let Graham go through that in more detail if needed. But on a constant currency basis, revenue was down 1% and EBIT down 14%. Thanks, Graham. So there's a little bit of a reconciliation of bridge, if you like. So obviously, starting from the left-hand side, we've seen growth in, as I mentioned earlier, marine foam, particularly sports and leisure, we've seen market share gains from the sale of existing and new products into roofing and construction and lower sales into tapware applications. A Moen in particular, they're big growth market with China that kind of, for obvious reasons, died through the first 6 months. We're starting to see an increase there now that should strengthen through the second half of this year ending into the next year. So that's all good. Dairy rubberware sales, I've talked about lower following a strong Q4. So this is really important. If you do the previous comparative period -- sorry, prior comparative period, if you do the comparison, we had very strong finish on the previous year. We had a very strong finish in the previous year. And this year, a lot of our sales were actually earlier. So what it means is that I expect to see a much stronger second half for Agri in particular. And so the same in industrial we expect the second half to be obviously is much stronger. But the industrial side, there's not so much destocking and things like that. There's some of that going on, but it is the introduction of a lot of new products and new opportunities. Corporate costs are down on pcp and obviously, the higher debt and rising rates, increased interest. Just a thought. Of course, we report NPAT. But within the business, we drive EBIT. So our leaders talk about EBIT. That's the way we think about the business because, of course, a lot of the tax and interest decisions are made here at the head office. But we keep people focused on how do you improve EBIT. And right now, how do you sell through inventory. Thanks, Graham. So let's talk about the growth, and this is a 2- to 3-year sort of view. We continue to invest in people, including new people. So for example, in the States, in an area where we had some new products, I've mentioned previously, vacuum systems and things like that. We've hired a key person from a customer. It's a good leader situation, person who has a lot of experience, and we believe that this will help us to grow our business faster in the U.S. That's just one example. So you're clear, certainly in Agri. If you go back, there was a lot of change in the Agri division, Hayley Gourley came in and she has now formed over 3 years. She's formed a strong team. And that team includes a lot more technical expertise, a lot more manufacturing expertise and in particular, I think we're doing a much better job on the customer services dispatch system side. So we are seeing the benefit of working hard on our digitization proceeds of data so that we can make better decisions. And that's not just an Agri at Wigram. It's also -- we've been rolling out a system called NetSuite among a number of the individual industrial businesses in particular. I think Graham is right when he joined almost 10 years ago almost every business on the industrial side used a different system. And I think [indiscernible] 9 businesses now use the same -- particularly the same system NetSuite, which is a second tier system. By the way, it's not where there's huge costly SAP-type systems, very appropriate to our business. And so that's also important. But as well as that, we are investing in new technology, particularly at Wigram. We still see a lot of opportunity to improve productivity there through investment and equipment, but also standardization in general of a lot of other equipment there. And we have quite a sophisticated understanding of how to think about materials. So we've been doing quite a bit of rationalization of materials, for example, but also we now have better equipment to measure what actually happens within the production process. So -- and the benefit of that, of course, is we expect to reduce process waste and by definition, that also leads to more energy use. One of the answers to some of the geopolitical questions I get asked, so what happens in China and Taiwan all those kind of things. To be honest, I don't know. One thing we can focus on, though, is we can focus on our in-market presence and where we have particularly manufacturing assets but also distribution assets. Almost regardless of what happens if we can strengthen the U.S. market, and you can see from the market share kind of growth in Skellerup, that's been our target market for years. That was part of the reason for acquiring Sim Lim. And we are looking hard so we have a manufacturing partnership in the U.S. This is where we are doing a joint venture to manufacture some of the infrastructure pipe rings. If we didn't do that, we might be limited in terms of the ability to supply the U.S. market, the buy American made kind of attitude that's taking place over the year. But one thing for sure, almost regardless of how the geopolitical thing plays out, having a strong presence in the U.S. is very, very good. Of course, we have a strong presence in China as well. So some people say to me, you should get out of China. Well, it's interesting when China in the next 50 years is going to be a very strong part, difficult place, in some cases, to work, but at the same time, an important market to consider. So we have a presence there. We have very long-term relationships. This is the 25th anniversary of Jiangsu. We have a good relationship in terms of selling high-quality product, but our customers demand that we're there as well. I explained Moen and earlier. So from my point of view, we, as a global business, are actually very well-positioned to deal with some of this geopolitical unrest. And before I go on, there's a couple of other things that happened. I've mentioned in the past, certainly on the Agri side, the DeLaval purchase of Avon milkrite has caused some disruption in the markets. And of course, they've now got an issue in Europe, but that has provided opportunities for us and I believe opportunities to grow profitably, not just in Europe, of course, in the U.S. market, of course, some dislocation there. And that comes down to the quality of our teams and the quality of our products and things like that. In another way, we've had Atlas Copco. So again, relatively small, but Atlas Copco have acquired NBE, NBE is the largest competitor for our vacuum systems business and Atlas Copco being on an acquisition binge -- it's unsettled customers that rely on NBE for their products. And of course, we've launched some new products that we believe, of course, are better than the NBE offering. And what's happening is there's a lot of discussion happening. In fact, next week, there's the big annual [indiscernible] show, so wastewater and something other ETT. And there's a big conference there. But a number of key customers are reaching out to us. Some of these are completely new customers and saying, hey, we're very nervous about some of the changes in the market. Can you help us? And of course, we have an A-team there. So that's great. The information system stuff, you can invest in all these systems, but unless you turn it into information to make decisions then what's the point? It's just the cost and additional cost. I think we've done this very, very cost effectively. I mean I understand how much money you can spend in this area. So particularly on the Agri side with [ JDE ], but also with NetSuite, we have very confident people to do this quickly and effectively. Speed is very variable. Velocity is very important to get through these things quickly because it's very disruptive to businesses. What you don't want is for it to take longer than 6 months. It just causes way too many issues. So what kind of information are we looking for? The obvious thing is I mean you'd assume we have this information, but it's interesting how many businesses don't. We want to be able to rank our customers on profitability and our products -- our product families on profitability. And we want to understand from a product family point of view, the process is behind and how we can drive improvement. I've said previously that one of our strategies is key customers and then the key products for those customers. And so if you take, for example, Moen, we probably have 6 to 8 items. I don't know exactly. But the point is we can focus in on those items and see where the opportunities are. But the key thing here is the ability to rank and re-rank as business opportunities change. It's the same with product development. We have proven that we can develop new products, solve the new issue faster than our competitors, particularly in the U.S. market. So many -- the initial OEM business comes when a customer cannot get what they've want. The problem cannot be sold from an existing supplier or supplier base. And so our opportunity to grow, it's not only in the U.S., but that model is very strong. And I think if you look back over the last 5 to 10 years -- we've explained the OEM model, but it's starting to really prove its value. And remember -- and I'm happy to talk more about the [indiscernible] before we finish off, the [indiscernible] started where money was cheap, raw material was cheap, labor cheap, everything was cheap. Now that's longer than COVID. Then COVID came along and what we saw was, in many cases, we saw an acceleration beyond the long-term demand. So the start of it is customers order more. But then when they don't get it, they order even more than they need. And over the last 3 years, we've seen that start to flatten out. It's inflationary. So what happens is, of course, at the same time, you find it hard to get more material and you find that prices are going up. So we've been through a period where I think in general, and not everything is perfect, but in general, we moved quickly on pricing, anticipating in many cases, the raw material effect. We got some of it right. We've got some of it wrong. That's the way it works. But now we're in a period where it will be interesting to see how quickly inflation expectations are brought under control by central banks. But what we're seeing now is we have customers in some ways like us, they found their inventories are a bit high. And if we're not careful, we're the second part of the [indiscernible], which is where they try to rapidly to meet some financial deadline, get their inventory down, which of course, has tied up cash. And that's just as dangerous. So we have some customers who, of course, are trying to either cancel orders or extend orders or those kind of things. What's the answer? So without dwelling on this too long. We have limited time this morning, by the way. We have to finish at 10:30 prominently. But one of the issues is to understand their inventory. And if we can see ideally weekly, but even monthly, the decline in the inventory, we can then predict when they will order from us again. Forecasts are not very helpful in that way because there's often delays and a one- or 2-month delay can have a big impact on what you do, what you focus on. Anyway, overall, I have to say, I think, again, that we've managed the business well. Graham and I are very focused to free up cash over certainly the next 6 months, but certainly over 12 months. I would expect our debt levels to resume pretty much to where they were previously, and we will see a lot of cash freed up certainly over the next -- the easy ones we have over the next 3 months, but some are sticky, they'll take longer. Please remember that inventory in general -- I don't know of any inventory that kind of goes off, so it will sell through. So there's no -- I don't see any risk there in that sense. Then an important other couple of parts here before going to questions, I'm probably talking too much climate change. We are modeling the impact of climate change, both physical and transition risks. We're preparing a framework for both the Board and Graham to aid and investment decisions. We have -- we need to explain clearly our climate-related goals and our FY '23 Annual Report will include an update on the progress ahead the FY '24 mandatory climate-related disclosures. Please keep in mind we still see this as an opportunity to improve the business. So we expect through this proceeds to deliver better returns for shareholders and even more importantly, more opportunities for our people. So I think, I mean, we have a disclaimer, and I think other than that, I welcome the questions. Thank you very much.

[Operator Instructions] Now we had a request for a couple of questions from -- firstly, from [ Josh Dale ]. And then we'll go to Christian Bell.

It's Josh, can you hear me okay? Yes, good. Just the first one was really about constant currency. And I know you sort of split out performance by division. But in terms of the overall business, reported NPAT was down 1%, but what was constant currency impact down by, I presume, was it a bit weaker?

Yes. So the outcome of, obviously, the New Zealand dollar, and we've talked about this before, our key currency peers are the Australian dollar and the U.S. dollar, both of which were beneficially weaker for us in the first half of the year. So they generated without any hedging that would have delivered around about $1 million of improved impact. But as a consequence of the hedging we had in place that pretty much neutralized that benefit. So the bottom line is the impact of FX on this first half results compared to the prior year is relatively neutral.

Okay, great. Just looking about the second half and looking at your guidance, which you've maintained, to get to the midpoint of that $50 million of NPAT, it looks like you need 10% growth for the second half versus pcp, which would probably need to be even stronger than that on a constant currency basis? It looks like you're needing a record second half by quite some margin. And I'm sorry to labor the point, but can you just run through the key drivers of that second half uplift once more?

There are a number of -- so I covered some of it. So we will continue to benefit from some new products and new customers that are already in hand in that sense. We start production. So I know one of the key questions people have is the healthcare-related product, GOJO. We start production early in March. It's still relatively small. They're suffering from the sell-through of their older equipment. And so they're building -- they're going to build carefully, but they have a hard stop in October this year for a full launch. And so we will see the benefits certainly in the next financial year. But from our point of view, of course, we have to start earlier than that. So we'll see some benefit, but that's still relatively minor. I'm expecting a much better second half from the Agri division because some of the sell-through of inventory, the reduced demand from our customers as they reduce their inventory is going to come back, and we've seen that happen in January. So another way of saying it is we had a very good start to the first half in January -- second half, sorry, apologies. We had a very good January, which is the second half, the start of the second half, and we see that continuing on. You're right, it's a big leap from where we've been in the past, but some of that is just the even flow of the cycles. So from my point of view, it does come down to us delivering on a number of those new initiatives. But it's broad-based. So I don't expect all of them to come through at the same time, but we have -- it's not just GOJO, and it's not just the blow up from vacuum systems. And it's not just -- I mentioned some of them, there's a customer [ haze ] in the U.S. that we have a key flow control component, and that will come through strongly and not just Moen in China, for example. If you add all that together, we had a huge kind of disruption through the first 6 months, particularly from China that had a bigger impact on some of our business, but also a number of customers started really trying to destock. And they may go too far with that. They may cause us an issue. Don't know, but I don't think so. But where we can, we have discussions with them, and we're smoothing the effect. But it is a big lift, but we're confident, I mean, by definition, we're confident we get there. Otherwise, we've changed guidance.

Yes. No, that's really helpful. And just last question on inventory. You did talk about this, but it is up $20 million over the last 12 months. I guess where do you see that leveling out at short- to medium-term and at what rate?

It's a good question. Look, the rate is, in some cases, we put in place genuinely strategic investment and things that will not be sold through by June. But be very clear that Graham and I are focused on this certainly over the next 3 months. So one kind of way of thinking about it I guess is to say we expect to free up what's the number around $10 million. I would say $10 million by June 30. We might do better than that, but that's certainly a target Graham and I have. So free cash flow should come in for the full year at about $50 million -- something of that order. But I mean I'm just giving you round numbers. We can dig into this in a bit more detail, if you like. But look, the real key thing here is not to cause an issue in the same way that some of their customers are. If we suddenly cut off and try to sell through inventory, then you cause other issues for the first half of next year. So we take a longer-term view. I'm not concerned about the build-up of inventory because most of it, not all of that was planned [indiscernible]. Now you're damned if you do and damned if you don't. If your customers say we need this, we need this, and they have orders and then they suddenly realize they've over-ordered. What do you do when they try to cancel? I mean that's an interesting question. You don't just say, yes. You can agree to a delay or even a cancel of an order, but always ask for information, ask them to share their monthly inventory or whatever. So you get a read on the real situation. So from my point of view, that's the key. But analysts want to know the hard numbers. So we think we'll have very strong cash flow. And of course, we consider that when we consider the dividend, but also the year-end result. So very confident we can deal with that from a systems point of view. I hope that helps.

Now Christian [Operator Instructions].

Yes, sorry, I'll just -- I'll start with a couple of questions, and then there's still some time I might jump on again, if possible. And sorry, into labor the second half, I guess, but just trying to tease that out a little bit more from what you've already provided. You're expecting a strong second half in Agri obviously, and you've also pointed to some product launches, the hygiene customer being one. Just curious, in the past, you've spoken about 4 or 5 large projects that could be game-changer type of projects. Are they separate to some of those product launches that you were talking about before?

Yes, they are. So the short answer is yes, they are. They probably won't have an impact on the second half of this year or if they do in a minor way, much like the GOJO product, the sanitization product. So no, they're not included. That's why I guess I'm very confident that over the next 12 months, the business is going to be in great shape compared to the last 12 months. And so the timing of these things, the only downside of OEM business is ultimately, you don't have full control over when the launch happens. But remember that our products are essential consumables. So in most cases, there's some retail products like gumboots, and I guess some of the DEKS products for roofing. But in general, these are -- they sell through. In other words, they get used. And so -- and they have to be replaced. That's the point of essential consumables [indiscernible]. So we should see that flow through and come back quite quickly, and we've already seen some examples of that. But please remember that certainly on the industrial side, we have strong growth in 2 areas anyway. We highlighted 2 particular areas: One is ultra-long foam, and that's going to carry on, we think, and we've got a very strong January, we see that carrying on certainly through to the end of this financial year. And also vacuum systems is one, but there's some other areas, the opportunities with some, which is really new products. So if you take the kind of the momentum and then add in the new products, we're confident on the industrial side. And then on the Agri side, there are a number of moving parts, why, for example, in the U.S., the U.S. became overstocked. It's mainly one key customer there but we -- we weren't giving regular updates on the stock on hand. We're just starting to get them again. Interestingly, on a couple of items, they stocked out, so we're going through this issue. One of the hidden issues that is starting to settle down is the inconsistency of shipping so too many people focus on the price of containers not on the regularity. So of course, if you think about it, if the ships actually deliver the container or the container gets unloaded them on the train faster, and that is certainly happening in the U.S., we ship a lot to the U.S. What happens is the customers suddenly realize it's often a surprise to them that they're overstocked. And if we're not careful, the answer is they just don't order for a month, well, that might suit them, but certainly doesn't help us. The stop-start is the board. It's the killer of companies. So anyway, so there's a lot of discussion going on, but I used to summarize it. We already have a momentum on the industrial side. For a number of reasons, Agri will come back. Add those things together and the reduction in inventory, I still think we'll have a strong second half. And it has to be a really strong second half. I get that.

Cool, thank you very much for it. And just in relation to the -- in relation to those larger projects, I'm sort of keen on understanding the medium-term sort of outlook, which sounds very optimistic. What do you actually mean when you say game changing? Like for argument's sake, if you were to get all 4 or 5 projects, would that -- just to give us some sort of sense of size, could that double the size of Skellerup as it is today or is it like are you able to sort of I don't know, loosely of any sort of sense of what those project sizes could be?

It's hard to -- I know what you're asking. I don't know if it's double the size, but certainly, we don't need all 5 to come through. I mean it's very hard for people to maybe understand what you're asking. So for example, please talk about some of the other trends that are affecting people. Around the world, direct labor costs are going up, minimum wage. It's not just New Zealand. You can see it in the UK and things like that. So how do you solve that as a company? You invest in technology and fundamentally capitalized labor. So one of the internal sort of projects, this is just something we do internally anyway is to move rapidly to be becoming far more effective at how we produce products. And ultimately, I mean, the aim is to be the lowest cost producer of whatever you do because then you have a lot of choice, at the same time, offer a differentiated product. And Christian, you helped explain it -- differentiated product, differentiated service and you end up with a really good solution. And so that's how you maximize the margin, your front end right and then you really work out on the backend. What surprised me in a couple of places is how much more we can do on the back end. And so I think certainly on the Agri side, that helps. But one of the things that's hidden, and I mentioned Scope 3 Emissions. So for example, for a key product, and it's quite high volume, we effectively get the raw material. I think I've said this before, but just to give you an example, we get the raw material from the America, it comes down to Auckland. We mold a plastic component that seemed to -- carefully it's overmolded with rubber. And then it's send back to Cleveland, which if you work it out, is not far from Chicago, and it runs down automated lines. And what happens is [indiscernible] there's a whole lot of inventory and everything. And we have now proof of concept that we could do that all in one place in one machine, just maybe in Cleveland or certainly in Chicago. So those are the kind of game-changing things but to maybe help you put that in context. I think the value of in market -- so take the U.S. market, if we can do everything in the market, then there's huge value in that. Would it double the size of Skellerup, it certainly -- it's not 2% increase or something. It's a big step change. In the same way, our old model was to make rings in Vietnam. And we've taken a small selection of rings, and we have a joint venture in the U.S. producing these infrastructure pipe rings or about -- to produce them, that's right. The tooling is just being finalized now. But once that happens, you can see how we can respond very, very quickly to changes in demand. And we've been hand to mouth for 2 years, a long time now. So it's been each of the [indiscernible]. But if you just think of the cost structure that that eliminates -- it's huge. So it sounds very operational, even as I'm saying it, it does rely on new products. So -- and again, we've been continuing to add to our product development team. So I mean the easiest thing to do to hit a number would just be to stop doing that or even get rid of some development. It's just not my view. Of course, that kills off your medium term. So in this hygiene product, this, whatever you call it, the GOJO kind of thing. Once we get that right, and we've got a hard launch in October, I believe. So once we get that right, the credibility that that gives is in other similar areas. These are areas that we have not played in the past or not been involved in. So the market is opening up and our ability to supply through pretty tough times in almost every country through COVID, our credibility has gone up. We haven't always got it right, but we've done what we said we would do. And so we've built trust through a tough time that's really important. So I'm not answering in dollar terms deliberately because I think that's for the future. I don't like to talk too far ahead, but very confident about certainly the next 12 months in terms of some of these things being realized, but we have got samples made in Austria of how to do this stuff in one go for a particular product. That is the next generation, we believe, of Techwear, the critical component and Techwear. We need to have a meeting with Moen and other key customers that do that stuff. But the size of that is if you're careful about it, you become the essential supplier. On the downside, we have Europe. We have for 4 or 5 businesses, Italy and 3 in the UK. We have -- some of the issues are going to be, what are we going to do about Europe? I don't see that being solved in the short term. So one of the questions the Board has put on us really is, what are you going to do about that? And I'm not saying they're not performing at the moment, but Italy is a hard country to do business. And so is the UK now with one, the increase in costs for people, but at the same time, energy. Energy is going to be an issue there for quite a while. And that's just a cost structure. There's not a lot we can do about it. It's not about putting in solar panels or anything. So anyway I'm talking around a little bit, but Graham's focus and my focus has to be on the next 12, 24, 36 months, not necessary -- I mean, of course, we're very focused on June 30. But we've always taken a longer-term view about doing that. The good thing is, I think, again and again, we're starting to prove we can do that. And you can see that in the historical EBIT. I know you'd like more detail, but that's as far as I'm [indiscernible] go for now.

Yes. Yes, I was -- I guess that's kind of what I was expecting. I wasn't expecting a dollar number. So no, thank you, that's very useful. So sorry, just bringing a bit to Agri. Obviously, alongside the volumes lost in the first half, there must have been quite significant cost increases given that your top line sales actually still increased. So just curious, as volumes come back in the second half, as you've sort of pointed out, do you think the boost to operating leverage on the back of that, do you think that your margin -- you can restore your EBIT margin in the second half? Because I mean, there's a 500 bps loss in the first half. Can you sort of go back to where you were in the second half?

That's our aim. So obviously, that's our aim. Whether we get there or not, I mean some of that depends on the volume, obviously. But we've seen -- so in January, we've seen a lot of the volume that was lost in the first half come back, that's just straight out volume. We have some things we can do operationally immediately. And so if I just emphasize, if you compare us to a tech company, you see tech companies, what do they do? They just lay people off. We have a loyal workforce that have got us through a lot of things, and I'll come back to a few other costs. So the cost increases really have been around raw materials. But in general, and I'll be careful how I say it. We passed a lot of that on. The issue we've had in a number of the Agri businesses, we'd already accepted forward orders. So the effectiveness of the price increases that are agreed, we will see -- so we'll see a volume increase at better pricing in the second half. And so those are agreed and locked in place, but we didn't see the benefit of those price increases in many cases in the first half. So that's another one. So straight out, if you have a price improvement, it drops straight through to EBIT, if you have a volume improvement, it drops through but not at the same rate, obviously. So I'm quite confident there. We do need volumes to hold up. And so -- and again, there are a couple of reasons why in the New Zealand market that we believe we will get the volume sooner than previous years. So we will be producing and supplying product ahead of the normal May, June, July. I can't go through the detail of why, but I think it's sensitive. But at the same time, we're seeing those orders. So actually, from my point of view I don't mind, I just want the orders. And so we're seeing those orders come through. So I guess the thing I keep saying even to our Board, it's in our hands. So Graham and I, we're responsible for getting the inventory in good shape and delivering the numbers, and there's still time to make this happen. So it's kind of -- it's not a [indiscernible] -- you make these things happen. And I think over time, our team has been strengthening and strengthening. So it's not like we had a problem in the tooth. The easy way to say it, we didn't really have a problem in the first half, but we saw the lower volumes have a much bigger impact on the effect of the [indiscernible] the second part of the [indiscernible] affecting agri far faster. From the 1st of July, round figures, we lost 100,000 liners a month for the U.S. market, roughly [indiscernible].

Beautiful. Actually, Graham, is there anyone else sort of put their hand up for a question on the web?

No, there's no further people in the queue at the moment, so you can ask another one.

Sorry, this might be -- come across a bit of a [indiscernible] question, but what is the edge process that you go through when you set your guidance like? Is it probability weighted with a high probability assigned to more defensive streams like wastewater and a lower probability to streams that are more exposed to the cycle? Are you able to sort of talk through it?

It's not probability so much, but we do, do 3 scenarios. We do most likely, we do worst case and best case. And we do that business-by-business. And we go through them in a lot of detail. We put it on a big A3 sheet, which we share with the Directors, Graham and I interrogate it of course, before we share it with the Directors, and we have a sense. So we understand where people are bullish. We have a couple of business unit managers as you would expect. The background is marketing and sales. Nothing [indiscernible] so they tend to be a bit more positive about what the number would be. And then we have a few more operational people that -- they want to promise leads and then deliver more and be heroes. So we've got a few of those. We've got the usual gamut. But the critical thing is this, I think that we provide very clear understanding of the historical numbers and the likely future certainly over 6 months, each time we -- and we have -- I think it's a [indiscernible] certainly, it's not just at the 6 months that we share this.

I mean we -- we share this information. We maintain a view of what our forecast result is and what our likely ranges throughout the year. So every month, we refresh that and have a look at it and consider what our range of likely outcomes are. And [indiscernible] on a BU basis, and it's based on an understanding of what's happening in each of those business units. And it's based on our understanding of the people we have managing those businesses as well in terms of how they think about their forecast.

Yes. It's not -- so just to be really clear, we don't -- it's not a probability of a forecast. It's real specific product [indiscernible].

And so you do have reasonable visibility over the next 6 months as you just sort of mentioned and I guess that's based on forward purchase orders that you've kind of received and stuff like that.

Some of our businesses have a longer lead time, and therefore, have a beta forward view of what the demand is going to be over a 2- or 3-month prediction. Some of them have a much shorter order book, so they have less visibility. And so they are relying on their customers' forecast and, therefore, their assessment of the customers' forecast because much in the same way as David has explained, we're looking at how we know our business has traditionally performed and what our managers' tiles are. They have a view of how the customers historically perform against their forecast and where they should be more cautious and where they take a slightly more optimistic view -- so not every -- we don't have perfect vision over the next 6 months or else, obviously, we give a narrower range. But -- so as I said, it depends on the businesses in our group. And it depends on some seasonal factors. And then, of course, there's always the things outside of your control, you don't know what are going to happen. So we try to take that into account and given the range.

I think it's fair to say we're taking a dim view of where we perceive retail products other than [indiscernible] for New Zealand for kind of obvious reasons where they've been clever. But the reality is some of our other near retail products, we expect -- I mean, who knows. But we expect reception conditions in all our markets really for those kind of products and a company and discretionary spending inflation stays high. Just a couple of other thoughts. One thing I'm proud of is some people would, of course, disagree, but I believe we pay our staff well. So the minimum wage that has no effect for us in New Zealand and also the changes in the UK, they're bringing in effectively the same kind of thing. Really, it has very little impact on our business. And we're in a position where we've been trying to attract new talent -- I don't know, where talent [indiscernible] talented. We actually have people that can do things, but the ability to attract people that can do things and hit the ground running, we're finding a fab better quality of people joining Skellerup. And so that's one reason. I think it's important to be seen as a company that wins. So we do talk a lot of -- we're pretty competitive. We do talk a lot about winning. And so it's a lot easier when you have the old saying, does it make the world go faster. I think we have a focus that is coming through, [indiscernible]. So the reality is the pressures on Graham and me and the Directors rightly pointed out the increase in debt, and they want to see the inventory down. I want to see the inventory down. I don't like too much inventory tied up, slow-moving inventory is the thing that I'm focused on the process of doing that. So I don't want to try and finish it well. I don't think it's practical to finish it by the 30th of June. But there is some low-hanging fruit. We will drive that through very, very quickly. And I'm very confident that we'll get there. So we will deliver a very good result at year-end.

Sorry, just 2 more questions from me. And this is the first one in regard to roofing and construction. I mean, given a downturn in construction is kind of difficult to ignore given it probably creates the most earnings risk. You've previously pointed out that the steps would say there should be a problem for Aussie in the next couple of years. However, the sort of business unit leader for DX, you wouldn't bet against them thinking that you can still grow against the market. Since -- so that was -- I mean that was kind of talking in August of last year. Are you still quite confident about that? And are there any specific plans in place that also give you confidence? Like -- I mean is it a combination of price increases and more products or that sort of?

They're calling out individuals. He would be one of the top 3 to get his pricing right quickly. He has developed a fantastic relationship with Bunnings and manages that relationship incredibly well. The relocation has given us opportunities to reduce our cost structure. There's series a little subtle thing. So we were used to, in some cases, sell individual products. We now sell by the carton. That might sound minor, but I can tell you on the distribution business, that's huge. And of course, he always goes up. So if we were selling in a bad number like 6 or 8, he's moved it to 10, a magic number, which is always good. So that solves a lot of issues. These things sound really small. So I know this is one of the hardest things I've been explaining over the years. It's not the big queen-sacrificed checkmate. If you use the [indiscernible], it's the accumulation of a series of small advantages, which they seem in receivable, but actually, they lead to -- that just creates some momentum. And I'm kind of loosely paraphrasing Warren Buffett when I say that, but it's just -- it is truly the continuous improvement process and what scares me is when we have a good hard look at certain process, how much more opportunity there is? And I went to Melbourne recently, and I was absolutely gobsmacked. Now I don't know how many places the leadership team have visited to get the layout of the warehouse right, but just to dwell on that freshen the layout is completely different to how I would have thought about it and it works and there's good reasons. They visited Amazon, they visited all these things. And I think they visited 30 sites. They've taken the best of all that and put it in one place. And so of course, you get some gains. But -- so you're right, I wouldn't bet against them. I think I've said they used that at board meeting. But it seems to be an optimist. But specifically in areas where industrial washes, these are used in roofing products. And DEKS kind of controls, they're not just in Australia, but in other export markets as well. And Christian is bringing through more of that business. So when you see it -- so I think in principle, we are not here to manage just market fluctuations when the market's up, we're heroes and when the market goes down, we complained about the market. We're here to make growth, profitable growth regardless almost of what the markets do. So that's our role in a number of our businesses and Graham's probably going to give some flavor, but what surprised us so occasionally, we have a positive. How long is the UK part of the roofing business is going to deliver through solar? And the answer is we don't know. It's very hard to get a read on that, but it's been a great performer for more than 6 months. I just don't have a read on that. But just on building products in general, opportunities arise with change. So New Zealand for good or for bad has brought in a new installation standard. So most of the existing insulation, so this is professional insulation, 50 mill, 70 mill, 80 mill thick insulation for buildings like the downtown convention center in [indiscernible], we expect another round of supply and some critical building products. When there's a change in standards, and you've seen this, I've talked about it with the Agri division. There's big opportunities for us to work with our customers and make them more competitive. And so that in itself is creating opportunities. So there's always an opportunity if you're looking at things the right way. So I appreciate it. I think the bigger risk has been in construction. You've seen a number of businesses fall over. Are we going to get paid? So one thing I feel some people take it for granted. Graham and the financial team and I'm focused on this. We've done a very good job of making sure we get paid. So I mean that's really important. So because we're doing such a good job in that area, people are almost taking it for granted. There's still a lot more we can do. It's part of working capital, obviously. So we're thinking about that a lot as well.

Yes. And I'll just squeeze in one more to it. I guess it's partly in relation to Talbot. You -- are you able to sort of say what the sales number was for the first half for the medical and hygiene segment split? I think it was in the second half last year was $4 million. I was just curious to see the sort of progress in that?

It's not materially different to what it was in the first half of last year. I think you know that there's a big health care company in New Zealand that's one of our customers in that area. And obviously, the demand has been down a little bit. So it's not materially different or else we would have called it out in that bridge. As David said, the biggest contributors to growth from the industrial point of view in the first half was on the foam side, the roofing construction, particularly in the UK and vacuum systems. But there was no material growth in the medical hygiene type area in the first half. I think we'll begin to see a bit more of that in the second half and when some of this new business comes on board. And certainly, when we're talking in 12 months' time about the first half of next year that will be a bigger contributor.

Much bigger. No, no, we need to wind it up. So look, first of all, thanks, everyone, for your interest. Of course, if you have any specific questions, feel free to reach out to Graham or me, and we need to get moving. We've got a couple of meetings downtown and inevitably, there'll be some updates from the press and things like that. So look, again, thanks for the interest. I'm really proud of what we've achieved in Skellerup and look forward to not only a good 6 months, but a good future over the next 2 or 3 years. Thanks, everyone.

Thank you.