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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for standing by, and welcome to the CSR Limited Half Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Ms. Andree Taylor, GM Investor Relations. Please go ahead.
Thanks so much. I'll just kick off with making our introductions about the team joining us this morning. We've got CSR's Managing Director, Julie Coates; and our CFO, David Fallu, who will go through the various sections of the agenda to leave plenty of time for your questions. Also joining us is Sara Lom, CSR's Group Financial Controller, to assist with questions following the presentation.
Before handing over to Julie, I'll just confirm that CSR will be holding an Investor Day on the tenth of November, starting at 9 a.m. Sydney time. Webcast and details of this presentation will be able to be found on CSR's website next week. Or if you have any questions, you can get in touch with me directly.
So with that, I'll hand over to Julie.
Thanks, Andree, and good morning, everyone. Just looking at the agenda on Slide 2, I'll kick off with an overview of our financial results as well as our safety performance and sustainability agenda. David will then take us through our financials in more detail and talk to Property and Aluminum. I'll then cover the performance of Building Products and provide an update on our outlook for the rest of the year before opening it up to you for questions.
So moving on to Slide 3 and before getting into the results, I wanted to highlight some key themes. The first is how well the business has performed to deliver for our customers. While we continue to operate in a high-demand market, the operating environment continues to be complex with ongoing supply chain disruptions, more variability in trading patterns and increases in input costs. Our work on supply chain continues to make an important contribution to our ability to support our customers, particularly the work we completed earlier in the year to establish strategic transport partnerships.
The work we've done to improve business planning processes to ensure we are optimizing capacity and managing demand with ongoing supply constraints has been valuable. And we've managed the inflationary environment very well with a clear focus on pricing discipline as well as cost control. Overall, this has led to a very strong financial and operational performance over the past 6 months.
So let's turn to the overview of our results on Slide 4. As you can see on the slide, we've achieved a good result for the half year. Our revenue was up 14% for the group, and EBIT increased 29%.
The 11% growth in revenue in Building Products reflects good execution by the team to deliver into our end markets and good pricing discipline across all of the businesses to manage inflation.
The 15% growth in Building Products EBIT highlights the benefit of this improvement in revenue flowing through to earnings with continued cost discipline and improved product mix.
NPAT before significant items in EPS were both up 27%. The Board have declared an interim dividend of $0.165 per share fully franked, which is up from $0.135. We've also progressed the share buyback announced at the end of June, which has now bought back $22 million in shares during the half.
Now on to Slide 5 and before going through the financial results in more detail, I wanted to talk to our safety performance. Our work over the last few years on embedding risk reduction plans at all sites have led to significant improvement over the last 6 months. Importantly, we are seeing a reduction in high-consequence incidents across the business.
We know we have more work to do. And in the last few months, we've launched a major new initiative around Never Walk Past. This is led by our operational and safety leaders to help everyone to build a mindset to never walk past an unsafe act or condition.
Turning to sustainability on Slide 6. Our focus on sustainability is a strategic foundation for our strategy, with the main focus over the last 2 years on progressing our 2030 targets.
2 Years in, we're seeing good improvement with reductions in our emissions and energy and water use, providing us with real confidence in the delivery of our 2030 targets.
During the year, we developed a more comprehensive Sustainability Framework, which will include the refinement of our current goals and metrics. This work will be finalized over the next few months and integrated into our sustainability strategy in 2023. More details across all of these areas will be included in our Sustainability Report, which will be published in December.
Now turning to Slide 7, which summarizes the EBIT performance across our 3 divisions. In Building Products, we delivered an 11% increase in revenue and 15% increase in EBIT. The team worked hard to deliver for our customers in a high demand but disrupted market while managing our costs and optimizing capacity.
The $28 million EBIT from Property reflects the completion of next tranche at Horsley Park, which was delivered on time and on budget.
The completion of the Warner sale positions us to capture a further $29 million of EBIT in the second half. There are a number of projects in the pipeline, and we will continue to optimize our network, which will extend this over the next 10 years.
In Aluminium, EBIT was down slightly to $17 million. As we [ flagged ] in May, we've seen increased volatility in pricing and costs, and this has escalated in the last 6 months. So the benefits of higher aluminium pricing has been offset by higher raw material and input costs.
I'll now hand over to David to talk more about our financial performance, Property and Aluminium, before I cover off our Building Products results in more detail.
Thanks, Julie, and good morning, everyone. Looking at our results for the half, slide 9 summarizes our profit and loss. In terms of revenue, it was up 14% for the half year to almost $1.3 billion. As we will talk to in greater detail, the increase in Building Products revenue reflects disciplined pricing outcomes, volume and mix.
We also delivered good cost management with our total SG&A spend flat compared to the previous half.
Building Products performance, together with improved Property results compared to last half, contributed to an increase in EBIT, with EBIT before significant items of $171 million, up 29%, and our net profit before significant items up 27% to $110 million.
Statutory net profit after tax of $104 million was down 34% as significant items last half recognized the benefit of $71 million in carryforward tax losses.
In terms of cash flow on Slide 10, our working capital balance increased from Aluminium due to timing of shipments and increase in debtors due to higher Building Products sales and an increase in Building Products inventory, primarily associated with higher input costs.
Debtor performance continues to be managed well through the period, with no changes in debtor days. And overall inventory volumes are ensuring we support customer demand.
We saw the unwind of prior-period hedging prepayments during the half, and our strong balance sheet position continues to support business investment and distribution to shareholders.
In terms of CapEx investment, this improved in the half as we saw less restrictions from COVID in the period. Whilst this is an improvement, the environment to execute CapEx projects is not yet normal. And based on run rates, we would expect capital expenditure, excluding Property, for the year to approximate $80 million.
Property capital expenditure of approximately $50 million will support the pipeline of projects for both contracted and future property opportunities.
Looking at dividends for the period on Slide 12, as Julie noted, the Board has declared a dividend of $0.165 per share fully franked. Strong growth in our dividend is reflective of our performance this half and the confidence we have in the pipeline of detached activity extending into next year. In addition, we've completed $22 million of the share buyback during the half.
Turning to Property. Over the last 5 years, we've been focused on developing, embedding and extending our Property strategy, which we highlighted at our July '19 Investor Day and updated in November 2020. Through the team's capability, deep knowledge of site management and proactively managing our network, we're now well positioned to unlock substantial opportunity over time.
On Slide 14, you can see the stages of opportunity that the team works through. Most of the activities you see in our P&L results come from work undertaken at stages 1 and 2. However, due to the very long lead times in Property, the team needed to be working across all stages in parallel to ensure we can take best advantage of value-creating opportunity and minimize any operational disruption to the business.
To ensure we are informed in how we manage across these time horizons, we undertake a global valuation review of our freehold properties. Historically, we have shown the key Western Sydney site due to the scale of those land holdings.
These valuations are done on a more conservative "as is" basis as opposed to a best use basis. As you can see, the overall "as is" valuation has been independently valued at $1.5 billion, excluding our long-term operational land holdings. We've always maintained our job is to improve the "as is" value, which we typically do through our rehabilitation and remediation capability.
You can see on Slide 16 how the team's great work continues to translate into results. Our EBIT for the half of $28 million was delivered despite challenging weather conditions, with the ongoing works at Horsley Park remaining on track.
In addition, taking advantage of the strong property markets, the team have secured additional contracted EBIT, expected to settle in YEM23, increasing total contracted EBIT for YEM23 to approximately $68 million.
We continue to work on projects to extend pipeline visibility of contracted Property opportunities in future periods, which is really exciting, and we'll provide more detail on the CSR group Property approach at our Investor Day next week.
Now turning to Aluminium on Slide 18. You can see from the results for the half that the environment for Australian smelters continues to be challenging, particularly from an operational and input cost perspective. Despite significant increases in modulation in power interruptions, which limits the opportunity to drive efficiency in production, the team did a great job to maintain volumes versus last half.
Whilst we received the benefit of our historical hedging compared to last half year and compensation for power disruption to support national electricity market stability, this was more than offset by cost increases during the half. Overall, EBIT of $17 million was down from $18 million in the prior period.
Of particular note are the substantial increases in carbon-based input costs, notably coke. With tight supply from key markets and a limited ability to secure long-term contracts, these raw material costs were $29 million higher compared to last year. Whilst we remain in a volatile period, we expect the elevated cost environment for our key inputs to persist over the next 12 to 18 months.
The material change in Tomago's cost base when flowed into YEM23, results in a full-year EBIT range of between $8 million to $24 million. However, we should note the volatility of the operating environment obviously makes forecasting a challenge in this period.
We continue to see merit in reducing risk where we can and as a result, continue to take opportunities for future hedging at levels that represent strong pricing, as you can see on Slide 19. This hedging program will insulate against high costs and also provide strong earnings during periods with more normalized cost levels.
I'll now pass back to Julie for a review of Building Products and outlook, and we'll be here for questions at the end.
Thanks, David. Before we look at our results in more detail, let's talk about the environment across the building and construction market on Slide 21.
As expected, the cycling of HomeBuilder demand has led to lower housing commencements compared to the first half year, but commencements are still at historically high levels. It is well understood that there are delays in completion time for housing due to supply chain and labor constraints in addition to weather issues do much at this half year.
And commencements continue to exceed completions with the size of the detached pipeline remaining over 50% higher than historic averages, supporting strong activity well into 2023.
Multi-res is starting to pick up, but the long lead times to completions will take time to work through and will contribute to future periods. The outlook for the nonresi market remains positive, with approvals continuing at near record levels.
Turning to Slide 22. Our 11% revenue growth highlights the benefit of our execution into our end markets, the diversity of our business across the building sector and a pickup in volumes in a couple of key areas, including in Hebel and in our Gyprock trade center sales.
This slide really helps to bring together the depth and breadth of CSR's unique position with the quality and range of products and systems and our ability to serve customers across a range of projects and through all key components in the life cycle of their build.
This is a key area of competitive advantage and sets us up well as the market is managing increased requirements relating to a range of issues across sustainability, supply chain disruption, installation, regulation and compliance.
Looking at the results in more detail on Slide 23, you can see a record performance in both EBIT and EBIT margin. Earnings benefited from pricing discipline, cost management and improved product mix. Costs benefited from the work we have been doing around streamlining the organization and ensuring we manage our cost base as we resume a more normal working environment post-COVID. Our return on funds employed is strong at 28%.
Now turning to our strategy. We continue to be focused on ensuring we deliver our results while making the investment required to drive improvement for future growth. Our strategic priorities are progressing with work on safety and sustainability, customer focus, streamlining the organization and supply chain optimization.
So let me take you through this progress by looking at the performance of our 3 Building Products divisions and the work we've been doing in customer solutions and supply chain.
Starting with Masonry and Insulation on Slide 25. We delivered 7% revenue growth, reflecting strong price management as well as an improvement in mix. Bradford performed particularly well with a strong increase in revenue and earnings driven by good price discipline. The team have also been doing significant work optimizing the Bradford range this year.
We've now [ delivered ] around 100 lower-margin SKUs, which is unlocking capacity in higher-margin products through longer runs and reduced changeovers.
PGH and Monier are 2 businesses that were most impacted by some of the weather issues this half, but they have also been disciplined on price to manage the impact of costs, which increased during the period.
Our priorities are continuing across key areas of investment to improve operational efficiency and unlock incremental capacity with investment underway at 2 sites in Queensland.
The Bradford investment will deliver a 10% increase in capacity, improve safety and support an improvement in our cost position. This is also an important part of how we will be addressing additional demand arising from the adoption of the 2022 National Construction Code. And we look forward to talking to you more about this at our project -- at our session next week.
Overall, revenue for Interior Systems grew 12%, which reflected the strong demand in the team's ability to deliver into its diverse end markets. We're seeing the benefits of the improved pricing discipline and product innovation coming through with Gyprock as we continue to invest in our range, including our highest impact-resistant board as well as improvements in our accessories and compound ranges.
This is a great outcome for customers, but is also driving a higher-value product mix, supporting revenue and margin. For Gyprock, we've been focused on improving in-store experience, which is driving a strong connection with our customers.
Moving on to Slide 27. In Construction Systems, we delivered revenue growth of 17%, reflecting strong growth in Hebel and AFS and good price discipline to offset increases in key input costs.
We're really starting to see the benefits of diversification as we build a greater share of the external cladding market in housing for both Hebel and Cemintel. Customers are seeing the value of this combination due to its speed and ease of installation compared to [indiscernible] Gyprock.
We're starting to see improvements in commercial and apartment sector demand, with increased opportunities for all 3 of our brands to be specified on new projects. This is enhanced by our project tracking capability, which was launched last year.
It really is an exciting time for the businesses. Our customers are facing increased requirements on compliance, regulation, installation and labor availability, with more product applications and sustainability requirements.
Hebel is well placed across all of these areas. So again, we look forward to going through the business in more detail next week.
On Slide 28, in relation to delivering customer solutions, we've spoken previously about some of the key initiatives including project tracking, which is part of our strategy to increase diversification across segments, particularly in the commercial market.
The key area we've progressed in the last 6 months is through our digital tools for architects and designers. In August, we launched our system selected tool, which provides over 20,000 compliance system solutions to support building design. This really highlights the depth and breadth of our product offering in an easy-to-use system to customize the right selection and support ease of adoption for our customers.
As I mentioned earlier, the benefits of project tracking are becoming more visible with new commercial opportunities specifying multiple CSR products such as the new Frasers Midtown project at Macquarie Park, which includes Gyprock, Bradford, Hebel and our Cemintel Barestone product.
Now turning to Slide 29. As I highlighted earlier in the year, we've now established strategic partnerships with key transport providers, which has been crucial to ensure delivery for our customers while managing numerous disruptions during the year. These relationships with transport carriers continue to enable us to mitigate transport shortage risk and minimize cost inflation pressure.
We also launched our transport management system or TMS in July with a CSR-wide approach on internal stock transfers, with TMS helping us be more responsive to our customers and more cost efficient.
We're also embedding integrated business planning on a more consistent basis across CSR. And as an example, based on a more robust and accurate forecast for our Cemintel business, we identified an opportunity to better handle imports through the port of Sydney by establishing a dedicated imports distribution center. Importantly, this has established a whole of CSR input capability that can service all brands.
So finally, let's look at the outlook for the year ahead on Slide 31. In Building Products, the business has entered the second half with good momentum. There continues to be strong underlying demand for Building Products and good pipeline visibility. CSR remains confident in the ability to manage the inflationary environment across product categories.
The diversified nature of Building Products across product, build cycle, geography and end markets positions the business well for the second half and into year '24. This is supported by continued focus on executing strategy and maintaining cost and operational discipline. The strategy work continues to enable the business to become more responsive to customer demand, improving efficiency and capture opportunities across more products and building segments.
In Property, contracted EBIT for YEM23 is expected to be approximately $68 million, which includes completion of the sale of Warner, Queensland in addition to the likely realization of other smaller transactions during the balance of the year.
In Aluminum, the ongoing cost volatility makes forecasting challenging. However, the best estimate for YEM23 EBIT is currently in the range of $8 million to $24 million. The current elevated cost environment is likely to remain over the next 12 to 18 months.
So in summary, given the outlook for Building Products for the full year and the improvement in Property earnings, CSR expects to deliver a strong group results for YEM23.
So with that, I'll open it up for questions.
[Operator Instructions] Your first question comes from Niraj Shah from Goldman Sachs.
Firstly, just within Building Products, are you able to quantify the split between volume and price/mix in that 11% growth you reported?
Yes. Sure, Niraj, thanks for the questions. So obviously, we were really pleased with revenue number. The majority of that is actually in price, as you would expect in our commentary. And the rest of it is a combination of both volume and mix.
Got it. And I guess, sort of a similar type of question. But can you sort of provide any color or quantify the benefits of sort of TMS and the transport partnerships in mitigating the level of transport inflation that's out there at the moment?
Yes. Look, I think that's a really important question. So obviously, given the disruption in the supply chain and the inflationary environment that we're operating in, a lot of what we've done is, first of all, enable us to deliver for customers, which is the first thing. But secondly, there's an element of cost avoidance in that end. There's also building and enabling capability for the future.
But I guess what's important for this audience is the investment in TMS, et cetera, that you point to is really being delivered in the context of these results. And so we're very conscious of making the investment to improve the business for the future but also conscious of needing to deliver results, and that's what we've done.
And it's obviously been compounded by the complexity in the supply chain that we've been dealing with. So it's really important that we've done that work. But we think the benefit -- quantifying the benefits will start to flow through more from YEM25.
Your next question comes from Lisa Huynh from JPMorgan.
I guess just on the strong margin result, can you talk about a -- similar to Niraj's question, to what extent price/mix and just the efficiencies you've talked to drove the margin improvement? And just qualitatively comment on how sustainable you think this margin result is, going forward.
Yes. Look, the margin improvement is partly due to the drop down or drop through from the revenue line, right? And most of that is in price. So that's been quite a bit of a margin improvement. But we've also, as I said, focused quite consistently on cost. And as coming out of a COVID-impacted environment, where we're conscious of needing to -- there will be a requirement to elevate our expenditure, but we wanted to do that in a very disciplined way.
So I'm really pleased with the cost outcome because not only is our SG&A flat to the last half, last year, it's actually -- as a percent of sales, it's actually improved. So it's a combination of all of the above, but price has been a really important factor.
Yes. I mean, just following on from that, Julie, I mean how long do you think SG&A as a percentage of sales can stay flat for, just given, I think last time we spoke, you flagged that would be stepping out as we came out of the COVID disruption?
Yes. We said that we would look to maintain SG&A as a percent of sales at flat, and we've done better than that this half. So we continue to be really focused on that, Lisa.
Okay. Sure. And just one quick follow-up. Can you just talk briefly about the cost inflation outlook for the Building Products business? I think you flagged gas hedging out to '27. Just, what exactly that hedge profile looks like within the next 5 years, would be great.
Maybe I'll kick off and then hand to David for the most specific part of your question. But the first thing I'd say is that our results indicate our ability to get ahead of inflation. There's no doubt about that. And we've seen the lag coming through in other places. So we've managed it in real time. So that's been important. And it is something, to your point, that we will continue to focus on. But in terms of your energy hedging question, I'll throw to David.
Yes. Lisa, look, I think the important thing is to actually have visibility of these things, so that you can manage them proactively rather than reactively. And that's our approach to energy.
The environment for gas is pretty well documented, right? And that's going to be an inflationary impost for all energy users, and we're working through the process of ensuring that we're able to manage that in the context of our P&L.
When we've got a broad portfolio, what that will result in is those products that have a higher gas intensity are going to need to put through higher pricing as a result. And I think Bricks is clearly an example of that. But we've got other cladding alternatives as well, which are less gas intensive, and that creates an opportunity as well.
So we're confident that we're able to manage through the inflationary environment that we see in front of us, and we've got good visibility of what that's like, moving forward.
Okay. So just quickly, David, on electricity, is that hedged as well with exposure?
We do. We typically try and get, again, around 12 months visibility of that moving forward. And so we do that through a hedging regime as opposed to specific supply contracts.
Your next question comes from Lee Power from UBS.
Julie, is it possible -- just thinking about your comments about variability in trading patterns increasing, can you maybe talk to kind of the SKU that we should be thinking about in the second half, given those comments?
Sorry, just helping with the variability of trading patterns?
I think, in your opening comments, last time we you heard you, you talked about increased variability in trading plan and supply chain issues. Obviously, we've seen weather in the first half. So I'm just trying to think about normal seasonality in what we should be thinking about this year.
Okay. So when I talked about the disruption, it was more about supply chain. I mean the pipeline of demand has not been variable. It's been strong, albeit, to your point, we've disrupted for some of our categories with weather.
We've got good momentum going into the second half, and we see that continuing as we move forward. I think as I said, there's delays in completion times, which is actually elongating demand, and the pipeline in detached housing is pretty strong, so we're envisaging that to continue into the second half.
Yes. So I guess, should we think about normal season -- should we just apply normal seasonality like traditional seasonality? Or should we think about something else?
Well, hard to predict that, but we've seen good momentum, and we know that people are working hard to -- on the pipeline in order to get houses completed. So there may be less, but I wouldn't -- I would let you kind of make your predictions about that. We just think it's going to continue to be strong right through the year.
Maybe to help it, if you look at first half last year, we obviously had the COVID-related shutdowns. If you look at the first half this year, yes, that's probably been replaced by sort of labor availability, supply chain and weather events.
So to the degree that you see an improvement in sort of labor availability and those sort of disruptions that have impacted the first half, then that obviously should be a net benefit, moving forward. But I wouldn't want to make a prediction around what the weather is going to be in the second half, and we don't normally manage the business around weather.
Yes, that's good information. And then David, maybe given you were asked before around gas prices, I've noticed that you've signed an agreement with Shell Energy for gas supply until 2027. Can you maybe talk about what the -- likely to the degree that you can, the pricing of that contract would be useful.
Yes. Look, the pricing is subject to terms of confidentiality, Lee, to sort of say, I think the dynamic around gas pricing in Australia is pretty well documented. And I think all people entering into contracts, whether you're entering into it today, next year or YEM24, you're going to be entering the same environment, which is a challenge. But as I say, we've got visibility as to what that looks like, how that plays out for us by product, and we'll manage accordingly.
Your next question comes from Brook Campbell-Crawford from Barrenjoey.
Julie and David, just one on plasterboard pricing here, 2 competitors on the East Coast have put through very material increases for January '23, I think it's high teens, even 20% increases. Yes, are you planning to, or have you put out increases for January '23 as well for plasterboard?
But what I'd say is the Gyprock team is very focused on what they need to pass through in terms of price. They've demonstrated their ability to do that, which they started to do last year, and we said we would see the benefit of flowing through to this year, which we have. They've put through an additional price increase this year.
So in addition to the normal March, April time frame, there was another one that just went through in September and October. And I'm sure they're looking at what's appropriate for early in the new year, given inflationary pressures and the market context.
Yes, okay. That's good. And David, just one on land. It looks like the "as is" value for the Western Sydney sort of $1.1 billion still, which is unchanged, and the uplift is from additional freehold sites as you've flagged. I guess my question really is the $1.1 billion is unchanged despite movement in interest rates. Do you mind sort of just stepping through why you're confident and why you're getting the feedback about an unchanged valuation there?
Yes. On a like-for-like basis, it's reflective of the work that's been done and also bearing in mind that there are stages of Horsley Park that come out progressively from that $1.1 billion as we complete each of those stages. So I wouldn't describe it as an exact replication of like-for-like.
And so the -- all factors are sort of taken into consideration by the independent valuer. And that's what they produce for -- we obviously have our own view as to how we want to best improve those valuations that sit there, but we just feel it's a helpful disclosure for you.
Yes, it's very helpful. And I guess just one more, David, for you. On Slide 15, you have the sort of staged timeline, I guess, there. And you flagged, number two, the short term opportunities, $400 million. How short term is short term? And if you can provide some color there? And also, what's the plan for use of those proceeds?
Yes. Look, in terms of how short term is short term, look, we've used a rough approximation of 5 years in that space. There's obviously a degree of uncertainty in those spaces where you're looking at rezoning applications and things like that.
I am encouraged by what we're seeing at both the state and federal level in terms of acknowledging the challenge around land supply, particularly within the Greater Sydney Northwest and South regions, which will be beneficial if that comes to fruition. And so that's sort of the time frame around what short term looks like.
I think in terms of what's the plan with the proceeds, that will be a function of how we take these various opportunities. These are large-scale opportunities. And I think how we take that forward will be one of the options that we have with the proceeds. Obviously, the other is to invest within the business or distribute to shareholders, which is what we've been doing.
Your next question comes from Simon Thackray from Jefferies.
Just a quick one straight out of the gates, Dave. Aluminium, just noting in that first half, there was a $16 million power disruption payment. I assume that's obviously in your guidance for the $8 million to $24 million. So backing that out, you're basically saying it's minus $8 million to plus $8 million, is that the way to think about it?
Yes. Look, that is the way to think about it. I guess the -- and that's reflective of the high cost environment. I guess the only point I'd make around that as well as it remains an uncertain and unstable electricity environment as well and kind of our team at Tomago proved that they are the most efficient, effective and scalable battery in New South Wales, and I think people are starting to recognize the value of that.
That's excellent. While we're on Tomago and then the discussion before, I think, with Lee on gas, the gas contract that you struck to 2027, is that across the Building Products portfolio or the entire business, including Tomago sort of [ 1 petajoule ]?
Yes. So that's around the Building Products portfolio. And Tomago manage their own gas supply and execute their own contract in that space.
Yes. Okay. That's helpful. And then thanks for your updated Property, it's very helpful.
Yes. No [ drama ] at all. So I'm going to have to have this or any feedback as always.
Yes. And just on that Property update with the -- where we've now separated Western Sydney from the broader portfolio, which is valued at 1.5, just so we don't get too carried away too quickly, what would be the estimate net of the Viridian capital losses? What would be the estimate of the kind of tax liability against that Property valuation should it be realized? Is it 10 percentages or single-digit percentages? How should we think about that?
Yes. No. So in terms of the tax liability associated with that, what you would typically see is that where it's on capital account, we'll be able to utilize our carryforward tax losses. And the total amount for that offsetting it is the -- tax effective amount of that is approximately $325 million, which ].
So we'll progress -- what we've been doing is we've been progressively booking that as we get certainty and visibility of the capital gains to offset against that. So that's the total amount of potential tax benefit that could occur if -- against those capital returns. Does that answer your question?
I think so. I think so. I'll have to process that. But I might come back to you on that one. And then if I can lead you this way, I know this is a bit sensitive, but maybe I can do this across the whole portfolio.
If we talk about the increased gas cost, the uncertainty of electricity and rising labor costs and every other bit of inflation that seems to be apparent in the system, if you compare gas cost in the contract to what you were paying and the other inflation across the Building Products portfolio, what kind of -- and assuming flat volume, what kind of pricing would you need to keep margins stable? I mean, is it low single digit, high single digit, double digit? Just trying to understand the scale of the inflation against the pricing that's required to get margin stable.
Yes. So look, it will depend by product across the portfolio. So the higher gas-intensive products, the scale of -- the most important impact into that is actually the energy cost. And so that is going to require double-digit price rises to maintain margins in that space.
In terms of the other portfolio products, the majority of those core products are far less gas intensive. And so the requirement to offset inflation in that space will be lower.
Your next question comes from Daniel Kang from CLSA.
David, I just wanted to ask on the working capital increase in the first half. Do you expect a reversal by the second half? And I guess along those lines, can you comment on how you are seeing channel inventories?
Yes. So look, I think in terms -- I would expect a reversal, I guess, just of note, about $40 million of that working capital increase related to timing of shipments. So that's -- those [ notable ] sales since the half year is closed. And so that's really a timing implication.
The debtor increase is a reflection of sales. So I'm not -- I wouldn't expect that to be reversed in the half. The most important thing that I focus on there is how is the performance of the debtor book, and that's been maintaining really well with DSO staying stable.
The increase in the inventory is the result of higher input costs. So there will be an element of that, that continues to flow into COGS as input costs continue to increase.
From a volume perspective, I think that -- I would describe the -- as a general rule, a sort of no challenges from a supply side perspective. We've always been focused on working capital management. I'd argue that through the period of challenges within supply chain, we've needed to carry additional stock. That may be a feature that changes as we move forward. But I don't think that will be a material impact as we flow through to the end of the half.
That's great, David. And just on Building Products margins, I guess it's similar to Lisa's question on sustainability of margins. I mean 15% is clearly a record level. I'm pretty sure.
Maybe I can ask it another way. If we look forward in terms of normalized through cycle margins, where do you see the range would be? Because in the past, at the low point of the cycle, we've seen margins fall to as low as 6% to 7%. Where do you think that low point is and the high point is, going forward?
So look, I think from my perspective, that's really going to be a function of activity. What I would say is we've got far more options at variabilizing our activity that I think you've seen when activity has reduced over the period and the ability to insulate the impact on margins.
Now clearly, there will be an element, depending on that level, that flows through to margin. But I think the reality is when you start out -- I do agree with you, it is a record Building Products margin. When you're starting from that level, the businesses -- it would not be going back to those single-digit numbers because the business is fundamentally different to how it was set up then we consolidated the Brick business.
You've seen how we can manage that high fixed cost network as we've done within Queensland. And businesses that were much smaller contributors at the time at which you were quoting those margins, are much more established and have continued category and geographic expansion opportunities with the likes of Hebel. So I think you will see an elevated and outperformance of our margin through the cycle from what you've seen historically.
Your next question comes from Keith Chau from MST Marquee.
David and Julie. So just the first question I have is on a follow-on on price increases. I mean certainly, Gyprock price increases has gone through and continue to go through as Brook mentioned. But if you look across the other portfolio, across the portfolio, [ installation ] prices have gone up as well. I think Bradford recently announced price increases. [ Rigs ] are certainly going up as well.
And this is all in the environment where some HomeBuilder margins are getting pressured. So I am keen to understand to what extent have you seen pushback from your customer base on price increases? And where do you think the elasticity and demand starts to price if prices do indeed have to go up double digits to recover cost?
Yes. Thanks, Keith. I'll kick off with that. I think the results showed that we've been able to land price increases in the current market. And we've always said, in a high demand market, you can at least recover CPI a little bit more, which is what we've been able to do. I think a lot of the benefit of those price increases will continue into next year as the ones from last year have continued into this.
In terms of the ability to continue to do that, we're very mindful of that in terms of the market. But the biggest issue for our build customers -- and actually, of course, they always push back on price increases. But the bigger issue for them right now is getting supply and labor constraints.
So the labor constraints in the market is actually what's causing some real challenges. And you see that in the extension of the pipeline, which is what's causing a lot of the congestion. So that's the bigger issue.
Okay, Julie. And just a quick follow-on, just focusing on the risks in the operating backdrop, David, perhaps, you've mentioned your day sales to debt has remained pretty consistent. But can you give us a sense of what your -- or how your bad debts have moved?
And then there's, again, plenty of press speculation that builders are really struggling, and you're seeing that in the asset data, there continues to some comments around Meriton and what could eventually happen to them. So just kind to get an understanding of how your [ bad debt ] is looking and whether you've seen any material increases in your customers' ability to pay.
No problem, Keith. No, we obviously stay close to it and manage it really closely working with our customers. We haven't seen a deterioration in our bad debt experience as we stand here today, Keith. It's something we continue to watch and manage. But no change. And so the commentary around bad debts would be exactly the same as the commentary around DSO.
Your next question comes from Matthew Abraham from Credit Suisse.
Just a query on Property and the guidance increase specifically. So you've called out the surplus additional sites that are the source of this positive delta against the prior guidance. Could you just provide a bit more color in reference to what these sites and projects are? And if there are any others that might reflect upside to the guidance materially in the outer years as well?
Yes. So look, the -- they're reflective of sales of surplus land, they're actually rehabilitated for Macquarie. So that was the opportunity we were able to take advantage of in the current half, and we continue to work through those processes.
So I think the surplus land is the canvas the guys can work with. And through work that they do to effectively rehabilitate those sites, that continues to give the opportunity to continue to add sales to the YEM24, YEM25 and beyond. So we'll keep you updated as we work through that process, but that's the nature of those additional contracts that have been executed in the YEM23 period.
Okay. That's helpful. Next one, just on the pipeline. So at the last result, you mentioned that the pipeline, I mean you sort of have the ability to reach out through to the end of this calendar year. Would you be able to just provide a bit of an update in terms of the duration of the pipeline on hand right now and where you think that gets you to?
Well, I think as we've said, we see it extending well into YEM23 for detached housing. But we also see multi-res starting to pick up as well. So we think that will be important as we move forward. And the outlook for the non-residential market is also pretty strong as well.
And we also think there's a couple of tailwinds that will play into our results, moving forward. And I'm well aware of some of the kind of key indicators that have been reported, lead indicators around the housing market. But we've got the National Construction Code coming through, which will have a significant and important positive impact on our Insulation business.
Net overseas migration will start to come back, and that again will have an important contribution to demand moving forward. So we think there's a couple of tailwinds that will start to flow through, and we're pretty confident about the housing market more broadly as we head into YEM22 and well into '23.
The pipeline is effectively as we were seeing it in the last results. So if there hasn't been -- based on commencements and completions, there hasn't been a reduction in the pipeline.
Okay. Would you say the duration of the pipeline is longer and more extensive than last result or...
No. I'd say, it's consistent.
Right. Okay. That's helpful. Great. And just one more last one on [indiscernible], if I may. So the cost pressures that you're talking to, do you -- is there a view that those pressure might worsen as you push into that 12- to 18-month period you flagged? Or is there a view that it's a consistent cost pressure that you're likely to [ stay in that window ]?
It's difficult to answer the question. I might talk to some of the drivers. So the 50% of our coke supply is from China. And obviously, the COVID-zero policies that are in place there are having an impact on production, and that creates limited supply and increased landed cost for us. I'd like to think those features are more temporary than permanent, but it's difficult to guide as to where they will go from here.
Your next question comes from Sam Seow from Citi.
Congrats on the results. Just want to frame the margin question in a different way. I think the majority of the expansion this result was price-related. And it looks like you had some fairly material price rises across your whole portfolio in September.
Now I know you won't comment on actual numbers, but it looks like that they have accelerated or doubled what you did before at a time, I guess, with the delta inflation is slowing. So would it be safe to say you can build on the expansion, going forward?
Yes. I think maybe the way I sort of think that is that whilst the delta of inflation may be slowing, I'm not seeing that in energy. As people roll into new contracts, there's going to be a supply side impact on costs that continues as people's tenures continue to roll on. I think that will need to be reflected in price.
I think the other component to bear in mind is that through the course of the half, you also have the full-year run rate of prior-period price rises, which weren't coming through in the results in prior periods as you need to roll through various contract renewals, and that's a feature of what you're seeing within the results as well.
Great. Great. And maybe would you have a guess on how many homes or any work resulting from the floods that looks like it was the most expensive kind of flooding disaster likely to be Gyprock or high margin, work intensive? Just your thoughts around there and maybe product mix or expectations, going forward.
Well, the first thing I'd say that flood is tragic for the people that are impacted that are requiring to do the work. And we're kind of focused because we operate in a lot of those areas that have been flooded. We have people who work there, and we have customers that operate there.
So we're kind of working with each of the communities as we have done since March -- February, March this year with the Northern Rivers flooding to provide some alleviation to those communities and those people needing products. So that's the first thing I'd say.
The second thing I'd say that in terms of quantum in our overall results, it's not material. And so it's probably not something that we would factor in as an upside for us. It's more -- for us, it's more about how we help those people in those communities.
Sure. And then, I guess, with the backlog where it is and quite extended. And then I guess, last week, the budget, government talking about the Housing Accord, do you have any views around how much work will come out of that and whether or not the backlog will get cleared before these 1 million homes start getting built?
Yes. Look, I think in terms of the quantum, it's over a 5-year period. So you've got to remember that as well. And it starts, I think, in '24, not '25 -- sorry, not '23.
Whilst an important kind of tailwind for us, [ the line ] start to come through potentially as the current pipeline is not at the same extent as it is today. So I think it's actually a good timing for the federal government support on housing and actually is one of the -- kind of one of the bridges to continuing performance that we think is quite important. So we're not worried about it in terms of the current backlog.
I think the other aspect that can help, Sam, on from the housing perspective is if it simply assists in the release of land supply from a state perspective and in conjunction with working through environmental regulation on development from a federal perspective, that will be a very important component of releasing supply into what is an undersupplied market.
Your next question comes from Anderson Chow from Jarden Group Australia.
I just have two questions. I just want to get a little bit more color on this production cost inflation and also pricing discipline. We have good pricing discipline. And from what I can observe is our competitors also have been quite disciplined. Until like what Brook was saying, [indiscernible] is talking about a 21% increase in January.
So I wonder if you could talk -- number one, if you could talk about the #3 or #4 biggest costs in -- you have a broad portfolio, but I wonder if you can talk about the #3 or #4, outside of energy, labor, how those costs are tracking?
And this huge price increase in plasterboard, assuming they're still disciplined, maybe they just haven't done a good enough job in terms of production costs increase. I mean does that present kind of the market share game opportunity from our perspective? Just want to...
The first thing I'd say is I'm not going to comment on the rationale behind the competitors' price increase, [ inappropriate ] for me to do so. We've remain disciplined in what we do. And we ensure that our price increases in this market can at least offset CPI, and that's what we've done. So that's what we'll continue to do.
And in addition to that, the -- if you take Gyprock as an example, the team has worked really hard to drive ongoing efficiencies in each of the production plants over a long period of time. We haven't called it out specifically this half, but I've called it out, I think, every half the last 3 years of some of the initiatives that we've put in place there. And Paul and the team do an absolute terrific job in ensuring that we continue to drive those operational improvements.
So we've got a job -- in addition to passing price through, we've got a job to do to offset cost increases as much as we possibly can, and we're very focused on that as well.
Okay. And just a very general question. Obviously, we're seeing strong organic growth going forward with a high inflation environment and very challenging operation in multiple sectors. Do we see any potential growth opportunity from acquisition, external acquisition? Anything within our existing portfolio or maybe a new product that we may be interested in getting to but never really had the chance, but now maybe the opportunity is coming up?
Yes. Look, I think it's a good question, and we remain live to any opportunity that presents itself in the Building Products or building materials sector. But obviously, there's some key criteria that's important to us in assessing that because we need to be able to create more value than currently exists in those opportunities. And so we assess it on that basis.
And one of the things that's important to us is we're very good manufacturers of long-run automated processes, and that's one of the things that we would look at in looking at any kind of building materials opportunity.
Your next question comes from Andrew Scott from Morgan Stanley.
David, just a couple of questions for you. I just want to focus in on the [ ALDI ] business, if I can. If we look at the first half ex the electricity disruption, it looks like it would have been sort of a kind of a breakeven result. The bottom half of your guidance for the second half of implied guidance is potentially loss-making.
If we look at the waterfall there, most of the things you've called out are externalities and commodities. Just interested in the levers you think you have within that business to pull. You've been pretty hard on continuous improvement for a long time in that business. Is there much that you can control within that around the cost environment?
Look, I think it's -- a lot of those levers are external as you -- all those impacts are external. I think the main piece we can control is how the teams are able to continue to efficiently produce in an environment where the requirement for modulation is high. And that gives us an ability to continue to add back value to network stability.
In terms of the other components, I think the reality is continuing to work -- continuing to take advantage of pricing that will enable us to cover those costs during an elevated period and earn strong returns during a normal cost environment is the main approach for us to take, so that we can take as much risk off the table as we can in relation to a smelter that's performing well, but as a result of electricity prices, sits within the fourth quartile of the cost curve.
Okay. That makes sense. And then you kind of led me into my second question. When we were here 6 months ago...
I regret my answer then.
It's probably an easy one. 6 months ago, you were guiding, or you're 95% hedged at $3,000 change [ ALDI ]. Your average realized price is $3,700 now. I know the premium is not included in your hedging, but I don't think that's anything that remarkable. Is the delta of the electricity disruption payments there?
No. The delta is a component that remains unhedged in order to balance off those cost items that are linked to the LME. So we leave a component of -- our hedging refers to -- our hedging levels refers to what we call what's available to hedge, which excludes the component that's used to the physical hedge against inputs like alumina.
Got it. Okay. That makes sense. And then, again, you've led me in the next one. Alumina, can you remind me where we are on your contracts and in particular, around the linkage and where you think that may be if you were to have to roll any there?
Yes. So look, we can -- we've moved away from having a cliff at one particular point, and the team continue to work to effectively build the [ tenure ] out across 1, 2 and 3 years, and we're progressively in the market around maintaining that engagement for alumina supply. We've seen that, that linkage rate continues to improve the further we go out. And my -- I'm not seeing anything that's really changing that at this point.
Right. Just to be clear, when you say improve, you mean from your benefit, your position?
Yes. Yes. We obviously, at the time at which we rolled from our prior 10-year contract. Now the alumina market was particularly [ unadjusted ]. And sort of as we sort of progressively roll off those contracts onto new supply contracts, that's typically at an improved linkage rate from our perspective.
Great. And I'm sneaking one more. David, in your comments to one of the questions earlier, you mentioned weather. It's hard to ignore. Just interested, you usually -- a lot of your products at least are -- after lockup are certainly reliant on the slab. Are you getting feedback that you're kind of seeing the difficulties of -- that the construction materials had 6 months ago?
Look, I think that component has been insulated a little bit, but that dynamic is probably more as a result of the way HomeBuilder was structured, where the start was so critical for qualification. As a result, you probably have people getting further ahead on starts than work done or in terms of moving through the completion process.
So the -- that has been -- we have not seen that as an impact. Where we would see more of that as an impact is when we had challenges around supply chain for things like timber framing, and a number of our products go on -- obviously go on to that. And it would be more of that component rather than any implication from heavy [ side ] delays as a result of weather.
You have a follow-up question from Simon Thackray from Jefferies.
Julie, I forgot to ask, we didn't sort of get the update on Hebel. I don't want to spoil the party for next week. But just in terms of the proposed increases or the pending increases in pricing for Bricks and the substitution to Hebel, how's the penetration at the moment on Hebel in the residential market in particular? Or what's the sort of status on where Hebel penetration is in resi?
Yes. Look, as I said in the results, Construction Systems revenue was well up, and a lot of that was due to increased volume in Hebel and increased penetration in the housing market to your point, Simon, so you're quite right about that.
And you're also right about the fact that we plan to take you through that in a bit more detail next week. And Andrew Rottinger, who runs that business, is going to give you a full update on what we think is the opportunity in Hebel because we think it's significant for all the reasons you highlight. So thanks for the question.
So to summarize, the pricing in Bricks that we're going to see across the industry because -- no doubt will be industry-wide, should accelerate that substitution effect. That would be the plan anyway, right?
Well, I think that the thing is we'll also -- we've also got price increases going in Hebel as well. There's the cost piece. But the more important opportunity here is about the labor to install and the ease of doing that, and that is actually the reason for customers to convert. But we'll talk more about that next week, and we're -- if you get on the bus, we'd take you at to Hebel at some of them and show you how it's made.
There are no further questions at this time. I will now hand back to Ms. Coates for closing remarks.
Thank you very much. And thanks, everyone, for your time. It's been a long session, really appreciate your interest.
Look, David and I are really pleased to be able to deliver the results that we delivered to you today. And we've done that really on behalf of the team, who continue to be focused on delivering every single day for our customers. And at the same time, they're doing the work in order to set this up, this business up for future growth. So we're pretty excited about that.
And as I said to Simon, I really look forward to talking more to many of you about the opportunities for our future next week. So thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.