Brickworks Limited (BKW) Earnings Call Transcript & Summary

[Audio Gap] Welcome to our shareholders who are participating through our online meeting platform. I would like to start by introducing my fellow directors. Speaking from the room shortly is Mr. Lindsay Partridge, your Managing Director. Also in attendance, we have Michael Millner, Mr. Robert Webster, Mr. (sic) [ Ms. ] Debbie Page, Ms. Robyn Stubbs, Mr. Brendan Crotty and Malcolm Bundey. Also attending is the Company Secretary, Susan Leppinus; the CFO, Robert Bakewell; representatives of our auditors and lawyers, Mr. Anthony Jones of EY; and Mr. David Friedlander of KWM. Justin Robinson of Computershare Investor Services will act as a returning officer for the purpose of conducting and determining the results of today's poll. The Notice of Meeting was made available to all shareholders. Copies are also available on the ASX company announcements page and our website. I take the Notice of Meeting as read. Voting today will be conducted by way of a poll on all items of business. I refer you to the instructional slide now on your screen and declare voting open on all items of business. If you are eligible to vote at this meeting, a new polling icon will appear. Selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of these options. There is no need to press submit or click the enter button as a vote is automatically recorded. You do, however, have the ability to change your vote up until the time I declare voting closed. Please submit your votes at any time whilst voting is open. I will give you a warning before I move to close voting at the end of this meeting. Proxyholders should vote undirected proxies in the same way. That is by selecting one of the voting options in relation to each resolution. As set out in the Notice of Meeting, as the Chairman of the meeting, I will be voting all undirected proxies in favor of each item of business to the extent permitted by applicable law in each case. I now formally vote all undirected proxies in this manner and all directed proxies in accordance with the directions provided by shareholders. And you'll now see the proxies on your screen there. We will also take the opportunity for questions. If you are attending online, you can start submitting questions now, and we will address them later in the proceedings. [Operator Instructions] When submitting a question, please provide your name, confirm you are a shareholder or a proxy holder and identify the item of business your question relates to. If you have any difficulties in asking a question, please refer to the user guide which can be accessed through the platform. Now to the agenda for today's meeting. After I have completed my overview, Lindsay will give the Managing Director's address, including a review of Investments, Property, our Building Products business, both here and in North America. Following this, shareholders will have opportunities to ask questions, and then we will proceed to the formal part of the meeting. 2022 (sic) [ 2020 ] will long be remembered as a year unlike any other. As with all businesses, Brickworks has faced the challenges and uncertainties presented by the global COVID-19 pandemic. However, we must not forget the local impacts of the devastating bushfires over summer and a crippling drought on the East Coast of Australia. In spite of these circumstances, it gives me great pleasure to report that the company has delivered a strong financial result with statutory profit up 93% to $299 million. The statutory result included a significant one-off profit in relation to our shareholding in Washington H. Soul Pattinson. After excluding this and other significant items, the underlying net profit after tax was $146 million, down 38% from the record result for the previous year. The contribution from Property, again was a standout, with strong demand for our prime industrial land driving a significant increase in the value of that portfolio. I'm also pleased with the performance of our Building Products businesses during the year. Demand in Australia remained resilient, and our U.S. brick expansion strategy remains on track. And pleasingly, we have made good progress with our sustainability strategy and workplace health and safety outcomes, both of which Lindsay will discuss in more detail in his address. A fully franked final dividend of $0.39 is payable to you all tomorrow. This takes the full year dividend to $0.59 per share, up 4%. We are proud to be one of the few ASX 200 companies who have increased dividends to our shareholders during the pandemic and have not needed to raise equity or receive government support payments. Including this year's dividend increase, we have now maintained or increased normal dividends for the last 44 years. Based on our current share price, the full year dividend represents a grossed-up dividend yield of around 4.5%, including the benefit of franking credits. This year, we took the decision to introduce a partially underwritten dividend reinvestment plan for the full year dividend. This provided existing shareholders with the opportunity to invest their dividend back into the company without incurring brokerage fees. It will also helped to preserve the company's liquidity position as we move through the period of significant capital investment and uncertainty of global economic outlook. In addition to dividend growth, Brickworks has a very strong history of total value creation. Based on the share price at the end of last week, the company has delivered shareholders' returns of over 12% per annum since the initial investment in Washington H. Soul Pattinson some 53 years ago, incorporating both dividends and share price appreciation. This means that $1,000 invested in Brickworks in 1968 would now be worth some $470,000. Brickworks has a strong portfolio of diversified businesses, consisting of our investment in Washington H. Soul Pattinson with a current market value of some $2.6 billion; a 50% share in the industrial Property Trust, with net asset value of $727 million; Building Products in Australia, with assets of some $675 million; and Building Products in America, with assets of around $225 million. Currently, the total inferred asset backing is almost $3.8 billion after including our net debt of some $454 million. This is based on asset values at the end of the 2020 financial year and updating for the current market value of Washington H. Soul Pattinson. On a per share basis, the asset backing equates to over $25 per share, providing solid support for our share price. It is worth noting that Building Products asset value includes some parcels of surplus land currently held at book value but with significantly higher market values. During the year, we appointed 2 new independent non-executive directors. Malcolm Bundey joined the Board in October last year. Malcolm has a valuable experience as a managing director with expertise in complex manufacturing operations in Australia and the United States, strategy, mergers and acquisitions and business portfolio management. Malcolm is Chair of the Board's Remuneration Committee and member of the Audit and Risk Committee, Independent Board Committee and the Nomination Committee. We were also pleased to welcome Ms. Robyn Stubbs, who commenced as a Director in January of this year. Robyn's executive career spans 25 years in senior sales and marketing roles, including 2 of Australia's largest property groups, Stockland and Lend Lease. Robyn is a member of the Board's Audit and Risk Committee, Independent Board Committee, Nomination Committee and the Rem Committee. I would also like to take this opportunity. [Audio Gap] who will retire following today's AGM. Brendan has served on the Board for 12 years, and in that time has made an invaluable contribution to this company. Following the appointments of Malcolm and Robyn and the retirement of Brendan, the Board will comprise 7 directors, including 4 independent non-executive directors. That completes my address. I'll now hand over to Lindsay.

Thank you, Chairman. Good afternoon, ladies and gentlemen. Where we received questions in advance, we've tried to include the answers in this report to make things a little bit simpler. As the Chairman mentioned, 2020 has been a year like no other. However, despite many challenges we have faced, it gives me great pleasure to report that Brickworks has had another successful year. As well as delivering strong financial results, we have also made significant progress in the implementation of a range of strategic initiatives to position the company for further growth. But before I talk about the many achievements of the year, I'd like to take a moment to discuss the specific impacts of COVID-19 pandemic. From an operational point of view, manufacturing was able to continue across most sites, albeit with strict protocols in place to ensure the health and safety of our teams. The only government-imposed shutdowns of manufacturing operations were in Pennsylvania, where we had 5 brick plants. These restrictions were in place for a short period of time during March. I'd have to also add that last week in South Australia, we were able to keep our factory running, although we were not able to undertake any sales operations. Whilst other plants in the United States and Australia were shut down for various periods, these were company decisions primarily to preserve cash and control inventory. In our financial accounts, we recorded $10 million in COVID-19-related costs as significant items. This relates primarily to these plant closure costs. On a more positive note, demand for our building products remain surprisingly resilient during the year. And there's been no significant impact on rental collections within the Property Trust. We have been proactive in taking the opportunity to implement a range of initiatives across the group during the pandemic. We have increased staff training through an extensive use of online programs. We have ramped up product development initiatives and invested in improving our digital presence. In the United States, in response to the forced shutdowns, we've made the decision to accelerate our plant rationalization activities that were already planned. Following an initial pause, we reinitiated our ambitious capital program and I'll talk about some of our exciting projects later. Overall, Brickworks' diversified portfolio of attractive assets and strong balance sheet have allowed the company to successfully navigate the pandemic without receiving any government support payments or undertake a dilutive capital raising. At the end of the financial year, Brickworks retained a strong balance sheet with gearing of 19% and significant headroom with all of our banking covenants. Before I talk about our financial performance for the year, I'd like to highlight the great strides we are making in the area of sustainability. During the year, we delivered our new sustainability strategy, Build for Living: Towards 2025. This strategy focuses on the opportunity to make building and cities safe, resilient and sustainable. It sets out a clear pathway with 15 measurable targets and commitments across the pillars: responsible business, environment, our people and community. We are achieving pleasing progress across many aspects of sustainability. During the year, we rolled out our improved environmental management system in Australia and the United States. We have consistently reduced carbon emissions over many years through a range of initiatives, including investment in fuel-efficient kilns, product redesign and utilization of alternative fuels such as landfill gas. In 2020, carbon emissions across our Australian operations continued their downward trend with a 12% decrease on the prior year. We also continue our focus on inclusion and diversity. Gender diversity has significantly improved with 27% of the senior executive team being female. This compares to only 7% in 2015. Brickworks is active in the community and has a long-standing partnership with the Children's Cancer Institute, having made direct and indirect contributions of over $4 million since 2002. During the year, Brickworks also formed a sustainability supply chain working group and developed a Modern Slavery Policy and Supplier Code of Conduct. I'm pleased to report that we continue to make steady progress reducing the number of workplace injuries. In 2020, the workplace injury rate in our Australian operations reduced again with just 1 lost time injury. This represents a record low of 0.4 lost time injuries per million hours worked. The injury rates in our acquired U.S. operations are considerably higher than in Australia. As such, we have invested significant time and resources into behavioral safety leadership training and incorporated key health and safety programs across this business. Although this has helped to reduce the injury rates in the United States, there remains more work to do in order to ensure our core value of creating a sustainably safe workplace is embedded and reflected across all of our operations. We'll not be satisfied until we have achieved our ultimate goal of zero harm across the business. Moving now to our financial performance for the year. Brickworks delivered a strong financial result in 2020, with a statutory profit of a near record $299 million and an underlying profit of $146 million. This translates to an underlying earnings of $0.98 per share. The company recorded EBITDA from continuing operations of $281 million, down 19% compared to the record earnings achieved in the prior year. Increased earnings from North America operations were offset by declines across other divisions. Net tangible assets per share ended the year at $14.08, up 6% over the year. As the Chairman mentioned, Brickworks has a strong portfolio of diversified businesses. In total, we have 4 divisions, and I'll now take some time to provide an overview of each. We hold a 39.4% stake in the ASX 100 company, Washington H. Soul Pattinson, which has a diversified portfolio of investments in listed and unlisted companies. Major investments include Brickworks, TPG Telecom, New Hope Corporation and Australian Pharmaceutical Industries. This provides Washington H. Soul Pattinson with a diversified asset exposure, including telecom, IT, financial services, mining, energy and pharmaceuticals as shown in the chart on the left-hand side of the screen. Reported profit from Washington H. Soul Pattinson is based on equity accounting and excludes that part of their earnings that are attributable to Brickworks. Investments delivered an underlying contribution of $51 million for the financial year 2020, down 51%. The main driver of the decline was the lower earnings from New Hope Corporation as a result of significantly weaker coal prices. During the year, cash dividends of $56 million were received, in line with the prior year. Over the long term, Washington H. Soul Pattinson has delivered outstanding returns with annualized total returns, including dividends, of 12.7% per annum for the past 20 years. This represents an outperformance of 5.2% per annum versus the ASX All Ordinaries Accumulation index. The market value of Brickworks shareholding in Washington H. Soul Pattinson was $1.8 billion at the 31st of July 2020. Since that time, the share price has increased by 42%. And as a result, the value of our shareholding has increased by almost $800 million to around $2.6 billion. Turning now to Property. Property delivered an underlying earnings of $129 million in 2020. Our Property earnings are derived from selling surplus land -- surplus operational land and through our 50% ownership in a joint venture Property Trust with Goodman. Having grown significantly since its inception in 2006, the trust now makes up the vast majority of our Property earnings. The JV trust structure is based on Brickworks selling surplus operational land into the trust at market value and Goodman funding the infrastructure works to create serviced lands ready for development. Balancing payments may be required to ensure an equitable contribution towards the value of the fully serviced land. Once a lease precommitment is secured, the serviced land then can be used as security with debt funding used to cover the cost of the construction of the facilities. The relationship is mutually beneficial, with Brickworks gaining access to Goodman's development expertise and network of customers, and Goodman gaining access to Brickworks prime industrial land. The total value of assets held within the Property Trust at the end of the year was $2.1 billion. After including borrowings of $606 million, total net asset value is almost $1.5 billion. Brickworks' 50% share of the net asset value was $727 million at the 31st of July, up 15% or $94 million during the year. Since the trust's inception over a decade ago, Brickworks net asset value has increased at 17% per annum, generating significant value for shareholders. A major highlight for the year was securing a lease precommitment for 20 years with Amazon at the Property Trust's Oakdale West Estate in Western Sydney. This is the second major precommitment secured at this site following the announcement of the Coles Group in January 2019. Amazon is a trillion-dollar market cap company, well known around the world as symbolic of the accelerating trend to online shopping. Securing this tendency demonstrates how Brickworks is well positioned to benefit from ongoing e-commerce -- on the ongoing e-commerce revolution, with the development and example of the increasing complexity of our facilities in response to the growing need for automation and innovation from our customers. In total, the facility has a total floor area of 190,000 square meters or to give you some understanding of that, 38 football fields, across multiple levels and on a base floor area of 53,500 square meters. Construction progress at Oakdale West is shown in the photo as of the 10th of November. The Amazon facility can be seen in the background and is due for completion by September 2021. The foreground shows the major infrastructure works, including roadway and bridge to access the site. These infrastructure works will soon be complete, allowing construction of the Coles distribution warehouse to commence in early 2021. And on that photo, the Coles goes basically between the bridge and where you can see Amazon on that pad there. Post-completion of these 2 facilities, the gross assets held within the various Property Trust assets across Western Sydney and Brisbane are expected to exceed $3 billion. In addition, the net rental distribution to Brickworks will increase by more than 25%. Amazon and Coles facilities will cover less than 40% of the available area of Oakdale West, providing significant further growth opportunities for the trust over the next 5 years. Building Products Australia is a leading manufacturer and distributor of building products across all Australian states. Since 2000, the Building Products Group has grown from a two-state brick manufacturer in New South Wales and Queensland to a diversified national building products business. In total, Building Products Australia comprises of 29 manufacturing sites and more than 40 design centers and design studios across the country. The portfolio includes Austral Bricks, Australia's largest clay brick manufacturer with significant market positions in every state; Concrete Products, comprising of Austral Masonry, Austral Precast and our newly completed Southern Cross Cement Terminal; and Bristile Roofing. Building Products Australia delivered resilient performance in 2020, considering the impacts of COVID-19 and the cyclical low building activity. Revenue from continuing operations for the year was $687 million, down 9% on the prior year. Underlying EBIT was $33 million, down 43%; and the underlying EBITDA was $91 million. A major highlight of the year was the successful completion of the Southern Cross Cement Terminal. Our joint venture terminal is in Brisbane, and we hold a 33% interest in that, along with 2 joint venture partners, being the Nielsen Group and Neumann Group. Southern Cross Cement is now providing quality, cost-effective cement to Austral Masonry and Bristile Roofing operations in Brisbane as well as to the other joint venture shareholders. Having now unloaded 8 ships, we are confident that Southern Cross Cement has a strong cost position and the lowest capital invested of all Southeast Queensland suppliers. Turning to our newest division, Building Products North America. In February, Brickworks completed the acquisition of assets from Redland Brick. This marked the company's third U.S. acquisition following the purchases of Sioux City Brick in August 2019 and Glen-Gery in November 2018. Having now completed 3 acquisitions in the past 2 years, we have quickly established a business of significant scale in North America, able to make a meaningful contribution to group earnings and a platform for growth. Building Products North America now has: a market-leading position in key states across the Northeast, Midwest and Mid-Atlantic regions; a portfolio of well recognized, premium brands; over 700 employees; 10 operating brick plants and 1 manufactured stone plant; annualized sales of approximately 400 million bricks; and an extensive reseller network and company-operated retail outlets. On revenue of AUD 230 million, Building Products North America delivered an EBIT of AUD 10 million, up 63% on the prior year; and an EBITDA of $27 million, an increase of 122%. Operations in the United States were more significantly impacted by COVID-19 pandemic compared to Australia, with sales activity across a number of states being restricted for various periods during the second half and manufacturing restrictions in Pennsylvania being applied in March. Despite these challenges, operational performance for the year was strong with unit cost reductions being achieved at most plants. In addition to the pleasing operational performance, significant progress has been made on the post-acquisition integration activities and plant consolidation initiatives to improve efficiency. Acquired businesses have been fully integrated into the upgraded IT infrastructure, with systems enhanced to deliver improved management reporting. In addition, some changes to the organizational structure have been implemented as a result of increased size and scale of the business. To support our strategy of increasing supply to the high-value architectural segment, a design studio in central Philadelphia was opened in August and is shown on the screen. In addition, the studio in New York City is currently under construction and will open mid-2021. Whilst uncertainty remains in relation to the short-term outlook, we are investing for the future and have been proactive throughout the pandemic to accelerate several exciting initiatives across the group and to position the company to emerge stronger. We have prioritized our investments in the Property Trust in order to meet the increasing tenant demand for more sophisticated and higher value facilities. We are investing in our manufacturing plants. After pausing the number of capital projects preserve cash in the early stages of the pandemic, I'm pleased to say that we have reinitiated the largest capital investment program in the company's history. In the United States, we are completing major upgrades at Iberia and Hanley in Pennsylvania. In Australia, construction of our $75 million Austral Masonry plant in Sydney is well on track for commissioning in 2021. At Horsley Park, we have demolished the old brick kiln and associated equipment at Plant 2, paving the way for the construction of a new $125 million face brick plant. When complete, this plant will be the most advanced plant ever built. We're investing in our product and our customers. Last month, we held B20, the largest product launch ever in the company's history with an exciting range of innovative new bricks, roof tiles and masonry products. We are transforming the way we interact with our customers with a new ERP system currently being rolled out and a revamped online and digital interface. We're also investing in our people. During the pandemic, we have completed an extensive training program across the company using online channels. Looking now at the outlook. The investment in Washington H. Soul Pattinson is expected to continue to deliver a growing stream of earnings and dividends over the long term. With the Property Trust, development activity continues at an unprecedented scale, it's fueled by the accelerating trend to online shopping. I've already mentioned progress at Oakdale West. At Oakdale East, the first facility of the new Austral Masonry plant is on track for completed -- completion in the financial years I mentioned. And also, a number of other additional warehouses are well progressed. Building Products Australia has made a strong start to the year, with first quarter earnings well ahead of the prior corresponding period on a relatively steady sales revenue. There is a solid pipeline of work for the remainder of financial year '21, buoyed by the various government stimulus measures currently in place in each state. In North America, COVID-19 has had adverse impact on sales and earnings in the first quarter. There remains significant uncertainty in this market, with the current surge in infections across many parts of the United States causing ongoing disruptions to sales activities and manufacturing operations. Sadly, I have to say, we have a number of employees that have COVID-19 currently and is suffering absenteeism in the order of 50 people per day. Conditions will not normalize until vaccine is widely available. And once this occurs, we are confident that our North American operations will deliver improved earnings and growth for many years to come. Before I finish, I'd like to acknowledge all staff at Brickworks. Following our U.S. acquisitions, we now have almost 2,000 staff. Our people are the key to our success. I'm very proud of our teams, and I'm particularly proud of our Victorian and our U.S. teams who have suffered particularly over the last 6 months. And I remain -- and they remain positive and committed in these challenging periods. I'd also like to take this opportunity to thank the Board of Directors for their guidance and support during the year. In particular, I'd like to thank Brendan Crotty for his help and guidance over more than a decade. Finally, I'd like to thank all of our shareholders, including those attending online today, for your continued support of Brickworks Limited. I'll now hand back to the Chair for any questions.

Thank you, Lindsay. As usual, a very good presentation. We will now move to questions from shareholders and proxyholders. This year, we again have asked shareholders to submit questions prior to the meeting. While we have not provided individual responses, the key themes within the questions have been answered through my address. We thank shareholders for taking time to submit questions as we value your views. I'm now opening up the meeting for questions from shareholders and proxyholders. Questions can be submitted at any time on any items of business. Well, before I came up, there weren't any questions. Do we have any questions? Okay. Thank you. So we don't have any questions. So I'll now move to the formal part of the business. Resolution 1 is for the meeting to receive and consider the financial report of Brickworks and the Brickworks Group and the reports of the directors and auditors for the financial year ended the 31st of July 2020. I now lay these reports before the meeting. This item does not require a vote. Susan, do we have any questions on this? No questions. So I'll move on to Resolution 2. Resolution 2 relates to the adoption of the remuneration report for the year ended 31st of July 2020. The Brickworks Board is committed to ensuring that the remuneration framework is focused on driving our performance culture that is closely in line with the achievement of the company's strategy and business objectives as well as the retention of key members of the senior management team. In order for this resolution to be passed, at least 50.1% of the eligible votes cast must be in favor of this resolution.

No questions.

No questions? So we have the proxies on there. Or because we're already seeing them. Okay. But I think if you all remember that it was well on truly more than 50.1%. Resolution 3 seeks shareholder approval for the MD to participate in the financial year 2020 plan and for the grant of performance rights to Mr. Partridge under the plan to be allocated following this AGM. The details of the proposed grant are set out in the Notice of Meeting. In order for this resolution to be passed, at least 50.1% of eligible votes cast must be in favor of this resolution. And again, we had those numbers before.

No questions.

No questions again. Resolution 4A seek shareholder approval to reappoint Ms. Debbie Page as Director of Brickworks. In order for this resolution to be passed, at least 50.1% of the votes cast must be in favor of this resolution. And again, I think we feel that before. So Deb, I ask you to come and say a few words.

Thank you, Chairman, and welcome, everyone. I've been on the Board for just over 6 years. And during that time, I have chaired the Audit and Risk Committee. And more recently, have been appointed as lead independent director. The details of my executive career and subsequent almost 20 years of experience as a non-executive director are outlined in the Notice of Meeting, so I won't repeat them today. Other than to say that the role I play on this Board is founded on the background of finance and audit expertise, together with governance leadership, and a passion for what Brickworks does. We make beautiful, safe and enduring products. And in particular, our expansion into the U.S. is front of mind for me, to ensure we continue to deliver on the strategy that will bring long-term value to shareholders. Our increasing investment in the Industrial Property Trust assets in the joint venture with Goodman is also a source of great interest and focus for me. I'm also a member of the Remuneration and Nomination Committees. I thank my fellow directors for renominating me as a Director and consider it a great privilege to serve on this Board. I hope you will support my reelection. Thank you.