Brickworks Limited (SOL) Earnings Call Transcript & Summary

Well, good afternoon, all, and thank you very much for taking time out and joining us this afternoon. As we're all aware, it's been a very extraordinary 18 months or so. And when you go through our results, you'll see that particularly affected our performance in the first half. We're going to all remember the fall in the equity markets and commodity prices came off as well. And then we had a complete turnaround in the second half. Equity markets have picked up in commodity prices, in particular, which has flowed through to the Soul Pattinson result. Very big jump in coal prices and copper prices, which we're involved in. Brickworks had a very good result again. Building Products were steady and the Property result was an excellent one. So before I go on, I'd just like to introduce Todd Barlow, who is the EMD from Soul Pattinson and David Grbin, who's the Financial Officer from Soul Pattinson. They will give you a presentation when Lindsay is finished. Lindsay is the MD of Brickworks, and Robert Bakewell is the CFO of Brickworks. On that note, Lindsay, I'll hand it over to you for your presentation.

Thank you, Chairman, and good afternoon, ladies and gentlemen, and welcome to the Brickworks analyst briefing to the year ended 31 July 2021. Today, I'll start by providing you an overview of our results for the year, including a review of the divisional performance, and then we'll discuss the outlook for Brickworks. Robert Bakewell will then cover through the financial side of things. And then we'll take questions, but most probably at the conclusion of Todd's presentation as we've done previously. Just giving a high-level overview. It gives me a great pleasure to deliver another strong result, underlying profit of $285 million, that was a record, up 95% on last year. The Property Trust was, of course, the standout, very strong demand for our prime industrial land and a significant increase in the value of our portfolio. Performance across the Building Products was mixed. Australian operations were largely unaffected by COVID. I mean, it was largely unaffected. There has been nervous interruptions, and I'll get into those, and they delivered higher earnings. Our North American operations were disrupted to a greater extent and greater variability being more states and precincts that we had to work in, and they were knocked around quite significantly at different times. In addition to that, Washington H. Soul Pattinson delivered a great result. And our 39% holding in Washington H. Soul Pattinson increased by $1.2 billion and a further $289 million since the end of the year. So a phenomenal return there. Those headline numbers, revenue was $890 million, down 6%. There was no property sales this year with some property sales last year. And there was some negative exchange rate movements as far as the North American operations were concerned. EBITDA from continuing operations was a staggering $453 million, up 61%. As I said, driven by the increased earnings from property. This -- the underlying profit of $285 million translates to earnings per share of $1.89. And the -- but the statutory profit was down to $239 million, down 20% than last year, and that was because there was a large one-off profit in the Washington H. Soul Pattinson result last year. Directors are very proud to be able once again to increase the dividend, both at the interim and final. The final increased to $0.40, bringing the total dividend for the year to $0.61. The record date will be the 3rd of November, and the payment will be on the 24th of November. We're very pleased with our graph there of the dividend performance, and it's been 45 years since the dividend was last produced and this has been steady or increasing. And you can see, it's increased every one over the last 7 or 8 years there. Looking at value creation, and this is sometimes, I think, overlooked. Over the long-term, Brickworks has created enormous value for its shareholders. We've got a compound return of 13% per annum over 53 years. That means that $1,000 invested in 1968 would be worth $630,000 today, because 1968 is the year that Brickworks and Washington H. Soul Pattinson first started their ownership of each other. Performance in those periods has outperformed the index, whether it be 1, 3, 5, 10, 15 or 20 years. Looking at how that portfolio has performed as far as asset creation. Washington H. Soul Pattinson's current market value of $3.4 billion, 50% value of the Property Trust is now $911 million. The NTA of the Building Products Australia, $831 million; Building Products North America, $205 million. That's a total of $4.8 billion, that is asset backing and net debt of $519 million. So if you look at that on a per share basis, the net assets per share have increased by 149% over the last 10 years from less than $13 to almost $32 today. And I must -- it's also worth noting that the Building Products has a significant amount of land at the original purchase price. And, obviously, today's value is much higher than that. Turning to safety. I'm pleased to announce that we've made steady progress on improving our safety. In the Australian operations, we just had one lost time injury during the year, which turns into 0.4 lost time injuries per million hours worked, which is a fabulous result and a repeat of the prior year. That has happened and we bought that about by a sustained effort over that time through disciplined implementation of safety management systems and procedures. Together, more recently with behavioral leadership and safety training, and that's helped us get the last little bit -- just the accidents that last a little bit with changing the behavioral areas. To date, we haven't been able to replicate that in the U.S., but we are applying all the same measures that we've done here to achieve that, but we did suffer 10 last time injuries. Part of the issue we had in the U.S. was a very high turnover of staff -- difficult to getting staff. And, of course, if they turn over quickly, you don't get a chance to train them, change their behavioral actions. The other important issue is that many shareholders that are asking us on an accreting basis is about sustainability. And I'd have to say here that nothing is more sustainable than clay bricks. We'll try and make beautiful products that last forever, stand the test of time. There's very few products on the market that can claim that. We make our bricks from clay and shale, which is abundant. Although, we're using an increasing amount of recycled material. Just at the moment, we're in discussions to take us forward from the Cross River Rail in Brisbane and the -- one of the tunnels today with the new airport in Sydney. Obviously, we take that material. It would otherwise been put to landfill. It means that this is years and years and years of material to make our bricks, which is recycled. So we've issued a Build for Living strategy, which states 15 clear measurable targets that we'll be working on going forward. But we are very pleased that we've reduced our carbon emissions by 40% since 2006, and we continue to invest in modern fuel-efficient production processes. And we're also very pleased that we have the only fully certified carbon neutral brick range, which we expanded that in the last year. I'll be talking to the divisions in detail, so I won't go through any more here. And I'll look first at the investment results. I won't say too much because Todd will be coming on shortly, but the Soul Pattinson's delivered $97 million for the year, up 91% with the high -- as the Chairman mentioned, higher contribution from New Hope and Round Oak Minerals. Brickworks received $58 million in dividends, up 3% on the prior year. And I mentioned the shareholding. I won't cover this, but Todd will, but it's a fabulous effort -- outstanding effort that Soul has achieved, up 13.4% for the last 20 years, excellent and amazing 7% lift in the last 12 months. I won't go into the merger because Todd will cover that off. Although, I will mention one thing or 2 points. First of all is that Brickworks' shareholding in Washington H. Soul Pattinson will drop to 26% because of the merger, and there will be a one-off non-cash profit that Brickworks will receive somewhere between $375 million and $425 million because it's a deemed disposal. So non-cash accounting transaction. I'll move into Property, which I think most of you will find a great interest, a fabulous result. EBIT of $253 million. All Property Trust assets were revalued under our guidelines at the cap rate moves by more than 25 points. The revaluation profit was $149 million, and that's because there's very much strong demand, people looking to invest their money and they say this is good stable returns and keep driving around the return that their prepared to accept. And, of course, our industrial sheds are in excellent locations and they are all, of course, A class building. The Property Trust income increased by 3% to $31 million, and development profits were $24 million on the completed facilities during the period. Property sales, there was retained earnings from our previous period when we put out Oakdale West, we couldn't claim it until such time as we had leases on the properties there and that released a further $52 million of previously undeclared profits. Looking at the Property Trust asset value. The total Trust is worth in excess of $2 billion. And in addition to that, we hold $686 million of land and infrastructure that is under current development or developed. So this is mainly in Oakdale East and Oakdale West. Including the development land, the total value of assets held within the Property Trust was $2.7 billion at the end of the year. Borrowings were $845 million, which if you follow the calculation means that Brickworks' half share is $911 million, and increased by $184 million during the year. And it's interesting when you look at that graph, you'll see back in financial year '12, that's all the Trust was worth. And here we are now a few years later, increasing by that amount every single year. Gearing of the Trust was very low, very concerning at 32%. So since inception, the asset values of the Trust have increased by 18% per year compound, which has been an excellent return for shareholders. We have -- we currently receive about $89 million in gross income for the Trust. We have a weighted average lease expiry of 4.9 years and an average cap rate of 4.2%. We have 708,000 square meters that is currently being leased. We have 284,000 meters of area that is currently under construction, and that includes Amazon, Coles, Woolworths and so on, all front-line companies, large corporations that they're never unable to pay their rent, they had been in greater trouble than that. So we're very confident that they will be able to continue meeting their obligations. But in addition to that, we have a 227,000 square meters of land that is in addition to be developed. So when that 284,000 meters comes through, that will increase our gross income by $51 million per annum, and the value of leased assets will be increasing by $1.2 billion at a cap rate of 4.2%. Looking at some of those properties to give you a bit of an idea. This is Oakdale South, which is just the remnants of that. There's 25,000 meters under development there. This is called Site 1C. You can see that we've got a building there for Amber Tiles and Yusen. We'll take that facility out. There's -- those assets are due to be completed in -- during the first quarter of financial year '23. Going to Rochedale. We have 3 pre-commitments up there. And that's -- we'll build that estate out. There's 30,200 meters we built out. It's a 10,600 square meter facility for Woolworths, a 16,800 square meter facility for CHEP and a 2,800 square meter facility for Franklyn. That is expected to be completed during financial year '22. Now, looking at the big one. You can see here, Amazon in the foreground and you may have heard that from Monday, there are no restrictions on the number of people that can work. And so, Amazon will go back to being built around the clock, 7 days a week. So, we're hopeful that it will be completed this -- and subject to approvals, it's mixed use or industrial and possibly residential will go into that area. And more broadly, we continue to explore what other parcels of land that we can bring on under frames and increases in shortages of other materials and also very significant. And it only took a couple of weeks before we had to start taking plant off-line because we started to run out of space. Since then, and I'll talk more about it, it's recovered. And up until now, the last couple of days, we're virtually running at 100% as we were prior to lockdown. So it's taken 6 or 8 weeks to get over that. Our major investment program continues at the new Oakdale East masonry plant with practical completion in July, and that's in the process of commissioning. In the last few days, it started to go very well. And the construction of our new Brickworks in Sydney is in the Horsley Park of Plant 2 is continuing -- delayed but is continuing. Looking at the various businesses. The Austral Bricks business in Queensland was very strong. We invested heavily in that business. It's taken us a while to, as always, to get it running to the efficiency and the performance that we like. But in the last few years, it's been outstanding. We've continued to pick up market share. It is now running at capacity and its results for last year were excellent. The recovery in activity in West Australia is starting to feed through with increased volumes, and we start to ramp up production in the 2 plants we have online. Concrete Products improved on the prior year despite a decline in revenue and besides having to swap plants in New South Wales. And Bristile Roofing improved its performance as well quite significantly. Looking at North America. Trends in building activity as a result of the pandemic have been similar to what we saw in Australia. Our single-family home has increased dramatically across the country and particularly in the Southern states. However, at that time, this only made up about 38% or 40% of our sales. Our primary market has been in the North, northeast, Mid-Atlantic and Midwest regions, and I call it like institutional work, schools, hospitals and multi-res buildings. And these markets were all down between 10% and 15%. The sales revenue was steady at $152 million during the period. The EBITDA was up 10% to USD 20 million, but the EBIT was down 6%. And we were significantly impacted. I won't tell you all the -- it's like trying to call a horse race. I won't tell you all the changes that happened. But I mean with so many states, counties, various people making different calls, it's just -- it was just endless, the changes going on. And of course, because the virus was running at all times, we had constant situations where we had to drop shifts in -- out of various plants. And in the end, I think we've had something like 600 absences and well over 100 staff have had COVID. Fortunately, of course, we have not suffered any deaths amongst our staff. But very unfortunately, many of our staff members lost loved ones during the pandemic. There was -- we -- that, like any other period, that period allowed us to accelerate our plans and we accelerated the rationalization of our plants and our retail outlets. We reduced from 16 plants down to 10, and so the amount allowed us to reduce the average age of our kiln fleet from 42 years to 21 years. And we're ecstatic that we could achieve that, that way in a mere 3 years. If you have to do it by building, it would be a 10- or 20-year program. We had to transfer over 200 products from one plant to another, and that's all been achieved quite successfully. But with rationalizing the plants has allowed us going forward to more focus our capital, which means that we can focus on the specific plants and the specific pieces of equipment that we need to improve to get our productivity where we want it. We've already completed a major upgrade at our Hanley plant and it's running particularly well. We have got work underway at our Sergeant Bluff in Iowa, and we've got work also underway at our Lawrenceville plant in Virginia. We opened a new design studio in Philadelphia. It was opened in May, and we had a new display center in Des Moines opened up as well. The New York studio was delayed, will open in the next month. And the Baltimore design studio is under construction. Last month, we were pleased to announce the further expansion in the U.S. with the acquisition of IBC. IBC was the largest independently owned brick distributor in the United States with 17 showrooms and distribution yards located in Illinois and Indiana. They were our largest customer, and we were their largest supplier. So it was a bit sort of natural that we got together. But it's increased our number of stores from 10 to 27 across the United States. And the sales volume will underpin our production in those Midwestern plants, so there was sort of a bit of a gap. But now we've given us -- we've got solid distribution right across the area that we are focused on. With that acquisition, we picked up 225 staff, and we now have well over 1,000 employees in the U.S. I'll now hand over to Robert, who will do the financials.

All right. Thanks, Lindsay. As Lindsay already mentioned, our total underlying group EBITDA for the year was $453 million, which is up 61%. After depreciation and amortization, the underlying group EBIT was up 86% to $383 million. Total borrowing costs were $19 million and tax was $79 million. This resulted in an underlying net profit after tax from continuing operations of $285 million, which is up 95% on the prior year. After including significant items, the net profit after tax from continuing operations was $240 million. That's down 24% from last year's record, but that included a large one-off via our holding in W.H. Soul Pattinson following the TPG's Vodafone merger. And including a small loss on discontinued operations, statutory net profit after tax was $239 million. Just focusing a little bit more on those significant items. The key items are: a $29 million cost in relation to W.H. Soul Pattinson significant items and the deferred taxes on our holdings in that company; there are after-tax restructuring costs of $13 million, primarily relating to the relocation of the masonry plant in Sydney, the post-upgrade commissioning of our brick plant in Cardup in Perth, the closure of retail outlets in the U.S. as we streamlined there and the staged decommissioning of production at the York plant in Pennsylvania; COVID-related costs after-tax were $3 million. This is a mix of unabsorbed fixed costs in our U.S. plants, as well as other incremental costs across the Group. We got $3 million of acquisition costs over the year, primarily in relation to the purchase of IBC, and we picked up a tax benefit of $4 million in relation to U.S. acquisition costs incurred in prior years. Turning now to the cash flow. Total operating cash flow for the year was an inflow of $140 million. That's up from $74 million in the prior year. That prior year being adversely impacted by higher tax payments, particularly the $54 million in tax we paid when we sold some shares in Soul Pattinson in December 2018. Capital expenditure was $117 million. As you know, the Company is midway through a significant capital investment program, including the new masonry and brick plants in Sydney, major upgrades at Hanley in Pennsylvania and the deployment of a new ERP system across Australia and the U.S. The uptake of the DRP that was in place for last year's final dividend, resulted in net dividend payments being flat over the period, despite the increase in the dividend paid per share. Now looking at a range of other key financial indicators. An anomaly here, net tangible assets per share is down 1% to $13.88. This was mainly due to a decrease in the market value of Soul Pat's listed investments, particularly with the DB -- the merger sorry, of the TPG with Vodafone and the change in accounting that, that resulted in. And then also the recognition of lease liabilities in relation to a number of significant new long-term leases. The corresponding right-of-use assets, which are intangible are excluded from the NTA calculation. Shareholders' equity on the other hand increased by $77 million to $2.48 billion, which represents $16.41 a share. An underlying return on shareholders' equity was 12%, which is up from 6% last year. And as I mentioned, operating cash flow was $140 million for the period. Net debt increased to $519 million. That resulted in a slight increase in the debt-to-equity gearing on the balance sheet to 21%, and our interest cover was 20x. I'll just finish on our debt maturity profile. We currently have a total of around $878 million in committed debt facilities. These include: a syndicated multi-currency facility of around $632 million; a bilateral cash advance facility of $100 million; an institutional term loan facility of longer tenor of $100 million; and a construction loan facility of $46 million, which is related to the construction of the new masonry plant, and this will convert shortly into a lease as that project is completed. As I mentioned, at July 31, our net debt was $519 million, giving us around $360 million in funding headroom, based on committed debt facilities and cash on hand. And as you'll note from the information we've supplied in that slide, we maintain significant headroom on our banking covenants. And with that, I'll hand back to Lindsay to discuss the outlook.

Thank you, Robert. Brickworks is in a strong position. We have conservative debt levels and a diversified portfolio of attractive assets. We're excited about the outlook for Washington H. Soul Pattinson, following the recent merger with Milton Corporation, giving them greater scale and liquidity and providing new investment opportunities. As I've discussed, development activity in the Property Trust is continuing at unprecedented scale and the completion of these facilities over the next 2 years will result in a significant uplift in rental income and asset value. Building Products in Australia's underlying demand across the country is strong, with a large backlog of detached house construction work in the pipeline. New South Wales has been impacted by the latest impact -- latest COVID outbreak. But I'm pleased to report that we've basically returned to our pre-lockdown sales. So it's taken about 6 or 8 weeks to get over and get back to full speed. And heading forward, I would say that New South Wales will continue to strengthen, particularly as the last restrictions are removed on Monday. And, of course, we've brought back online that second kiln at Plant 3. And I assume in the next week or so we'll also bring back online the Punchbowl operation. In the short-term, there's a significant amount of uncertainty persists as we saw with this week with the close down or lockdown in Melbourne. And they're similar to Australia, amazingly, our sales fell 80% in the first couple of days. Assuming that there's -- it's lifted, has been indicated by the government at the end of 2 weeks, we'll be in a situation where things will then start to recover. It's actually given us a bit of a chance to put a bit of stock on the ground because we're very, very tight in Victoria. But if it goes more than 3 or 4 weeks, we'll definitely have to start the same problem down there. We can't stop our entire output for a month or more. In North America, the sales momentum has recommenced following the summer holiday period where this year, everyone did take holidays. And assuming there's no further disruptions from the pandemic, we expect that we'll see improving sales through the balance of the period. However, we are -- it is taking longer for the commercial work to come back online. In some cases, this is because the developers are concerned that they don't have all the materials and they're waiting for their stockpile, all the materials before they start. And in other situations, they're concerned that the costs have risen so much that is not on commercial to do the project. And so, they're waiting for -- particularly lumber prices to return to a more normal level. Having said that, we have redirected ourselves into the housing market. I've mentioned before and as we've now effectively got 60% of our sales go to housing. But unfortunately, we don't receive the same margin from housing as we receive from doing the commercial work. Having said that, though, with the acquisition of IBC is definitely going to give us a spring in our step going forward. So, I won't go to questions. We'll hand over to Todd. Now, I think I've got to swap. Just keep going with it. Okay. And I will be doing the slides for you, Todd. So I'll hand over to Todd.

Great. Thanks, Lindsay, and good afternoon, everybody, and thank you very much for your interest in our company. I'll turn to the next slide. WHSP offers a unique investment product in the Australian market. Through WHSP, an investor has the opportunity to gain exposure to: a range of asset classes and industries; investment strategies that have delivered above market returns for decades; steady and growing dividends; and a management team with a strong track record of execution and active stewardship of capital. Our investment philosophy defines our strategy and competitive advantage. We invest in a diverse range of uncorrelated investments across listed equities, private equity and venture capital, property, structured credit and cash. The key advantage is our unconstrained and flexible mandate, which allows WHSP to invest in and support companies from an early stage and grow with them over time. We are disciplined and value focused and we'll need to invest through market cycles to deliver returns over the long-term. As you will see in this presentation, we have an excellent track record of paying consistent and growing dividends for over 20 years. We are also focused on protecting capital by investing in a portfolio of assets, which generate reliable cash through the market cycles and therefore, perform better in market corrections. We aim to be a trusted capital partner with attractive companies and management teams who will value our long-term, stable and supportive approach. Now, looking at the results for FY '21. The Group regular profit for the year was $328 million, which was up 93% on the prior year. The major drivers of this result came from Brickworks, as you just heard, generated a record underlying profit and increased its contribution to us by 95%. Our Round Oak increased its profit contribution by $103 million as a result of higher production and higher commodity prices, and there was a strong recovery in coal prices, which increased New Hope's profit contribution by 45%. Group statutory profit was down 71%. However, you may recall that FY '20 included a large one-off non-cash gain of around $1 billion from the change in accounting treatment of our investment in TPG. The company's key performance indicators are capital growth and growth in the net cash from investments. The portfolio ended the year valued at $5.8 billion, which was up 12% for the year, and the net cash from the investments was $180 million. And while that was down 29% in the previous year, again, last year, we saw an inflated figure due to a large special dividend paid by TPG prior to its merger with Vodafone. The strong cash generation from the portfolio has enabled the Directors to declare another increased final dividend of $0.36 per share fully franked. That brings total dividends for the year to $0.62, which is 3.3% higher than the last year. Total dividends for FY '21 represents 82% of the net cash that we generated from our operations. We remain the only company in the All Ordinaries Index to have increased dividends every year for the past 2 decades. As I said, the net asset value of the portfolio was $5.8 billion pre-tax, which was an increase of 12%. That growth was despite our biggest investment, TPG, decreasing in value by 23% through the year. As you can see in this table, most portfolios experienced strong growth through the market recovery, with particularly strong growth in the value of Brickworks, Round Oak and Financial Services. The New Hope share price increased over 52% throughout the year. However, as a result of WHSP selling some shares, the value of the share increased by 21% during the year. The equities portfolio also had a very strong year, increasing $275 million, of which only $33 million came from new investments. External borrowings were stable despite the issuance of the convertible bond, which was primarily used to repay existing debt. And the gain in the value of the structured yield portfolio was a result of new investment of about $148 million. The TSR performance has been very strong over any period of investment. As a long-term investor, our focus is on delivering outperformance over the long-term. And WHSP has outperformed the index by 4.7% per annum over the last 20 years. This outperformance has had a material impact on shareholder wealth. Over that 20-year period, an investment in WHSP appreciated over 11x, which compares to a 4.3% multiple for equivalent investment in the market. And the 40-year performance is even more impressive with a compound annual growth of 14.7%. If a shareholder already invested $1,000 in 1981 and reinvested all of those dividends, the shareholder would have appreciated to around $240,000 40 years later. We remained a very active investor. A couple of years ago, we had a slide show in the active M&A amongst our major investments over the past decade. However, it's also worth noting that we remain very active in our own portfolio. Over the last 3 years, there has been a total of $2.3 billion in investments and disposals and $1.1 billion of that activity was in the last financial year as we were actively investing in the market recovery and repositioning of the portfolio. While WHSP is generally fully invested, it does retain liquidity for opportunities, but it essentially means that we have to sell assets to invest in new ones. The gap over the last 3 years, where investments have exceeded divestments, has largely been funded with cheap debt. And the activity has been across the board with an increasing allocations to private equity, structured yield and public equities. I'll now cover off on some of the key portfolio themes in the portfolio. TPG now has a year-end of 31 December and recently released its half year results. For the half year, TPG reported EBITDA of $886 million on $2.63 billion of revenue. Both of these numbers were 3% lower than the pro forma period last year. These were solid numbers given the continuing short-term headwinds from NBN migration and COVID-19. Pleasingly, we are seeing some improved trends with increasing on-net subscribers in its broadband, market repair in terms of ARPU growth in mobile and synergy realization from the merger tracking ahead of expectations. TPG is a full-service communications business with scale and a significant amount of infrastructure assets. In mobile, Vodafone is rolling out its 5G network, which, by the end of this year, will have excellent metro coverage and service 85% of the population. TPG has very competitive spectrum holdings, which will serve it well as take up for 5G services increases over time. The 5G rollout will allow TPG to offer fixed wireless services to bring customers that migrated to NBN back on-net. TPG already has the second largest broadband customer base in Australia with over 2.2 million subscribers and a 24% market share in NBN. And I think I mentioned at the half, for every 100,000 customers that sign up to fixed wireless 5G broadband, that would represent an additional $50 million of margin. Importantly, TPG and Vodafone provides excellent service with fewer complaints and award-winning products and customer service. There's a very large asset base and TPG has announced a potential to look at selling its mobile towers, but the fiber optic network, international subsea cables and connections to customers are actually far more valuable assets. As an investment theme, we are very attracted to telecommunications as an essential service where demand for data is growing, and TPG, in particular, is very well placed. It has a network that will become increasingly valuable as we move into the Internet of Things and technologies such as driverless cars. TPG is a low-cost competitor, which we are always attracted to as it provides a margin of safety and a competitive advantage. We will also continue to achieve integration wins, not just from cost synergies ramping up, but the ability to cross-sell and win market share as an integrated supplier. And the short-term impacts of COVID will reverse as borders open up and international travel resumes. I won't go into too much detail about Brickworks given Lindsay's comprehensive presentation, but we're very comfortable with our Brickworks positioning, given its commanding position as a supplier of building products in Australia benefiting from strong growth in detached housing. And we're also excited about the prospects in the U.S. where Brickworks is building out regional scale and efficiency in markets, they're currently seeing strong residential demand and non-residential demand is expected to pick up on the back of government stimulus. As Lindsay outlined, there is a very strong and rapid growth in the value of its industrial property, and there's also a significant further growth from pre-committed developments, as well as the future development of land. New Hope reported an underlying EBITDA of $367 million, which was a 27% increase on the prior year. It really was a tale of 2 halves in New Hope and the first quarter of FY '21, thermal coal index pricing sunk below USD 50 a tonne. And by the end of the year, prices were over USD 150 a tonne. And you can see on this graph that if we just focus on New South Wales, the second half revenue was 63% higher than in the first half. Our focus on New South Wales revenue for 2 reasons. Firstly, the Queensland operations contributed little to copper. And secondly, the Acland mine will cease production within a few months. New Hope is back before the Land Court in Queensland seeking approval for Stage 3, but it will be some time between cessation of mining at Stage 2 and commencement of Stage 3. On the next slide, we have -- this graph shows the average price New Hope received for product broken down by quarter in FY '21. The first quarter was under $70 a tonne, an increase to around $120 a tonne in Q4. And since the end of the financial year, prices have remained strong and the index pricing is now over $240 a tonne. So just in August, the first month of FY '22, New Hope has already produced over $100 million of EBITDA. Coal prices are currently at levels not seen since 2008. It is clear there is still strong demand for coal, notwithstanding China's ban on Australian products. Australian producers have switched supply to other countries and global supply is still constrained. We do not expect to see the same supply response we saw back in 2008 when large new mines were brought into production. You can see on this graph at Bengalla is very low on the global cost curve of all thermal coal mines. This will only contributes to the high margins in the current environment. It underpins the sustainability of operations into the future. We are extremely cognizant of the fact that global coal demand will need to reduce if the world is to meet these ambitions to cap global warming. Coal remains the largest source of electricity generation in the world, accounting for around 40% of global generation capacity. And its importance is even greater in Asia. Bengalla has an approved mine life that ceases before 2040 and the Stage 3 of New Acland would have a similar lifespan. In this graph, we've illustrated the drop in demand modeled by Wood Mackenzie in their 2 accelerated energy transition scenarios. The most aggressive reduction in coal would be part of the achievement of the accelerated energy transition scenario, which limits global warming to 1.5 degrees. And we see a drop in demand of coal by 30% by 2030 and a drop of over 65% by 2040. New Hope believes that its position as a responsible operator of coal mines producing more efficient and lower emission coal will make its operations resilient to pause in global demands of this magnitude. In a scenario like this, we would expect to see a rapid reduction in supply of higher cost dirtier coal from the global seaborne market, and we do not expect to see meaningful new supply into the market. Looking now at Round Oak Metals, which is a wholly owned subsidiary of WHSP. Over the last few years, as you know, we've been building out our operations across Australia, and we have assets in Queensland, Western Australia and Victoria. In FY '21, we finished mining the open cut Barbara mine in Queensland, and we're exploring an underground extension. And we continue to mine the Mt Colin underground mine. Jaguar in Western Australia has a few more years left. However, the nature of the deposit there is that, there tends to be ongoing opportunities for extending the mine life, and we're certainly seeing those opportunities at the moment. We've also been progressing the Stockman asset in Victoria. Stockman is a long-life development asset with approximately 10 years of production. It had all of its key approvals, and we're currently fine-tuning the mine plan ahead of its development. Last year, Round Oak produced an EBITDA of $183 million as a result of increased production and efficiency, at the same time, as an increase in commodity prices. After the COVID-19 disruption to commodity markets, FY '21 saw the price of both copper and zinc, which are the major commodities produced by Round Oak, increased by 50% and 30%, respectively. We believe that copper has some structural tailwinds in supply and demand that will continue to support higher prices. Copper has traditionally been a proxy for global growth. And as we see China and the rest of the world emerge from COVID-19, we expect demand to be very strong. We also believe that copper is a key component of the transition to renewable energy and increased electrification, including the uptake of electric vehicles. On the supply front, we're seeing globally a decline in copper grades, increasing capital intensity required to mine new deposits and declining discovery rates. When we put these things together, there is likely to be a supply gap emerging in future years. And for these reasons, WHSP is currently exploring opportunities to enhance Round Oak's ability to be a meaningful producer of metals, and we're currently considering an IPO which will enable Round Oak to attract new capital and be a platform for growth. If we look at the other investment segment of the portfolio, there's around $2.2 billion in assets spread across 7 discrete portfolios. This segment increased in value by 38% through the year and contributed profit of $129 million, which was 87% higher than the previous year. You can see in this table that there's a good balance across each of the portfolios. And, obviously, once the merger with Milton takes effect, there will be a significant increase in the large cap portfolio initially, and it will be our job to increase the balance over time. The financial services portfolio includes investments in LICs, funds management and financial advice companies. We saw a strong market recovery after the COVID-19 market disruption, and that benefited, not only valuations, but operating companies like Bengalla -- Pengana and Ironbark. We believe we're seeing a strong fundamentals with the growth in superannuation assets under management. The pharmaceutical and health portfolio may undergo some changes in FY '22. As many of you will be aware, the largest asset, API, is currently under offer from Wesfarmers, and WHSP has indicated its support for a transaction that is recommended by the API Board. We remain interested in looking at new opportunities in the health, retirement and aged care sectors. The large cap portfolio is a diversified portfolio of Australian equities, generating a strong yield and it contributed $12 million to operating cash flows in FY '21. The small caps portfolio had a very active year and contributed significantly to profit and net operating cash. This portfolio is more active in short-term trades, trades which realized cash profits, and we saw some solid gains across many of the portfolio's major positions. The private equity portfolio saw increased investment in the agricultural real assets of $60 million, and the other major assets include Ampcontrol, which is leveraged to the commodity cycle, as well as the growth in renewables, energy transition and infrastructure investment. And we also continue to invest in swim schools through Aquatic Achievers. Our property portfolio is relatively low as a proportion of the overall portfolio for a few reasons. We've been recently taking profits on a few assets. And we also take into consideration our look-through interest in Brickworks substantial property portfolio. We are, however, continuing to invest in new assets and in particular, suburban industrial property, where we see strong fundamental growth. And finally, our structured yield portfolio has seen a lot of growth in FY '21 with nearly $150 million of new investment. The running yield of the portfolio is 8.4% and generally includes high cash yield loans with some downside protection mechanisms in the form of security or seniority [ about the ] capital. There's a healthy mix of industries, and we're keen to continue to build out this portfolio. As for our outlook, I'll talk about the impact of the Milton merger on the business. We're very excited to announce that the merger of WHSP and Milton Corporation has been approved and will complete on 5 October. This is a highly strategic transaction for WHSP and will deliver a number of key benefits. Then if you don't mind just flicking over to the next slide, I'll -- firstly, an opportunity for greater portfolio diversification and additional liquidity for future investments. Secondly, the addition of the Milton portfolio will increase cash generation across the company. Thirdly, we will welcome up to 30,000 new shareholders, which will virtually double the number of shareholders and increase liquidity in our shares. Fourthly, we will see significant uplift in market capitalization and free float, which will increase WHSP's index participation. And lastly, the Milton investment team will nicely complement WHSP's existing capabilities. Immediately, you can see that the gross value of the portfolio increases from $6.5 billion to just short of $10 billion on merger. The heavy concentration of our core investments in Brickworks, New Hope and TPG, which currently at 58% of the portfolio will reduce to less than 40%. We'll see a large increase in the portfolio weighting to the diversified large cap portfolio. However, these assets are highly liquid and give us the opportunity to reallocate to other parts of the portfolio as we see new opportunities emerge. Milton employees experienced and high-performing team to manage these assets with a similar philosophy to WHSP. We are delighted to welcome this team to WHSP where the expanded team will be able to leverage investment opportunities and ideas across the larger platform. We're also pleased to announce that Brendan O'Dea will become WHSP's Chief Investment Officer. Brendan has a distinguished career across the globe, managing a range of assets and investment teams, and we are confident his skills will provide significant benefits to WHSP. Looking forward, WHSP will have significant liquidity for future investment. In a cautious and disciplined way, we will seek to reallocate up to $2 billion of Australian large cap equities into diverse assets as they become available. Our gearing levels will be significantly reduced, enabling further gearing to be introduced at the right time and for the right assets. As I outlined earlier, we have a strong deal flow as evidenced by the $1.1 billion of activity in the past year. As we expand our investment horizons and investment team, we think that deal flow will increase. We are opportunistic in our approach, but we're also looking at a few key themes. We are interested in broad investment themes such as health and aging, energy transition, agriculture and real assets, financial services and education. And we're interested in the way that technology can play a part in anticipating existing businesses in these industries. We're also very keen to establish platforms that allow us to build upon. This is an approach that has worked well for us in the past, and we believe we have some very suitable assets in the current portfolio that we can build around. Thank you very much for your time. And I'll now hand back to the Chairman for questions.

Thank you, Todd. I'm not sure if Rob is going to come in for questions or I'll just go -- might go to Lisa. I think the questions have been coming in by e-mail, and let's go to those.

It is for Brickworks. Could you please update on industrial gas prices, including what AEMO assets potential future supply issues in Victoria?

Yes. Well, we've had a 5-year contract with Santos to supply gas on the East Coast. That was at a better price than we were previously paying. That contract still has another 4 years to run. And we've got indications that they and some other parties prepared to provide gas after that point of time. We're also looking at the production of synthetic natural gas as a way in which that we can make our products more sustainable overall. So at this point in time, we're okay. There was a lot of volatility in the market and we used our flexible contract to have trading opportunities where we were both buying and selling gas at different times, and that was quite a profitable exercise for us and something we couldn't have done before we were in the wholesale market. Next question, please?

From the 2-week or longer shutdown of Victorian construction, plus continuing CFMEU unrest, do Brickworks expect problems such as buildup of inventory or an unrecoverable loss in sales?

As I mentioned, the sales fell off 80%. The same experience in Victoria is what we had in New South Wales. Obviously, we're now stocking at the rate of in excess of 3 million bricks a week. We have adequate space to go for about another 2 to 3 weeks before we have to consider starting to ramp down production. But an actual fact, it's very -- well, it's going to be profitable for us because we're going to build our stock up in Victoria, which means we supply more product from Victoria and not have to begin for me to state was we're always a bit shorter supply in Victoria. I think once it gets going, I don't think the jobs we've lost. They'll just be deferred. My biggest concern amongst all that is that a lot of builders, their costs would have increased because of the delay, and they might be building houses at a loss. And so, therefore, I think next year we're going to keep an eye out for potentially some builders getting into financial difficulty.

And next question, 73% of Building Products Australia sales revenue is from New South Wales and Victoria, above their combined population share of just under 59%. Does this remain okay given that many have left Victoria for good and more will immigrate overseas into Queensland as the border is reopened?

Well, this is a really interesting question, a good question because it shows a fair amount of insight into what's going on. Yes, in the longer-term, the lack of immigration is going to be a concern, and it's unlikely that immigration will immediately return and try and recover the lost 0.5 million people that haven't immigrated. It's more likely to be quite slowly recover. So the loss of people in Australia that we have otherwise had could blow out to more, I'd say, 0.25 million. In Victoria, they have generally gained from immigration and their population has been increasing because they haven't been losing the people to the same extent New South Wales. New South Wales has always lost more people to other states than any other area. And this, I guess, I suppose held back the growth of New South Wales. But listen, having said that, we're in a regular position in Victoria. When we replaced the 3 plants in the last sort of 12 to 14 years that we had down there, we didn't put back the original capacity, which was about 230 million bricks per annum. We only put about 170 million bricks in. So, we have been running short of capacity of a sense we've been pulling in product from South Australia, Tasmania, New South Wales and Queensland to maintain supply down there. So, what that will mean is there is a bit of a slowdown in housing in Victoria is that, the demand will more equally match our production. So, from that point of view, I don't see it's a particular concern. And, of course, where the people moves, they're going to need a house. So, we'll be in a position to pick them up at the other end. If they move to Queensland, we'll pick them up there.

Okay. With the important Property Trust, when you refer to medium-term possible development of Craigieburn's 332 hectares and separately very similar for the remaining 75 hectares at Oakdale East, do you mean 5 to 10 years for each?

Look, we have traditionally developed these areas of about 30,000 to 50,000 lettable square meters per annum. And as I mentioned, we're running at currently about 270,000 to 280,000 square meters, so it is absolutely extraordinary. I would sort of tend to think that it's got a steady up a little bit once -- particularly once we get out of the COVID and maybe online sales slowed down a little bit. So, I think that will come back a bit and that will give us more time. I think in -- and also, by the way, we're still bringing on properties, and this will be ongoing as we decommission factories and make the land available. So that will continue. Clearly, we've developed a lot of land 5 years in New South Wales and maybe longer. And, of course, we haven't started the one in Craigieburn. So Craigieburn's 330 hectares is enormous. And, of course, to the north of there, we have the Wollert facility and a significant amount of land around that. I would think that overall that the Victorian development is something that could go on more like 10 or 15 years. And so, yes, the bit of difference of timing there. So Queensland, we're almost up against the [ Wallace ] factory, New South Wales, 5 to 10 years; Victoria, 10 to 15 years.

Okay. There's a question from Peter Steyn from Macquarie. Could you give us a sense of the process and...

The value of land. So the value of land behind the building products is significant. It's something that we're looking at. The valuation given the building products doesn't seem to take that into account. If you look at Brickworks, overall, you'll say why Brickworks a little bit undervalued. We've sort of indicated here. We think a better price for Brickworks is more about over $30. And where that is, and that would be one area that we're looking at that maybe it's in that -- hiding under that rock.

A question from Daniel Kang at CLSA. Congratulations on a record result. With the carbon neutral brick range, are you seeing or do you expect a premium to emerge for this range?

Yes, particularly architects that are trying to get the embodied energy in a building down. This is very popular now prepared to pay for them. I would say over time, we're going to expand that. And partly what I was talking about that synthetic natural gas. If we can get some supply -- significant supply synthetic natural gas, we'll be able to offer all of our products as carbon neutral. And also, I've got to say, I don't think some of the questions and some of the analysis we've had on our product range that I've seen in the last 6 to 9 months, I don't think it's fully understood. People investors appear to be looking at the first level, what's the embodied energy. They're not looking at the second level. What is the energy consumption of this building by using the various products? And clearly, that is a much higher number and far more significant than what the initial, what's the embodied energy. It's felt like looking at the cost of a car and not what the fuel efficiency is of it.

Well, then you got the replacement cycle.

That's right.

Of the other products.

Yes. We're going for bricks 100 years, and that it is to go 1,000 years.

Another question from Daniel again from CLSA on property. Can you provide some thoughts on your expectations for development profits and land sales that may fall in financial year '22 and '23?

Well, we've indicated -- the biggest one that we've indicated that once we get the new plant -- that Plant 2 operational, that we'll decommission Plant 3, and there's potentially in stages up to 70 hectares of land on the Oakdale East site, we'll be able to go into the Trust. And so, this -- at this point of time, I think, is really going to be in the first half of next year. But don't hold into that because there's a lot of moving parts, and we've been delayed trying to get engineers into -- to get our plant built. And we've got no idea what other hurdles are going to be thrown our way over the next 12 or 18 months.

Okay. Another question from Peter at Macquarie. Inclusive of IBC, could you give us a sense of fixed variable cost split in the U.S. and how you see operating leverage potential in the context of improving demand?

Not off the top of my head.

There's a fair bit of integration to go before I'd like to give any kind of view on that ratio.

It's quite an effort to integrate IBC. And the second part of that is what was the...

The margin leverage. And I think the complementary products that they sell at that higher margin.

Yes. Look, I think the most important thing for the profitability -- future profitability in the United States is for us to see our institutional work return, the schools, hospital, we'd always have a dozen high schools underway that all about 1 million bricks each. We're doing university extensions, football fields, baseball pitches.

Also some municipal buildings.

These things and the New York's back, and we'll get back into that high-rise buildings, et cetera. But it's -- overall, it's not -- it's very disrupted and enormously variable in these areas.

There's a question from Raju at CCZ, also on the U.S. market. Noting increased material costs, making a number of non-resi projects less justifiable, do you see that risk emerge into housing as well? And what is your view on the time line of normalization of this lumber price challenge?

Yes. Look, good question, Raju. What tends -- what my experience has been for housing, yes, there'll be some people that will have difficulty paying a higher increase of cost. Some of them will, of course, have fixed price contract, and that will put that burden back on to the builder and my concern, therefore, about builders starting to build houses at loss. But what we've historically seen is, when the overall value moves up, there's a whole lot of medium density and other developments, which now become viable that weren't viable before. And that has generally produced a second leg. So you get -- the first leg is, people start buying houses and -- because there is no existing houses available, you got to buy new. That's the first leg, prices of existing houses go up. And then the second leg is medium density development become viable and we see second wave work caused by the increased value. And that I would have no reason to believe that we won't see that again this time. And we also believe that there's a good chance, because of low interest rates, high employment, there's a lot of people who would like to buy a home that haven't bought a home, the historic percentage of people who have bought a home -- buying a home is low. And we could see that increase. They only have to increase a couple of percent of people that are going to buy a home versus rent, and you'll see strong demand caused by that. So, while we're seeing lower immigration, I think there's quite a few positives there that may also drive the market going forward.

Okay. A question from Raju again, the Brickworks Australian housing market. It appears that housing market recovery post Royal Commission expects returning in 2020 and the pull forward of demand with stimulus should support a solid financial year 2022. What are your thoughts on approvals from here on in? And do you see risk sort of reverse migration ahead?

Well, there's always a potential for reverse migration, and then we spoke earlier about moving around -- people moving around the country. I think a lot of people have reassessed their lives because of COVID, and that's why we're seeing such enormous turnover of staff in our operations both here and in America. So people are reassessing their lives and deciding to go to somewhere else. So that's clearly going to be one of the trends. What was the first part of that question, Lisa?

Housing starts?

Yes, look, there's definitely a full year. We're seeing some -- many builders are reporting that their sales have continued on strongly even though the stimulus has come to an end. So that's positive. But look, there's no doubt what we're seeing in Victoria at the moment. There's going to be a month or so hole in the sales because of the lockdown, people physically can't get out. So once the lockdown is lift, I think we'll see a stronger level of sales than we currently seeing. But the -- but, I mean, this is what we've been going on there for 18 months. I mean, it's stop-start, it's just like trying to call a horse race. It's just changes continuing all the time.

And a final question from Raju in regards to property. With regards to your expectation of 60% growth in gross rents within the coming 2 years or so, can I please confirm if this is all committed? Is this just tracking...

Yes, this is -- the 284,000 square meters of pre-committed work that we've got agreements to lease on. This is buildings we're building for customers the Woolworths, Coles, Amazon that signed up.

Okay. Ross Illingworth from Kingfisher Capital Partners. What is Brickworks ability to increase trade prices for clay bricks in Australia? And separately the U.S. market to insulate against rising input costs, particularly rising energy costs?

Well, our energy prices are contracted. So we haven't faced increased energy costs here. It is -- and we have now started to lay out long-term contracts in the United States at a number of our plants as well. So we're fairly well insulated there. The -- we've put in additional price rise this year, a significant price rise and we're not -- there's a lot of volume builders are very unhappy with us at the moment. But, I mean, these shutdowns all cost money. These delays cost money, and we have to recover it as best we can. And I'm sure many builders are having quarterly price rises to recover their costs as well. So, we are getting price rises. We continue to get them. And -- but one of the great things about our business is, our main raw material, clay, we already own it all, whereas I mentioned before, we're receiving material from 2 tunnels being built and we often get paid to take the raw material. So, when you've got that tied down and wages are generally gauged really low, 1.5%, 2%, so that's pretty well tied down. We've had more difficulty in the U.S., I must admit. Our gas is contracted. We've got in that there. We've mostly pretty got 60% of our costs all under control. So, the main thing is just to keep those prices moving forward and keeping those margins climbing. And hopefully, we don't have shutdown. The shutdowns cost money, decommissioning plants and like we've had to do cost a lot of money.

What are the challenges you talk about for the WA Bricks business?

Yes. So it's really interesting, BGC has now taken over Midland and they've branded it as Midland. They have now started to consolidate their product range and they're telling customers. So customers are seeing that they're not going to have the existing range that they had and are starting to make inquiry with us, and we started to win back major accounts that we had lost during that long drawn-out battle or war that was going on in WA. Prices have started to lift, but they need to lift further. Demand has started to lift. It needs to lift further. But I think -- and also, we've got to have resolved what happens at BGC because BGC itself is still for sale. I haven't had anything recently, but I assume either this side of Christmas or early in the new year, that whole organization will be coming on the market, and we'll have to see how that plays out. So, there's a few moving parts still there, but the early moves are positive for us. It's returning to a more balanced market. I think that we'll see our market share will greatly decline assuming that we can make high-quality products with good service, that will gradually pick up our market share and over time, we'll recover. And we're still, obviously, making losses in the West, but we're starting to pull them back.

Okay. Do you think there is a round of consolidation to happen in the Queensland cement market?

There's a lot of moving parts there. Yes. Look, we also mentioned it, but there is some tension in the cement market at the moment because the prices of shipping. And there is a genuine concern with the supply line, there's going to be shortages and also in regards to oxides are concerns. If anything I was concerned about, I'd be concerned about those 2. But we have made arrangements with some of the other competitors where we're able to get product on a tolling basis. And so, we've sort of been accepted into the industry. But look, there's potential, yes, there is the fact we're seeing more -- servicing more competitors online. There's a new -- there's a term that's been there for a while, a Newcastle, a new term will just come online in Port Kembla. We're seeing this starting -- and here is a terminal being built in Adelaide. So, a lot of people like ourselves are used to realize that they could -- for a commodity get a better price by having their own terminal and we're in a bit of an unusual period at the moment, but I'm hoping that, that will sort itself out in the next 6 months.

Okay. That's all for Brickworks. I have a question for Todd. With the Milton merger expected to increase the Group's net cash from investments, can you talk about how this may potentially impact your thinking about dividends and payout targets?

Yes. Look, I think the merger is going to be directionally positive for dividends for a number of reasons. I mean, even before the merger, we had a portfolio that we had invested in over the last few years to try and enhance the dividend income that we received and the benefits of some of those investments will be seen over the next few years. In addition to that, we're seeing very strong underlying results from our businesses, such as Brickworks, New Hope and TPG. So even on a stand-alone basis, we were expecting quite good cash flow growth over the coming years. But then when you overlay the merger, it's directionally positive for a couple of reasons. One is that Milton is a higher-yielding portfolio themselves, so that's accretive from day 1 to dividends or cash flow per share. But the other thing -- the other aspect that I think will be different going forward is that if you look at the payout ratio that Soul has paid in the past, for example, last year, we returned 82% of the cash that we generated from our portfolio to our shareholders as dividends. And we've sort of generally been around that region of 70% to 90% in recent years. And the reason why we hold some back is to make further investments. That's the capacity to increase payout ratios, as well as seeing higher net cash generation on a per share basis. And we have huge bank of franking credits to enable that to happen.

That's all for today. Someone was just asking, if there's a catch-up video available, which then will be later today. So that will be up on our website. That's all. Thank you.

Thank you, everybody. I'm going to turn to Chairman want to make any final words. Okay. If not, all right. Well, thank you very much for your attendance today. We greatly appreciate your interest in our companies, and we look forward to the AGM, which unfortunately will also be done the same matter. We won't see you in person, but hopefully, thank you very much again, and good afternoon. Thank you.

Thank you.