Fleetwood Limited (FWD) Earnings Call Transcript & Summary

[Audio Gap] I must advise that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Mr. Brad Denison, Managing Director and Chief Executive Officer of Fleetwood Corporation Limited. Thank you. Sir, please go ahead.

Thank you, and good morning, ladies and gentlemen. Thanks to everyone for joining us today. We understand that this is a very busy time of year for most of you. So today's presentation will be fairly targeted. I will start off with a brief overview of the results and the near-term outlook. And then we'll move on to discuss the group's forward strategy, and we'll hold questions to the end of the session. Before we start, though, the picture on the front of the slide presentation shows one of our recently completed projects, which is Balwyn High School in Metropolitan Melbourne. And this project had a contract value around $8 million, and it represents one of the new types of projects known as a permanent modular school. And these are buildings that have been designed for off-site manufacture. But once they're installed, they'll never be moved. Could I ask you to turn to Slide 2 now? First up, Fleetwood's updated branding is complete now with the company now known as Fleetwood Australia and the 3 segments referred to as Building Solutions, Accommodation Solutions and RV Solutions. I won't dwell on this too much because it's probably more important as to how customers and staff see us than for investors, but that's how you'll hear us referring to the segments in the future. So moving to Slide 3. And we understand that most companies are discussing the impact COVID has had on their business, and I'll get to that in a moment. But these are the highlights Andrew and I would like to focus on today. Fleetwood generated a result almost completely clear of the caravan manufacturing business, which was sold in the previous financial year and generated $330 million in revenue and EBITA, just ahead of analyst consensus, at $22.3 million. At June 30, Fleetwood had $65.7 million in net cash on its balance sheet, plus access to undrawn credit facilities of $65 million. So we had access to $130 million, if need be, at short notice. At the interim result announcement, we noted that reinstatement of dividends at around 30% would be considered at the full year. And in that regard, the Board has declared a dividend in respect of the 2020 financial year of $0.05 per share, which is about 30% of the company's earnings per share on an NPATA basis. In addition to this, capital has been returned on closing out the sale of the caravan manufacturing business. And to acknowledge shareholders' patience throughout the sale period, a special dividend of $0.07 per share has been declared as a part of capital return, making a total dividend of $0.12 per share. Now the impacts of COVID. Each of Fleetwood's 3 operating segments experienced a different impact from COVID in the last quarter. In Accommodation Solutions, changes in FIFO rosters along with ceasing the practice of motelling, which is where people on alternate rosters share a room, meant that COVID had an overall positive impact on earnings. Although a significant factor in performance not related to COVID was increased demand from shutdowns, which was steady in the first half and then increased in the second half. In RV Solutions, we had been undertaking a period of major restructuring prior to the pandemic, and this has significantly lowered the segment's breakeven point before the pandemic started. And when the impact of COVID on retail demand and consequently demand from manufacturers really started to bite from March, the business already had a level of resilience built in from the restructuring. And along with aftermarket demand that fared relatively well as well as JobKeeper payments, this meant the segment didn't lose money in the last quarter. Having said that, given unpredictability regarding the future, the Board have decided on a conservative approach and raised an impairment charge against goodwill in the RV Solutions segment. The impact of Building Solutions was twofold. Firstly, government spending, particularly in terms of critical school infrastructure increased. This was offset by small- to medium-sized commercial projects, which almost completely dried up in the last quarter. This meant that states where the company doesn't have ongoing government panel arrangements had to rely on larger, lower-margin projects, which brought the overall margin down in the second half. So before we talk to the specifics of the results, I've changed the order up a little this time. And I'd just like to briefly touch on the forward outlook, which is on Slide 4. Firstly, the pipeline of opportunities in Building Solutions is at an all-time high. While government spending features very heavily in this, we're also seeing activity starting to occur in the resource sector in WA. We expect that FIFO rosters will return to normal patterns in the '21 financial year. And as a result, demand for Accommodation Solutions will moderate to a degree, particularly in the second half as the new capacity that's presently under construction comes online. In the medium term, though, anticipated construction activity in the region should drive a demand profile greater than the total number of rooms currently in the market, including those under construction and also including those slated to be built under any of the scenarios currently planned. And finally, while demand for caravans and associated parts and services will probably be sporadic as differing levels of lockdown are implemented and removed, over the medium to long term, it should be reasonable to expect that the industry will benefit from increased domestic travel. If we turn to the next slide now, Andrew will speak to a more specific rundown on the results.

Thanks, Brad. Please turn to Slide 5, group earnings summary. At the EBITA level, Building Solutions posted an improved results in the second half off the back of major programs of new work in WA and New South Wales. And as Brad mentioned, Accommodation Solutions benefited from roster changes in the fourth quarter. EBITDA grew by 11% and benefited by $7.5 million as a result of the adoption of the new lease accounting standard. Excluding this impact, the EBITDA would have been $30.6 million. Overall, the adoption of this accounting standard resulted in EBITA increasing by $0.5 million and pretax profit falling by $0.2 million. There's a full reconciliation of the impact of this accounting standard in Note 19 of the statutory accounts and a summary of the P&L impact that's been appended to this presentation. Despite RV Solutions withstanding the pandemic environment relatively well, uncertainty regarding the near-term industry demand profile has led the Board to take a prudent approach and book an impairment charge to goodwill of $13.8 million in this segment. Importantly, this charge does not impact Fleetwood's ability to pay dividends or our banking covenants. Discontinued losses reduced substantially and in line with reduced activity levels in the caravan manufacturing business. We currently have under 70 vans remaining and less than 10 staff, mostly handling warranty runoff. Turning to Slide 6, which details our underlying EBITA performance by segment. In Building Solutions, government demand remained strong, and recent announcements point to this continuing. Given the high levels of economic uncertainty, demand from the private sector for small, higher-margin works was softer in the second half. This had an impact on margins as larger, lower-margin projects dominated production, particularly in New South Wales and Western Australia. These projects included the $17 million Koodaideri project for Rio in Western Australia and a $35 million project Hansen Yuncken in New South Wales state government. Additionally, given the scale of these and similar projects, substantial business and market development costs were incurred, totaling over $2 million. These relate to design, travel, estimating as well as direct bid costs. Activity levels in Queensland were strong driven by education demand. However, volumes remain low in the affordable housing sector following changes in ownership of 2 of the company's major clients. Despite the Koodaideri project win in Western Australia, the resource sector remains patchy in part due to an overhang of secondhand buildings. A new branch has been opened in South Australia off the back of education demand in that state. Finally, the business welcomed new Chief Operating Officer, Jason Kunkler in June 2020, who brings proven experience in construction company leadership and project delivery to Fleetwood. Accommodation Solutions continued to benefit from increased occupancy at Searipple Village in Karratha. This was as a result of higher-than-anticipated shutdown and maintenance-related demand. COVID-19 protocols resulted in modified rosters, including the removal of the practice of accommodating people on alternate rosters in the same room, improving utilization in the June quarter. Other protocols undertaken included extra cleaning, ongoing guest monitoring and education, staggered mealtimes and the provision of handwashing stations. Earnings from Osprey Village were stable as expected. In RV Solutions, COVID-19-related impacts saw the second half experience a significant reduction in volume from caravan manufacturers. But the business reduced this impact by continuing to focus on the aftermarket, where the impact was not as severe as that seen with manufacturers. This was likely due to existing caravan owners playing aftermarket parts and services to ready their RVs to travel once restrictions ease. Services revenue performed in line with the OEM market, with market share gains offset by pricing pressure. JobKeeper payments, arrangements with landlords and previous significant restructuring of the fixed cost base, meant no operating losses were encountered in RV Solutions in the fourth quarter. Net of these payments and arrangements, operating costs across the business were 28% lower in FY '20 than FY '19. Please turn to Slide 7, cash flow. This slide details our cash flows and movements in net debt. Cash flow from operations of $46.6 million was exceptional and benefited from a focus on cash generation during COVID-19 lockdowns. Advance payments of $6 million in Building Solutions at the end of the year also boosted cash flow. Net cash outflows from discontinued businesses fell substantially, in line with the wind down of activity in the caravan manufacturing business. During the year, the dining room in Searipple underwent a major renovation in preparation for increased activity levels. The acquisition cash flows represent the MBS and NRV earn-out provisions paid in cash. And following the introduction of the new lease accounting standard, rental payments have been reclassified from operating to financing cash flows. Overall, we finished the year with $65.7 million in net cash, placing the company in a very strong position. Please turn to Slide 8, balance sheet. As discussed, working capital was lower due to advance contract payments in Building Solutions and close management of working capital balances by the RV Solutions team. In addition to the substantial cash position, the group has access to $65 million in funding facilities. We also had credit approved terms for an additional 65 -- sorry, $15 million in bonding facilities. Return on capital employed was 13.9% for the year. This compares to our internal target of 15%. I will now hand back to Brad to discuss the strategy.

Okay. Thanks, Andrew. If I could just get you to turn to Slide 9, I'll talk about the forward strategy. The modular industry in Australia is still in its infancy when you compare it to other countries. And in Europe and the United States, up to 10% of all construction is executed in a modular format. In Australia, at the moment, it's less than 3%. So we've spent quite some time learning from these overseas markets. And we started a journey of adapting traditionally in-situ build construction towards modular across the country. And the Balwyn High School project I discussed at the start of today's presentation is an example of this. And there are 4 other examples shown at the back of the slide pack, all of which Fleetwood won International Awards of Excellence for -- at the recent World of Modular conference in Orlando, Florida. Having said that, and notwithstanding that we've taken this segment of Fleetwood from a small mining services business based in Perth to being the largest modular construction company in Australia, we've now got the opportunity to market Fleetwood with a national identity. As well as this, a lot of projects are still tendered individually. So we're now turning our attention to how we can improve the overall quality of earnings at Fleetwood. And we're seeing opportunities to do this in the Accommodation Solutions segment. A significant proportion of Fleetwood's earnings comes from this business, and we're expecting that in future years, there's potential for even greater earnings. Expanding our footprint here should increase Fleetwood's overall quality of earnings, and I'll touch on how we intend to do this in a moment. We've seen the RV Solutions segment's aftermarket volumes stand up quite well during the pandemic, as obviously have a number of other retail businesses, and we expect the aftermarket to feature more strongly in the future in this segment. Could I ask you to turn to Slide 10 now, please? This slide shows the spending across the announced spending across the country in programs that include off-site or modular manufacturing and also shows Fleetwood's capacity to serve that volume in each state. As you can see, we've recently opened a branch in South Australia, which has already built a reasonable order book. And the only states we don't have a direct exposure to today are the northern territory and Tasmania. Most states have major publicly announced government and commercial spend. And you can see from this slide that education and corrections are key exposures for the company. However, as I said, even though demand is a bit patchy in WA, we are seeing signs of increased activity. And Slide 11 sets out our competitive advantage, which was really the behind-the-scenes factors that have seen this company gain so much market share. Firstly, we run an advanced in-house design function where we have designers at all of our key locations, but also a center of excellence in the Melbourne CBD. And our design team have literally changed the modular industry, and there are exciting new developments to come. Also, we've taken learnings, as I said, from overseas companies and other industries and rolled out advanced manufacturing techniques. There's an example of one of those techniques shown on Slide 12. So the 2 school buildings you see pictured here are both in Victoria, and they've been built from a standardized kit of parts, which are just being configured differently to produce 2 completely different looking school buildings. The one on the left is Fairfield Primary School in Melbourne, which is a 2-storey configuration with an open plan learning environment. And the other is Elwood College, a 3-storey configuration. Again, the concept behind these projects is that they're designed for off-site construction, but once they're installed, they'll never be moved, which is different to what you might remember as traditional transportable buildings. So if I can ask you to turn to Slide 13 now, I'll touch on Accommodation Solutions. And as you know, Fleetwood has the largest accommodation village in Karratha, and Searipple Village was built really for the last construction boom when there were major iron ore and gas construction projects underway. In the last 4 or 5 years though, there's been minimal construction activity, and as a result, we've mostly been accommodating operational workers. However, as 2020 got underway, we saw increased demand from shutdowns and the COVID impact in the last quarter that we discussed earlier. The chart on this page is just a simple depiction of what we estimate are the manning requirements for major capital projects for resource companies, which on current information should start to ramp up in the next year or 2. And as you can see, there's not enough capacity to satisfy the potential demand. And in addition to utilizing all of the current market supply, including those villages presently under construction, further capacity will have to be constructed. If we turn to Slide 14 now. I'll just touch on one other key opportunity briefly for us growing a larger earnings base. And our modular business provides us with the opportunity to develop new FIFO villages at a cost lower than our competitors in the accommodation rental market can. And given the group's in a very strong financial position, we've started bidding some projects on a build-own-operate basis. If we turn to Slide 15 now, I'll just touch quickly on the competitive landscape for RV Solutions. And a key issue for the industry is that we're seeing a stabilization of volumes of products built in Australia, and an increase in imported product. Generally speaking, the customer mix in this industry is changing, the baby boomer demographic is in decline when it comes to buying caravans and the family market is expanding. And this is what's driving the shift towards imports, whereas new retirees tend to buy full-size caravans, which are generally those built in Australia, because it's just not economic to import full-sized boxes of air. And families with young children tend more towards smaller caravans and camper trailers that can be tied with lighter vehicles. So the key strategy for us is to capture more of the import market through providing services and also expanding our reach into the aftermarket segment. And when we speak of the aftermarket, we mean online and in-store retail, trade repairs and that sort of thing. Overall, caravan registrations in Australia are at their highest historical levels, and that's shown in the chart on the right slide. So the challenge for us is to focus on where the caravaners are directing their discretionary spend, particularly post-purchase of the asset itself. So just to conclude, Fleetwood generated $22.3 million in EBITA, which was just ahead of consensus despite withdrawing guidance when the pandemic started. The company has got a strong war chest, which includes $65.7 million in cash and facilities, on top of that, another $65 million. We've recommenced dividends and also declared a special dividend to partly return capital from the caravan manufacturing business. And the pipeline in Building Solutions is at a historically strong level. Despite uncertainty over the longer term -- or uncertainly in the short term, over the longer term, there are positive demand drivers in both Accommodation and RV Solutions segments. So that concludes the formal part of today's presentation, and we'd now like to open it up for questions.

[Operator Instructions] Our first question comes from the line of [ Vic Chan. ]

Just a question for me. I'm just wondering, if you look back over the last 12 months, within the Building Solutions segment, if you look across some of the government work that's been out there, roughly, what percentage of market share are you guys winning in terms of when you go out to tender?

Good question. It really differs by state. So in Victoria, it is certainly north of 50% of the market share. That would be similar in Queensland. In New South Wales, really our operation is the only substantial modular manufacturer that's located in New South Wales. So there are other smaller companies. But we tend to get a lot of work out of that commercial and sort of private sector in New South Wales, which is why we talked about, those sorts of projects dried up in the final quarter. But we are on the program to build schools under the Schools Infrastructure New South Wales program. And that's got some really exciting bids moving forward. So our market share is quite strong. I would say Fleetwood is twice as large as its nearest competitor. And then there are a number of smaller ones below that.

Okay. And my second question just relates to the RV Solutions business. If you look at the chart that you've got on kind of Page 15, it's roughly about, let's call it, 10 million imports -- units of imports that come through into Australia per year. Like roughly how much of those do you guys touch at the moment? And as we go forward, is it just a matter of the import -- volumes of imports actually growing? Or is there a strategy to actually increase the number of imports that you guys actually get involved with?

Yes. Another good question, actually. So that -- the scale on that chart is in thousands. So firstly, imports have grown to about 10,000 and those built in Australia about 20,000. At the moment, pretty much all of the imports that come into Victoria are touched by a Fleetwood business at some point. So we're involved in -- we're involved either in installing or certifying plumbing and electrical that comes across. After plumbing or electrical has been done in China, then we will look to certify that. Alternatively, some coming without those things fitted and we fit it. But only about half the imported units actually come into Victoria, the other half come in generally through Queensland, and we don't have a Queensland operation servicing that market at the moment. So that's an obvious opportunity for expansion for us.

Your next question comes from the line of Benn Skender from Canaccord.

You talked about focusing on major retailers and repair services in the RV Solutions segment. I just wondered if you could clarify what the current revenue mix in the segment is in terms of customer type and whether this has already begun to change.

Yes, sure, Benn. So look, over the last few years, that channel has become quite a substantial part of revenue in RV. And right at the moment, it makes up about 50% of the RV Solutions revenue. And if you went back 5 or 6 years ago, it would only be 10% or 15%. So that's been growing really strongly, particularly through agreements with major big box retailers. So if you went to a BCF store, for example, anywhere in Australia, you would find almost a whole isle of Camec gear, and we're in SuperCheap as well. So that's become quite a big part of the mix of revenue in the business. And that sector has actually fared quite well through the pandemic. I know myself being a boaty, I've spent a lot of time at BCF buying fishing gear and that sort of thing. And we've seen retail. People getting their caravans ready to go on trips -- domestic trips and good volume through retail. We certainly see that as the future really for that segment.

So what's the rationale for the write-down in that segment then? Like the earnings went that much -- that went that much bad [ and worse because of COVID and there's definitely, as you're sort of talking to, signs that the industry has had a bit of a spot? ]

Yes. So it's really -- this has been the subject of quite vigorous debate really amongst the management team and the Board. The volume, I mentioned in the presentation, that would expect it to be a bit sporadic. So we saw a couple of months there where volume was off drastically, 70% reduction, and then a bounce back in June. And then July was actually a strong month. And that business actually generated really strong EBIT in July before then going into the Victorian lockdown in August, which has decimated things again. So it's just the near term is just so hard to pick in that business where it's going, but the Board have just taken a conservative approach and taken a really literal interpretation of the accounting standards and taken a write-down. But over the longer term, I think all the signs are pointing to people doing more domestic travel and in their caravans. I know I'm certainly planning to do that with my caravan. And I think this segment has really got a good longer-term future. But in the immediate term, it's very hard to pick what's going to happen.

And lastly for me, could you talk to the utilization in the construction facility in WA? I sat on a few mining calls in the last few weeks that have talked to some of the smaller miners and explorers spending money, setting up their own [ domes ] and things like that, which I assume has been a bit of a tailwind for your operation?

It has been. So we've had good -- really good utilization for the last probably 4 months building that Koodaideri project for Rio. Those are really high-tech and high-spec units that we've built for that project. But it's a big yard. It's 9 hectares. And a good example of what that yard is capable of is we built that Osprey project back in 2014, which was 320 houses. We built in 6 months in that yard. So it's got -- it's the biggest capacity yard that we've got in the country. The next biggest one would be our New South Wales and then our Queensland operation. But the demand is a bit patchy. Andrew mentioned it's patchy, but there are a number of actually fairly meaty projects in the pipeline, any one of which fell would give us a good forward for the next 12 months.

And is it fair to say that some of these smaller jobs had better margin, like you kind of talked about smaller jobs rolling off in Q4, which would have been -- added some cream to margins and cover fixed costs. Is it fair to say that some of those jobs that are rolling in WA that, that would help margins?

Yes. So generally speaking, the smaller the job, the higher the margin. It's generally how it works. And generally speaking, government projects are broadly a little higher on the margin than resource and commercial projects. Government projects have, generally speaking, have a very high-specification level and require some more complex engineering that we do in-house and then charge -- book to overheads and then charge a slightly higher margin to recover it. So the smaller projects, and that's why in New South Wales in the last financial year or earlier on in this financial year, we've built -- for example, we built a training facility for the Paramatta Eels. We built another training facility for the Western Sydney Wanderers and 1 or 2 others that I just can't remember at the moment. And those projects are all around sort of $4 million, $5 million, $6 million and are really good margin projects versus the much larger Hansen Yuncken project, around $35 million, which has got a heavy engineering component upfront, which has meant that project is a bit lower margin. But obviously, setting ourselves up to be on that panel arrangement for the duration of the program justifies that spend upfront.

There are no further questions at this time. I'd like to hand the conference back to today's presenters. Please continue.

Okay. Andrew, do you have anything further to add, mate?

No, I just would like to thank everyone for their attendance today. And Brad and I are available for questions over the next week or so.

And we're happy to do Zoom calls or just telephone calls. But if there's no more questions, we'll just wrap it up. Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.