Fleetwood Limited (FWD) Earnings Call Transcript & Summary

Thank you, and good morning, everybody, and thank you for joining us today. As you just heard, my name is Bruce Nicholson, and I'm the CEO of Fleetwood. I'm also joined today by Andrew Wackett, our CFO, and together, we'll take you through our results for the first half of financial year 2022. I'll start by providing some introductory comments. Andrew will go to some detail on our financial results, and then I'll talk about the various businesses, the strategy and their outlook. And the point of interest, our cover picture for those of you who are following our slide pack today is the Mackenzie State School in Queensland. This building represents another example of the impressive architectural design that has been incorporated to modular modern buildings today. And these are first-class buildings, and that's why we're seeing an increasing popularity in modular as a high-quality, reliable, cost-effective and sustainable building alternatives. Moving to Slide 2. At Fleetwood, we continue to focus on our 3 core businesses: our Building Solutions business, where we see the growth, best opportunity for long-term growth; our Community Solutions business, which has been renamed from Accommodation Solutions to reflect the significant opportunities this business is pursuing in the development of new communities facilities, community housing and other areas; our RV Solutions business, which continues to service the growing demand in recreational vehicles, caravans, camper trailers in the motor home sector. On Slide 3. Operationally, our 3 operating businesses had a mixed path in the first part of the year, combined to deliver an underlying loss of $1.5 million on earnings before interest, tax and amortization. The result was impacted by cost increases on 2 major projects and COVID-related disruptions in the Building Solutions right up in business -- right up and down the East Coast of Australia. Our Community Solutions business delivered a sound result, given the short-term excess capacity in the Pilbara as we have previously demanded, while our RV Solutions business delivered a strong result on the back of domestic travel and is likely to remain strong in the second half. Importantly, our prudent approach to working capital has allowed the company to maintain a strong cash position of $56.2 million at the end of the period, which has given the Board, the confidence to declare an interim dividend of $0.02 per share. To drive performance improvement, several strategic initiatives were commenced in the first half, among these with the appointment of a National Sales Manager, Tom Gleeson, and National Manufacturing, Tara Goldsworthy to drive our diversification of revenue strategy and to deliver on our manufacturing transformation. The second half for Building Solutions is forecast to be stronger with contributions from contract wins on the Centers for National Resilience in Melbourne, Brisbane and Perth as well as an increase in demand from the education segment, which we saw a slowing of decisions during the first half on the back of border closures. Demand for Searipple is strengthening with several major projects in the Karratha region advancing during the half, while cost and price management in our RV solutions remained strong and led to an exceptional result. On Slide 4 and speaking specifically to the impact of COVID, the various lockdowns across our country during the first half had a cumulative impact on our operations. This predominantly had an impact on our Building Solutions business, and the lifting of lockdowns in December, we saw a corresponding rise with Omicron cases, introducing a new challenge for us. This was observed most clearly in our higher levels of absentees and the staff member who either contracted COVID or would deem to be closed contacts during the period. This peaked at around 12% of our workforce on the East Coast of Australia, but thankfully is improving quickly. On Slide 5, I'll just pass over to Andrew now to focus on more of our financial detail.

Thanks, Bruce, and good morning, everyone. As Bruce mentioned, the positive performance from RV Solutions was unable to offset the underperformance in 2 major contracts of Building Solutions and the COVID-related impacts on the East Coast. The award of the quarantine center contracts has been a positive contributor to revenue growth throughout the second quarter. Community Solutions have delivered consistent results compared to the second half of FY '21 and ongoing domestic tourism strengths, combined with strong management of raw material and freight costs, has resulted in another excellent half for RV Solutions. As reported previously, the review of the carrying value of the Building Solutions business resulted in significant items totaling $39.8 million. This was noncash and does not affect the ability of the company to pay dividends in the future. Slide 6. Despite the operational challenges, a disciplined approach to cash flow management has seen a healthy cash balance maintained at the end of the period. Tax payments have recommenced and working capital has been contained despite the growth in revenue. Significant financing cash flows in the period included the return of a project finance advance in July 2021 and dividend payments of $9.9 million. Slide 7. The balance sheet remains strong. The company continues to carry no balance sheet debt and retain $62 million in undrawn credit facilities. At the end of the period, $23 million were drawn for performance bonds and guarantees. The reduction in the carrying value of Building Solutions saw a decrease in intangibles of $33.6 million and working capital impact of $6.2 million. So in summary, we continue to manage our finances prudently. We are maintaining the strength and flexibility to invest in the development of the business, especially the manufacturing transformation in Building Solutions. Back to you, Bruce.

Thank you, Andrew. Over to Slide 8 now. I'll now walk through the different businesses, the strategy and the outlook for each of those businesses. And Building Solutions recorded significantly more revenue compared to the previous corresponding period. As I mentioned, this revenue was driven by the order of the Centers for National Resilience contracts in Melbourne, Brisbane and Perth. The image on Page 8 reflects one of those units being delivered out of our Dandenong facility down in Melbourne. As flagged, cost increases on 2 unrelated contracts and the cumulative impact of COVID affected the profitability of the business during the half. The future impacts due to the cost overruns of these 2 projects have been contained and the business has completed a detailed review of lessons learned to ensure we don't repeat those mistakes. While cost increases have also been observed on smaller projects, the short-term nature of the majority of our order book will allow for the cost increases to be accounted for moving forward. The order book currently stands at $189 million, which has grown from $103 million in the previous half. The appointment of the National Sales Manager and the National Manufacturing Manager brings capability of the business, which will assist us in the drive of our transformation for greater revenue diversity and delivering efficiencies in the national manufacturing footprint. Moving to Slide 9. I'm looking forward to the Building Solutions business. The strategy continues to lead the Australian modular industry by diversifying and growing our revenue base and leveraging the benefits of modular as an alternative to in-situ building. Secondly, to transform our building business to a manufacturer to improve customer outcomes, reduce costs and increase our productivity and efficiency. We continue to see reductions in absenteeism related to Omicron and the impact from lockdowns. Underperformance from 2 contracts has been identified and contained in the first half. The larger order book with substantial work still to be completed in the Centers for National Resilience in Brisbane and Perth, and improved cost control should see a stronger second half for our Building Solutions business. However, it's important to note the company remains alert to the risk of ongoing disruptions to supply chain, where we've seen cost increases, materials rationing and certainly labor shortages. If I move to Slide 10. As expected, our Community Solutions business returned a similar result to the second half of FY '21 ahead of major project demand. The COVID-19 rosters in place in first half of FY '21 were not repeated in this half. And as we've said previously, our Osprey Village in Port Hedland remains fully occupied. Going forward, on Slide 11, the strategy for Community Solutions is continue to target multiple sectors for the build, own, operate and transfer opportunities across Australia. The expertise and capabilities of Fleetwood were to competitively build new villages means we are ideally positioned to meet the growing demand for community scale solutions. The company is seeing demand in the resources sector as well as residential aged care and affordable housing sectors via across Australia. Demand for Searipple is expected to strengthen with several large projects progressing across oil and gas, fertilizer and the green energy sector in the Pilbara. If you go to Slide 12, our RV business. The performance of RV on the back of the continued domestic tourism strength has really been a highlight for our first half. Lockdowns during the half had a limited impact on the ongoing demand for our OEM and aftermarket trade. The business managed the rising cost of materials, freight and other operating costs through occurred -- caused a strong lift in EBITDA compared to the previous corresponding period. On Slide 13, RV Solutions will continue to expand the aftermarket offering and the OEM market target commercialization of our sandwich panel walls and our aluminum frames. The outlook remains strong for domestic travel and with international travel still uncertain. The ongoing excellent management of price and cost should see continued strong margins in the second half. However, as I've said, as with the other Fleetwood businesses, potential risks, including product sourcing, freight and labor shortages are common, although common across the entire industry. On Slide 14, the overall business is well positioned for the second half and beyond. All 3 businesses have clear -- capture for future opportunities, clear plans and focus to capture future opportunities to increase utilization, manage costs and in doing so, improve our margins. These plans aim to return the company to profitability in the second half of FY '22. The company is becoming more adept at identifying managing challenges, and I'm confident that the team will continue to find ways to identify and successfully navigate these challenges as they occur. As we have said, our balance sheet remains strong and will be prudent in the way that we leverage the strength to support our growth. I'd like to thank all of our shareholders for their understanding during these difficult times. And from here on, we're happy to take any questions.

[Operator Instructions] First question comes from Sean Kiriwan from MA Moelis Australia.

I've got a couple. Just on the Building Solutions, can you just talk about those 2 underperforming contracts, what are the sort of drivers for the underperformance was? And if they have been completed in the first half?

Yes. So, Sean, thanks for the question. So clearly, I can't tell you which projects they were there commercial and in confidence. So I'll say that upfront. There's a multitude of reasons, I guess, across the 2 key projects and have been as difficult, it might sound. There've been good lessons learned for the organization Sean. Some of them relate to scope cap that wasn't identified during the project. Others were things that had not been procured in a timely fashion that meant that we incurred higher costs on those materials and in particular, some areas around contracts that weren't secured with our downstream business that had -- contracting costs were higher than anticipated. There was also some disruption partially from COVID in terms of accessing the projects and having cross-border management of those projects that meant things weren't accounted for in a timely fashion. And therefore, we had unexpected costs came through to us from one or another part of the business if that's sort of -- hopefully, that describes it for you Sean. So there wasn't one single thing, and they were quite different between the 2 projects.

No, that makes sense. And presumably, your comment before about short-term nature of work sort of contracts that -- work that you were kind of bidding going forward sort of has provisions to account for some of these challenges?

Yes. So certainly, I can say that when we bid for the quarantine facilities, we built risk into those project bids because we knew there was risk to supply chain and risk to cost, and it's sort of playing out as we'd expected with those Centers for National Resilience. They are large and more complex projects. So I think we've been quite prudent in that point. I will just add, Sean, if it's all right that whilst we have contained the large swings in the first half, those projects aren't quite complete yet. We've still got a couple of months to run and they'll be running out at lower margins than they had previously booked at, but we won't be having a significant swings in terms of our costs that -- we have contained those in the first half, Sean.

Understood. And just last one for me. with accommodations, which is now Community Solutions. Can you maybe just talk about the dynamic in the sort of Northwest of WA, just given major projects been given approval, what sort of, I guess, inquiry levels are you seeing from people looking to secure rooms over the next few years?

Again, commercial and confidence. So I'll let you draw your own conclusions, but certainly, we are seeing strong demand and strong inquiry, and we are negotiating with several parties up in the Pilbara right now for actually medium- to long-term demand. So it's not short term at all, Sean. So very strong demand.

Okay. And does that sort of suggest we can expect, assuming all going well, some new slide on the outcomes of those negotiations over the coming months?

Over the coming months, you will. Yes, I think it's important to note that the peak of demand doesn't sort of come into around 2023 if the FIDs are approved and if the projects go to plan, Sean?

Got it. I'll jump off now.

The next question comes from Gavin Allen from Euroz Hartleys.

Just a quick one for me. The timing of the contracts or I should say before -- I think you just covered off there with Sean. But just perhaps on the Building Solutions thing, again, and I'm not -- clearly, arrangements are commercial and confident and I get that. But just in terms of the journey, thinking outside of the underperforming contracts, how might we think of that journey? I mean 1H was difficult. 2H, we might expect to be better recognizing that there is the impact of those outperforming contracts. But can we look at '23 as potentially back to sort of more normal margins? Or is there more legacy to think to work through 2023?

That's a great question, Gavin, and one that's a bit hard for a person who's been here just under 7 months, most of it is locked down to answer. So I might -- so I'm not trying to dodge the question. So I might see if my compadre, Andrew would like to answer that first, and then I might try and round it out, Gavin, if that's all right. Absolutely.

Yes, sure. Thanks for the question, Gavin. Look, I think we've dealt with the legacy issues as much as we're capable of in the first half. And I think we've been consistent in our messaging that the turnarounds are -- to realize the potential out of this business is going to be a multiple-year journey. And so I don't -- I think we should expect to see some improvement in FY '23 in margins. But certainly, I don't think in FY '23, we'll be at the margins in that business that we're targeting over the longer term. It's going to be a multiyear journey to get there. And as Bruce was alluding to in his presentation, it's going to come from a manufacturing transformation. It's going to take a few years to implement fully and a better balancing of our sales efforts. And they're the 2 key executive appointments that Bruce has made during the half.

Right. Got it. Yes.

And look, Gavin, if I can just add to that, I think we are widening out. I think there's been some key learnings on those 2 projects. But as I said, we went in with our eyes wide open on Centers for National Resilience. We built risk into that project. We build margin that we think was accepted in that project. It is a difficult and challenging project, but it's delivering to plan at the moment. So I think we're still a learning organization. And as we get away from high dependence on the education sector and move into these sectors, we just need to plan and prepare, and that's what we're setting up for -- to have our eyes wide open going to these projects moving forward.

Very good. Understood. That's it from me guys.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Nicholson for closing remarks.

Well, thank you for that. And look, if there's no further questions, I do look forward to the investor road shows we'll be getting underway next week. And I would like to pass on our sincere thanks for everybody taking the time to join us this morning on this conference call moving forward. So thanks for that, and speak again soon.