Fleetwood Limited (FWD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Fleetwood Limited Results Briefing 2022. [Operator Instructions] I would now like to hand the conference over to Mr. Bruce Nicholson, CEO. Please go ahead.

Thanks, Ashley. Good morning, everyone, and thank you for joining us today. As Ashley just pointed out, my name is Bruce Nicholson, I'm the CEO and Managing Director of Fleetwood. I'm also joined today by Andrew Wackett, our CFO. And together, we'll walk through our results for the financial year FY '22. I'll start by providing some introductory comments. Andrew will go through some detail of our financial results, then I'll talk about our various businesses and the outlook. Just as a point of interest, our cover picture in this year's results presentation is Jimmy's Pavilion during the morning to Peninsula in Victoria. This building another great example of the impressive architectural design that is being incorporated into modern modular buildings. These are first-class facilities, and that is why we're seeing an increasing popularity of modular as a high-quality, reliable, cost-effective and sustainable building solution. If we move to Slide 2 at Fleetwood, we continue to focus on our 3 core businesses: our Building Solutions where we see medium- to long-term growth. Community Solutions has been renamed from Accommodation Solutions to reflect the significant opportunities that this business is pursuing in the development of new community facilities and our RV Solutions business, which continues to service and continued demand in recreational vehicles, caravans, camper trailers and the motor home sector. Shifting to Slide 3. We've recently developed a fresh new company vision, purpose and values. Our vision at Fleetwood Australia is to be the leader in reimagining sustainable spaces. This touches all 3 of our operating businesses in slightly different ways. Our new vision and purpose are underpinned by 5 core values, Zero Harm to both our people and the environment, collaboration becoming One Fleetwood, integrity, accountability and growth through innovation. If I move over to Slide 4 now. Operationally, Fleetwood's 3 operating businesses had a mixed year, combined to do an underlying loss of $12.3 million on earnings before interest, tax and amortization. Building Solutions clearly delivered an unacceptable $24.3 million loss, overwhelmingly driven by major project underperformance. Material and labor shortages as well as COVID lockdowns, which also impacted the result, but to a lesser extent. I'll discuss these further in detail on our next slide. Community Solutions delivered a sound result to expectations given the short-term excess capacity in the Pilbara as we've previously flagged, while RV Solutions delivered an outstanding result on the back of domestic travel demand, and is likely to remain strong for the first half of this financial year. Importantly, a prudent approach to working capital has allowed the company to maintain a strong cash position at the end of the year with $55.3 million of cash. To drive and deliver on our performance improvements, several long-term strategic initiatives were commenced during the year. We also appointed key roles and national sales manager, Tom Gleeson, National Manufacturing Manager; Tara Goldsworthy to drive the diversification of revenue and deliver on our manufacturing transformation. We've also appointed a new executive GM to WA business, Charles Everest, to drive the improved performance of this important state. Demand for Searipple is strengthening with several major projects in the Karratha region advancing this year. And in our RV Solutions, cost on price management remains strong which again led to an excellent result. Specifically on Slide 5, as we move to the Building Solutions results. Major project underperformance accounted for about 80% of the $24.3 million loss in that business. The vast majority of those losses relate to the Ti Tree Rail Camp Upgrade mining project in WA. The project experienced significant delays in cost escalations during the year and in preparing our year-end accounts a further review of the project and its associated risks were undertaken. Following this review, a conservative approach was adopted and a further onerous contract provision of $8.9 million was taken at year-end. Fleetwood's intention is to complete this project and will continue to pursue a number of material claims, which remains subject to ongoing commercial negotiations. These claims have not been accounted for in these results. Other major projects such as the Center for National Resilience also impacted the efficient flow of work through many of our facilities, and this resulted in a reduced utilization and unrecovered overheads further impacting our performance. When we realized the impact of these major projects we're having on our Building Solutions business, we implemented the following criteria to pivot our bidding for new work to lower risk projects to better align with our current capability. Specifically, our criteria are: is the product buildable? Can it flow through our factories? Have we got the right margin? Our deeper understanding of the risks and opportunities on the projects. And is the customer the right customer for us to partner with? The result of this shift has meant that from a high of 50% of our order book in December 2021 being major projects. This now only accounts for 15% of our order book at the end of June, and that 15% relates entirely to the tale of projects which commenced to late last calendar year. We've also implemented the lessons learned from our projects and have a far more robust project review process in place in the business, which has already seen us walk away from several key projects in recent months. I'll now pass over on Slide 6 to Andrew, and he'll focus more on our financial details.

Thanks, Bruce, and good morning, everybody. I'm on Slide 6, as Bruce mentioned, the positive performance from RV Solutions was unable to offset the underperformance on major projects of Building Solutions and the COVID-related impacts on the East Coast. The underlying EBITDA loss for the year of $12.3 million included the $8.9 million onerous contract provision announced last week. Community Solutions have delivered consistent results compared to the second half of FY '21, and ongoing domestic tourism strength combined with strong management of raw material and freight costs, has resulted in another excellent result for RV Solutions. As previously reported, the review of the carrying value of the Building Solutions business resulted in significant items totaling $39.8 million in the first half. This was noncash and does not affect the ability of the business to pay dividends in the future. Over to Slide 7, despite the operational challenges, our disciplined approach to cash flow management has seen a healthy cash balance maintained at the end of the year. Whilst working capital performance was strong, it was boosted by year-end provisions, and I'll demonstrate this more fully on the balance sheet slide. 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 the outflow of dividend payments of $11.8 million. Slide 8. The balance sheet remains strong. The company continues to carry no balance sheet debt and retains $58 million in undrawn facilities. At the end of the period, $27 million of the credit facility was drawn for performance bonds and guarantees. The reduction in carrying value of Building Solutions is reflected in a decrease in intangibles of $33.6 million and working capital of $6.2 million. Working capital was also reduced by the onerous contract provision. And finally, while no final dividend has been declared, our dividend policy remains to pay out 100% of all future earnings. So in summary, we continue to manage our finances prudently, and we are maintaining strength and flexibility to invest in the future development of the business. Back to you, Bruce.

Thanks, Andrew. I'm on Slide 9 now. I'll now walk through our different businesses and the outlook for each. Building Solutions recorded a significantly higher revenue compared to the previous corresponding period. And as mentioned, this revenue was really driven by the order of the Centers for National Resilience contracts in Melbourne, Brisbane and Perth. An image on Page 10 actually shows the Melbourne facility under construction. Whilst these projects were profitable for the companies, these projects were a one-off in nature and are not likely to contribute materially to the FY '23 revenues. Second half earnings reflected the ongoing underperformance as I've mentioned to the Rio Tinto Ti Tree Rail Camp Upgrade mining project. and the significant impact of supply chain issues leading to cost increases, material and labor shortages being felt right across the entire industry. Further seen delays and cost escalation were experienced in that project in WA. And whilst we've previously said that the project will be completed in the first quarter of this year, a more detailed assessment in recent weeks, as site work substantially completed by the end of the first half in 2023 -- financial year, sorry, 2023. In addition, a combination of property delays as satiated with poor weather on the East Coast as well as labor and material shortages resulted lower-than-expected progress across projects in New South Wales, Victoria and WA during the second half, and specifically, we are struggling to source qualified trades in our business. Overall, the order back book remained solid at $130 million, and whilst lower than the $189 million at December 2021 boosted by the Centers for National Resilience, it compares favorably to $103 million back in June 2021. Over to Slide 10 now. Drilling Solutions anticipates an improvement in earnings in FY '23. They expected to come from a combination of a solid order book, the reduced impact from major project cost overruns and continued overhead reduction. As I've said, unlike previous periods, the current forward order book does not have any material new major one-off projects of high complexity in an environment of limited skilled labor that are outside the traditional scope of Building Solutions projects. During FY '22, these included the highlighted Ti Tree project as well as the Centers for National Resilience and several other quite bespoke projects. While Building Solutions will continue to fill the ongoing effects of labor shortages and high raw material costs in the near term, volatility is expected to reduce over coming months. Opportunities with government, including housing, education and defense are expected to increase as adoption of modular gathers momentum. And as an example, the Western Australian Department of Housing is now using modular solutions for their affordable housing after engagement with Fleetwood in WA. Our Build, Transform and Grow strategy provides a road map for medium- to long-term improvement in the quality and consistency of our earnings. The build phase involves the improving the capability, systems, processes and brand awareness that underpin a long-term sustainable growth. The business is moving to a national functional leadership model to improve coordination and effectiveness of important functions such as sales, estimating in design, procurement, manufacturing, health safety and finance functions. The senior management teams in several states has been substantially replaced, reflecting the underlying issues that have impacted our FY '22 financial results. And the transformation stage of the strategy includes a revenue diversification, moving from being a builder to a manufacturer and the involvement of qualifying work coming through our pipeline, as mentioned, and those key measures before build ability to be for modular, the right margin, a deep understanding of risks and opportunities and the right customer to partner with. Other major work streams include allowing our national workflows and developing common processes and procedures to deliver consistency, improving and introducing our sales and operational planning so that we can push and pull orders to optimize our capacity across the network, balancing the build complexity with standardization of modular components to open pathways to automation, focusing on national procurement to reduce costs by consolidating our purchasing and leveraging our purchasing power as a national business. Over the medium term, this is expected to see a stable and growing business able to effectively leverage the advantages of modular building. Reduced building time of speed, lower cost essentially when design variations are considered improved quality when compared to in situ bills and better ESG credentials, especially around waste, sustainability and the ability to recycle, repurpose and reuse buildings. As I move to Slide 11, as expected, Community Solutions returned to a similar result in the second half of FY '21 at ever major project demand. The COVID-19 rosters in place in the first half of FY '21 were not repeated in FY '22. FY '22 also saw the full impact of the increased room capacity in the Karratha market. The recent 5-year agreement with Rio Tinto underpins our base utilization and profitability moving forward and creates a strong negotiation position for ongoing discussions with additional clients to support planned shutdowns of major projects over the coming periods. Osprey Village remains fully occupied. Moving to Slide 12. The outlook for our Community Solutions business is buoyant with a strong prospect WA's Northwest will see significant future development of new projects in the oil and gas, fertilizer and green energy sectors. The securing of existing demand from current customers place the fleet in a strong position in the medium term. Commercialization of our keyless lock and energy management system using the Fleetwood developed Glyde technology is underway. Fleetwood's development of the technology, and it's available to deliver through our Building Solutions business positions the company as a digital market leader in modular. The growing number of low-carbon projects are currently under consideration in the Northwest of Western Australia. The requirement for communities to house and facilitate these projects is a medium-term opportunity for our Community Solutions business. In addition, Community Solutions is well placed to pursue build, own, operate and transfer or build, own, operate -- sorry, build, own to rent opportunities in the residential aged care and mining sectors, leveraging the ability to source new villages at a competitive cost through our Building Solutions business and leveraging Fleetwood's balance sheet. On Slide 13, the RV Solutions business finished FY '22 with an EBIT of $9.8 million on review of $81.2 million. The result was driven by the strength of both our OEM and aftermarket segments and excellent trading conditions created by ongoing interest in domestic tourism. Tight management of increased raw materials and freight costs allowed gross margins to be maintained. An excellent control of operating costs saw the increased demand translated to earnings growth. Continued growth in new caravan registrations and secondhand sales of caravans has been a key contributor to the growth of RV Solutions over the past year. On Slide 14, the medium-term outlook for RV Solutions remains positive. While international travel has resumed, the forward order book for manufacturers remains at very high levels. The business is likely to remain in a strong position through our exposure to locally built RV market via the parts business Camec, and the overseas imports through the services business, Northern RV. The boom in caravan sales during the past 2 years will likely continue to deliver demand for the aftermarket service and renovation offering for an RV business -- Northern RV business, I'm sorry. Continued strong management of price and input costs is expected to support margins. We're also introducing new products such as sandwich panels and aluminum wall frames now, and the increase in secondhand van sales provides an opportunity for products and promotion of renovations through our service offering. Challenges remain, primarily around raw material supply and price, freight costs and access to skilled labor and RV Solutions. The potential impact of recent interest rate rises, fuel increases and the impact of discretionary spending are being very closely monitored. On Slide 15, overall, the position -- the business is positioned to generate improved results in the future. All 3 businesses have clear plans to improve the revenue quality to capture of future opportunities, increasing our utilization and managing our costs and in doing so, improving our margins. These plans aim to return the company to profitability in FY '23. And I note, as Andrew pointed out earlier, our dividend policy remains to pay out 100% of future earnings. The company is becoming more adept at identifying and 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 solid, and we've been prudent in the way we've leveraged our strength to support growth. I'd like to thank all of our shareholders for their understanding during these difficult times, and we'd be happy to take questions now.

[Operator Instructions] Your first question comes from Sean Kiriwan with MA Moelis Australia.

Bruce and Andrew. First one for me, Bruce, you mentioned you're expecting an improvement in earnings in F '23 for Building Solutions. So can I clarify, are you expecting that division to return to profitability in '23?

We do. We expect that the first half will be tough because we've still got the tail of these projects we talked about, we expect our run rate to be profitable in the second half of the year.

Got it. And what's kind of, I guess, informing that at the AGM last year at the first half result. I think the expectation was for those underperforming contracts to be the impact any way to be contained to the first half of well. And clearly, that hasn't been the case. I guess what if you done to, I guess, kind of give you the confidence that the rest is kind of behind you.

Yes, that's a good question. Look, I said clearly recruiting some new AGMs into the business has allowed us to actually get under the hood and have a more detailed look at these projects, and that's one of the reasons that we took the decision on the Ti Tree project in WA in the last couple of weeks, Sean. We have a fairly deep, not fairly, we have a very detailed process through our commercial teams now -- our commercial managers and contract managers, and so we're going through cost to complete in a more detailed way than we have in the past. As I'm acutely aware that what we said at midyear as we thought we had those projects contained, we clearly didn't, and we've had to look harder at both at ourselves and the capability of our team to actually get under the hood and really understand what the true cost to complete these projects are, so we do fortnightly contract reviews on these major projects. We're managing them on a monthly deep dive. We go through them in quite a bit of detail. We're actually getting a lot more clarity. I think the other thing that should give the shareholders some confidence is we're getting to the end of these projects, too. It's not like they've got a year ago. As I said, we expected to be finished the Ti Tree one a lot earlier than we do. We now know that we are almost at completion. And therefore, we're a lot closer to the end. So we understand more clearly what those costs are.

Understood. And just changing to a bit on Searipple. Can you maybe just talk to what you're seeing on the ground over there, just given some of the major projects ramping up and expected to ramp up?

So what we're seeing. So we -- as you'll be aware, we signed the Rio Tinto contract for another 5 years. We've just signed a much smaller contract extension for 2 years with a supplier. And we've got a third contract which we are just in the final weeks of concluding at the moment. They're all quite small, but all, as I've pointed before, us layering that. Clearly, as we've said before, we're quite pleased to hear the Perdaman project is not being pulled by the federal government now. So that's a key project that we are watching intently on the FID for. But there are multiple inquiries coming in from multiple sources or other projects up there, particularly in the renewables space at the moment. Now they're not particularly large ones, Sean, but there is certainly a lot of interest in the region both Perdaman and clearly other projects that are either proceeding or going through the discovery phase at the moment for use of that property up there.

Understood. And just on the Perdaman, I know anyone's guess really, but what's your take on expected date for mobilization for that project?

I've only got the same information we're obviously speaking to the EPC, and we're speaking to Perdaman quite regularly. We've got no more clarity than what you have. Vikas has come out and said that the announcement on FID will be 4 to 8 weeks away, I think, about 1.5 weeks ago. We've heard this before. But we expect it to mobilize quite quickly if it lands in the next 4 to 8 weeks. So certainly, we're expecting something in October. When I say mobile, you won't see big volumes of people until next year, but we do expect to see some take up this year as it currently stands. But as it's really got no more insight than what's been in the public domain, Sean.

Your next question comes from [indiscernible] with Asymmetric Asset Management.

Just a couple of question -- more questions on Building Solutions. First, the loss was $24 million, and the onerous provision was something like 8 suggesting there's another 16 or so before we hit breakeven. Were there other on risk provisions taken there that we need to take out of the equation to get to the sort of baseline?