Fleetwood Limited (FWD) Earnings Call Transcript & Summary

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

Thanks, Darcy. Good morning, everybody, and thank you for joining us. As you heard, my name is Bruce Nicholson. I'm the Managing Director and CEO of Fleetwood. I'm also joined today by Andrew Wackett, our CFO and Company Secretary. And together, we'll take you through our results for financial year 2023. I'll start by providing some introductory comments. Andrew will go through into some more detail on our financial results. And then, I'll talk about our various business units and the outlook. Just flipping over to Slide 2 in our presentation pack at the moment. The first would we continue to focus on our 3 core businesses. Our Building Solutions business, we're in the midst of a turnaround in the early stages of a transformation as we see the opportunity for long-term growth. Our Community Solutions business where we see significant opportunities, to optimize CFO in the near term and extend the business by pursuing the development of new community facilities and key worker accommodations. In our RV Solutions business which continues to service the ongoing demand in recreational vehicles, caravan, camper trailers and the motor home sector. If I move over to Slide 3 now. We continue to work to bring to life our refreshed vision and purpose and to embed our core values. Our vision is to be the leader in reimaging and sustainable spaces, which touches all 3 of our operating businesses, albeit in different ways. Our business purpose are underpinning by 5 core values, which has been a key focus in the last 12 months; zero harm to both our people and the environment, sorry, collaboration, integrity, accountability and innovation. If I move over to Slide 4. We would return to profitability during financial year 2023, with improved momentum demonstrated in the second half, delivering a full year result of $4.2 million EBITA. Improved operating performance in the second half saw our cash increase by $6.7 million to $46.6 million at the 30th of June, 2023. A major focus on safety as the business stabilized saw a significant improvement in the lost time of the group's lost time injury frequency rate, which were reduced by 59%. Building Solutions losses were substantially reduced as the FY '22 major projects were closed out and the implementation of our Build, Transform and Grow strategy gained momentum. Work on all FY '22 major projects was completed early in the second half. I'm pleased to confirm that we've now closed our commercial negotiations on all of the difficult projects. Closeout costs on these projects, net of the provisions we've already taken during the year totaled $3.3 million. We split $900,000 in the first half and $2.3 million in the second half. This meant that the underlying loss for the second half in Building Solutions was reduced to only $900,000. The Building Solutions business has continued to target projects aligned with its current capability. And this target saw the order book growth from $87 million in December 2022 to $127 million at June 2023. At the same time, staff numbers are down 7% as we centralized key functions and adopted greater standardization. A highlight of the year was the June 2023 announcement of additional wins booked by Rio Tinto under its coloration agreement, which is expected to generate a further $100 million to $120 million in revenue until the end of the contract term in April 2027. I'm also pleased to announce that our improved operational performance and strong cash position has allowed us to reinstate the dividend policy and distribute a dividend of $0.021 per share fully franked. At Fleetwood, we continue to embed the Build, Transform and Grow strategy in the business with the aim to focus on quality of revenue through diversification, generating sustainable margin, increasing utilization and reducing overheads to improve earnings. This is underpinned by new leadership capability across the business to successfully execute our strategy. If we now move over to Slide 5, I'll pass over to Andrew to focus on some more of our financial details.

Thanks, Bruce, and good morning, everyone. Improved results in Buildings and Community Solutions were partially offset by lower earnings from RV Solutions and higher corporate overheads. Building Solutions revenue declined by 11% due to lower margin project revenues. Second half revenue of $128 million was impacted by lower project win rates across the second and third quarters as the business was reset. Win rates and revenue improved markedly towards the end of the year, seeing the business up for a stronger start to FY '24. Still on Building Solutions, the major project played out costs as per [indiscernible] totaled $3.3 million during the year weighted $2.3 million during the second half. This compares to FY '22 where approximately 80% or $19 million of the $24.3 million loss as a result of underperformance on several major projects. Community Solutions had a solid year with EBITA up 23% on FY '22. The timing of major client shutdowns at Searipple Village saw an excellent performance in the fourth quarter with the highest occupancy and average room rate so far this cycle. This business is well-placed with long-term demand now contracted. RV Solutions saw reduced consumer discretionary demand emerge in the fourth quarter. This changed the trend in the past 2 years. And we also saw several aftermarket clients reduce their stockholdings leading into the end of the financial year. Turning to Slide 6. The company maintained a stable net cash position after allowing for the payment of the $14.1 million onerous contract provision taken late in FY '22. While net cash fell from $55 million in June 2022 to $46 million in June '23, net cash actually increased from the December position of $40 million, reflecting commercial -- several major projects and improved operational performance. CapEx remains broadly in line with our non-AASB16 depreciation of our fixed assets, which is about $9 million. We expect CapEx to increase a little bit in FY '24 as we prepare Searipple Village for the upcoming increase in demand. On Slide 7, on the balance sheet. Our balance sheet remains strong with net cash of $46.6 million. As I said before, working capital returned to more typical levels as the FY '22 IRS contract provision was paid out during the year. The company continues to carry no balance sheet debt and retained $62 million in undrawn credit facilities. At the end of the period, $19 million of the facilities will drive for performance bonds and guarantees. Overall bonding outstanding fell from $27 million in June 2022 from $19 million in June '23, reflecting reduced exposure to major projects. Also during the year, the company's banking facility was extended for a further 3 years. As Bruce said, the balance sheet position and improved earnings momentum means the company has resumed dividend payments with a fully franked final dividend of $0.021 per share. The company's dividend policy remains to pay out 100% of net profit after tax. And we currently have $0.20 per share in franking credits available to support up to $0.46 per share in fully franked dividend. So in summary, we continue to manage our clients prudently. And we are maintaining the strength and flexibility to invest in the development of the business. Up to you, Bruce.

Thanks, Andrew. I'll move over to Slide 8 now, if I can. And I'll now walk through the different business units and the outlooks for each of them. As we've said, Building Solutions losses will substantially reduce in the FY '22 major projects were closed out and the implementation of our Build, Transform and Grow strategy gained momentum. As previously highlighted, major project costs net of our provisions during the year were $3.3 million. Revenue for the year declined by 11% as expected due to lower major project revenues. And second half revenue was $127.7 million was impacted by low project win rates across the second and third quarters as we leased up the business, as Andrew mentioned. Win rates and revenue improved markedly towards the end of the year, setting the business up for a very strong start to the financial year 2024. Our Queensland business continued its excellent performance where population growth is creating education and key worker accommodation demand. And pleasingly, Fleetwood was added to the queue to social housing panels during the second half of the year. Activity levels in Victoria and New South Wales also improved in the fourth quarter as renewed management terms growth performance. Western Australia made significant gains over the second half and have seen the early signs of a strengthening market. Gross margins improved throughout the year with the benefit of our focus on repeatable module works took effect. And we gained traction with our procurement savings. Pleasingly, Building Solutions achieved target margins in the fourth quarter. Overheads increased 3% from with later show discontinuing and competition for key staff in the broad construction industry remaining intense. This is reflected in much pressured saw costs rise despite lower staff numbers. We did however see material shortages ease further in the fourth quarter. Overall, the business achieved its goal of an underlying profitability on a monthly run rate by year-end. If I move across to Slide 9, the reset the Building Solutions business commenced in December 2021. As I've previously spoken about, this involved qualifying work coming into our pipeline against key measures, including build-ability for module and our capability, the right margin, a deeper understanding of the risks and opportunities on how we manage them and the right customers to partner with. Having challenges of the major projects in our rearview mirror have allowed us to refocus. And this has seen the order book grow from $87 million in December 2022 to $127 million in June 2023. The small to medium projects have meet this criteria. Our business is continuing to consolidate its national functional leadership model to improve toward margin effectiveness of important functions such as sales, estimating and design, procurement and manufacturing. During the year, the centralization of our design estimating and procurement functions was completed. Manufacturing KPIs are now in place across our 8 factories and manufacturing hubs. And we're starting to see improved utilization and productivity across our business as we use these to drive our business decisions. If I move to Slide 10. Our Build, Transform and Grow strategy provides the road map for medium to long-term improvement in quality and consistency of our earnings. The build phase involves improving capability, systems and processes and brand awareness to underpin long-term sustainable growth. This includes relaying our national workflows and developing common processes and procedures across our business to deliver consistency, introducing the sales and operational planning to improve the capability to push and to pull orders to optimize our factory. And as I've said, we're now measuring factory cost within the utilization. And this is driving our sales decisions and our operational planning decisions. Balancing bill complexity with standardization of modular components will open up pathways to greater standardization for the Building Solutions business. Opportunities with governments, including housing, education and defense are expected to increase as the adoption of modular billing got its momentum. The Western Australian Department of Housing and Queensland's CureBuild are now using modular solutions after engaging with people. And our own proprietary housing designs will launch into the broader market in the second half of the year in Queensland and New South Wales, where we're seeing significant interest from government, community and key worker housing accommodation providers. During the year, a number of states announced move to kindergarten compulsory, which extends our operating offering in the education sector. And the business has already seen an uptick in demand for this. Fleetwood strategy in defense sector has been well-defined and is now underway. As we've said, this focus has seen our order bank grow by almost 60% from $87 million in December '22 to $127 million at the end of the financial year. It's also important to note that in addition to order bank, Building Solutions generates approximately 50% of its annual revenue from long-term contracts or panel agreements in the education and housing sectors. This is Fleetwood's ability to plan and manage utilization in many of the states and provides a solid foundation for the business. Power customers include state education departments, building and lifestyle developers and state housing authorities. Building Solutions anticipates a continued improvement in earnings in financial year 2024. This is expected to come from a combination of a solid order book, better quality margins, procurement savings, no impact from the major project cost overruns we've experienced and careful overhead management. If I now move to Slide 11. Our overhead staff numbers were down by 7% since June 2022 as activity on major projects reduces and we consolidated these key functions. A refocus on safety led to a 63% in Building Solutions lost time injury frequency rate in the last financial year. An example of aligning our national workplace and development of common processes and precedent consistency in the centralization of our design escalating and procurement functions, which will generate benefits for the business over time although current factory capacity and utilization is now being [indiscernible] and driving sales and operational planning decisions. A focus on national procurement to reduce our costs by consolidating and buying and leveraging the purchasing power of our national business is well underway. Procurement savings have been identified and captured in major spending categories. And whilst the benefits were relatively minor in FY '23, we've seen material savings in the financial year ahead. Over the medium term, we expect to see a stable and growing business able to effectively leverage the advantages of multiple billings, which include reduced building time or speed, lower costs, especially when design variations are considered, improved quality were compared in future buildings and better environmental, social and governance credentials, especially around waste reduction, sustainability and ability for us to recycle the purpose and reuse the building suites we have. If I move across to Slide 12 now. As Andrew mentioned, Community Solutions had a solid year with EBITA up 23% on FY '22. The timing of major project shutdown at Searipple saw an excellent performance in the fourth quarter with the highest occupancy and average year so far this cycle. The 5-year agreement with Rio Tinto, executed in July 2022, underpinned base utilization and profitability during the year. We've also created a strong negotiated position for ongoing discussions with additional time to support plant shutdowns and major projects over the coming periods. A highlight of the year was the June 2023 announcement of additional earnings booked by Rio Tinto under its accommodation contract, which is expected to generate a further $100 million to $120 million in revenue until the end of the contract term in April 2027. During the year, we also secured contracts with Woodside and Yara Fertilizers, further underpinning future demand. Opportunities remained for securing long-term demand in Searipple to support future earnings, which was a major focus in business in FY '23, along with planning for the big upgrades to support future occupancy. Our Osprey Village remained fully occupied. I'll move across to Slide 13. The outlook for Community Solutions is buoyant with strong prospect of Western Australia's Northwest will see significant future development of new projects in the oil and gas, fertilizer and brand energy sectors. Securing an existing demand from current customers Fleetwood positioned strong position for the medium term. The most significant new project during the year was the $6 billion Perdaman urea project, which achieved financial plays in April 2023. And also approximately 2,000 construction and 200 permanent roles up in the Carafe region. With a growing number of low-carbon projects that currently under consideration in Northwest of WA, the requirement to housing facilitate those projects with significant medium-term opportunities for Community Solutions. Commercialization of our previous lot and imaging system using the Fleetwood developed Glyde technology is underway. Fleetwood's development of the technology and its availability delivered through our Building Solutions business positions the company as a digital market leader. In addition, Community Solutions is well-placed to pursue build, own, operate and transfer for various lengths of opportunities in several sectors, leveraging the ability to source new villages at a competitive cost supported by our Building Solutions business and Fleetwood balance sheet. If I move across to Slide 14. RV Solutions saw reduced customer discretionary spending in the fourth quarter on rising interest rates. This resulted in lower revenue and EBITA in the second half of the year. In the first half of the year, the business continued its positive revenue performance driven by ongoing strength in domestic visits albeit with ongoing global supply chain challenges. The original equipment manufacturers in that segment experienced solid trading conditions throughout the year as many manufacturers work through the historic customer audits. The aftermarket segment noticeably softened in the fourth quarter of the year. And while the underlying customer demand did fall, the business also saw, as Andrew mentioned, aftermarket customers reducing their stock holdings as they head into the end of the financial year. The synergies out of the -- pass-through pricing prices to customers during the period, which largely maintained our product margins, but weren't enough to offset wage inflation and significant increases in property fleet costs, which saw operating costs increase by 14% compared to FY '22 and translating to lower EBITA margins. Moving to Slide 15. The medium-term outlook for RV Solutions remains solid. While international travel has resumed, the order book for manufacturers has resettled at historic levels. The early part of financial year 2024 has also seen some signs of restocking by our aftermarket customers. The business will remain a strong position for our exposure to locally built RV market by our parts and accessories business and drive these input ports through the services business more than RV. The booming carbon sales during the past 2 years will continue to deliver demand in our aftermarket service and renovation offering. Further price increases and work to rightsize the business is underway even we anticipate the business will normalize over the first quarter of this year. New product development is a major face of the business. The new premium door has been launched to the market, while owning and offering the new sandwich panel Royal Wolf and floor products are currently under trial with keen interest from multiple customers. Several exciting new imported products and a range of upgrades are also coming to the market this year. The increase in secondhand band size provides an opportunity for combining our products and affirmation of renovations for our RV service offering. Challenges remain primarily around raw material supply and foreign exchange as well as access and the cost of skilled labor. We are, however, seeing freight costs lower. The potential impact of interest rate rises, fuel increases and the impact on discretionary spending continues to be closely monitored. If I move across the Slide 16 now. Based on the improved Building Solution's order book and forward booking for Searipple, Fleetwood anticipates continued improvement in earnings momentum in '23 and 2024. Building and Community Solutions are gaining momentum. All 3 businesses have clear plans to improve revenue quality, capture future opportunities, increase utilization, manage costs and in doing so improve their margins. The company has come up a particularly challenging 2 years and in doing so has become adept at identifying imaging challenges. I'm confident that our new refreshing experience leadership teams will continue to find ways to define success or to navigate these challenges as they occur. As we've said, our balance sheet remains solid. And we've been prudent in the way we've leveraged this strength to support growth. I'd like to thank all of our shareholders for their understanding as we work through this dynamic Building Solutions business and implement our Build, Transform and Grow points. And with that, we'd now be happy to take any questions.

[Operator Instructions] The first question today comes from Matthew Chen from Moelis Australia.

Just wanted to get an update on the focus of the building strategy and how you're seeing that time line on a return to breakeven in that segment?

Thanks, Matthew, for the question. Look, the trajectory is positive. As I just said, we returned to a small profit in Building Solutions and upped the run rate by year-end. That was the aim, we've done that. We don't expect it to accelerate quickly. So we're not expecting it to turn around in a fast way. We're taking a prudent approach to that. We think it will certainly, we believe it will be profitable in FY '24. As I said, it's currently tracking sort of a little bit better than breakeven or near breakeven. We are optimistic that that will gain traction in the first half and then continue to gain traction second half. As we said, we've got a strong order book. We put quality margins in it. We also have procurement savings coming through and as you say. I hope that answers the question for you. I'm not sure I'm going to give you much more detail on that around our detailed forecast in that.

No, that's very helpful. And just following up on that order book, so that delta in the order book. Can you talk to the sources of that increase and I guess the quality of that order book? And I guess if that gives you confidence in that run rate, profitability run rate?

Yes. So there's been a combination of us expanding our education sector offering, Matthew. So we've had these kindergartens we've seen certainly some uptick in both Queensland and Victoria. We've picked up a significant work in the private education sector in New South Wales. We've also picked up work in housing in WA, in housing in Queensland and housing in Victoria. So it's not one. It is actually we are prosecuting our diversification of revenue strategy so that we're not entirely dependent on the education sector. And so I will argue 3 of those sectors where we've seen growth. Queensland has done a similar work in health, for example, in terms of [ PAC ] accommodation. There's work coming through the pipeline in the hire business. So we're manufacturing for a number of hire companies at the moment, particularly in South Australia and in New South Wales. So there's been quite a bit of good quality work done to diversification of revenue and reduce our reliance on the education sector. Does that answer your question for you, Matthew?

That's very helpful.

[Operator Instructions] Your next question comes from Tony Mitchell from Shaw and Partners.

A fantastic turnaround. What I'd like to ask you, Bruce, is given the huge amount of interest in developing the projects in the Carafe area, can you give us some idea of the title spend that all these different companies are looking to do within the next 2 years?

I haven't got the data in front of me. Thanks for the question, Tony. And the answer is, I haven't got the data in front of me. And I would be wrong to try and guess because there is a moving fleet plan. So I apologize if that sounds I'm obfuscating the answer. I will take a period up with the 20 projects in the region we discussed. We are having open discussions with a number of interested parties around our Searipple operation. And I don't want to -- the answer is the projects are all taking longer to come to market and the very specialty project as a degree of real ones, such as the Perdaman projects that we've talked about previously, Tony.

Yes. Okay. In terms of -- I mean it's hard for you to know, but how many of these real projects do you think will get off the ground in the next 1, 2 years?

I'm not sure I want to answer that, Tony. I think that's a question for others. We're very focused on the stuff that's right in front of us right now. As I've said, we have been very focused on living Searipple. And clearly the first and second tranche of offers and acceptance with Rio Tinto take Fleetwood well above half its capacity when their demand peaks. We're focused on the stuff that's near-term right now, Tony. And as other opportunities come to fruition, we will sort of prosecute. A lot of people are talking us about speculative projects that a year or 2 years out, whether it's a solar project, a hydrogen project, the hydrogen pilot project being brought to Yara at the moment. We're aware of all that. We're watching that closely. Obviously that's subject to how that pilot project goes, Tony. So I might sort of pause there. Andrew, I am not sure anything you could add to it because you're a bit closer to over there in WA.

Thanks, Bruce. I think the way we look at it internally here is we look at the existing customer base in Carafe, which is we said -- as Bruce said and we're very excited about all their CapEx plans and the [indiscernible] companies. But behind that, there is a way more speculative projects, as Bruce said, a lot of these new energy projects and the like. So we're monitoring all those policy and like Bruce said, we're trying to layer up the demand for Searipple and get the highest return through the cycle that we can.

Okay. Just as a follow-up, where is -- what's the state of the program in negotiations at the moment?

They are ongoing. Tony, I think it's fair to say that there's some rooms that they have secured their first tranche of accommodation in the smaller village for the start-up weeks. As said, we are continuing to have open negotiations with Searipple and Carafe joint venture. We're looking at the histogram, they're looking and talking to us about that. So it's an ongoing process. But we're also selling to multiple other parties in the region about other opportunities at Searipple as well. So they had just wanted to talk about that, Tony.

[Operator Instructions] The next question comes from Caleb Weng from PAC Partners.

Congrats on the turnaround. Just the color on the WA, the increase in -- well, what's going to be excited there is that the social and key work at housing, was there a bit of mining going on there?

Caleb, it's a combination of both. We've got a very strong position in social houses -- sorry, sorry, lifestyle housing over in WA and social housing now. We're seeing a significant uplift in demand in the mining sector. And it's really about mining companies, for mining companies tending to refresh and upgrade the quality of the facilities on the ground up there. Some of the expectations would probably get much for us. But certainly, we're building mining SPPs again now. We're going out of size as we're building and to be quite frank, Caleb. So we're seeing them on expect the start to end up, but that's probably driving the demand the most at the moment, we've got a very secure base in terms of the housing sector, the lifestyle and social housing sector. And we see this is the strong upside. In fact, we just turned on our production line over in WA. So we've actually moved back on our production on the factories, which has been operating for several years, so.

And just on Searipple, so the CapEx spend, do you see that disrupting the occupancy levels at all or...

Look, of course, spending CapEx on anything, we'll have some drawdown on our cash position, Caleb, but we're in a strong cash position that is prudent. It's not many...

There's no disrupting occupancies or you have to like close account?

Oh, absolutely. No, no. Sorry. Okay. No, no. Look, at the end of the day, we still have a reasonable amount of the village is unoccupied. So we can move people around the village. It is about upgrading the older rooms that haven't been used for several years. It is around upgrading some of the facilities and Searipple has multiple gyms, multiple swimming pools and multiple rooms. So we can actually move people around within and it's a large facility as you would know. And therefore, we don't see any real disruption to our current occupancy out there with that. In fact, we're doing it ahead of demand to make sure that the people actually get what they expect and they come to a high-quality village like Searipple.

As there are no further questions at this time, I'll now hand back to Mr. Nicholson for any closing remarks.

Thank you, Darcy. Look, on behalf of Fleetwood, I'd like to thank you all for joining us this morning. I'd like to thank our investors for their patience as we've worked through the last few years of quite challenging circumstances. I'm quite positive, as is Andrew, about the outlook for the business and certainly look forward to seeing some of you on our road show over the next few days. With that, I'll call it. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.