Fleetwood Limited (FWD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Fleetwood Limited Full Year FY '26 Financial Results Market Briefing. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. I'd now like to welcome Andrea Pidcock, CEO, to begin the presentation. Andrea, over to you.

Thanks. Good morning, and thank you for joining us for today's annual results briefing. Before we begin, I'd like to remind everyone of the usual disclaimers and in particular, that any forward-looking statements are based on assumptions which are subject to change. I'm Andrea Pidcock, Chief Executive Officer of Fleetwood, and I'm joined by Cate Chandler, our Chief Financial Officer. I'll start with a brief overview of our FY '26 highlights, and Cate will take us through the financial results. Then I'll give some more details of segment performance and outlook. FY '26 was a year of decisive action for Fleetwood. Over the past 6 months as CEO, my priority has been to drive the changes needed to strengthen the business and lay the foundations for long-term sustainable earnings growth. Our financial results reflected contrasting performance in our operating segments. Overall, underlying EBIT was $35.6 million with very strong cash generation of $35.9 million, up almost $9 million on last year. This strong cash performance supports the fully franked final dividend of $0.095 per share, bringing full year dividends to $0.19 per share. Community Solutions had an outstanding year, delivering $50 million EBIT, supported by strong project activity in Karratha. And the recently announced acquisition of Red Dog Village really cements our position as a leader in accommodation villages in the Pilbara. As previously flagged, Building Solutions did not meet expectations and made a loss of $8.7 million. I'll go through the key drivers of this performance in more detail shortly. I'll now hand over to Cate to take you through the financials.

Thank you, Andrea, and good morning, everyone. Turning now to our FY '26 financial performance. Revenue of $475 million was 6% lower than the prior year, reflecting softer conditions in Building Solutions and the planned exit from RV Solutions. Importantly, this was offset by our outstanding performance in Community Solutions, where 96% occupancy at Searipple Village drove record earnings. Reported EBIT was $6 million and NPAT was $2.4 million. These statutory results include $29.6 million of nonrecurring restructuring costs associated with simplifying the portfolio and exiting RV Solutions and resetting the Building Solutions cost base. Excluding these one-off items, underlying EBIT was $35.6 million, only slightly below the prior year. While Building Solutions performance was below our expectations, Community Solutions delivered record earnings and demonstrated the quality of Fleetwood's portfolio. The closure of the Smithfield factory is expected to reduce Building Solutions' annual cost base by approximately $8 million to $9 million from the start of second quarter FY '27. Combined with an improved order book and more focused operating model, we believe Fleetwood enters FY '27 as a simpler, stronger and better positioned business. Turning now to the cash flow. A key highlight of FY '26 result was the strength of our cash generation across the group. Operating cash flow increased to $63.9 million, while free cash flow rose 33% to $35.9 million. This outcome reflects disciplined working capital management and strong operational execution and the release of working capital associated with the divestment of Northern RV. The strength of our cash generation enabled us to end the year with $61.5 million of cash and no debt, providing significant balance sheet flexibility and strategic capacity. During the year, we invested $7.5 million in the business, including enhancement works at the Searipple Village and capability investments within Building Solutions. These investments support customer outcomes, operational efficiency and future earnings growth. Looking ahead, approximately $11.9 million of remaining cash costs associated with the Smithfield closure are expected to be incurred in the first quarter of FY '27. However, these costs are largely going to be offset by $9.5 million in proceeds from the Camec divestment and approximately $4 million of tax asset recoveries across FY '27 and FY '28. Overall, the result highlights Fleetwood's ability to convert earnings into cash, self-fund growth initiatives and maintain strong liquidity while returning capital to shareholders. Turning now to capital management. Our capital allocation framework remains focused on maintaining a strong balance sheet, investing in opportunities that generate attractive returns and returning surplus capital to shareholders. Fleetwood finished FY '26 with $61.5 million in cash and no debt, positioning the group to pursue growth opportunities from a position of financial strength. Capital employed reduced significantly from $114.7 million to $80.7 million as we simplified the portfolio, divested noncore operations and released working capital. At the same time, the underlying return on capital employed increased to 44.1%, demonstrating our strength of our core earnings base and attractive returns generated by our operating business. The group also retained substantial capacity to support project growth with $75 million of bonding and guarantee facilities available to support the Building Solutions project pipeline. Reflecting confidence in the balance sheet and future cash generation, the Board has declared a fully franked final dividend of $0.095 per share, bringing the total fully franked dividend for FY '26 to $0.19 per share. In addition, we completed $4.2 million of share buybacks [indiscernible] during the year. Together with dividends declared and buybacks resulted in total capital return to shareholders of $21.6 million. In summary, Fleetwood enters FY '27 with a simplified portfolio, a high return earnings base, significant financial flexibility and a balance sheet capable of supporting both growth initiatives and ongoing shareholder returns. I will now hand back to Andrea to take you through the segment results.

Thanks, Cate. Now to our segment results, starting with Community Solutions. I'm incredibly proud of what the team has achieved in Community Solutions over the past year. Searipple continued to perform strongly, achieving 96% occupancy during the year. We see that continuing into FY '27, where we are fully booked to the end of the calendar year. Contracted occupancy is already 72%, and we expect that to pick up, given the strong pipeline of projects in the region. I'm really thrilled with our acquisition of Red Dog Village. This is transformational for Community Solutions, strengthening our position from a high-performing business to an exciting growth platform. It expands our capacity in the economic hub of the Pilbara and together with our modular building capability uniquely positions us to support future residential development. FY '26 was a challenging year for Building Solutions. Performance was impacted by lower revenue in the first half, then margin compression in the second half. We also had $2.7 million in costs associated with a historical project. In Queensland, revenue declined due to a gap between big projects finishing and new projects starting. And in New South Wales, a number of tendered projects were either delayed or canceled. Coming into the second half, we had a strong order book. But as we worked through it, we found a small number of large projects haven't been scoped and priced properly. As a result, these projects didn't deliver the margins we needed. I've reviewed our work in hand, and I don't see the same issues in the rest of our portfolio. These challenging projects will be completed within the first half of FY '27. I appreciate that this result is disappointing, and I want to ensure investors that I'm laser-focused on improving our scoping and estimating processes. I recruited a highly experienced construction executive to lead a program of work to improve project governance and end-to-end execution. In June, I announced the decision to close our New South Wales facility in Smithfield. This will structurally reduce costs by $8 million to $9 million annually, starting from the second quarter of FY '27. We remain committed to the New South Wales market, and we are confident we can meet demand, leveraging our national manufacturing network. The RV Solutions segment continued to face headwinds throughout the year as local caravan manufacturers struggled to compete with imports. During the year, we closed local parts manufacturing, and we divested the Northern RV plumbing business in February. In June, we announced our decision to exit the segment completely. In July, we announced the sale of Camec. Notwithstanding the challenging conditions, the RV business made a positive underlying EBIT of $1.7 million. The sale of the 2 businesses achieved $14.3 million in proceeds and a further tax benefit of around $4 million will be realized across FY '27 and '28. Now to our strategy and outlook. In my first 6 months as CEO, I announced that we would exit RV Solutions and close New South Wales manufacturing. These were tough decisions, but I believe they were necessary to streamline our business and structurally improve profitability. We are now a simpler, more focused business with 2 core divisions: Community Solutions, which owns, operates and manages accommodation villages; and Building Solutions, a leader in modular building across a range of sectors. In Community Solutions, we have high-quality accommodation villages in the Pilbara, one of Australia's most attractive workforce accommodation markets. Searipple, the FIFO village we own and operate in Karratha, and Osprey, the key worker housing village that we manage in Port Hedland, provide critically needed accommodation in these markets and strong earnings to Fleetwood. In July, I announced that we are expanding Community Solutions with the acquisition of Red Dog Village from Bechtel. This is a game changer for Fleetwood. This high-quality asset materially lifts our earnings potential and strengthens our position in the key economic hub of Karratha. The combination of Searipple and Red Dog Villages expands our capacity to supply the high demand for transient worker accommodation in the short term and positions us to meet longer-term housing needs supported by our modular building capability. In recent years, Searipple occupancy has been above 80%, driving exceptionally high returns. We see demand continuing for the next 5 years, underpinned by a strong pipeline of over $30 billion in major infrastructure projects in addition to expanded operational and maintenance activity. The Karratha region is forecasting a continued shortfall in transient worker accommodation of at least 1,500 beds for the next 5 years. Our strong position allows us to meet this demand, optimize yields across our assets and evolve our offer in line with housing and workforce needs. Red Dog Village is a great acquisition for Fleetwood. We agreed to purchase the village from Bechtel for $20 million. It is a large accommodation camp set on 45 hectares of Crown leased land and built in 2022. It has over 2,000 beds and excellent amenities, including large modern catering and dining, guest laundries, a well-equipped gym, a 25-meter pool and a range of other recreational facilities. We expect completion at the end of December and to take over operations from January. Red Dog Village is really well situated in the Gap Ridge industrial area of Karratha, being close to the airport and near the Burrup Peninsula. We anticipate an earnings uplift of $10 million to $20 million on an annualized basis with occupancy ramping up from January. Searipple is fully booked to the end of this calendar year, and we expect occupancy in the 82% to 92% range in FY '27. In our Community Solutions business, Fleetwood has privileged accommodation assets in a key economic hub with sustained high demand. We have these assets because we also have our Building Solutions business. We built Searipple and Osprey, and we were the selected buyer for Red Dog because of our ability to support both immediate transient worker demand and longer-term housing development. We believe there are further opportunities to grow Community Solutions where we can replicate this combined advantage. Fleetwood Building Solutions is a leader in modular building in Australia with a national network of large-scale facilities and proven capability across multiple market sectors. We ended FY '27 with a strong order book with $156 million of work in hand and over $200 million in tendered projects over a diverse range of sectors. It is important to add that around 60% of the work that we do is recurring work based on panel agreements that often bypass the tender process or move through it very quickly. As a result of the stronger pipeline, we are expecting revenue to grow in FY '27 by at least 5%. However, I want to emphasize that we are focused on choosing the right work and making sure that it is properly priced so that we deliver sustained profitability. Fleetwood is a streamlined business with an expanded accommodation platform in Community Solutions and a structurally lower cost base in Building Solutions. We expect to complete the sale of Camec, the closure of Smithfield and the acquisition of Red Dog in the first half of FY '27, setting us up for more focused and profitable growth. We operate in large markets where our ability to deliver high-quality turnkey building projects at speed solves real problems across education, housing and infrastructure. And we have significant opportunities to grow nationally where we have proven capability. We also have a really strong balance sheet. We had a positive cash balance of $61.5 million at the end of FY '26, which supported dividends of $0.19 per share for the year. During my first 6 months in Fleetwood, I made significant changes to strengthen the business and lay the foundations for long-term earnings growth. My immediate focus areas are, firstly, to ensure sustained profitability in Building Solutions. I've taken the first big step in lowering our costs with the closure of Smithfield, and I'm focused on strengthening our foundations in project governance, improving operational efficiency and profitably growing revenue. Secondly, to ensure we deliver value from the Red Dog Village acquisition. We have a lot of work to do over the coming months to make sure that we can complete the acquisition and to set ourselves up to operate from January. We also need to work with local operators to establish agreements and secure occupancy. Thirdly, to lift capability and culture. We've recruited new capabilities into the business that we need to achieve our aspirations. These include an experienced construction executive to lead our transformation program, high-caliber market-oriented regional leaders, new IT leadership to help us make better use of technology and manufacturing leaders experienced in operational best practice. This targeted lifting capability lays the foundation for a collaborative and high-performance culture. In summary, Fleetwood is a leading modular builder with a large national footprint, well positioned to meet the needs of a housing shortfall and rising infrastructure spend. We have resilient earnings in Community Solutions with expanded capacity and continuing high demand for workforce accommodations. We have a strong pipeline for growth in our key segments of education, housing and infrastructure. We are now a sharper business with a structurally lower cost base, and we have a strong balance sheet with significant net cash and ownership of key assets. Now we have time for questions.

[Operator Instructions] And your first question comes from the line of Caleb Weng of PAC Partners.

Andrea and Cate, just a few questions. On Community Solutions, you guys are fully booked until calendar year-end. So I mean that implies sort of second half '27's still quite a fair amount left uncontracted. And then you guys also announced, I guess, the Red Dog acquisition about a month ago. So just colors on, I guess, conversations with Rio and Perdaman and Woodside and how that -- how we should think about occupancy from sort of second half '27 onwards?

Thanks, Caleb. Yes, you're right. So we -- as you know, we booked -- we're contracted with Rio until April '27, and they've fully booked us out until the end of this calendar year. We are starting to see now some bookings come in for the second half. But typically, they only come in 3 months ahead of time. And so we don't expect to see that -- a lot of movement on that in the short term. In terms of our conversations with all of the operators up there, we've been predominantly talking with Rio Tinto. As you know, they've put out an RFP for their next several years of accommodation requirements. They've gone through some changes internally. So they were a bit late coming out with that. And when I met with them, they were saying that they expect that to be finalized by the end of this calendar year and not really before then, but we have been kind of having ongoing discussions about understanding their requirements and their needs. And over the next 5 to 10 years, they've got some quite serious requirements for accommodation up there. We've also been in preliminary talks with Perdaman and Woodside, but that was before the announcement of the Red Dog acquisition. Since that announcement, we've really been predominantly focused on making sure that we do all the work to meet the conditions precedent, but we will be continuing to talk with the other operators. When I did meet with Woodside, I've got to say they were talking about, at that time, how they were having to delay and postpone and de-scope major maintenance works because they couldn't find any accommodation for their workers. So we're pretty confident that, that work will start to come in as soon as there is some available accommodation.

All right. And on Building Solutions, you mentioned that sort of the order book and work in hand at the moment sort of doesn't have the problems that sort of, I guess, some of the large projects you had in the second half in terms of margins. What gives you confidence in that? And what were sort of the major lessons and takeaways from sort of second half Building Solutions results?

Yes. Look, I've got to say it was disappointing as we kind of started to see the problems unfold in some of these large projects. There were problems that stems out of misses in scoping and estimating that played out as the project started to be delivered, and we realized that the costs were not as we had expected, and so the margins got compressed. They were tendered in the first half of FY '26, which was a time, obviously, before my time, but a time where there was quite a lot of disruption in the business. We put a lot of focus on understanding our order book. We have a lot of work that is our regular repeat work with our regular repeat customers that makes up a lot of that order book, and we have great confidence in, and understanding of the margins that we expect from that work. And we just -- from what we see, we just don't see the same problems in any of the other projects in our order book at the moment. I have recruited extra expertise, and we have started a program of work to really make sure that we embed tighter processes around governance and project execution throughout the business. And we expect that to play out over the coming months.

Yes. And the final one for me, just the thinking about reinstating dividends since I think you guys put it on -- for under review about 2 months ago, and now you guys came out with a sort of -- declared a final dividend.

I'll let Cate speak to that.

Thanks, Andrea. Look, I'll take that one for the team. At the time, we were guiding the market because, as you would know, we had a very clear dividend policy at the time to pay 100% NPAT for the current year. So obviously, at the scale of our restructuring costs, we had consumed all of our NPAT for the FY '26 financial year. However, when the Board took a look back at some of our historical earnings and our fabulous way that we've managed cash and the balance sheet, they recognized that they should return some more capital to shareholders in the way of fully franked dividend, which we have the capacity to do so. And so the Board resolved to do that and to reward shareholders for that. So we believe we set the business up for really good growth next year, and we don't feel like we should punish shareholders on the decisions we've done to set it up for the future. That's essentially the thinking in that space.

Your next question comes from the line of Matthew Chen of Moelis.

Just wanted to ask about the trajectory of EBIT in Building Solutions over FY '27.

Thanks, Matt. I've got to say, obviously, I'm new to the business, but when I was looking back at the historical EBIT, it has bounced around quite a lot. Last year -- sorry, FY '25 was obviously a really strong year for Building Solutions off the back of higher revenue and some really high margin projects that then closed out in the second half of FY '25. To me, that bouncing around is part of the reason behind the decision to close Smithfield because I kind of -- to me, we just have to structurally reduce our costs. And that sets us up to have a higher profitable base from which we can then grow. And as I said, one of the things that I noticed when you look at the variation in EBIT over the years, my understanding is that there is underlying core of profitable project work that is really repeat business that we can depend on. And then every now and then, there is a project or a set of projects that then have a negative impact on profitability. And that's certainly what we saw in FY '26. And that's why we have engaged this experienced capability to really drive a program and improve our internal processes to make sure that we don't make those mistakes again.

I might just help round that out, Matt. If you take a look at some of the pieces of information we've provided you today, the reset of the Building Solutions cost base, so the 3 quarter value of that is $6 million to $7 million, so you can add that back. So that's another breakeven, so that's setting us up for next year. We also don't expect to have a repeat of the legacy projects from yonder year of just under $3 million. So you can add that back to the mix. We also don't expect to have a full 6- or 7-month impact of core projects. So you can add that back and plus we also see revenue growing. So we do see us getting back into a positive territory next year.

Yes. Great. And potentially as quickly as in the course of the first half?

Well, the first half is going to be impacted still because we still have our Smithfield in the first quarter, and we still have these projects having an impact in the first quarter as well. That will be largely complete by the end of the first quarter, but will flow in a little into the second quarter as well. So at the moment, we would say that the first half will be breakeven to slightly positive. And we see that all of the benefits from the structural cost reduction and those projects being completed and the strong order book should flow into the second half.