Fletcher Building Limited (FBU) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Fletcher Building half year results analyst briefing. [Operator Instructions] I'd now like to hand the conference over to your speaker today, CEO, Ross Taylor. Thank you. Please go ahead.

Good morning, everyone, and welcome to the presentation of our results for the 6 months ended 31 December 2019. And presenting with me today will be our group CFO, Bevan McKenzie. Slide 3 outlines our key talking points today, and I'll begin by providing an overview of the results, and then I'll run through the divisional performance in a bit more detail. Bevan will then talk through the overall financial performance for the half year. And then finally, I'll sum up with some outlook comments on the half year ahead. Turning to Slide 4. Our first half revenue and earnings were broadly in line with expectations. Our revenue declined by 5% to $4 billion half-on-half. This decrease was part -- in part a result of having less legacy construction revenue to get through, which is a positive, and also a result of lower revenue in our Australian division as we felt the effects of the tougher residential and infrastructure markets. EBIT half-on-half was down at $219 million, and this was a result of 2 main themes. A poor result from our steel business in New Zealand and a larger-than-normal second half weighting to our expected full year earnings in our land development and Australian divisions, and I'll discuss both these in more detail later in the presentation. And with 5 months left until the year-end, I'm pleased to be able to confirm our full year earnings guidance of EBIT for the year, excluding significant items, of being between $515 million to $565 million. Moving to Slide 5. We see that net earnings for the half were $82 million. It's worth noting that these were impacted by the previously flagged $35 million of significant items related to the intervention and reset of our Australian businesses. Our return on funds remained steady at 12.4%. And as we've outlined previously, we expect this to improve into the future as we start to see growth in our Australian division. Slide 6 shows trading cash flows improved half-on-half to $88 million. This was predominantly driven by continued improvements in our management of working capital. And our net debt levels at the end of the half were $766 million, and this continues to leave us with a very strong balance sheet position. On Slide 7, we show that EPS was slightly down in the comparative half in line with earnings. And we confirm that the Board has declared an interim dividend of $0.11 per share, which will be paid in April. Slide 8 provides an update on a couple of areas we look at on our balance scorecard. We continue to place significant focus and investment into our safety reset. Our aspiration is to be injury-free across all of our businesses. And while this will be a multiyear effort, we are seeing good progress and engagement from our leadership teams across all of our divisions. On sustainability, we are pleased to have our science-based targets verified during the half year. Fletcher Building is the first New Zealand or Australian building materials company to set a science-based target for carbon reduction. This is an important step in both meeting our aim to be the New Zealand, Australian sustainability leader in our sector and to ensure we future-proof our overall market positions. I'll now move on to the divisional performance. But before I do, I wanted to briefly comment on the coronavirus. Our businesses are not currently seeing any material impacts, but we are monitoring the situation closely. We have resilience and contingency plans in place to manage the majority of our potential supply chain disruptions, should they occur. And at this stage, we're not factoring in any major overall economic slowdowns in our sectors, either in New Zealand or Australia. That said, it's obviously a dynamic situation. And should this change, we'll update the market accordingly. Now moving into the details. I'll start with an overview of the New Zealand market on Slide 10. New Zealand accounts for some 2/3 of our revenue, and overall, the market remained broadly steady year-on-year. In residential, while consent numbers continued to grow, the ongoing shift to multi-unit dwellings and smaller house areas meant volumes and activity remained broadly flat. Commercial volumes followed a similar path, where headline consent numbers improved half-on-half but project sizes were generally smaller, with the net effect being market volumes eased slightly year-on-year. And in infrastructure, the first half of the year was slower after a wet start to the financial year. However, looking ahead, the outlook is strong, and this follows recent government infrastructure package announcements. I'll now run through the various New Zealand divisions, starting on Slide 11 with the Building Products division. Before I start, I want to orientate you on how to read this slide and the other divisional slides in today's presentation. The first column of numbers, in light gray, are the actual numbers we reported for the first half of 2018. The second column of numbers, in black, are the same first half 2018 numbers, but adjusted for the IFRS 16 accounting changes that came into effect from the 1st of July this financial year. And the third column of numbers, also in black, are our first half numbers for this financial year, which are reported under the new IFRS 16 accounting rules. All my commentary on the half-on-half trends through the presentation will be referencing the second and third columns. So now moving on to Building Products. The overall revenue for the half year was down slightly, but EBIT was down more materially to $66 million. This was a direct result of a very poor first half performance from our Steel business. Unfortunately, in Steel, we saw a continuation of the challenging trading conditions we experienced last year continue into the first half. Beyond this, the broad thematic for the half was that our businesses exposed to finishing trades saw strong volumes, while those exposed to civil and infrastructure activities saw softer volumes. Aside from this, a particular highlight was the strong trading cash flow and cash conversion that the division achieved. On Slide 12, we look more closely at the Building Products division. On the top left-hand graphic, you can see that, excluding Steel, operating margins have improved half-on-half across the Building Products businesses. This has been achieved through a combination of operating efficiencies and product and service innovation. Amongst this, Humes remains a work in progress, and we continue to work both on its manufacturing and distribution performance. We're also pleased to confirm that we've now committed to the build of our new wallboards North Ireland plasterboard plant in Tauranga. This is a port city just southeast of Auckland. This will be a state-of-the-art facility and will provide our wallboards businesses -- business with efficiencies, additional capacity and reduced carbon emissions. The total investment for land, buildings and equipment will be around $400 million over the next 3 years. In Steel, we have intervened and reset this business through the first half. This, combined with what feels like an improving market backdrop, should see a much stronger second half performance. Moving now to Distribution, on Slide 13. While revenues were up half-on-half, operating earnings were slightly lower as a result of a highly competitive environment in Auckland and investments that we're making to step change the business's digital capabilities. Through the half, we continued both the branch and showroom upgrade program and the ongoing opening of branches in areas where we have network gaps. Trading cash flows were a highlight and a direct result of well-controlled working capital across the division. Given the critical importance of e-commerce and digital trends to the future of our distribution businesses, I've laid out where we are and where we're heading on this journey over the next 2 slides. On Slide 14, we look at where our investment and focus on digital has been to date. We've now digitized in excess of 70% of our in-branch transactions. This provides a much more seamless and efficient service for our customers. It improves the accuracy of goods receipting and stock picking. And it allows the capture of a richer and more accurate set of customer data. We have also now completed the transformation of our transport capability. And we can now offer Uber-style track-your-truck notifications to our customers in real time. This has been achieved through the insourcing of our fleet and delivery service and the addition of full tracking capabilities to each vehicle. These are very important steps in what will be a multiyear journey for us. Slide 15 lays out our next steps in digital, which will now pivot to our customer-facing application, both the channels to market and the overall customer ecosystem that we want to establish. Our aim is to provide an unmatched digital experience into the New Zealand market. And we are confident that if we can win in this space, that we'll be able to maintain margins and achieve above-market growth in the coming years. The digital transformation will enable our customers to do business with us where and when they want taking us from a physical analog business limited by store opening hours to a 24/7 omnichannel experience. We expect to have the initial application on e-commerce channels in place for the balance of this financial year and then progressively refine and enhance them through to FY '22. Turning now to Concrete, on Slide 16. Revenues and earnings were solid in the half year despite a decline in market volumes. EBIT was up half-on-half, but we did benefit, in a relative sense, from no major cement mill outages in this half. Margins were also up from a combination of price gains and supply chain efficiencies, and these were only partially impacted by increased energy costs. On Slide 17, we bring to life the half-on-half operating margin improvement I talked about on the previous slide, and we also outlined where our innovation and product development focus is heading for this business. With the manufacture of cement contributing to around 8% of the world's carbon emissions, there's a lot of research and innovation occurring around the world focused on getting these carbon levels down. And at the same time, we're seeing increasing consumer appetite to opt for lower carbon options. We feel uniquely placed to take advantage of this. The cement we produce in New Zealand now is both competitively priced and already has a 20% lower embedded carbon than imports. We also continue to make investments, such as the Tyre Derived Fuel project, which will improve this further, achieving lower carbon emissions, further efficiencies in our cost base and consuming up to 50% of New Zealand's waste tyres. And we're actively working on the introduction of pozzolans as a cement substitute. We believe this could materially reduce carbon even further over the coming few years. All this should provide some exciting competitive advantages for our concrete business in the years to come. Turning now to our Residential and Development business, on Slide 18. Demand for housing in Auckland priced between $600,000 and $900,000 remains very solid, and we're seeing strong sales volumes across the majority of our developments. However, revenue and profits were down half-on-half as a result of both our residential and land development earnings being second half-weighted this year. When we look to the full year, we expect both strong residential housing sales result as well as our land development profits to be above $35 million rather than the $25 million annual run rate we have previously guided to. We continue to control a healthy land pipeline with around 5 years of future housing lots under our control. And our off-site housing manufacturing company, Clever Core, has started successfully in the first half, but it did incur $3 million of losses as it builds volume and throughput in its start-up year. On Slide 19, the graphic on the left brings to life the strength of sales momentum we have in residential this year. As you can see, average weekly sales rate in the second quarter was significantly higher than this time last year, and we have remained at these levels into the third quarter. This leaves us very confident on the outlook for house sales through to the year-end. On the right, we show a number of photos from our Clever Core manufacturing facility in Auckland. We're very excited around what this business can do to reduce both the typical house construction times and improve the overall build quality. We remain on track to get to at least breakeven business through the next year as we increase volumes and settle the plant, operational performance and rhythm. The half year numbers, shown on Slide 20, to some extent, masked the progress we've made on the construction business. While the overall revenue was down half-on-half, if you exclude the legacy projects, which we want to run off, revenue was up by 3%. Profits were slightly down half-on-half but that can be attributed to a wet first quarter, which particularly impacted Higgins. Fortunately, we're seeing a drier second half, and we expect higher second half volumes to offset this weaker first half. Our new work win rates have been good, and we're again growing our work in hand. And we continue to confirm that all legacy projects, including the convention center, will be completed within the provisions we raised in 2018. On Slide 21, we cover 3 important themes related to Fletcher Construction. Over the last 18 months, we've reset the leadership team within Fletcher Construction and it is now fit-for-purpose with a strong group of experienced leaders across each of our business areas. This has underpinned the ongoing improvement to both our bid and project delivery disciplines. This improvement has not gone unnoticed by our customers. And as you can see in the graph on the right, that is now translating to better win rates and an increasing go-forward committed order book. I'd also make the important point that this order book has a much improved and more appropriate risk and margin profile. And finally, on the convention center rebuild. Over the coming months, we expect to agree the final scope and completion dates with both the insurers and SkyCity. At this point, the rebuild will move into full swing. And again, I can confirm, we continue to remain confident the insurance will respond to the loss and damage on the project from the fire. I'll now move to our Australian businesses and start firstly with a market update on Slide 23. The Australian market accounts for around 1/3 of our revenue. And of this, just over half is exposed to the residential sector, where consents have contracted sharply year-on-year. That said, there are signs that the residential market has stabilized, and we're hopeful we'll see it return to growth later this calendar year. The commercial market has remained steady, but the downside surprise for us was the infrastructure market. Here we saw unexpectedly weak activity levels through the first half and this negatively affected the quantity of project work we saw through both Iplex and Rocla. Moving to an overview of the Australian results, on Slide 24, you can see revenue was down half-on-half, but considering the market backdrop, it held up pretty well. Across our businesses through the half, we've seen strong performance and momentum in Laminex and Fletcher Insulation, ongoing tough competitive environments for Tradelink and Stramit, which has kept a lid on their growth, and our pipes businesses, Iplex and Rocla, were heavily impacted by the lack of infrastructure project work I mentioned before. This resulted in profits being down half-on-half, reflecting the tougher market conditions. That said, the second half will be stronger and benefit from both the residential market stabilizing and the full run rate cost out -- and the full run rate of the cost-out initiatives falling to the bottom line. On Slide 25, we focus on 3 important areas of our Australian business reset. The operational reset and cost-out program is now mostly done. It has gone well and was essential. But it was equally important to get it behind us so we can better focus on the customers and how we now grow our Australian business. With the reset well advanced, we have assessed our portfolio and decided to divest the Rocla business and are now focused on driving growth and operational performance in our other Australian businesses. The sale process for Rocla is expected to be completed in calendar 2020. And the last point I'd make is that through the reset program, we've continued to invest in product and service innovation. We have selectively expanded ranges across most businesses. We've invested in new product lines and a good case in point is the compact line in Laminex. We feel this has a lot of potential, and it will be an exciting alternative to stone in both kitchens and bathrooms. And we've invested in digital channels to market as we progressively upgrade our e-commerce capabilities. And while there remains much to do, I feel we're now on the right track with this division. I'll now hand over to Bevan, who will take you through the details of our financial results for the half.

Thanks, Ross, and good morning, everyone. Turning first to Slide 27, we show the group income statement. Ross has talked to the key drivers of the group's operating earnings. So the additional points to highlight here are further down the P&L. Firstly, significant items of $35 million were recorded in the half year and relate to restructuring charges for the Australia reset. Consistent with the charges booked in FY '19, these restructuring costs comprise around 50% cash and 50% noncash expenses. Gross benefits from the reset program are tracking in line with our expectations and relate mainly to savings in property and distribution costs, headcount and manufacturing rationalization. These benefits have been key to offsetting the declines in market activity in Australia and will ramp up in the second half of the financial year. Lease interest expense appears on the income statement for the first time, which represents the interest charges on capitalized leases following the adoption of IFRS 16 from the 1st of July. Funding costs on the group's debt were $35 million in the current period, down materially from $62 million in the prior period. Finally, net earnings from discontinued operations near the base of the P&L represents the impact of the divestment of the Formica business in the prior period. On Slide 28, we provide a reminder of the key impacts of the new IFRS 16 lease accounting standard. The standard has had the effect of capitalizing around 5,000 operating leases across the group. The impact on the balance sheet has been to recognize a right-of-use asset of $1.5 billion and a lease liability of $1.8 billion, with the difference taken as an adjustment to retained earnings. This difference reflects the front-loading of interest expense under the IFRS 16 treatment. The table on this slide shows the impact of IFRS 16 on the group's income statement with operating lease expense now treated as depreciation and interest charges. As Ross mentioned earlier, we have provided the pro forma results of FY '19 year throughout our financial statements with the impact on EBIT being an increase of $24 million for the half year and forecast to be $49 million for the full year. In terms of cash flows, there is no impact on the underlying cash flows, but the new standard results and operating cash flows increasing by the amount of the lease principal payment with an offsetting outflow in financing cash flows. Slide 29 provides further detail of tax and funding costs for the half year and what we can expect for the full year. Our effective tax rate for the half year, excluding the impact of significant items, was 25.3%, similar to the rate in the comparative half and reflecting the application of accumulated capital losses on our land development transaction in Australia. For the full year, we expect the effective tax rate to be approximately 26% and tracking back to 29% in subsequent periods. Cash tax paid was $1 million in the half year, with no tax currently payable in either Australia or New Zealand due to accumulated tax credits. We expect cash tax paid for the full year to be around $10 million. As mentioned, funding cost of $35 million in the half year was significantly lower than the prior period and was made payable -- and was made possible by the pay down of gross debt, including early exits from some of our higher-cost sources of funding. The comparative period also included payments of additional interest charges, which had arisen from the debt covenant breach in 2018. For the full year, funding costs are expected to be in the range of $70 million to $80 million in total. Slide 30 shows the group's cash flow performance. As we've done previously to allow for clear comparison of the group, we show, first, the trading cash from continuing operations and have separated out the cash flows from the legacy construction projects and from the International division divested last year. Overall trading cash flows, which we see highlighted in the middle of the table, improved from $36 million in first half of '19 to $88 million in first half '20, mainly from improvements in working capital. I'll cover this off in more detail on the next slide. The cost of completing the legacy construction projects resulted in cash outflows of $142 million in the first half. This was in line with expectations and was higher than the prior half, reflecting the increased activity for key projects as they near completion. The convention center fire, as Ross has noted, will impact the phasing of the remaining cash outflows from the legacy projects, though at this stage we expect this to be a timing issue only with no change to the overall provisions or to the cash flows. Slide 31 lays out the key movements and metrics for the group's working capital. The top table shows that $85 million improvement on the prior period was driven mainly by improved inventory and debtors cash flows as well as higher cash flow in our residential and development business. The lower table shows the metrics for each component of working capital in the Materials and Distribution businesses. Overall, the working capital cycle improved by 4.2 days in these businesses, which represents around a $70 million cash release. We've highlighted previously that inventory is the area of working capital with the greatest room for improvement. We're getting greater traction in this area, which is pleasing, though performance does still remain too variable across the group. Debtors remains very well controlled, though we note some pressure in the half in Australia as cash cycles extended in the tough trading environment. Turning now to Slide 32 on capital expenditure and depreciation. As Ross has highlighted, our investments are focused on growth and operational improvement initiatives to support our strategy. This includes an emphasis on digital, especially in our distribution businesses, with additional investments in manufacturing efficiency and operating capacity across our core operations. In the first half, this included a number of upgrades to fleet and ready-mix plants in our Concrete division as we look to drive network density and service improvements. The result has been a continued growth in ready-mix market share in a highly competitive market. We're also continuing to invest in sustainability, including at present the Tyre Derived Fuel initiative in our cement business. As Ross noted, we have now secured the land for our new plasterboard plant in Winstone Wallboards and expect the total investment of this plant to be approximately $400 million. Of this, around half will be plant and equipment and around half will be land and buildings. We will initially fund the full cost of the project, but we'll look at options to release the land and builders component of around $200 million as we near completion of the project. Overall CapEx for the full year still expected to be in the range of $275 million to $325 million, and this will now include the outlay on the land for the new Wallboards plant. Depreciation and amortization on continuing operations is expected to be slightly lower than previously forecast in a range of $180 million to $190 million. This is due to the rephasing of some CapEx projects and treatment of the Rocla asset as held for sale in the second half. Turning to Slide 33. Having strengthened the group's balance sheet in the FY '19 year, this provided a robust base for the execution of the go-forward strategy. We show here that in the half year, we applied funds mainly to the dividend payment, outflows on the legacy construction projects and the repurchase of shares through the buyback program, all of which were in line with expectations. On Slide 34, we see that despite this planned increase in net debt, the group's liquidity position remained strong. We have said that we expect our leverage ratio of net debt-to-EBITDA to track back to the lowering of our target range by the end of FY '20. This continues to be our expectation, with the leverage ratio at the half year sitting at 0.8x, just below the bottom end of the range. We note here that the adoption of IFRS 16 has had the effect of increase in the group's EBITDA by around $240 million and, therefore, reducing the leverage ratio by around half a tune in our target range. While there is no change to the group's underlying capital structure settings, we have modified our target leverage range down by half a tune to reflect the impact of the new accounting standard. The group will continue to maintain a prudent approach to balance sheet management as we execute the strategy. Slide 35 talks further to this point, showing the maturity and liquidity profiles of our funding sources. In the past 2 years, we have reset our balance sheet, which has included a significant reduction in gross debt and a rebalancing of our funding sources while also ensuring we have good tenor in these facilities. At our Investor Day in 2018, we committed to reduce the group's gross debt by $700 million to $800 million over the course of FY '19 and FY '20. So far, we have repaid $731 million, including $321 million in the first half of FY '20, and hence, this program of gross debt reduction is now largely complete. Within our current facilities, as shown in the table on the right, we have just under $1 billion of liquidity available as well as an additional $570 million of cash on hand. In the first half of this year, we renegotiated our local syndicated bank facility establishing new 3-year and 5-year tenor. These are the facilities shown in blue on the maturity profile in the chart. Importantly, 75% of the group's facilities now mature in FY '23 and beyond, providing a strong liquidity for the group in the medium term. Finally, on Slide 36, as Ross has noted, the Board has declared an interim dividend of $0.11 per share. Our dividend policy remains unchanged, which is to pay out 50% to 75% of net profit before significant items and having regard to available cash flows in the period. The interim payment reflects our confidence in the trajectory of the business in the second half. We note that in FY '19, dividend was weighted heavily to the final payment due to the timing of the Formica settlement. As noted on the slide, the FY '20 dividend will return to a more normal first half, second half weighting. The group does not currently have tax credits available, and so the interim FY '20 dividend will be unimputed and unfranked. Finally, on the share buyback program, which we commenced in September last year, we have so far purchased and canceled just under 28 million shares for $141 million. The buyback will recommence next week as the group moves out of its half year reporting period. I'll now hand back to Ross to provide the final summary and outlook for the year ahead.

Thanks, Bevan. I now want to briefly turn to the outlook for our business, looking at 3 areas. The progress we're making against the goals we have set ourselves, the market outlook and our earnings guidance and outlook for the balance of the FY '20 year. Slide 38 shows the time line I talked to for the last couple of years. It's a bit of a busy slide, but I'll distill it down to a couple of key points. Through FY '20, our focus will continue to be on getting all our businesses set up to perform consistently. In our New Zealand core, we're close to having all businesses repositioned. Construction, we'll have completed the legacy projects by the year-end and hence be working on an increasingly high-quality order book. I note that we'll treat the convention center as an ongoing B+I project and part of our go-forward normal business workload. The major intervention in Australian business is almost -- is mostly done, and we're now changing gears to focus on growth and portfolio choices. And while we've been working across all of our enablers, we're well into major investments to lift our safety performance and drive innovation and sustainability across all businesses. This will mean that from FY '21 onwards, we will be better able to focus on our markets, customers and growth, having got the recent major distractions behind us. Moving now to Slide 39. We summarize our market expectations for the remainder of the financial year, which, in summary, we expect to see an ongoing solid New Zealand market and a similar second half in Australia to what we saw through the first half, but with a more positive outlook on the residential side emerging, which should start to lift volumes and throughput in our business in the next 6 to 9 months. It's also worth noting, again, that this outlook assumes no dramatic increase in the coronavirus impacts on the world economy. And finally, on Slide 40, we reconfirm our EBIT guidance range for the year, excluding significant items, of $515 million to $565 million. And again, I'd point out that we expect our earnings to be slightly more second half-weighted than usual this year as a result of a better second half performance from Steel, higher residential house and development settlements, the Higgins pavement volumes being second half-weighted and Australia getting the full run rate benefits from its cost-out programs. And with that, I'd now like to hand back to the moderator to allow us to take questions.

[Operator Instructions] Our first question comes from the line of Arie Dekker from Jarden.

Yes, first question just in relation to Construction. I'm just interested in some color on the mix and second half -- and growth that you've got on work in hand and also just what you're sort of seeing in terms of opportunities in B+I, specifically.

Yes. So if I -- there's actually -- in terms of just the order book growth, there's a good slide in the deck in the Construction thing, which just shows the trajectory of a committed order book growing. And when I look into that order book, what's been driving it is quite a different sort of win profile. There's allowance work in there. And even the Watercare deal, which is a 10-year deal, which ultimately is risk projects, but it's a lot of smaller ones. So the overall risk profile that's quite good as well. So when you look into that growing order book, and you can sort of see on that slide the legacy project running down and the new order book growing. It's been very deliberately -- has better margins than historically, has better risk profile in it. And as we've sort of talked about, we're trying to hit it to a sort of 30, 30, 30 mix, 1/3 maintenance, 1/3 lower risk allowance work, 1/3 risk work as a profile. So we're starting to build towards that.

And just on B+I, any opportunities in that space that have sort of come up yet or sort of pending?

Yes. Look, we don't talk to projects we haven't won yet, but we see a pretty good pipeline there, and there will probably be some announcements around just the next projects we're working with that over the coming week or so. But equally, when I look at the convention center now, as we do the reset, that will become an ongoing project for a year -- a couple of years in that business, which is how we're thinking about it in our work portfolio.

Sure. Just in terms of Australia, I guess, just any comment you can kind of give on, one, sort of the net benefit you sort of see flowing through FY '20 and FY '21, I guess, you should get full year benefit. And then also just any further restructuring costs to come in the second half.

Okay. Bevan can answer that just so we mix it up a bit here and I don't bore you.

Morning, Arie. We said at our Investor Day last year, we were targeting gross benefits, $50 million this year, $100 million in '21 and net benefits, $15 million this year and $50 million next year. In order of magnitude, that's what we're still tracking to. Certainly, the gross benefits are coming through strongly. So that's well and truly online. The team is doing a really good job in terms of pushing those cost savings. So that was -- that's where we see it hitting. And what was really the second part of your question, Arie?

Sure. Just in terms of restructuring costs in the second half in Australia or any extent material sort of to expect.

Yes. We're largely done with the restructuring costs. There could be a small tail in the second half. But as we said, we were looking to get that mainly done in the first. So there might be a little bit more in the second, but we're largely through that now.

Ross, just on Steel, and you obviously sort of talked to what sort of drove the poor result in the first half and you pointing to a turnaround there. Could you just give a little bit more sort of color on what are the things that give you sort of confidence that you, in terms of a turnaround, enable them in Steel in the second half?

Yes. So look, a lot of -- we try to expose just the volumes, obviously, hurt through the first half, they were down. So that's an important part of the puzzle. So we're feeling the market has been more robust. But once we've looked at where the volumes are going, we've done a bit -- we've done work to make sure we set that business on the right footing for that market reality. So we're sort of seeing a bit of upside in the market as well as having done the reset. So we're -- and as we have started this half, we're seeing sort of better run rate profits as we go forward. So that gives us a pretty good feel, confidence of the outlook of it. But as I said, it was a very disappointing first half, but we've acted on it.

Sure. And last question for me. I guess it's just around the framework in which you've sort of, I guess, made the decision to exit Rocla. Just some color on that. And then in terms of other businesses that you've, I guess, decided to keep, thinking things like Iplex and Stramit, just how they sort of -- what it was that differentiated them in terms of when you look at it through the framework you've put on Rocla?

Yes. Look, having -- the first thing I'd say is the way we want to approach it, and I've said this, the market is -- we didn't want to distract ourselves for the first -- last 12 months. We wanted to get the reset done and get through that and get the businesses, what I call, a fighting fit for one of a better word for market reality and positioned to where we could take them. So having done that broadly and got through most of that, we're now looking at where we think we want to invest in the future and drive growth and performance. And like all things, you looked at that portfolio against that light and Rocla didn't really fit into that against the sort of things -- the opportunities we saw and where we wanted to take the business. And it was pretty much as simple as that. So we wanted to trim it. And that's really -- that job is done now. So yes, we'll deal with Rocla, but the rest of the businesses in Australia, we think there's good pathways going forward with them.

Our next question comes from Matthew Henry from Forsyth Barr.

As you highlighted, guidance implies quite a big second half SKU. It's around about $100 million to the midpoint. You have quantified, I guess, an upgrade to land sales for the year. But beyond that, are you able to give us any sort of quantification around any sort of big luck in the second half that may get you there?

Matt, Ross here. Look, we try to do that without getting into specifics in the sum up on the outlook slide, where we've sort of pointed to obviously the residential and put a bit of granularity on that just because hard to -- we decided to talk about where we saw the development profits. But then it's Higgins and paving volumes. It's Steel making more than $1 million. So we'd hope that has a much better second half. It's the full run rate of cost-out in Australia. And I think I've forgotten one, haven't I? No, that's it. Yes. So we tried to identify those 4 things. And that to try -- and through the presentation, we've also tried to give a bit of sense of it as well. So you can sort of get some confidence out of it because we're very confident in that occurring.

Okay. Okay. The ICC, what's the risk that this -- or is there a risk that this turns into a prolonged process until you get final clarity on what the end costs look like?

No. I mean, it needed to take us -- it seems frustratingly slow probably from the outside. But when you step back from it and you think of when the fire occurred late last year and then just to get back in, we had to get it safe. It was a very major fire. And that took a while. And then effectively, in this calendar year, we've been in there, getting our mind around. And it's a very difficult site to get in when you had to sort of deal with some of the debris and the safety issues. So we're sort of getting -- we're through that sort of what I call get organized, understand where we're going to go phase. So now we're into the sort of clear it out and the -- and there'll be demolition. And we expect by the time we get to May-ish, June-ish this year, we should be back in full swing. And through that process, we'll naturally then agree time lines and scope and insurance, et cetera, et cetera, in the detail with both insurers and SkyCity. And it just was always going to take that long. And the uncertainty for us was just what the extent of the damage was. We've got a much better fix on that now. So we're sort of starting to wrestle all those pieces of the puzzle to the ground.

And sorry, can you give us some sort of sense around what the kind of potential range of outcomes here? And what your confidence levels around that range outcomes? I mean not necessarily hard numbers, but just the sense of materiality.

We're not talking publicly about that. I know SkyCity have made some comments on their own balance sheet estimates, but it's premature to do that. I mean the things we can say confidently is we remain within those provisions that we set. But we're not going to talk publicly about the estimates of costs. And a, it will cause us issues with our insurers; and b, we're not allowed to under our contract anyway. So look -- but I can give you confidence around provisions and insurance response.

Okay. So the -- I guess, just to clarify, the confidence levels that you're within the provisions is pretty high?

Yes. Well, if we weren't, we'd be saying something different to that.

Okay. And then just a small question, Bevan, around CapEx. Looking out beyond this year, I think back on the Investor Day, you were talking about sort of circa $300 million a year, excluding the Wallboard plant. Is that still the case? So we're looking out the next few years, it's at $300 million base plus whatever the share of the Wallboard plant on top of that?

Yes. Exactly right, Matt. We've guided $275 million to $325 million and that will be over the next 3 years. And as we've noted, Wallboards will have a big spend on its plant in the next 2. And again, I'd just emphasize as we get towards the end of that project, we'll look at our options around releasing the land and buildings component of that spend.

Our next question comes from Brook Campbell-Crawford from JPMorgan.

I just had 2 on Australia. So I'd just be interested to understand the earnings trends within the Australian business. And when did you start to see year-on-year EBIT improvement in that division?

So might talk about it at the business level because -- and I've tried to bring that to life in my -- when I was talking to the slide. But if I look at our Australian business, in both Laminex and Fletcher Insulation, we've seen good momentum in those businesses. And so their trajectories are looking positive as we sit here today and feeling good about those. When I get into Tradelink, our plumbing distribution business, and Stramit, it stayed pretty competitive there. There's been a bit of a fight for market share and also that's kept a lid on margins. So they've been a bit tougher. But again, when I look forward at the backdrop to the Australian market, I think we're sort of, as I characterized, we've weathered the storm and are more hopeful as I look forward. When I get to the pipes businesses, Iplex and Rocla, they've both been impacted. And we didn't expect it because there's a big backdrop infrastructure program going in Australia. But the new projects and some of the bids and the usual things we bid on in those businesses just didn't materialize. So that's been an unexpected tougher 6 months. And it doesn't look like it. It looks like it's going to stay a bit lumpy. We're seeing some bids come through, but it doesn't look like it's about to reset just yet. But with the overall backdrop infrastructure spend in Australia and the government wanting to put the pedal to the floor there, you think it will start to improve at some point. So that's how I'd characterize our businesses there.

Yes. No, that's fair enough. I guess, if we just think about the division as a whole, you expecting a second half improvement, but the last couple of months, have you seen divisional EBIT improve at all?

So as we -- we're actually on our forecast. But the funny thing when you talk about January, it's a funny month. So it doesn't -- what drives profit in this business is you get -- you suffer January because everyone's coming back to work. And then you -- really strong months in March, April, May, June. So we're on that trajectory we expected to be. So that's what allows us to sit here and guide the way we have.

Brook, I'd just add one point. We've pointed in the MD&A to the fact if look at Laminex and insulation, they were impacted at the top line as the market came off, they had lower revenue, but they both grew earnings period-on-period. So when we are seeing the benefit of that cost-out flow through, you can see the earnings coming through as well.

Okay. Great. And then just on the -- I mean, on the synergies that, Bevan, you were talking about the gross benefit -- the expectation of gross benefits being broadly in line with your prior guidance that saying you're likely a bit less confident on the net. So can you just elaborate on that and why the slippage, if that's what you meant?

No, I said I thought we expect that order of magnitude, that plus 15% this year, that's to what we're targeting. The pipes market has been tough, as Ross has highlighted, that's impacted us a bit. Likewise, we've gone a bit better in our cost-out in other areas, which is why we're still targeting that net benefit this year.

Okay. And just related to that question, I mean, any of these targeted synergies tied up with sort of Rocla at all now that you're divesting it? And would that mean you had to sort of revise any of those targets?

So 2 points there. The first one is that the team in Rocla have done a great job in driving performance improvement in that business. So that's really pleasing to see. And look, we, as Ross said, expect the divestment to be through calendar year '20. So at an underlying earnings level shouldn't have any impact in FY '21. We'll obviously just need to see how the sale process plays out, and we're into that now.

Our next question comes from Simon Thackray from Jefferies.

I may have a couple of follow-up questions. I just want to start with the plasterboard expansion. Thanks for that color on the split on the $400 million between $200 million P&E and $200 million land and buildings. I was wondering what you were building for $400 million when I first saw the headline. But just on the land and building side, is that likely to be, given your comments, a bit of a development play in terms of getting it close to the end and then looking to sell in this low interest rate environment? Is that the idea? I just want to make sure I understand that clearly.

That's -- morning, Simon. That's certainly direction of travel. And all we're doing is this will do us most good once we have derisked the project I got through more towards the end. And when we get to that point, we'll obviously evaluate where we are in our capital structure settings, what the interest rate environment is like and, of course, what yields are looking like for, as you say, a development of a sale and leaseback-type play. So that's what we'll do, and that will be in -- I suspect, in F '22 that we start to look really hard at that.

Okay. That's great, Bevan. And just in terms of housekeeping, what's the capacity -- if I've missed that, what's the capacity for this plant?

So the best way to think about it is that we -- currently at Felix Street, which is the plant that we are replacing, we have about 20 million squares of capacity for plasterboard. We've obviously thought about the site and the long-term investments. So we'll get some initial uplift on that capacity, and that's necessary as Wallboards continues to grow with the market here. Broadly speaking, the site, over time, will allow us to double the current capacity, but we won't scale up to that size initially. Well, obviously, you get flex with the length of your plasterboard line over time to increase should we need to. So key point, it's really future proofing the Wallboards operation here in New Zealand.

And just to be clear on that, Bevan, that's a replacement that you're doing for Felix Street. Is that what we're referring?

That's exactly right, Simon. So Felix Street is...

Is that land -- is Felix Street owned? Is that...

No. We leased the land at Felix Street. That's right.

Okay. Great. That's really helpful. Just another quick one, if I can. Sorry, I've been bombarded with concerns about Northern Express. The consortium on the PPP for -- with all claims of, I don't know, liquefaction of ground work and all sorts of stuff and expectations, there's going to be some kind of disaster. There's nothing in any of the statements I've seen and probably for good reason. Can you just give me some help with a bit of an update on that project? If there are issues or what I need to know about it?