Fletcher Building Limited (FBU) Earnings Call Transcript & Summary

Thank you for standing by. And welcome to the Fletcher Building Analyst Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Ross Taylor, Fletcher Building CEO. Please go ahead.

Thank you, Taylor. Good morning, everyone. And welcome, and thanks for joining us today for an update on FY '20 trading. Our Group CFO, Bevan McKenzie, is also on the call, and he'll be available to take questions with me after I finish the presentation. During today's call, I'll provide an overview of how COVID-19 has impacted our businesses and how we've managed these impacts to date. I'll then turn to the market outlook and the actions we are taking to ensure the business is well positioned to weather what will be a serious market downturn. Unfortunately, this will lead to a significant reduction in our workforce across all areas of our businesses. And through the presentation, I'll provide both the context and the details around this and what we'll be doing to support our people through these very tough times. Through the call, I'll be referring to the presentation that we issued today with our announcements. On Slide 3, we're trying to show visually the impacts COVID-19 has had on our operations. In New Zealand, we saw little operational impact until the full shutdown in late March. From then, the impacts were significant. We've had to work through the shutdown and then subsequent ramp-up of the majority of our New Zealand businesses. It's worth calling out how well our teams managed this from a safety point of view but it was no small feat doing this across over 400 locations. Right now, we continue to suffer from some productivity losses as we incorporate social distancing and contact tracing into our day-to-day operational disciplines. In Australia, operations have continued but have impacted some areas by the necessary social distancing and other safety requirements that we've needed to implement. Our trading was tracking to plan and guidance ahead of the COVID-19 outbreak, but on Slide 4, we summarize the impacts on our business since then. In New Zealand, we recorded 0 revenue for the majority of our businesses in April. And so far in May, our overall revenues are currently tracking around 80% of our pre-COVID budget levels. We've also seen some major future construction projects that we are working on stopped. In Australia, revenues have been tracking on average at around 90% of our pre-COVID budget levels. And pleasingly, debtor collections, which we're monitoring closely, have been tracking normally both in New Zealand and Australia. Against this backdrop, Slide 5 summarizes the immediate actions we have taken to reduce costs and preserve liquidity and cash. From a cash perspective, we've canceled interim dividend, suspended the on-market share buyback, reduced our planned FY '20 CapEx by $60 million and increased our focus on ensuring strong working capital management. I stress through this that we have and will continue to meet our creditor payments as per our normal obligations and terms. We've also implemented significant cost reductions over the last couple of months. And these have included our New Zealand employees moving onto our Bridging Pay Programme, and this importantly was supported by the New Zealand government wage subsidy. We achieved reductions across most of our New Zealand operating costs. We implemented salary reductions across the board and the executive team and made the decision to pay no FY '20 bonuses across the business. Despite these actions, we've incurred a material impact to our fourth quarter earnings, which are outlined on Slide 6. In April, we incurred a $55 million EBIT loss in New Zealand, but this was materially better than the usual New Zealand monthly cash burn of around $100 million and was a direct result of the swift cost reduction measures we put in place. Meanwhile, in Australia, operating profits were around breakeven due to lower trading levels we experienced. Unfortunately, this performance in the fourth quarter will have a material impact on our overall earnings results of the year, and it's usually our strongest quarter. There are no changes to provisions on Construction legacy projects, but we do need to work through the impacts from project delays in the lockdown period and ongoing productivity risks since we've restarted these projects. We'll update these in our August results. Working capital and cash flows have been strong, and we saw positive free cash flow across the group through April. On Slide 7, we present our balance sheet, which remains in a solid position. Net debt at the end of April was around $650 million, and our leverage ratio of 0.8x remains below the bottom end of our target range. Liquidity is strong at $1.5 billion at the end of April, with almost $1 billion of cash on hand and undrawn credit of around $0.5 billion. And our debt is reasonably long-dated with an average maturity of approximately 4 years. Turning now to Slide 8, I want to move my focus on to the outlook. Firstly, Fletcher Building's revenue is closely aligned with the overall sector activity, with around half of our revenue exposed to the residential sector and the balance exposed to infrastructure and commercial sectors. Our earnings, however, are weighted a bit more to the residential sector. Overall, the building and construction markets are generally aligned to broader economic activity, and it's clear from both government and external forecasters that we're heading into a very tough and extended downturn in activity which will translate directly into the building sector. The residential part of the sector tends to be hit earlier in the cycle; commercial, a bit later; and infrastructure will be directly influenced by government spending levels. While the depth and duration of the downturn remain uncertain, it is critical that we now plan and ready ourselves for a realistic market outlook. Slide 9 shows what we're now planning for in the New Zealand markets through the coming financial year: a 30% downturn in residential activity, a 10% (sic) [ 15% ] downturn in commercial activity, a 15% (sic) [ 10% ] downturn in infrastructure activity. And this, as importantly as we think about the sizing of our business today, is what we assume will happen in FY '22; and that is that the residential market will stabilize at around 23,000 consents per annum and then we'll see the benefits of the government's announced infrastructure spend program start to drive real growth in the sector. Now turning to the Australian market outlook on Slide 10. Here we're assuming the outlook for this market is a further 16% downturn in residential to around 129,000 consents per annum and then for it to stabilize at these levels, the commercial work put in place to decline about 15% and then to also stabilize at these levels, and for a slight contraction in infrastructure in FY '21 and then for it to grow in the following year. I'll make the point that we're basing these assumptions on trying to make sense of numerous forecasts with quite different outlooks and scenarios. As such, we will stay very vigilant on what we're seeing in the market and how these forecasts evolve, and we'll make sure we're ready to further react if these assumptions prove to be wrong. Against this backdrop, it's been critical that we quickly reset our business to be both resilient and successful into the future. Slide 11 provides a summary of the approach we are taking. We will look at operating efficiencies and cost savings across every area of our business. We'll ensure we reduce spend that is no longer sustainable against the new market reality. We'll maintain our focus on cash and CapEx, reducing our planned annual CapEx to around $150 million per annum. I do note that we'll continue with the new Winstone Wallboards plant, which will account for a further $50 million of CapEx above this in FY '21. And we'll unfortunately have to reduce our workforce, and I'll cover this in more detail on the next slide. All this will achieve both cost benefits but incur one-off restructuring costs, and we'll provide details of this in our August results update. On Slide 12, I want to talk about our people. Despite the plans we have to reduce our non-people costs, we will not be able to support the same-sized workforce in a market that's going to contract by around 20%-plus on average. As such, we'll be forced to reduce our workforce by approximately 10%. In New Zealand, this means a workforce reduction of approximately 1,000 roles and in Australia a workforce reduction of approximately 500 roles. We'll be commencing a consultation progress -- process with our people in the coming weeks. In doing this, we recognize we'll have a large impact on many people, and as such, we're putting in place a number of things to ensure we provide as much support as we can. We'll ensure no one leaves the business with less than 4 weeks' redundancy even if their contract explicitly excludes this. We'll provide support to help people find a new job, including CV-writing courses, job search advice and tools and other outplacement services. And importantly, we'll provide various types of support around health and well-being. As tough as that backdrop is, these actions will ensure Fletcher Building remains a strong company in the future and a solid employer of around 9,000 New Zealanders and 4,000 Australians. On Slide 13, I'll make the following summary comments. We've moved quickly to reposition the business for the new market reality, but that said, it remains an uncertain world and we'll continue to closely monitor our market activity as the year progresses. And finally, these moves will ensure Fletcher Building remains strongly positioned and we'll be able to continue to pursue our leadership aspirations across New Zealand and Australia in building products and distribution. That concludes my presentation. I'd now like to hand back to the moderator to allow us to take questions. Thank you.

[Operator Instructions] Your first question comes from Simon Thackray from Jefferies.

I just had a question about the level of subsidy, in the April loss, from the New Zealand government and presumably from the Australian government for JobKeeper that is reflected in the $55 million for April. That's the first part of the question. The second part is, can I confirm that -- at the end of both the 12-week subsidy for the New Zealand government assistance and presumably for the end of the JobKeeper assistance on September 28, that the total help or assistance that you've got from the governments is in the payroll or estimated to be.

Yes, sure. Look, I think I can answer both ones. So the total subsidy we got from New Zealand government is around about NZD 68 million. We've got no subsidy assistance from the Australian government. We didn't qualify. Then effectively in the $55 million loss is 1/3. And so basically, it's divided over 3 months. So 1/3 of that $68 million is what was applied in the April number.

Okay. That's helpful, Ross. And then just in terms of...

And just jump in if I'm giving this wrong.

Just in terms of Australia, the comment of -- I was just not much surprised but just wanted to sort of unpack the Australian business running at 90%. And your comment specifically called out Rocla and Iplex but a break-even result. Just there's a few moving parts there. I would have thought trading, being sort of more essential, probably held up better. Plus you had your own initiatives running there. So could you help us understand how it arrived at a break-even result in terms of the moving parts in Australia?

Yes. Look, we're not -- look, I'm not going to get into detail blow by blow. The thing I would say though is that you're right. Different businesses have different impacts. And I'd argue the malaise, for want of a better word, in Rocla and Iplex got worse, just on the projects didn't manifest because of that. It got tougher, harder. And then -- but we did see a general drop in volumes across different businesses. So that combination led to that outcome. And we'll obviously be more explicit when we get to August.

Okay. That's fine. And then just finally, maybe one for both of you in terms of the impairment risks for -- or given the outlook, the impairment risks, if there are, across the portfolio.

Yes. We're not talking to that right now. And then as I said, we -- if we thought there was an impairment issue as we are sitting here today, we'd be forced to disclose on anyway, giving this disclosure but -- so we will update it fully in August, but yes [indiscernible] we have an impairment, we'll be talking about it today.

Okay. Yes. That's helpful. And then finally, you mentioned some commercial projects in New Zealand that had stopped. Can you sort of walk us through the [indiscernible?]

I -- the one that has been -- the one that impacted us, we were working on the domestic jet terminal with Auckland Airport. That was a major project over multi years. So obviously, Auckland Airport has been very badly hit and they've put on -- they stopped all their major projects and just doing maintenance work now on certain areas. So that was the major one I was talking to.

Your next question comes from Andrew Scott from Morgan Stanley.

Just first off, can I just be clear? With the reductions you're making, do you anticipate exiting any recent businesses? Or is it just rightsizing all your operations?

Rightsizing. I mean the only business that we flagged we're going to exit is Rocla. So nothing, no new news on that front. It's just rightsizing.

Okay. And secondly, if I can just drill down into these forecasts you've given. It's a period when most companies do not -- are avoiding giving guidance for the period end of June. It's kind of surprising to hear a company put out a housing start forecast for 14 months forward. Can you just talk about how you've come out and what they're based on and the level of confidence and some assumptions around those?

Yes. Look, I mean I get what you're saying, but when you're making a workforce -- when you're doing the reductions we're doing, I mean we have to, for credibility, talk to our people and commentators and explain why we're doing what we're doing. So I think that it's quite important to try and provide some sense of where we saw the market going and therefore why we needed to make these decisions. So that was the logic of it. I wasn't particularly looking to go out and forecast other than most sorts of reasons. And so then if I look at the forecast, I mean there's a lot of different forecasts out there right now, and so we've tried to look at those and say what do we think is a reasonable scenario for us to base our expectations on. And as you know, I mean at best, it's a scenario -- I mean we're trying to make the pragmatic choice. So the reason we're putting it out there was to explain the context on how we're thinking about it. It wasn't to suggest that we've got any particular insight. We just don't know. So that was the context. And what I would say through that is that we're going to watch it really closely. Hopefully, we've got it about right, but if we haven't, then we'll have to react to it in the future. So that was the context of it. So I hope that makes sense.

Yes. And then just finally. I assume it was intentional but conspicuous in its absence. Is there any quantification of the costs to execute these and the potential benefits? I assume you're avoiding discussing that at this stage, but when do you think you're in a place to talk about that?

Yes. So we're not talking about it at this stage. We just want to work through it. And there's a couple of reasons for that, when's the appropriate time, but equally, we're only just back in New Zealand trading and we don't really know where the market is selling. So there's a whole bunch of information. We just need to see it settle and we need to get through it. So we're leaving that to the August results. I mean we should have a better fix on what the market is doing. It won't be precise but at least we'll have traded from May through to then anyway and then we'll be through a lot of the stuff, so we'll be able to talk a lot more comprehensively in August.

Your next question comes from Stephen Hudson from Macquarie Securities.

Just a couple of quick ones for me. Just Bevan, just on the balance sheet, I just wondered if you can confirm that the net debt number that you've got there to April is equivalent to the sort of $766 million number that you disclosed for December. So in other words, the -- I think it's the economic net debt, as you refer to it. Also, can you give us a -- just a feel for the fact that you've moved your cash position from sort of $570 million to $970 million. Is that just providing a buffer for what's to come? Or so has there been a particular reason why there was such a big drawdown there on your undrawn facilities? And then just a couple for Ross, I suppose. Ross, just interested in the lags that you're expecting between the sort of forecast that you've put out there. I realize that there are probably more scenarios -- stress test scenarios rather, than maybe a central case, but I suppose I'd be interested in what you think the lag between the volumes there are and the sales and also if there are in fact a sort of a -- more of a stress test worst case or a central case.

Yes. I'll let Bevan start.

Stephen, so the $650 million that we've guided, that's economic debt. And you'll see, in the different debt from the half year, the number. The equivalent number there was $652 million. So basically, net debt from 31 December to 30 April has been flat. And that's, as Ross mentioned earlier, partly due to the positive free cash flow that we had in April principally due to working capital unwind as the debtor balances came down. And we've also flagged we expect that obviously to go back up a bit in May now that we've started trading again. And then on the large cash balance. Ahead of the lockdown, we drew down, as you'll see in the syndicate numbers, $400 million of the syndicate facility. That was in an abundance of caution to make sure that we were highly liquid through what was looking like a challenging period. We already had obviously a decent cash balance, and then that's grown through to April with that positive free cash, but we've consistently said we're going to be conservative around balance sheet and liquidity. And the cash numbers you see are a reflection of that.

And then just jumping in. And then you can come back with your rebuttal last, Stephen. Just on the lags, I sort of mentioned it, I mean. So firstly, how do I think about these? I think these are -- they're sort of -- the forecasts, which are out there, are realistic but they are a scenario. No one knows exactly what this is going to look like. No one really knows how COVID goes as the governments pull back on sort of the requirements and free things up. So it'd be very dangerous to say these are rock-solid because they're just not. But I do think they represent a plausible case. And then we're just trying to work through the various forecasts that we're seeing and some of the sort of backdrop in each of these sectors and come up with what we think is a pragmatic view of where it's going to go. Certainly, you can imagine the downside. You can imagine it being better but -- yes. That's the context of them. It was just something for us to start thinking about how we need to position our business. And as I said, putting these out there was really because, given what we're doing to the workforce and in terms of sizing, it was really important to be able to talk to this so we could actually put the context and the logic around it. The -- in terms of lags, I mean what I think we'll see is the residential lag is pretty fast. And a lot of our residential exposure is either into single or smaller multi-dwelling houses as opposed to big apartments, so -- which might have a bit more of a lag. So the feedback loop and the build time is usually 3 to 6 months maximum. So I think you'll see quite a quick feedback in residential, which will probably start manifesting itself quite palpably whatever level it's going to go to in the next 2 to 3 months across both sides. And obviously, alterations and additions, I mean once we come out of lockdown and everyone have done their quick refurbishments and the reality of unemployment comes through, I think we'll see that get pushed on as well quite quickly in the next 2 to 3 months as well. On commercial, bigger projects generally, and therefore, there's a bit more of a lag. So you'd expect to see, I don't know, a 6-month lag. And really it will come down to us now. We -- because we're already moving out of that activity in Construction, for instance, it will be the projects we're finishing. And there will still be a potential couple but that will be a pretty hard market. And in infrastructure, I'm actually more positive both sides of the Tasman on that simply because it might ease a bit just while projects get through to both governments. And the states in Australia will have the infrastructure spend programs, which I think is the logical place for government spend, and I expect that to look pretty buoyant. The macro issue for us is that's only 25% of the overall market. So -- and 50% of what happens is resi. So that's the one that we've got to, yes, understand and watch.

That's useful. Ross, just if I throw one final one on [ COV ]. You talked to the more legacy provisions being unchanged. I think the New Zealand government had talked to the pandemic qualifying as a basis for a valid variation across government agency contracts. Is that your expectation across your fixed-price book?

That's pretty correct at an overall level because it becomes a force -- whether they're government or -- but there are some nuances in some of the contracts and some of them don't work exactly that way. So what we're -- and you get different clients who behave differently, of course. Not everyone behaves the same way. So what we're just doing right now is working through that. So I think generally, it will be a force majeure issue, for want of a better word. And generally, we'll be able to claim costs for it, but we just need to land that before we make any more comments. But that won't apply everywhere, but it will probably be 90% of the answer.

[Operator Instructions] Your next question comes from Lee Power from CLSA.

Can you maybe just give us an idea of how long you think the resetting process is actually going to take?

Yes, sure. Look, the -- we will get the majority of it implemented between June -- before June 30. And that's not a -- I'm not forcing a date. It just so happens that the tempo will -- the next 6 to 8 weeks, we'll get most of it done. It will be my guess. And I don't really know the exact percentage of -- but, call it, 80% done by then on -- give or take. But as I said, we'll be very precise about it in August, but a lot of it will get done pre-June 30.

Okay. And then does any of this change anything around the timing with the new Wallboards plant or [ feeling strength ] for that matter?

That's it. So we've looked hard at it and we need to continue with it, but it will be probably about 6 months delayed simply because of the impact COVID will have on what's happening there. So -- but yes -- but we just wanted to flag we're going to continue with that expenditure, as we talked about our CapEx, but it will be 6 months later.

Your next question comes from Matt Henry from Forsyth Barr.

Well, I appreciate it's really a lockdown and I appreciate there's a lot of uncertainty around the outlook, but I just wondered if -- can you give us any sort of color or updates about what you're seeing in real time that may be helping to sort of frame your thinking? And specifically around the residential business given sort of view on what sort of interest levels you're at and, well at the moment, cancellations of commercial projects. I know you mentioned Auckland Airport, but anything else that you're sort of seeing at the moment to kind of give us a flavor of the outlook?

Look, I'll give you a few anecdotes, but I don't know. We will have to do with them right now because it is very early and we don't know what real looks like just yet in New Zealand. I mean obviously Australia hasn't shut down. So that's more just on a run rate, for want of a better word, but in New Zealand, if I -- what effectively occurred when we came back out of the shutdown is basically, as you can imagine, a lot of the trades or the group homebuilders effectively had committed projects. So when you look at what I call the macro market, there are the big projects. And effectively, all that just got going as people tried to get things finished and get back to work. So that's what sort of drove our volumes pretty much up to, as I said, the 80% level across the business pretty quickly. So -- and then if you look at -- we're only just getting back in, in Level 2 in New Zealand and the residential being able to actually have open houses, et cetera. So it's hard to gauge what that looks like just yet. We -- in terms of defaults, we had very [ strong lending ] in one. So there's been very little in the way of people wanting to pull out of contracts. So that's been pretty robust. The other thing we're very wary of, on another end, we weren't sure what -- whether we have a lot of, yes, people not paying bills, et cetera, but that's been surprisingly good to date. So we were very wary of getting a spread between creditor and debtor. Look, I mean we put a lot of focus on that. And as I said, it's been very robust. So that surprised me on the upside a little bit but -- and the reason I just -- I don't know what -- I mean there's nothing we're going to be making of it because until we get through what I call this hobbled stuff that have to get finished, we don't really have any sense of where it's going to settle for probably a month or 2 particularly -- we'll go start to get a sense of that as we get through the first quarter in the next financial year. I don't know, Bevan, whether you'd add to -- anything to that.

No. Probably the only other anecdote I'd give you, Matt, is as we've come out of lockdown and started to have sales, there has been activity in the market there. And I guess there's probably a bit of pent-up demand as people who wanted to buy houses were unable to do so during lockdown. So trading had started there again, but we're just echoing Ross' comments. This is going to take a little while to play out but probably a reasonably positive activity. And in May, it's just -- it's taking a while for customers and supply chains to ramp up, which is why we're at about 80%.

Your next question is a follow-up question from Simon Thackray from Jefferies.

Actually just following on from Matt's line of questioning, is it the right way to describe it, do you think, Ross and Bevan, that the pipeline of work for both New Zealand and Australia is actually pretty good and ramping up pretty well? We had this event where we got T-boned by COVID. We restart. We're playing catch-up on work that was already being done. But of course, during this period, there's been really the new work being approved or being put into the pipeline. Is it fair to describe what lies ahead as an air pocket in activity?

No. I mean I -- look, it's very sector dependent. Let me start with residential. I actually think it's inevitable that will -- once unemployment goes up, once immigration has the brakes on it because of border closures -- and we haven't seen the real unemployment numbers yet because the subsidy schemes in both sides of the Tasman are masking it a little bit, that reality is going to really impact consumer spending. And therefore, I think the residential softness and downturn is real and we will see that manifest itself. And what we don't know is to what extent. And as I said, we've had our best guess over here to sort of accomplish what we're doing. So I don't see any silver lining in that as I sit here. In terms of then the infrastructure sector, I do think the way you characterize it is correct because we know that there's large spend going on and a big spend planned. And therefore -- and they generally look real. So it will have a slight dip as the -- we transition from the projects from now and then start getting to that new volume, but I do think that will grow. And then I think the commercial vertical space, that will be supplemented there. Governments can spend money on hospitals and those sorts of things, but fundamentally, the issue is how many office buildings, how many hotels, et cetera, are going to be built in general, what I call the construction over the coming years. That has to soften as well, I think, in this environment. So I do think that also will come down and stay down for a period. So I think you've got 2 sectors there which have 75% roughly of the overall building market, which will -- I think will go down. And you've got the infrastructure bit, which is about 25-ish sort of percent. Both sides, I think, will grow. So that's how we'd look at it.

And Ross, you've been in that game for a very long time in terms of both commercial and residential construction and the overall employment as well. So you've got a good sense of how communities and office spaces bid. Are you sensing there is there going to be a structural change in commercial demand and the way commercial construction for office goes ahead in the future?

Look, I think there'll be some -- I mean I think COVID is going to accelerate a number of trends. So I think as unemployment washes through the economies, you'll need less space. That's -- and then as -- I think we've all learned that you can more effectively work remotely than you thought you could. I don't think they will do a lot of it, but I think that will sort of, again, ease office space demand a little bit. And we've seen that as we think through our own office footprint, some of the cost savings we're thinking about is -- we just don't think we'll need as much office space particularly as we go forward. And I think that will be a general theme, but I don't think it will remove the need for office space, but it certainly will accelerate some of those trends we've seen. And as we look at our business, I mean, and we think of that online similar trends in those as well across our Distribution businesses, they're just going to get accelerated. So we need to make sure we really pivot hard in some of those spaces for our own businesses' sake as well. So I do think some of these trends will go faster, and it's not lost on us and we're focused on it as we speak.

Your next question comes from Marcus Curley from UBS.

Ross, just a couple for me. Just for the short term, I take your comments around the trading in May and June across the core divisions, but as a group, would you expect the business to being EBIT positive in May and June?

Look, what we think -- if I talk to the quarter, it will probably be awash. By the time we lost money in April and then we trade at the sort of levels we are through May, June, [ circular wash ], call it, at that corner. I mean that's -- it's just difficult to say exactly where it lands because we need to trade, it sort of looks like, but that's sort of how I'm thinking.

Okay. And then -- and just looking into '21, given your comments around volumes, can you provide a little bit of color on what you think around margins? Obviously, cost savings offsetting some of the volume decline but, yes, to what extent do you think margins come under pressure next year for you?

Look, we're not guiding that the thematics will be that once volume start drops, obviously, pressures come on what you can sell stuff for. And then the only way you can preserve margin is get cost out so you can sort of reset to that level. So exactly where that lands and exactly -- we will talk a bit more approximately about it in August, but fundamentally the reason we're pulling this lever is to get our business rightsized as best we can for the volumes we see going forward. And how far we can get with that, we'll update in August, but certainly, I think you'll see, call it, margin pressure on what you can sell stuff for. We think both ways will occur, and we've got to be ready for that.

There are no further questions at this time. I will now hand back to Mr. Taylor for closing remarks.

Look, thanks for joining us, and I hope you found this informative. And as I said, I think the thing I'd leave you with is that I think we're focused on what we think will happen. And I think it's quite important because we do need to start positioning the business for that, but we'll have to watch it closely because this is not a precise science and it's not a precise world out there right now. So we will stay vigilant. And as I said, we'll be back in August with a much more fulsome update, and we'll have some better perspectives on market then and also be able to be a lot more definitive around just what the cause and effect of these interventions were, but thank you for joining today.