Fletcher Building Limited (FBU) Earnings Call Transcript & Summary

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

Thanks, Amanda. Personally, thanks, everyone, for joining us today for an update on year-to-date trading for the first 4 months of FY '21. We're doing this update to provide some details on how our business is performing against the uncertainty and backdrop of COVID-19 has brought to our markets. Our group CFO, Bevan McKenzie, is also on the call, and he will be available to take questions with me at the end. I don't plan to go through a formal presentation today as the key information is contained in today's stock exchange release. Now before we go into Q&A, I'll recap on the main points in this morning's announcement. The trading conditions for the group in the first 4 months of FY '21 have proved resilient, and this has been particularly the case in the New Zealand residential sector. And as a result, the volumes and revenues in our New Zealand core businesses are tracking slightly ahead of last year. We've also continued to see good levels of house sales in our Fletcher Living business. This has been driven by good demand from both first-hand buyers and investors. In Australia, the market in the first 4 months has been slightly down overall, though there has been some variability by state and sector. We've seen an impact in Victoria from the COVID restrictions, though trading is beginning to improve as these restrictions ease. And the civil sector across Australia has continued to be slow as it was in the second half of last financial year. That said, when you look across the whole group, revenues for the first 4 months of FY '21 are up 1% compared to the same period last year. On the operational front, we continue to see benefits flow through to the bottom line from the performance improvement work we've been implementing across the businesses over the past 2 years. This is visible in the improved EBIT margins, which were up by 2.9 percentage points to 8.4% overall for the group. The combined effect of the resilient trading conditions and the operational improvements has resulted in group EBIT of $227 million in the first 4 months. This is up $80 million on the same period last year. As you look at the drivers of this year-on-year improvement in earnings, we summarize it in rough terms as follows. Around 10% is due to the slightly higher year-on-year revenues. It's worth noting that the higher revenues were predominantly driven by stronger house sales at Fletcher Living in the first 4 months. And this level of sales would ease for the rest of the year as we work to replenish stock. And the balance of the improvement of around 90% is due to the operating efficiency and cost reductions we are delivering. In terms of cash flows and balance sheet, these remained strong, with net debt at $388 million and the available liquidity of $1.4 billion as at 31st of October. As we look ahead, our customers are pointing to trading volumes staying at current levels at least through to the end of this calendar year. However, the second half of the financial year continues to remain uncertain with the impact of the broader macroeconomic factors in our markets -- in markets -- in New Zealand and Australia are not yet clear. Therefore, what you're going to expect at the ASM is we'll be guiding through our expectations for half year earnings rather than the full year. We will, of course, provide further updates on trading conditions at the half year results in February. Finally, I'd like to say thank you to all of our Fletcher Building employees who have been superb through all the disruption and uncertainty of the past year. They have adapted and responded brilliantly, maintaining a real focus on delivering to our customers. That completes the key points I wanted to highlight, and we're happy to take questions now. As we do, I just want to note that this is not a half or full year results release. So we don't intend to get into the same more of detail as we would at those announcements. With that, I'll hand back to the moderator.

[Operator Instructions] Your first question comes from Rohan Koreman-Smit from Forsyth Barr.

Congratulations on solid start to the year. Just a few quick ones for me. Firstly, you say that finishing trades are doing well. Are you able to provide any color on, I guess, the early trades in the kind of frame and truss orders?

Yes. So that's -- let me look at just saying things look positive to the end of the year. What we can see and what we can guide is particularly that. So we look at what do we -- where do we get visibility. And we see strong frame and truss orders. We're basically booked up to more or less capacity through the end of the year. And then ahead of that, what we look at is just what estimates are we doing on those sorts of bids. So they look pretty solid as well. So we sort of get -- it feels like good till the end of the year and probably okay at the beginning of the year, but that's about as far as we can go. So -- but yes, so activity looks robust. So we're not seeing any degradation or anything. But we just don't know past that because we don't have any, really, lead indicators much past that.

Perfect. And then just on the cost-out program. You said at the full year reset cost base for significantly larger falls in volumes than we've seen. My understanding was that part of that was a cyclical reduction in costs. Just wondering, given volumes are much better, can you give us an indication of how much costs may need to come back in? Or how much of that cost-out will stick?

Look, roughly at 50 -- the trend really is 50% variable, 50% fixed. So broadly about 50% fixed is sticking. And the variable, we're getting a bit old because we haven't got to ramp that up completely all the way through. And then what you -- when you look at our sort of what's going to the bottom line now, it's really just where volumes and how much are we seeing on volumes. And as I mentioned in my introduction, what we're seeing is that we've had a very strong start with residential. And we just can't maintain that level because we've got to replenish the stock now. So what you'll see is there will be a little bit of a headwind against that sort of the 90% of the improvements or 90% of the 80s coming from those operational efficiencies. Some of it will get chewed up as that resi comes off a little bit in the year, but broadly, that's what's dropping through to the bottom line. I don't know, Bevan, whether you'd add anything to that?

No, that's spot on. We said at the full year the gross $300 million of cost was fit for market materially lower. And obviously, with the market where it's at, you're not getting the variable cost benefits. But on the flip side, you've got a good market to be operating in. But we're very confident that, that roughly $150 million of fixed costs that we were targeting for the full year, you can certainly see that flowing through to the bottom line.

Perfect. And final one on the Residential division. I guess, one, how much of the 342 settlements in the first 4 months were actual delayed settlements that couldn't happen during lockdown? And then second, given what's happening to house prices here in New Zealand, should we be expecting margin improvement maybe this year or the next given it probably feels like you're getting a better pricing power?

So roughly about half, and Bevan will probably give you the actual number on what was carried from last year on the 342 was carried over. And that's a feature of mostly everything we settle in May, mid-May to June. We don't take to profit until we actually -- everything we get a sales agreement, it doesn't go unconditional for 6 to 8 weeks generally. So that's why they fall in the following year. We are seeing a little bit of margin, probably about 100 basis points as we track through this year in the houses. And it depends where that then goes. I mean to see how the supply demand pans out as we get into the next year. But certainly, if you look at this stage really robust on the opportunity there. Bevan, do you have the actual number of what we carried forward?

It was just over half of what we've delivered year-to-date was from those conditional sales in May and June, which settled in July and August, high 100s were from that period.

Your next question comes from Grant Swanepoel from Jarden.

Three sections, just on construction. That seems to be the only one that looks a little weak. Don't get me wrong. I'm not picking holes in your update. Can you just talk through, are you guys still on track for over $1 billion of revenue in that vertical with 3% margins? What's happened to Higgins in the first quarter? And that last year, I understand why it was so wet. This year, not so much. So we should have seen a bit more from Higgins. Can you talk through that a little bit? And then next one is on steel. Some rebound there. Can you talk to what the rebound components were? Is it stock write-backs? Is it cost-out or revenue growth? And then finally, on the dividend. I understand you guys are nervous about the final quarter of the year. But if 1H does come in anywhere close to $300 million, would you then consider not bothering with your covenant relief and actually paying a 1H dividend?

All right. Let me just quickly get through those. So the first one on construction and order book, what we are pointing to on the 3% to 5% margins with the new work on, we still don't begin to have a ramp of legacy work circa $600 million was at the full year to get through of which circa $300-ish million will go through the [ blended ] margin. So you just sort of remember, it still continue to be a blended margin situation in construction. If I look at the performance of the first 4 months, that was always what we were expecting. It was just a combination of the timing of what some of the other businesses were doing versus what throughput look like. So -- and we have a very -- we're now into the summer season, and Higgins particularly has a very strong [ voluntary ] season to go through the next 4 to 5 months of [indiscernible] So no alarm bells there. That's just purely caught up in the timing. On steel, just to give you a sense, our profit for the first 4 months was $14 million. We haven't tried and work around it. And that's actually not coming from any stock we churn through. We haven't got very large inventories. So that's actually coming in through performance across the business in terms of both volumes and profitability and what we're selling. So that business, after all the indigestion that gave us over the last 18 months, is -- it feels like it's sort of through that now, and it's going to perform at a reasonable rate. And then on dividend, look, you've pointed out the issue. I mean I think with the way the markets are uncertain, it will be a decision to the Board to make on the half year. And do we get up that covenant relief? No. My expectation is we wouldn't, given just what the backdrop is. But that's a Board decision for the half year. And if I look at it, that issue disappears once we get through to the end of the financial year because we get -- it's a rolling 12-month there. So certainly, there's no covenant issues that would restrict us looking at a full year dividend, and that could be clearly supporting over the whole year. So that would be my way of answering that, Grant. Obviously, that's a Board decision.

Your next question comes from Stephen Hudson from Macquarie Securities.

Just a couple of quick ones for me. I just wondered if you could characterize the $150 million of fixed costs that you talked about that. And just give us a flavor for what the main buckets are there. Secondly, just on Rocla, could you maybe, Ross, give us an update on the process there? And also whether or not we might start to think about other asset sales going forward in the next 12 months? And then just thirdly, there's quite a lot of movement around provisions. Last financial year, I think you had a $33 million inventory write-down and for the $60-odd million of restructuring provisions. I just wondered if you could give us a feel for whether or not we saw any movements above the line in respect of those 2 amounts.

I'll just deal with Rocla, and Bevan answers the other 2 ones. So look, there's nothing to update on Rocla. As soon as we do, we will. But the sale process is, there's 2 parts to it, how we're dealing with the land from the assets and how we're dealing with the actual businesses. That process is running. It's going well. So as soon as we get to a point where there's, trying to say, we will decide, not now, but over the coming months, I'd expect to be talking to that. And no, there are no other further asset sales envisaged as we sit here today. So I'll just pass to Bevan to talk to the other 2 parts.

Stephen, on your final question though, there's nothing -- there's no provision relief that has gone above the line. It's a pure trading result that you're seeing in the $227 million. And then on the fixed cost, as Ross said, the total cost-out benefit we've seen in the first 4 months is about $70 million. And the split of that between SG&A and COGS is about 80% SG&A and 20% COGS. And that would make sense given the COGS benefits we were pointing to at the full year were mainly variable cost benefits, which given where the market is, as you've seen, less off. So there's been really good work done across the business in getting the underlying fixed cost base business, the SG&A costs, where we want it to be. So that's how I would characterize it.

Just one follow-up, and that's useful. On the $33 million of inventory write-down, is it safe to assume that a large chunk of that was steel and that would have actually benefited as of third Q and the second half of '20 would have benefited you in the first half of '21?

The way I characterize it, Stephen, is we got that where we needed to be given where steel prices were. I think it was a reasonable portion of it in the steel business, not solely. And that just means that we were entering the year with inventory values appropriately vis-à-vis global steel prices. And so we've ended the year with no baggage. That's the best way to think about it for the steel business. And then as Ross said, we're just seeing really good underlying performance, particularly out of [ EZ steel and PTC ], which will has a bigger image in that business with good margin management and obviously, competent volumes in the New Zealand market for the first half of the year.

[Operator Instructions] Your next question comes from Marcus Curley from UBS.

Just one question for me. I just wondered if you can provide, you have any comments if relevant to what sits below the trading results. Obviously, previous years, we've had some pretty big one-offs. I know that there's restructuring costs that you have already been announced for this year. But anything else over and above that? Anything to say on the legacy projects on that topic as well?

So there's nothing that sits below that, apart from what we talked about at the full year results in terms of the portion of what we've booked as the guidance for the full year that flows this year. And then other construction projects are progressing. And there's no new news on those legacy projects. They're all running.