Fletcher Building Limited (FBU) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Fletcher Building Full Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Ross Taylor, Chief Executive Officer. Please go ahead.

Thank you, Rachel. Good morning, everyone, and welcome to the presentation of our full year results for the 12 months ended 30 June 2021. I'll start today's agenda on Slide 3 of our results presentation pack. Building on the way we approached our recent Investor Day presentations, myself and our group CFO, Bevan McKenzie, will be providing the group overview. And then each of the divisional chief executives will be providing a short summary of their division's performance through the year. And after a short sum-up for me at the end, all of us will be available for Q&A. Turning to Slide 4 and a short summary of FY '21. Market activity across New Zealand and Australia was pleasingly robust through the year. And our businesses largely enjoyed a more normal trading environment with only minor impacts from COVID-19 disruptions. We're now 3 years into our reset strategy for Fletcher Building. And it's pleasing to see the momentum and clear progress that is driving the delivery of both financial and operational performance improvements. This is flowing through to solid margins, earnings and cash flows and, ultimately, our strong balance sheet position. Against this backdrop, the Board has declared a final dividend of $0.18 per share. And as you'll be aware, we have a share buyback program, which is currently underway. Looking ahead, we continue to see a positive market backdrop and, against this, believe we can build on our present momentum and drive further performance and growth improvements into the future. Moving to Slide 5. And before I get into the detail, you'll see in many slides through the presentation today that we've provided 3 years of comparison numbers. We've done this as we felt the FY '19 year was a more meaningful comparator year than FY '20 as the FY '20 year was significantly impacted by COVID restrictions on our business, particularly in New Zealand. Group revenue for the year was $8.1 billion. In New Zealand, our exposure to the strong residential market had a positive impact. And in Australia, the effects of a slower commercial and civil market was a slight headwind. EBIT before significant items was $669 million, an improvement of 12% compared to FY '19. And our group EBIT profit margins also improved materially to 8.2%. Finally, on this slide, our returns on funds was up strongly to 18.6%. Slide 6 shows our very strong performance across all dimensions of cash management through FY '21. This resulted in group free cash flow in the period, excluding legacy construction projects, of $652 million and trading cash flow of $929 million. I'd note, however, that we expect cash flows to be lower next year as we replenish our housing stock in the Residential and Development business and inventories generally. Net debt levels at the end of the year were $173 million, and we had $1.6 billion of liquidity. This continues to leave us with a very strong balance sheet position. On Slide 7, we show that net earnings for the year were $305 million. This was impacted by $128 million of significant items. These relate to the last phase of our restructuring costs and the final Rocla impairment. Just after year-end, we are pleased to reach an agreement to sell Rocla for AUD 55 million. Earnings per share and pre significant items, which is the basis upon which we pay our dividend, increased to just over $0.50 per share. Against this backdrop, the Board has declared a final dividend of $0.18 per share to be paid in September. This brings the total dividend for this financial year to $0.30 per share. Continuing with capital returns. We started our share buyback program of up to $300 million in June 2021. And so far, we have purchased and canceled just over 3 million shares for $24 million. On Slide 8 and 9, I outlined some of our key nonfinancial metrics, starting with our safety performance on the top half of Slide 8. Through the year, we made good progress on safety, with 85% of our sites being injury-free through the full year and our overall injury rate dropping to just under 5. It's worth pointing out that this is our lowest level ever. We also conducted many hours of development and training across all levels of our business. This line manager-led training has had the aim of both lifting the skills and changing the culture of our organization. This will be ongoing and should allow us to continue to improve and drive towards our goal of ensuring all our people go home safely every day. Moving to our people more broadly and looking at the bottom half of Slide 8. It was disappointing to see engagement levels decline since FY '19. This was in the context of a very tough period for our teams that included the restructuring program as well as dealing with the complexity arising from the ongoing COVID-19 lockdowns. Having navigated this difficult period, we are very focused on investing in our people and in raising engagement levels across the business in the future. Moving to sustainability on the top half of Slide 9. We continue to make good progress towards our 30% by 2030 carbon emissions reduction goal, with our sustainable carbon emissions now running at 5% below our 2018 levels. Projects are ongoing that will drive this down in future years. And to this end, we completed both solar projects across various facilities and our cement plant waste tire projects through the year. We also continue to improve on our waste recycling and, through the year, diverted 46% of our waste from landfill. On the bottom half of the slide, you can see that our customer Net Promoter Score increased slightly to 41 through the year. This increase was achieved despite a range of service disruptions due to the COVID pandemic and general supply chain constraints. And while this movement is in the right direction, ongoing investments in technology and data will further enhance our customer service proposition, strengthen relationships and help us focus on the areas that they value most. I'll now hand over to Bevan who will take you through the details of our financial results for the year.

Thanks, Ross, and good morning, everyone. Turning first to Slide 11, we show the group income statement for the past 3 years. Ross has talked to the key drivers of improvement in the group's operating earnings, so there's just 2 additional points to highlight here. Firstly, funding costs of $44 million in FY '21 have continued to track down materially from the prior years, resulting from a sustained reduction of gross debt levels and, in particular, the early exit of our USPP debt in July 2020. Secondly, tax expense for FY '21 was $116 million. And our effective tax rate, excluding the impact of significant items, was 24%. Going forward, we continue to expect the effective tax rate to track back to around 29%. We also expect to resume cash tax payments with respect to the New Zealand businesses in the second half of calendar 2022. Turning to Slide 12, we summarize the benefit we're seeing from the group's efficiency programs over the past 3 years. This program has delivered more than $250 million of gross cost savings, principally in the area of fixed costs in our core divisions. It has been the key driver of the 100 basis points improvement in margins achieved by the group since FY '19. We consider that our fixed cost base is now broadly rightsized. And while we will continue to look for efficiency, our focus now is on pursuing targeted top line growth so that we can drive operating leverage off this base. We continue to target EBIT margins of around 10% in FY '23. Slide 13 shows the significant items cost for the year. The top table shows the P&L charges and the lower table shows the cash impact. Restructuring costs relate to the final phase of the group's restructuring program, mainly in the Australia division. These costs and associated cash flows have both been lower than forecast at the outset to FY '21, mainly due to the improved market environment. On Rocla, our sale agreement was signed in July to divest the business to CPE Capital for AUD 55 million. As flagged at the Investor Day in May, this has resulted in an additional noncash impairment to the business. Completion of the transaction is targeted for the end of August, with the final working capital washup later in the first half of FY '22. Reclassification of the foreign currency translation reserve will also take place in the first half of FY '22 and is expected to result in a noncash significant item charge of around $35 million to $40 million. Moving to Slide 14, we provide the detail on the group cash flow performance for the year. As shown in the middle of the table in the highlighted line, trading cash flows, excluding legacy projects and significant items, were very strong at $929 million. This was driven by a combination of good operating earnings as well as positive working capital cash flows, which I'll provide more detail on in the next slide. Further down the table here, which shows the cash outflows on the legacy construction projects in FY '21 were $104 million. Our forecast for remaining cash flows on these projects has not changed. These are expected to be around $70 million over the next 3 years and relate mainly to the completion of the International Convention Centre. Turning to Slide 15. We continue to see good discipline and management of working capital across the business, which has supported the cash flow result. In FY '21, as Ross has mentioned, we've also ended the year with lower-than-normal inventory positions in our residential housing and New Zealand manufacturing businesses. This has been due to a combination of good market demand levels and also supply chain constraints, which have limited stock build in some businesses. This impact can be seen particularly in the top table on Page 15 with the $105 million working capital inflow for Residential and Development. This division's fund ended the year 12% lower at $534 million and we expect its funds to lift by around $200 million in FY '22 as we rebuild stock levels and continue to scale the business. The other point to note on the top table is that in the Construction business, there was a working capital outflow of $72 million in the year, which was due to an unwind of prepayment positions on some key projects. Shifting to the lower table, this shows the working capital efficiency metrics for the Materials and Distribution divisions. Inventory improved by around 4 days in FY '21, which is around 2 days more than we would have considered to be sustainable levels. In FY '22, therefore, we expect a rebuild of around $25 million to $50 million of inventory in these core divisions. Finally, here, payables days have remained flat in FY '21, which reflects our focus on ensuring payment to suppliers is in line with our credit terms to support overall industry liquidity. Slide 16 shows that capital expenditure for the year was $212 million. Around 70% of this CapEx was on maintenance investments, mainly on the manufacturing plants and our core products businesses. This year, it also included $78 million for the new Winstone Wallboards plasterboard facility, which we expect to complete in 2023. The remaining 30% of our CapEx in FY '21 was on strategic growth and efficiency initiatives. These investments continue to be focused on modern manufacturing, product adjacencies, sustainability and an acceleration of the program to improve our digital capabilities. On Slide 17. As we look ahead, we expect the group's base CapEx envelope to continue to average $200 million to $250 million per year. This base envelope will include around $50 million to $100 million of growth CapEx as well as up to $40 million per annum as we accelerate our program to improve the group's core systems environment. Outside of our base CapEx envelope, we highlight 2 additional areas of capital investment. Around $295 million on the next 2 years to complete the Winstone Wallboards plant and, as mentioned, around $200 million of investment in the Residential housing business as we scale our operations and invest in new areas of growth. Finally, here, we highlight that we will make some focused OpEx spend from FY '22 to support our growth and systems improvement initiatives. I'd note that this spend is factored into our target of around 10% EBIT margins in FY '23. Turning to Slide 18, we show the net debt bridge for the year. Strong underlying trading cash flows, partly offset by the legacy projects and significant items cash outflow, resulted in our net position reducing materially to $173 million. And as we'll see on the next slide, Slide 19, this translated to a leverage of 0.2x. This is below the group's target range of 1 to 2x and supported our decision in June to commence an on-market share buyback of up to $300 million. This balance sheet strength will also support the remaining CapEx on the Winstone Wallboards plant, rebuild of residential land and housing stock plus the group's targeted investments in organic growth. Slide 20 shows that the group's funding profiles remain strong. We've continued to reduce our gross debt while maintaining around $1.8 billion of total credit facilities. These facilities have good tenor, with around 90% maturing in FY '23 and beyond. Our average interest rate on the group's debt reduced to 4% in FY '21. And at 30 June, our liquidity was $1.6 billion, including around $700 million of cash on hand. On Slide 21, as Ross has noted, the group will pay a final FY '21 dividend of $0.18 per share, which will be unimputed and unfranked. In total, for FY '21, dividends declared are $0.30 per share, which represents a 60% payout ratio. In sizing the dividend, the Board has had regard to the target payout range of 50% to 75% and also the lack of imputation credits currently available to the group. Looking ahead, we do expect to be in a position to impute the FY '22 final dividend. On Slide 22 and summary. FY '21 has seen good delivery by the group against key financial targets. Our efficiency and growth initiatives over the past 3 years have resulted in a substantial uplift in earnings margins to 8.2%, return on funds to about 18%, good cash generation and a strong balance sheet. This performance has enabled the Board to declare both an interim and final dividends for FY '21, alongside a share buyback of up to $300 million, which will continue into FY '22. While these results are pleasing, we do see a clear path to further performance improvement and growth for the group, targeting EBIT margins of around 10% in FY '23. In support of this, we will continue to make targeted CapEx and OpEx investments and our organic growth, sustainability and an acceleration of the program to improve our digital capabilities and backbone systems. I'll now hand back to Ross to provide a summary of the divisional results for FY '21.

Thanks, Bevan. Moving to Slide 24. I'll now run through a quick snapshot of the divisional performance in FY '21 and then cover off the market backdrop before handing over to each of our divisional chief executives. Overall, our divisions performed well during the year. Across our New Zealand core businesses in Building Products, Distribution and Concrete, we saw good volumes from what were very solid market activity levels. And while input cost pressures have been a feature through the year, we've generally been able to flow this through to price. This combined with good operational discipline, so all these businesses lift both margins and overall profits. In our Residential and Development business, we had an excellent year, which saw us contract all of our housing stock by one house. And on the industrial land side, we successfully completed 2 large sales in Australia. Our Construction division made good progress returning to profits and continues to reprofile its forward order book to lower risk and better margins. In Australia, market conditions were mixed year-on-year, but the division delivered a material profit improvement, and this came from a combination of operational efficiencies and product growth strategies. And amongst this, strong performance at Laminex was a particular highlight. Looking at our markets and beginning with New Zealand on Slide 25. The New Zealand market continues to look favorable. The economic backdrop remains robust, and we'll continue to see strength in both the residential and infrastructure markets. Many lead indicators, such as residential consents and the planned government investment in infrastructure, are at record levels. That said, ongoing supply chain and labor constraints mean that New Zealand construction sector is currently at or near capacity. This dynamic means that consent and project commitments will not flow directly into work volumes and is likely to have the impact of extending the higher levels of building activity through FY '22 and beyond. On Slide 26. In Australia, the economic backdrop is also broadly favorable. The outlook for residential remains resilient, particularly across the detached housing and renovation subsectors. This is likely to be offset to some extent by the apartments subsector, which does remain a bit subdued, while commercial and key civil sectors seem to be stabilizing at current levels. I'll now hand across to Hamish Mcbeath to cover off the Building Products presentation.

Good morning, everyone. Building Products revenue for the year was up 19%, and our profits were up 126%. And pleasingly, our margins improved significantly to 14.1%. We do see strong demand across the residential and infrastructure sectors with good volumes throughout the year, and increased input costs have been passed through to price. It was good to see a much better contribution from our Steel and Humes businesses come through as we conclude those turnarounds. Trading cash flows were also very strong, reflecting working capital disciplines we have [ implemented ] on the past 3 years. However, as Bevan has noted earlier, the strong trading performance did overly reduce some inventory levels, and we expect to rebuild these over the coming year as capacity allows. Just moving on to Slide 28. There are a couple of highlights worth pointing out from the operational side. In the Products group, our new Winstone Wallboards plant construction is well on track. We are delivering on digital and e-commerce at Winstone Wallboards, and we have a new Laminex website, which has much better capability to transact online. And at the moment, I think we're trading at about 22% online now. Meanwhile, our automation investments are ensuring cost pressures are controlled, and this has an added benefit of expanding capacity and service improvements. In our Pipes category, we have entered the rainwater market through Iplex now, and that's proceeding well. And with Humes, we have optimized the extensive network that we've got, and we are also going through the plant automation upgrades now, which would finish in about 12 months. In Steel, we took the opportunity to rationalize a number of our South Island sites, and we also relocated our Wellington Easysteel and Dimond plants into a new purpose-built site. We've continued to introduce new products across the businesses, and we're seeing that the customers are showing a preference for locally manufactured product and the more reliable supply chain that, that provides. Looking ahead, we continue to invest for future growth through automation, with Humes and Laminex being a key focus area. On new products, we expect solid growth from the Winstone Wallboards, Barrierline and Weatherline as well as innovating new solutions in line with the new plant capability as that comes online. Iplex now have a polyester long-run and coiling solutions, and steel has improved its solar roofing profiles quite extensively. We continue to build on our performance improvement and aim to maintain margins at the 14% level, and I believe that's sustainable at the current activity levels. Thank you very much. And with that, I'll hand over to Bruce McEwen to cover off Distribution.

Thank you, Hamish. Good morning, everyone. On Slide 29, Distribution revenue for the year was up 17% and grew across almost all regions, especially Auckland and the lower North Island. This was underpinned by solid demand across all the residential trade segments in which we operate. Profits were up 49%. The result of scale benefits from revenue growth and really tightly managing cost and efficiency initiatives has delivered an improved EBIT margin of 7.4%. This was despite ongoing competitive pricing pressures in the industry. Trading cash flows were also strong as we managed working capital tightly through the year, balancing inventory levels to ensure we have the best availability of key stock lines as international and local supply lines really came under pressure. On Slide 30. Operationally, we have continued to focus in the areas of e-commerce and digital, customer settlement and driving efficiencies. Throughout the year, PlaceMakers released its enhanced e-tools for an improved customer experience with features like livestock availability and personalized pricing. Our delivery track and trace transport management system was embedded across our branch network. And we successfully moved to regional distribution hub structures in Auckland and in Christchurch across the PlaceMakers branches. Looking forward, our focus is to drive profitable market share and earnings growth through innovation and disruption, disrupting ourselves before someone else does. These key initiatives to drive these outcomes are centered around our customers with services and solutions that enable them to succeed in the market. By enhancing technology, we will create digital services that enable integration into our customers' systems. We'll continue to create cost efficiencies through new ways of working to improve both our customer centricity and our performance metrics. And we'll look to improve our sales capability and pricing disciplines to capture more of our customers' share of wallet. We're very much focused on driving convenience and value for our customers, making it easier for our customers to do business with us and, therefore, deepening loyalty and engagement. I'll now hand over to Nick Traber who will cover off Concrete.

Thank you, Bruce, and good morning, everyone. In Concrete, on Slide 31, revenue was up 15% on the back of focused volume growth and solid pricing across all businesses. This was driven by our expanded and differentiated offerings, asset renewal as well as debottlenecking of key operations. EBIT was up 53% and margins improved 3% driven by the savings from manufacturing and supply chain initiatives, network optimization and keeping a lean and agile support organization. We experienced, as mentioned before, some impact from higher electricity costs and product purchases caused by the extended shutdown to commission the new waste tire platform at our cement plant. Our trading cash flow was strong, too, up 62% year-on-year, thanks to the earnings delivery mentioned before, discipline on working capital and CapEx spend. We expect some inventory rebuild in the coming year, again, as was mentioned before already. Moving to Slide 32 on our operational highlights and outlook. At first, we have benefited firstly from our enhanced product range, particularly in masonry products and, secondly, reaping the benefits of our asset renewal program, such as the block plant at Hunua, now operating at capacity. We have and will further benefit from our initiatives related to footprint and supply chain optimization while keeping a lean and agile overhead organization. At Golden Bay, the focus has and will be on expanding its service offering and increasing the flexibility to serve our customers. On the cost side, we have seen first benefits from our operational excellence program and the commissioning of the waste tire platform. Scaling alternative fuels and raw materials remains a key priority at Golden Bay. Coming to Winstone Aggregates. We have seen great results there from product portfolio optimization, debottlenecking key plants and driving operational excellence. We see further potential leverage in digital technology as well as fast-tracking recycling in our key markets. As you can see, we are making great progress, particularly in the areas of, first, innovation with our innovative products, services and solutions; second, digital, optimizing our operations, supply chain and providing a more enhanced digital customer experience; and third, sustainability, building on and enhancing our leading position in carbon reduction. Based on the initiatives put in place, we are confident that we can sustain the current momentum, driving both further margin expansion and above-market growth. I'll now hand over to Steve Evans to cover off Residential and Development.

Thanks, Nick. Good morning, everyone. As can be seen on Slide 33, a the Residential and Development division performed very strongly through the year, driven by strong residential housing market across New Zealand. Against this backdrop, our house sales were up on the previous year to 836 and prices were up on average around 8%. This, in turn, drove strong revenue, profit and cash performance for the year. As Bevan noted earlier, we expect during FY '22 to lift our funds base by approximately $200 million to replenish our housing stock and to continue to grow the business. In Development, we completed the sales of both the vacant Rocla Gailes and Crane Copper Tube sites in Australia, which contributed $57 million to our earnings. This is well ahead of the $25 million per annum run rate we guide to for this business. But as you recall, the CCT sale was delayed in the prior year due to COVID. On Slide 34. The housing market in New Zealand remains strong, and our Residential business is continuing to deliver. Our price point is proving popular across the board, and we continue to optimize our communities to meet a variety of customer price points. The business is extremely well positioned for the future with around 4,000 lots under our control and around 950 units confirmed in our FY '22 pipeline, of which over 30% of these are already sold. At Clever Core, our off-site manufacturing business, we've continued to make design and installation improvements throughout the year, and we continue to ramp up with approximately 200 homes forecast for delivery in FY '22. During FY '21, we have also put our dedicated apartments team in place, and we're working on scaling this up, the business, with hundreds under construction in FY '22 and about 40 apartments of these being completed by year-end. And our future pipeline is already over 500 homes. Meanwhile, we've announced our retirement market proposition at the Investor Day and we have a number of sites underway already, with the first of these delivering homes in FY '22. Underpinning this is our investment in a large and long-dated pipeline of land held both on- and off-balance sheet that will ensure we have the ability to deliver homes and apartments in our Residential business into the future. Finally, our industrial business will continue to transition from selling legacy Fletcher Building sites in both New Zealand and Australia to one that's focused on developing New Zealand sites from raw land and consistently delivering $25 million of EBIT per annum. I'll now hand over to Peter Reidy to cover off Construction.

Thanks, Steve, and good morning, everyone. Construction gross revenue was $1.5 billion and reflects solid construction activity levels, particularly in the transport and water infrastructure sectors. Profits were $31 million for the year. This was supported by strong margin performances in Higgins and Brian Perry Civil and was partly offset by the historic legacy infrastructure and building projects, which are flowing through at 0 margin. Our trading cash outflows were $123 million, and this reflected a solid earnings from Brian Perry, Higgins and our South Pacific businesses, which were more than offset by our legacy project outflows and the unwind of working capital across some contracts. During the last 12 months, we've invested in our digital project management construction platform and focusing on our contract project controls and our field productivity tools to improve efficiency. We've also significantly reshaped our forward order book to a lower risk profile, which I'll cover on the next slide. During the year, we handed over 3 major legacy B&I projects, namely Commercial Bay, the new Te Nikau Grey Hospital & Health Centre in South Island and the Biolabs research facility in Wellington to our customers, and we continue to progress our major legacy roading projects, in line with their completion dates through calendar '22. In Brian Perry, we delivered a strong turnaround performance during the year. Activity levels were generated through our water and marine sector capability, mainly in the central and lower North Island regions. Looking ahead, we will invest in our self-perform technical capability and specialized assets. Meanwhile, in Higgins, we saw strong volumes of asphalt during FY '21, and we expect this to continue through into FY '22. We have new plants in Auckland and Napier to supply major roading projects, and we'll continue our focus on roads maintenance contract performance, growing our business in Fiji, and investing in smart road asset management systems and partnerships. As I highlighted, our forward order book at June '21 was $3 billion, and we have a further $300 million in preferred works for the Auckland AMETI Busway alliance project. Over the past 2 years, we've successfully reshaped our order book to a much more balanced risk profile. About 2/3 of the order book is lower risk, smaller self-perform work in Higgins and Brian Perry Civil, and this comprises national and local maintenance contracts, multiyear framework and alliance agreements with larger customers such as Watercare, Kainga Ora, Waka Kotahi New Zealand Transport Agency and Auckland Transport. Overall, 77% of our current workbook is with local and central government plants. And this reshape in the lower-risk order book will support the Construction business returning to a 3% to 5% EBIT margin as the nil margin legacy project is complete. In FY '22, we'll continue to focus on our 3-stage strength and build and growth strategy, and we enter the FY '22 year with a secured order book of 75% budget revenue. As with normal contracting businesses, our focus will be to secure the remainder order book within the year of operations. I'll now hand over to Dean Fradgley to cover off Australia.

Thank you, Peter, and good morning, everyone, from Australia. On Slide 37, our revenue was about 2% lower as the overall residential market was broadly flat while civil and infrastructure projects continue to be delayed. This had a direct impact on our Pipes businesses. Pleasingly, however, our share gains in most businesses were able to offset some of those market headwinds. Profits grew significantly year-on-year to $103 million, and EBIT margins lifted to 3.7%. This was achieved by an improved performance across all businesses with a key focus on 3 things: gross margins with strong procurement and pricing initiatives; improved product vitality as evidenced by revenue growth in new products; and finally, continued improvements in our cost base, evidencing operational leverage. And pleasingly, trading cash flows were at $136 million, reflecting ongoing improvements in inventory management and good debtor controls. Slide 38 covers our Building Products businesses where highlights of the year included Laminex market share gains in decorative categories. We introduced new ranges, and we pushed on in digital sales, which are now sitting at over 25% of all Laminex transactions. And we launched Haven Kitchens joinery offer, which is now live in Metro Melbourne. And as we travel into this year, Laminex will be bringing more product innovation to market. A good year at Fletcher Insulation where we completed the optimization of the network and grew share in its supply and install offer. We saw strong revenue growth and margin growth in our core segments, increasing market share. In FY '22, we will see further automation in manufacturing and continue to grow in key margin-accretive segments and new products like FirmaSoft. At Iplex, whilst the project market was slow, our simplified business model drove better earnings and margin improvement. In FY '22, we will see further maturation of that strategy and growth in the civil sector. The business is digitizing well, and that will continue this year. On Slide 39, we see Tradelink strategy continue to grow sales in the key small-to-medium enterprise plumber segment with the revenue now lifted to 46% of total sales. And its own brand performance is strong. 35% of all front of wall sales are now own brand. This has helped the business grow market share and lift gross margin. We successfully launched our online retail offer, which is now delivering well ahead of plan. And in the year ahead, Tradelink will continue to accelerate its digital program and drive further growth and share. The performance of Stramit was a key highlight of the year, with the business achieving share growth in its core categories. Our performance in the margin-accretive sheds and doors segments is particularly pleasing. And this year, the business will continue to drive automation and customer solutions through its digital program. So we're making pleasing and sustainable progress. We are confident we are driving performance and are on track to deliver margins in the 5% to 7% range in the medium term. So thank you. And with that, I'll now hand you back to Ross.

Thanks, Dean. Moving to Slide 41. I'll briefly sum up the outlook across our markets and for our business. Looking ahead, we expect an ongoing solid market in New Zealand with an extended period of building activity in the residential sector in particular. In Australia, we see the overall backdrop remaining supportive for growth. Supply chain disruption and input cost inflation will continue to be a feature, but we're managing this and our cost base well. We remain confident in our ability to continue to drive both performance and growth from here through the year. Major COVID-19 lockdowns, however, remain a risk. The Australian businesses have been experiencing impacts over the last 6 weeks. And in New Zealand, with the lockdown commencing today, the ultimate impact will depend on how long it takes to get the virus under control. We'll have a better fix on this in a few months and be able to provide a further update on market activity and trading performance at our Annual Shareholder Meeting in October. With that, I'd now like to hand back to the moderator to allow us to take questions.

[Operator Instructions] Your first question comes from Lisa Huynh from Citi.

So I guess I had a question in terms of capital management. Just given leverage remains quite low at the moment. Notwithstanding some of that investment you've talked about in working capital and CapEx next year, just given the strong balance sheet position, can you just talk about how you're thinking about further capital management and whether there's scope to expand the buyback?

Lisa, I'll hand over to Bevan to get us over the blocks of the first question.

Lisa, I think we'd say we think about it consistently as we always have. So given the low leverage at the moment, that's what led to the initial buyback. And then on an ongoing basis, we'll continue to assess our investment opportunities. We've highlighted we think we have a good number of those organically within the group. But if we're at sustained leverage rates below the bottom end of the range, then we'd need to reassess that and look again at capital management. So that is the consistent approach we take to ensure we're balancing investments in the business with potential returns to shareholders.

Okay. Sure. And then I guess in terms of cost inflation, that will remain quite topical for the rest of this year. I guess from a cost perspective, at the Investor Day, you called out $10 million to $15 million impact from steel and energy inflation in the second half. Can you just talk about where this ended up settling at? And are these kind of the key cost items we should be keeping an eye on into the next year?

Yes, that is broadly where those input costs impact landed for the second half, Lisa. Obviously, there's an ongoing inflationary environment, as has been pointed out, across the sectors. You're seeing some input cost benefits coming through. Steel has obviously come off a bit. On the flip side, resin and coal headed the other way. So that, alongside wage inflation, is the other key thing that we are keeping a look out on. I'd say that at the moment, we are confident that we are able to recover those cost increases through price. It's a very dynamic environment, and you're seeing regular price rises coming through from our suppliers and, likewise, up into the market. But certainly, for the moment, the businesses are doing a good job in ensuring that we've got that price recovery, and we don't expect that cost environment to change in the near term.

Okay. Sure. And just, I guess, the last one for me in terms of Australia. It looks like you're making good traction with growing share of the SME client base. So that's 46% now of Tradelink's revenue. I guess how much did that contribute to the earnings improvement in Tradelink? Or is it still relatively small growth off a lower base?

I'll let Dean go to that one, Lisa.

Yes. Lisa, thank you for your question, and thank you for your positive comments around Australia. We feel we're making good progress. Look, for several years now, the SME category has been a key focus for us. We know it delivers a chunk of gross margins. So it's crucial to margin performance and it's actually lifting 2 things for us, both gross margins and EBITDA, as we wash through. The caveat to that is, Lisa, we have to make sure we control cost at the same time. So it is a principal driver of our EBIT. And I think that's what's helped us improve performance last year and into this year. And that, combined with our brand, is giving the SME customers a reason to choose us. And that's what's lifting market share. So I think the short answer is, yes, it's a principal driver of profit.

Okay. That's helpful. Because I guess, if I think about in the context of the SME builders' overall basket, how much of that do you think you're capturing? Or are they still kind of shopping around as well?

Yes. Look, I've been in the plumbing industry long enough to know that all types of SME plumbers will have multiple accounts. I think the question is are we becoming a destination of choice more so than before. And I think when you see above-market share gains in the SME plumbers, we're starting to win them back. That said, Lisa, one of our key focuses is to digitize an offer for them this year. I think that's the next step of the journey for us to push on again. And of course, we'd like to keep accreting that market share performance in SME as we go. The builder also influences that. The General Manager will tell you that we're also focusing on servicing the builder market because of the subcontract tree. And our own brand has really opened doors for both SME plumbers and builders to give them a choice to potentially drive past our competitors and come to us. So we've still got heaps more opportunity to go, Lisa, as I'm sure you'd expect from us.

The next question is from Keith Chau from MST Marquee.

The first one, just on the outlook. Supply constraints and labor constraints are both things that have been called out by several companies. Perhaps, Ross, if you could maybe characterize what the prospect is for volume growth going into FY '22 given these volume constraints. I know theoretically, we should actually see some pretty punchy growth. But because of the supply constraints, it might throttle it back a bit. So is it at all possible in New Zealand that you'd see volume growth somewhere in the mid-single-digits? I don't want to put numbers to you, but if you could perhaps give us a few more comments on that, please?

Yes, Keith, look, I think the way you characterize it is correct. I mean with the sort of background consenting levels, whether it's residential and other projects, there's no way we can -- the market will ramp up to mirror that. But I think that overall, volume there will cause us to see -- it will be flat, but you might get to, as you sort of said, mid-single-digits. Work put in place growth -- through the year is sort of the way we're thinking about it as we sit here. And look, the market will continue to add capacity and respond to it, but that just takes a little while to do that. And border restrictions and shipping constraints and all those sorts of things and just commodity environment just put a lid on how fast you can chase that. So that's why I think the way you're thinking about it is, yes, it might be flat to some growth. And then I think the other thing we're thinking is that they just probably extend it a little bit longer. So that's -- I think the way you're thinking about it is about right.

And then on the pricing front, Ross, I mean you had several pricing notices published by Fletcher Building over the last 12 months. Is the business seeing any real price increase? Or is it a matter of cost recovery at this point?

Look, I think there's 2 themes going on. I mean a lot of our margin improvement that you've been seeing in our business has been a result of what we've been doing through our sales efficiency programs, but also what I'd call better pricing disciplines, just how we're controlling our own pricing. So that's the environment that we've got ourselves into and the skills we've sort of been pushing on, which is what you've seen driven our 100 basis points improvement to date. That's work in progress and will continue. So that's -- as we look forward, and we talk about ongoing margin improvements as we look forward, basically, that dynamic won't stop. The other dynamic that's come into here is sort of the input cost pressures and the beauty of having got a fighting fit with our pricing disciplines, as they come in, were very effective of them passing them on in the markets, actually, accepting and taking those in this present environment. So I think you'll still see an element of what I call real price, but that's less about us being opportunistic with price increases and more about our own disciplines to continue to improve. And I think we feel very confident at this stage that we have continued to deal with input price pressures via price increases that relate to those. So that's how I'd characterize it. So yes.

Okay. That's great, Ross. And maybe that's a good segue into my next question. So clearly, a positive that the company is maintaining a 10% group EBIT margin target for FY '23, particularly in the cost inflationary environment. So we've got flatline kind of -- sorry, top line, flat to slightly up, maybe you get some price recovery. The cost base has reset from where it is now. If you just look at it on this year's revenue number, the implied step-up in EBIT has to be around $150 million or thereabouts to get to that 10% group EBIT margin target by FY '23. So outside of Australia and Construction, is it merely continued efficiency gains within the New Zealand benefit that will get you to that target?

Yes. So we've sort of laid that out. The simple thing is exactly the way you're going, is Australia gets up into the 5% to 7%, Construction clears its legacy and moves towards 3% to 5% and then we get a bit more sort of out of the core. But it doesn't all just come from efficiencies. I mean across all those businesses, we're looking at products, we're looking at adjacencies. So some of it will come from just entering into new areas as well and driving that performance. But yes, the characterization, think of it 1/3, Australia; 1/3, Construction; 1/3, core in New Zealand.

And then in the products and adjacencies, what kind of contribution do you think the business can achieve to revenues from new products and adjacencies in the coming periods?

We haven't guided to all that. We laid that out. I mean what we're focused on is I think there'll be growth from there. We haven't actually tried to guide to that. There's so much guidance out there in the market right now, I'm not sure I want to add to it particularly. But a part of it's what does the market do over the next 2 to 3 years. I think we'll continue to -- we'll grow market shares and add products, so I think we'll make some progress there. And you've seen no aspirations around that laid out in a number of businesses. We talked to Residential business that Steve is running. We talked apartments. We talked about growing our number of houses. We've talked about off-site manufacturing. You've seen Dean talk about how he's thinking about what Laminex can move into Haven Kitchens. We've talked about a number of businesses at our Investor Day. So we've laid out some of those pathways. And we also know we've got enough going on there that -- they won't all work, but a big chunk of them will. So I think you're going to see the feature of improving profitability and growth beyond what the market is doing, and we've sort of pointed to that, but we haven't quantified it yet.

And just a final quick one for me before I turn it over. USG Boral has clearly announced it's going to exit the market in mid-November for plasterboards. So it certainly sets Fletcher Building up to take some of that share, if not the bulk of it. Anything the business is doing proactively to try and capture those volumes? And from a pricing discipline standpoint, it being a headwind or import is being a headwind over the last few years, do you expect pricing discipline to improve from hereon in?

I'll give it to Hamish to answer that one for you.

Thanks, Keith. So the USG Boral piece, yes, look, to be honest, we pretty much had seen them declining a bit in the market probably this calendar year. So we believe we've actually picked up mid last year to this year and the last 6 months of last financial year and where we're seeing now. So we don't see a material lift from where we're trading now. So we've been able to absorb that within our capacity. And really, just focusing on that, we offer the best quality product at Winstone Wallboards and a strong service model, which I think everyone's pretty aware of. So we're confident that, that will pick it up, and that's where we're focusing on that one. And then the question was around pricing, wasn't it, which I think Ross has pretty much covered off, really.

Yes, pricing.

Yes. We've got, Keith, the price rise happening to offset the inflation pressures. And yes, we're not being opportunistic in that sort of thing.