Fletcher Building Limited (FBU) Earnings Call Transcript & Summary

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

Thanks, Rachel, and thanks, you all, for joining this morning. We set this call up to discuss the announcements we made today on the Auckland Convention Center rebuild, the group trading outlook and investments we're making in the New Zealand wood sector. Our group CFO, Bevan McKenzie, is also on the call. I'm not going to do a formal presentation today, but I will provide a brief overview on some key points, and then open it up to any questions for Bevan and myself. Also note, we are doing a separate media call at 11:00. So any media that are on this call, we won't be taking your questions. We'll leave those until the 11:00 session. 11:30 session, sorry. Just don't want to get everyone [ knocked off ]. Firstly, I just want to start with the convention center. I guess disappointingly, and despite the good progress we're making on site, we now expect the post-fire rebuild cost for the Auckland Convention Center to exceed the insurance proceeds. This has resulted in taking an additional NZD 150 million of provision for these costs. The team on site are making good progress. The demolition is complete, the field of remediation is well advanced, the group installation has commenced, and 2 of the 4 car park levels will be completed and handed over later this month to SkyCity. We also, importantly, have clarity and agreement on the scope now. That really is what needs to be repaired versus what needs to be replaced. We've got the procurement well-advanced and we've got high levels of confidence in our productivity, manning levels and just overall program. And based on the progress we're making, we expect to complete early 2025 or late 2024. However, the unfortunate combination of just the real unique complexity of the rebuild and overlay that the COVID delays we've seen in stoppages and supply chain and manning levels, and then the higher-than-normal industry cost escalations we've seen. That meant that as we've progressively got our arms around the rebuild, it became clear. It can't be completed within the insurance levels that are in place, and this is what's resulted in the need to take the provision. The cash impact of this provision are not immediate and will flow through of the remaining 2 years of the project. I do note that this is our last vertical project as we exited the sector back in early 2021. This is a deliberate move to ensure Fletcher Construction was focused on the infrastructure and roading sector where the risks and margins are more attractive. In this announcement, we also provided a brief trading update for the balance of the Fletcher Building Group. It, in essence, remains in line with the comments we made at our recent Annual Shareholder Meeting. Our New Zealand products and distribution businesses continue to see good activity. Levels' only marginally down from last year, and margins are remaining slightly ahead of expectations. We look forward to customer activity. It continues to look solid into at least the second quarter of next calendar year. The Australian business is performing well, and we expect the EBIT margin for the first half to be at least 5% on similar volumes to the last year. On the New Zealand residential business, it does continue to feel the housing headwinds, but prices are holding up at roughly 10% to 15% down from the peak in late 2021. And while sales rates are down on about 20% to our target, we're still seeing solid volumes at that level through our business. So -- and as we look at visitation rates for the business as well, they're also staying strong, which gives us confidence we should be able to maintain those sorts of rates as we get into the balance of the year. And finally, we expect a strong half from Fletcher Construction. There's a strong second half from Fletcher Construction, similar to what we saw last year. Baking all that up, we remain comfortable with our FY '23 EBIT guidance, excluding sig items of at least NZD 855 million. And importantly, our balance sheet continues to be in a strong position, with group leverage forecast to stay in the lower end of our target range of 1x to 2x through FY '23. We also announced today some details around our movement to the broader wood sector. It's an important part of our growth plans and logically complements our already strong position in steel and concrete. Firstly, we're confirming that we will proceed with constructing a new wood panels plant in our current Laminex site in Taupo. This investment involves introducing new state-of-the-art technology that is well-suited to serve the New Zealand market, but it's equally flexible to supply export markets. The new plant will enable us to achieve lower manufacturing costs, additional capacity and allow us to introduce a range of innovative and new products to the New Zealand market. We've also announced our intention to acquire Waipapa Pine. Waipapa produces a range of sawn timber products, including industrial and structural grades, and includes a renewable fuel business. The business is based in [ Northern ], close to the supply of high-quality logs and services customers from the Far North through to Hamilton. Our plans to this are based on continuing these customer relationships and growing them over time as we look to invest in enhanced production capabilities and volumes of the Waipapa facility. Combined investment in these two initiatives will be around NZD 375 million, and we're targeting ROCE of 15% or greater. Importantly, the investment case is based on mid-cycle activity levels and should generate additional EBITDA across the group of around NZD 60 million per annum when they complete. That completes the key points I wanted to highlight. I'll now hand over to the moderator to take questions.

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

Just in terms of the additional NZD 150 million provision for NZICC, can you just talk or split out for us a little bit the -- how much is attributable to scope, how much is attributable to labor and how much is attributable to materials? Given you're supplying the large portion of those materials, presuming that the provision you've taken is a sort of a net consolidated provision below the line?

Yes. Look, it's -- I don't have -- we don't split it that way. If I look at -- if I have to characterize the -- where the costs have got into it, there's a total chunk of it in just the unexpected nature of what I call the demolition. What ended up carrying with all the water that went in the building is there was mold through the whole building. So the 1.5 years, all work had to happen in full hazard suits, so it was very inefficient. So that was sort of one part of it. And I'm just going to go through the sort of -- then what has occurred is all the steel work in the building, most of it's not being replaced. Most of it is being remediated, but the problem we then hit with the remediation is you have to remove all the fire-rated intumescent paint off it. And again, the productivity and manning levels to do that was hard to understand it first, and we have to get into a rhythm to understand how fast we can do it, how much manning it was going to take and how we get into a process. So as we progressively work through these items, we started to get clarity around what I call the production inefficiencies in it. Then what went on through the -- as we've been working the project is you end up with the insurers, SkyCity, the design consultancy authorities, and you're trying to work through what is to be repaired versus what is to be replaced. And it seems a very logical and simple discussion, but it's been quite complex. And it really has taken the last 3 years of the project to sort of land those decisions across the whole thing. And then once you know where you're going with it, you can then deal with procurement and start to understand what you're going to do. And most of the procurement issues are not what I call our materials. There are things like escalators, lifts, plant room, facade, where the things that -- the electrical equipment is damaged by water because most of the damage in the building is not fire, it's actually water damage. So where we then got caught with that is that as you're then defining what you're doing and getting the work done, you then -- what we've seen with the industry escalation as we've got into the back part of it. So as we've got clarity around that, and we've understood the production rates and bought altogether, that's why it's taken this long to understand where we are and get a good level of confidence of what we think it's going to take to finish it. Now I know that doesn't answer your question, but we have to [indiscernible] you just asked me. I don't have an answer for it that way.

No, I think you've answered it anyway, because it sounds like it's mostly third-party cost in terms of materials, also then your own materials. And just with that inflation, as you look forward to that NZD 150 million provision, Taupo now is saying NZD 275 million for the board plan. Just wondering how much inflation is in that number versus your expectations at the June Investor Day?

So when we look at that, I mean, we're now -- the reason we're announcing is we've procured and signed all the equipment things which are a big chunk of the cost, and so that's locked in. And then basically, we've got the building [ risk, ] which we're very -- we've got a good grip on them. We actually have baked in what we think the market is going to look like over the build period over the next 12 to 18 months.

Yes. That's helpful. And then just a final quick one, just on the EBIT margins for Australia. That's a good update on at least 5% EBIT margins on similar volumes. What's the driver of that, Ross?

It's actually -- what's pleasing about it, and I don't want to talk around too much, but we've had the rail lines out of weather. So it's nice to be -- the business is actually achieving that despite some of the challenges on them. And what's been driving is just -- we've talked about a lot, just the general run rate of improvement that we're seeing in the business. So across all of our business lines, they're generally holding to the trajectory of improvement that we've been laying out, which was this year to get above 5%, and then over the next couple of years to continue to drive it up into the 7%, 8%.

The next question is from Brook Campbell-Crawford from Barrenjoey.

Just the first one on NZICC. Can you confirm what the total remaining costs are to complete that project?

Yes. Look, we -- not trying to be difficult. We don't actually disclose the cost. I mean, we are sort of down -- it's in our contracts, we -- that's the clients' prerogative, and we don't have the ability to talk to it. So we've sort of stayed away from that, putting those out there. So apologies, but I'm just a bit wary of over disclosing without their consent.

Okay. That's fair enough. And I guess outside of that project, can you just provide a bit of an update across your broader construction portfolio, and how's performance and margins tracking relative to your expectations? Are you seeing the sort of broader inflation issues start to around margin in the rest of the business? This is the construction portfolio...

No. If I look at our order book in construction, which is circa around about NZD 3 billion, we've been very -- where we've got longer term -- bigger projects to go full [ on ], book our alliances and they all have inflation. We don't take the inflation risk, so they -- within the season, we reset the cost base as we go, and where we do take this, it's very short-term projects. So you've priced them and then they're small and they're done in 3 to 6 months, so you really don't get exposed to it because you price it in quite effectively. So I'm very comfortable with how -- we're not really exposed to inflation risk in that order book. And what we're seeing in that order book is margins that should flow through and support our 3% to 5% range that we've been guiding to get that business performing margin since.

That's great. And last, just quick one for me. In the residential construction business, can you just confirm what your expectations are for pricing for the balance of the year? I think you might have mentioned earlier on, you're expecting stabilization, but correct me if I'm wrong.

Yes. Look, from what we're seeing as we've gone through this year is if you get back, the peak was about -- in pricing in about December 2021 or November, December, somewhere around about there. We're roughly down about our pricing levels stabilized for 4, 5 months ago at around about 10% to 15% down, depending where you are, in which development and what value house. So we're seeing -- that's sort of pretty well-held now. And when we look at our -- we've been targeting about 1,000 units this year, just above it, and we're running at volumes that would support probably 20% below that. So we just see how the visitation is good, but we're not better. If we're -- volume-wise, we're still selling, but not quite at the levels we hope we would. So look, so with the visitation we're seeing, therefore, it feels like we should be at least better to keep doing that. But we'll see how we go in the second half. But as we look right here, right now, about 10% to 15% down in price and volume is about 20% below target.

The next question is from Peter Wilson from Credit Suisse.

Just following up on the residential development volumes and your growth targets for the next few years. So at the Investor Day, you outlined a target of 1,000 plus homes, 300 apartments and 150 in retirement living. How should we think about each of those items? Still see you're running at [ 800 ] run rate for homes. Should we expect you're not going to try and grow that? And then what are the implications for apartments and retirement living?

Yes, so we are still producing apartments and our first retirement living offers go out. But we're basically -- with the market -- we always said that the market -- when we have been pleased on this historically, what's our downturn or recession playbook? And our recession playbook has always been not to give too much price away and let volumes ease. So basically, I don't want to overplay the [ 800 ] or that 20% down sort of target, but that's the playbook we're on. We're giving a bit of price, but we're actually letting volumes ease. So what that means is that until we see the market sort of get stronger, we'll be on that playbook. So we're just being a little bit prudent about how much we start, not getting ahead of ourselves. So we'll basically match our build out across all those to what the market can absorb. So that's sort of what we're on. So as we get into FY '24, therefore, it's likely that we won't be chasing those growth plans that we had out previously simply because if the market is not there, there's no point putting the capital in. So we'll just manage that quite closely. And once -- the minute it turns, we can then we've got -- we've certainly got the land supply. We've got the capability. We've got the spot. So as soon as we get a sniff that the markets' coming back, then we'll just start to increase volumes into that. But we certainly have all those three business lines up and running. It's just -- will only go as fast in growing them as we think we can actually sell products to sensible margins.

Okay. So market dependent, what should we look for in terms of market indicators, because -- did we take building consents for October? Seasonally adjusted, the 46,000, which is a good number, I think, in anyone's language, well above the average of the 30,000 each. So building consents, it still appears to be a strong number. I think most probably expect some downside to that. But what do we need to see in terms of market indicators for you to be targeting that kind of 1,450 total?

Yes. Look, I mean, I get the question when we look at all the various indicators, consents and interest rates and [indiscernible]. But fundamentally, the way I'd characterize our residential business, it's sort of a really good lead indicator for how we think about the market because we get a sense of what's going on directly as we're selling. And the main indicator we'll start looking at is when we start picking pricing movement up and we get volumes up. And honestly, trying to work out what that trigger is going to be is a bit complex, so we're just watching it very closely running at them. And as soon as it starts to move, we'll seize it quite quickly. So -- and I mean, that's a bit of a blunt instrument because it's not very sophisticated, but yes. We can look at all the other indicators around there, and it's all -- there's a few confusing ones. Employment, is it interest rate cycle is it, as you say, consent, integration? Is it yadda, yadda, yadda, and then it's a bit murky. So we're just basically watching closely what we're seeing out in the real world, I guess, in cutting that cost to suit that.

Okay. And again, in Investor Day, you said that target was backed by an extensive land portfolio. Now, the message seems to be that you've been slowing your land purchases for some time. How do I reconcile those two comments?

So we've got about 5,000 lots give or take under control. And so 4 or 5 years, depending on what you think your volumes are, the way we -- and if we're growing the business, we always then make sure that we've got to then elongate that and add to it. But -- so what we tend to look at is we want to make sure we've got a reasonable backlog of future work. But as we sit here now, I mean, if the volumes don't drop a bit, well, we don't rely need to secure much to do those volumes. So we'll be very selective what, if anything, we buy. So as we see now, we don't really need to add to our land control position dramatically. But we will -- obviously, we're very focused on if we see really good opportunities, then we'll certainly grab those just because it's commercially smart and we've got the capability to do that. So therefore, what that message was to sort of pull back and just being very pragmatic about it. I mean, we don't need the land positions to support the volumes for the moment, so we can be quite selective.

Got it. That makes sense. One last one, if I can. On the Taupo upgrade, it's like I go into Investor all the time, it just seems like some mixed messages. At the Investor Day, the Taupo was expected to generate NZD 20 million of incremental EBIT. Now you're talking about a NZD 40 million number. You see the NZD 40 million gross, about the NZD 20 million incremental? Or have you actually increased your expectations for the earnings uplift from that project?

I'll let Bevan have a crack at that. Here is Bevan on.

Yes, you're right. So as we've worked through and finalized the plan for the equipment that we're putting in, scope volume, all of that, you're right, Peter. We have looked at our expectations there. We're probably a little bit cautious when we spoke to the 20th Investor Day, it's a combination of that. And we've got a good handle now on the bonds that are going to come out of that, again, all based on the cycle. So we finalized the plan. We're confident in improved outlook rates. That's what we going in Investor Day.

Got it. And just to confirm, is it NZD 40 million incremental? Because some of the language, they suggest like supersedes it's just going to replace some existing business. Is it NZD 40 million incremental or just NZD 40 million for the project itself offset by...

NZD 40 million. It is incremental, Peter.

The next question is from Keith Chau from MST Marquee.

Just the first question, going back to NZICC and perhaps more reflection on projects from the past, Ross. So the learnings from the Justice Precinct and Christchurch, I think 5 to 6 years ago, would tell us that these provisions can be ongoing, particularly through a couple of years to run on the projects. Can you give us a sense of your level of confidence that this will be the last provision? The question's asked all the time, the answer is always we're comfortable with our provision levels. Obviously, things happen that are out of your control, perhaps some in your control. But can you give us some confidence around the current provisioning level or the incremental provisions that have been written for this project?

Yes. Keith, and I'm not sure you believe me anyway, it's my third [indiscernible]. But the things I'd say to give you some comfort would be that whatever how many 60 projects we were grappling with back in 2017, 2018, really, if I look at them now, we're broadly finishing. And [indiscernible], that will finish and open probably at March next year. So it's done. And if I look at then really down to this project, NZICC. And when I was giving Simon -- answering the question, I hope I gave you a sense of it. This is one complex beast. And where we are now is I think we do have our arms around what we have to do and how we have to do it. And what's been good to see is with a program that we're running to back midyear, we actually have stayed on that and are actually bettering it, which is why as we're saying, we think it will be in early 2025, maybe late 2024 finish. So our confidence level on our production rate and what we're doing is there and we're actually achieving it, and that's very important. So -- and the team is really on point. They know what they're doing. We're well-procured. We're well manned. [indiscernible] are working well with us and the quality of what producing is really good. So I'm -- as I said, we took a while to get a lot to come together, and we have now. And so therefore, I think we've got our arms around this and we know where we're heading. So I think it's the right provision, and I don't think we'll have to come back to that well. But there's always risk. The good thing I'd say to you is that we're down broadly to the last one and the home stretch of this is as long as it has been. We are getting close.

Okay. That's great. And the second question, just around the trading update. I think you mentioned visibility out into the first quarter of CY '23. The business, I think, through the quarter COVID disclosed 40% to 45% of the EBITDA is actually generated in the fourth quarter. So certainly, a lot of risk and not as clear of a line of sight into the fourth quarter of the year. So again, just around conviction level with getting to that EBIT guidance, given the bulk of your earnings for the second half delivered in the fourth quarter? What gives you comfort that, that can be achieved, given 40% to 45% of the year's earnings are delivered in the period where there's not great line of sight at the moment?

Yes. Maybe I came across -- I mean, the reason I think we'll be okay is that the NZD 855 million assumes it's back a bit anyway. But we're talking -- what I don't think will happen, and we could be wrong here, but I don't think we're going to fall off a cliff in May and June. I think what will happen is it will -- it will probably start easing. We're seeing a good customer base and what they're talking about, the commitments tend to be out to the middle of next calendar year. And so what we just don't know is I think it will be definitely lower through FY '24 and when does it start to ease off. So I think the NZD 855 million allows you to do that. And as I said, the anecdotal evidence from what we're seeing in forward orders where we have them. And some of the things that we're selling now at high volumes, for instance, just the roof volumes and things that are going on the top of houses that then have the trades following it suggests that the first half should be pretty solid. Might get a bit scrappy out in June-ish maybe, but I think the number we've got out there allow us for a bit there. I don't know, Bevan, would you add on to that?

I'd just add, we obviously put a chunk of that fourth quarter into the roofing part. It's been very good [indiscernible] back in as we see back in 2020. Sort of run rate on roofing house sales is going to be -- the reasonable driver of that second half results.

As Rob said earlier, while really sales volumes have been lower, they're still being run at reasonable rates. And I think we're probably doing a bit better than the broader market out there. And that's in large part due to the way that the team is positioned, that business. We've got more of lower priced stock out there than the average developer, which is benefiting us for the moment because the market below that in the [ north ] part is definitely strong than above. So that gives us some confidence that we can hopefully, more or less, maintain that run rate that we see or maybe even a bit better in the second half. But if you look to FY '23, that's obviously going to be a key part of where we land.

And then maybe just come back to a quick one on the Waipapa acquisition. So EBIT for that business running at NZD 14.5 million now targeting to get to NZD 20 million. Can you just give us a sense of how that EBIT uplift is going to be achieved? Just thinking about that from the perspective of the New Zealand market money at peak cycle now, delivering NZD 14.5 million, but the expectation of getting to NZD 20 million mid-cycle. How does that square up and where will the synergies come through?

Yes. So effectively, just running on one shift now we think we can add. So we can actually get more through the plant, as well as there's a program or a bit of an upgrade we want to do at the plant as well. And we think then there's an opportunity around the broader customer base up there. As we mentioned, some mid-cycle levels. So we're not being too crazy with it, but we can actually drive that EBIT up to that level at lower levels of background market volume. So we're quite confident about that. We've done a fair bit of work on that. So yes, that's how we approach it. We think we can get [ more ] into the plant, make it more efficient. In doing that, because what happens as you double shift the plant like that, you actually lower your cost base because you slip the asset a bit more. So the combination of lowering the throughput cost as well as getting a bit more volume is sort of where it comes from.

Okay. So there is an expectation that you'll take it from a 1-shift operation to a 2-shift operation?

Yes, that's part and parcel of what we're doing. I mean, and we've actually -- that was -- we've done a lot of work ahead of purchasing and to make sure that's all plausible in understanding what we need to do around the plant and equipment to drive some of those cost efficiencies. So that's all been baked in as we thought about it. So we've spent a fair bit of time laying it out. The other thing which is good about it is when you look at the renewable fuels piece of it as well, that's a very interesting sector for us. A, because of our own security supply to our own businesses, but the pellet and those sort of use of wood byproducts is becoming a very interesting sector. So I think there's a few ancillary opportunities around it as well for us.

And when you change the shift pattern from 1 to 2, who would you be taking share of in the New Zealand market? .

I mean, we've actually done it quite granulary with the customer base up in that region and down to sort of, I guess, Northern Auckland. I don't really want to lay that particularly. I mean, it's probably a step part of this call. There will be a competitive dynamic up there. We're going to think that through, and we need to be bit thoughtful about it. So -- but it's not just a hope and a prayer with this. As I said, it's an important investment for us. We want it to work, so we've put a lot of thought to this.

The next question is from Daniel Kang from CLSA.

Just a few more on NZICC, if I can. You mentioned in your release that you'll be pursuing opportunities to recover the additional project costs on the revenue and cost side. Can you just elaborate on these issues?

To your point, I mean, I don't overplay my hand publicly. But what's going on here is that there are -- as we look at the different insurance pops out there, third-party and building works that we've got to think through, there's -- as we look down into our subcontracting thing, it's just how we think about the procurement there and what we may do around it. We knew that there are opportunities to hopefully improve on that, but we're certainly just lagging. That's our attitude. You always want to look up and down and around and make sure that it's not just us wearing all the pain where we have legal opportunities or contractual opportunities elsewhere. So it's just flagging that we're not just sitting here taking everything that comes our way. We will work that. I'm not fair dimensioning what that might be or might look like, but certainly, it's saying that we will be working up and down on this as we work through the completion.

Makes sense, Ross. And I'll also note that you're still expecting completion of the project by 2025 or earlier. I mean, is there a risk to that time line given today's announcement?

No. As I said, well, there's not so much risk, but I'm very comfortable that the team are really on top of this now. And as I said, what we've been seeing with that program, we've been hitting our milestones. Delivering these first two car park levels is a really big peak for us, starting to hand stuff back over. It's nice to get it off our books onto SkyCity's. But -- so actually, the reason I'm sort of alluding that we think we're probably a little bit better than 2025 is that based on our programming and production performance that we're seeing, and just the fact that we think we've got our arms around it now, we know where we're going. So I don't see that likely. I feel like we can do pretty well from here.

The next question is from Stephen Hudson from Macquarie Securities.

Ross and Bevan, just a couple of quick ones for me. The 20% variance to the 1,000 build rates that you mentioned, we're hearing for the story to design and build guys sort of down 50% or more. I just wondered if you sort of consider that you're outperforming the market because of the offering, or are you expecting some to the second half of [indiscernible]? Maybe give us a feel for the difference in those two numbers? And then just secondly, on the unrealized land bank, I think you put it at NZD 350 million to NZD 400 million for your resi business. I just wondered if you had an update estimate of that number?

Stephen. A couple -- I'll start with the second one. We don't have an updated one. They're relative to the one that we talked to at Investor Day, but we are refreshing that. So I will be able to talk to that at half year results because we got that work underway. And then on the first one, I commented pretty earlier, yes. We think we are a small share of the overall market for [indiscernible]. Obviously, yes, we think we are doing better than the average at the moment. And as I said, that because the quality of the community, Steve and the team builds, and also the good price points that we've got are below the [ BDA ] has been the more active part of the market. Actually surprised us a bit, again, that in Auckland, [ 700,000 to 900,000 sort of space, ] that's where you're moving more volume at the moment. And as you're moving up into your low net one is when your stock has been harder to move, including for us. But because we are more weighted to the lowering price point, yes, I think that means we're doing given than the average...

The next question is from Grant Swanepoel from Jarden.

First question, just on your guidance. From what I'm hearing, [ turnaround ] interests, Australia is offsetting the softness in the housing market, and that's why there's no real change to guidance? My second question is around all the activities now you've got going plus the board and new [indiscernible] plant for [ Glasswool ] and new markets you've entering, and now, the [indiscernible] plant, and there's this Waipapa acquisition. Is there a lot going on when you guys are potentially facing a downturn in 2024, which could be a bit of management time? And my final question is on NZICC just from an insurance perspective. Is such a building just underinsured, or -- I still don't quite get my head around why this is an insurance issue or actually unexpected damage issue, and you carrying on NZD 150 million of extra costs. Can you please try and just close the gap on that one?

Yes. Grant, I may forget one. You gave a few questions there, but I'll see how I go. On the guidance one in Australia in the [ gap ], if you remember when we talked about the guidance, we called at NZD 855 million plus. And the reason we said plus is that we were basically saying it will be better than that if we sort of end up having a broadly flat market, which we didn't think would actually occur because we knew we were coming to some sort of level of headwinds. So what's really happening with the guidance being maintained is we've talked about the residential development, which is probably experiencing the bigger headwinds. And Australia is probably ticking a little bit better than when thought. But when I look at the distribution and products businesses in New Zealand, they're off a bit in volume, but they're actually being better in margin. So they're not far or for wash or what we thought anyway. So as we -- as I responded that, the reason we're still confident in our guidance is that there's a relatively conservative peg, which assumed that it's some market headwind anyway. And so yes, so that's really the main theme as opposed to one offsetting the other. And if you remember, we basically just sit out of that the NZD 100 million from the COVID impacts and didn't take any market upside, so that's how it interacts. So it's not so much trial setting, it's just a bit more conservative when we go into it. On the lot going on, a couple of things. When we -- you probably don't remember this, but when we -- first, on the timber piece, [ Ian Jones ] used to run our concrete business at [indiscernible]. When we started really focusing on how we grow the business and what sectors are interesting, we basically identified the wood timber sector as a very logical area for us. And we thought there was a real opportunity in there, both in new product lines adding a bit of capacity, as well as you're now seeing a structural timber. So back -- I think it was 2 years ago, 2.5 years ago, we took [ Ian ] out of that role, and he's running the whole wood strategy. And he has been focused on the setting up of the Taupo plant and doing that. We've got a good history of capital projects, and he's been all over them, the setting up of the team and going after now the Waipapa plant. So I'm very comfortable. We've actually taken a fee and put resources around in like one of our other divisions, [indiscernible] working in Hamish's business for Hamilton Building Products. But effectively, he's set up with a see individual good track record on that and focused on timber. So I think that really does blend out well. So then you get back out of that and you look at the other major ones, really, we're all but there on [indiscernible]. So we've managed that well on time, on budget. And so the only other major, major CapEx we're envisaging is [indiscernible] or the impact -- the [ inflation ] plant, which might -- it's NZD 150 million. And I think we've definitely got the bandwidth to do one other. Based on that we are to set it up, and there'll be a few other smaller ones, but. So I don't think we've got a capacity problem in terms of skills to turn over. In terms of then -- and I don't feel like we're making forward decisions here. We're doing everything on mid-market when it comes to timber and the adjacencies, so we're not really adding capacity at the top. And on the [ ComforTec ] one, I mean, that's the good change. I mean, it's just a bit of a no-brainer for us to go after that market volume of hold share increase or maybe it will be bad delivered, not just feed share. So I think we're okay with that, Grant. And I don't think we're actually overstretching. And then I'll let Bevan answer the last one.

Grant. We've discussed before, there are two key insurance policies in the convention center, that the contract works policy and as a third-party policy. The one that covers the reinstatement and rebuild costs is the contract works policy. This way to think of it is when [indiscernible] came out with the initial write-downs on the buildings book, and it was clear that convention center was going to cost a lot more than we had bidded for. When we renewed the insurance process, we significantly increased the quantum of that insurance. Its like any policy, you've got a total coverage cap. We increased that because we need to rebuild, costs were higher. What happened since then, that insurance has responded, so it's not an issue of the insurance responding. As Ross said before, if the costs have increased on the remediation due to complexity, those costs have now gone past that cap that we put in place, notwithstanding the fact we increased it materially. So that's why we've now got an overrun.

The next question is from Marcus Curley from UBS.

Just a couple of quick ones. Maybe I'll start with the easiest. Is the NZD 150 million, is that -- can that be tax deductible?

The answer is yes, Marcus. The tax effectively, you get the tax deduction often to buy in the cash flow rather than when we make the provision. So it will be treated just the same way as the prior B&I provisions where basically when you do the work that crystallizes the cash loss, that's when you get the deductibility.

And Bevan, the NZD 150 million is a gross number, so that the after-tax number would be more like NZD 100 million?

It is the pre-deductibility benefit number you said to us.

And then secondly, Ross, it sort of sounds like it's a little early to be talking to what you think the right sort of sort of resi style outcomes for FY '25, '24, even though there's some potential signs of some weakness. It's a little early to be conclusive in terms of what market you're entering next year?

Yes. So look -- I mean, I sort of indicated what I think the run rate looks like this year. The 20% of our volumes, and we know the prices that will be supportive of the margins we have [indiscernible] actually. Look, we need to keep doing what we're doing, but that's sort of the direction of travel we're seeing. So I think then FY '24. I mean, I'm not sure. I mean, we're basically watching it like a hawk and basically, whether it be our residential development business and our more volumetric businesses. And we just -- we're really going to make sure we have about a 6-month indicator if we look ahead. So as we start to see it dropping a bit more than we think, then we'll be ready to move on costs and some of those things. If it's a bit more buoyant, then we'll -- again, we're well-positioned. So I think we've got our costs. We understand them, we're fighting fit to these sorts of things. So we're ready to move, and we're watching it very closely. I'm just not sure where it will end up. I mean, I think it will ease. I don't think it will be a calamity, but we'll watch it and make sure if it's getting really hard, then we'll be basically sizing our business to suit it.

And then just finally, probably the first time publicly, you've got an opportunity to talk about the changes you've made with the [indiscernible] rebates. How do you think that impacts the business, if at all?

Not at all. I mean, I'm not -- I don't think the way we're rebating was actually volume forcing. And when you look at the submissions into the Commerce Commission from our clients, the merchants, they actually said this does not influence the volumes we buy. So I mean, it wasn't us saying that. It was actually a customer saying that. So we'll change it. I mean, the thing is that it just made no sense to fight that fight. I mean, they were looking for us to do that, so we decided we'll just change it. I mean, I was waiting for the report to come out with the recommendation, which is sort of the logical thing to do, but I don't think it will have any impact on what we saw.

And so you remove the rebate and replace so that you lower the price? So how does the...

I'll explain. So what I didn't like was the concept of volumetric rebate. And what that means is if you fairly bought 10 and you have a 100, and you've got a 10% discount. But if you got to 200, you might get a 15% discount across the whole 200, not the -- so what I didn't like is the incentive that created potentially to drive volumes. They go to the next, and therefore, they get a rebate across their whole volume. So what we're changing from that to just each client based on what we think the volume is, which will just be a rebate [ this ] year. So if they then change the volumes the following year, then you'll adjust it accordingly. But you're not, there's no rebate incentivizing, driving volumes. It's just a -- there'll be some volume sense around it as you think about how much they put through, but we won't -- they won't have to get to a magic number to get a rebate across the whole volume. So it's really still -- they're still rebates, but they're just different constructive rebates.

The next question is from [ Rowan Coleman Smith ] from [indiscernible].

Just a couple of quick questions. First of all, there's talk of kind of 20% down in the resi business, but can you talk of early-stage construction orders? Frame and truss, concrete slabs and resi reinforcing volumes, just things like that? I know you gave us some color on decent roofing numbers, but something a bit earlier in the construction process.

Yes, so there's a bit of a [indiscernible] side to the [ deal ] on this. And then if I -- I think what we're seeing, and as I said, the roofing plants board, those sorts of trade's very strong. Civil -- what I call civil has been a little bit soft, but it's a bit complex as to what's going on because the wet season in New Zealand has been very wet last 6 months. And what we're seeing, if I look at the customers that are pointing into non-res and infrastructure, they're all saying the same thing. It's been very wet. And a lot of those customers, they are actually asking and getting product, stockpiling, trying to get through it all in the first half. So it feels like that part of what I call the civil works equation is going to be quite strong in the second half. And we've seen the same thing through Fletcher Construction and the roading. We just had a terrible ceiling season so far, and everyone is getting organized to try and get as much through in the first half of calendar '23. If you get into the residential civil work side, that's also been softer, and I think that's probably representative of just that sector being a bit slower. So I think that's probably more underlying. If you then look at what we're estimating in placemakers and frame and truss, it's probably about 15%, 20% off a year ago, but it's a bit complex. That number is simply because it's not -- what's happening is as projects have been getting delayed, part of that is actually being stuff being stripped forward as projects didn't start. So it's a bit messy, that number in terms of a lead indicator. I don't know, Bevan, if you want to add...

No. I think the only other thing I'd add, Ross, is that you get asked the question a lot, what you see in terms of calculations. We continue to see very little getting canceled, but you still do see deferrals taking place. To Ross's point, residential [indiscernible] line, for example, have been lumpy due to weather that creates flow-on effect. So you're still in that lumpy, deferred mode at the moment. What has been strong in the concrete world has been non-residential unit, kind of where large warehousing, logistics, et cetera, working been very busy in that space. The non-res has been going well, and we forward in that they've continued to look robust.

Perfect. Just sitting back to your comments around it being difficult for the civils to kind of lay road base in your own construction business. I think one of the last projects you've got with some risk pool to work with is APPP. Are you able to give us some color on, I guess, provisioning there and time line going forward? I've been paying close attention to the YouTube videos you put up every month. It looks like there's still a little bit of work to do.

Yes, just to give you. We are pretty close to physical works completion now, so -- and what then happens at the end of it, there's a bit of a quality assurance process where you've got to do all your final testing, put those around it and get the acceptance process through. So predominantly, in the first couple of months of next year is we'll be going through that process. And we should be able to open not long after that. 2 March, that's -- we're going to work through that with [indiscernible]. So broadly, the road -- the physical works is give or take finished as we get up to Christmas. What then -- and we flagged it in our accounts. What then happens is we've still got a washout COVID delay claim to do, which we're working through of what we could do. So if you remember the first COVID shutdown, we did wash that up after a year of negotiations. So we've got a similar one to wash up at the end of the project, which we'll probably just sweep it all up. And I believe we'll get the right outcome there that we've got to get that and we've played in the account. There's a risk for that, but as we sit here today, I think the dimensions of it and the justification for it is solid, and so I think we should be okay. So that's sort of how. But the good thing is it's always nice to get these things finished. So -- and the other big one, which we [indiscernible], which we're hoping we open on the 21st of December, give or take, so finish, so that. That's why, I was answering the earlier question, we're broadly through all that historical stuff. So before that, we'll be open. And then the last one will be the convention center, which hopefully we get done by the end of '24.

Perfect. And then final question. You're going into the saw milling industry. It's historically been a pretty rocky industry in New Zealand. I guess, why do you think you can do it better than other people who have kind of been and in out of the industry?

Well, look, I think that there's a few things. If I look at the timber opportunity is in -- talk sawmilling, a bit structural timber. When we deal with a lot of structural timber through placemakers at frame and truss plant. So we're sort of all in that area. And the bit we haven't got is what I call -- we don't play in what I call the raw material conversion into the structural timber itself. So I don't see it as, what I call, a major adventure with sort of a logical adjacency for us. I would make the point that we do have a 50-50 JV in Australia with West Pine in Western Australia, which runs the sawmill. So we do have those sorts of things in our business. The other thing around the sawmill, which is interesting as we look at what we're doing with Taupo and the wood products is there's a whole bunch of stuff that comes out of sawmills that you could use in different board products which get reconstituted. So having that raw material supply with all cuts, we've already got a way and use it. And as we grow that part of the business, it's a very, very good complementary strategy. And the third part of it is there's also some of the byproducts. We've made fuel pellets. And again, we're a very big consumer of that and probably a bit more so, and I think it's a growing part of the manufacturing environment anyway, the power source. So I think it's -- and that's the way we've looked at it. The books, it gives us a very logical place for us to play and not a big step for us to make, and it sort of complements nicely. If you think of the big structural components out there, we're well positioned in concrete. We're well positioned in steel, and we sort of -- we're sort of half there in timber, and we just really want to fill that out because I think then you've got those core structural elements covered.

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

Quick one for Bevan, actually. I think we've got around about NZD 600 million guided CapEx at the August result. You've obviously sized the project now for the plan. You've got the additional acquisition with Waipapa. Just -- can you just talk us through sort of CapEx expectations this year, next year and the year after, Bevan? And just to give us a guide as to where against whatever the market is, where the gearing is likely to be over the next couple of years?

Yes, sure, Simon. So what we call our base CapEx envelope, where everything [ exceeding ] the major growth in business is the best way to think about it. That's consistently in that NZD 200 million to NZD 250 million range per year. No change there, and that's all the maintenance CapEx, normal efficiency, the digital [indiscernible] program, which lets all of that NZD 200 million to NZD 250 million per year. Over and above that, what we did at Investor Day is we had about NZD 500 million of growth CapEx, and Ross ran through the project earlier. We remain committed to those that include Taupo, which we've affirmed, we've just reconfirmed. The split of that CapEx is roughly half of that NZD 500 million and flowing in FY '23, Simon, and the balance across '24 and '25. And the one additional piece per our announcement this morning is a bit on Waipapa. So that we expect to be about that NZD 100 million going out in Q4 this year. Otherwise, it's all still consistent with what we said at Investor Day.

Excellent. And then I think on top of that, we've got the NZD 125 million. So Winstone Wallboards as well, right, in this year?

That's right, yes. And that project is a very briefly alluded to going well. Teams' done a great job. We're on track so that May, full commissioning for the year. And again, as I say, we'll keep our feet running for a little bit longer. But we are on time, on budget, on [indiscernible] with time. Perfect. You're winding up.

There's no further questions at this time. I hand back to Mr. Taylor for closing remarks.

Well, it was a seamless in [ clause ] there, Rachel. Thanks for coming on the call. Obviously, we'll be around if you have any follow-up questions, but appreciate your time. Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.