Fletcher Building Limited (FBU) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Fletcher Building FY '23 Full Year Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Ross Taylor, CEO. Please go ahead.

[Foreign Language]. Good morning, everyone, and welcome to the presentation of our annual results for the 12 months ended 30 June 2023. Presenting with me today will be our CFO, Bevan McKenzie. The agenda for today is shown on Slide 3 of the pack. I'll provide an overview of the results. Bevan will provide a bit more detail on the financial performance, and then I'll sum up with how we're thinking about FY '24 and beyond. After this, we'll take any questions you may have. Turning to Slide 4, and a summary of the full year results. Against the backdrop of a softening residential market and extreme wet weather events in New Zealand, we delivered a strong year across our businesses. EBIT increased year-on-year to $798 million, and margins were pleasing at 9.4%. The return on our funds was 17.1%, and our balance sheet remained strong. Against this backdrop, the Board declared a fully imputed final dividend of $0.16 per share. The disappointment, however, was in provisions we needed to book on the convention center. Cost forecast to complete the project post the 2019 fire event moved well beyond the insurance cover, which is in place. These provisions were the main contributor to a drop in our net earnings after tax to $235 million for the year. Provisions aside, the team are making good progress on completing the project with all the car park levels and the hotel expected to be completed in the next 6 months and the full project by the end of calendar year 2024. We continue to look through the cycle and made good progress on our $800 million growth investment program. We remain confident these investments will deliver strong upside earnings to our bottom line in the next couple of years. In the short term, we remain very focused on being prepared for a softer upcoming 12 months and ensuring we perform well through the coming year. While revenue was stable year-on-year, overall group profit and operating margins grew year-on-year, as shown in Slide 5. The performance of our Materials and Distribution businesses on both sides of the Tasman was one of the key features for the year. Combined, these businesses produced an 18% or $104 million profit uplift on the prior year. This improvement offset the tougher year our Residential and Development business had as it weathered the softer New Zealand housing market. That said, the business still sold 617 units through the year and made $147 million. Group return on funds eased slightly to 17.1% as we invested through the year into our future growth opportunities. Moving to Slide 6 and on to cash and leverage. Cash flows from the Materials and Distribution divisions were very strong at over $700 million, but this was partly offset by the outflows to rebuild our land and housing stock following the significant drawdowns that occurred through FY '21 and '22. The net result of this and the growth CapEx investments we made through the half is that net debt increased as flagged to $1.4 billion and our leverage ratio moved to 1.2x. All this maintains our strong balance sheet position with available liquidity at the end of the year sitting at $1.4 billion. On Slide 7, we showed that net earnings for the year were $235 million. As I mentioned previously, the decline in net earnings through the year was mainly from the additional provisions we needed to take on the Auckland Convention Center project. Earnings per share and before significant items, which is the basis upon we pay our dividend, was $0.577 per share. Against this backdrop, the Board declared a fully imputed final dividend of $0.16 per share to be paid in October. Our ongoing progress on making our workplace safer and then delivering against our sustainability targets is shown on Slide 8. Protect, our multiyear safety program continues to drive improvements. At the end of the year, we recorded a total recordable injury frequency rate of 3.1. This was a 12% reduction on last year. And pleasingly, 90% of our sites remained injury-free through the year. On sustainability. We continue to make very good progress on reducing our carbon emissions, diverting waste from landfill, getting more of our products sustainable and substituting the fuels we use with sustainable options. The graphic on the slide highlights the reductions we're achieving in carbon emissions with our emissions intensity now down 19% on our 2018 levels. Slide 9 highlights our progress in 2 other key areas: our customers and our people. We continue to see our service performance to our customers improve through the year. And our Net Promoter Score, or NPS, increased to an average of 40. This increase was driven by many things but I'd call out ongoing improvements in our on-time deliveries, our stock availability and our online and omnichannel offerings as all being significant contributors. Going hand-in-hand with customer improvements, we also saw our overall employee engagement increase to an employee Net Promoter Score, or ENPS, of 26. While the improvement was pleasing, this result only places in the median for global organizations. So more work to do if we're going to get to global best-in-class levels of 40 and above. As we mentioned at our recent Investor Day, driving improvements in these 2 areas is critical for achieving both the next leg of our performance improvements and then to perform consistently in the upper quartile over the longer term. Slide 10 provides a summary of each division's performance through the year. As I mentioned earlier, the uplift in profits and margins across all our materials and distribution businesses was a highlight. And I think the performance in Australia is worth a particular mention, with the Australian division achieving an EBIT margin of 6% through FY '23. And while in Australia, we advised the market today that Dean Fradgley, our Australian Chief Executive, will retire in February next year. And I want to take this opportunity to thank Dean for the good work he's done during his time at Fletcher Building and wish him well in his next steps. Once we've decided on Dean's replacement, we'll advise the market accordingly. While down year-on-year, our residential development business performed well in the face of a softer New Zealand housing market. The combination of the quality of our communities and the product we develop and with a skew towards a lower average unit price has meant we continue to see reasonable sales volumes and margins. And in Construction, Brian Perry delivered a good result. However, Higgins was lower in part due to the unusually wet weather. The overall construction order book remains strong and continues to be a real highlight for the business. There are more details on the divisions in the appendix to this presentation as well as in our annual report published today. I'll now hand over to Bevan, who will take you through the details of our financial results for the year.

Thanks, Ross. [Foreign Language ] and good morning, everyone. Turning to Slide 12 and the income statement. Three key points to note here. Firstly, input cost inflation has remained a feature throughout the year, averaging around 6% to 7% compared to the prior year. We are pleased with the ability of our Materials and Distribution businesses to recover this through price with gross margins in those businesses expanding by 170 basis points year-on-year. As Ross has highlighted, the significant items charges of $301 million remained mainly to the additional provisions on NZICC with the other key charges being the Iplex Pro-fit fund and property and equipment damage during the significant weather events in New Zealand in the second half. Consistent with our announcement at the half year, I'd note that all trading and business interruption losses from these weather events were taken above the line in EBIT before significant items. Finally, here, funding cost of $94 million have risen in F '23 on higher borrowings and variable interest rates as flagged. Slide 13 shows the group's margin performance over time. The operational gains we've made over the past 5 years have been in a few key areas: cost efficiency, getting sharper on the products and segments where we play and ensuring our pricing is both well controlled and linked to the value we deliver. The resulting margin improvements, as shown here, have come mainly in our materials and distribution divisions in both New Zealand and Australia, which is the top chart on Slide 13. In F '23, we were pleased to deliver margins both for these divisions and the overall group of 9.4%. To cash flow is on Slide 14, the Materials and Distribution divisions delivered strong cash flows of $720 million on good earnings and working capital management, especially in the second half. The full year result was about $270 million higher than the prior year. This was partly offset, as Ross as noted, by the expected rebuild of land and housing stocks in residential and development after a material drawdown in the prior 2 years. This constitutes the majority of the working capital movement of $294 million that is shown in the middle of the table. Finally, here, cash tax payments in the year were $191 million, in line with expectations. We do expect these cash tax payments to reduce materially in F '24, as I'll highlight shortly. On Slide 15, some more detail on the various working capital movements and our Materials and Distribution divisions receivables were well managed in a tightening credit environment. Debtor days for these businesses increased by less than 1 day from June '22 to June '23 and bad debt expense for the year remained very low at just $4 million. On inventory, we saw some of the stock unwind take place given the elevated levels in the prior year, and the creditor movement was from higher balances of June '22, returning to more normal levels in June '23 with underlying supply credit terms unchanged. In resi and development, almost all of the working capital movement was from around $235 million of prior land commitments brought on balance sheet. We've entered into very few new land commitments and have paused work on some housing developments until we see the New Zealand housing market recover. Pleasingly, we continue to see the market value of the land we hold on balance sheet being around $300 million higher than book. Our housing stocks entering F '24 are at around 100 finished houses, which is slightly but not materially above the levels we target. On Page 16, we show the updated phasing of the legacy construction cash outflows. This is aligned to the latest accounting provisions, so includes the impact of the additional $105 million provision on NZICC announced last week with $70 million of that impact forecast to be in F '24 and $35 million in F '25. Because we're unable to take third-party liability insurance revenues recoveries to account at this point, we have not included any in the forecast cash flows shown here. However, we will continue to pursue material claims under this policy and recoveries would represent cash flow upside from F '25 onwards. I'd note that FY '23 legacy cash flows were around $20 million favorable to what we forecasted at Investor Day, with this being a timing difference on Puhoi to Warkworth between F '23 and '24. And I'd also note that legacy cash flows in F '24 are expected to be heavily weighted to the first half, which will lift our leverage position at December '23. Finally, all cash flows shown here are pretax, cash taxes impacted by the construction projects based on when the cash outflows occur and not when the accounting provisions are taken. Therefore, our significant legacy cash outflows in F '24 are expected to materially reduce our tax liability with group cash tax payments forecast to be in a range of $30 million to $50 million. On Page 17, we provide an update on the Iplex Australia Pro-fit matter. As previously announced, houses built in Western Australia using Pro-fit have experienced leaks with around 1,500 homes currently affected. There have been no abnormal leak rates outside of Western Australia. In April '23, we announced a provision for this matter of AUD 15 million to cover expected costs through F '23 and F '24 of repairs and replacement work. We did this to support our customers and homeowners on a no faults basis and to date, around 200 homes have been repaired through this fund. Since our April announcement, the Western Australian building regulator, DMIRS, has continued to assert that it has concerns regarding the Pro-fit manufacturing process though has not provided the results of its investigations to Iplex. Iplex's own extensive testing has not identified a manufacturing defect, and we continue to look at a range of other factors, which may be relevant to explaining the cause of the leaks. Last week, DMIRS advised that it referred the matter to the ACCC, which is expected to undertake its own investigation. While there remain a number of uncertainties in this matter, our position announced in April remains unchanged based on what we know today. On Slide 18, our base CapEx was $230 million for the year, which is within our target range of $200 million to $250 million, and we're also making strong progress on our program of above-base growth investments. For F '23, we invested around $300 million in growth CapEx, which includes the successful acquisitions of both Tumu and Waipapa as well as getting going on several organic projects. As we've noted, all of these growth investments are targeting ROFEs at or above 15% when mature. And finally, we'd call out the Winstone Wallboards plant project, which has gone very well, remaining on time, on budget, with commissioning currently taking place and with final CapEx of around $30 million to complete that project in F '24. Slide 19 shows that closing net debt for F '23 was $1.4 billion, the same as the half year position and slightly ahead of the $1.5 billion we guided to at Investor Day, which was due to a stronger June trading cash result. The increase in net debt for the year was due to expected investments in land and housing stocks, growth CapEx and the tax and dividend payments. As previously guided, this has resulted in a leverage ratio for the group of 1.2x in exiting F '23, as shown on Slide 20. This remains currently at the lower end of our range. We do expect to move into the upper half of our target range through FY '24, including at the half year due to the growth investments in the legacy construction cash outflows. We remain confident, though, that we remain within the overall 1 to 2x range. Slide 21 shows that the group's funding profile remained strong with around $2.8 billion of total credit facilities, meaning the group's total liquidity is healthy at $1.4 billion. The group's current average interest rate is 5.7% and around 60% of our current borrowings are on fixed rates. In FY '24, we expect funding costs to lift to $140 million to $150 million as a result of the higher debt levels and higher average variable interest rates. Finally, on Slide 22, the Board has declared a fully completed final dividend of $0.16 per share, which brings the full year dividend to $0.34, a payout ratio of 59%. This dividend reflects a solid FY '23 earnings result, whilst also having regard to the expected cash flow impact of the construction legacy projects through the next year. The final FY '23 dividend will be fully imputed. However, we do not expect to be in a position to impute the interim FY '24 dividend due to a lower cash tax profile this year. With that, I'll hand back to Ross for some closing remarks.

Thanks, Bevan. I'll take you to Slide 24 and make a few comments both on these results and the year ahead. Firstly, we've delivered a solid 2023 result. And while this result was impacted by the Auckland Convention Center project, we are getting closer to having all legacy construction work firmly behind us and in our rearview mirror. We're well positioned to perform in the 2024 financial year and through the cycle across all our operations. We're actively focused on further improvements to our overall operational performance and have a good set of metrics beyond just margins to demonstrate this progress. We're well into $800 million of committed growth projects which we are confident will be delivered well and set us up for significant extra earnings in the next 2 to 3 years. And beyond this, there remain plenty of other growth opportunities we can take advantage of as soon as we have a firmer sense of when the cycle is returning to growth. All in all, Fletcher Building is nicely positioned to both the present market cycle and an exciting future beyond this. And to finish, I'd just like to thank our people, our customers, and our shareholders for their efforts and support through the last 12 months. And I'll now hand back to the operator to take questions.

[Operator Instructions] Your first question comes from Grant Swanepoel from Jarden.

A couple of questions. Just first one, you mentioned in the past about 10% of your workforce on flexible or temporary contracts. Can you still cut this into the slowdown that we're now seeing?

Look, I think a lot of that's been moved on in certain areas, and it's always a bit of a chicken and egg, Grant. And what I mean by that is that as we start to see businesses that have been busy, you just don't move. And so some of the businesses haven't done that. Others that have already seen softening, we've already moved in certain things, and there's some that will probably be a work in progress. But it's hard to sit here and say there's a whole 10% available because we've already seen some of the volumes come off across our businesses. So we're probably a chunk of the way through that, but probably not all of it, just depending where you are. So we've probably got a bit more flex there.

In 2H, Tradelink was pretty disappointing. There was a project to improve those margins. What's going wrong there? And is there a change of strategy coming up?

So look, it's not lost on us, and we talked about this, I think, quite openly at the Investor Day. We are disappointed with what Tradelink's achieved. So we need to get in under the covers there and just have a good look at that in which we'll do over the next few months. And I don't mean that in a threatening way. I just think it's just -- obviously, it's not doing what we want and we need to find a way forward for it that works.

And then Iplex, you've done 200 homes out of the 1,500. How much of the $15 million provision has been used up for those 200 homes?

Roughly about 20%. It sort of gives you a run rate for the year to do the repairs while -- we need to look after the homeowners and the customers while we actually get to the bottom of what's going on and get data because it's -- because we've got to get the causation, what's causing it, and we've got to then work out what the best and appropriate fix is. And we're also working on other things that we might better to reline pipes, et cetera, just to bring the cost of the fixes down. But critically, it's keep on top of the leaks while we get to the bottom and finish our testing ourselves as well as understand causation. And that should -- we should be fairway through that over the next couple of months.

My final question is on net working capital. Can you give some color in terms of what FY '24 might look like? Is the housing inventory going to be run down so we actually get a reversal of that impact?

That will be the main one, Grant. The main working capital movement you see will be in Steve's business. We will have, we think, a reasonably material reduction in funds through the year with $9 million, $15 million in that business at June '23. So you will see that come down through F '24. The Materials and Distribution businesses, there's a little bit more to come there, Grant, but it will be mainly in Steve's business that you see the unwind.

Your next question comes from Lisa Huynh from JPMorgan.

I guess, I just had a question on the outlook and the expectations of Material and Distribution volumes being down 8% next year. I guess, can you just talk through a little bit more about the range of outcomes the business is planning for around that negative 8% and just the key milestones you're kind of watching out for from a macro perspective an election is coming up?

I'm going to try and avoid guidance and give you thematics and see how satisfied you are after I finish. But if I look at the what I call the volume at the Materials and Distribution concrete businesses, Australia and New Zealand, we've sort of said we think we'll see about another 8% come off in that in volumes. And look, it will be something order magnitude that I think. I do think those businesses are well positioned and you've seen strong margin performance this year. I think it will come off a bit, but not dramatically. So that's sort of how I think about those businesses. And as the volumes come off, there's going to be a bit of cost inflation. So exactly the revenue line, it might not be exact wash, but it should be there or thereabouts with a bit of margin softening. If you think into the residential business, I actually think we're seeing reasonable volumes, but they're sort of stabilizing -- prices sort of stabilizing. The issue we'd have to deal with through this coming 12 months is cost, so costs will go up. So we're expecting, and we've said for a while that we expect to see a margin contraction in that business as revenue stays the same for the year and costs go up a bit. And I think the other thing that we -- we're hoping to -- we'll see as that might change by the end of this financial year, FY '25, but time will tell on what that looks like. And construction will be about a similar outlook. So that's how I'd talk about the year, but we're only in August. So I don't want to get too far ahead of myself.

Yes, it is a bit early. I guess, you talked about the stabilization in residential. But, I guess, Ross, what type of feedback and trends are you kind of hearing back from your sales team around foot traffic?

So that's good. I mean -- but I'll just go to sales. I mean, if I look at traffic, if I look at -- as we exited last financial year and into July, August, we've just been selling 17 to 20 houses a week. Foot traffic is good, so -- and prices have stabilized. So I think that all is well, but it's just too early to call. I mean some of the commentators out in the market are a bit more bullish about where we are in the cycle. But we just need to see that in the business. So I'm hopeful, but I'd call it stabilized is where I'd call it now. And we're seeing decent volumes. So that's good. It's a nice -- better place to be than we have been. So yes, we'll see how we go from here. And by the time we get to the ASM or later this year, we might have a better fix on it as we get into the -- through the election, into the summer season. So we'll see what it looks like then.

And, I guess, just a follow-up question on the dividend. The payout ratio was below The Street's expectations. But should we expect -- be expecting you to err around the site of caution around the dividend payout ratio range over the next 12 months, just given the slowdown that's ahead?

Lisa, the first thing I'd say is your dividend payout range this year at around 60%, it was a little bit below the Street. It's still a good solid dividend, reflecting good underlying performance. Our reality is that, that construction legacy outflow has clipped us a bit this year. That's our reality. If you take that out going forward, we continue to think that we will pay good sustainable dividends within that range. We'd like over time to move higher in the range. It's too early to call that now. But I'd say that on an underlying basis, the dividend performance, it reflects the strength of the business ex those legacy cash outflows.

Your next question comes from Sam Seow from Citi.

Just on resi, you had the 617 sales there. Just wanted to ask if there was any contracted but not sold during the period? And then you talked a couple of months ago to sales around 700 to 800 through FY '24. Just wondering if that's still correct.

Yes. So we only book a sale when we get the certificate of completion. And so basically, by the time we get to the end of May-ish, we're pretty well done in sales. So there's always carried forward into the financial year. So in a sales since a year almost finishes in May and starts in -- but that's every year, it looks like that. So it's very normal. So you still get a year sales, it's just that that works. In terms of the volumes, yes, 700 to 800, I think, is about where we feel it is and it's very well supported by the sort of sales run rate we're seeing in the -- in July, August. So that might all go well for better than that, but will stay with the 700 to 800 now and we'll see how we go.

And then just on Australia. You had the 6% margin, which is a great result. Just maybe unpack some of the drivers there. And some of the factors there look like online sales, which looks a little bit more structural.

No, look, I think what -- if I get right in my helicopter and it was Bevan speaking, he had been his tail crane. But if I sort of get up above it all, the Tradelink was a disappointment. So it's sort of stuck at those low margins. So that didn't really feature any improvement. But what we saw across the other businesses is a couple of high-level dynamics. One is costs well under control. But then what we've been doing is pushing and focusing on the right products with the right margin and just getting our mix better and more -- better set. So the combination of the products we're emphasizing, the quality of our distribution, logistics and cost base and the manufacturing improvements. So it's a whole lot of things. And the reason we've been, I guess, quite confidently forecasting getting to this sort of level as we could see those structural improvements getting in place. And then the profit from the revenues always lags by about 12 months. So that's why we've been quite emphatic that we get into the 5% to 7% range because we can sort of see the trajectory. And that's just what you've seen. And the good and bad thing is we've achieved it without seeing the uplift we had expected in Tradelinks. So the focus really now is on what we need to do to get Tradelink to contribute to that uplift as well. And what we've also said is we therefore still see opportunity in the future. We're still going to deal with what would probably be a softer market through '24, but we still see runway in front of the Australian business.

Your next question comes from Stephen Hudson from Macquarie Securities.

Ross and Bevan, just a few from me. Firstly, just your comments that all trading and BI losses were taken above the line this half. Can you give us some idea of what you think those costs could have been, Bevan, and also going to add in destocking as well because obviously a feature for your customers? Second question. Just on Australia. Are you minded to replace Dean as country head? Or do you think you might sort of look to replicate the New Zealand model and look at lines reporting only rather than sort of a geographic country head? And then just finally on the mix of fixed and variable costs. I think in the past, you've sort of said 25% fixed and 75% variable. Bevan, I just wondered if you could give us your latest thinking in terms of the mix there to the EBIT line.

Stephen, Ross here. I might start with the Dean question and then let Bevan answer the other 2. So look, I -- we -- I'm committed to replacing Dean with a country head. I think it's quite important because it is a time zone step away, and I do think there's a benefit of having closer real-time hands-on management of that leadership of that business. So that was the model we moved to. If you think back 5 years ago, and if I look at the Australian business back then, it was achieving 1%. So I do think part of the reason for the success of what we've been implementing is having a leader in country with that leadership team working with them in real time. So that's the intended approach. And once -- we'll work through that over the next 6 months, and I'm comfortable we'll have someone in place by early next year.

Steve, the weather events in Jan-Feb this year, they cost us around $30 million to $35 million. Essentially, we lost -- think about it as of 2, 2.5 weeks of trading. And of that impact, about 2/3 of it was in the Materials and Distribution divisions. And the balance was in the resi and construction businesses as they were obviously interrupted as well, so it was a reasonably chunky impact as we spoke to at the half year. In terms of destocking. You've seen that continue in a couple of places through the second half of this year. You're definitely seeing the merchant channel continue to destock, including in [indiscernible] and in PlaceMakers. But it's largely run through and when we look at some key businesses like wallboards, like steel, we think we're broadly done there that the destocking has occurred. So you've got to more normal levels. I think there's a couple of spotty areas to go. I think timber will be one of them, but largely run its course. And then finally, on fixed variable split. We still sit for the Materials and Distribution divisions at 24% to 25% fixed. So it's very consistent with what we've seen before. So the read-through there is as you've had revenues come off, the fixed cost control has been good in those businesses.

And Bevan, just to clarify. That's to the EBIT line that you're talking on that last comment.

The fixed variable split fixed costs represent between 24% and 25% of total revenue for the Materials and Distribution divisions, the balance being variable.

Your next question comes from Simon Thackray from Jefferies.

You've partially touched on this, Bevan. Just -- I just wanted to get a little bit more color on the first half versus second half timing of cash flows for gearing just because I think you made the point first half will be a bit heavier on cash outflows than the second, but you'll stay within the range. So can you sort of maybe just help us understand the expected timing of cash flows first half versus second half?

What you should expect in the Materials and Distribution divisions is a pretty normal trading cash performance there. So I use '23 as a pretty good guide, Simon. I think resi will be broadly cash neutral first half with cash mainly flowing in the second as we've got the weight of our completions there. And then your final key factor is, obviously, those construction legacy flows and we've pointed out, our estimate at the moment is that in H1, it will be about $275 million of the F '24 flow. So that will be the key driver that's pushing up the leverage at the half year.

And I presume that the funding costs themselves, are they reasonably even given your comment about being about 60% fixed?

Yes, they should be slightly more second half weighted. At this point, it's -- the phasing of that legacy cash flow is going to be the key variable there, but slightly more second half weighted on funding costs.

And, Ross, maybe just one more for both of you. Just in terms of easing supply chain constraints and falling logistics costs and freight costs, I'm just thinking in terms of distribution. You had that dynamic pricing model working very well through COVID and post pandemic. Do we expect you to give price back in the market? Or how should we be thinking about pricing given not all areas of the business face rising costs? Some, in fact, face cost deflation.

Yes. Look, I wouldn't say there's a wholesale approach to give price back. I don't think that's what will happen. But I do think, if I look at the businesses, I think where we're going to see the most competitive part of our business is going to be the distribution business, and we're seeing it already. And I think there'll be a bunch of -- as you work there, it's a volume versus margin game and there'll be a bit of -- need to be a bit of elasticity there as we work through this year. So if I look at our businesses, and it goes back to what I was characterizing earlier, if I look at the concrete and the materials businesses, generally, I think there might be a bit of it, but I don't think that will be a feature of those businesses. I think we'll see some real push and shove in the distribution businesses because there's a fair bit of competition, particularly in New Zealand across both plumbing and just the normal hardware distribution. And then in resi, as I said, the revenue, I think the prices have stabilized. Maybe hopefully, we'll see some improvement there. So that's sort of how I think about it.

That's super helpful. And then finally, just on your wagon wheel of revenue on Slide 32, which is always helpful. Just in terms of your 8% decline in volume expectation for FY '24. How do we think that wagon wheel -- in your mind, how does that wagon wheel shift between sort of resi, nonresi infrastructure?

That feels like a question for Bevan.

The resi sector exposures in both New Zealand and Australia, Simon, we expect to be down a bit more than that 8%. I think you should be more sort of 12, 13-type levels as our guess at the moment. And then it's the commercial and infrastructure exposures, which are better than the average. So we think infrastructure will be broadly flat, slightly down. Commercial might be down about minus 5, and that gets you the weighted average of the minus 8. No surprise, it's resi, which is the one that will come off more than the others.

Your next question comes from Marcus Curley from UBS.

Just following up on that, Bevan. Have you seen any signs of commercial being down 5% so far?

It's not down that much yet. Your question is a good one, Marcus. It's holding up pretty robustly at this point, and you're seeing that in the consenting numbers as well. So yes, look, we're calling it for the year at a minus 5%. How we feel today? Well, we probably feel like that should get and we might do a bit better in commercial. And one of the things Ross and I have been pleased about is the businesses have been pointing themselves, particularly in [ next world ] for example, into that commercial segment. So no, it's remaining robust at this point.

And then just circling back to the dividend. Is it -- am I right to think that the reset down, you would hope as a base? Or is it a slippery slope?

No, I'd avoid -- I certainly would describe as slippery slope, I'd go back to the comments before with targeting being well within that 50% to 75% range of NPAT pre SIG. And we're just being prudent at the moment given those legacy cash outflows. We will -- we think this business should be delivering a good healthy dividend. Outside of legacy, the performance is very good and the cash flow performance is following it. So it shouldn't be anything that changes that. We're just being realistic at the moment with that outflow we've got in '24.

When you put out the statement the other day around the NZICC, it sort of read that you weren't giving up on insurance proceeds, but could you give a little bit of color -- and the number that you talked to was about $100 million, so obviously, pretty meaningful. Can you give a little bit of color in terms of what's changed here outside of the accountants having a particularly strong view on how you should think about putting this through the accounts?

Look, I think the issue is the threshold for booking those sorts of revenues that come from insurance proceeds as there's words like absolute certainty. And you don't -- and unfortunately, the intersection of what your commercial view is doesn't necessarily intersect well with accounting standards would be the way I'd characterize it. So we are -- we will -- as we said in the stock exchange announcement, we think we've got a very good case for those third-party insurance revenues, and we intend to execute that case as we go through the year, so -- and what you've seen and what we've now profiled in both the cash flow expectations is that's not baked in. So we'd expect to see benefits from that of some order of magnitude in the future years.

And then just finally, can you talk a little bit about the [indiscernible] acquisition contribution in FY '24. Has that moved at all away from your last comments around $35 million?

Marcus, Waipapa first, we're very pleased with how that business is running. Hamish and Ian, the team is doing a great job, integrated well. In FY '24, it will deliver between $10 million and $15 million is what we're targeting. That's of the total $35 million contribution from those investments that we highlighted. We've also said that Waipapa has capacity to grow. We're working on an expansion of that. And you'll see a little bit of investment flow over '24, '25 as we build up the capacity of the mill, but we're pleased with the position team has done a good job.

Your next question comes from Shaurya Visen from Bank of America.

I had one on your Residential and Development business. So just following on from Sam, right? Can you just give us a sense of how we should be thinking about the volumes for the business? So see the Investor Day's outlook first for 700 to 800 units, right? So which sort of at the lower end implies 14% year-on-year growth, 30% year-on-year at a higher end. I'm just trying to marry that with some of your comments that resi markets still remain quite soft. I understand they've stabilized. And the next one, just related, perhaps for Bevan is, could you just help us with a few numbers on what are the number of sales agreements you have in place? Or what is your current weekly sales rate? I think it's some of the numbers you have shared with us in the past.

I think we caught most of that. I'll have a crack at the answers and to the extent there's some leftover, then Bevan can have a crack. But look, so firstly, when I look at -- you got to remember also, remember, but last year, we had 2 dynamics we talked about to get to the 617 we sold. One was we came out of the previous financial year with very little stock. So we really had to rebuild our stock through the first half. So we have the dynamic of not the market plus not having a whole lot of fronts to sell stock on. What you then saw in the second half, which we pointed to, and we thought we'd do a bit better than we did, but we sort of still got a lot of volume out in the second half. We had more sites to do, and we saw a couple of features, more development sites we're selling on better stock levels. And as we got towards the end of the financial year, we started to see the market stabilize and people starting to think, well, okay, it looks like the markets bottomed, so they got more confident in actually buying houses. So what we're now seeing is we wash into FY '24, which is quite a different dynamic. We've -- as Bevan mentioned in his presentation, we've got good stock levels. We've still got to build a lot through the year, but we're coming into the year much better positioned, which was part of needing to put the capital back into residential to get those stock levels back up. So that's been done successfully. We're seeing a market that we're not calling it as growing just yet, but we certainly are calling it as stabilizing. And what we're seeing through the winter months are not the best months generally, but we're still seeing 17 to 20 sales per week, which is good. So the combination of what we're seeing is foot traffic sentiment out in the market, our stock levels and the volumes we're seeing are giving us confidence in sort of saying we will get to the 700 or 800. Now we will be targeting more than that. But as we sit here today, we're just getting ahead of ourselves because it is only mid-August. So everything is pointing to at least 700 to 800 and hopefully, we do better than that. And I think that was all of your questions, but if I missed something, maybe give a clarification.

That's super helpful, Ross. Ross, very quickly, can you just give us a sense of cancellation rates? I think in the past, you have a spoken about less than 1%, but does that still hold?

They're very low. Look, it's not a material consider -- and generally, it just goes around finance. But they're not -- it's -- and they might fall over before you actually get an unconditional. So -- but it's not a material consideration. We're generally seeing by the time we sell, they're transacting. So there might be a few percent in the background.

Your next question comes from Brook Campbell-Crawford from Barrenjoey.

I'd just like to ask about Pro-fit. So I think the provision just relates to homes that might need repairing in Western Australia. But I think the product was also used in an equivalent amount of homes around other states in Australia. So can you just help me better understand why perhaps you might not see issues in claims in other states, that would be great.

Yes. Look, I'll do my best to answer it. So roughly, the product went into, say, 30,000 homes, it's order of magnitude pretty close, half of them in Western Australia and half of them on the East Coast. There are no abnormal leak rates on anywhere other than the Western Australian homes. And at a high level, what you see in these -- everywhere but West Australia, the installation practices are quite different on the eastern states, where the pipes generally installed in straight length with elbows at every bend. So it's quite a different methodology. So we're just not seeing anything different occurring than normal in all that area. So the focus is very much into the Western Australian in pipes and where the leaks are occurring. And as I said, there's a couple of themes we need to work through, and it's just quite a complicated period to do all the external testing and verification that the pipe is built to code and fit for purpose. Just takes a bit of time because it's quite a sophisticated set of tests we need to do and verify. And we're well through those, but there's a couple more we need to just finish off. And we're seeing no issues there. It was also a matter of going back through our manufacturing records and just understanding that all the QA and all those processes were robust and that's what we've found. So we're not there yet on the product particular piece, but we're -- by the end of October, November, we should be through all those. So then you go into what else could be causation. And the idea of the fund was to, just as I said, make sure the consumer is okay while we actually get to the bottom of it. And that's going out and looking at how it was installed in West Australia. What is the water pressure? Is the water -- because the pipe operates up to a certain water pressure, so if the water pressure is higher in a house then that can cause issues. Then there's also what is the water chemistry? Are there any unusual things going in the chemistry? Are there any other particular nuances that we need to look at. So -- and you've got to get into the houses and just do a review of what's going on there, and that just takes a little bit of time. So we're through -- we've been to 200 repairs now. So we're getting a good solid database and a good emerging view. But we just need to bring all that together with the test results and get to causation. And the beauty -- once you know that, it does get a liability ultimately as well. But more importantly, it goes to the fix because to the -- once you pinpoint what's going on, you know what you've got to fix. So at this stage, it feels like it's just a Western Australian issue. It feels like it's going to be something that we'll get to the bottom of it as we do the reviews in the houses. And then we can understand what the right fix is. And while some of the fixes go in and replace the pipe, the other thing we're looking at is are there things we can do to line pipe. So I do say it's less invasive and a little bit simpler and cheaper just to deal with the problem a bit more quickly. So we just have to work through that and it's just takes a bit of time, but I think we'll be well advanced through this next half.

Just a question on price and costs. Are you able to quantify the magnitude of the price increase that you've come through in FY '24 from your core manufacturing businesses based on already announced increases to the market? So I guess the roll-through of what's already been announced? And then also, could you give a comment on cost trends, things like raw materials, freight, labor? Are you seeing any relief at this point year-over-year on those pockets?

Yes. I mean, we've said in mostly every market announcement we made that we think we've got good price disciplines. So we'd expect to cover cost. I mean that's our position. That will be generally -- I mean, in the only place I'd flag where we might have a bit more elasticity, call it that, our distribution businesses might not be as simple as that. It might not be as straightforward because we'll have to be a bit pragmatic about volume and just throughput as well. And then in terms of the broader market. My sense is that we're starting to see the cost increases ease, but you can't -- some places, that's still not the case. But direction of travel, I do think we're starting to see it come down. But let's see where we are in the next 6 months, and we'll see how well the -- all the settings, the reserve banks on both sides of the ditch are actually translating to that reality and just what the world is doing. So -- but that would be my sense of where it's going. It's probably easing.

Your next question comes from Cameron Parker from Craigs Investment Partners.

Just the 2 from me. Look, I'm just wondering about the powers of the regulator or the investigators in this Iplex issue on the West Coast, if your exposure is kind of 15,000 houses, can they force a product recall or a replacement on all of them and so forth? Or -- I know it's early days in terms of investigation, but some color around that would be great. And also, just wondering about the speed to market on infrastructure projects in New Zealand. Just are you seeing those come forward and progress or things take a little while, sometimes in New Zealand? So any color on that would be great, too.

Yes. Regulators have the power to recall, but they've got to actually find a fault with the product. So to the -- that's why causation is quite important here. So as ACCC get involved, I mean, we will work absolutely with them because we all need to get to the bottom of what's going on. But that's the way. I don't really want to add to that. We're quite comfortable to work through with them, and we have actually set ourselves up so we can very effectively do that. So we will. And there was a second question there, which on the speed of infrastructure. Look, I think the -- yes, look, there's a couple of things I'd say to that is that the market was very busy in infrastructure in New Zealand. And therefore, it was sort of running at about the capacity to deliver it. So what -- I do think we'll see it grow. But you can only scale up as fast as you can resource up. So I do think all the extra damage that's occurred and the need to rebuild is going to ultimately drive more work getting done, but it just takes a bit of time to do that. And then the government, I think, is taking steps to do that as fast as possible in terms of the way it stood up alliances and really directing where it wants companies like us and others to work to get stuff going so they can actually respond to the need as quickly as possible. But it was already busy. So there, you'll see that momentum grow, but it will just take a little bit of time for it to get ahead of steam.

So nothing really expected much in '24, but [indiscernible].

It's going to underpin our businesses facing an infrastructure businesses. So I do think you'll see that probably being a little bit more robust than it otherwise would have been. And really just how much -- I don't think it will be huge. I think -- but I do think it will be positive for our business.

Your next question comes from Keith Chau from MST Marquee.

Apologies for laboring the point on Iplex. I think you mentioned, Ross, earlier that you burned through 20% of the provision to date on the home repairs. Can you help us understand whether you're through 20% of the work related to the 200 homes where Fletcher has decided to support the repairs?

Yes. So what we've done is 200 homes. So basically, they're quite small jobs. I mean, I'm not trivializing going and you might do it over a couple of days and you replace pipes or fix the problem. So they -- so the 200 represents what's been spent and it's basically work done. As I said there's -- then the other consideration in there is just what sort of the rate we need to react to. But we're working with a chunk of it. There are certain builders that are doing their own work as well. So we're not doing everything at this stage. We're prepared to, but we just have to work through our relationship with others that wish to work with us or not on this. And the other thing that's going on in the background is there's only so much capacity in the industry. So you've got -- it can only go so fast as well. So there's a few dynamics over there that we're working with in.

I mean ultimately, what I'm trying to get a gauge of is the comment around the it could be a material impact to Fletcher. I'm assuming that's beyond the $15 million provision. So just trying to get a gauge of worst-case scenario on what that number could look like.

Yes. Look -- it's -- that will be pure speculation. I mean, I mean all I can tell you is what -- the idea of the $15 million was to deal with the here and now in terms of the effect -- what we think will be the affected people through this year and allow us to then deal with that while we got to the bottom of what was going on. And I'd just go back and repeat where we're up to. As I said, we've got to get to the bottom of causation and we've got to finish our own testing on our product as well as get into enough houses and put together enough data on what we're seeing around those other elements. And I really can't help you much on that. I can only tell you where we're up to.

Okay. No, I understand. The second one and another set of provisions just relating to the construction business. There's obviously quite a bit of chat about that at the Investor Day on the 21st of June. But the company has decided to firm up on some of those provisions alongside some estimations of what can be recovered through insurance. I appreciate some of the details you've provided on the call around accounting standards, Ross, but obviously, accounting standards haven't changed between June and August. So given the experience of the business and the Board, I'm just trying to understand what did change between June and August such that the estimations of insurance recoveries and the costs associated with those projects moved adversely relative to prior expectations?

Yes. I'll make a couple of -- to try to lay it out in our or AS -- NZX and ASX announcement. But it's high level, what changed at NZICC was we took out $55 million of revenue, and we added back in $50 million of cost. But if I go back to what we said, so what happened is that when we looked at the building works insurance or the construction works insurance, SkyCity are covered by the same insurance. So they took $20 million went their way, which we were expecting to get ourselves. So that impacted us. So that was lost revenue relative to what we had assumed back in -- at Investor Day. And then there was $35 million we'd assume from the third-party liability insurance. The other thing that changed is we flagged back then, we thought there were 0 to $55 million of -- or $50 million of cost risk. So as we work through the full year and just looked at where we were. The thing that changed is we decided just to book that cost and then we took out $20 million of construction work insurance, and we chose through as we looked at the accounting not to assume any third-party liability insurance, even though we think we've got a much bigger claim against it than the $35 million. It just didn't pass the accounting test of being able to recognize it as revenue. So those were the 2 changes. So revenue, $55 million down, albeit we've got an opportunity much more than that, I think, to go after, which we just have to prosecute through the next 12 months.

So maybe if we think about the risk going forward, I think there was a comment talking about there being some risk still to go. Can you perhaps elaborate on that for us as it relates to the Construction division? Is it NZICC related? Is it the balance of the projects within the backlog? And then a jump to that question, if you can give us a sense of what proportion of the total backlog is alliance projects. And for those that are not alliance projects, what is the weighted average duration of those projects?

All right. I'll just give you a quick run through the legacy. Bevan can try and give you a quick sense of the alliance on well, he can figure that while I'm answering. And the other thing I'd note is we do need to stop soon. So this is probably going to be our last question. So if I go back to what we said at the Investor Day in terms of the risk on legacy. Simply on Puhoi to Warkworth, we've got a claim above $200 million for the COVID delays. So our risk is how much of that claim we get. We think it's a well-constructed claim, but that is a risk. So -- and that claim is for 100% of the project. Our share is 50%. If I look at the convention center, given what we've now done here, there is an opportunity above what we said then, which is how much of the third-party insurance we get. But until it's finished, there's always cost risk, but the only thing I would say, the closer we get to the end, the less that risk becomes. And then we also flagged a dispute we've got with Wellington Airport, where they've got a claim against us of $40 million over some defects, and we've got some counterclaims in there which we have to work through. So they are the main ones that we talked about. I'll just -- I'll let Bevan answer the alliance.

Keith, just on the flow of the order book. I'll just point you to Page 66 of the Investor Day. We laid out in quite some detail how that both in-order book and preferred work flows. But in rough numbers, about half of it flows in F '24 and the balance flows thereafter. On the risk profile, as Ross and I look at the contract profile, we would classify around 80% to 90% of that book as low or low-to-medium risk is how we look at it. And then you've got a little bit of the edges, which is mainly smaller jobs, and so your overall kind of quantum risk is low. So we don't -- if you look at pure alliances within that, Keith, you're between 1/3 and 40% of that is pure alliance, but then you add measure and value maintenance contracts, et cetera, and you get to a high-quality order book in that business, which the team has done a good job to build.

We have to finish there. Apologies. And I know that if any of you didn't get to ask your questions, and you can always call in, and I'm sure Aleida is more than happy to talk to you or will pick you up over the rounds as we go through the investor roadshow. So apologies if we didn't get to your question, but we do need to finish up there. But thank you very much for attending the call.