Fletcher Building Limited (FBU) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Fletcher Building FY 2024 Full Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Nick Traber, Acting CEO. Please, go ahead.

[Foreign Language] Good morning, everyone, and welcome to the presentation of our full year results for the 12 months ended 30 of June 2024. Moving to the agenda on Slide 3. I will provide an overview of the results and then Bevan McKenzie, our Group CFO, will talk through our financial performance and outlook. I'll then close with how we are planning and thinking on the year ahead, and we'll take questions after that. Before we get into the detail, let me explain how we have reported our results. Due to the Tradelink divestment being held for sale, we have reported our results on a continuing operations basis and Tradelink has been treated as a discontinued operation. Consequently, the FY '23 results have been represented on a like-for-like basis. Turning to Slide 4 and a summary of the year. We have been facing tough trading conditions for the year particularly across the materials and distribution sectors, where market volumes declined materially. This resulted in a revenue decline in these divisions, offset by higher revenue in construction and residential and development. On a continuing basis, EBIT was NZD 509 million and was within the guidance range we provided in our May Trading update. Disappointingly, we recorded a non-cash write-down of NZD 117 million on Higgins at year end. As flagged previously, we recorded legacy Construction provisions of NZD 180 million, while the Tradelink net loss, including impairment was NZD 141 million, which is included in discontinued operations. This resulted in a net loss for the group of NZD 227 million in FY 2024. Our strong cash flows were at a particular highlight for the year, with trading cash, excluding legacy and significant items of NZD 784 million, a material uplift from last year. Our leverage ratio was 1.99x, Net debt, NZD 1.8 billion and liquidity remained strong at around NZD 1.1 billion. Looking ahead, we expect FY 2025 to remain challenging with macroeconomic pressures to persist throughout the year. We are planning for FY 2025 market volumes to be around 10% to 15% below FY 2024, and we remain vigilant to further market weakness. On Slide 5, I would now like to briefly reflect on the actions we have taken and the priorities going forward. Our first priority was to have new leadership team members in place and we are pleased to have announced yesterday's appointment of Andrew Reding as Managing Director and Group CEO, and the appointment of Will Wright as Group CFO; and Haydn Wong, as Group General Counsel and Company Secretary. All have strong industry experience and performance track records. Second, we worked hard on our operational performance with accelerated cost reduction, particularly overheads. Third, we focused on improving our balance sheet through strong cash generation. We adjusted our CapEx program, divested non-core businesses and extended debt facilities and covenants. Last but not least, we have made good progress on closing out our legacy projects. Looking to the immediate future, we will continue to focus on ongoing cost reduction to adjust to a weaker operating environment, reducing debt and leverage through capital discipline and proceeds from non-core asset sales. We will also explore capital options for the Residential and Development division, supporting our people and deliver on our promises to customers as well as completing our legacy projects and established a sensible joint industry response for WA plumbing. Turning on to Slide 6. Revenue, profit and margins were under pressure for the group during the year as we dealt with the large declines in market volumes. Importantly, our materials and distribution businesses on both sides of the Tasman proved resilience against the spectrum. Revenue for these divisions were 8% lower than a year ago, which compares favorably to overall market volumes, which dropped materially further than FY '23. Combined, these businesses produced lower profits and margins for this year. Meanwhile, for our Residential and Development division, the New Zealand house sales market was positive in the first half and then slowed materially through the balance of FY '24. The slowdown was driven by greater caution among prospective homebuyers as the New Zealand economic outlook deteriorated. This led to fewer transactions across the overall market and price pressure in the second half of the year. In spite of this, we sold good volumes overall with 886 units sold, but our residential EBIT was lower year-on-year, and there were also NZD 29 million lower land development earnings year-on-year. Pleasingly, the Construction division reported solid EBIT for the year with the usual second half seasonal weighting. Group return on funds declined to 10% with funds employed increasing from investments made. Moving to Slide 7 and on to cash and leverage. Group trading cash was NZD 341 million. Excluding legacy and significant items, trading cash flows from continuing operations were very strong at NZD 784 million, well ahead of FY '23. This was a particular highlight for the year. Furthermore, CapEx spend for the year was lower overall as we reduced our investment spend. And, as I've mentioned, net debt increased to NZD 1.8 billion and leverage ratio was 1.99x. On Slide 8, net earnings before significant items were NZD 183 million. After including the legacy Construction provisions, the Higgins write-down and the discontinued trailing operations, the group net loss was NZD 227 million. Flowing from this basic, earnings per share were negative NZD 0.29. Given the current market conditions, the continued legacy cash outflows, our lender agreements and in line with the company's dividend policy, the Board has made the decision to not declare and pay a final dividend. On Slide 9, on our non-financial performance metrics. Firstly, we continue to drive a strong health and safety culture and risk controls. Our injury rates are at top quartile industry levels and 89% of our sites were injury-free. On sustainability, we continue to make good progress with 22% intensity and 19% absolute CO2 reduction compared to our 2018 level, on track for 30% lower absolute carbon emissions by 2030. And 87% of waste diverted from landfill well exceeding our 2026 target ahead of time. Slide 10 highlights our progress in 2 other key areas, our customers and our people. On customer, we are very pleased to see continuous improvement of our service performance with our Net Promoter Score increased to an average of 48. Our customer focus has been critically important in this tough market. We also saw our overall employee engagement improve to an employee Net Promoter Score of 35. Through the year, we have been engaging more with our frontline staff to drive ownership and achievement in business plans as well as recognition. Slide 11 highlights our performance through the year across all our divisions. It is evident that our margins have been impacted by the macroeconomic backdrop, sharp competition and the deleverage effect of lower volumes. While our Residential Exposed divisions have been affected by the market slowdown, the number of house sales in the Residential and Development division has been a particular highlight, as well as the strong cash flows across the Materials business. There are more details on the divisions in the appendix to this presentation as well as in our annual report published today. Moving to Page 12. The Residential & Development division has performed well through the cycle and over the years, generating strong EBIT margins and ROFEs above 15%. We think it's the right time to explore capital partnership options for Residential & Development to invest in and drive the next phase of the business success. Consequently, we have engaged Jarden to explore these options with both local and international investments. On Slide 13, we provide an update to WA Plumbing. We remain focused on reaching a sensible industry response with builders and the WA government to the WA plumbing matter, mediated discussions have been constructive. If agreed, this can deliver coordinated, effective and timely response for those impacted. And we will update the market of any such agreement, including terms and financial implications. There is no change in our view on concession and leak rates are below what we have seen previously. We also note the class action filed in the Federal Court of Australia, which Iplex intends to defend. I'll now hand over to Bevan, who will take you through the details of our financial results for the year.

Thanks, Nick. [Foreign Language], and good morning, everyone. On Page 15, the income statement. Nick has covered off the key points, so just 2 to add here. Funding costs in FY 2024 have risen to AUD 142 million, which is in line with our prior guidance, and with the increase from the prior year driven around 2-thirds by higher borrowing levels and one-third by higher average interest rates. On tax expense, this was lower in the year due to the impact of the significant items' charges. And the increase in the effective tax rate to 38% was due to a one-off non-cash tax expense, which is related to a change in treatment of depreciation on commercial buildings in New Zealand. On Page 16, we provide more detail on the drivers of the year-on-year EBIT performance, bridging from FY '23 to FY '24 EBIT on a continuing operations basis. Starting from the left, the first 4 drivers in the chart relate to the Materials and Distribution divisions, with the most significant impact being the drop in market volumes. This resulted in an overall AUD 220 million adverse EBIT impact in FY 2024. For clarity, the market volume declines of 25% in New Zealand and 15% in Australia are measured against volumes in the first half of FY '23. So, this is against the same baseline that we used at the interim results. This highlights the progressive decline in market activity that has occurred right through FY '24. The NZD 20 million market share impact relates to the drop in share in the distribution division in the first half, but we saw this stabilize in the second half. This impact has been partly offset by share gains in our Concrete and Building Products businesses. Despite competitive pressure on pricing and areas of variable cost pressure, particularly in energy, overall gains on price across the business more than offset inflation, with a net benefit of NZD 32 million. These benefits were mainly in the Australian businesses, with the New Zealand Materials & Distribution business broadly flat on price versus variable cost. We note that Steel Inventory valuations were a net NZD 16 million adverse impact, which reflects the movement in steel prices between the years and in land development, lower earnings were a NZD 29 million impact. Finally, on the right-hand side, we saw the impact from the overhead position across the full group. Cost reduction initiatives, which, as Nick has said, have been a key focus, provided a NZD 111 million benefit on a gross basis which was driven by material head count reductions, rationalization of facilities, and significant compression of discretionary spend. This more than offset inflationary overhead cost increases of NZD 91 million and restructuring costs of NZD 16 million. In a market environment where activity is still declining, cost reductions remain an important ongoing area of focus across the group. Turning to cash flows on Slide 17, the highlighted row in the table shows trading cash flows for the group. This is prior to legacy Construction and significant items. Pleasingly, these cash flows in FY '24 were NZD 784 million, well ahead of the prior year, with working capital inflows more than offsetting the lower earnings. The positive working capital performance was across all divisions, which we'll cover on the next slide. In Construction, while cash flows for the go-forward business were strong, legacy at cash outflows were a material impact at NZD 376 million, which was almost wholly on NZICC and P?hoi to Warkworth. We note that this legacy cash outflow was below or favorable to the guidance that we provided at the interim results, and this is due to the early receipt of the contract works insurance settlement on the NZICC project. On Slide 18, we provide some more detail on the improved working capital position. In our Materials & Distribution divisions, we are actively managing inventories to the lower market environment, and this resulted in a NZD 79 million cash inflow in the year. We also improved our DIO, which measures inventory efficiency, by around 1.5 days in FY '24. In the receivables space, we had just NZD 3 million of bad debt expense, and our DSO were only slightly up, which we see as a strong result given the deteriorating customer liquidity in the market. In the Residential and Development division, we have been actively managing inventories lower, given the tougher market for housing. In FY '24, we brought approximately NZD 156 million of land onto the balance sheet. This was from prior land commitments we have made. However, this was more than offset by a reduction in work in progress through the high house sales. We also note here that we have updated our valuation of the land portfolio held by the Residential business and at June '24, this valuation was around NZD 265 million, compared to the book value. This buffer is slightly lower than in December, as we have cycled out of land made through the significant house sales during the second half. Finally here, construction also contributed to the working capital inflows as we see improved performance on cash management in the go-forward business. On Page 19, the legacy Construction cash outflows. As I've mentioned, the early receipt of the contract works insurance claims on NZICC in June 2024, means that we now expect a net of NZD 100 million outflow on legacy projects in fiscal year '25. This is split between a material outflow in the first half, mainly relating to NZICC and a net inflow in the second half, which is the assumed settlement of the P?hoi to Warkworth claims. For clarity, there is no change in overall legacy provisions or cash flows. There is just a timing slide between the 2 years. We remain on track to complete the legacy projects in FY '25. While risks will remain until they are finalized, we are pleased that the construction works on NZICC are on track for completion by the end of this calendar year and we are targeting handover to the client in early calendar 2025. On Slide 20, net CapEx and investments in the year were NZD 416 million. The key point, as Nick has mentioned, is that we continue to compress our CapEx spend in the current environment. Base CapEx in FY '24 was NZD 218 million, which compares to guidance at our half year results of NZD 240 million. As also flagged, we have been smoothing our growth investment profile with FY '24 CapEx of NZD 136 million, coming in below prior guidance of NZD 150 million. On Slide 21, closing net debt for the group was NZD 1.77 billion. This is materially below the NZD 1.9 billion to NZD 2 billion range we provided in May. Around half of the improvement from that guidance is from the early receipts of the insurance on ICC, with the balance due to the improved working capital inflows and lower CapEx. As shown on Slide 22, our leverage ratio for the group is at the top end of the target range at around 2x. On this slide, we also show our position against our key banking covenants. We announced in June that we had agreed amendments with our lenders, which enabled us to rely on more favorable covenant terms for testing through the end of calendar '25, if required. At June '24, we have headroom to both our normal and our amended covenant levels, which are both shown on the chart. Slide 23 shows that the group's funding profile remains strong with around NZD 2.8 billion of total credit facilities. During the year, we refinanced our syndicate bank facilities, increasing them by around NZD 100 million and extending their tenor such that our earliest maturity is now in FY '27. This, combined with a strong cash performance in the second half means our total liquidity is healthy at NZD 1.1 billion. The average maturity of the group's debt at June '24 was 3.0 years, with a 44% of all borrowings on fixed interest rates at an average duration of 2.3 years. Inclusive of floating rate borrowings, the average interest rate on the debt based on period-end on borrowings is 6.2%. To close, on Page 24, the tougher market conditions and additional legacy cash outflows have put pressure on the balance sheet and the company is committed to reducing debt and leverage over time. Our FY '25 CapEx is expected to be around NZD 325 million, which is below the already reduced guidance from the half year. Growth CapEx will be limited in FY '25 to our critical in-flight projects and we're also compressing our base CapEx envelope to around NZD155 million. This is materially below the run rate from prior years and around NZD 20 million below underlying depreciation. In Residential and Development, we expect further working capital reductions in fiscal '25 and Tradelink divestment proceeds of NZD 170 million are expected in September. Construction legacy cash outflows in H1 means that we do expect the group's leverage to be higher than the top end of the target range at half year '25. As we manage through a market environment where we expect further volume declines of 10% to 15% in FY '25 and as we complete the legacy projects, our focus will remain on delivering robust operational performance and cash flows to reduce our debt and leverage. I'll now hand back to Nick to conclude on the broader outlook.

Thanks, Bevan. Finally, looking forward, we expect the year ahead to remain challenging, as mentioned before, with market volumes in our Materials & Distribution businesses to be around 10% to 15% below FY '24. Consequently, we remain focused on, firstly, ongoing cost reduction and reducing debt by being disciplined on working capital and CapEx and completing the sale of Tradelink. Second, focus on what matters are people and our customers. Third, finalize legacy projects and agree on industry solution with government and builders on WA Plumbing. Finally, position our businesses well for when our markets return to growth. With that, I'll now hand back to the operator to run through your questions.

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

Bevan, just a bit of clarification for me, if you wouldn't mind. Your comment on the effective tax rate of 38%, I think if I understood it correctly, was that a denied depreciation charge on a commercial building? I didn't quite catch that. Is there a cash impact in FY '25? Or has that already flowed through in FY '24?

Good morning, Simon. So, it's one-off. It's noncash. There's about a NZD 34 million expense that we need to put through that. So, it's a result of the New Zealand government changing the rules such that you can no longer apply depreciation to commercial buildings, but it's a noncash one-off in this year. Absent that, the underlying tax rate is around that 27%, 28%, which is what we expect going forward.

And then just looking at your commentary in terms of legacy cash flow is about NZD 170 million, which I would think is obviously offset by the Tradelink settlement in the half, and you've got further working capital reductions, but you're still expecting gearing to be above the target range. Is that just the slowdown in the market that is accounting for that expectation on net debt being higher above the target range at the end of the first half?

Yes. So, the first half, you've got that seasonal build of inventories, both residential and development and the Materials and Distribution divisions. And then you'll see for Resin that working capital unwind in the second half, which will bring it back down at that sort of NZD 50 million to NZD 75 million level. So, yes, the seasonal movement in working capital and then as you rightly point to, it's the pressure on earnings from that market environment, which we're guiding to 10% to 15% down year-on-year.

And then a final one, if I may. Just on your commentary, Nick and Bevan about the Iplex interim fund run out of funding in September. What is the intention around the -- any further funding for that interim fund?

Thanks very much, Simon. The remediation and the discussions are the remediation and the discussions are progressing really well. So, no, we don't have any further plans for the fund here because we think that should be it by then.

I might have read that, I don't want to misread it, Nick, is that a suggestion that we should be settled or come to some kind of resolution by September?

Yes, we will be disappointed if that wouldn't be the case.

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

Two questions here. I'll just start with the volume guidance, right? You say 10% to 15% volume decline. I'm just curious if this reflects the very rapidly changing macro in New Zealand. And I'm saying just given the recent rate cut and expectations of more to come? And then I have a follow-up.

Yes. Thank you. Look, obviously, we are very kind of positive about seeing our OCR interest rate decline ahead of, I think, most people's expectation. But in our experience, this will take time to flow through consenting, building and sale of houses, apartments or materials and that's why we are taking a prudent cautious approach here for next financial year '25. We also see obviously positive signs long term in the infrastructure space. And, as you know, we have quite a nicely set up business in that space as well. But again, it takes time from planning and actually getting the money on those projects until actually you start building and see materials flow on those projects.

And just as a follow-up, as you run your numbers internally and, just curious if you're comfortable with your covenant for even the revised covenants as we look ahead, say, for the year '25, how do you think about that?

Yes. Look, as you will have seen, we have good liquidity covenant headroom and year-end financial year 2024. We also negotiated the covenant relief; Bevan was talking about before with our lenders for the next 18 months. We recognize the need to reduce further our level of debt and leverage in line with our target credit metrics and haven't talked about that. Again, especially at this point of the economic cycle, we are very focused on the moment on further cost-reductions, tight management of working capital and investments and also targeted divestments as we have just announced with trailing, but also with Higgins and land sales before. And as you will have seen also today, we announced that we are exploring capital options for our residential development business. So, there's a whole range of actions we are pursuing to be in a good space in a tougher market environment.

That actually brings to my next question. Your comments on exploring capital options for the resin development. Can you just lay out some of the options you're exploring? And how should we be thinking about that?

Yes, I appreciate the question on the residential because look, we, maybe add a bit of color here, we really love that business. It has provided really strong results in terms of profits but also returns. And as we have said just before, we're also looking at further reducing our debt level and strengthen our balance sheet. Again, you've seen the OCR rates come down. This is good news for first home buyers. And also, the government is looking at alternatives for affordable housing in New Zealand because we have a significant housing deficit. So, it's actually, we believe, a good time to go to the market, talk to potential investors, both locally and internationally because that could further really allow this business to grow and perform into the future. But we are not entering those discussions with any preconceived ideas about any fixed models or outcomes we have in mind.

Your next question comes from Andrew Scott from Morgan Stanley.

Just a quick one to start with for me. You're guiding for 10% to 15% reduction in volumes, given the environment you're in, I'd imagine price as a headwind or if anything, is it fair to say revenue is down more than that? Sorry, attributing to your distribution, I should say.

Morning Andrew. I think you're right. That price is challenging in the current environment. That being said, it was a challenging environment in '24, and you saw us broadly hold. So, our assumption would be that we're net neutral against variable cost. We're seeing inflation come off a bit. So, we would expect that more to be down around that 3% level with price basically offsetting that. The thing we remain really attuned to is just ensuring we maintain our market share position through this point in the cycle. And for instance, in distribution, you saw that we had to shape particularly frame and truss pricing to do that. So, we'll be targeted with price to ensure that we maintain share positions.

And that leads me to my next one. So, the '24 year saw Materials and Distribution revenues down 10%. I think EBIT was down something like 34%. It's a pretty stark reminder of the leverage that sits in these businesses. I know there are a couple of things like the steel reval and some restructuring costs. But when you're guiding for volumes and, therefore, top line down another 10% to 15%, is there any reason anything you want to call out that will mean we don't see a similar leverage level again in FY '25?

Look, there is obviously a business-by-business case here to be made as well. As you said, we had a destocking of resin, for instance, in Iplex. We had some new businesses to kind of build-up. We also have a couple of businesses, which required a turnaround like Humes and others. There's quite a couple of businesses which enter in a stronger setting than they kind of exit '24. I'm looking at businesses like Humes, Iplex New Zealand, Higgins, much improved order book there. So, this is not just a straight extrapolation, I would say, there's much more work which has gone in there. I would also point out that we would expect that certain inflationary pressure on certain input materials, but also hopefully, energy is going to adjust again. So, there's a whole range of things and it's no straight extrapolation, I'm afraid.

And then look, against this backdrop, I know there's really good cash performance in the period particularly in the second half so, well done. But you have said you about target range in the first half, things are getting worse. I take your point; you will be within covenants and you're comfortable on that. But history so shows an incoming CFO, CEO is a high likelihood of any company raising at some point. Has there been discussions about getting in there now? I mean, the market is only getting worse from here, your earnings base is only getting worse. How have there been discussions about a capital raise and fixing the balance sheet now at Management and Board level?

Look, Andrew, we are really focused on the measures we have outlined before here. I mean like cost reduction, tight management of working capital and CapEx, targeted divestments. We just announced capital partnership option on residential development. We'll have to see what we get as a response from investors over the next couple of weeks and months. So, we are really focused on that at the moment. And, of course, we'll closely monitor over the next months, how the market and our results are going to pan out. This is all I can say at this stage.

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

Just one on the outlook. You're talking about 10% to 15% volume decline for the full year. Do you think that will be like a steeper decline year-over-year in the first half and then get less severe in the second half? I guess, given what you're seeing at the moment in terms of order books, et cetera, if you can comment on those year-over-year trends in market volumes and how it compares between the first and second half?

Good morning, Brook. That would be our expectation at this stage. We're obviously coming off a high-level activity in first half '24. So, yes, we would expect the drop to be higher in the first half of '25. I just note this is obviously a very volatile market environment. So, yes, that's our expectation, but we're obviously watching it very closely. The key point for us is, we're continuing to see the declines. And you're seeing that in the residential in New Zealand consent numbers, and also the commencement numbers in Australia. So, we remain very watchful for any additional movement.

I appreciate your comments earlier that you usually build inventory in the residential business as investments your core units in the first half but for residential, what's the magnitude of investments you're looking out of this first half there to build some stock and any sort of commentary on the outlook for home sales for the full year? I might have missed that in the materials, but if you wouldn't mind commenting, that'd be great.

Yes, sure. So, we exited the year with about 840 of funds. We won't see the level of working capital build there that we have historically, Brook. So, I'd expect it to be in the NZD 50 million sort of range before it unwinds in the second half. What happens on house sales from here? Obviously, as Nick mentioned, we hope that, that OCR cut puts a bit more confidence back into the market. You're obviously seeing the banks move their lending rates, which is positive. What Steve and the team are doing, they're putting in place measures to help new buyers as well. We've just put in place a NZD 10,000, what we call a first home grant, because that was removed from the government, which essentially gets treated by the banks as a deposit. Our sales at this point, they're always a bit softer through the winter months. We've been selling about 12 to 15 per week on average. We would hope that, that would move up as we enter into the summer period. Again, we just need that confidence to come back into the buyer market and in NZ.

Your next question comes from Stephen Hudson from Macquarie Securities.

Just a couple from me, I suppose just following on from the last question. We've seen consents in New Zealand sort of falling kind of 30% over June in real terms and you're sort of guiding 10% to 15% declines. Would it be fair to say, well, I'm just trying to square what you're seeing right at the moment sort of in the final quarter of the financial year or into July, are you sort of seeing volume declines in Australia and New Zealand consistent with your 10% to 15% or something significantly worse?

Good morning, Steve. I'll start at the end. Yes, we're seeing declines July, August consistent with our guidance. To Nick's point before, it's a mixed bag. It's business by business. You're seeing the businesses which point into the latter trades do better than those pointing into the earlier trades, which is what you would expect given this point in the cycle. Just on the declines, obviously the floor area consented is the best metric to look at, I mean, I think that's down 23% year-on-year at the moment. The only thing I'd point out is you're still coming off a period in which you had consents which weren't getting activated. We think we're moving to a point where actual consenting is more getting activated and we've moved through that period of the gap between actual work and consents that is happening. So, that would explain that delta that you're seeing between our 10% to 15% and the higher drop in the consent numbers.

And just on cost out, you've talked about gross savings of NZD 111 million for FY '24. Is there any sort of flow through FY '25 sort of annualized gross ups that we should be allowing for?

You obviously got that full base that's now flowed into there. I think the theme to take away, Steve, is that Nick and I, and I'm sure Andrew as he comes in, we're pushing for additional cost out to Andrew Scott's question earlier with that level of market decline. We're going to need additional cost out of the business in order to adapt to that again next leg down in the market. We're not quantifying that at this stage, but I'm sure we'll give more color on that ASM in half a year.

And residential sales, obviously the margin moves around quite a bit depending on which sales front you're selling from. Can you give us a bit of a feel, Bevan, for volume and margin versus what you've just reported coming into the next year?

As I mentioned to Brook's question, Steve, we're seeing that 12 to 15 house sales per week at the moment. It's a bit lumpier than normal. And again, that's not unusual at this time of year. On the revenue front, we have had to move price. You've seen prices coming down across the REINZ index at about 1% per month the past 3 or 4 months, and we've been consistent with that. Our expectation, I think most economists are pointing to that stabilizing and improving through the year. That's our pick at the moment. And obviously, if you believe the forwards on the OCR cuts, that should be materially positive to that. We just need to see it actually happen.

And then just one on the CEO and CFO announcement. Sorry, it's an awkward question to ask, I suppose, but if the acting chair is there, maybe one for her. I think the advice offered initially was that we would see the chair announcement, then the CEO announcement, then the CFO announcement. It almost looks to be the other way around. Can she comment on the sequencing there and why that has changed from earlier signaling?

Look, it is a question to the chair, Steve. However, what I can say, look, it is really key that you get the right talent, the right experience, the right skill set when it's on the market. And that's why it was important to get legal covered, CFO covered as quickly as we can and when the candidates are available and can join us. I think like there is, kind of, we can't let get perfection in the way here. But as I said, the Chair, CEO's succession is a question to the Chair and the Board.

Your next question comes from Grant Swanepoel from Jarden.

First question just on Distribution division. I see 2H was down 82% on the PCP at just NZD 14 million. That was an eye-watering decline. Is this the competition you guys are talking about in FY 2021 that has picked up, that got hidden by the COVID effect and now is showing up again? So, that's actually a structural change to this division that's a bit more in trouble than just a cyclical downturn?

No, it's the latter. I mean, like the market came off very quickly, as Bevan described before, and as you know, the distribution business is very exposed to the residential build and those kind of homebuilder market kind of dropped very, very quickly. Of course, there is also a competitive positioning going on here. We kind of lost market share we had to grab back in the second half that came with certain pricing conditions. And we also had to reset part of the business like the frame & truss operation, which is now on a good track there. I would also like to point out that we have a new kind of leadership team in place that led by James, who will get his feet on the ground very, very quickly here, take some quite important measures with regards to cost, pricing, positioning of the offer, et cetera. So, there's a lot of good work on the way here to mitigate the market impact going forward.

And then just exploring that a little bit further just in terms of the NZD 111 million of cost out. Can you talk about which divisions had a lot of the cost out over FY '24 and which ones have opportunity in FY '25 for further cost out?

The answer is, the cost out was across the full business in '24 at grant and that's all divisions plus we also took material additional cost out of corporate. As we've announced previously, we've taken a decision to pause our Digital@Fletchers program. It was about NZD 10 million to NZD 15 million run rate OpEx that we have our corporate cost line there. And in FY '25, really the same thematic is applying. We're obviously making sure that we take the right approach to that so that our business has come out of this cycle in good shape. But the reality is we're going to have to cut our costs further to the environment. So, I say that will be across all divisions.

And my final question is on that, the elephant in the room, the Iplex. If you guys do develop an industry solution or come to some solution there, does that negate the possibility of an industry recall? And what does it mean to the class action?

Yes. Look, I mean, that's a key element of the joint industry response is to kind of end up with a much better solution. And I think everybody is seeing that now that recall would be very disruptive and would not really kind of immediately support the people who need it most, which are the homeowners who have a leaking pipe right now. So, I think everybody is landing there as we kind of pursue the discussions. Look, I mean, as you've seen, yes, we got the call section filed in the Federal Court of Australia. But this was a likelihood we knew was there, but it's not related to the industry response in that sense. And we'll, as we said, we'll strongly defend our position there.

And the industry response in Western Australia, how does this affect any of those bits that are sitting outside of Western Australia, or do they have access to that industry response as well?

Look, we always said it is a Western Australia topic. And we see that also in the latest numbers again and again. So, it is focused on Western Australia.

Your next question comes from Harry Saunders from E&P.

Firstly, just given you're flagging this market volume decline of 10% to 15%, could you give us what your market share expectations are in '25, please?

Look, I mean, we expect to kind of have stable market positions there, and there's maybe one or 2 businesses also where we want to gain a bit of position back. Like we said, Distribution had a tough first half, but we got it back in the second half. So, you would expect that to flow through into FY '25. And it's just a flow-through or base effect, whichever you want to call it, but we think we have a pretty good order book. Businesses which needed attention got the attention in the second half. I mean, Distribution is one, and other ones like Humes. We are quite happy with how that's coming along, Higgins, but also Iplex New Zealand, all those businesses which had a tough time, maybe last year, are in a much better position and also some new leadership, as you might have seen. So, we are quite happy with how those have positioned. So, you might see a little bit of improvement there. But overall, we see a stable situation in our market positioning.

And just confirming earlier comments, you mentioned, I think, 3% pricing to offset inflation across these businesses. Is that right?

Yes. Talking to what we expect average inflation to be and a view that we'll broadly hold price versus cost, again, it's your question on market share. We're making sure we're really thoughtful about if we need to get more aggressive in the competitive environment to hold. We might need to do that in some areas.

And is it possible to give any more color on operating leverage in that volume environment, perhaps what you're sort of internally expecting by division, please?

The best way to look at operating leverage, we've shown the figures in the past around the fixed cost base in the Materials and Distribution divisions, Harry. We talked in the past to around 25%. That's ticked up a little bit, just given, obviously, you've got lower revenues and therefore lower variable costs. But it's about one to 2 points higher. So, to Andrew's point before, yes, you do have leverage in the business. And again, it's going to make that cost-cutting as we head into this environment, the continued cost reduction is important.

Also, just wondering how comfortable you are about the senior interest test in the first half of '25, please?

I think it goes back to Nick's points earlier, Harry. We've put in place those agreements to give ourselves additional headroom. We always thought that the market was going to be tough into '25, which is one of the reasons we did that again, then it's the focus on cost, on working capital, on CapEx and on those targeted divestments and finally, getting that burden of the legacy projects are finished. We're very close with P?hoi at to be operationally, just got to land the claim and construction in ICC just got 2 or 3 months to go. So, once we do that, that cash burden lifts off the company.

And just a final one for me. Could you give us an idea if the timing of the capital options for resin and development could be before the December covenant test or not?

Look, I mean, that process will have its own dynamic. I wouldn't kind of give any guidance on how fast we can achieve that. It also depends on the option we finally want to pursue. I mean rest assured, obviously, we're going to do as fast track as we can, because I think that's the best thing also for all stakeholders involved, also our employees. But as we don't have any kind of fixed options in mind at the moment, we'll rather want to hear also the feedback from investors, both locally and internationally. I think it's too early to give any time lines here.

Your next question comes from Keith Chau from MST Marquee.

First question. Nick, maybe I'll start with you just as a follow-on from Harry's question. You said you came to work through as fast as possible the options for the resin and land business. But earlier in the call, you talked about how Fletcher has really loved that business. What I'm getting at ultimately is how investors can develop, I guess, a degree of comfort or get some assurances internally from Fletcher Building that the outcomes for shareholders will maximize value or at least add a little bit of value, noting that the sale of trade line hasn't necessarily yielding an outcome that on a net basis even recovers the book value of those assets. So, I'm just kind of understand how willing or how far you would want to push that divestment process to try and solve a balance sheet issue?

Look, as we said before, we love this business. It's a very different case to the others you mentioned. We think it's very likely we'll retain a material stake in the business, just to be clear here also. And look, I mean, if this is an opportunity we're pursuing, it's not a must do. So, again, if we can't get a fair value for this business, it's not worth pursuing. But we believe there is kind of quite an appetite for those sorts of assets, just those sorts of investment in the New Zealand context, particularly. And we have a really well-performing business here. So, we are quite confident here about finding a good outcome for shareholders, obviously.

So, just to be clear, the value isn't there, you would walk away from a process?

That's how we look at it, yes.

And then second question, again, some follow-ups from prior questions. But I apologize for harping on about this 10% to 15% volume decline guidance for FY '25. But Bevan, you mentioned things are tracking as expected in response to Steve's question, but also in response to Brooks' question, you said that the first half is likely to be worse in the second half. So, when you say track in line with the expectations for the first half or as you're seeing it through July and August, are you seeing volumes down 10% to 15%? Or are you seeing volumes down more than 10% to 15%, just to be clear.

Yes. Additional color I'd add here is Australia, in particular, we're seeing come off more, Keith, in both the back end of FY '24 and early FY '25. And I think looking at the BlueScope result as well. Those numbers are pretty consistent there. So, yes, but to your question, we're expecting sort of at the top end of that first half '25 against first half '24. If we've picked it right, that should ease off in second half is obviously going to be comping off a lower base. So, yes, we would expect to be at the top end of that half-on-half declines in the first half of '25.

And then, again, just covering off on the NZICC timing. So, I think the guidance there is that construction is still going to be completed at the end of C1 '24. Is there anything material with the handover or any potential costs that could arise that we need to be thinking about, given the handover is going to be somewhere in the second half of fiscal '25?

Look, the major spend is really in finishing the construction by end of calendar year '24. Those handovers, it's always a top-notch asset in the end we have built now and want to do a good job handing it over to the client here. So, that will have a bit its own dynamic, like also with the hotel. But no, we don't expect major costs there. The major costs are clearly in finishing the construction by end of the calendar year.

Your next question comes from Phil Campbell from UBS.

Just a few questions from me. Just firstly on NZICC. I just noticed when we go back to the February update on it, we're looking at an NZD 80 million outflow in FY '25 and obviously, today's announcement we're looking effectively at a kind of NZD 100 million, minus the NZD 70 million. And so, I just had a question around that. And I suppose the other question was if we go back to the February announcement, we talked about the Horizon Hotel that was completed and was going to be handed over. But obviously, there was a delay there, I think, between February and July actually got handed over. So, just kind of curious, could there be a chance we could see a similar thing happen around NZICC or is some of those quality issues being kind of addressed on that project?

Look, I'll take the Horizon thing first, and then I hand over to Bevan for the outlook on the impact. Look on the Horizon Hotel, it's actually more than just a hotel, which got commissioned at the time. There was also some really important infrastructure for the whole of NZICC. So, that took a bit longer. But again, if you look at the spend, the major spend on construction was finished well before. And then we went into commissioning, which, as I said, had more than just a hotel in there and took longer. But no, we don't expect that to be the same for NZICC because we learned a lot. We have a lot of people on the commissioning here. But again, that's why we say it second half of financial year '25, with a very good view of finishing construction in the first half of financial year '25 where the major spend is.

Yes. On the cash flow, Phil, as I said before, both provisions and cash flows haven't changed. We just had a timing slide there. So, it's all in line with where we were in half year. I have to come back on your detailed numbers, a key point. There has been no change. And we just got obviously, first half '25 higher outflow because the cost is there. So, the construction works, contract works, insurance has already been received.

Question #2 is just on the gearing and the balance sheet. Obviously, the gearing is expected to be north of that top end of the target range. Do you expect in the first half '24 covenant tests to have to use the covenant relief close?

We're not going to get into those forecasts, Phil. Obviously, start to speak to guidance. Key point, we put those in place to give ourselves headroom against a weaker environment, and that's what we're seeing. So, we're pleased we did that work. And as Nick said, target is absolutely to manage within them.

And just another question on working capital. I noticed with the Franklin Bathroom liquidation that I think Iplex Fletcher steel and construction are secured creditors there. So, I think it's NZD 25 million with Westpac being the other secured creditor. I'm assuming it would expect to get money back on that situation?

Yes, I'm not going to discuss the security position of a particular client. I'd go back, Phil, to we had a total of NZD 3 million of bad debt expense for the full year FY '24. The credit teams do a fantastic job in this environment where we do have exposures. We obviously use PPSA to secure positions. But again, I won't speak to the specifics of Franklin.

And then just the last one for me. It was obviously quite topical at the moment around the energy costs. I'd just be interested to see to what extent under your kind of main business is probably the concrete and maybe the wood businesses in terms of the extent of hedging and what kind of impact you would expect from the higher energy costs in FY '25?

Yes. Look, I mean it's quite an unusual situation to have such a drive in the right. And that's why also this is the quarter Golden Bay is our major electricity consumer here by far and that's why we are not substantially hedged for that quarter. But the Q2, Q3, Q4, we are very well covered with hedges, but also we have our first purchase power agreements kicking in then. So, we are in this kind of 60%, 75% hedging space for those quarters. So, the impact is really felt at the moment. And across the business, we are feeling about NZD 2.5 million to NZD 3 million per month extra costs for our New Zealand business relative to financial year '24. And look, it's not a big help, but I think everybody realizes that the affordable sustainable, reliable energy is absolutely crucial for manufacturers in New Zealand. And I think everybody is kind of making the point here that this needs to be sorted because even if you do hedging and so on, you need to hedge from an acceptable competitive level here, and that's not the case at the moment. But again, this is an impact for this quarter. But the Golden Bay is well hedged for the next quarters and the other businesses are much smaller. So, we normally not entering into hedges there.

Your next question comes from Rohan Koreman-Smit from Forsyth Barr.

A lot of questions that I had have already been covered off. But just on the operating leverage. In your bridge where you calculate the NZD 220 million volume impact, just doing some simple math, Bevan, with 25% fixed cost, it seems a little light. What was the actual volumes? I know you've given 25% and 15% down. But if you look year-on-year rather than against just the first half, what was the actual volume impact on '24?

Yes. So, if you take it year-on-year, you're between 15% and 20% blended down year-on-year, '24 against '23 across Australia and New Zealand.

It still looks a little light if I put that into my very simple spreadsheet here. Obviously, price was relatively important this year. Can you just give us some color on how any recent price increases have stuck, if at all?

Yes. I think the theme as mentioned earlier, is that getting price in this market has been relatively challenging. Again, we've had to be very mindful of market share. We have had price increases coming through in certain businesses. We tend to do them. They were mainly earlier in the calendar year. So, we're getting the flow through or the run rate benefit of those now. Key point is expectation going forward. We think we're going to have to be tight and flowing through more than your cost increases in this environment, we think, is going to be tough.

And just on this cost reduction that you're talking to, I know it's, I mean, you talked about a decent amount. You used to talk to having 10% of the variable costs that you could take out. I'm assuming all of that's been enacted to-date?

Yes, the teams have done a good job. As we've discussed in the past, Rohan, things like contractor spend, variable over time, temp labor. we've really hold back on that. And what you see in our numbers is, we've also obviously made material permanent head count reductions. And the other key factors, as I've mentioned before, is that the company made the decision to pause the digital Fletcher investment, just given the environment that we're in. So, there was another decent head count reduction, albeit we were able to redeploy some of our good people into businesses, because we've taken them out of the businesses into that project. So, there's a bunch of those things. But, yes, on the variable, we're basically pretty light in terms of further opportunity now. So, it's going to have to be more structural.

And you in the past, given some indication of where that kind of corporate head office line will end up with 67% this year, how much of that has actually been taken out when you look at the head count reduction that you push through?

Yes, we would expect to be certainly no higher than that. We'd be targeting more in the lower 60s. This year would be our position. We just have to look at what additional work has done through the year, Rohan, but, yes, as I mentioned before, it wasn't just the divisions who looked at their overhead costs, particularly through the back half of fiscal '24, it was also the corporate office.

Your next question comes from Daniel Kang from CLSA.

Just a real quick one and I know we're running time. Most of my questions asked. Maybe if you can provide some color on outstanding insurance claims progress, timing and magnitude. That would be great.

So, on the International Convention Center, Daniel, we have fully settled our contract works insurance claims of other claims against the remediation costs that will be settled and, as we mentioned, we did so in line with our provisions. I was pleased to derisk that aspect of the project. So, that leaves us with what we call the third-party liability claims. Those are quite complex. And as we've said, takes time to prosecute. We've got north of $100 million of claims. We expect that will take till next calendar year, '25 before that sorted. I'll just repeat the prior statements, none of that is included as revenue in the ICC provision. So, to the extent we get benefit there that would be upside against our current position.

Your next question is a follow-up from Brook Campbell-Crawford from Barrenjoey.

Two quick ones. Just around the ERP pause. Can you just talk about how much was spent so far on that have far progressed? It is an asset for this spends to restart that if that is the decision at some point? And then the second is around the growth CapEx. I think previously, you talked to $800 million plus over FY '23 to FY '26 presume that if still there do you mind just providing an update on where that's at and the incremental growth CapEx in the prior and at this point?

I'll kick off with ERP and then hand over for the CapEx to Bevan. Look, on the ERP, we basically have spent NZD 100 million so far, and we have 4 businesses on the platform running well. And that $100 million is obviously a global template. We want to then reactivate going into financial year '27. We also have redeployed quite a bit of, I mean, Bevan alluded to that before, we have redeployed some key talent we have put on that project on various other things. You have, for instance, seen a team of Michael was actually project manager, just recently appointed and we have some key people also now helping with carve out of trading. So, we redeployed in a very agile and pragmatic matter here some key talent back into the business and that was the other idea. It was not just about reducing the cost and the CapEx for the next 2 years, but also has everybody fully focused on the business here and now. And that was also a key element of that decision, okay?

And on the CapEx, Brook, your read is right. As we mentioned in the material, we're only at this point, continuing with the in-flight growth projects, the 2 biggest of those are the Laminex wood panels' plant in Topo and PlaceMakers automated frame & truss. There are a couple of smaller ones P?hoi to Warkworth our new plants down here in Penrose. The key point is we have no additional plans at this point on that further growth CapEx. That would obviously need to be a decision down the track, as balance sheet is restored and the market improves.

Unfortunately, that does conclude our time for questions today. I'll now hand back to Mr. Traber, for any closing remarks.

Thanks very much. And I also have particular thanks to everybody, for their farewell wishes. Speaking for myself, my family and I have generally enjoyed the 4 years here in here it's a great place. Fletcher Building is a great business, and I'm wishing Andrew, really all the best, and I'm fully committed here to make sure he has the best handover and start at Fletcher Building possible. Appreciate you joining our call today. Look forward to talking with many of you over the coming days. Thanks very much, and have a good day.