Fletcher Building Limited (FBU) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Fletcher Building briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Andrew Reding, incoming CEO and Managing Director. Please go ahead.

Good morning, everyone and thanks for joining us on this presentation and Q&A session regarding the equity raising, we have announced this morning. My name is Andrew Reding, and I'm the incoming CEO. With me is Nick Traber, the Interim CEO; and Kevin Burke, the Group Treasurer. Through this session, I'll be referring to the presentation that we put up on both stock exchanges this morning, and then we'll take questions after that. So moving past the disclaimer slide and starting on Page 9. Today, we've announced that we are raising $700 million of our replacement and non-renounceable entitlement offer. We consider this a proactive response to continuing macro pressures, placing the business in a good position by improving financial stability and resilience in the current environment. This rating has been sized to strengthen our balance sheet. Firstly, our pro forma leverage at June '24 reduces to 1.22x towards the bottom end of our 1x to 2x target range. And secondly, pro forma gross leverage at June '24 reduces from 4.15x to 3.38x, supporting our commitment to maintain an investment-grade credit rating. Market conditions are challenging and this raising provides headroom and flexibility for the company to focus on operational performance. And as we continue to assess our portfolio composition, we can do so at the time when we can achieve fair value. As we said at our FY '24 results recently, we are dealing with very challenging markets with regards to Australia and New Zealand, particularly in the residential sector. That said, we have strong and well-positioned businesses with leading market positions and we continue to focus on cost reduction to mitigate further market downside risk with significant -- apologies, with significant operating leverage once market volumes recover. Turning to Slide 10. Our investment thesis underpinning Fletcher Building remains strong. Starting on the left-hand side of this slide and working our way across, the company operates in attractive markets with favorable long-term dynamics and demand tailwinds and our ability to capitalize on these opportunities can be driven by a leading portfolio of high-quality businesses. We acknowledge that legacy construction projects have had a significant impact on the company, however, we are close to completing these. Outside of this, the combination of appealing markets, quality businesses, prudent management and capital allocation decisions has generated attractive returns on invested capital over time. Admittedly, this excludes significant items, which have been impacted by legacy construction projects and recent business impairments. Turning to Slide 11. Despite the challenging market conditions, we have continued to execute on key operational and strategic initiatives. We've made significant progress on appointing new Board and management team members with a permanent chair, being the main outstanding role to be filled. We're focused on putting in place operational performance initiatives, including cost outs and reducing and deferring CapEx spend, where sensible. And the signing of the divestments of the Tradelink is also a milestone and improving balance sheet strength with settlement expense expected at the end of this month. On Slide 12, we provide a recap of 2 material matters. Firstly, we've made meaningful progress in relation to WA plumbing with the in-principle agreement of the joint industry response announced at the end of August. Importantly, this JIR will take product recall off the table. As previously disclosed, we recorded a provision of AUD 155 million. This is mainly comprised of the estimated share repair costs and the supply and installation of leak detectors for all eligible WA homes with Iplex. We think this assessment is appropriately conservative. Cash flows are expected to be phased over 5 years and formal documentation of the JIR is being targeted later this calendar year. Meanwhile, our legacy projects remain on track and in line with the update we provided at our FY '24 results. Each of the NZICC, P2W and WIAL projects are tracking to expectations, with circa $170 million cash outflow in the first half of FY '25 and circa $70 million cash inflow in the second half of FY '25 remaining unchanged. Turning now to recent trading and our near-term outlook on Slide 13. As we indicated at our FY '24 results, we're experiencing volume declines of 10% to 15% year-on-year, a trend which we expect to continue for the rest of the financial year. However, it is a volatile market and we are vigilant to the possibility of further market weakness and are aggressively attacking costs to partly offset this. We continue to see good cash flow performance including in July and August, which is stemming from focused working capital management. The near-term outlook is expected to remain challenging. However, our underlying business remains strong and this equity raising further enhances our balance sheet position and ability to withstand market headwinds. On Slide 14, we provide a snapshot to contextualize the market backdrop. Overall, as noted at the bottom of this slide, Fletcher Building revenue is weighted more than 50% to residential construction across New Zealand and Australia. On the chart, we see the material decline in Australia and New Zealand residential sector activity from their respective market peaks to March 2024. This is one of the key factors weighing on performance. However, the underlying business is well positioned with significant operating leverage expected once the volumes recover. The quality of Fletcher Building businesses and market positions will allow the company to capitalize on this. On Slide 15, we provide an update on our near-term priorities. A key priority is costs. We are continuing to aggressively take out costs targeting $180 million in gross overhead cost out in FY '25. This excludes inflation and not all will flow to the bottom line. As we've already said, we also have a key focus on working capital and CapEx, making sure these are managed to respond to current market conditions. On Slide 16, if you put all this together, Fletcher Building has a group of well positioned and well-run businesses. The underlying investment thesis remains sound with the businesses operating in appealing medium- to long-term markets and having historically delivered attractive returns on capital. We're experiencing continued challenges in the market. However, resetting the balance sheet gives us headroom and gives us the ability to best position the business for an economic recovery. On Slide 17, we note that funds received will be applied to reduce borrowings with net debt expected to reduce from NZD 1.8 billion to NZD 1.1 billion at June 24 on a pro forma basis. As mentioned, this will also have a meaningful impact on the company's leveraging credit metrics, which are covered on the next page. On Slide 18, we note that on a pro forma basis at June '24, leverage reduces towards the bottom end of our 1x to 2x target leverage range, and a pro forma gross leverage at June '24 also materially reduces. This is one of the key metrics used by Moody's in its credit rating assessment. Offer details outlined here on Slide 19 and are within the supporting documentation released this morning. And finally, Slide 20 note details the timetable, which is also included in the supporting documentation released this morning. That concludes the presentation. And with that, I'll now hand back to the operator to run through your questions.

[Operator Instructions] Your first question comes from Andrew Scott with Morgan Stanley.

Andrew, I'm just trying to understand a little bit more about the overhead reduction program. It seems to come very quickly, particularly given as far as I'm aware, at least you haven't formally started in the CEO role. So I'm also conscious of the $200 million program through COVID. So I just really want to understand who's driven this? Is this already in train before you've started? Or has it come about very quickly? And just how much science or analysis is behind the $180 million figure?

Okay. A very good question. So coming into this year, we were already focusing on cost out and Nick and the team have done a good job on that. So it initially budgeted for $120 million in cost out -- but as we've seen the volatility of the market, we've now done a further exercise to make that $180 million. But it is a bottom-up exercise, not just the demand for the center. So each business unit has a granular target and map of what they are committed to achieving and they can be monitored against it.

That's helpful. And you referred to a gross number. Could you talk to us about any one-off costs to deliver that?

Certainly. So last year, we had taken NZD 6 million of restructuring cost last year to achieve the costs out there. This year, we're expecting to take NZD 15 million in restructuring costs.

That's helpful. And just one more, the rate certainly keeps the wolf from the door. Are we still considering a capital partnership for the resi business? Or is that really a reaction in response to a stretched balance sheet?

That's a process that's undergoing. We have some people we're still talking to but I don't think that would be a quick conclusion to that process, and we'll obviously update accordingly.

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

Andrew and Nick, just a couple of quick ones. Gross leverage seems to be a new metric you're talking to. And the leverage ratio changed from -- I think it was 2x to 3x EBITDA to 1x to 2x with the implementation of IFRS 16. And it's kind of had a mismatch versus the covenants for a long time. I was just wondering if you can give us some color on what you think the appropriate leverage through the cycle for Fletchers is and if it's still that range you previously put out there?

Yes, you're right. We have had that policy for a long time since 2019. I think as part of this process, we may look to reassess what makes sense for the group going forward, but it remains 1x to 2x for now. And you're right, there is a mismatch to the banking, so the leverage ratio. And you've also mentioned the Moody's one was a different one again. So yes, it needs to be reassessed and we'll do that in due course.

And I guess you talked about quality positions in the Fletcher Building businesses. And if you look over the last 20 years or so, you've lost small amounts of shares consistently. So I'd probably argue the positions aren't what they used to be. Andrew, can you give us some comments around maybe how different, I guess, the businesses are now versus when you left Fletcher Building 20 years ago?

18, I would say, let's not exaggerate. No. So what I -- I was seriously worried that what we've done was taking focus away from a major strength of Fletcher Building, which is it's strategic business units. And I've spent quite a lot of time in the previous 4 weeks going around the businesses. And what I've actually found is that we have got the focus back on them. I've met a number of extremely competent general managers and staff at the front end. So I think we have -- we still have our strategic business unit strength. I'm just trying to challenge your perception that we've necessarily lost market share. Certainly, I started in Fletcher and the concrete industries. And I would say they are stronger today than they were when I was around. Firth has certainly picked up market share. Golden Bay has definitely picked up market share and Winstone Aggregates are stronger today than they were when I was around. Winston and Woolworths has maintained its position. So I don't think you can say that we don't have strong businesses well positioned.

Okay. Don't go look at the Steel division or insulation then.

No, no stock insulation is still a very, very strong position. And steel, well, we don't have much of steel left. Now it's easy to deal. Pacific Coil Coaters has maintained its market share. The one area we have had real problems was PlaceMakers and that was -- we've attacked that late last year by getting the pricing right on Frame & Truss. So I do challenge your contention that we're not -- haven't got strong market positions.

Okay. Okay. And then maybe one final one. You talked about having lifted the budget for cost out from $120 million to $180 million. Are we -- is it fair to assume that you kind of thinking that maybe volumes will be more towards the 15% [indiscernible] 10% to 15% range versus maybe the top end of that range earlier -- is that kind of what's driven your thinking?

We are seeing extreme volatility. And look, we're being very prudent in trying to anticipate where the market might go. So if one can take costs out is ahead of needing to, there's nothing wrong with that, I don't think.

Your next question comes from Keith Chau with MST.

First question, just around the sizing of the capital raise. I know there are a lot of pro forma numbers to FY '24 that have been provided to the market. But quite clearly, you're not raising the defended balance sheet position in the past. So can you give us a sense of how you've decided to size up the capital raise on a go-forward basis. Is the thinking that you're raising enough to be closer to the midpoint of the current target range for leverage at trough cycle earnings. Can you give us a sense id that's a fair way of looking at how the capital raise has been sized up, please?

So we carried out a sufficiency exercise to ensure that what we were raising was going to be all we would need to raise. The gearing ratio is obviously cycled through as we move through the year, given the seasonality of some of our business. So all I can say is that as we took a forward look and looked at the volatility of the market that we're in at this moment in time, this capital raise was deemed adequate to cover our needs.

And so then, I guess, is it suffice to say that at the top end of the current target range of 2x even in the very worst base scenarios you'd have enough to cover the top end of the range, if earnings were to severely depressed in FY '25?

Kevin?

Sure. As Andrew has said, we've run the sufficiency analysis. Obviously, we've used the covenant amendments we have in place and that's been modeled out on various assumptions and we're satisfied with adequate headroom through FY '25.

And then on the cost-out program, the $180 million, is that simply a function of cyclical cost outs rather than structural? I mean, presumably, you're not reducing the cost of the business by $180 million permanently. And when the cycle does come back hopefully sooner rather than later, those costs will have to be put back into the business?

Well, I mean, it's certainly a rightsizing exercise and therefore, you're sort of right. At the moment out of that $180 million, we think we're taking about 2/3 of it will be from SG&A and the balance is from warehousing, handling and distribution.

Okay. So what proportion of that, therefore, would be structural versus cyclical?

I couldn't answers that off the top of my head, I'm afraid.

Your next question comes from Phil Campbell with UBS.

Just a couple from me. Andrew, is there a reason why there was no FY '25 EBIT guidance provided? And I know there's a trading update in the ASX, but will we get a kind of forecast number at that point? Or another way is, are you happy with the consensus numbers for FY '25 in terms of EBIT?

Well, I think we are aware of what the consensus numbers are, and we're also totally cognizant of our responsibilities vis-a-vis that.

Okay. Great. I suppose just another question, just the first time we've kind of engaged with you, I'd be just interested in your kind of your plans going forward in terms of the strategic review and just maybe some comments around kind of your management style maybe compared to some of the previous CEO of Fletcher?

So in terms of any strategic review, we will be carrying out one. It won't be complete before the start of next year. It will be a deep dive review, I can't predict the outcome because obviously haven't started it. In terms of my management style, I'm very much a decentralist, it's very much strategic business units, getting as much decision-making and impairment at the line that serves our customers as possible.

Your next question comes from Stephen Hudson with Macquarie Securities.

Andrew, welcome. Just a couple from me. I think in the risk section, you talked about the allocation of carbon units that Golden Bay Cement received as being potential risk. I think literally, the decision is due out this week from the MfE. The reason that I raised it is, I think the prior CEO said there's quite a large CapEx envelope envisioned for Golden Bay Cement and that's contingent on that release. I just wondered if you can update us on your expectations for what the MfE are going to say and what that means around the Golden Bay Cement CapEx envelope?

I think I'll ask Nick to add to that.

Steve, this is Nick. I'll take that one off. As we always said, we have some sizable decarbonization investments at Golden Bay, which are dependent on clarity on the next 10 years NZ used allocation, and we stick to that. We are in discussion with the government on that. But if I remember well, this week, it's just about the kind of regular cycle of allocation, not the long-term outlook, but we are in discussion to make sure we get a certainty about CO2 allocation for at least a 10-year period because that's what we need to make such investment decisions.

I think they are actually releasing the allocators' baselines this week.

Yes. But that's just the baseline. We also need clarity of the legislation around that, and that's not -- that's just the allocation of the baseline, okay?

Sorry, just going back to the sort of previous comments made by Execs. I seem to recall the outgoing CFO saying that the cost out covered was relatively there. You've given some good detail on where the $180 million lies. But Andrew, what's your confidence that you're not going to be cutting into muscle here?

Look, it's very high. I think -- look, we know we're in a cyclical business. We know there will be an upturn, it would be wrong to take out fundamental capability. So it will be rightsizing for the volatility of the market at the moment, and we will not be cutting muscle.

And then just a couple of quick further ones. Just the silicosis liability, I think the former CEO had said that he expected to take an actuarial estimate at some point of that provision. What is your thinking around the current management estimate and the need for an actuarial assessment?

Look, Steve, as we have highlighted during the annual results, we are a small piece of this industrial allocation of those costs as people unfortunately suffer from the consequences of silicosis. And we adjust provision if it needs to be, but it is -- as you have seen, it's pretty fairly stable. So no change there from what we have said in the annual results, okay?

And then just obviously, the chair timing, I think it's sort of the market's waiting with bated breath for the announcement of the permanent Chair. Can you give us an update or the acting chair there, she may like to give an update on the timing there?

Look, I mean, I think, as I said earlier on, they're getting the -- getting the right person is more important than the timing of it. So we are undergoing the search at the moment. That's all I can say.

Actually, I might just slip in one final one. You talk in the risk section about the core ERP being suspended in June. What's your expectations as to whether or not that restarts or is abandoned?

Sorry, the what?

ERP.

Sorry. ERP, we can't predict today. It's subject to intense review and we'll keep our eyes on and monitor it. But the important thing is that all the businesses have computer systems which are operating and we're servicing.

Your next question comes from Al Harvey with JPMorgan.

Just one follow-up for me on the resi and development sell-down. I guess I just want to step through the timing against the decision to raise just given your comments around wanting to realize the full market value for the asset. Was there some disappointment in early market feedback on the resi development division? And is that what kind of drove the decision to go ahead and raise today?

No. The decision to raise today was more about having quantified the West Australian plumbing situation. Resi and development, we're all -- it's always going to be a complicated process because the number of people who could buy it in New Zealand is limited. And if it's somebody from offshore, you've got OIO involvement and so on. So very little impact on our thinking on the capital raise.

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

Sorry, just one follow-up. Just on Slide 10, where you have the ROFE over time, and you've got ROFE including significant items at the bottom there. Do you adjust the funds employed for the historical write-downs? Or is it just taking reported EBIT versus kind of your underlying EBIT number?

Charles, do you have [indiscernible]?

I can come back to you on that. So no, in terms of our funds, the funds base, we keep consistent. It's just the inclusion of significant items in that metric that is different between those 2 calculations.

Your next question comes from Sam Seow with Citi.

Just wanted to clarify, the $180 million cost out, $60 million higher than the $120 million original. Does that mean your EBIT expectations are $60 million higher now than a month ago? Or yes, could you outline any other factors there? Maybe...

What we're doing is recognizing the volatility in the marketplace and rightsizing accordingly. I think I said earlier on, we're aware of what consensus is, and we're aware of our responsibilities around that. So...

If I might just add to that, the $120 million was in the budget and the budget, it's only done April, May. Then obviously, we came into the annual results and met with all of you guys, and we kind of put that 10%, 15% market volume decline in there and that's what has triggered us to lift obviously proactively the cost out again, okay? Just to kind of -- that you see that this has been pretty much in sync as we went through the slowdown as we flagged during the annual results to stay ahead and be prudent and proactive.

Your next question comes from Keith Chau with MST.

Just want to go back to the points in the equity raising announcement release materials. So the second bullet point on the first page, there's a comment on there, which points to preserve optionality in relation to its portfolio and reduces short-term pressure to realize assets at the low intrinsic value. But it sounds to me like there are more divestments that could be on the table. . Can you give us a sense of -- I know it's pretty early stage, but you know Fletcher Building quite well, which part of the portfolio could be noncore at this stage? And secondly, I don't know who on the call could answer this, but if you've sold Tradelink, when you've been under some financial address, why not just hold off on that one for a couple of months to potentially get more value when you've actually done the capital raise? Because clearly, there's a recognition that you're better off having a solid balance sheet before selling assets. So maybe Nick, you're on the line, maybe you can go on answering that one.

I'm quite happy to comment on Tradelink. We try Tradelink to turn it around for many, many years, unsuccessfully. We even had a Chief Executive of that division who came from Ferguson. It doesn't get better in terms of the leadership. And -- this was a strategic decision, which we took very, very early in this calendar year, and we already discussed it end of last year. So this was a well thought through decision, and we also believe it has been a good deal, and we've got a really fair value of this business. So on Tradelink specifically, we don't see that holding on today, we would have realized more value.

And then the capital raise, back to your earlier point, is to allow us the time to be able to do a proper evaluation of our portfolio. And I wouldn't preclude -- sorry, I wouldn't presume what the outcomes of that will be. I think it's too early.

Your next question comes from Grant Swanepoel with Jarden.

Sorry, Grant, we can't hear you.

Apologies, Grant has dropped off. As there are no further questions at this time. I'll now hand back to Mr. Reding for closing remarks.

Thank you very much indeed. I appreciate you joining our call today and have a great day.

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