Winton Land Limited (WIN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Winton Land Limited FY '23 Interim Results. [Operator Instructions] I'd now like to hand the conference over to Mr. Chris Meehan, CEO. Please go ahead.

Thank you, and good morning, and welcome to Winton's interim results call for FY '23. It's a pleasure to have you on the call today, and I appreciate you making the time on what seems to be a pretty busy results day. We present these results at a time when New Zealand is battling with the severe effects of Cyclone Gabrielle. Our thoughts with all of those personally affected and those working hard in the recovery to restore the basic needs of those areas that have been impacted the most. It's too early to understand the full extent of the damage and costs for New Zealand, but the rebuild and repercussions will no doubt be ongoing. Thankfully, the Winton team was all safe, and most importantly, as were the residents in our various neighborhoods, all of which stood up very well to both weather events. Alongside me today, we have Jean McMahon, who's our Chief Financial Officer for Winton. I will take you through the business highlights and update for the first half of the year, and then I will hand you over to Jean for the financial overview and further guidance. I'll wrap up the presentation with our views on the market and general outlook going forward. And at the end of the presentation, we'll be open to the call for any questions that you might have. Business highlights. It's been a great first half of the financial year. To touch on a few of these highlights, we settled 219 units at about 12.2% higher average price, earning $85.1 million. We delivered a $49.7 million EBITDA and a $34.5 million profit after tax, both of which were substantially higher than what we experienced in the first half of FY '22. We improved our gross margin to 46.3%, and that reflects a higher margin product mix in more mature projects in the comparable period. I must say there was excellent execution on site by our talented project team and our team of contractors, which has been further emphasized during the very wet summer and the recent adverse weather events. We made significant projects -- progress, rather, on Northbrook, which is our premium luxury retirement living brand. We pivoted deliberately towards the high end of the market for some new products and launched a premium freehold apartment project in Parnell, Auckland. Our presales from our prior years have done their role to provide security of income now and well into the future. As at the 31st December '22, our presale book was $565.8 million. We continue to operate with 0 debt across the board, and we have $89 in cash holdings as at December 31. We established a $200 million Medium Density Development Fund with MaxCap, and importantly, we grew the Winton team to further execute on our growth plans going forward. In executing these development plans, we completed Stages 5, 7 and 8 at Beaches Matarangi. We completed Stage 2 at Lakeside Te Kauwhata. We completed the Ovation apartment building at Launch Bay in Hobsonville Point. And we completed Stage 15 homes in Wanaka at Northlake. So all in all, we completed 227 units during the first half and settled 219 units, creating a small inventory of 8 completed but unsold properties. What the settlement does show is the significant works underway in future stages of all of our various projects to deliver future settlements. The Winton team and our contractors have delivered many milestones across our projects whilst navigating supply chain challenges and poor weather conditions. The can-do attitude is at the core of how they operate and what we can do, and I believe it is to be commended. Northlake Wanaka is our most mature neighborhood, and it is absolutely thriving. Currently under construction, we have a townhouse project, the commercial units, an apartment building and the remaining 10 duplexes, which are all looking great. Also underway at Northbrook -- at Northlake, rather, is our Northbrook Retirement village. Staying with the South Island, we've completed all the works on our boutique lifestyle project at River Terrace in Cromwell, and we brought that project to its full completion. At Ayrburn and Waterfall Park in Arrowtown, the remediation of the historic buildings and other works are well advanced for the Ayrburn hospitality precinct, which we expect to be completed and opened before the end of 2023. In the North Island, we had the Lakeside Commercial center nearing completion and continued significant civil works for the future residential stages. At Beaches Matarangi, importantly, we've constructed all 4 lakes in the development and nearly completed all earthworks in Stages 9 to 14. Civil works, roading, services installation and landscaping are well advanced for Stages 9 to 13. At Launch Bay in Auckland, we completed the Ovation building and continued the construction on the Launch Bay townhouses and apartments as well as the Jimmy's Point apartment project. In North Ridge Cessnock in Australia, the work has progressed quickly with Stages 3 and 4 now completed and awaiting council sign-off and Stages 5 and 6 [ are very well underway ]. All in all, Winton is in fantastic shape. We have delivered the first half results with the backdrop of a softer housing market, high inflation and increasing interest rates. When there's a lot of uncertainty in the market, having 97.9% of forecasted FY '23 revenue presold and 100% of forecasted FY '23 development costs under contract put us in a strong position to finish the year in very good shape. We believe in our ability to time the top of the sales cycle and to time the bottom of the construction cycle to maximize the value creation for our shareholders. We currently have a landbank of up to 6,751 units, including about 907 retirement living units from our current landholdings. Julian Cook, our Director of Retirement, has continued to build out the Northbrook team, having appointed an operations manager, a clinical manager, a marketing manager and a sales manager who are starting to build a sales team. We're initially focused on our first 5 sites with land acquired for all of those. Development is well underway at Northbrook Wanaka, including the construction of a show suite. Our flagship Northbrook show suite is also under construction at Wynyard Quarter in Auckland, and civil works are also well underway at Northbrook's Arrowtown. We're moving forward at Sunfield. Currently, 50 hectares on the already zoned future urban land is undergoing a traditional master plan and is expected to yield about 2,000 lots. However, we still very strongly believe in the original concept of Sunfield and are pursuing alternative legislative pathways to rezone the remaining 170 hectares. In parallel, Winton has issued proceedings in the Auckland High Court under the Commerce Act, alleging anticompetitive conduct by the government housing agency, Kainga Ora. Winton is seeking court declarations that Kainga Ora's conduct is unlawful and is in breach of the Commerce Act. We're also seeking an order requiring Kainga Ora to consider Sunfield for assessment under the UDA as well as the payment of substantial damages for Kainga Ora's conduct to date. The decision to issue these proceedings was not taken lightly, but we firmly believe that the current conduct by the housing agency cannot continue unquestioned. FY '23 will be a record year for Winton with 638 units forecast for delivery, of which 219 units have already settled, leaving 419 units in the second half of this financial year. True to our development cycle and seasonality, settlements will typically be higher for Winton in the second half of the financial year. As I mentioned earlier, 97.9% of FY '23 forecasted revenue is presold to date, putting us in a solid position in a changing residential sales and credit environment. So I'll now hand over to Jean McMahon for the financial overview. Thank you.

Thanks, Chris, and good morning, everyone, and thank you for joining us. We are very pleased to report our interim results for FY '23. The 6-month period ending 31 December 2022, we continue to execute our development plans. We settled 219 units and delivered $85.1 million in total revenue. Gross profit was $39.4 million, resulting in a gross profit margin of 46.3%. EBITDA was $49.7 million, and net profit after tax was $34.5 million. Winton delivered $85.1 million in revenue, which was 91.9% higher than the comparative period, reflecting the settlement of an additional 91 units and increased revenue per unit of 12.2%. This higher average price is driven by settlement of more premium units in mature developments. It's important to remember that the number of settled units will vary between halves of the year and year-to-year, depending on the number and size of projects and the development, the development life cycle of each project, the staging of construction works, the level of presales and the underlying market. Cost of sales increased by 82.6% from $25 million in the comparative period to $45.7 million in H1 FY '23. This reflects the 71.1% increase in the volume of units sold and a 6.7% increase in the cost per unit due to construction cost increases. Gross profit was $39.4 million, up 204.1% compared to the comparative period. Gross profit margin was 46.3% compared to 43.5% due to the different product mixes settling in applicable halves. In the most recent half, we had a higher proportion of lots to dwellings settling, which typically provide a greater return than dwellings. EBITDA was $49.7 million, up 484.6% on the comparative period pro forma EBITDA of $8.5 million. One-off listing costs are removed from pro forma EBITDA and profit after tax in H1 FY '22 to demonstrate the business' underlying performance. The substantial increase compared to the prior year reflects $40.8 million more revenue, $6.7 million of other income, mostly driven by favorable litigation settlement, fair value gain on investment properties and lower selling expenses, offset by higher administration expenses. The 45.6% lower selling expenses were attributed to reduced sales commissions for presales and reduced marketing expenses for the Sunfield and Winton brand, partially offset by increased Northbrook marketing. Profit after income tax for the period was $34.5 million compared to pro forma net profit after tax of $7.1 million in the comparative period. Turning to Winton's balance sheet as at 31 December 2022. Cash and cash equivalents were $89 million compared to $204.8 million as at 30 June 2022, reflecting the acquisition settlement of land at Wynyard, Cracker Bay and construction timing. The corresponding increase is seen in the investment properties line. Total assets were $556.3 million, total liabilities were $70.6 million, and total equity, $485.7 million. We note that most of Winton's property assets are reflected on the balance sheet at cost, not fair value, as at H1 FY '23, with the exception of the land at Lakeside Commercial in Northbrook Wanaka, which were fair valued during H1 FY '23 due to progress on site. Turning to Winton's cash flow. Receipts from customers were $93.6 million in H1 FY '23, up 97.9% in the comparative period. Payments to suppliers and employees were $89.7 million, up 78.3% due to additional recruitment of staff and works being completed across more sites. Settlement of land at Wynyard Quarter and Cracker Bay contributed to cash flows from investing activities of $94.7 million. Board has updated its dividend policy to exclude any unrealized valuation movements in investment properties. Our dividend policy is to target an increasing distribution per share over time within a payout ratio of approximately 20% to 40% of full year distributable earnings. The Board has declared a $0.0206 dividend per share for the 6 months ending 31 December 2022. Dividends are declared at the Board's discretion and are dependent on the company's financial performance. On 3rd of February 2023, we updated guidance for the 12 months ending 30 June 2023. The change to guidance is driven by the delivery delay of presale projects attributable to heavy rainfall in January in the North Island. As a result, we have already lost 83% of the summer's earthwork season, incurred water damage to preordered supplies and expect supply chain implications to the industry. For FY '23, we now expect net profit after tax of between $72.4 million and $82.4 million. This compares to the FY '23 forecast provided at the time of the IPO of $98.9 million. The revised guidance remains above the FY '22 declared net profit after tax of $31.7 million. Any net profit after tax not realized in FY '23 is expected to be realized in H1 FY '24, as these profits are largely presold, and there are no sunset dates in relation to the delayed units that would put this at risk. Cyclone Gabrielle has further solidified this change to our full year expectations. The revised FY '23 guidance remains subject to no further material adverse changes or unforeseen events.

Thank you, Jean. Turning to our outlook. So the double-digit year-on-year growth we've experienced in New Zealand housing market in recent years was unsustainable, and it was amplified by coverage impact on the housing market, which was unprecedented. We expect sales prices to continue to decline from their COVID-triggered peak at the end of '21, and we expect this to continue until both inflation and interest rate increases have stabilized. We successfully operated in the pre-COVID market for many, many years with robust profit margins and the ability to create and fund new projects, and we'll continue to do so as we move through the current sales cycle. The recent weather events will likely have further supply chain implications for the entire construction industry. In this environment, the strategy adapts to accommodate low presales for the majority of the market as buyers prefer to buy completed properties as and when they need them. So instead, we will focus on high net worth presales, where buyers are more immune to the current economic conditions through premium urban residential offerings as well as our luxury retirement offering, Northbrook. FY '23 is expected to be a record year for Winton as we deliver more land lots and more homes than we have done any time in the past. Going into the remainder of the year and into the next, we're in a very strong financial and market position to continue to deliver our presale project -- our product to create ongoing revenue opportunities and to use the softer market conditions to our advantage for further land acquisitions, and importantly, for further opportunistic entry into construction delivery contracts. That brings our presentation to an end. And if anyone's got any questions, we're very happy to move forward into those now.

[Operator Instructions] Your first question comes from Nicholas Hill from Craigs Investment Partners.

Congratulations on your results, and my thoughts are certainly with you and your team dealing with the weather events in what is normally a very busy time of the year for you. Just on your comments regarding adopting -- adapting your presale strategy to the current macro environment. Beyond the apartments, are you thinking about changing your product mix for some of the other projects to target more at the higher end of the market?

I think, certainly, for Northbrook, that's clearly targeted at the higher end. We've launched 1 project in Parnell, which is also very deliberately targeted at the higher end, and we're shortly to launch another freehold apartment project in when you also deliberately target it at the very high end. Across the board in our existing projects, for the most part, we're still presold quite a few years in advance. So I guess we've got time to consider that as we move forward. But certainly, any new projects we're entering, I think you either want to be at the very top end or at the top end -- not the very top end, but the top end or upper end or at the very bottom end. I think the middle will be difficult. And I think it's fair to say that in these economic times, high inflation, high interest rates, middle New Zealand gets squeezed. And so our focus would be at either end of the market for anything new that comes our way.

Great. And just sort of looking across the [ debt ], are you seeing -- would you say that you're seeing the same level of presales version in Australia for Cessnock?

It's hard to say because we're totally sold out. We've sold everything forward so far. We haven't been in the market here for a long time. Although having said that, the mining boom is very strong over there, and we're in a mining lead area, and we think the -- both the population growth and the income growth is very strong in Cessnock, so we wouldn't expect to have any problems if we went back to preselling land. But we're sold so far forward. We won't be doing that for some time.

Great. Just looking at MaxCap, what kind of opportunities are you starting to see across the desk given that sort of the macro environment has changed quite quickly? Would you say that you're starting to get a sense that banks are starting to put more pressure on vendors?

I wouldn't say banks because the banks haven't really been lending in that space for quite a long time. So it's more your foreign lenders or foreign hedge fund lenders and/or your second-tier local lenders that are now starting to really put a squeeze on quite a few of those smaller to midsized developers. So we are seeing opportunities come to us from lenders, but we feel that they still need to take a bit more of a discount to their debt for us to act.

And just one last one. I had a quick look on Google Maps, but I couldn't find it. Whereabouts is Cracker Bay or [ land you acquired for us ]?

Yes. So we've renamed Pier 21 complex in Wynyard Quarter. When we bought it, it was called Pier 21. It's now going forward to be called Cracker Bay.

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

Congratulations on [indiscernible] and getting through what is a pretty challenging period across the country. First question, the seasonality, this is the kind of second half where we've had kind of 30%-ish in the first half. Is that normal? And I know Jean called out various events that move it around, but is it typically kind of 30%, 40% first half, 60%, 70% second half in terms of volumes, just given earthwork season and timing of completions and titles?

I'd say I'd concur entirely, yes, that's pretty -- it's been normal for a long time for us.

Okay. Perfect. That's useful going forward. I had more of a 50-50 split, so thanks for confirming that. And just when you look at the guidance that you've given, the new numbers, I just noticed there was a comment at the bottom just talking to, what did you say, excluding any unconfirmed fair value revaluation of investment properties. I'm assuming that means the range is kind of including the $15.6 million and the $7.6 million other income?

Yes, that's correct.

Okay. Perfect. And when you look at other reval gains you could get through the books, Wanaka is now in investment properties. Wynyard is there from the retirement village side. So can we assume that when Avon Loop, Launch Bay and Ayrburn move into kind of production or development, then they will move across? Or have they already been moved into the investment properties segment at land value?

Yes. So they already have been moved, so they were moved at 30 June '22. So in that investment property line, you've got the 5 retirement villages, Lakeside Commercial, and now you've got Cracker Bay as well. And they all are held at fair value with the exception of Launch Bay Northbrook and Arrowtown Northbrook, which continue to be held at cost, pending progress on site.

Okay. Perfect. And then the other commercial projects you have within your kind of forward pipeline, there's a piece of commercial at Northlake that you were looking at selling, and there's Ayrburn Farm as well. Would they potentially be things that could move into the commercial book once you get more visibility on if it's a sale or a keep on balance sheet-type project?

Yes, that isn't an option that could happen as the Board approved that. I'll just touch on Ayrburn present. That actually is part of property plant and equipment because that's an asset that we will operate specifically, so that's not in inventories. But the other project that you referred to, Northlake Commercial, debtors and inventories.

The general [indiscernible], Rohan, is where we have an asset that we feel that we can generate a high recurring income, which delivers a higher return on cost. We're trying to build our recurring income side of the business. And so where the opportunity exists, we are aiming to keep some of that product that we probably in the past did used to sell, but perhaps shouldn't have.

Fair enough. I think it's a strategy that's worked reasonably well for similar businesses in Australia. Going back to the margins, this is the last question, the higher portion of lots versus dwellings, there was a benefit to first half. I'm assuming just given what's happened with your guidance on settlements with a decent decrease at Northlake, that is a similar sort of situation second half as in there's more lots than built form, and that kind of built form in Wanaka has been selling slower and therefore is likely to sell in '24, '25 as conditions improve?

There is some built form settling in FY '23 in the second half at Northlake, but we do have a higher proportion of land lots versus built product settling in the second half, similar to the first half.

There are currently no further questions at this time. I'll now hand back to Mr. Meehan for any closing remarks.

I think that's it from us. I just like to thank everyone for their attendance and their ongoing interest in Winton. And we're very open to taking any calls from anyone that has any additional questions, and we look forward to delivering on the full year results. Thank you for your time.

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