I would now like to hand the conference over to Mr. Bruce Nicholson, CEO. Please go ahead.
Thanks, Ashley. Good morning, everyone, and thank you for joining us today. As Ashley just pointed out, my name is Bruce Nicholson. I'm the CEO and Managing Director of Fleetwood. I'm also joined today by Andrew Wackett, our CFO, and together we'll walk through our results for the financial year FY2022. I'll start by providing some introductory comments. Andrew will go through some detail on our financial results, then I'll talk about our various businesses and the outlook. Just as a point of interest, our cover picture on this year's results presentation is Jimmy's Pavilion down in Mornington Peninsula in Victoria. This building is another great example of the impressive architectural design that is being incorporated into modern modular buildings. It is a first-class facility, and that is why we're seeing an increase in popularity of modular as a high-quality, reliable, cost-effective, and sustainable building solution.
If we move to slide two, at Fleetwood, we continue to focus on our three core businesses. Our Building Solutions, where we see medium to long-term growth. Community Solutions has been renamed from Accommodation Solutions to reflect the significant opportunities that this business is pursuing in the development of new community facilities. Our RV Solutions business which continues to service and continued demand in recreational vehicles, caravans, camper trailers, and the motor home sector. Shifting to slide three. We've recently developed a fresh new company vision, purpose, and values. Our vision at Fleetwood Australia is to be the leader in reimagining sustainable spaces. This touches all three of our operating businesses in slightly different ways. Our new vision and purpose are underpinned by five core values. Zero harm to both our people and the environment. Collaboration, becoming one Fleetwood. Integrity, accountability, and growth through innovation.
If I move over to slide four now. Operationally, Fleetwood's three operating businesses had a mixed year, combining to deliver an underlying loss of AUD 12.3 million on earnings before interest, tax, and amortization. Building Solutions clearly delivered an unacceptable AUD 24.3 million dollar loss, overwhelmingly driven by major project underperformance, material and labor shortages, as well as COVID lockdowns, which also impacted the result, but to a lesser extent. I'll discuss these further in detail on our next slide. Community Solutions delivered a sound result to expectations, given the short-term excess capacity in the Pilbara, as we've previously flagged. While RV Solutions delivered an outstanding result on the back of domestic travel demand, which luckily remained strong for the first half of this financial year.
Importantly, a prudent approach to working capital has allowed the company to maintain a strong cash position at the end of the year with AUD 55.3 million cash. To drive and deliver on our performance improvements, several long-term strategic initiatives were commenced during the year. We also appointed key roles in National Sales Manager Tom Gleeson, National Manufacturing Manager Tara Goldsworthy, to drive the diversification of revenue and deliver on our manufacturing transformation. We've also appointed a new executive GM to our WA business, Giles Everest, to drive improved performance of this important state. Demand for Fleetwood is strengthening with several major projects in the Karratha region advancing this year. In our RV Solutions, cost and price management remains strong, which again led to an excellent result. Specifically on slide five, as we move to the Building Solutions results.
Major project underperformance accounted for about 80% of the AUD 24.3 million loss in that business. The vast majority of those losses relate to the Ti Tree Rail Camp Upgrade mining project in WA. The project experienced significant delays and cost escalations during the year, and in preparing our year-end accounts, a further review of the project and associated risks were undertaken. Following this review, a conservative approach was adopted and a further onerous contract provision of AUD 8.9 million was taken at year-end. Fleetwood's intention is to complete this project, and it'll continue to pursue a number of material claims which remain subject to ongoing commercial negotiations. These claims have not been accounted for in these results.
Other major projects, such as the Centers for National Resilience, also impacted the efficient flow of work through many of our facilities, and this resulted in a reduced utilization and unrecovered overheads, further impacting our performance. When we realized the impact of these major projects were having on our Building Solutions business, we implemented the following criteria to pivot our bidding for new work to low-risk projects that better align with our current capability. Specifically, our criteria are: Is the product buildable? Can it flow through our factories? Have we got the right margin? A deeper understanding of the risks and opportunities on the projects, and is the customer the right customer for us to partner with?
The result of this shift has meant that from a high of 50% of our order book in December 2021 for major projects, this now only accounts for 15% of our order book at the end of June. That 15% relates entirely to the tail of projects which commenced late last calendar year. We've also implemented the lessons learned from our projects and have a far more robust project review process in place in the business, which has already seen us walk away from several key projects in recent months. I'll now pass over on slide six to Andrew, and he'll focus more on our financial details.
Thanks, Bruce, and good morning, everybody. I'm on slide six. As Bruce mentioned, the positive performance from RV Solutions was unable to offset the underperformance on major projects for Building Solutions and the COVID-related impacts on the East Coast. The underlying EBITA loss for the year of AUD 12.3 million includes the AUD 8.9 million onerous contract provision announced last week. Community Solutions has delivered consistent results compared to the second half of FY2021 and ongoing domestic tourism strength, combined with strong management of raw material and freight costs, has resulted in another excellent result for RV Solutions. As previously reported, the review of the carrying value of the Building Solutions business resulted in significant items totaling AUD 39.8 million in the first half. This was non-cash and does not affect the ability of the business to pay dividends in the future. Over to slide seven.
Despite the operational challenges, a disciplined approach to cash flow management has seen a healthy cash balance maintained at the end of the year. While working capital performance was strong, it was boosted by year-end provisions, and I'll demonstrate this more fully on the balance sheet slide. Tax payments have recommenced and working capital has been contained despite the growth in revenue. Significant financing cash flows in the period include the return of a project finance advance in July 2021 and the outflow of dividend payments of AUD 11.8 million. Slide eight. The balance sheet remains strong. The company continues to carry no balance sheet debt and retains AUD 58 million undrawn facilities. At the end of the period, AUD 27 million of the credit facility was drawn for performance bonds and guarantees.
The reduction in carrying value of Building Solutions is reflected in a decrease in intangibles of AUD 33.6 million and working capital of AUD 6.2 million. Working capital was also reduced by the onerous contract provision. Finally, while no final dividend has been declared, our dividend policy remains to pay out 100% of all future earnings. In summary, we continue to manage our finances prudently and we are maintaining strength and flexibility to invest in the future development of the business. Back to you, Bruce.
Thanks, Andrew. I'm on slide nine now. I'll now walk through our different businesses and the outlook for each. Building Solutions recorded a significantly higher revenue compared to the previous corresponding period. As mentioned, this revenue is really driven by the award of the Centres for National Resilience contract in Melbourne, Brisbane and Perth. The image on page 10 actually shows the Melbourne facility under construction. While these projects were profitable for the company, these projects were a one-off in nature and are not likely to contribute materially to the FY2023 revenues. Second half earnings reflected the ongoing underperformance, as I've mentioned, of the Rio Tinto Ti Tree Rail Camp Upgrade mining project and the significant impact of supply chain issues leading to cost increases, material and labor shortages, I'm sorry, being felt right across the entire industry.
Further significant delays and cost escalation were experienced in that project in WA. While we had previously said that the project would be completed in the first quarter of this year, a more detailed assessment in recent weeks has site work substantially completed by the end of the first half in 2023. Our financial year, I'm sorry, 2023. In addition, a combination of project delays as I stated, with poor weather on the East Coast as well as labor and material shortages, resulted in lower than expected progress across projects in New South Wales, Victoria and WA during the second half. Specifically, we are struggling to source qualified trades in our business.
Overall, the order backlog remains solid at AUD 130 million, and while lower than AUD 189 million at December 2021, boosted by the Centres for National Resilience, it compares favorably to AUD 103 million back in June 2021. Over to slide 10 now. Building Solutions anticipates an improvement in earnings in FY2023. We expect it to come from a combination of a solid order book, the reduced impact from major project cost overruns, and continued overhead reduction. As I've said, unlike previous periods, the current order book, forward order book does not have any material new major one-off projects of high complexity in an environment of limited skilled labor that are outside the traditional scope of Building Solutions projects.
During FY2022, these included the highlighted Ti Tree project as well as the Centers for National Resilience and several other quite bespoke projects. While Building Solutions will continue to feel the ongoing effects of labor shortages and higher raw material costs in the near term, volatility is expected to reduce over coming months. Opportunities with government, including housing, education, defense, are expected to increase as adoption of modular gathers momentum. As an example, the Western Australian Department of Housing is now using modular solutions for their affordable housing after engagement with Fleetwood in WA. Our build, transform and grow strategy provides a roadmap for medium to long-term improvement in the quality and consistency of our earnings. The build phase involves improving the capability, systems, processes and brand awareness that underpin a long-term sustainable growth.
The business is moving to a national functional leadership model to improve coordination effectiveness of important functions such as sales, estimating and design, procurement, manufacturing, health safety and finance functions. The senior management teams in several states has been substantially replaced, reflecting the underlying issues that have impacted our F20Y22 financial results. The transformation stage of the strategy includes revenue diversification, moving from being a builder to a manufacturer, and involving the qualifying work coming through our pipeline as mentioned in those key measures before, buildability for modular, the right margin, a deep understanding of risks and opportunities, and the right customer to partner with. Other major works streams include aligning our national work size and developing common processes and procedures to deliver consistency, improving and introducing our sales and operational planning. So that we can push employers to optimize their capacity across the network.
Balancing the build complexity with standardization of modular components to open pathways to automation. Focusing on national procurement to reduce costs by consolidating our purchasing and leveraging our purchasing power as a national business. Over the medium term, this is expected to see it as a stable and growing business able to effectively leverage the advantages of modular building. Reduced building time and speed, lower cost, especially when design variations are considered, improved quality when compared to in situ builds and better ESG credentials, especially around waste, sustainability and the ability to recycle, repurpose and reuse buildings. As we move to slide 11, as expected, Community Solutions returned to a similar result in the second half of FY2021 ahead of major project demand. The COVID-19 rosters in place in the first half of FY2021 were not repeated in FY2022.
FY2022 also saw the full impact of the increase in room capacity in the Karratha market. The recent five-year agreement with Rio Tinto underpins our base utilization profitability moving forward and creates a strong negotiation position for ongoing discussions with additional clients to support planned shutdowns and major projects over coming periods. Osprey Village remains fully occupied. Moving to slide 12. The outlook for our Community Solutions business is buoyant with a strong prospect that WA Northwest will see significant future development of new projects in the oil and gas, fertilizer, and green energy sectors. The security of existing demand from current customers places Fleet in a strong position in the medium term. Commercialization of our keyless lock and energy management system using the Fleetwood-developed Glyde technology is underway.
Fleetwood is developing the technology, and it's available to deliver through our Building Solutions business, positions the company as a digital market leader in modular. A growing number of low carbon projects are currently under consideration in the northwest of Western Australia, where a climate for communities to house and facilitate these projects is a significant medium-term opportunity for our Community Solutions business. In addition, Community Solutions is well-placed to pursue, build, own, operate, and transfer or build, own, to rent opportunities in the residential aged care and mining sectors, leveraging the ability to source new villages at a competitive cost through our Building Solutions business and leveraging Fleetwood's balance sheet. On slide 13, the RV Solutions business finished FY2022 with an EBIT of AUD 9.8 million on a revenue of AUD 81.2 million.
The result was driven by the strength of both our OEM and aftermarket segments, and excellent trading conditions created by ongoing interest in domestic tourism. Tight management of increased raw materials and freight costs allowed gross margins to be maintained and excellent control of operating costs saw the increased demand translated to earnings growth. Continued growth in new caravan registrations and secondhand sales of caravans has been a key contributor to the growth of RV Solutions over the past year. On slide 14, the medium-term outlook for RV Solutions remains positive. While international travel has resumed, the forward order book for manufacturers remains at very high levels. The business is likely to remain in a strong position through our exposure to the locally built RV market via the parts business, Camec, and the overseas imports through the services business, Northern RV.
Booming caravan sales during the past few years will likely continue to deliver demand for the aftermarket service and renovation offering from RV business. For our Northern RV business, I'm sorry. Continued strong management of price and input costs is expected to support margins, and we're also introducing new products such as sandwich panels and aluminum wall frames now. The increase in secondhand van sales provides an opportunity for products and promotion of renovations through our service offering. Challenges remain primarily around raw material supply and price, freight costs, and access to skilled labor at RV Solutions. The potential impact of recent interest rate rises, fuel increases, and the impact of discretionary spending are being very closely monitored. On slide 15, overall, the business is positioned to generate improved results in the future.
All three businesses have clear plans to improve their revenue quality, the capture of future opportunities, increasing our utilization, and managing our costs, and in doing so, improving our margins. These plans aim to return the company to profitability in FY2023. I note, as Andrew pointed out earlier, our dividend policy remains to pay out 100% of future earnings. The company is becoming more adept at identifying and managing challenges. I'm confident that the team will continue to find ways to identify and successfully navigate these challenges as they occur. As we have said, our balance sheet remains solid, and we've been prudent in the way we've leveraged our strength to support growth. I'd like to thank all of our shareholders for their understanding during these difficult times, and we'd be happy to take questions now.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Shaun Caruana with Moelis Australia. Please go ahead.
Hi, Bruce and Andrew. Thanks for taking my questions. First one for me. Bruce, you mentioned you're expecting an improvement in earnings in FY2023 for Building Solutions. Can I clarify, are you expecting that division to return to profitability in 2023? We do. We expect the first half will be tough because we've still got the tail of these projects we talked about, but we expect our run rate to be profitable in the second half of the year.
Got it. You know, what's kind of, I guess, informing that view, you know, at the AGM last year and at the first half result, I think the expectation was for those underperforming contracts to be the impact, in a way, to be contained to the first half as well. You know, clearly that hasn't been the case. Like, I guess what have you done since to, I guess, yeah, kind of give you the confidence that the worst is kind of behind you?
Yeah, that's a good question. Look, as I said, clearly recruiting some new EGMs into the business has allowed us to actually get under the hood and have a more detailed look at these projects, and that's one of the reasons that we took the decision on the Ti Tree project in WA in the last couple of weeks, Shaun Caruana. We have a very detailed process through our commercial teams now, our commercial managers and contract managers. We're going through cost to complete in a more detailed way than we have in the past. That's. I'm acutely aware that what we said at mid-year is we thought we had these projects contained.
We clearly didn't, and we've had to look a lot harder both at ourselves and the capability of our team to actually get under the hood and really understand what the true cost to complete these projects are. We do fortnightly, you know, contract reviews on these major projects. We're managing them on a monthly deep dive. We go through them in quite a bit of detail, so we're actually getting a lot more clarity. I think the other thing that should give the shareholder some confidence is we're getting to the end of these projects too. It's not like they've got a year to go. As I said, we expected to be finished with Ti Tree One a lot earlier than we do.
We now know that we're almost at completion, and therefore we're a lot closer to the end, so we understand more clearly what those costs are.
Understood. Just changing tacks a bit. On Searipple Village, can you maybe just talk to what you're seeing on the ground over there, you know, just given some of the major projects wrapping up and expected roll back?
What I've seen. We, as you'd be aware, we signed a Rio Tinto contract for another five years. We've just signed a much smaller contract extension for two years with a supplier, and we've got a third contract, which we are just in the final weeks of concluding at the moment. They're all quite small, but all, as I've pointed out before, us layering that. Clearly, as we've said before, you know, we're quite pleased to hear Perdaman project is not being pulled by the federal government now. That's a key project that we are watching intently on the FID for. There are multiple inquiries coming in from multiple sources for other projects out there, particularly in that renewables space at the moment.
We're not particularly large ones, Shaun, but there is certainly a lot of interest in the region for both Perdaman and clearly other projects that are either proceeding or going through the discovery phase at the moment for use of our property out there.
Understood. Just on that Perdaman, I know it's anyone's guess really, but what's your take on expected date for what mobilization for that project?
I've only got the same information. We're obviously speaking to the EPC, and we're speaking to Perdaman quite regularly. We've got no more clarity than what you have. Vikas has come out and said that the announcement on FID will be four weeks-eight weeks away, I think about a week and a half ago. We've heard this before, but we expect it to mobilize quite quickly if it lands in the next four weeks-eight weeks. Certainly, we're expecting something in October. When I say mobilize, you won't see big volumes of people till next year, but we do expect to see some take up this year as it currently stands. As I said, we've really got no more insight than what's been in the public domain, Shaun.
Got it. Thanks again for taking the question. We've got a lot more for you, so thanks a lot.
No, thank you.
Your next question comes from Pierre Prentice with Asymmetric Asset Management. Please go ahead.
Hi, guys. Just a couple of more questions on Building Solutions. First, the loss was AUD 24 million, and the onerous provision was something like AUD 8 million, suggesting there's another 16 or so before we hit breakeven. Were there other onerous provisions taken there that we need to take out of the equation to get to the sort of baseline?
I might need to get Andrew. I can answer that, Pierre, but I might have Andrew give that to you because
Okay.
Yes, the answer is yes. There were ownership contracts, so I'll let Andrew answer that.
Sure. Thanks, Pierre, for the question. We said that about 80% of the loss in Building Solutions was due to major project underperformance. That rounded that to about AUD 20 million of the AUD 24 million. The onerous contract provision is just what's remaining in those contracts to do. We took an additional provision of AUD 8.9 million at the end of the year. Hopefully that answers your question. All the major projects we've identified are, you know, like obviously all the ones we've announced to the stock exchange, like, you know, Pinkenba Centre for National Resilience, those. They're all the projects. Ti Tree, obviously. They're the projects that have caused us some issues.
As Bruce said, we're sort of pivoting pretty heavily away from that size and complexity of project at the moment.
Right. Okay. That AUD 20 million includes the provision for onerous contracts and leaves basically a bridge of AUD 4 million to get to breakeven if you take those out.
Mm-hmm.
The related questions are, labor shortages. Have you found a magic wand to wave at labor shortages and how are you gonna deal with that? Obviously, it's an ongoing problem, not just in Building Solutions, but you're obviously confident that you've got on top of the problem, otherwise you wouldn't be forecasting a return to profitability. Can you tell us what gives you that confidence?
Yeah. Look, I don't think there's any magic wand out there. I mean, there's certainly a shortage of skilled trades in the marketplace, either because they're not available and we are competing against the building industry for those trades, Pierre. Thank you for pointing that out. There isn't a magic wand. We are trying all sorts of different things through our HR teams and through our local teams to recruit the right employees and contractors to our sites. Where I have confidence is the demand is dropping off because we haven't got these large major complex projects. The tradespeople we need aren't at the skill level you need to do a highly complex school build or a highly complex quarantine facility, for example. We're looking at a lower, not skilled.
Skills is the wrong word to use, Pierre, but we're not looking for the level of trades that we need for these more complex projects. We are bringing much smaller projects, more in the sort of AUD 1 million-AUD 3 million, AUD 3 million-AUD 5 million dollar work into the factories that are more traditional builds and more in our wheelhouse. Therefore, we can do it with the existing trades without having to go and source others. I don't think the issue of labor shortage is gonna be fixed by a meeting with the federal government on Thursday and Friday. I think it's gonna take some time for that to play out. We do need to work out how we can reduce our reliance on trades in the business. That's part of our manufacturing transformation, but that's not something that's gonna happen overnight.
That's gonna take some time to play out, Pierre.
Right. Okay. Well, that leads to my last little bit of question, which is, you're repositioning to supply lifestyle villages, affordable housing and defense sectors now. To a layman from a distance, they look like pretty big projects, but given that you're getting out of big projects, the implication is that things are quite a bit smaller. Could you give us a feel for how this target area compares with things like the Melbourne Centre for National Resilience and the Ti Tree Rail Camp?
Yeah. Look, they're quite different. We do a lot of lifestyle housing now. We do lifestyle housing in WA, we do lifestyle and affordable housing in Queensland already. It's part of our current remit. We don't do much in Victoria, we don't do much in New South Wales or South Australia, so we're actually extending it there. What we are developing is a suite of our own internal products that we're taking to market as an offering because we see that opportunity. We're actually controlling the design and the manufacturing our own way. We're not trying to design and build a bespoke product. That's about us having more control.
Similarly in the defense sector, you know, there's some really quite large complex projects like six-story living accommodation that they're looking at some of the defense force facilities. We're not looking at anything like that. We're looking at doing things in the sort of two to three story office and accommodation space. That again, is stuff that we're familiar with and we do commonly across the business. Much smaller types of works and certainly not taking on a head contract or a contract with large on-site works such as civil and other things. Just to give you a perspective, the challenges we had in Ti Tree were not about the buildings. We built the buildings and did quite well out of the buildings there.
It was the on-site works that we weren't able to contain and manage well in the last 18 months, Pierre. It's not what we do. We do mining camps very well. We're very capable. The quality of them. We're just finishing off two large mining camps where we supplied the buildings in WA. They've gone very well. The product is high quality and we're looking at others at the moment in WA. It's something again, we're comfortable with. If I just.
Okay.
Sorry.
What's the contract value of these lifestyle villages, affordable housing and defense sectors? You know, I ask that because, you know, in a sense, the total contract value circumscribes your risk a little bit.
Yes and no. I mean, a lifestyle village could be one house for AUD 300,000 including a bit of site works and complexing, Pierre. If it's, you know, 20 houses, it could be an AUD 8 million or AUD 9 million dollar project, but again, it's 20 of a similar type of product. We're not talking about high levels of complexity or buildings with, you know, real design risk with them, if that makes sense, Pierre.
Mm.
Similarly, we're talking about, you know, if I was looking at another mining village, for example, it might be AUD 6 million-AUD 12 million for buildings, for potentially delivery and for complexing on site. Again, not doing site works, not doing earthworks, and things like that, back in our capable wheelhouse. The quarantine facilities were a very different animal, though, Pierre. They were very much a medical grade, high quality, very expensive AUD per square meter. I won't tell you what that was. It's commercially sensitive, but a very high grade product that required a significant amount of design after the contracts were signed and a significantly higher capability in terms of the engineering services that were required to build those things for the Commonwealth Government. We're steering right away from those types of projects.
It was, as I said, really up there with a medical grade facility that we weren't experienced in.
Right. If you want to avoid the site works on these projects and just do the building-
Mm-hmm.
Could you get similarly caught by not having relationships or customers with access to the trades to get it done? In other words.
I-
A great product, but no one to install it.
Well, if we're doing the install work, then there's always a risk with that. We have our own installing people, Pierre. So we do have our own project managers, project supervisors and site people, and we do education projects right across Queensland, New South Wales, Victoria, where we do installations, but a very small component versus a major civil project, which is largely what Ti Tree was. Quite a different profile. You know, there's many ways to contract these projects. We can actually simply contract, if the client allows it, for us to build and deliver the product to site, and complex. We have contracts like that, so we've not got any risk whatsoever for the site works at all.
there's a balance there in terms of what the client's willing to take on themselves and what we have to take on. We're just being more prudent right now than we have with these larger projects, recently.
Okay. Thanks very much for taking the time to answer them.
Thank you, Pierre.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. We'll now pause a short moment to allow questions to be registered. There are no further questions at this time. I'll now hand back to Mr. Nicholson for closing remarks.
Look again, on behalf of Andrew and myself, I'd like to thank you all for joining us this morning. I'd like to also really, you know, make it clear we do see that Building Solutions result as incredibly unacceptable. We have pivoted the business. We're reducing our exposure to those high-risk projects. I'm confident we're putting a more stable business in place to move the business forward. I'd like to thank our shareholders for your understanding during this challenging time. Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.