Earnings Call: H2 2021

Aug 26, 2021

I would now like to hand the conference over to Mr. Bruce Nicholson, CEO. Please go ahead, sir. Thank you. Good morning, everybody, and thanks for taking the time to join us today. As you just heard, my name is Bruce Nicholson. I'm the recently appointed CEO of Fleetwood. I'm also joined today by Andrew Wackett, our CFO, and together we'll take you through our results for this last financial year. I'll provide some introductory comments. I'll let Andrew speak in some more detail around our results and our cash position, and then I'll talk to the various businesses and outlook for you. I will push through the details fairly quickly today because I want to take some time at the end for Q and As. And I'm also mindful it's a busy market with a lot of announcements being made this week. For those of you who are actually flipping through the presentation at the same time, I guess, out of interest, the front page of our presentation today is the Barramara Public School here in New South Wales in Southwest Sydney. And with that, I'll sort of kick off now to my broad presentation. Look, we continue to focus on 3 core businesses: our flagship Building Solutions business where we see the best accommodation solutions where we have 2 operating villages up in the Pilbara. We also have significant opportunities to form developing new community facilities and I'll talk more to that as I go. In RV Solutions where we have CAMEc and Northern RV are both seen as leaders in the recreational vehicle, caravan and motor home sectors as well. Fleetwood's 3 operating businesses combined to deliver sound performance resulting in underlying earnings before interest tax and amortization of $26,300,000 for full year 2021 financial year, up 18% compared to the previous corresponding period. Revenue was up 9% to $360,000,000 Cash levels at the end of the period were lower than in the first half of twenty twenty one due to the working capital requirements of 2 major building projects, which carried across the end of the financial year. The company has largely utilized our tax losses from previous years and has recommenced paying tax this year as well. You'll note that cash levels and balance sheet remain strong and are well matched to the company's ongoing requirements. And you'll recall the Board introduced a revised dividend payout policy of 100% of net profit after tax in February 2021, and we intend to continue with that. As such, a final dividend for this year for this half will be $0.125 per share has been declared following the $0.06 per share interim dividend paid in April 2021. This compares to an FY 'twenty dividend of $0.12 per share. The strategic focus of Fleetwood Management remains on revenue growth, sustainable improvement to our margins and increasing our utilization whilst reducing our overheads to improve our earnings. Building Solutions and RV Solutions delivered improved profits, partially offset this second half by accommodation solutions, which was impacted by the additional regional room supply coming online and normalization of that business post the COVID impacts in the first half. In Building Solutions, our Victorian and WA businesses had very strong results, especially across Education, Mining and Housing. But we also saw some ongoing operational integration issues in our New South Wales business. Sea Ripple Village in Kirarthas, our occupancy levels returned to normal levels. And then we've also seen an increase in regional room supply up in the Pilbara. We've closed international borders. We've seen a boom in domestic travel, which has benefited our RV Solutions business as well. I'll now pass over to Andrew to focus on some more financial details. Thanks, Bruce. I'm on Slide 5. Good morning, everyone. Once again, we have generated solid cash flow as a business. This is pleasing given the ongoing uncertainties that all companies find themselves in during these times. Our operating and free cash flows were lower than the last year, but there are some specific reasons for this, namely the recommencement of tax payments and more importantly, working capital associated with the 2 major projects that remained under construction at the end of the financial year. We have paid out $17,000,000 in dividends and have $0.20 per share in franking credits. That's available to support up to $0.46 per share of fully franked dividends. Slide 6, looking at the balance sheet, we're in a strong position. Our closing net cash of $58,000,000 is solid and that's before the return of the $8,700,000 of project finance advances we received in July. We have no balance sheet debt and our credit facilities of $85,000,000 are drawn to $18,000,000 for performance bonds. Our working capital is at a more sustainable level to support the Building Solutions business and to provide appropriate levels of inventory support for the strength in RV sales. For the year, we delivered an overall return on capital employed of 15.9%. Back to you, Bruce. Perhaps you're muted. Apologies. Sorry about that. So I've just moved over to slide 7. Thank you, Andrew. I'll take a more specific look at the different businesses and particularly the outlook. The outlook for Building Solutions remains very strong, especially driven by federal and state government stimulus spending programs. Our order book is sitting at $103,000,000 compared to $74,000,000 last year and we've seen significant increase in our bid pipeline with a 56% increase in tenders submitted to $438,000,000 compared to last year. This pipeline excludes several government projects that have been announced post the end of the financial year such as the specialist quarantine facilities that have been announced across several states. We continue to see modular construction gaining traction, particularly in this environment of wanting rapid solutions for things like quarantine facilities, housing and education. And we're starting to see our results of our strategy work, but still have yet to complete achieving a fully nationalized and integrated business. That's a work in progress. We also have to be mindful there are challenges not least of which are the cost of raw materials and general labor shortages across the industry. The ongoing lockdowns on our East Coast during the September quarter are also impacting our activity and some of our client decision making. These have had the biggest impact on our New South Wales business with restrictions being placed on our staff and contractors as well as construction sites for the first time in July August. There's been a negative impact on our business in July August. And at this stage, it's very hard to predict the nature and any form of recovery in the first half, but it's unlikely we'll recover those numbers in the first half of twenty twenty two this financial year, I'm sorry. We'll continue to monitor the situation and do what we can to manage the impacts of that and provide a further update in our AGM. What we see in the accommodation solutions performance has returned to more normal levels after the abnormal activity driven by COVID-nineteen response to the sector last year. Importantly, some of the activity and opportunities in Building Solutions are also opportunities for us to leverage our accommodation solutions skill set. We can leverage the Building Solutions to be able to offer new villages at competitive costs, whether they be in the mining, residential or affordable housing sector or, as I've said before, in the quarantine space. In the near term, the FIFO room market in Qiratha is oversupplied and we're competing in that market. But ultimately, with the investment touted in the mining and oil and gas sector, we see significant medium term opportunities. That is what we're positioning ourselves to take advantage for at the moment. RB Solutions experienced the breakout year, which has been driven the combination of border shutdowns with Aussies rediscovering their love of caravanning and camping as well as the restructuring that was undertaken by management back in 2020. I'm just traveling into slide 12, if those of you are trying to keep pace with me. The medium term outlook remains strong with what is happening in Australia at the moment with international travel seeming like it's still a long way off. Our challenges are skilled labor shortages, sourcing product and freight issues. But in order to capitalize on the opportunities that have been presented, we continue to look at expanding our retail and renovation offerings, whilst also commercializing new products such as sandwich panels and aluminum frames. So in summary, our business is strong and well positioned. We have 3 businesses all with significant opportunities in front of them. As discussed, building and accommodation solutions provide complementary opportunities, while our RV Solutions business is well positioned to introduce new products and pivot to the aftermarket segment as international borders reopen. We need to note, of course, that there are challenges. The significant lockdown in New South Wales impacting both manufacturing and construction, while border closures and rolling shutdowns across the East Coast is creating uncertainty and impacting our ability to execute some of our improvement plans. As I said, it's too early to quantify the impact of this on our business. We'll continue to monitor and act where we can. I would like to add that I've been incredibly impressed by our people's agility and their ability to push through and be resilient in this difficult time. Our balance sheet is solid and will be prudent with the way we utilize this balance sheet to pursue growth. I'm very mindful that we still have a way to go in terms of delivering the types of margins that our shareholders expect, but I'm confident the strategy is in place and the team is focused on achieving that. We also remain committed to retaining our annual dividend payout of 100% of profits of not profit after tax basis. And with that, I'll thank you, and I'll be happy to take any questions. Thank And the first question will come from Gavin Allen with Yersos, Hartleys. Please go ahead. Bruce and Andrew, thanks very much for that. Just a couple of quick ones from me, if you wouldn't mind. Just firstly, on the RV business and you sort of mentioned Building Solutions and the impact that COVID was having on that business in July August. How's RV coped with the various lockdowns? It would be my first one, guys. Yes. Thanks for the question, Gavin. We're sort of monitoring that quite closely. RV Solutions is holding up probably better than I would have expected. We're certainly seeing a significant drop in foot traffic through retail stores, but we are seeing plenty of activity online. We are seeing a slowing down of online, but it's actually it's quite small, smaller than I would have expected it to be. I think there's some uncertainty and people are sort of trying to hold back and see what's going to happen in terms of state borders reopening so they can get back to their travel plans. Does that make sense for you, Gavin? Yes. No, that makes sense. And just a real quick one on the working capital. We saw you talked about the 2 major projects impact that's happened. Would we expect that to sort of reverse in 1H 'twenty two? Do you think where's Andrew? Look, from where I sit, Gavin, I think the question is what does the end of the year look like? It's likely we could have projects that carry out at the end of this financial year that sort of have the same sort of impact. It's a business that can have some very large and solid projects that are likely to cross over between financial years. One of the things we've done as you've picked up is we are hedging by preordering in both the RV business and in the Building Solutions business to ensure we can protect ourselves from some of the price increases. We'll just act prudently on that. I'd hate to try and give you a figure as to whether it's going to normalize or it's going to go up or down at this stage. Yes. No, that makes sense. And then just the last one for me. Just the Building Solutions tension between the short term and the longer term. And by that, I just mean you pointed out the challenges you're having in relation to COVID. But just in terms of that tendering number of 438, that seems to me that that might be close to a certainly a heightened level, might even be close to a record. So I'm just wondering if you can give us any sense of how that compares to previous periods. And I know the timing of the award, this stuff is difficult, but just in terms of broader demand, I guess. I might ask Andrew to try and answer that one given he's been around a little bit longer than I have and might have a bit more history. Yes, sure. Thanks for the question, Gavin. We said in the presentation that it's a 56% increase on the value of tenders submitted at the same time last year, 30 to June 2020. And certainly, in the 4 years I've been here, it's certainly the largest tender platform we have. So it's the outlook is very strong in that space. Perfect. Thank you, gentlemen. That's all for me. Thanks, Gavin. Our next question will come from Tony Mitchell with Ord Minnett. Please go ahead. Well, welcome aboard, Bruce, and hello to Andrew. I've got a few questions. The first is, how long do you think it will take to get the economies of scale that you're looking for in modular accommodation with the education sector? I'll try and answer that. Given I've been here 7 or 8 weeks now, I intend to give a broader update on that, Tony, when we get through the second half or after the first half results to give me some time. Unfortunately, I've got some ideas on that, but I've been unable to get around to factories and spend the time on the ground. I would like to give you a firmer answer than that, Tony. It's not a short term change. There's certainly our economy to scale that we will leverage regardless of what manufacturing looks like in Fleetwood. But as I said, it's probably premature for me to try and answer that for you right now. And my intent would be to give a broader perspective on that after the first half results, if you don't mind. Okay. Now in terms of the RV thing, my understanding was that you were looking to sell the Caravan parts business. Is that on hold now or what's the planning there? We've done a strategic review. We it's not on hold. We're retaining that business now. We are executing the strategy for RV Solutions. So we have a very clear and defined strategy. Some of that was obviously on hold while we're doing a strategic review time. We've made the decision to keep that in our portfolio. If unsolicited bids came in for that business, we would certainly look at them as you would expect anybody to do. However, there's a clear strategy in that space. We are about pivoting away from the dependence on the OEM market into the aftermarket space. We're pivoting towards ensuring that we've got the right new products coming online in that space to sort of capitalize as international travel lifts. And we see people shifting from buying new caravans to actually repairing and modifying caravans for travel around Australia. So that's where we sit with the RV solutions. Does that answer your question? Yes, yes, it does. Andrew, you've mentioned you've got a working capital facility of $85,000,000 and you've drawn down to $18,000,000 How much of a further drawdown are you going to do in relation to that? Thanks, Tony. Look, that's really project dependent. So as you'd appreciate with the construction business, we have to provide bonds against the work we're doing. And so it just really depends on the project. So we've deliberately probably got too much in terms of facilities, but we've got that tender pipeline is very large. And there's lots of other sort of projects that are probably further out on our horizon that we're looking at. We just want to make sure we've got the ability to do those projects as and when they come up. Okay. So with the quarantine facilities that are being moved in Victoria, etcetera, are you going to tender for those contracts? We are certainly participating in the process, yes. Right. And how long do you think it will take for them to make a decision as to who gets the contract? As it currently stands, it's looking like it will be a panel type arrangement. And I can't say too much. We've clearly bid the Victorian ones are out. It's with the Commonwealth and the principal contractor at the moment. We will let the market know as soon as we know, if that makes sense. There are no further questions at this time. And now I'd like to hand the call back over to Mr. Nicholson for closing remarks. Please go ahead. Look, I have nothing further to add. We'll clearly be doing a roadshow or a video roadshow in the next few days to our investors. I'd like to take the opportunity to thank everybody for dialing in this morning and appreciate the opportunity to talk to you about Fleetwood. Thank you.