[Foreign language] everybody, and welcome to the presentation of our half-year results for the six months ended 31 December 2023. Before we start, I wanted to hand over to Bruce Hassall, our chairman, to talk briefly about the changes that were announced this morning to the board and the executive team.
Thanks, Ross. Thank you for joining us today. I'd like to start by making a few opening remarks before today's investor presentation. You will have seen the announcement today that I am stepping down as Chair at the ASM in October and Ross Taylor is stepping down as Group CEO. I wanted to provide you with the context of today's announcement. It has been a great privilege to chair this company through some incredibly challenging times. I know that Ross feels the same about his tenure, and we share a real passion for this great company. As part of the privilege of leading, we both recognize that the buck stops with us and believe it is important for us to take accountability for some of the recent issues we have had at the corporate level. The core businesses are doing really well.
They are more focused and profitable with improved earnings, margins, and returns. Looking forward, it's our view that it is in the best interest of the business for us to hand over to a new Group CEO and a new Chair who will be able to focus on leading the organization forward. Ross has a six-month notice period and has agreed to remain longer if required to facilitate a smooth transition. I will stay on to the ASM. This will be an orderly transition. I'll now hand over to Ross to continue the presentation. Ross.
Thanks, Bruce. In the six years I've been at Fletcher Building, we've achieved a lot. The base business is performing well, and we have a solid and committed growth trajectory. We've cleared the majority of the legacy construction projects and will finally finish the convention center at the end of this year. That said, it would be a major understatement to say the convention center has been a challenge. The complexity of what the team had to take on post the fire in 2019 is unique in my 40 years in the construction industry. Understanding and dealing with the mold issues, the steel remediation, COVID, super high inflation, multiple supplier and subcontract insolvencies, and the list goes on, has all meant that the cost forecasts evolved as the scope and what was required to rebuild the project could be understood.
With the remediation now complete, we are now on the home straight with just the convention center fit out itself to complete. This meant we're finally better positioned to understand the cost to complete the project. This, unfortunately, resulted in the need for NZD 165 million of further provisions. As CEO, taking accountabilities in these situations is important. It sets the tone and expectations in the organization from the top. It is for this reason I've announced my intention to retire today. With that, a smooth transition to new leadership is critical, and I'll stay on to ensure this can happen. It's important through this that we stay focused on running the business, closing out the final legacy construction issues, and working to get an acceptable industry solution to the plumbing issues in Western Australia.
I'll now get back to the results presentation and move to the agenda on slide three. I'll provide an overview, and then Bevan McKenzie, our Group CFO, will provide a bit more detail on our market volumes. It's fair to say that these have surprised us on the downside in New Zealand and have been a material headwind for us through the first half. As usual, he'll then talk through our financial performance and the outlook for the second half in that context. I'll then sum up with how we're planning and thinking about the balance of the financial year, and we'll all be available for questions after that. I do note we've got a busy day today, and so we'll need to finish on the hour today. Turning to slide four and a summary of the half-year results.
Against the backdrop of a tough trading environment where market volumes in the New Zealand residential sector declined by around 20%, our overall revenues held up quite well. This, however, was predominantly a result of higher weighting of construction revenue, which is our lowest margin business and hence somewhat masks what was really going on. Our more profitable New Zealand materials and distribution businesses are heavily exposed to the residential end markets, and while they did better than market, they still saw a revenue decline of around 8% half on half. Despite our cost control and cash management being very strong, the market impacts on these businesses saw us achieve an underlying EBIT at the group level for the half of NZD 264 million. Disappointingly, legacy construction cost forecasts continue to crystallize on the downside, and we recorded further provisions of NZD 180 million against these.
We also completed our Tradelink the review of our Tradelink business through the half, and while the team have a credible and solid plan to take it forward, we feel it is not a fit in our portfolio of businesses and will now move to divest it through the balance of 2024. With this decision, we've taken NZD 122 million non-cash impairment against its carrying value. This resulted in a net loss for the half of NZD 120 million. Our leverage ratio remains in line with prior guidance at 1.8 x, and liquidity remains strong at around NZD 0.9 billion. Against this backdrop, we expect EBIT before significant items for the full year to be in the range of NZD 540 million-NZD 640 million, with the midpoint reflecting ongoing similar market conditions to the first half.
Turning onto slide five, revenue, profit, and margins were all under pressure for the group during the half-year as we dealt with the large declines in background residential market volumes, particularly in New Zealand. Importantly, our materials and distribution businesses on both sides of the Tasman proved resilient against this backdrop. In New Zealand, revenue for these divisions were 8% lower than a year ago, and this compares favorably to overall market volumes, which were 15% lower. In Australia, revenue reductions were broadly in line with the lower market activity. Combined, while these businesses produced lower profits and margins for this half, the reduction in our performance was better than what we saw in the background market conditions. Meanwhile, for our residential and development division, the New Zealand house sales market continued to strengthen with improved buyer activity and a continuing stabilization of house prices.
We continue to sell good volumes and finish the half with 419 units sold. Off the back of this, our residential EBIT was up NZD 8 million year-on-year, and this was with no land development sales during the half. The construction division delivered a small loss for the half and, like last year, will be heavily second-half weighted as the roading season gets into full swing. Group return on funds eased to 13.8% as we navigated the downturn in our markets. Moving to slide six and onto cash and leverage. Cash flows from the materials and distribution divisions were strong at NZD 253 million, and we maintained tight control on cash in the residential and development division. Meanwhile, CapEx spend for the first half was lower overall. The net result of this is that net debt increased as flagged to NZD 1.9 billion, and the leverage ratio moved to 1.8 x.
We continue to maintain our strong balance sheet position with available liquidity at the end of the year sitting at NZD 0.9 billion. On slide seven, net earnings for the half-year before significant items were NZD 117 million but moved to a loss of NZD 120 million when including the legacy construction provisions and the Tradelink impairment. Following from this, the basic earnings per share were -NZD 0.153. Given the current market conditions, the expected legacy cash outflows, and in line with the company's dividend policy, the board has made the prudent decision not to declare and pay an interim dividend in order to maintain our balance sheet settings. Our ongoing progress on making our workplace safer and in delivering against our sustainability targets is shown on slide eight. Our safety culture remains strong, and our injury rates continue to be at the top quartile of industry levels.
In addition, 94% of our sites remained injury-free through the half-year. On sustainability, we continue to make very good progress both on reducing our carbon emissions and getting more of our products sustainable. The graphic on the slide highlights the reductions we're achieving in carbon emissions, and our overall emission intensity is now down 23% on our 2018 levels.
This keeps us on track for 30% lower absolute carbon emissions by 2030. Slide 9 highlights our progress in two other key areas: our customers and our people. We continue to see our service performance to our customers improve through the half-year and our net promoter score, or NPS, increase to an average of 48. This increase was driven by many things, but I'd call out our ongoing focus on product and service offerings, the improvements we've achieved in our on-time deliveries, our stock availability, and our continually improving digital offerings.
We also saw our overall employee engagement increase through the half to an employee net promoter score, or eNPS, of 30. This combination of improving customer service and engaged employees is an important part of why our materials and distribution businesses were able to perform better than market through the last six months. Slide 10 highlights our performance through the half across all our divisions. A particular highlight is the performance in Australia, with the division maintaining solid year-on-year EBIT margins above 5%, and this is despite the ongoing underperformance of Tradelink. As I mentioned, we intend to commence a divestment process of this business. There are more details on the divisions in the appendix to this presentation, as well as in our interim report published today.
I now want to move to an update on the plumbing issues in Perth, Western Australia, starting with a few overview points on Slide 11. Our testing and expert reports on the pipes made with the Typlex resin are now complete, and these confirm the leaks are caused by installation failures. Our on-site inspection and data collection continues and now covers hundreds of homes. From this, we continue to see the same correlations between leaks and installation failures as we described in our October presentation. All this information has been submitted to the Consumer Protection Authority in Perth as part of their investigation process. Based on the latest information, the total homes we estimate were fitted with Typlex Pro-fit pipes in Perth to be around 15,000, of which around 2,200 have leaked. 37 leaks have occurred elsewhere around the rest of Australia.
With our work on causation complete and with the benefits of larger and more predictive data sets, we are now in a position to actively engage with government and the industry on the appropriate solution going forward based on the facts. There is no change to our present provisions nor our view based on the data and trends we are seeing that a viable and appropriate industry solution could have rectification costs of around NZD 100 million, but risks remain as we work through the industry solutions and the consumer protection reviews. Moving to slide 12 and the detail on our testing and expert reports. We have now completed both extensive testing and received independent expert reports from Australia's leading experts in this area. This work has provided some emphatic conclusions. The Pro-fit pipes conform to Australian standards. There is no manufacturing defect.
The observed plumbing installation failures, either in isolation or combination, create excessive stress on the pipes and the pipework system, which is the cause of the failures. But for these installation failings, the Pro-fit pipes would perform as expected. With compliant conditions, there is no difference in performance characteristics between the Pro-fit pipe manufactured from Typlex resin or the Basell resin. The change to the Typlex resin from Basell resin has not caused the pipe to fail. The analysis and ultimate conclusions in the Scheirs report , which was BGC's expert report, are without foundation, incorrect both in methodology and interpretation, and demonstrate a failure to properly consider all the relevant factors when seeking to determine the causes of failure. And the theories proposed by the regulator, DEMIRS , or the building authority's consultant, have been disproven by the evidence.
These reports have been submitted to the WA Consumer Protection Department as part of our response. We are continuing to test the relative performance of pipes manufactured from both the Typlex resin and the Basell resin, and this is to see if we can learn anything further on their relative performance in poor installation situations. To date, we've seen no differences in any tests, but this work is worth continuing with as it may help with better predictive abilities in determining which poor installations will fail and when. Slide 13 provides an update on our on-site data collection from all of the industry except BGC. BGC continue to decline ongoing offers to work with us and the rest of the industry to solve this issue for affected homeowners. For their own reasons, their preference is not to work collaboratively or collectively.
The data we have now collected and which has been reviewed by an independent plumbing expert shows the following. We continue to see the same correlation between poor installation and leaks as we described in October, that if a home leaks, on average, the first leak is about three years from when it was built. The data trends imply that most homes will not leak and that homes leaking for the first time are declining. Extrapolating that data to all Perth builds, Iplex expects that it is through the peak levels of leaks and now that fewer homes will leak into the future than have already leaked. Slide 14 updates the Australia-wide data. This continues to show this is a Perth problem only and is resulting from construction practices that are unique to the Perth market. On Slide 15, I update the status across our three work streams.
Our NZD 15 million investigation fund continues to effectively support customers and homeowners. 39 plumbers and builders across Perth are registered with the fund. It's working to plan with a streamlined claims process ensuring homes are repaired quickly. We've now funded over 1,300 claims at a total cost of around NZD 2.5 million, and the fund remains less than 50% drawn. The causation work is well progressed, and as mentioned previously, it has identified installation as the root cause. This now allows us to confidently focus on the most effective fix solutions. We're making good progress on many avenues that will ultimately help the industry deal with the problem for homeowners as quickly and as effectively as possible. We've funded over 200 full ceiling pipe replacements. These are now cost-effective and efficient to do, and it removes the forward risks of further leaks in the ceiling space.
We have largely completed the trials on leak detection units, and with that, we'll look to set this up so it can be rolled out as part of a broader industry solution. Technologies to better map pipes within walls and remove tiles non-destructively are well advanced and will ultimately help minimize leak repair damage and times. Our pipe relining technologies are looking very promising, and we're into the refinement of these and working through the regulatory approval. Slide 16 looks at why a product recall is not the solution for this problem. A product recall is not the appropriate remedy for installation failures. On the evidence, most homes will not leak, so there's no reason to remove the pipe from a properly installed home that will not leak. What is required is a proportionate industry solution based on the facts.
As mentioned, we're now in a position to start working this up with government industry and hope to do so quickly from here. And finally, based on the data and trends we're seeing, we still believe an industry solution of around NZD 100 million in total, which will be over a 5-to-6-year period, is both viable and appropriate. I'll now hand over to Bevan, who'll provide some market context and take you through the details of our financial results for the half-year.
Thanks, Ross. [Foreign language] , and good morning, everyone. As Ross has highlighted, market conditions deteriorated through the half, especially for our New Zealand materials and distribution businesses. As shown on page 18, we've seen a decline in market volumes in this part of the group of around 15% versus last year, driven mainly by a sharp reduction in the residential sector. Against this background, our top line has held up well. Revenue in the half was down around 8% against an overall market volume down around 15%. I'd note that sales for these businesses into the residential sector are higher gross margin on average than into commercial and infrastructure. Despite this shift, our gross margins have held up well, which I'll touch on more in a moment.
In Australia, on slide 19, the decline in market volumes was in line with our expectations, and the division's revenues have broadly followed this, with the exception of Tradelink, which underperformed the market. Turning to the New Zealand housing market, conditions have improved over the past 12 months, and this is despite ongoing elevated interest rates and challenges for some home buyers in securing financing. Fletcher Residential is targeted at the lower and mid-end of the market, which has been the most active. This has supported sales in our businesses of around 20 units per week in the half, as shown on the chart here. We've seen house prices stabilise in the period after 18 months of sharp decline, and prices are now showing slight improvement in some developments, though not in all areas.
In the first half, we completed 419 unit sales, and we have another 180 contracts already in place for second-half settlement. Based on this, we're now targeting overall sales for the year of approximately 900 units. Now moving on to look at the financial results in detail for the half. On slide 22, Ross has already covered off the key points of the income statement. Just two points to add. We've seen average cost inflation across the period of around 5%, which is down from prior periods but still above long-term averages. And on funding costs, these were NZD 62 million in the half, which is in line with our guidance and higher on our higher borrowings and variable interest rates. On slide 23, we put a spotlight on gross margins and overhead costs in the materials and distribution businesses.
Against the backdrop of a highly competitive market and inflation that has continued to run at around that 5% level, our businesses have broadly held gross margins. We have had to cede price in some areas, especially in distribution. As mentioned, we have a greater skew of revenues to the lower-margin commercial and infrastructure sectors this half. We've been able to offset much of these impacts through good price disciplines and tight management of variable costs and COGS, particularly through optimizing shift patterns. Overheads have also been well managed in light of the market environment. Overhead costs in these businesses are down on the prior half despite an impact from inflation and the addition of new businesses to the group of around NZD 50 million.
Turning to cash flows on slide 24, underlying trading cash flows for the group in the half-year were NZD 176 million, well ahead of the prior period as we managed down our working capital. Pleasingly, the materials and distribution divisions delivered trading cash flows of NZD 253 million, which is ahead of last year despite the lower earnings. Likewise, residential and development delivered an improved performance as we actively manage capital in this business. We've made limited new land commitments and have paused some of the more capital-intensive projects. Disappointingly, legacy cash flows were NZD 295 million outflow, and per our update last week, we expect these to be around NZD 150 million in the second half. Slide 25 provides some more detail on the improved working capital position. In materials and distribution, we're actively managing inventories to the lower market environment.
And in the receivable space, our DSO has remained flat year-over-year, and we've had just NZD 1 million of bad debt expense in the period, which is a great result from our credit teams despite deteriorating customer liquidity in the market. In residential and development, the working capital movement includes NZD 110 million from prior land commitments brought on balance sheet, which has been partly offset by a reduction of work in progress through higher house sales. We also note here that we've refreshed our valuation of the land portfolio in Fletcher Residential, and at December 2023, this remains around NZD 300 million higher than book value. On slide 26, we note that net CapEx and investments in the half are NZD 199 million, and looking ahead to the full year, base CapEx is expected to be around NZD 240 million in FY 2024.
We have taken the decision to smooth our growth investment profile. In-flight projects in the growth space will continue, and we continue to believe in the broader growth opportunities available to the group. In light of a tougher market, though, and to support our balance sheet settings, we have rephased this program investment, and we now expect that FY 2024 growth CapEx will be around NZD 150 million versus prior guidance of NZD 250 million. On slide 27, closing net debt for the half was NZD 1.9 billion with the increase in the period due to construction working capital and the investments in CapEx and dividend payments. As previously guided and shown on slide 28, this resulted in a leverage ratio for the group of 1.8x at the half-year. At the full year, we expect leverage ratio to remain at the upper end of our target range.
Slide 29 shows that the group's funding profile remains strong with around NZD 2.9 billion of total credit facilities. During the half-year, we refinanced one of our bank facilities and increased it by NZD 100 million, which leaves us with healthy liquidity of NZD 0.9 billion. Our average interest rate on debt is 6.0%, and currently, 50% of borrowings have fixed interest rates. On funding costs for the full year, these are now expected to be approximately NZD 140 million, which is at the low end of our prior guidance.
To close, the tougher market conditions and higher legacy cash outflows have led us to take a number of prudent steps to support our balance sheet settings. On growth CapEx, we're smoothing the profile of our investments across both FY 2024 and FY 2025, and we expect in aggregate, these investments now to be around NZD 325 million versus prior guidance of NZD 500 million.
We will also be compressing our base CapEx envelope next year by around NZD 50 million at the midpoint. In residential and development, some capital-intensive projects have been paused. On our funding lines, we've continued to strengthen our liquidity. As Ross has mentioned, the board has taken the decision to exit the Tradelink business and to not declare an interim dividend. Overall, we remain committed to our target leverage range and broader balance sheet settings. As we manage through a softer market environment and completion of the legacy projects in 2024, our focus will remain on delivering robust operational performance and underlying cash flows. I'll now hand back to Ross to conclude.
Thanks, Bevan. I'll move to slide 32 and just do a look for the outlook of the business for the rest of this financial year. We expect present market volumes to remain under pressure for the next 6- 12 months but to see improving conditions in the New Zealand end housing market. We expect full-year EBIT between NZD 540 million-NZD 640 million, with the midpoint based on a typical seasonal weighting and current market conditions not deteriorating further. We'll remain focused on managing trading cash and maintaining healthy balance sheet settings. We'll keep the Convention Centre project on track for completion in 2024. With the plumbing leak causation in Perth now confirmed, we'll actively move to agree an industry solution with the Western Australian government and builders.
With that, I'll now hand back to the operator to run through your questions you may have of either Bruce, Bevan, or myself.
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. To be mindful of time, we ask that you limit to one question and then rejoin the queue if you have any further questions. Your first question comes from Daniel Kang with CLSA. Please go ahead.
Good morning, everyone. Just a quick question on slide 18, if I can. Can you just elaborate on the key drivers to the collapse in activity in 2Q, or December Q, from the first quarter? And then following on that, have you seen any improvement at this point in 3Q? Any evidence of the green shoots that you talk about, whether these green shoots have translated into some volume bottoming or stabilizing?
Morning, Daniel. The drive in the Q2 reduction we've seen is really in the larger part of the residential market. The smaller builders and renovations have been holding up well, but you've had group home builders down sort of in the order of 30%-40%, and that decline has continued. And that's what's driven the greater deterioration. We're not yet seeing an improvement in that. As we've started the first half of this calendar year, we are operating at those similar volumes that we saw in the December quarter, which is why we're pointing to broadly a continuation of these conditions through the balance of the year.
Thank you, Bevan.
Your next question comes from Andrew Scott with Morgan Stanley. Please go ahead.
Morning. Thank you. And I apologize if this is an extension of the theme. Bevan, you just said it. Broadly, similar conditions continuing. If I look at the data, New Zealand consents were down 27% for the December quarter. That's pointing me towards a significant deterioration. Why would you see anything different to that?
We see the commercial and infrastructure sector as broadly robust, so we shouldn't miss that point, Andrew. What our customers are telling us is that they're seeing that they think that broadly, these volumes will continue. That said, clearly, our guidance range is broader than normal, and it's for exactly the reason that you're pointing to, is that a movement up or down against those volumes that we're seeing at the moment would move us materially. So we're playing back what our customers are saying to us. And again, commercial infrastructure continues to be reasonably robust. That's what we're seeing at the moment.
Okay. Thanks. I'll jump back in.
Your next question comes from Phil Campbell with UBS. Please go ahead.
Yeah. Morning, everyone. Just a question on Iplex. When the resin was changed in 2017, was there a recertification under WaterMark? And then just in the notes for the council, I noticed that the Western Australian minister was asking for an increase in the AUD 15 million fund. I was just wondering if there's any indication on what size the fund increase was asked for.
So the answer to the first question is yes. We go through a WaterMark process for those products, so the answer is yes, it was. On the minister, she reached out on the basis of just wanting to understand where the fund was up. And when we went over there and I spoke to her recently, we explained what I just said here is the fund's only half drawn has got plenty of capacity to support the builders and plumbers and homeowners that are working with us. And fundamentally, it's less about that now and more about getting an industry solution in place. And the fund's more than adequate to cope for what its purpose was while we now hopefully can do that from this point on, working with all the interested parties.
Great. Thanks.
Your next question comes from Lisa Huynh with JP Morgan. Please go ahead.
Hi. Morning. I appreciate the update on Tradelink, but can you just confirm whether you're still undertaking a review across the rest of the Australian business and whether that will stay on scope as a result?
We weren't taking a review of the rest of the Australian business, and we're not doing a review of the rest of the Australian business. I mean, what I flagged back at the full-year results was just Tradelink's performance and the fact that we wanted to step back and have a good look at it. And I sort of flagged that was well flagged, and that's what we've been doing. And as we look forward, there's a plan that drives that business forward. But when I look across all the businesses that Fletcher Building have and where we want to put our efforts, we think it's better for us to divest Tradelink and let someone else run with that opportunity in Tradelink.
Okay, Ross. Thanks.
Your next question comes from Grant Swanepoel with Jarden. Please go ahead.
Good morning. We are now having a leadership turnover again. Can I just try and find out how the communication breaks down in Fletcher Building? In that, at your ASM, you said things were similar to where you were at the start of the year. Two months later, you had the write-down in December, which you didn't update the analysts. And then last week, you were indicating that things couldn't be extrapolated across the rest of the business, what was going on in the NZICC. So what is going on that the feedback to the leadership is so slow that you have these sort of downgrades?
So if I look to talk specifically to the Convention Center because that's where it's been a perennial bugbear for the last series of results every six months. But what's been happening is, as we work through the project and you and I talked a bit in my just context in the beginning. I mean, the complexity of that project is unique in terms of remediating from the fire. And as we sat there at the beginning, understanding the mold and the steel remediation, where every bit of paint had to be scraped off, but you had to dig it out to get it, then understanding the impacts of COVID. And because of the longevity of it, then you had dealt with the resource constraints. And then ultimately, we've had a number of suppliers and installers go broke, so you had to find new people to provide that.
You end up with the inflation in the background being a price taker rather than a you had to take what the industry would do it for. We've only been able to get our arms around that as we progressively got through the scope and we understood the productivity, and then we understood the issues. And as frustrating that has been for us as well as shareholders, that's just the reality. The team's done a good job of keeping the project on schedule. And I talked about getting things handed over, and now we're on the home stretch. But fundamentally, we've stayed very close to the governance of it. But until we try things like the steel remediation, you had to get into the productivity. You had to set it up. We're doing things that just don't normally get done.
You'd never normally, in a building like that, remediate steel in situ. But we couldn't take it out, so you had to set up humidity control, painting, and productivity and teams that allowed you to sandblast and do all that. There's no normal rates or productivity norms for it, so you basically have to do it and see how it goes, and then you can forecast it. Yeah, so that's the context. What's been happening then is, as we work progressively through all that and we knock things off and we got to the next issue, then you can actually understand it and have a look at the forecast. We tried to say there's risk there. The risks, unfortunately, have caught us on the downside. In the end, as I mentioned also, we're now at the point where we're doing the fit-out.
We've done most of the procurements in place, so we're on the home stretch. Not saying we're there yet, and we'll be when it's finished, it's finished. But the context, when I step back from that, is in spite of that little speech, I'm running the place. It's frustrating the provisions, and I felt I needed to take accountability, so I have. So that's the context. I don't know how to answer it differently. But I actually would say, Grant, the team is doing a good job.
Sorry, Ross. I'm more talking about the organic earnings. But your divisional Tony's guys indicated that we're due for a downgrade. It was because you said you had a board meeting and pulled together your divisional heads to give you some sort of update on what's going on in January and February. But it turns out that your first half was actually materially down on your direction you were giving as late as December last year. And even at your ASM, you were saying you were tracking according to the way you had started the year. So what I'm talking about is the organic business seems to have a communication issue up to head office and what you're telling the market.
Oh, okay. So Grant, the way as you probably are aware of with our businesses, you don't really get a read of what the market's doing in January. And it was a very slow January, worse than we thought anyway. But you just don't know because you've got all the trade holidays, and the trades don't come back. Then you get into February, and you get the first sense of it. But really, our big trading months are then March, April. So it's really difficult to get a gauge of what is the market actually going to do. And we were putting those forecasts together as we were coming into this results update.
We were trying to get as close a read as we could as to what we thought the market was doing so we could actually think about what the forecast for the balance of the year looks like. That was just the unfortunate reality of our situation.
Thanks, Ross. I'll get back into queue.
Your next question comes from Simon Thackray with Jefferies. Please go ahead. Please go ahead.
Thanks. Morning, Ross. Morning, Bevan. Sorry. I think Grant was actually asking about the first half, to be honest with you, but we'll come back to that. My question's on Iplex. Just given where we are at the moment, Ross, can you walk us and investors through your expectations of the steps from here to agree an industry solution and what the order is and the timing so that we can have a bit of an understanding of what you're expecting? And then maybe you can help us understand the relationship between the investigation fund that you've got and the role of, if there is one, of WA Home Warranty Insurance and claims that have been made against home builders for this issue, how that interface works.
Okay. I'll start with timing. If I forget something, it's not because I'm dodging it. You sort of just remind me. So if I look at the timing, we've put all our information into Consumer Protection. What we know from Consumer Protection is they're sort of saying 8th of March, I think, is the date they go out there for any last submissions. We don't know any more about the timing of when they'll come up with the recommendations. All we know is when they're taking last inputs.
What we are then doing when it comes to industry solution is we put the fund in place so we could really get a fact base out there because it was just impossible to start talking industry solutions if you didn't know what was actually causing it and understand what to look for and how you should think about the repairs. As I mentioned, we've done a lot of work around that. We've got real clarity on causation, being installation. We also have real clarity on what the sort of installation failings we're seeing. We have good data to understand the trends and what we might be up against. We now have a situation where we have a good fact base to actually sensibly dimension and talk to industry about what the right approach here is.
So what we'll start, in fact, Andrew Clark, who, as you know, has been one of my direct reports, is running this now. So he's over in Western Australia, and we'll start talking to builders about that. And we've briefed the government, but I'm not getting into the details. We just need to work collaboratively with those different players and try and stitch together a sensible, sustainable, and appropriate solution that works for everybody.
Yes. End of that. Is there any relationship with Home Warranty Insurance and the role of insurers in this?
Yes, there is, but not with us. That's really to the homeowner. We're actually sitting behind that and looking at what we do as an industry response. So there's no direct relationship. But that is something that at different times, homeowners may actually look at themselves.
Thanks, Ross. I'll jump back into queue.
Your next question comes from Keith Chau with MST Marquee. Please go ahead.
Morning, all. Morning, Ross, Bevan, and Bruce. Question for Bruce. Bruce, you mentioned earlier on the call that there will be an orderly transition of management. There is a lot of change in the business at the moment. You just had a recent change in the head of Australia, another change in New Zealand distribution. Ross, you'll be there for another 6 months. And if the timing's full, then Bruce will be stepping down in October. So there'll be a period of change between, say, August and October where the company will actually be devoid of real senior leadership. So just wondering, if under a scenario there is no CEO or you're waiting for a CEO to enter a business and the chair is stepping down, how will the business be managed at the very senior level at that point in time?
As an extension to Grant's question, have the shortcomings of communication through the business been addressed, and what are some of the remediation processes that have been put in place? Thank you.
Okay. So in relation to sort of managing the sort of transition, I think we're comfortable with what we've put in place. Ross has already indicated that he's here for six months, given a six-month notice. But he said if there is the need for him to stay on beyond that, then that's the case. The reality is where the board is, we've had an ongoing CEO succession plan in place, which you'd expect us to do. And we'll be looking at external and internal candidates. And that process is an ongoing process. If it was an internal candidate, that may be sooner. If it's an external candidate, that may be a little bit further down the track. But we're comfortable that we've got the right sort of processes, the ability to manage our way through that. And the second question was in relation to communication.
Just in relation to internal communications up the line, have there been any breakdown kind of in communication between management up to senior management and the board? Has there been an issue that's been identified? If so, what's the remediation that's been put in place to ultimately help improve communication through the senior ranks of the business?
Okay. No, I don't think there is any internal miscommunication or lack of it. I think one of the things that Ross has been very focused on, fully supported by the board, is to evolve the culture of the organization. And the culture is around openness and transparency and accountability. And so I don't see that as concern. If you look at the Convention Centre challenges, I've said a few times in the past, we haven't been building anything since the fire. We've been remediating a fire. We've now finished that. We're actually about to finish the last six or seven months on that. So I don't have a concern. The board doesn't have a concern around communication problems or information not flowing up. In relation to the forecast position, the upgraded earnings, we were in the situation where we just did the half-year. We quickly raced through January.
As part of that process, we did an update. As Ross said, what are we seeing out there in the marketplace? What are our customers telling us? And those numbers have just been available within the last day or so.
Okay. Thank you, Bruce. I'll circle back. Thanks.
Your next question comes from Sam Seow with Citi. Please go ahead.
Well, hey, guys. Thanks for taking my question. Look, just a simple one, I guess, following on from Keith, maybe just on the timing. In particular, I guess you had the August update, November update, etc. Are we to infer that the trading decelerated then, in particular towards the end of the year, that now we're only seeing it in February?
We've definitely seen, Sam, a deterioration of trading, particularly in that rising New Zealand market through the December quarter. You saw a little bit of that in the Readymix sets, which came out yesterday. But it's particularly in the finishing trades, which is flowing through. I'll also pick up on the question of the consents. We're seeing, obviously, that decline. But there has been a material disconnect for quite a while in New Zealand between consenting activity and actual work on the ground. So whilst you might be seeing a headline consent decline, it's not necessarily what's been happening on the ground. And what our forecast for the full year assumes is that that trading that we've seen in the December quarter flows through to the rest of the year. We've also, in Australia, started to see a bit of softening there. Generally, residential trades held up well.
We've started to see that soften again. Our forecast has needed to take that into account.
Got it. And maybe just following on from some of the stuff you said there, the second-half split for the guidance implies, I guess, a sequential improvement that's probably a bit higher than normal seasonality where you kind of are saying that your guidance implies December conditions kind of continue and at the same time, things decelerate in December. So just maybe if you can kind of square all those three off.
The main driver of the seasonality between the first and the second half is the fact that residential development and construction have much higher earnings in the second half. And when you bake that in, you'll get a first-half, second-half split of about 45/55 at the midpoint of guidance. What you'll see in the materials and distribution businesses is that they're normally about 49/51 first-half, second-half. This year, they'll be more like 50/50 or maybe even more first-half weighted for exactly the reason that you say, which is the trading through December has been softer, and we've extrapolated that out. But the headline for the group, as Ross said, it's an even split driven by residential and construction having a better second half.
Got it. Thanks, guys. Appreciate it.
Your next question comes from Rohan Koreman-Smit with Forsyth Barr. Please go ahead.
Hi, guys. Sorry, just staying with this communication around the activity in the business. If you go back to the AGM comments, you said for the New Zealand materials and distribution businesses - and this is a quote - "Infrastructure and commercial sectors remain robust, and while residential sector's around 5% softer than our prior guidance, market shares are stable and pricing solid." And you also said EBIT, the four significant items, is tracking slightly behind our previous expectations. That kind of implies that the last two months of the year had a significant step down. Is that the case? And kind of when did you, I guess, get communication that that occurred? And secondly, in terms of the performance of these businesses, we were of the understanding that there were a number of levers you could pull around cost and low-margin businesses as volumes declined.
We saw margins hold up pretty well second-half 2023, but they've kind of collapsed in first-half 2024. Are we to assume that there is nothing left in that kind of cost-out tank as well?
Good morning, Rohan. So if we go back, what we said at the ASM sort of mid-late October, revenue down 5% against expectations. As you've seen, it's down sort of more like 8%. And that's the deterioration in that period that we've talked about. We're obviously baking in forecasts for the group at an EBIT level. So we needed to look at what was happening more broadly as well. In terms of cost-out, we've continued to take out the variable cost and the COGS. And as you can see, that has meant that gross margins have broadly held up stable.
If you get in the helicopter, the market impact on the materials and distribution businesses is just north of NZD 100 million of EBIT. And they've declined by about NZD 70 million. So you can see that we've been able to offset through cost and some good pricing in a tough market environment a whole bunch of that. So as Ross and I stand back from the performance, holding gross margins, significantly reducing overhead costs has been supportive through the period.
Just to jump in.
Sorry, just circling back to your first comment. Sorry.
No, keep going, Ross.
That you talked to, you only said slightly behind previous expectations. And the first half appears to be much worse than previous expectations. So I guess your answer doesn't quite gel there, Bevan. I get the full year versus the half-year kind of guidance for the full year versus the half-year result. But I'm just more talking about how quickly things deteriorated in the first half. And secondly, your finger around costs, if you take the materials divisions in New Zealand and you just look at gross revenue and EBIT and the gap in between, it's only down, call it 5%. But your volumes are down, would you say, 15%. So you would have expected more variable cost to come out than just 5%. I'll probably be repeating myself, Rohan. Gross margins is what we've looked at, which has broadly held.
Just to interrupt, I mean, we've just had a. There's an article. Bridget Carter's up to her usual tricks from The Australian and misreporting again. But what she's put in an article on Australian Business Review is that we've, through our results, put the Iplex business up for sale. And the ASX and NZX are keen for us to correct that. We've just had an incoming thing. So I just want to make sure I correct it on this call that it is the Tradelink business that, as we've said, is up for sale and not the Iplex business. So that's been a direct request from the stock exchange for me to say that.
And we'll obviously talk to Bridget and see if she could start writing things that are based on fact in the future rather than all her speculative diatribe, which she seems to be on a roll for lately. But anyway, I'll leave that one alone. Now, back to questions.
Am I still on? Sorry, Ross. I kind of got a half-answer to my reiteration of my first question.
Look, I think what we might do is take that one offline and move on later. Otherwise, we're going to time out here.
Yeah, yeah. No, fair enough.
Your next question comes from Stephen Hudson with Macquarie. Please go ahead.
Oh, good morning, guys. I've got one question, but I suppose it's to two people, Ross and Bruce. If we look at the last five years of significant items, I think it's been about NZD 1.1 billion of losses versus sort of NZD 3.2 billion of pre-significant EBIT. So sort of 34% ratio. That's not changed too much over the last 10 years. I mean, one commonly quoted comment out there is that the complexity of the group is the group is too complex. And with 30 different product categories, it's too unwieldy to manage. And that's led to some of the issues around the significant items. Can I just ask both of you just for a quick take on that point?
I'll have a crack first, Stephen. I think you've got to unbundle those SIG items and say where did they come from. And I think there's a few features in the background here. One is clearing the construction legacy has been diabolical. And as we all know, and it's been a lot dearer and a lot more significant than we thought. And that's one theme. There was a theme in terms of some of these businesses as we've worked through the repositioning of them. There were acquisitions done in Fletcher Building, the crane acquisition, and other acquisitions done 15 to whenever it was, 10, 12 years ago where arguably prices paid for assets was very problematic. And as we've had to deal with that on the way through, there's been a bit of that in the cleanup as well.
I'd argue looking forward, as we get away from the construction legacy and we've got mostly all the businesses now are performing well and more than adequately covering what I call their goodwill and their balance sheets. Western Australian plumbing issues aside, I don't think the business is too complicated at all. You can always get into debate. Okay, we've got 25 businesses. But is that different or better than companies that work in 50 countries? It doesn't feel too complicated. I think we've got a divisional structure that lets us look at the bits of the business properly. And I think through this year, we should actually calendar year, we should be clear a lot of the things that have driven the need for significant items that have been material.
So I'd expect us to be hopefully through the lion's share of that at the end of this calendar year. I don't know, Bruce, what you'd?
Yeah, some quick comments from me. So look, I think picking up what Ross said is that the bulk of the significant items relate to two areas. So the largest chunk by far is in the construction area and all the legacy projects. The fire at the Convention Centre just added to that, construction challenges. COVID added it to it where we couldn't get resources and people. So then in that area, there's been some impairments, a lot of it related to the Australian businesses. Four or five years ago, the Australian businesses were making EBIT margins about 1%. We had six businesses. We decided very quickly that Rocla wasn't up to it. So we divested that. And we largely got all our funds back through selling property and the business. We then had five businesses. Four of them are performing very well.
Their EBIT margins are probably north of 7% at the moment. We've got one business there that we've been focused on, Tradelink. We've been very clear about that. It needs to lift its performance so it's going. It hasn't. And it's going. So I guess that's sort of my perspective on it. One other comment I'd say, when Ross and I joined the business nearly seven years ago, feels like a lifetime. But there was complexity in the group. We had an international division. We had plants in Helsinki and Canada and all over the place. So one of the things we quickly did was to reshape the strategy. We exited the international business Formica and Roof Tile Group. And we got, I thought at the time, a pretty good price. So our focus has been around taking complexity out of the group, refocusing on Australia, New Zealand.
We've largely achieved that. We've just got to finish these lovely legacy projects in the convention center. That's what we're doing.
Thanks, Ross. Thanks, Bruce.
Your next question comes from Cameron Parker with Craigs Investment Partners . Please go ahead.
Hi, guys. Just the one question from me. Just given the market conditions at the moment and a potential soft second half and these conditions lingering, does it change or translate into a different strategy with your land bank or how your residential development is going to operate going forward?
No. I mean, we've mentioned that we're basically running that business with Circa and NZD 800 million capital float. What has changed is and we've talked about this already. I think that our balance sheet can support that going forward. And that's how we've thought about our stress testing and as we look at all these things, all things capital and balance sheet. But what we have done and we've talked about this is that there's a background opportunity in the sites that we have in that whole business to grow it quite substantially by about 300, 400, 500 units per year. What we have said is we won't do that. So what our settings are is just to run the business basically at equilibrium while we just get confidence of where the cycle's going.
Once we have confidence, whether that's in one year, two years, three years, then we will seriously look again at that growth. But we'll only pull that growth on when we're very confident in the cycle and we've got capacity in the balance sheet to go after it. So that's how I'd look at that business.
Okay. Thanks, Ross.
Your next question is a follow-up question from Grant Swanepoel with Jarden. Please go ahead.
Hi, guys. Just a quick question on your dividend. How bad is your balance sheet in your own view based on all the uncertainties that you've killed this dividend? And when will the board reconsider resuming dividends?
So we're not paying an interim dividend, which is actually consistent with our current dividend policy. We'll make decisions on future dividends as that sort of plays out. So as per the dividend policy, which is based on a percentage of earnings and also in relation to free cash flow, and we've made that call. So future dividends, we will make that call at the appropriate time.
So you're killing all this dividend. It's more backward-looking, not forward-looking.
I didn't quite catch that. Say that again, Grant.
So doing away with your dividends this half is more about what's happened in the last six months and not what's going to happen in the next six months.
Oh, look, well, the policy is based on the earnings that have happened in the last six months and then in relation to sort of free cash flow. There is an element of looking forward as well. We've made it clear that the decision on the dividend is part of our broader question on maintaining balance sheet settings.
Your balance sheet netting aren't moving above 2 x. I still don't get it why it's cut to 0 and not at the bottom end of your payout ratio?
Bevan, do you want to pick that up?
It's really pointing to the available cash flow. Grant, as Bruce says, we have a policy for a reason. You're right that if you look at the earnings, you'd pay NZD 0.07-NZD 0.11 based on the percentage of the impact. But the reality is those legacy cash flows mean we do not have the cash at the moment. So we're being consistent with our policy in paying for that. Your comment on the balance sheet strength, we've always said that we would manage within our target settings. We're committed to that 1-2 x range. And we have very strong funding in place. Regrettably, the legacy cash outflows mean that a dividend is not possible at the half-year. But as Bruce says, we will continue to look at that against policy at each dividend setting period.
Okay. So it might be resumed in the second half. We can assume that it's zero for the full year.
Correct.
Thank you.
Now, we have room for one more question because there's no more. Oh. There's no more questions. Okay. Apparently, there's no more questions. So with that, I might just do a sum up. So it shows how well informed I am and what's going on with the question, Q. Look, everyone, thank you for joining us this morning. We'll obviously see a lot of you over the coming week as we get around on our results roadshow. So look forward to seeing you then. And thanks for joining us this morning. Thank you.