Thank you. Tēnā koutou katoa. Good morning, everyone, and welcome to the presentation of our full year results for the twelve months ended 30 June 2022. Given nothing material has changed since our Investor Day just 2 months ago, where we covered in some detail our medium-term strategies and FY 2022 operating update and the outlook for FY 2023, we'll do a shorter and more focused presentation than usual today. The agenda for today is shown on slide 3 of our results presentation pack. Presenting with me today is our Group CFO, Bevan McKenzie. I'll provide an overview of the results, Bevan will provide a bit more detail on the financial performance, and then I'll sum up with the FY 2023 outlook. With this reduced agenda, there'll be plenty of time at the end for Q&A. Turning to slide 4 and a summary of the full year results.
Despite the significant COVID disruptions and lockdowns in the first quarter, we improved across all our financial and most of our non-financial metrics through FY 2022. EBIT was up 13% for the year. Our second half margin lifted to 9.5%. Net earnings improved significantly, up 42%. Our trading cash flows remained solid and our balance sheet remained strong. Against this backdrop, the board has declared a fully imputed final dividend of NZD 0.22 per share. Looking ahead into FY 2023, we continue to see solid committed workloads across all our sectors and expect market levels to remain at or about FY 2022 levels. This positions us well to deliver further profit growth in FY 2023. Turning now to slide 5. Overall, our teams have delivered an excellent result for the year.
Revenue was up 5% and EBIT at NZD 756 million was just ahead of guidance and up 13% on last year. Our second half margin of 9.5% across the group was pleasing and sets us up well as we enter into FY 2023. This all translated to ongoing strong returns on our funds employed of 19.3%, again ahead of our 15% base target. Moving to slide 6 and onto cash and leverage. As we flagged at last year's results, through FY 2022, we needed to restock stock inventory across most businesses and replenish housing stock in our New Zealand residential business. Despite these investments, we still achieved a good trading cash flow through the year of NZD 462 million.
Net debt levels at the end of the year were NZD 670 million, resulting in a leverage ratio of 0.6x and NZD 1.1 billion of available liquidity. All this maintains our strong balance sheet position as we enter into FY 2023. On slide seven, we see this strong performance flowing into our other financial results. Net earnings for the year were up strongly to NZD 432 million, and earnings per share before significant items, which is the basis upon which we pay our dividend, increased to NZD 0.60 per share. Against this backdrop, the board declared a fully imputed final dividend of NZD 0.22 per share to be paid in October. Continuing with capital returns, we completed our share buyback program in May, and in total, we purchased and canceled around 41 million shares for NZD 274 million.
As I mentioned in my introduction, we continue to make good progress on our key non-financial metrics as well. The graph on the top half of slide 8 shows the continued improvements we're achieving in safety. TRIFR, our total recordable injury frequency rate, sat at 3.4 at the end of the year, 32% down on last year. This translated to 90% of our sites being injury-free through the year. We continue to focus significant ongoing efforts into further improving our safety performance, and this year will see us implement a major frontline training program. We're confident this program will keep us moving towards our ultimate goal of no injuries across any of our businesses at all. After the challenges of resetting our cost base through the early stages of the COVID years, it was pleasing to see our overall employee engagement again improving.
We're putting a lot of effort into ensuring this continues. Beyond these day-to-day activities, we're also working on our overall employee value proposition. Some recent examples on how we're improving this include introducing a materially enhanced parental leave policy, working to specific targets on increasing the percentage of females in operational roles, and continue to work towards pay parity, which should see the last of our gaps close over the next couple of years. Moving to sustainability in the top half of slide nine. We continue to make good progress towards our goal of a 30% reduction in our carbon emissions by 2030. Our emissions are now sustainably 12% below our 2018 levels, and each business has a plan to ensure we'll meet or better our 2030 target as an overall group.
On the bottom half of the slide, you can see that the COVID and geopolitical disruptions that occurred to demand and supply chain over the last couple of years have had some impact on our net promoter score with our customers. This softened slightly to 36 through the year. We recognize that this has been a tough period for our customers. Looking forward, we're now seeing most building product supplies, including plasterboard, are moving back into balance. Capacity is being added, international and local supply chains are starting to sort themselves out, and panic buying and stockpiling is abating. Beyond this, we're very focused on improving our own performance and value proposition to our customers. This is through things like our new digital interfaces and e-commerce channels, decreasing delivery times while adding certainty and traceability and increasing the pace of our product range and innovation improvements.
The combination of our own focus and the generally improving backdrop gives us confidence we'll see improvements in our customer satisfaction scores through FY 2023. On slide 10, we have a summary of our divisional performance. The more detailed divisional slides we usually present are available in the appendix of this presentation, as well as in our annual report published today. Overall, the divisions performed very well during the year. Across our New Zealand building products, distribution, and concrete businesses, we saw ongoing good activity levels and volumes. While input cost pressures have been a feature through the year, we've generally been able to flow this through to price. This, combined with ongoing operational improvements, saw all these businesses lift both margins and overall profits through the year.
In Australia, the division delivered a material profit improvement, and the second-half margin of 4.8% sets us up well as we enter into FY 2023. In our residential development business, we had an excellent year. Although house sale volumes were lower than last year due to disruptions in industry capacity constraints, margins were very strong. Finally, our construction division made good progress with a second half margin of 3.9% and a strong and much better dimension order book as it enters FY 2023. I'll now hand over to Bevan, who will take you through the detail of our financial results for the year.
Thanks, Ross. Kia ora mai tatou, and good morning, everyone. Turning first to the income statement on page 12. As Ross has noted, the group delivered a strong full year performance despite the significant impact of the COVID lockdowns in the first quarter. The second half performance where the group delivered EBIT margins of 9.5% and year-on-year earnings growth of 46 percentage points to the operational improvements in a number of key areas. In particular, it's been driven by more effective pricing to offset inflation and to slightly expand our gross margins, growth into higher margin product categories, a more efficient cost base, and the operating leverage which that cost efficiency is enabling.
I'd note that as we look at our second half revenue growth of 11% year-on-year, around 1/3 of this is due to volume growth and around 2/3 is due to price to offset inflation. This is consistent with the market that remains at capacity in many areas, with volumes broadly flat year-on-year as we head into FY 2023, consistent with our prior guidance. A couple of final points here. The significant items in FY 2022 relate principally to the Rocla investment, which we completed earlier in the year, and our results are inclusive of around NZD 15 million impact this year from changes to the cloud computing accounting standard. Turning to cash flows on slide 13. The group's underlying trading cash flows were strong, and the result has come in ahead of the guidance we provided on Investor Day.
As we've highlighted previously, the group has made targeted investments in inventories in FY 2022 to support both the growth of the business and also to support customer service levels through a period of significant supply chain disruption. We've continued to see the benefits of these investments both in our earnings growth and also our customer satisfaction metrics, which, as Ross has highlighted, have softened slightly, but have generally held up well despite these disruptions. Page 14 provides some more detail on the working capital movements. The key investment in the year was NZD 239 million in inventories for the materials and distribution divisions. About half of this investment was due to higher stock volumes, again, to support growth in customer service levels, and about half was due to higher stock values, particularly in areas impacted by higher commodity price inflation such as steel and resin.
We do expect to maintain inventories in the materials and distribution divisions at about the current level through FY 2023. This is slightly higher than our long-term target level. However, we consider it prudent to maintain a higher level of resilient stocks as supply chains are yet to fully normalize. Turning to slide 15. The focus of our capital expenditure program remains consistent. On maintenance CapEx, we're seeing the benefit of our investments in prior years in a well-controlled spend that is now broadly in line with underlying depreciation. Our base CapEx also includes NZD 50 million-NZD 100 million per year to deliver on our objectives in the area of digital, data, more efficient manufacturing, and sustainability. As we highlighted at our Investor Day, we also have a number of what we call our above-base growth projects underway.
These are primarily organic investments targeting returns of at least 15% and are focused on entries into new product categories and network adjacencies. We're well underway with 6 key growth projects currently, and this will be a feature of our FY 2023 investment. On slide 16, closing net debt for FY 2022 was NZD 670 million, with the increase in the period due to the expected investments in inventories, the Winstone Wallboards plant, and the share buyback. This has meant a leverage ratio for the group of 0.6x at the end of FY 2022, as shown on slide 17. We do expect leverage to move back to the lower end of our target range as we make our above-base growth investments. Through FY 2023, this will mean the group's leverage will move to around the 1x level.
Over the medium term, as we've highlighted, the group will continue to target leverage at the lower end of the target range. Slide 18 shows that the group's funding profile remains very strong. We have around NZD 1.8 billion of total credit facilities, a long-dated maturity profile, and liquidity at June 2022 of NZD 1.1 billion. Looking ahead to FY 2023, we expect our funding cost to be around NZD 90 million as borrowings lift on our growth investments. On slide 19, as Ross has highlighted, our return on capital and our returns to shareholders remain strong. Our ROFE lifted to 19.3% in the period, well above our base target.
With the group returning to cash tax payments in New Zealand, the group has delivered a fully imputed full year dividend of NZD 0.40 per share, a material uplift on the unimputed dividend of NZD 0.30 per share paid last year. In summary, the group's results in the period demonstrate our ongoing performance momentum. We're seeing the benefit of initiatives put in place over the past 4 years. In particular, improved price disciplines mean we're more than offsetting input cost inflation. We have a much improved cost base, which is giving us strong operating leverage to volumes, and which resulted in underlying earnings margins of 9.5% in the second half, which is more than 200 basis points ahead of the prior period.
On cash, good working capital disciplines mean we can make targeted investments in stocks to support customer service and earnings growth, making the most of our local positions in a disrupted supply environment. We're pleased that this performance has enabled another material uplift in our returns to shareholders, as well as ongoing strength in our balance sheet metrics. Finally, and consistent with our long-term strategy, we're now firmly in the phase of investing in the future growth of the business, primarily through organic investment in new product and network adjacencies. With that, I'll hand back to Ross for some closing remarks.
Thanks, Bevan. Turning to slide 22 and the outlook for FY 2023. Customers and forward indicators point to ongoing strong volumes across all our sectors. With this, we expect similar market activity levels across the FY 2023 year to what we saw in the second half of last year. We are confident in our operational disciplines and continuing to cover inflationary costs. With that, we're forecasting to see an EBIT profit uplift in FY 2023 of at least NZD 100 million from FY 2022. Moving finally to slide 23, I'd like to recap on how we see our medium-term positioning. When we look at our strategy, we remain confident we're well positioned to drive shareholder value both in the short and longer term. As mentioned, we expect to see solid profit growth into FY 2023.
We continue to have both plans and runway to drive further margin improvements above what we're achieving now. We have an established pipeline of growth opportunities, which we outlined in detail at our recent Investor Day, that will start to mature over the next three years. Our balance sheet and financial position is strong, and we intend to keep it that way. Our operating approach and scale in-country presence positions us well to both take advantage of and deal with the global trends affecting our sectors. Before we move on to questions, I'd like to thank our people for their commitment and resilience through what has been a very demanding couple of years. It's through their efforts that we've been able to deliver this performance. I'd also like to acknowledge all our customers and shareholders for their continued support.
With that, I'd now like to hand back to the moderator to allow us to take questions.
Thank you. If you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press *2 If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Lisa Huynh with JP Morgan. Please go ahead.
Hi, morning, team. I just had a question around that conservative stance around the balance sheet. You know, is it largely the macro that you're provisioning for? I guess in 12 months' time, if the macro doesn't kind of deteriorate and it's not the end of the world, whether there's room to look at more capital management.
Look, I'll have a quick go at that, and then Bevan can pick up on anything he thinks I've missed. We've put out there our target range or leverage target range of 1-2, and we've also said that we are positioning to stay at the bottom end of that. You know, that's where we're comfortable to run the business at. We've also said that with the investments we've got planned over the coming, in FY 2023 particularly, you'll start to see us move to the bottom end of that range. Right where we've said we wanna hold it. I don't see any capital management. We've also said, should we find ourselves below the bottom of that range, well below it for a sustained period, then we'll obviously look at those options again.
We don't, we're not forecasting that at the moment. We're expecting to get by the end of FY 2023 or probably halfway through it, we'll start to get quite close to the bottom end of that range.
Okay, sure. I guess just on the Australian business, just that private label brand, Oliveri. I've just noticed it's being stocked in a number of retailers here in Australia now outside of Tradelink. Can you just talk about what's happening with the strategy around that?
Yeah. Oliveri, I mean, we obviously, you know, use the Oliveri brand through Tradelink, but yeah, it is stocked through Winning Appliances and other companies like that. They've got a broader strategy to go to the retailers as well as through our Tradelink distribution things. We think that's complementary and doesn't cannibalize it at all. We're very comfortable with that, and it's going well. We're, you know, and we've been increasing our range for a sort of good better best sort of strategy, where we've positioned the Oliveri at the best end. We've got products now through Oliveri that compete up and down what I call the value proposition. We expect that strategy, it's working, and we'll continue with that.
Okay, sure. Thanks. I'll leave it there.
Thank you. Your next question comes from Grant Swanepoel with Jarden. Please go ahead.
Good morning, team. First question, just around your NZD 100 million uplift of FY 2023. A couple of things around that. Is any of the above normalized CapEx EBIT gonna come through in FY 2023? Second one around that, if you add back the COVID impact to the first half, a little bit of leverage on the Aussie business for the NZD 5 million you get, you get to about a 9.7% margin for the first half. I was just wondering how conservative is your guidance considering you did get 6% price increases throughout FY 2022.
I won't comment, Grant, on the conservativeness of or otherwise of the guidance. Simplistically, the NZD 100 million came, and we've been very transparent about that, is the first quarter impacts due to the disruptions in New Zealand and the shutdown, while we held our overhead and our people costs, it cost us NZD 100 million of profit. What we're sort of The thesis is not more complicated than, okay, we think the market backlog and volumes look pretty stable through FY 2023 as we look at our own customers. We see those volumes continuing, and we don't see another COVID lockdown or disruption through the year. We're simply adding back that NZD 100 million is the way I think.
In terms of our longer term, our NZD 500 million CapEx that we've flagged into growth, the only one that will really drop into FY 2023 is going to be the Tumu store acquisition, which we flagged at the Investor Day, will be ten to twelve million of profits through the FY 2023 year. The balance of them tend to start generating profits after that, probably more in year 2 and 3 of that program.
Excellent. Thank you. You're meeting this Winstone Wallboards bulge. Is there any margin squeeze coming in the first half because of your or the things you're doing to mitigate bad press?
No. The way we work and what we've been doing, I mean, if I take all of our building products, I'll start from the helicopter first, is that generally as we, you know, as our commodity price supply agreements usually are over periods. As we come off those and we have to renegotiate, and if we do get cost increases, which generally is what we've been experiencing, that's when we pass costs on or prices on to our customers. We're not. You know, we just gotta make sure we marry that up as well as we can. As we look at plasterboard, we're only just now concluding our renegotiation of our gypsum suppliers as well as our paper suppliers. They're just happening now. That will.
They are going up, so we're gonna have to look at price in plasterboard again as we come onto those. We haven't been carrying that to date, but we are now starting to experience it as we come off our fixed-year agreements on the new ones.
Thank you. My final question, just on central costs. I think once you net out that NZD 15 million related to Tauranga, it's around about NZD 53 million. What number should we be looking for central costs for FY 2023?
Yeah. 75 is the right number for corporate costs in FY 2023. Grant, that's largely driven by that OpEx spend we flagged around the Digital@Fletcher program, so it's the backbone ERP systems. That's been all CapEx in FY 2022, but as we move into the pilots, we've got about 10-15 of OpEx, and that'll flow into the corporate. Otherwise, corporate is flat year-on-year.
Well, thanks very much. Thanks for answering those.
Thank you. Your next question comes from Simon Thackray with Jefferies. Please go ahead.
Thanks, Ross. Thanks, Bevan. Good morning. I'm not sure if the rest of the team are there, but I've got four questions which I'll punch out as quickly as possible. There's an addition in the annual report to the outlook to say that the 9%-10% mid-cycle margins are premised on activity levels being 10%-15% below the second half 2022. I can either do the math on the revenue or do the math on the EBIT, but it looks like you're talking at the midpoint to around NZD 750 million EBIT as being your through cycle expectation. Is that correct?
We look at the first part of your question in the same way. Yes, we think mid-cycle, as we said at Investor Day, Simon, is about 10%-15% below. In New Zealand Resi, for example, we think 30,000 consents thereabout is the right level for mid-cycle versus what's built today at around 35,000-40,000. In terms of where that takes earnings, the difference in our outlook there, Simon, is that we've obviously got those growth investments underway, so we expect those to be additive. We've said that we expect both at, obviously, EBIT quantum, and also we've said they're gonna be margin accretive investments.
You know, we've been pretty clear 9%-10%'s the right level, but we need to be factoring in that growth that is coming from those organic investments as well.
With the return hurdle, I presume, of 15%, is that the returns hurdle?
That's right. We said at least fifteen percent on those organic investment, which is consistent with what we've applied in the past. We think all of those at mid-cycle levels can deliver the 15%+. That's right.
Excellent. That's very helpful. Just on your comments on leverage being at the bottom end, just noting from the annual report at note nine, the land and property commitments, I think they came in at NZD 787 million this year versus NZD 431 million, with a note that 415 to be delivered in FY 2023. That's. I hope I'm reading this right. That's cash outflow. Does that go through the working capital?
Yes, it flows through the resi working capital line. That's spot on. You see that in the note disclosure. You've got those investments coming. You've obviously also got land going out in the sense that you'll be selling houses on top of them. That's not the. You know, that's. You shouldn't expect that NZD 400 million odd to be the total outflow. We do expect an increase in resi funds this year, and that's consistent with our growth strategy. We delivered just under 700 units this year. We're pointing more towards 1,000 in FY 2023, but with that longer-term objective up near the 1,400-1,500. Yes, you'll see some working cap growth in resi this year, Simon, but not that full number that you point to.
Yes. Which is a gross number, not a net number.
Spot on.
Thanks. That's helpful. Just while, you know, I don't know if Steve's there, but I guess it's a good opportunity just to get a live update on what foot traffic and consumer sentiment is around housing and house sales, you know, given what we're watching with the transaction volumes falling, median prices falling and time on market obviously rising. Just wondering if there's any feedback on the current conditions.
Absolutely. If I just give you a sense of what we're seeing across our portfolio. Firstly, prices probably peaked around December 2022, and since then, on average, they've come off about 10%. What we saw is there was a bit of a hiatus in sort of sales and conditional contracts, sort of becoming a feature probably back in March, April, as people were quite nervous where it was going and my sense, waiting to see where prices went to. What we've actually seen since we've got into the July, August sort of sales thing is that it seems to be stabilizing about that average of 10% across our portfolio down.
What we're also seeing is sales are running at about 30-40, which is about where we'd expect given our stock levels in the winter months. You know, there's far less in what I call conditional contracts there. The consumers have sort of moved on now and it feels like there's starting to be a level of comfort coming into where prices have fallen to. They're confident, they've got a good sense of where interest rates are going and where bank loans will be going, and so they seem to be returning to the market. That's a real positive for us. You know, it feels like we've now got a base level to go forward for the year in terms of our house sales.
Yeah, that sort of gives me a bit of confidence of what we're sort of projecting will occur through this coming year.
Thanks, Ross. Just the final one on the construction backlog for the legacy projects. I didn't see a number in the NZD 3.2 billion backlog. Thank you for the timing. I can see that in the annual report. Also just for interest, what's now the largest single project by value as a proportion of the total backlog?
It's all NZICC. Yeah, basically we'll be out of the roading projects in the next 6-9 months, and there's bits and bobs to go there. Fundamentally it's NZICC, which is part of the provision, which is not much, about NZD 0.1 or 100 million of provision maybe, and then the balance is insurance work.
Excellent. Thanks so much, gents.
Thank you. Your next question comes from Peter Wilson with Credit Suisse. Please go ahead.
Thank you. I might just follow that question up on the construction. Very good second half margin, 3.9%, despite still having some revenue from those legacy projects. I was just wondering what proportion was those nil margin legacy projects, and I guess the margin excluding that, should we expect that to be indicative of the go forward margin you might expect? I'll start from. Morning, Peter. Start from the end. We said construction should be delivering a net 3%-5% range and you're spot on, second half was firmly in the middle. We'd be hoping to push into the upper end of that range. We've been very focused on the quality of the order book, and as you see that flow through, we expect good margin to follow.
In terms of legacy, for the full year it was about NZD 250 million of legacy, i.e. nil margin work, and that was split pretty evenly between the first and second half. Just north of a hundred million in the second half would've been nil margin revenue.
Perfect. Another one probably for you, Bevan. Just the NZD 100 million COVID impact in New Zealand. Have you or can you provide a rough split by business?
We have not and we will not. It was obviously concentrated in your larger manufacturing base businesses where you get the fixed cost deleverage as the revenue turned off. But we also had a reasonably chunky impact in Steve's business. You know, we didn't sell any houses for the level four lockdown period. You had the delay in construction that flowed through, and you can see that the year-end house units at 670 were obviously below where we wanted to be. That kind of clipped the full year number in volume terms. Obviously margin was significantly up just due to where house prices, particularly in Auckland, were through the year.
Okay, good. That'll do. I'll leave it there. Thank you.
Thank you. Your next question comes from Marcus Curley with UBS. Please go ahead.
Good morning team. Just a few. I just wondered if you could talk a little bit more to, you know, the GIB expansion project now that you're sort of closing in on the finish there. Maybe an update in terms of timing and potentially a view on returns, you know, from that project as we look, you know, into the next year.
Yeah. Timing, it's running as we've been talking about. We should be in full production in May next year, so that means we're broadly doing trial board from February, March, you know, just getting it commissioned and all that. That's running well and as we do that, we've still got the facility up here in Felix Street in Penrose, which sort of covers us. We've got good transition planning through all that. It's running to budget and on time and you know, it's going really well. Very confident on that. In terms of returns, it's actually not as simple as that, Marcus, because it's actually not a growth CapEx. It's actually...
Well, yeah, part of it's replacing. So the overall impact on the building products division and on the wallboards is to actually drop its ROFE as we make that investment. It'll still stay above, well above what we call our 15% target, but it will come down because we're basically manufacturing plasterboard in Auckland out of an end-of-life plant that's basically more or less depreciated. It's the wrong way to look at it as incremental, what I call, returns on capital.
Would you expect any net, yeah, negative out of it, yeah, once it opens? Or do you think it could, yeah, break even in the first year?
It's actually it'll be a seamless transition, there'll be no what I call diminution of the wallboard's profitability. The EBIT will flow. In terms of any remediation costs we've got around the site, that'll be dealt with as we think of the overall envelope, capital envelope that we're investing. It's really just get it working, and if anything, what it will do, you know, just gives us better ability to have volumes meet the market sort of thing. I'm very bullish about it. I wish it was open now.
Secondly, Ross, can you talk a little bit about, you know, the outlook for the steel business, particularly around margin looking into 2023?
Look, if you look at premise and what we're seeing in our businesses is the volumes and the orders and the activity, take the second half FY 2022 and just roll it across FY 2023. If I look at the steel activity, we'd expect it to be very similar. And this is not based on us just putting our thumb in the air. It's talking to our customers, understanding that backlog of work to get through, that disconnect between the amount of consents versus the capacity of the industry. It's also talking to our customer base builders, group home builders, smaller builders. We've got a bit of visibility of their order books, and we're looking at our own orders and volumes in our various businesses.
From my perspective, I'd expect the steel business to run pretty well, same again, you know, from that second half. That's what we're sort of pointing to across all of our building products businesses.
You're not expecting a material impact on margins from falling steel commodity prices?
That's it. They go up and down. What happens is that you always have opportunity and issues in the steel trading business because effectively you're buying stock and then selling it. Whether it's going up or down, it can have an impact. What it is is mostly volatile. You can have spikes. You might make a bit in some months and be a bit below run rate the next month. What you find is it tends to average out over the year. The answer is no, because we don't carry a whole 12 months of stock. You basically are a trader in the steel. Therefore it sort of sorts itself out as you go through the year.
On the dividend, can you give us, you know, sort of any I know you've talked about your leverage levels, but, you know, any perspective on, you know, where you think you might take the dividend next year, given the higher level of profitability? One would assume you're looking to try and make sure that the dividend level is sustainable through the cycle.
If I look just forward to next year rather than predict it over five years, because I think that's unfair, we're very specific on the 50%-75% payout range of net profit after tax. If you know, to the extent, you know, FY 2023, we've also said we think we'll be NZD 100 million higher in EBIT. That should give us, you know, the. Therefore, the opportunity to pay out more dividends is there, then it's a decision for the board after that. The direction of travel in our underlying profitability is the core, I think, indicator of where the dividend goes. I'm optimistic of the dividend outlook, but I'm not sitting here trying to predict it through mid-cycle.
Just finally, maybe one for Bevan. Can you talk, you know, I know you've sort of highlighted this, but just specifically to cash tax payments this year and working capital. You know, will you be paying full cash tax and, by the sounds of things, working capital relatively stable, as is, would that be the right conclusion?
Yeah, three components, Peter. Cash tax payments this year, obviously in New Zealand, not yet back to cash tax paying in Australia. Cash tax payments in New Zealand for full year 2023 in the year will probably be at around NZD 180 million. We'll be back to our normal levels, which is, you know, enabling us to impute those dividends, which is positive. On working capital, as I mentioned before to Simon, you will see investment in the residential business as we invest to grow that business.
On working capital outside of residential, yes, you should expect that to be broadly flat because we think those investments that we made in stock in FY 2022 have got us to about the right level, even to support a bit of, a little bit of growth that we're targeting in FY 2023.
Bevan, can I draw you on, yeah, what type of number that adds up to?
In terms of the working capital investment?
Yeah.
I think, look, in Steve's business, you'll be in the range of NZD 100 million-NZD 200 million investment. This year we ended at NZD 650 million of funds, June 2022, Peter. The reason. Marcus, excuse me. Thank you, Ross. My apologies. At least the numbers are right.
Just helping your brother not get Marcus offside here.
Always. Yeah.
The reason for the range, the NZD 750-NZD 850, it just depends. You know, there's a few variables, obviously, in Steve's business. Obviously, sales is a clear one. But you know, yeah, there's some interesting opportunities out there on land. But we're also at this point, you know, reasonably kind of well-booked on that front. But NZD 750-NZD 850 is about the right level of total funds for Steve exiting this year, therefore a net NZD 100-NZD 200 investment.
Great. Thank you.
Thank you. Your next question comes from Keith Chau with MST Marquee. Please go ahead.
Good morning, everyone. Thanks for taking my questions. First one, just going back to the resi division. Ross, you talked about running at, I think you said 30-40, in response to Simon's question. Just wondering if you can clarify what you mean by that in terms of running at 30-40?
Oh, so-
In July and August.
I'm just talking 30, 40 sales. Sorry if I didn't make it clear. What you find, it's very seasonal, this business, because we're into the winter months, we don't have as much stock, so there's not as much to sell. Yeah, that.
Right.
That's a pretty solid number from our perspective.
Mm-hmm.
What then happens is as we build, it'll start to swing up through the year. You know, as we get work completed, and obviously the weather does affect our consumers as well.
I was just pointing out the fact, the point really was that as we look at that, you know, it feels like people are back in the market. They've seen some price drops. They've also got comfortable around interest rate outlooks, and they're buying. We're not seeing that, you know, I'm not gonna buy until I sell my house stuff. They get quite confident on what they're doing. It is a really different feel to what we were seeing in April/May. Yeah. It feels like we've now sort of got to a sort of a level that we can then go forward on from here.
That run rate is 30-40 per month, but obviously seasonally impacted in.
It's seasonal. I mean, as I said, that's about what we'd expect to see in July, August. You know, so.
Yeah.
It grows stronger from there 'cause, I mean, as I said, we, if you think of our overall outlook, we're sort of talking about 1,000, but that's really about 800 houses up from the sort of six-
High sixes because we've also got the retirement living going into the thing as apartments next year. You know, we haven't got overly ambitious targets, I think, in the residential space. That feels about right for what we wanna see now to get on that trajectory to the sort of circa 800 houses.
Okay. Maybe I'm nitpicking here, but you know, the expectation for FY 2022 was circa NZD 700 sales and, you know, with only a handful of trading days going into the end of the period versus when guidance was provided, the end outcome was NZD 670. You know, lower than expected, notwithstanding, you know, only a handful of trading days. Can you help me understand whether the lower outcome was driven by timing? Was that related to the pause of the market? Just keen to understand where the differential was and what was actually achieved versus.
Yeah. Keith.
the guidance intimated.
Sure. Keith, I would agree you're nitpicking, but I'll answer it anyway. No, the thing here was that, you know, what we saw happen, the biggest issue we've faced is the extension of approvals from council, 'cause the approval process just got elongated. What happened is you might have had a sale, but we only book it when it finally gets completed. Those completions just got a bit elongated as you know, just. They're COVID affected as well. They're understaffed. You know, we were trying to be order of magnitude in the 700. We didn't quite get there, but the profits were very solid, and they went up, so it didn't really change our forecast. Apologies if you thought-
We gave you a missteer there, but we weren't sort of guiding that specifically. It was sort of order of magnitude.
Look, just trying to understand the.
Yeah. Look, so there's the capacity constraints across the industry are not just building supplies. It's trades. It's supply chain. It's council. It's getting on to site, get the sections approved. It's then get the final handover of the houses. It is right across it. But what we are seeing, as I mentioned, is certainly some of the supply chain, the building products, that's easing. You know, there's still a skills challenge, but to the extent the borders, they're starting to get a little bit easier. We're starting to see some hope in the next six to nine months we might get a few trades supplementing it. Hopefully the authorities start to get better at the section approvals and then the final approvals on the way through.
That's why we don't wanna get overly ambitious with our numbers this year because I just don't think it'll free up completely, but it'll hopefully get a little bit easier.
The assumption in getting to the 1,100 number for FY 2023, that's based on these labor constraints and consenting constraints.
No. No.
Remaining as they are or easing?
Not really. I mean, what we're actually more like. I mean, if I break it down, call it about 800. 800, 850 of residential. But what you get, I think, retirement living is about 60, 70, and then apartments are about 140, 160, 165, something like that. I mean, they're not gonna be exactly right. The thing is that what we're sort of seeing is a mild uptick in our residential throughput, you know, from the high close to 700 up to the 850s and the others of the new product coming into the market, which are fundamentally aimed at different consumers.
Sorry, Ross, does the housing target of 850 then, does that assume consenting processes remain as constrained as they are?
Oh, that really sp-
Do you expect that gets better?
Oh, I think it'll get a bit better, but we're not sort of sitting here saying we go back to nirvana at all. I mean.
Yeah.
We're sort of planning this outlook based on, you know, what we see. Firstly, it starts with the consumer buying it, and then the second thing is, well, what can we actually get built? You've still got a constrained market to some degree, albeit not as dramatically constrained.
Mm.
as what it was in FY 22. We think it'll get a bit easier, but we don't expect it to completely transform.
Yeah. Okay. Understood. Just a follow-up question on construction. You know, with the legacy projects, you know, I see in your notes to the accounts that, you know, the provisioning is still fine under current assumptions. There are still, however, a few projects in there that could be at risk. You know, NZICC, you've got some insurance claims on that, which may provide a fail-safe. There's only a small amount of work left for Peka Peka to Ōtaki and PP2Ō. In the current environment with cost tracking as they are and with delays to projects, et cetera, et cetera, where do you think the key risks lie for those businesses with respect to where the end outcome could be for cost to deliver? The only reason I ask is what, you know, basically what's happened with the justice precinct in the past.
You know, that project was earmarked to complete in short order, but dragged out for multiple months, if not years. Just trying to get an understanding of how confident you are in current provision levels based on what you can see, on the cost backdrop and the labor backdrop, evolving.
Two things, Keith. Firstly,
Mm-hmm.
The two main projects to finish are Pūhoi to Warkworth and NZICC. Pūhoi to Warkworth will finish 2023. Really that one, it's well understood. We know we're going direction of travel very solid, so we can sort of see that, you know, it's basically done and we're basically getting paving in from here. It's just progressively finishing the pavement and then doing the QA checks to hand it over. I don't wanna trivialize it. There's a fair bit in that. It's, you know, in terms of that one, and the reason it's in the accounts is that from the COVID delays back in first quarter 2022, there was delays around that, and that's the subject of a claim we've got to work through with Waka Kotahi.
Just as we had to work through a claim with Waka Kotahi on the FY 20 COVID disruptions as well, which we successfully did. We obviously gotta work through that, but we're confident we'll get an outcome there. On NZICC, it is an insurance work, and insurance covers the cost of inflation in that. Again, there'll always be push and shove in the insurance world, but you know, we're covered for the inflation costs in that. The other thing I'd just say to you is that, you know, we put a lot of focus on assessing these projects, whether it be ourselves, the board or the auditors.
That's, you know, and the comfort you can take is we're still comfortable with the provision envelope as we have been for many, many years now.
Okay, great. Thank you. Perhaps if I can just squeeze in one quick last one. For the PlaceMakers business in New Zealand and Tradelink in Australia, how would you characterize your channel inventories for those two businesses? Would you say you're back to normal, over full or still running fairly lean?
No, no, I think it still goes to Bevan's overall comment. I think both those businesses have a bit more than you'd have in a normal environment. We're not going to pull them back until, as I said, I think we're seeing the direction of travel with the supply chains getting better. I don't think we'll call it done on that until we get into second half of FY 2023. We're letting them hold inventory in the critical products where we think they need to hold them on both sides, in Tradelink and PlaceMakers. Then we'll only move back. I mean, we're more concerned about our customer outcomes.
We don't think it's excessive, our inventory levels there, but they are a bit higher than normal, and we'll leave it at that for the moment until we see all that, the other issues dissipate.
Okay. Excellent. That's great. Thanks for taking my questions.
Thank you. Your next question comes from Stephen Hudson with Macquarie Securities. Please go ahead.
Oh, morning, Ross and Bevan. I've just got three quick ones. Just firstly, on Australia, Ross, your exit rate, your margin there at 4.8% was pretty strong in spite of weather. Can you just call out the outperformers and underperformers, sort of by company? Then a couple for Bevan. Tumu looks like you've acquired at something like 3.8x EV to EBIT, which is pretty remarkable multiple. Are there more of those out there? How do you weigh that up versus sort of buybacks? Another one just for you, Bevan, just on Winstone Wallboards. Are you still thinking about the NZD 400 million sale and leaseback on your Winstone Wallboards investment, or has that sort of been parked for the time being?
Hey, Stephen, do you mind, Ross? It got garbled when you asked your question. I just couldn't quite hear what you wanted to hear about Tradelink. Sorry, can you just say it again?
Sorry, can you hear me okay?
Yeah, I can. No, I can hear you fine with all your questions.
Yeah.
Just whatever that happened at that point, it just got garbled. I really didn't hear.
Oh, sorry.
It was my old age hearing fail. I don't know, one of the two.
Look, it was just really which, you know, your exit run rate for margin in Australia was pretty strong at 4.8% in spite of weather. Would you know, are there any call-outs for you in terms of the divisions that outperformed, or was it across the board?
Oh, okay.
Hopefully Bevan heard my other two.
Oh, no, the other two were clear. It was your. I'll let Bevan speak for himself, but I heard them anyway. Look, I think. Just on Tradelink, I think that it is pleasing, the direction of travel. You know, I think the results are starting to speak for itself. If I just think about that momentum, the way we're looking at Tradelink is we're sort of assuming we can drive about 100 basis points a year for the coming couple of years. That's the direction of travel on Tradelink, and we're starting to see all the things we've been doing starting to set us up for that. That's how we're thinking about it, and that's what gives us confidence to talk about the overall Australian division going into the 6%-7% overall performance.
I look at the other divisions, the ones that I think then you start to see really getting a bit of momentum. Iplex came back nicely. That was probably the other one that we've been worrying really hard over the last couple of years just to really clean up its manufacturing footprint, really focus on what it did manufacture, didn't, and also how it thinks about its distribution channels. I'd say. Yeah, Oliveri went well, and Laminex and Stramit and those other businesses also performed. The ones that really started to move the performance dial were probably those two, which is really pleasing because they're going to. There's a fair bit of revenue in those two, and they'll actually get them going, and it starts to drag the whole Australian business up.
On, um-
Thanks, Ross.
That was. We think that's a good business that Bruce and the team have bought there, and we're pleased to welcome them into the fold at the end of the month. Stephen, are there any out there? I think we've said consistently a couple of things. There are a couple of areas in kind of bolt-on acquisitions that we continue to look at, and we will continue to do so. I think the discipline on the buying is important to us. Stephen, you know, we need to look at these things on a through-the-cycle basis, and they obviously need to make strategic sense. Yeah, there are a couple, but again, to our point, most of the investment you're gonna see is in that organic area, and that's the way we like it.
We like to have these, the lion's share under our control. In terms of Wallboard sale and leaseback, we keep that option on the table, Stephen, but again, we've consistently said that we would get through the project, we'd get commissioned, and then we'd have a look at it. I'll make two points. You won't see a sale and leaseback in FY 2023. We're gonna commission in May next year, so it's certainly not part of our FY 2023 plans. We've not factored in any sale and leaseback of the land and buildings into our balance sheet metrics. When we talk about being at the lower end of the range, that does not rely on a Wallboard sale and leaseback. Probably it'll be, you know, FY 2024 and maybe even later FY 2025 before you look at that question, Steve.
Fine. Thanks, Bevan.
Thank you. Your next question comes from Daniel Kang with CLSA. Please go ahead.
Oh, good morning, everyone. I'm just, I mean, in terms of the backlog of work that you talked about, consents and completions, wondering how you see this backlog lasting, in terms of, you know, duration, given that, as you mentioned, there's some easing in some supply constraints that we're seeing?
Look, we've actually put a lot of thought into this and as you would have seen at the Investor Day, not only we sort of tried to supplement our own sort of views, which aren't necessarily overly sophisticated 'cause we just talk to our customers and look at our volumes and forward orders with the piece of work we had by Deloitte. So Daniel, I'm not avoiding it.
We laid out what we think it looks like, both what the economic things are doing versus that backlog consideration, and that's why we had Deloitte try and piece that puzzle together for us, which basically led us to be confident, not only from our own customer soundings and our own order books. Yeah, you sort of have that outside-in view, sort of supported the relatively flat volumes through FY 2023. What that then said is, you know, it started to ease a bit in FY 2024, but not precipitously slow. That was sort of it. I just point to that, you know. We're seeing nothing in any of what I call our lead indicators or what we're seeing with our business that would indicate it's any different to that. But it's hard to.
I've just haven't got much more to say on FY 2024, FY 2025 beyond what that piece of work we did at the Investor Day.
No, appreciate that. Ross, with regards to inflationary pressures, can you talk about the key areas that you're noticing this most and perhaps any areas where you are starting to see some relief?
Basically, let's start with building products. We're seeing it. That's running 5%-10%, but let's call it 7.5%. If I look at what we've put into the market, either through PlaceMakers and what we buy and also what we've put into the market from our own building products, it's running at around about 7-ish%. What you see, the inflation that's occurring actually in people that are procuring houses from builders or doing alteration additions is far higher than that. That dynamic, from my perspective, is all about once the tradies or the builders got busy, you know, prices went up. What I think will happen is as we get through, you know.
If I look at their order books as we talk to our customers, depending who they are, they're basically full to early next year to middle of next year. What will start to happen in my mind, you know, if you absolutely wanna lock them in for a house now, the price is high. If that's, you know, as they start to see more need to fill their order book, they'll start to get a bit sharper. That'll probably also be a confluence with borders getting a bit easier and, say, some of these trade skills becoming available out of Asia or Philippines, et cetera. I think what you'll see is an unwind in the pricing aggressiveness that's been going from the trades or the builders to the consumers. That'll also marry up with as what people can sell houses for drops.
It sort of brings it together. I think you'll see that more than anything ease a bit of the housing inflation that's out there, more so than building products. I do think, I mean, then we're all in our economic forecasting. I mean, to the extent the interest rate cycle gets inflation under control, then I expect in FY 2024 building products to return to more normal levels of inflation, you know? You know, but that's how I think it will play out.
Thanks, Ross. Just a couple of housekeeping items, Bevan, if I may. Effective tax rate, what should we be assuming going forward? Secondly, given the higher interest rates, how does that impact your borrowing costs?
Yeah, sure. Effective tax rate, we're creeping back up to that 28% that we have been talking about. It was a couple of percentage points lower than that in FY 2022, again, due to the industrial land sales in Australia and the nondeductibility there. We're at 26-ish, 28, you know, I think we'll be getting close to that in FY 2023. In terms of funding costs, we're at 4.6% in FY 2022. You're largely gonna move with base rates there, as we have a coupon above that. You've obviously got the capital notes which won't, but the others, you know, the syndicate and USPP will. There's obviously an announcement out in New Zealand today on that. We'll broadly move in line with that.
You're probably looking into the low fives in FY 2023.
Great. Perfect then. Thanks, Dan. Thanks, Ross, as well.
Thank you. Your next question comes from Rohan Gallagher with Forsyth Barr. Please go ahead.
Morning, guys. Congratulations on a good result. I clearly need to press *1 earlier. Just a couple of quick ones, hopefully. Previously you talked about, you know, needing to invest NZD 200 million in the resi business, you know, to take funds to 750-ish, and now you're talking kind of maybe topping out at 850. Can you just talk to what the difference in investment there is versus those plans that you kind of outlined in resi investment at the FY 2021 result?
I think what you're seeing there is that as we've looked at the opportunities more broadly, we see a couple of good opportunities. You know, we've talked, or Steve's talked extensively around Vivid Living and the investment there that'll obviously be held on balance sheet and apartments. I think, you know, we've got good confidence in the ability for that business to deliver on a couple of other fronts, and that's why, you know, we're looking to invest a little bit more, and you're gonna need to scale that. You've also seen, I would say, that the number of units that we are targeting, up at that 1,400-1,500 level has also grown as well. You're gonna need to invest a bit more both in the total volume growth and inclusive within that, some of those other areas that.
You know, those are pretty exciting. Ross has mentioned the 60-70 Vivid that we're doing this year at Waiata and Red Beach. That's getting plenty of attention in the market. I'd characterize that as part of the overall innovation that you're seeing in the business, Rohan. Yeah, there's a bit more capital that comes with it, but Ross and I are pleased about it. You're seeing the business really start to push on some of these fronts, and that's a thematic more broadly, not just in Steve's world.
Thanks. On that 1,000-home kinda guidance you gave, you know, 800 houses and what was it, 140-160 apartments. Can you give us some color on how much of that was pre-sold kinda going into the year?
Yeah.
I assume you had more.
With the apartments, it's about 40%. That's just the way we sort of approach it, but we don't wanna pre-sell everything 'cause some of the you know, depending on where it is and. Apartments will always have an element of pre-sale. What we don't pre-sell with houses. Basically, we just we build them and then sell them in the market. You always got a bit of carryover from the previous year, but it's not a pre-sale as much as anything. We came into the year with around about 100 already, you know, which didn't settle in June. You know, so they get carried over, and then we get onto sales, and we finish the house and sell them.
Every now and then, we might sell one ahead of that, but that's not our main model.
Well, thanks. Just circling back to these benefits from this growth investment. I mean, you talked to the benefits kind of dropping through in years two and three, kinda outside of Tumu. When you just look at the commentary that you give, you know, the steel sites you've got four sites to consolidate, that kind of happens in 2026. Taupō Laminex is a 2027 story. You know, I guess, what am I missing from what will aid, I guess, FY 2024 and 2025 from that investment?
I mean, for simplicity, what we've tried to point to is the bigger ticket investment items that are going on. You know, they are the Taupos, it's the tins upgrade, et cetera, those style of things. You know, but what we don't, 'cause you just die in a ditch with detail if you're not careful. All of the businesses have what I call small to middle size investments going on, either in production upgrades or bolt-ons or, you know, whether it's a quarry footprint, additions to what we're doing in our Firth plant. You know, we're adding bits and pieces all the time, and you can go and look at the different product lines in Australia. It's a feature across everything. Yeah.
There is a bunch of that going on as well, which sort of gives us that confidence of trajectory. Rather than try and bring all that to life, which is almost impossible, we've sort of said, "Look, get in your helicopter. There's some really big stuff happening, which is really gonna underpin some material lifts to what we're doing." That's how I'd characterize it. We think we've been doing enough across all the businesses to have a direction of travel, which will help us, what I call incrementally keep driving growth, as well as some clump on bigger bits, bigger bites that actually move the dial a bit more materially.
Are you able to give any color on the, I guess, the quantum of those bigger investments versus the smaller ones which seem to deliver more immediate benefits?
Yeah. The size of the big ones we've actually outlined. We've sorta said there'll be about NZD half a billion of it going into that, and we've sorta said that we'll be doing at mid-cycle levels at 15% ROFE, which equals NZD 75 million EBIT or more. That's sort of the. We'd hope to be north of that, and then it'll emerge, as you say, in year two and year three. That's FY 2024, 2025 and beyond, 'cause it doesn't just stop then. We've tried to be quite granular around that, and hopefully we'll find other exciting opportunities as we go, 'cause there's a good pipeline of innovation and ideas in the business. I'd expect to see that evolve as we go forward as well.
Sorry, we might be talking across each other on those numbers. Maybe we take it offline.
Yeah, sure.
On that one. Finally, you know, import competition's been you know kind of impeded for the last couple of years. Are there any signs that, you know, the importers are actually having an easier time of it? What are you kind of expecting from a competition kind of standpoint in guidance and I guess the coming years?
Oh, look, I just think it's more of the same. I think the market's competitive. I think it's internationally competitive, and we have to constantly stay on our game, as we have always, on making sure we're innovative and we're benchmarking ourselves against what can get imported and what our local competitor's doing. I just think more of the same. I don't think any real change to that, to be honest. Rohan, we have to stop there. I think we've got one more question on. We're over time, I think, but maybe if I can just let the last question get asked, and then I'll finish up. Thank you.
Thank you. Your final question comes from Aditya Narain with Citigroup. Please go ahead.
Maybe we've lost her. Maybe we bring it to an end at this stage. Moderator, are you happy to do that, or is there a question there?
Aditya Narain, your line is now live. Are you there? There are no further questions at this time. I'll now hand back to Mr. Taylor for closing remarks.
Yep. Again, thank you all for attending this and, yeah, no doubt we'll see a lot of you over the coming week or so when we get around the traps. Thanks for coming along, and thanks for the questions.