I would now like to hand the conference over to Mr. Andrew Reding, Group Chief Executive Officer and Managing Director. Please go ahead.
koutou katoa, and welcome to the presentation of our half-year results for the six months ended 31st of December 2024. Moving to the agenda on slide three, I will provide an overview of the results as well as covering off progress on our strategic areas of focus and an update on where we are on near-term priorities, and then Will Wright, our newly appointed Group CFO, will talk through our financial performance. I'll then close with how we are planning and thinking on the year ahead, and we'll take questions after that. Turning to slide four, I look at the highlights of the first six months before getting into the detail of the financials. With the recent appointments of Jackie Coombs and James Miller, and the appointment of Peter Crowley as permanent chair, we've completed our governance and board reset.
We have a high-quality board who bring a wealth of relevant experience. Although we've faced volatile and challenging markets, we've continued to drive business improvements across our factories. For example, Winstone Wallboards' new Tauriko facility has achieved first-pass recovery rates of greater than 95%, significantly ahead of plan. In safety, where Fletcher Building's TRIFR is its lowest ever at 2.8, in our sustainability with an emissions drop of 21% compared to the 2018 baseline, and in our employee engagement with an eNPS of 39. At the same time, as we'll outline in more detail shortly, our Cost-Out program is running ahead of plan. Having raised capital, our balance sheet reset continues with debt repaid resulting in reduced leverage, while we also successfully divested the Tradelink business in the half. Slide five.
Moving on now to look at the financials, and just a reminder that Tradelink is treated as a discontinued operation, so the numbers are reported on a continuing basis where appropriate. During the half, we faced significantly more difficult trading conditions across all sectors with activity below mid-cycle levels, where July to September were among the worst months for some of our business units that we've experienced. This impacted overall revenue, which was down 7% to $ 3.6 billion for the half-year. Volumes declined across most divisions, which resulted in a revenue decline, although this was partly offset by higher revenue in Construction. EBIT for continuing operations, and therefore significant items, was $ 167 million, $ 96 million lower than the prior period.
Lower market volumes for the Materials and Distribution divisions were the most significant driver of the earnings reduction, resulting in an $ 80 million adverse EBIT before significant items half on half. This deleverage of lower volumes is evident in the EBIT margin, which was softer in the half, down to 4.7% from 6.8% in the prior period. As we've previously communicated in detail, we recorded a provision of $ 170 million relating to the Western Australian industry response, which is addressing the plumbing failures impacting some WA homes constructed using Iplex Pro-fit pipe. In addition, Tradelink discontinued operations incurred a non-cash loss of $ 58 million, mainly due to a foreign currency transaction reserve reclassification. This resulted in a net loss for the group of $ 134 million in the first half of FY25.
Our cash flows were impacted by the lower earnings, with trading cash excluding legacy and significant items of $ 138 million compared to $ 225 million last year. The $ 700 million capital raise was applied to repaying bank debt and reducing USPP debt, resulting in net debt of $ 1.1 billion at the end of the half-year. Having commenced my role in September last year, on slide six, I outline our three critical areas of focus. As I mentioned at the start, we are now through the governance and leadership reset. With the appointment of industry experts, we have hit the ground running to continue to de-risk the business, drive the reset of Fletcher Building, and manage our through-the-cycle performance.
Coming to our strategic priorities, the board and management are currently conducting a strategic review, which includes the shape of the portfolio, the appropriate operating model, and a capital structure review.
Although we cannot yet give much detail on this, we can say that in general, we will reduce corporate overheads, increase focus on our strategic business units, and look to take advantage of higher growth markets. While our capital raise has resulted in a more robust balance sheet, we continue to manage cash carefully. All ERP projects are on hold, and a review of CapEx carried out has resulted in the delay, pause, or the acceleration of some projects. Our Cost-Out initiatives have resulted in a better than originally expected first-half benefit of around $ 91 million, $ 61 million from general overheads, and $ 30 million from COGS. Our original target was a gross Cost-Out for the year of $ 180 million, split 40/60, first half versus second half. However, given the run rate we've already achieved, we now believe we can do better than that.
Meanwhile, we remain unwavering on our focus on our customers and the safety of our people. On slide seven, we provide an update on how we are progressing on our near-term priorities, which we outlined at the time of the capital raise in October last year. So, our board renewal and the Tradelink sale are completed. Meanwhile, the industry response to the Perth plumbing matter has been set up and is working to plan. To recap, we initiated the industry response not only because it was a more appropriate solution than the product recall, but also as a means of providing respite to WA homeowners affected by the issue. All major builders of homes other than BGC have signed up and have begun attending to the agreed work program.
Given its early days with the rollout of the industry response, we won't yet provide detail apart from noting that costs and cash flows to date are running in line with expectations. We'll provide an update at the end of the year, and as we have noticed previously, litigation is in process and the risk of loss remains, but because the evidence points to installation as the root cause of the issue, we will continue to defend our position. With respect to the three key legacy projects, we are pleased to have substantially completed the NZICC building and are now in the complex commissioning phase. To give you an idea of the complexity of this commissioning, consider that the convention center is 32,000 square meters over seven floors. It has exhibition capacity for 3,150 and theater capacity for 2,850.
There are 600 lineal meters of movable walls, which can form 26 separate enclosures, each requiring independent multi-service controls. The AV system has 32 projectors and screens, 15 LED walls and 66 LED screens, and 450 kilometers of fiber optic cable, and the most stunning thing for me is that the number of man-hours spent on the project was 4.8 million pre-fire, with a further 9.4 million post-fire. For Puhoi to Warkworth, the arbitration and other processes continue in search for resolution, and we're still confident of our provisioning for this. On Wellington International Airport, we've recently agreed a rectification methodology with the client's engineer and expect remediation to commence shortly. On cost reduction, as I mentioned, we're ahead of target, and Will will cover this off in more detail.
As already mentioned, we've carried out an in-depth review of our in-flight growth CapEx spend program and are excited about the growth opportunity at our Laminex Taupo plant. Once completed, we will offer a new board product for the New Zealand market, which has superior strength, is moisture resistant, and has a better surface finish than the existing particle board offer. Meanwhile, our new Firth Auckland Ready Mix plant is nearing completion and will eventually replace the old port site, which is coming to its end of use. As part of the CapEx review, we've decided to pause the new frame and truss plant at Felix Street, and whilst we consider the other options, such as utilizing another plant in Auckland, this alternative may allow us to save CapEx and release surplus property for sale.
We continue to engage with third parties on potential funding models for our residential development division, and on the group portfolio as a whole, we'll update the market prior to our investor day in June. Finally, we've lodged our defense to the Commerce Commission's claim against Winstone Wallboards, and we are confident we have a strong defense. Moving on to our non-financials, firstly covering sustainability on slide eight. Improving the sustainability of our operations is an ongoing process. On the right-hand side of this slide, we provide a number of photographs of examples from across our operations. These include the ongoing substitution of coal at our cement plant with the use of wood waste and end-of-life tires, supplemented with disposal of unused COVID PPE and the use of biomass-based industrial sludges.
This has substituted around 55% of the plant's coal requirements, which has resulted not only in the diversion of 46,000 tons of waste from landfill during the period, but also reduced process CO2 emissions by 50,000 tons. Meanwhile, Laminex Australia has started energy generation from their new solar roof installation, and Pacific Coilcoaters, our coil painting operation in Auckland, has achieved higher than expected carbon reduction by changing from gas to infrared ovens. Overall, our greenhouse gas emissions continue to fall, and we've achieved a 20% reduction since FY18 of carbon intensity. During the half-year, we published our 2024 climate statements, and we continue to be included in global indices for sustainability. Moving to slide nine and the importance of our communities and our people to our future success.
We wish to be a workplace where everyone belongs and nobody is discriminated against, and I'll talk briefly about some of the things we do to try and achieve this. Our Australian team have completed the action set out in their Reflect Reconciliation Action Plan, or RAP, and submitted their Innovate RAP to Reconciliation Australia. This is an important milestone in their reconciliation journey and demonstrates their deep commitment to building stronger relationships with First Nations communities. At Higgins, our new bitumen tankers are decorated with drawings of our workers made by their children. The design helps promote the importance of family and reinforce a positive culture of health and safety. Our Women to Leadership program, initiated in 2024, helped 55 women in their leadership journey through a structured mentoring program by internal male and female mentors.
This has proven to be an outstanding way to build strong relationships across the business. We're also proud of the way we contribute to the community in different ways. For example, Concrete is partnering with the Backcountry Trust to restore 30 iconic huts used by outdoor enthusiasts across New Zealand. PlaceMakers supported New Zealand's Olympic Team's Paris campaign, and we supported seven First Foundation scholars and two TupuToa interns to carry out invaluable work experience. All these efforts are summarized here, so the metrics noted on slide 10. Our culture of workplace safety continues to improve, and we will remain committed to personal and team safety. As already stated, at the half-year, we achieved our lowest ever injury rate with a TRIFR score of 2.8, putting us close to the global top quartile and showing what is possible when we work together with a sense of purpose.
I cannot stress enough what an achievement this is. Meanwhile, in spite of the tough market, our focus on the customer has delivered strong outcomes, and we have achieved a net promoter score of 57 for Fletcher Building as a whole. This greater emphasis on our customer is leading to better outcomes for our people. Our people feel a greater sense of achievement in meeting or exceeding our customer needs and expectations, and this sense of achievement is part of the improvement in overall employee engagement. In January, we reached our target eNPS score of 40, which is world top quartile. Moving now to slide 11 and just to reiterate some of the points made at our annual shareholder meeting late last year. We are currently experiencing one of the deepest and most prolonged market downturns in recent history and one that is affecting all of our business and industries.
Although we had expected a pullback from FY23 and FY24 activity levels, the reality is the market turned down more quickly and more deeply than we, our customers, and our external economics advisors had anticipated, and the impact on our financial performance has been significant. Fletcher Building is clearly not alone in facing a difficult macro environment. However, we are particularly exposed to residential Construction activity levels in our markets, as noted at the bottom of this slide, with 50% of our revenue weighted to residential Construction across New Zealand and Australia. These charts show the material decline of between 30%-40% in New Zealand and Australia's residential sector activity from their respective market peaks to December 2024. To give you a sense of scale, this decline is greater than we experienced in the GFC.
In addition to the volume decline in the residential sector, we're also seeing a marked slowdown in commercial and infrastructure Construction in New Zealand. Based on past building cycles, we might have expected those markets to continue to provide some support at this stage in the cycle, so this is not typical. Additionally, we have faced an environment of ongoing cost inflation. All of these factors weighed on our financial performance in the first half year and are continuing to put pressure on our business as we go into the second half. Turning to slide 12 and looking into a bit more detail at the financial performance across the group and the next few slides.
Revenue, profit, and margins were under pressure for the group during the half year as our businesses continued to deal with the declines in market volumes, particularly those heavily exposed to the residential sector. In the New Zealand Materials and Distribution divisions, down 5%-10% half year on half year, some businesses benefited from major projects like the Auckland Airport expansion project. Meanwhile, in Australia, market activity continued to decline sharply, down 15% year on year. Our Residential and Development division reflected the overall housing market conditions in New Zealand, with 115 fewer units contracted and sold versus the prior period. This slowdown was a continuation of what we saw at the end of FY24 and was driven by greater caution among prospective home buyers as the New Zealand economy deteriorated.
Pleasingly, the Construction division reported improved revenue with higher work volumes arising from key infrastructure projects at Auckland's Eastern Busway and Auckland Airport and a number of roading projects. First half revenue, before significant items and from continuing operations, included $ 12 million of additional cost in Concrete, which had previously been flagged. Group return on funds declined to 8.4%. Whether this is the measure we wish to use going forward forms part of the capital structure review currently underway. The divisional revenue and EBIT performance is summarized on slide 13. Clearly, our margins were impacted by the macroeconomic backdrop, strong competition, and the deleverage effect of lower volumes. This was particularly evident in distribution, which reported a disappointing result.
Through our Residential and Development business, we have started seeing tentative signs of improvement appear following the first OCR cut late in the period, with sales up 17% between September to December as compared to the July to August period. While our residential exposed divisions have been affected by the market slowdown, Construction has been a particular highlight, delivering EBIT of $ 20 million in the first half year. There are more details on the divisions in the appendix to this presentation, as well as in our interim report published today. Moving to slide 14 and on to cash and leverage. Within the prevailing challenging market positions, we've remained focused on ensuring robust cash flows. Group trading cash outflows were $ 40 million compared to an outflow of $ 148 million in the prior half, mainly due to lower legacy outflows.
Excluding legacy and significant items, trading cash flows from continuing operations were $138 million compared to $225 million in the prior period. CapEx for the half year was lower overall as we reduced our base CapEx spend and, as I've mentioned, net debt reduced to $1.1 billion and the leverage ratio moved to 1.4 times. On slide 15, after taking into account the WA plumbing provision and the Tradelink loss, the group net loss for the last half year was $134 million. Following from this, the basic earnings per share were negative $0.143. Given the current volatile market conditions, our lender agreements, and in line with the company's dividend policy, the board has made the decision not to declare an interim dividend. I'll now hand over to Will Wright, who will take you through the details of our financial results for the year.
Thanks, Andrew.
Good morning, everyone. Moving to slide 17. Andrew's covered off the key points on the income statement, so just a couple of points to add here. Our funding costs were $ 63.5 million and slightly higher than the prior corresponding period. However, the debt repayments occurred at the end of the half and will result in lower funding costs moving forward. We expect funding costs to be in the range of $ 100-105 million for the full year on a net basis, with approximately $ 10 million of capitalized interest to the balance sheet. On tax, we posted a benefit from recognizing the WA industry response provision. Cash tax for the 2025 year is expected to be less than $ 5 million. This is due to the timing of cash flows related to the previously provided for legacy projects, which are only deductible when incurred.
On slide 18, more detail on the drivers of half-on-half performance on a continuing basis are given. The first four drivers in the chart relate to the Materials and Distribution divisions, with the most significant impact being the drop in market volumes, which resulted in an $ 80 million adverse impact. The market share impact of $ 8 million relates to decreases in share in PlaceMakers and Stramit, partially offset by gains in Building Products. Competitive pressures on pricing and variable cost inflations, such as electricity costs, resulted in a $ 54 million decline in gross margin. This was partially mitigated by Cost-Out initiatives such as changes in shift patterns, site closures, and extended shutdowns. Residential and Development's gross margin was lower, with 115 fewer units sold in the period and with margin compression due to a combination of mix and lower prices year on year.
Meanwhile, Construction had an improvement in gross margin of $22 million, with higher volumes of work and improved margins. On the right-hand side, we show the overheads impact across the group. Cost reduction initiatives provided a $61 million benefit on a gross basis. This was driven by headcount reductions, rationalization of facilities, and a reduction in discretionary spend. We remain focused on delivering our $180 million gross cost reduction target for the year, and we are pleased to be ahead of that target at this point. Turning to slide 19, as Andrew has outlined, we remain focused on delivering improved cash flows. Trading cash flow for the group prior to legacy Construction and significant items was $138.5 million and was below the prior period, mainly from lower trading performance. Working capital, while subject to the usual seasonal movement, was well controlled.
In Residential and Development, we brought approximately $40 million of land on balance sheet from commitments made in prior periods, and we carefully managed a housing WIP. Construction's result included the benefit of advances on new work won, as we see improving business performance on cash management in the go-forward business. Working capital across our material and distribution divisions saw an improvement in debtor and inventory days in the half compared to the prior half. In Construction, legacy projects' cash outflows were $134 million, mainly from NZICC. Legacy outflows are also the key driver of low cash tax payments, which were $2 million for the half. Cash flows from operating activities were an outflow of $5 million for the period compared to an outflow of $126 million for the prior corresponding period. This reflected a reduction in legacy project cash flows as NZICC nears completion.
On slide 20, net CapEx and investments in the half were 114 million. Base CapEx was 47 million, well below the prior corresponding period, and maintained under tight control. As Andrew already outlined, we reviewed some of our capital investments. Our Laminex Taupo plant is tracking well to the planned program of works and is on track for the first board in FY27. We have paused our frame and truss project and are reviewing more cost-effective and flexible options. Offsetting the capital spend was the receipt of 53 million from the disposal of land at Papakura, which currently houses the steel purlins mill. Andrew and I have undertaken a full review of capital expenditure and expect the full year CapEx to be circa 355 million, inclusive of two million of Tradelink CapEx, approximately 15 million of Vivid Living investment, and 10 million of capitalized interest.
On slide 21, a closing net debt for the group was $ 1.1 billion. The improvement principally reflects the equity raised during the half, as well as the divestment of Tradelink, the 50% sale of FCC Fiji, and the sale of land. This was partially offset by working capital rebuild, continued legacy Construction outflows, and the ongoing above base CapEx program relating to the previously discussed projects. We remain focused on reducing debt levels further in the future. Material second half debt reduction will be dependent on the timing of settlement of claims and insurance on legacy projects and the release of working capital in our residential business. On slide 22, you'll see that the capital raise has resulted in an improved leverage ratio of 1.4 times. The leverage ratio is calculated as net debt divided by EBITDA pre-significant items.
Importantly, no adjustments have been made to the numbers presented in the stat accounts. Additionally, we show that when lease liabilities are included in the net debt, leverage increases by two times to 3.4 times. The impact of leases is shown by the dotted line in the chart on the left-hand side of the slide. As we carry out our capital structure review, we will look to determine the appropriate financial settings that we need to deliver on our strategy and provide additional guidance to the market on where we see an appropriate level of debt for Fletcher Building over the medium to long term. As shown on this slide, the position against our key banking covenants, which are calculated on a pre-IFRS 16 basis. We announced in June last year amended covenants through to the end of calendar year 25.
The group was in compliance with all financial covenants during the half year and at balance date. Slide 23 shows the current group funding profile with around $ 2.1 billion of total facilities, a reduction from $ 2.8 billion at year end. During the half, we repaid $ 680 million of borrowings. This included a repayment and cancellation of the group's $ 400 million club loan, partial repayment and cancellation of $ 169 million of USPPs, and repayment of $ 111 million of our syndicated bank facility. Average maturity of the group's debt at 31 December was 2.7 years, with 52% of all borrowings on fixed interest rates. The average interest rate over the half was 6.1%, excluding line fees. I'll now hand back to Andrew to conclude on broader outlook.
Thanks, Will. Now looking forward to the remainder of the year on slide 25.
As we outlined in September and then again at our annual meeting in October, we continue to expect FY25 market volumes in our Materials and Distribution businesses to be circa 10%-15% lower than FY24. We also expect FY25 EBIT for significant items to be circa 60% weighted to the second half, mainly due to three factors. Firstly, cost savings of at least 180 million are expected to be circa 60% weighted to the second half. Secondly, we expect seasonally higher second half house sales in Resi and Development, with approximately 170-180 more settlements expected when compared to the first half. Thirdly, we incurred some $ 20 million of one-off costs in the first half, which relate to the outage of Golden Bay's cement transport ship, the MV Aotearoa, NZ electricity, and restructuring initiatives, which are not expected to reoccur in the second half.
The key downside risks to the outlook are further deterioration of Materials and Distribution market volumes and/or lower than target house sales. Before we move to Q&A, I'd like to highlight here the fundamentals of our business on slide 27. I am, on the whole, very pleased with the competence of our staff and general managers within Fletcher Building, but more importantly, our businesses are largely operating as empowered strategic business units. This is patently of huge importance as a group as diverse as Fletcher Building relies on good quality people making quality decisions close to their customers in order to meet and exceed their expectations. Finally, despite all the noise and distractions, the fundamentals of the business remain sound and we're well positioned to deliver through the cycle.
We operate in attractive markets with favorable long-term dynamics and demand tailwinds, and our ability to capitalize on these opportunities can be driven by a leading portfolio of businesses. We have well-positioned quality businesses, and we have strengthened our balance sheet, which allows us to focus on executing operational and strategic initiatives. Finally, on slide 28, our markets offer other benefits, such as the requirement for quality infrastructure, large housing footprints, and a significant housing deficit. I'd like to wrap up by reiterating my fundamental belief in the strength and resilience of our businesses and the capability of our people and teams. I would like to provide a word of sincere thanks to our people and the tremendous amount of work undertaken in the current challenging climate. There are many achievements, examples of achievements across the Fletcher Building group, and we are proud of them.
And with that, I'll now hand back to the operator to run through your questions. Thank you.
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. Please note that we ask in the interest of time to limit yourself to two questions. If you have more questions, you may rejoin the queue. Your first question comes from Grant Swanepoel from Jarden. Please go ahead.
Thank you. I'll ask my big question first then. So it's a year ago now that the CEO and chairman fell on the sword for something that was going wrong in the company.
You're not talking about driving a reset, but you haven't told us what was going wrong within the company and to wait until June to find this out. Is that not a bit lazy?
I'm not sure you'll ever necessarily find out what was going wrong. I don't think it's of advantage to turn around and keep looking back. We have to look forwards and where we want to take the business, and that's what we're doing.
But is there nothing in the communication between divisions or the processes that were corrupted that caused the outcome that occurred last year?
I can't answer to that because I wasn't here.
What I do know is that I came on board as a director of Fletcher Building in an effort to ensure that there was no gap or distance between management and the board and to ensure that the communications and desires of both parties are adequately understood and acted on.
Okay. Thank you. And then just one on slide 18, it talks about the NZ distribution and division. It's down 5%-10%. The 10%-15% that you talk about in your outlook statement that has occurred in the past six months, is the difference between that and a market share loss or am I missing something?
There has been some market share loss, yes.
Thank you. And if I can just ask one more question just on development gains, is there anything penciled into the second half?
I couldn't catch that, sorry.
The development gains?
Any development gains in the second half?
At the moment, we're currently doing a review of the property portfolio at the moment, so it's a bit early for us to say.
So not included in your 40/60 split, or is it included in that?
Not at this point in time.
Thank you very much.
Thanks, Rob.
Thank you. The next question is from Rohan Koreman-Smit from Forsyth Barr. Please go ahead.
Good morning, guys. Thanks for taking my question. Just maybe following on from Grant's a little bit, but changing it a little bit. When you look at your review of the operating model, and I think you've previously said, Andrew, that you think the divisions are operating well, but what sort of improvements do you think you need to make to deliver on the customer and pricing focus?
I just noticed that particularly around pricing, there's lots of comments here about you having to drop pricing to gain market share. So pricing doesn't seem to be a huge focus at the moment, but just wondering if you could talk us through, I guess, structural changes or anything that you kind of can give us on that operating model side of things.
It's too early to be able to comment in detail on that. It is a significant exercise that we are undergoing at the moment, and it does require time to be able to come up with a conclusion for it. All I can say in general is that, as you know, my view is that the business happens at the business unit end, and we want to ensure that that's the bit that we're doing well.
Do you think from your go-around of the divisions that the appropriate people at the customer end have the, I guess, individual power and a license to make decisions? Do you think that's kind of how the structure's focused, or do you think that it's a bit more top-down in terms of some of those customer focus?
We have an active program in the business of the NPS and that promoter score. Now, and that promoter score may not be perfect, but it does actually allow you to identify where you have areas of customer weakness. And on the whole, our customers rate our businesses, and we use that to turn around and identify the businesses which may need some shoring up and some support. So on the whole, I'm happy that we are empowering our businesses at the front end to turn around and absolutely exceed their customers' expectations.
I'm conscious of time and question limits, so I'll jump back in the queue. Thank you.
Thank you. The next question comes from Stephen Hudson from Macquarie Securities. Please go ahead.
Morning, guys. I'm just thinking about my two questions. Maybe if I just kick off with PlaceMakers. I guess my understanding in the past has been sort of continuous process businesses like Golden Bay Cement and Wallboards and some of the extractive businesses in your portfolio have probably had the highest operating leverage. And so looking at the PlaceMakers' results, I think we've sort of seen a 7% decline in revenue, but close to a 90% decline in EBIT. Can you just step us through what's actually happening in that business?
Look, so firstly, it's all leased sites, so the operating leverage is high fixed cost anyway.
Secondly, we've lost some market share, and we became inefficient in delivering frame and truss. And if you don't deliver frame and truss, you tend not to get the household balance of houses, as it were. And thirdly, in history, we seem to have moved a bit away from the operating model that included JV partners. And the advantage of JV partners is that they are absolutely focused on their business and have skin in the game. So corrective actions we're taking at the moment is there will be some Cost-Out exercises. There is a greater focus on supplier relationships and understanding how they work, and there will be a change or an increase, I should say, in the number of JV partners that we have in place going forwards. And fourthly, we have now got some real expertise in the business in frame and truss manufacture.
Okay. Thanks, Andrew.
I suppose my second question is just around the cycle. Are you absolutely convinced that we're sort of at trough volumes because there's lots of indicators that suggest that we're much closer to mid? It looks like consensus is sort of buying your story, that they actually have you running sort of twice the EBIT run rate by the middle of next year, sort of an $ 600 million kind of consensus number for FY27. Clearly, the market is thinking there's going to be a sharp bounce back in volumes and/or operational improvement. I just wondered, at a very high level, are you absolutely convinced that you can make those operational improvements and see those sort of volume improvements across your business?
We're not forecasting it to be boom times in the second half of this financial year.
We think it's very much bouncing along the bottom, to be frank. The OCR cuts may have come through late last year, but it still takes six to nine months before they start to hit the market and you see volumes increasing. So we're at the moment just saying the market's volatile. We have downside risk in the materials volumes or in Resi and Development. So we're comfortable with our guidance for the second half, but we're not forecasting boom times.
Okay. Thanks, Andrew.
Thank you. The next question comes from Ben Karadimas from MST Marquee. Please go ahead.
Morning, Andrew and Will. Thanks for taking my question. Again, just following up from Grant's question a little bit. So you noted on slide 12 that New Zealand volumes were down 5-10% in the first half, but wood volumes were indicated as down 10-15%.
So it implies a pretty sizable improvement in the second quarter. So just wondering if this improvement has carried into the third quarter to date and why you continue to guide to volumes being down 10%-15% given this improvement.
Sorry, I'm not sure I follow your question.
Yeah. So just given that the first half decline in New Zealand volumes in Materials and Distribution was down 5%-10%, and the guidance that was given at the AGM of the first quarter volumes being down 10%-15%, it just means that the second quarter, there must have been a pretty sizable improvement relative to the first quarter. So just was that improvement sustained in third quarter to date and why we're still going to down 10%-15% given that?
I wasn't here at the AGM, but it could have been that they were speaking to across the group, and there are some areas where we see volumes down 15%, such as in Australia where market volumes are down 15%, although our businesses are only down 13% in Australia, and then there's a sort of a range of volume outcomes across the New Zealand businesses as well.
Okay, and then just on NZICC, I appreciate the comments made about the complexity of commissioning currently underway, but there was a comment made at the AGM that there's a fair degree of confidence of no further provisioning for NZICC, so I just wanted to explicitly confirm that that is still the case.
Yeah, as we're still comfortable with the provisioning on NZICC.
Okay. That was all for me. Thank you.
Thank you.
The next question is from Phil Campbell from UBS. Please go ahead.
Yeah, morning, everyone. Just a question for Will, just around the working capital management. Talking to kind of industry players, they indicate that the IRD has got a number of claims against builders for late payment or no payment of GST. So I was just kind of wondering how you're kind of managing that into the second half. I think the commentary in the first half is you seem to have managed that pretty well, but yeah, just be interested in your comments on that point.
Yeah, look, we've got a credit management team that work pretty closely with our customers. So we haven't seen an elevated level of bad debts, although in December we did see a couple come through, but it's probably at about normal levels at the moment.
But are you hearing the same type of stuff in the industry that there is quite a bit of potential GST risk around some builders?
Well, there's definitely distress out there. Now, that doesn't necessarily just relate to GST. I think there are people who are feeling the pain of the current environment for sure.
Right. And then just the second one, just on the guidance, because obviously if I take the $ 167 million of EBIT and divide by 0.4, given the 40%, 60% first half, second half, it gives me a full year EBIT of $418 million, I think, if I'm asked this correct. I suppose the question was why you didn't provide any guidance, like a range, like a $ 400-420 million or something like that, rather than doing it that way?
Because we still think the market is very volatile, and we are comfortable guiding to and understanding our continuous disclosure requirements, but we still see the market as tough.
Okay, great. Thanks.
Thank you. The next question is from Saurav Vishnupad from Bank of America. Please go ahead. Pardon me, Saurav, your line is now live. Please go ahead.
Hey, Andrew, Will, how are you? Thanks for taking my question. I had a quick just follow-up on the volume question. Just starting with New Zealand, as we've gone through the third quarter, do you think just the volumes maybe, if you compare that to the second quarter, have they sort of remained stable, or do you reckon they've worsened or improved versus the second quarter?
And look, I ask that when we speak to some of your competitors or companies generally, there appears to be a sense that things are improving, but just keen to get your thoughts on that. And also, if you could just give a similar commentary on Australia. Thank you.
Sorry, I'm not sure what you mean by Q3. You mean the quarter we're currently in?
Yeah.
Yeah. Okay. So it's pretty early in the year at the moment. In New Zealand and Australia, January and February are pretty tough months to really take a read from. A lot of people take holidays. There's a lot of public holidays as well. So what I can say is in New Zealand, probably we saw builders come back early to work.
That was probably a reflection of some of the distress in the building sector here and that they needed to get back to work and so didn't take extended holidays, but that's purely anecdotal, and then in Australia, we saw builders take extended holidays and take advantage of the good summer that they're having over there, so we probably won't get a decent read on sort of the quarter and how things are tracking until March is probably the first time.
Great. Thank you. And do you reckon similar for Australia?
Yeah?
Yeah. Thank you.
Thank you. The next question is from Nick Dale from Barrenjoey. Please go ahead.
Good morning, Andrew and Will. Thanks for taking my questions. Just the first one on Concrete. Just keen to understand how you're seeing volume in the commercial and infrastructure end markets.
Maybe if you could sort of comment on the quantum of the year-over-year decline in those end markets relative to residential. And then also the timing and materiality of the sales into the new airport project. Thanks.
That's a pretty detailed question. So I think, I mean, concrete volumes are down year on year, but don't appear to be worsening. We have picked up market share in Auckland, and part of that is a result of that Auckland Airport project, which we've been busy on since October time, I'd say, and we're just accelerating its endpoints now. I'm not quite sure what else you wanted to ask about that. Oh, Will, have you got something to add?
Oh, look, what I'd say is volumes are actually holding up pretty well in our Concrete business, but it's pockets.
Specific projects in particular that are holding up well, as well as us picking up share off competitors as well. I think our locally manufactured product puts us in a good stead versus imported product at the moment.
Thanks. That's helpful. And then maybe just back on distribution. I think you said in 2018 or 2019. I appreciate that was before you were with the business, Andrew, but your market share was around 30%. Where do you sort of assess the market share of the business now? And I guess going forward, to what extent do you think you're willing to continue flexing price in order to sort of retain that share?
Yeah. Well, I mean, first off, you have to remember that the distribution sector is overserviced at the moment given the level of activity that's going on.
I think the market share at the moment, it meanders between, let's say, 25% and 27%. And my expectation is that as we get better at the frame and truss and better at delivering to our customers' expectations, I think we'll end up growing market share.
Okay. Thanks. And then just a final quick point of clarification, if I can. Just in the presentation, you talk about targeting $ 180 million in total gross cost savings in FY25. Yet in the financial report, it sort of says you're targeting more than $ 200 million in total cost reductions. So maybe you could sort of just help us understand what the difference is between those two numbers.
Okay. So when we went into the program, we were targeting the 180, but as we're seeing us overachieving, it's taking us up near the 200.
Okay. Thanks.
Cool.
Thank you.
The next question is a follow-up from Grant Swanepoel from Jarden. Please go ahead.
Thanks again. Just to follow up on the Cost-Out program. So with a 40/60 split, does that mean we've got quite a nice run rate into FY26 on reduced costs? Second question is on the market value that you normally give in your residential business that's above book value. Can you disclose what it is at this point in time? And if you're not going to disclose it, can you just let us know that you're not going to disclose it into the future? And my final question is, do you have any new idea of what it costs to fully repipe a house in New South Wales, or is it still too early? And I think you guys had indicated that we possibly could get that at the year end.
And is that still on track for that disclosure? Thank you.
So Grant, can I just clarify? You said New South Wales. Do you mean Western Australia?
I mean Western Australia, obviously.
So I haven't got the absolute number to hand, but I know that the work we are doing there is coming in cheaper than we had originally forecast.
That is a major data point for risk for this company. Could we ask if you disclose it as soon as you're comfortable around that number?
So I think we've already said that we'll be at the full year, we'll be turning around and getting an analysis. Don't forget, the industry response has only been in place since November. They had their Christmas break and their builders off. So I don't think we've got meaningful. So I will back up what I just said.
I know that what we have done has come within the parameters we've planned, but I don't think we've got meaningful statistical data at the moment and probably won't be getting that through until the end of the year.
We've only spent AUD 5 million in Western Australia, and the bulk of that is in the rolling out of leak detectors. There's actually been very minimal works completed at this point in time.
Thanks.
So now, sorry, I think that was the third part. Okay.
And then just on the Resi market value versus book value, the delta at the moment is 160. Happy to disclose that. Happy to discuss in more detail with you as well offline.
Thank you.
Thank you. The next question is a follow-up from Rohan Koreman-Smit from Forsyth Barr. Please go ahead.
Hi guys.
Just going back to the cost out, I noticed that you said that the ERP projects are all on hold and you're doing a review of future requirements. How much of the cost out savings to date have been basically just stopping the ERP projects? And I guess, when do you expect to have a view on when that cost will need to kind of start to be incurred again?
Yeah, thanks. Not a significant portion of the cost out relates to the ERP projects. Essentially, a lot of that ERP spend was capitalized. The components that are not capitalized still continue, such as licensing costs. So it's not a huge contributor to overall cost out on a P&L basis, but from a cash perspective, it's important. I think the second part of that question was, when do you expect it to restart? Is that right? Sorry.
Yeah.
Yeah.
Look, we're continuing to do a review of what's appropriate from an ERP perspective moving forward. We're just sort of at the start of that. What we have is probably a collection of relatively small businesses on a global scale. And so we need to make sure that we're putting in ERPs that are appropriate for the scale of our businesses. And so that's probably the lens that we're taking as we review that ERP project.
Thanks. And then just one question for Andrew. Do you think, this kind of goes back to one of my earlier questions, but do you think that senior management has sufficient ownership of targets within their divisions on current remuneration structures?
Yes, I do. They're highly motivated by their STI and by the numbers that are produced to support that.
Okay. Thank you. Cool.
Thank you. There are no further questions at this time.
I'll now hand back to Mr. Reding for closing remarks.
In which case, I'd just like to say thank you all very much. I appreciate you joining our call and look forward to talking with many of you over the coming days. So thank you very much indeed. Much appreciated.