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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and welcome to the Fleetwood Corporation 2020 Half Year Results Conference Call. [Operator Instructions]Please be advised that today's conference is being recorded. I will now hand the conference over to your first speaker today, CEO and Managing Director, Brad Denison. Thank you. Please go ahead.
Thanks very much, and good morning, everyone. Thanks for joining us today. And look, we understand this is a busy time of the year for everyone, so we're going to try and keep today's presentation fairly targeted. We'll start off with a brief review of first half results, and then we'll spend some time discussing our forward strategy and the likely factors that will impact our near-term results. So could I ask you to just turn to Slide 2 now, please? And first up, you might have noticed that we've been through a review of branding in the group recently with the company now known as Fleetwood Australia and the 3 segments referred to as Building Solutions, Accommodation Solutions and RV Solutions. I'm not going to dwell on this too much because it's probably more of an important factor for how our customers see us rather than for investors, but that's how you'll hear us referring to the segments as we move forward. So moving to Slide 3. And as you know, we sold our Caravan Manufacturing business last year, and we now have a solid 6 months of results that are essentially clear of the impact of those losses. The statutory net profit has risen significantly. However, our continuing business EBIT (sic) [ EBITA ] is down on the previous corresponding period due to delays in formal awards of 2 key projects, and those were both announced recently and work has commenced on both of those projects in January. Additionally, in New South Wales, although there is still a substantial number of prison cells to produce for the state government, there weren't any live orders in the first half. On a positive note though, we were able to replace that volume with work in other channels. However, it was at slightly lower margins. The group has net cash of $29 million at the end of December. However, over the next couple of months, we will see that position eroded to a degree as the 2 major projects we announced come into full swing. Our target EBITA for FY 2020 is similar to 2019, but as I said, with the 2 large projects pushed out, that gives us volume as well well into next financial year. If we turn to the next slide now, Andrew will talk through our first half earnings.
Thanks, Brad. Please turn to Slide 4, the slide titled Group Earnings Summary. As Brad said, the EBITA result was principally driven by the timing of major projects in Building Solutions, as announced at the AGM, partially offset by a strong result from the Accommodation Solutions business. EBITDA grew by 5% and benefited by $3.7 million as a result of the adoption of the new lease accounting standard. Excluding this impact, EBITDA would have been $17.0 million. Overall, the adoption of this accounting standard resulted in EBITA increasing by $100,000 and pretax profit falling by $200,000. There's a full reconciliation of the impact of the adoption of this accounting standard in Note 9 of the half year report. The group EBITA result also benefited by $1.7 million from the reassessment of an earn-out provisions as detailed in Note 11 of the accounts. Our accounting tax rate is marginally higher than the statutory rate due to nondeductible share-based payments expense. As Brad said, discontinued losses reduced substantially and in line with reduced activity levels in the Caravan Manufacturing business. We currently have approximately 100 vans remaining and less than 10 staff, mostly handling warranty runoff. Overall, we saw a statutory net profit up 98% for the half to $6.2 million. Over to Slide 5, which details our EBITA performance by segment. In Building Solutions, the result was predominantly due to the timing of major projects in both periods. While the Koodaideri project for Rio and the Hansen Yuncken project in New South Wales were very good wins for Fleetwood, both opportunities took longer to gestate than anticipated. As a result, revenue and earnings for these projects will be pushed into the second half and next financial year. In contrast, the first half of fiscal year '19 benefited from higher activity levels in the correction sector. Additionally, given the scale of upcoming projects, substantial business and market development costs were incurred in the half, totaling over $2 million. These related to design, travel, estimating as well as direct bid costs. High activity levels in Queensland were experienced during the half, driven by the education sector. However, volumes remain low in the affordable housing sector, following changes in ownership to 2 of the company's major clients. Despite the Koodaideri project win in Western Australia, the resource sector remains patchy in part due to an overhang of secondhand buildings. The outlook for the second half is stronger with high levels of work-in-hand in New South Wales and Western Australia. Education demand is expected to continue to support activity levels in Victoria and Queensland. A new branch has been opened in South Australia off the back of education demand in that state. Given the creation of a national network of manufacturing facilities, the organizational structure will now be flattened in coming months. Accommodation Solutions continue to benefit from increased occupancy at Searipple Village in Karratha. This was as a result of higher-than-anticipated shutdown-related demand and the resolution of a contractual variation to the customer. Earnings from Osprey Village was stable as expected. Given the weighting of major shutdown bookings to the first half, we currently expect EBITA in this segment to be lower in the second half. Despite additional village capacity likely to come online in calendar year '20 and '21, a number of planned resource sector projects has the potential to positively impact accommodation demand in the Karratha region.RV Solutions continues to operate in a tough environment for locally built caravans with the Australian OEM market down 13% over the half year. However, the business reduced this impact by continuing to focus on the aftermarket. Solid revenue gains were achieved through new relationships with large retail outlets. NRV revenue performed in line with the OEM market on a full 6-month basis with market share gains offset by pricing pressure. The strategic intent of this acquisition was to increase integration with our OEM customers in Melbourne with a focus on hedging the company against the greater mix of imported product now entering the market, requiring Australian licensed gas and plumbing fit out. The OEM market was further mitigated by an 8% reduction in operating costs across the business. Excluding the associated restructuring costs, this would have been over 10%. The second half result is expected to benefit from the full half year run rate of these savings. Over to Slide 6, cash flow. Cash flow from operations of $3.4 million was below the previous period's cash flow of $7.8 million. Working capital use was driven by the start of major new projects in Building Solutions towards the end of the half and high activity levels in Accommodation Solutions. Cash outflows from discontinued businesses fell substantially, in line with the wind down of activity in the Caravan Manufacturing operations. During the half year, the dining room at Searipple underwent a major renovation in preparation for increased activity levels. Overall, CapEx in FY '20 is expected to be similar to FY '19. The acquisition cash flows represent the MBS and NRV earnout provisions paid in cash. Following the introduction of the new lease accounting standard, rental payments have been reclassified from operating to financing cash flows. Please turn to Slide 7, balance sheet. As discussed, working capital use was driven by the start of major new projects in Building Solutions towards the end of the half and high activity levels in Accommodation Solutions. Despite this, we largely maintained our cash position, which ended the half year at $28.7 million. Importantly, the group has access to $65 million in funding facilities. Return on capital employed was 12% annualized for the half year, and this compares to our internal target of 15%. I will now hand back to Brad to discuss the strategy and the forward outlook for the group.
All right. Thanks, Andrew. So if I could just ask you to turn to Slide 8, and we'll just talk briefly about forward strategy. So the modular industry in Australia is really in its infancy when you compare it to other countries. In Europe and the United States, up to 10% of all construction is executed in a modular format. And here in Australia, it's only around 3% at the moment. So we've spent quite some time learning from these overseas markets, and we started a journey of adapting traditionally in situ-built construction towards modular across the country. And so far, we've had pretty good success in what we call permanent modular schools, and there are photos of some of those projects throughout the presentation slides. And we also won a worldwide award for the Best Permanent Modular School, which was for Yallourn Primary in Melbourne. Again, if you'd like to have a look at any of those projects, they're all on our website, which is fleetwood.com.au. And we've also been nominated for 4 awards at this year's World of Modular Conference in Orlando in March. Now having said that, and notwithstanding that we've taken this segment of Fleetwood from a small [ gung-ho ] business based in Perth to the largest modular construction company in Australia, a lot of the projects are still tendered individually. So we are now turning our attention to how we can improve the overall quality of earnings at Fleetwood. And we think that the opportunities to do this will largely rest in the village operations or Accommodation Solutions, as it's now known, segment. And a significant proportion of Fleetwood's earnings comes from this segment, and I'd expect that in future years, this segment has got the potential to comprise an even greater share. And of course, we shouldn't forget Parts and Services, which is centered around the RV industry, where we have a very large presence, and we're looking to diversify those earnings, but we'll come back to that a bit later. So could I ask you to just turn to Slide 9 now, and this slide demonstrates Fleetwood's presence in the modular industry on a state-by-state basis. As you can see, we've just opened a branch in South Australia, which has already built a reasonable order book. And the only states we don't have a direct exposure to are the Northern Territory and Tasmania. Most states have major publicly announced government and commercial spend. And you can see from this slide that education and corrections are key exposures for Fleetwood. However, we're also seeing increased activity in the mining sector in West Australia. And Slide 10 sets out Fleetwood's competitive advantage, really the behind-the-scenes factors that have seen us gain so much market share in this segment. Firstly, we run an in-house design function. And we've got designers at all of our key locations but also a center of excellence in the Melbourne CBD. Our design team have literally changed the modular industry in the last couple of years, and there are exciting new developments yet to come. Also as I said, we've taken learnings from overseas companies and other industries and rolled out advanced manufacturing techniques. And as an example, one of those techniques on Slide 11. The 2 school buildings you see pictured there are both in Victoria and have been built from a standardized kit of parts, which have been just configured differently to produce 2 completely different looking school buildings. The one on the left is Fairfield Primary School in Melbourne. That's a 2-story configuration with a very nice open plan learning environment. And the other one is Elwood College, which is a 3-story building that's just been recently finished. Again, no one else in the modular industry is doing this to the same degree. So if I could ask you to turn to Slide 12 now, we'll touch on Accommodation Solutions. As you know, we've got the largest accommodation village in Karratha, and Searipple was built for the last construction boom, which is when there were major iron ore and gas construction projects. However, in the last 4 or 5 years, there's been very little construction activity, and as a result, most of the occupancy has been from operational workers. However, in the 2019 year and in the first half of 2020, we saw increased demand from shutdowns. And the chart on this page is just a simple depiction of what we estimate of the manning requirements for major capital projects for resource companies which on current information should start to ramp up in the near future. And as you can see there, there's not enough capacity to supply the potential demand. So in addition to utilizing all of the current market supply, new villages will have to be constructed. The main risk that we see to our earnings, if any, is that if some of the new capacity comes online ahead of that construction wave, it could potentially cause a temporary lull in our earnings. Now we've been saying that for a year or 2 now, and it hasn't happened yet, but we're still keeping a watching brief.So if we turn to Slide 13 now. I'd like to touch on the other key opportunity for growing a larger, reliable earnings base. So our modular business provides us with the opportunity to develop new fly-in fly-out villages at a lower cost than our competitors in the accommodation market can. And given the group's in a much better financial position than it was several years ago, we've now started bidding some projects on a build, own, operate basis. If we quickly turn to Slide 14 now. I'd just like to touch on the competitive landscape for RV Solutions. A key issue for the industry is that we've seen a reduction in products built in Australia and an increase in imports. Now generally speaking, the customer mix in this industry is changing. The baby boomer demographic's in decline when it comes to buying caravans, and the family market is expanding. And this is what's driving the shift towards imports. Whereas new retirees tend to buy full-sized caravans, and those are generally built in Australia because it's not economic to import full-sized boxes of air, families with young children tend more towards smaller caravans and camper trailers that can be towed with lighter vehicles. So a key strategy for us in this market is to capture more of that import market through providing services and also expanding our reach into the aftermarket segment. And the aftermarket segment, when we refer to that, we mean online and in-store retail, trade repairs and that sort of thing. Overall, caravan registrations in Australia are at their highest historical levels, and that's shown in the chart on the right-hand side of that slide. So the challenge for us is to focus on where the caravaners are directing their aftermarket discretionary spend. Okay. The last slide just covers some near-term factors. So our modular business has good momentum into the second half of FY '20, particularly in New South Wales and Western Australia. And while there could potentially be a period of lower earnings in villages, market demand looks very strong in the medium term. And while the Australian-built caravan sector is tough at the moment, we're capturing more of the family demand, and we'll continue to focus on that aftermarket segment as we move forward. So that concludes the formal part of today's session, and we'd now like to open it up for questions.
[Operator Instructions] Your first question comes from Oliver Stevens from Hartleys.
Just, Brad, you mentioned the targeting [indiscernible] such as contract awards. Can you just talk us through the sort of scale of those awards you need to win to hit that guidance?
Yes. Thanks, Oli. So look, at this stage, we don't need to win very much more work to hit our full year result. So it was just a bit unfortunate that the 2 awards that we actually had verbals on many months ago were both delayed. But at this stage, the work is in hand to deliver the full year result that we're targeting. And that's why we've been fairly specific about that full year result. I guess probably a good thing is that we have some pretty good visibility into the first half of next year as well.
Yes. And the Health and Human Services panel that you guys announced in August, any luck on that so far?
Yes. Look, it's interesting. So that one is a panel to -- that seeks to build up to 1,000 homes in Victoria. What has happened in the last month or 2 is that the spend through that panel has been diverted, to a degree, to bushfire relief. So the dialogue now with the Victorian government is around how can we use that panel arrangement to potentially build a series of new -- rapidly build a series of new homes for us to support bushfire victims. So that's probably looking a bit more promising for us than it previously was.
Yes. Cool. Sorry, just going back to the Building Solutions. You -- I think, Andrew, you might have mentioned cash was -- obviously, your working capital requirements for those contracts kicks in. Any idea on where you sort of see cash ending at the end of FY '20?
We'd be hopeful that we'd be ending up somewhere around where we finished the half year. So we think -- hopefully -- I guess, as Brad said, we'll use a bit of cash as these projects ramp up fully over the next month or 2. We're hopeful that we'll get it back to sort of similar levels to where we were at the end of December by June.
Yes. I think that once you ramp these projects up, they drain a bit of cash in the first couple of months. But once you start to get your progress [ times ] going, you actually get a way into these projects that sort of -- it sort of reverses a bit to a degree.
Yes. Cool. And last one, Slide 12. Can you just talk us through the [ cause ] of that sort of at a high level in terms of construction and the construction potential there? [indiscernible] side of it?
So are you talking about Accommodation Solutions, Oli?
Yes, mate. On Slide 12, you've got sort of [indiscernible] .
Right. Okay. So at the moment, there are about 3,000 rooms in that market, that Karratha market. And where -- we are roughly half of that supply. The demand that's coming down the pipeline from major gas-related projects looks to be extremely significant. So while there's 1,500 operational people in the market at the moment, that's what we've been [ catering ] for in the last few years and earning the sort of numbers that you've seen. And there's been additional shutdown demand in the last year or so which is -- you can see in that middle chart. What's coming down the pipeline is huge. So we think there could be potentially 8,500 rooms required for a number of years. So there's only 3,000 rooms in the market. So new villages have to be built. But what the local shire has said is that they won't provide approval for new villages, unless it can be demonstrated that existing villages have been utilized, and the approval for any new villages will only last for the period of that construction-related demand. So what it means is that we should -- if things play the way they look, we should be fully utilized for a number of years. And then once those projects are finished, those new villages will have to be removed from the market, and we should be in a similar position that we've been in the last couple of years.
There are no further questions at this time. I'll hand the conference back to you presenters for any closing remarks.
Okay. Well, thanks, everyone, for dialing in today. And Andrew and I are doing our roadshow next week, Sydney and Melbourne. So we look forward to seeing a lot of you then. But other than that, thank you very much for listening, and we will see you later.
Ladies and gentlemen, that does conclude today's conference call today. Thank you for your participation. You may now all disconnect.