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Edited Transcript of AVJ.AX earnings conference call or presentation 20-Aug-19 4:00am GMT

Full Year 2019 Avjennings Ltd Earnings Call

Victoria Sep 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Avjennings Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 4:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Larry Mahaffy

AVJennings Limited - CFO

* Peter K. Summers

AVJennings Limited - MD, CEO & Director

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Conference Call Participants

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* Bradley John Newcombe

Brazil Farming Pty Ltd. - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the full year results through June 30, 2019, conference call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Mr. Peter Summers, Managing Director and CEO. Thank you. Please go ahead.

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Peter K. Summers, AVJennings Limited - MD, CEO & Director [2]

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Thanks, Rochelle, and welcome, everyone, to this investor briefing teleconference for the AVJennings Limited 30 June 2019 results. With me today are our Chief Financial Officer, Mr. Larry Mahaffy; and our Company Secretary, Mr. Carl Thompson.

As usual, we will be following the format of the investor briefing document which we released to the ASX earlier this morning. And there will be 3 parts to this presentation. Firstly, Larry will take us through the financial outcomes for FY '19; secondly, I will then look beyond FY '19; and thirdly, as Rochelle mentioned before, we will finish with a period for questions.

So if I could now ask Larry to take us through the financial outcomes, which begin on Slide 6.

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Larry Mahaffy, AVJennings Limited - CFO [3]

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Thanks, Peter. Turning to Slide 6. You see that revenue and statutory profit, both before and after tax, were down on the prior corresponding period but were nevertheless ahead of internal expectations. But the decrease is fundamentally due to slower market conditions that adversely affected the volume of land sold and settled during the year. 970 lots were settled or revenue recognized in fiscal '19, down about 25% on the prior year.

Full year result was reliant to a greater extent than usual upon the settlement of sales made in earlier periods, particularly those with good margins at Lyndarum North and Waterline Place, the GEM Apartments in Victoria, together with settlements at Arcadian Hills Cobbitty, Argyle Elderslie, Spring Farm and Magnolia Hamlyn Terrace in New South Wales. Pleasingly, the rate of settlement completion experienced by the company remained close to 100%, although a small number of customers did require a short extension to their contracted settlement period in order to obtain mortgage finance.

Average gross margin rose 0.5 percentage point to 24.5%, reflecting the mix of products settled, which included relatively more higher-margin land sale contracts, notwithstanding the fact that land settlements overall were lower than the prior year. I'll comment upon the dividend later.

Slide 8 analyzes revenue by product type. The year-on-year reduction in revenue from both land-only and housing product, highlights the effect of the slower market on contract signings, whilst the increase in revenue from apartments is attributable to settlement of the bulk of sales made in the GEM Apartments building at Waterline Place in Victoria.

Slide 9 demonstrates that the average value of contracts signed during the year continued to rise as the product mix skews further towards built form over land-only product.

Slide 10 shows that the balance sheet remains strong with net assets of about $396 million. This was down nominally from the prior year due to the impact upon retained earnings of the adoption of the new revenue accounting standard, AASB15, which saw the reversal of around $12 million in margin on unconditional contracts with builders in Australia that was recognized under the prior accounting standard but where control of the land had not passed to builders as at 30th of June 2018 as required by the new standard. The approach adopted in transitioning to the new accounting standard is also responsible for the significant drop in receivables since FY '18.

Net tangible assets at $0.97 per share is down about $0.03 per share since 30th of June '18, which in addition to the effect of adopting the new accounting standard is also a function of the issue of new shares under the DRP that was operative at 30th of June 2018. For those who are interested, the position is set out in detail in the Appendix 4E.

Slides 11 and 12 show that gearing remains well within the company's target range of 15% to 35%, continues to follow the traditional pattern of rising with production in the first half before declining with stronger settlements in the second.

The increase in net debt year-on-year is attributable to the net effect of settlement of our exciting new flagship project Ara Hills, located at Orewa, some 30 kilometers north of the Auckland CBD, together with acquisition of the remaining 50% of Riverton in Jimboomba, Queensland, over some tapering of new production commitments in response to market conditions.

Slide 13 is the summary cash flow statement, the most significant aspect of which is the movement in net cash from operations between the years. When considering this, it is important to bear in mind that approximately $63 million was invested in the acquisition and first stage of development of Ara Hills, which is expected to contribute to earnings in 2021. Cash generation from the balance of operations was, therefore, positive at approximately $17 million, notwithstanding the softer market conditions experienced during the year.

Slide 14 shows that earnings per share and declared dividends reduced in line with reported profit. The final fully franked dividend declared of $0.015 per share brings total fully franked dividends declared for the year to $0.025 per share, equating to a fully franked grossed-up yield in excess of 6% per share based upon the current stock price. Further information is contained within the appendices.

I'll now hand back to Peter.

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Peter K. Summers, AVJennings Limited - MD, CEO & Director [4]

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Thank you, Larry. On Slide 15, we have identified 4 areas which I'd love to take you through, which collectively will be the main drivers for our results going forward and their areas of concern. Slide 15: market conditions, our inventory, our capability and our social license.

I'll begin with market conditions, which I'm pleased to say are on the improve, certainly when you compare that to FY '19.

Slide 16 starts by addressing the improved market sentiment. In our FY '18 results announcement, and certainly at our 2018 AGM, we called out the risks associated with having 3 significant elections in front of us. And it's fair to say confidence in Australian politics was low throughout FY '19, a period where we saw yet another change in Prime Minister. The lead-up to the federal election, in particular, was turbulent and had a considerable impact on consumer confidence.

The period since the federal election has been different, and we have seen that reflected in increasing confidence levels. Recent months have also seen positive changes in relation to mortgage lending and the cost of finance. The Banking Royal Commission had a significant impact on FY '19 with lending practices, making it much more difficult to obtain mortgage finance, lengthening the time it takes to get financed. It also had a negative effect on consumer confidence as confidence in financial institutions dropped. But with changes such as APRA's recent change to the minimum mandatory servicing requirement to be used by banks when assessing home loan applications as well as reductions in the official cash rate, the environment for our customers seeking finance is improving even if there is still some way to go.

Before I leave the point in relation to finance, I would like to emphasize the point Larry made earlier that, whilst this difficult lending environment impacted on consumer confidence to buy, we saw very few cancellations in relation to presales or even new sales that were made. What we did see was a small number of customers requiring time extensions to meet the longer time frame of banks in approving loans. It's also important to remember that there have been price reductions in house and land prices, especially in Melbourne and Sydney, which has reset the affordability equation.

All of this is playing out tangibly in a number of ways. We are seeing much more positive or at least balanced media commentary around residential property. We are seeing improved auction clearance rates. This is not only an important indicator of improved sentiment but an important factor for some of our customers, who first need to sell their existing home before buying a new home. Improved confidence is also supported by new tax offsets and future tax cuts which have been announced, and in the case of first-time buyers, by continued support through government grants and stamp duty relief.

Slide 17 also shows the way this has played out in terms of our recent experience in inquiry level and contract signings. Throughout FY '19, whilst open in our conversation about downside risk to the market, we have also openly expressed our view: market fundamentals remain sound.

As set out on Slide 18, other than in relation to high-rise apartments, the sectors in which we operate continue to be steady. In particular, the supply/demand balance remains positive in that we continue to see an undersupply of traditional housing. Population growth, employment, GDP, interest rates and wages growth all continue to be either strong, trending more positively than in recent years or at least stable, as set out on Slide 19.

The second factor that will impact our results going forward is our land bank, in terms of quality, quantity and status. As can be seen on Slide 20, FY '19 did see a reduction in the level of work in progress, which you would expect in more challenging market conditions. However, it remains at historically strong levels and is located in those areas where you would want to see it.

Slide 21 also shows our net funds employed levels and geographic diversity to be strong with growth occurring in Auckland with the settlement and development commencement of our Ara Hills project.

As set out on Slide 22, we have maintained a very similar level of land bank. We have remained active in looking for new opportunities. The prices have in general tended to remain above levels that we consider as true value. We were successful in acquiring a project at Mernda in Melbourne's north, and whilst not adding to the number of lots we have under control, the acquisition of the remaining 50% of our Riverton, Jimboomba project increases the value of the land bank and will increase results from that project going forward.

Since 30 June 2019, we have also entered into a binding Heads of Agreement for about 3,500 lots in relation to a large project in Caboolture, north of Brisbane. At an estimated 8,500 lots in total, this project will take some time to get through the planning process but will form a significant platform for our Queensland operations for many years to come.

These type of projects are valuable, just as Hobsonville Point, Auckland, has been our New Zealand operations for over a decade and as Ara Hills will be going forward. Victoria, Lyndarum North replaced our Lyndarum project, and together they have or will provide a key platform for our Victorian operations for well over 20 years.

Slide 23 is included to provide information in relation to the status of our significant projects. At the start of FY '19, we had much in front of us. Lyndarum North had significant presales, but we had not completed or settled any stages as we entered FY '19. In the second half of FY '19, we completed stages 1 to 6 and settled on 287 presales. We will complete stage 7 soon and stages 8 and 9 are under development.

In Queensland, our Riverton, Jimboomba, joint venture project was stalled. During FY '19, we acquired the remaining 50% interest in that project, and we have recommenced both development and sales on that project. Arbor at Rochedale also commenced in FY '19, and 52 presales were made. These will all contribute to profit in FY '20.

A number of other Queensland projects also made significant steps forward in terms of achieving important milestones. In New Zealand, the acquisition of Ara Hills, which had been held up in a lengthy approvals process, was finalized, and considerable development work has been achieved. Further presales have commenced, and a retail launch is planned for around November this year. And whilst you would expect projects to be advanced as normal business, this has been an exceptional year for such progress, and that gives us considerable more momentum going into FY '20 and beyond.

For the sake of time, I won't talk specifically to Slides 24 to 28. However, I would like to highlight the comment on Slide 27 in relation to presales held for the Buckley B precinct at Hobsonville Point. Profit recognition is awaiting the normal council signoff process, which we expect in the first half of FY '20. To-date, almost all of our New Zealand operation has been B2B and very lumpy. This has resulted in a skewed FY '19 result from New Zealand as the timing of profit recognition for Buckley B has fallen into FY '20 despite the fact that sales and development pretty well all occurred in FY '19 or earlier.

I'll turn now to Slide 29. This deals with the third factor in determining our future performance and relates more specifically to our capabilities. During FY '19, we undertook a significant review of our operational structure and capabilities. The first outcome was the appointment of a Chief Operating Officer in September 2018. This was followed by a restructuring of the business along discipline lines rather than geographically with a strong emphasis on projects. This has given us a stronger national approach with a clearer line of sight to issues to be resolved and opportunities to take. The early outcomes have been very positive, and I'm sure this will be an important contributing factor to our performance going forward.

And in terms of capability, we are always aware of the strength of our AVJennings brand. There have been some issues in relation to high-profile high-rise apartments in recent months. As customers move from a position of lacking in confidence to looking to acquire property, we know they rate more than ever the importance of trust in who they are dealing with. And to that end, we were proud to achieve the Reader's Digest commendation as a Trusted Brand during the year.

This ties in nicely with the final part of the equation, which is social license, which is covered on Slide 30. Consumers are demanding more and more of those they transact with. They want to know that the businesses they deal with operate the right way and that they do the right thing. And it's the same internally with the relationship between employee and employer much more equal than has been the norm in the past. So we continue to invest in our people, in safety and in the community. We continue to focus on innovation and quality and ensuring we deliver high-quality, affordable choice to our customers.

These are things we have believed in for many years. Slides 35 to 37 look at some of those areas in detail. And whilst I won't speak to those now, I would encourage you to look at those slides at a later date.

To conclude this part of the presentation, I'll ask that you turn to Slide 31. FY '19 was a challenging year, and one of the most challenging aspects was dealing with a very poor sentiment towards residential property. For reasons stated earlier, we believe sentiment is improving and will continue in that direction. And that this will be supported or support by continuing positive market fundamentals.

From an AVJennings-specific aspect, our portfolio has been considerably advanced throughout FY '19, and this has continued since the end of the year. It places us in a better position to capitalize on improved market conditions.

We have continued to challenge ourselves to find better ways to do things, and this has led to change during the year. So today, I'm pleased with how this has played out to-date, and I'm confident it will be a strong contributor to our performance going forward. And finally, we continue to focus on those matters that are important to our people, to our customers and to the community. It is largely on those values that the legacy of AVJennings has been built over 87 years.

We believe that maintaining a diverse portfolio, continuous improvement of our operational performance and focusing on the needs of our stakeholders will deliver returns to shareholders going forward.

Before I hand back to Rochelle to invite questions, can I thank my Executive Team and all staff of AVJennings for their enormous efforts during a challenging year? I'm sure we're all looking forward to seeing the results of those efforts moving forward. I would also like to thank the Board, all of our business partners and our shareholders for their support over the last 12 months.

I will now hand back to Rochelle to initiate the question-and-answer section of this presentation.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Brad Newcombe from Brazil Farming Pty Ltd.

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Bradley John Newcombe, Brazil Farming Pty Ltd. - Analyst [2]

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Just quickly wondering what level of -- you would give indication of what level of stock you still got left at GEM, and how quickly that's clearing since the year-end and how long it takes, you expect, to finally work through all of that?

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Peter K. Summers, AVJennings Limited - MD, CEO & Director [3]

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Yes. There's around 20 left, Brad. It's starting to get some traction as we've been able to take people up and now show their view. So if you recall that -- you've been here, haven't you?

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Bradley John Newcombe, Brazil Farming Pty Ltd. - Analyst [4]

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No, I didn't get to go to Analyst Day.

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Peter K. Summers, AVJennings Limited - MD, CEO & Director [5]

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Oh, right. So there's -- if you listened, there's front and a back to GEM. And certainly, I think in the prior perception there has been, the front being -- seemed to have the superior views. Now that's not necessarily the case. And as people have been able to get up, they realize you actually do get water views from what most would consider the back of the project. So starting to get some traction. But it's caught up in the same market dynamics as everything else right now. We're seeing a return to confidence but an increased inquiry not really translating heavily into sales at this point. But it's not something we're concerned about. I think this will work through in the normal course.

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Bradley John Newcombe, Brazil Farming Pty Ltd. - Analyst [6]

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So probably by -- hopefully, most of it done by the end of this half year or...?

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Peter K. Summers, AVJennings Limited - MD, CEO & Director [7]

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Every week that goes by, it's a little bit harder to judge on how the market is coming back. But, yes, I think that's a reasonable expectation.

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Operator [8]

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(Operator Instructions) Currently, we don't have any questions on the line. Presenters, please continue.

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Peter K. Summers, AVJennings Limited - MD, CEO & Director [9]

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Thanks, Rochelle. Look, I'd just like to wrap it up by again expressing my thanks for your support and particularly for taking the time to dial in today. It was relatively short notice, so I appreciate that and the support that you've given throughout the year and the interest in attending today's teleconference. Thanks very much.

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Operator [10]

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Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.