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Edited Transcript of FBU.NZ earnings conference call or presentation 20-Aug-19 11:00pm GMT

Full Year 2019 Fletcher Building Ltd Earnings Call

Penrose Auckland Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Fletcher Building Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bevan McKenzie

Fletcher Building Limited - CFO

* Ross H. Taylor

Fletcher Building Limited - CEO

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Conference Call Participants

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* Aaron Ibbotson

UBS Investment Bank, Research Division - Director & Research Analyst

* Arie Dekker

Jarden Limited, Research Division - Head of Research

* Keith Chau

MST Marquee - Building Materials & Packaging Analyst

* Keith Chau

* Matthew Allan Henry

Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research

* Rohan Koreman-Smit

Goldman Sachs Group Inc., Research Division - Industrial Analyst

* Stephen Hudson

Macquarie Research - Head of Research

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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 analyst briefing 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. Ross Taylor, CEO. Thank you. Please go ahead.

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Ross H. Taylor, Fletcher Building Limited - CEO [2]

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Good morning, everyone, and welcome to the presentation of our results for the 12 months ended 30 June, 2019. Presenting with me today is our group CFO, Bevan McKenzie.

Slide 2 outlines our key talking points today. I'll begin by providing an overview of the results and then I'll run through the divisional performance in a little bit more detail. Bevan will than talk through the overall financial performance for the year. And then finally, I'll sum up with some outlook comments for the year ahead.

Moving to Slide 3. FY '19 was a critical year for Fletcher Building. It was very important for us to successfully stabilize and focus the business, while keeping our core businesses performing. Pleasingly, we achieved this through the year. We kept our New Zealand businesses on track. We stabilized construction, returning it to profits and staying within the B+ I provisions. We intervened and set up Australia for a turnaround and exited Formica and the Roof Tile Group for good prices. And beyond these 4 main focus areas, we succeeded in landing a leaner organization with strengthened governance, returned to profitability, paid a healthy dividend, reduce debt and confirmed a capital return of up to $300 million via share buyback. This sets us up well to now drive the consistent performance across all of our businesses in FY '20 and beyond.

Slide 4 summarizes our financial metrics for the year. Pleasingly, we kept our earnings within guidance, ended the year with a very strong balance sheet and reinstated dividends. Revenue across the group declined by 2% to $9.3 billion. However, when adjusted for the discontinued operations, the go-forward business revenue was up by 1% year-on-year.

EBIT was $631 million, and was within our guidance range. Net earnings were $164 million. These were impacted by $234 million of significant items of which there were 2 main components: $140 million of right offs associated with the sale of Formica and the Roof Tile Group and around $78 million of cost associated with the intervention and reset of the Australian businesses.

Cash flows from operations were $153 million and this was a good recovery from the first half and reflected the strong second half performance we flagged and discussed in the half year results. Our net debt position of $325 million is a particular highlight. And this directly results from the strong price we achieved from the sale of Formica. Our return on funds at 11.8% is lower than we target. And this is predominantly a reflection of the underperformance of our Australian businesses through the year. And finally, the Board has declared a final dividend of $0.15 per share. And when combined with the $0.08 interim dividend, this totals a $0.23 overall dividend per share for the year.

Slide 5 provides a quick look at some of the areas we look at on our balance scorecard. While our lag safety metrics continue to improve, FY '20 will be all about the overall safety reset we've started following the fatalities that occurred in the business in FY '19.

Pleasingly, our employee engagement has continued to rise with our medium-term target to get this to best practice and above 80%. Our carbon emission intensity reduced and through the year, we committed Fletcher Building to science-based targets. This aligns us with the overall government agenda in New Zealand and ensures we'll continue to reduce our carbon footprint into the future. And we continue to see ongoing improvement in our customer Net Promoter Scores. And we want to drive these to best-in-class levels across all our businesses over the medium term.

Slide 6 again lays out, while we feel the strategy we've embarked upon positions as well to drive growth in shareholder returns into the future. It brings focus, it provides consistency and what we're trying to do and where we're trying to do it, its leverage to the upside with 90% of our profits from New Zealand, where we are strongly positioned to grow and improve and only 10% from Australia, which really becomes an upside opportunity around getting the Australian businesses to perform to normal profit levels and returns into the future. We now have a very strong balance sheet from which to do this, and we're well positioned to both deal with and take advantage of the key trends and disruptions that'll impact our sector in the medium term.

I now want to move on to the divisional performance. But before getting into the details, I'll start with an overview of the changes in year-on-year EBIT at the divisional level on Slide 8. This bridge shows the changes in profit between last year and this year. After adjusting for the B+ I losses in the prior year, profits reduced through FY '19 from $710 million to $631 million. There were 3 main drivers that caused this reduction. The divestment of the Sims in Dongwha businesses in late FY '18, the impacts of competitor activity in the steel sector and the lower earnings from our Australian division as the impacts of the residential slowdown, higher input costs, unfavorable exchange rates and patchy operational performance hit our various businesses. These are partly, but not completely, offset by better result from Formica and lower corporate costs.

To provide some context, some 2/3 of our go-forward revenue is currently derived from the New Zealand markets. Slide 9 shows these stayed quite robust through FY '19. In residential, consents were solid through the year, underpinned by Auckland, which remained very strong. However, with progressively more townhouses in Auckland and floor areas generally becoming smaller on average, overall construction material volumes were broadly flat year-on-year. In Commercial, the sector remains strong, but growth rates are showing signs of easing as some of the larger projects progressively finish. This is creating a fairly competitive market for building material supplies into this sector. And in Infrastructure, the pipeline slowed as expected in the past year. This has occurred as the spend has shifted away from major highway projects and towards regional road safety upgrades, rail and water.

I'll now run through the various New Zealand divisions, starting on Slide 10, with the Building Products division. Revenue in the year was broadly flat with EBIT slightly down. However, strong second half recovered some of the earnings headwinds we experienced in the first half. Volumes across our major product lines were strong, generally supported by a solid market backdrop. The overall higher cost environment continued, particularly in raw material pricing and energy. This affected earnings for the year but margins held steady with the majority of the 50 basis points fallen overall profitability, resulting from underperformance in our Humes pipe business rather than generalized overall margin compression. Pleasingly, of the back of these volumes, cash conversion also remains strong. We continue to innovate across the division with new products and product range refreshes as well as an investment in growth CapEx such as Iplex's South Island mobile extrusion plant.

The performance of our New Zealand Distribution businesses laid out on Slide 11. PlaceMakers contribution broadly reflected consent trends across the regions with continued strength in the Auckland market and softer conditions in Christchurch in the Bay of Plenty area. While Mico's performance of growth was a particular highlight was achieved across the majority of New Zealand. Overall, revenues were ahead of the prior year, while operating earnings remain flat but we're still at a solid EBIT margin of 6.5%. Trading cash flows remain robust and working capital was well controlled. The division continue to establish a greater market presence with new branches opening for both Mico and PlaceMakers. The division continues to focus to invest to ensure it's positioned for future key trends. Our new transport management systems and centralized logistics function is being successfully rolled out now at 30% of our branches. The PlaceMakers branch digitalization rollout was completed and we now digitize 1.2 million transactions with 70% of our customer yard transactions completed via handheld scanning. The first phase of our backbone ERP systems upgrades were completed. And we continue to invest in Snappy, an online store, which is generating incremental month-on-month sales growth.

Turning to Slide 12. Our Steel business had a tough year and what became an intensely competitive trading environment compounded by rising steel prices and input costs. Through this, we continued to focus on our customer service and maintaining market share. But this came at the expense of some margin compression. To keep pressure on material sourcing prices, we pivoted further to dual sourcing of stock. This negatively impacted cash flows and cash conversion through the year as higher inventory and different payment terms worked their way through the system. This will return to normal in FY '20 as we have now completed this transition. And just to note, that next year we'll report this division consolidated into the Building Products division.

Turning now to the Concrete division on Slide 13. Revenues and earnings ended the year close to our expectations as a strong performance in Winstone Aggregates mostly compensated for the losses we incurred from the mill failure at Golden Bay Cement. EBITDA remained broadly flat year-on-year while EBIT was impacted by higher depreciation charges as a result of the investments that we've made across the businesses. These investments are being critical in keeping the Concrete division competitively positioned and are being made across each business area. Driving cement supply chain efficiencies, we extended our coastal shipping to New Plymouth and had a barge capacity between Portland and Auckland. The new Firth masonry plant in Auckland, a new ready-mix plant in the Auckland airport precinct and the -- in the progressive renewal and upgraded the Firth ready-mix fleet. And progressive equipment enablement works in our Winstone Aggregates quarry operations across the country and the acquisition of a new quarry in the Waikato region, which was fully integrated in the division by year-end.

Cash flows and cash conversions remained strong and improved working capital management resulted in healthy year-on-year cash flow improvements.

Turning to Slide 14 on our Residential and Development business. Revenues for the year were up strongly underpinned by strong sales volumes of 755 units. And I know this year had a better skew to completed houses rather than land sections. Demand for housing in Auckland priced between $600,000 and $900,000 remained solid, as do margins. And pleasingly, we made our first sales at One Central in Christchurch. We also achieved strong sales on -- of the lower new margin stock we needed to clear in the Atlas Quarter in Awatea developments. Land Development sales were slightly higher than prior year, so as we realized more sales than we anticipated from the Wiri development here in South Auckland. Cash flows and cash conversion remain reasonable and the overall capital invested in the residential housing development business grew slightly to around $650 million. Finally, on this slide, we separate our panelisation, where we incurred $3 million of cost as we set up this new business. This is a potential game changer for the industry and we're very much looking forward to seeing the first panels being manufactured this year. This will initially support our Fletcher Living business and once proven, we'll then look for general market sales.

Slide 15 provides an overview of the Construction division. Through the year, our focus was all about the stabilization of the business, rebuilding the team, ensuring better governance overall and returning this business to profits. These outcomes were reflected on the slide and pleasingly, we recorded profits of $47 million for the year. Our backlog of work stood at $1.4 billion at the end of June and this compares to $1.8 billion at the end of June last year. This reduction was predominantly the consequence of continuing to complete the historical B+ I projects. Elsewhere, the business continue to win work with the major projects business securing the Northern Interceptor project for Watercare while Higgins, South Pacific and Brian Perry continued with smaller project wins across both New Zealand and Fiji. We continue to forecast completing the B+ I projects within the provisions raised in 2018. 10 are now complete. We expect a further 4 to be completed this calendar year and the last 2 in 2020.

Slide 16 provides an overview of the Australian market from which we source about 1/3 of our go-forward revenue. Just over half of this is exposed to the Residential sector where consents have contracted sharply by about 20% year-on-year. We have planned for this decline in residential to be a continuing theme in FY '20. But we do note that sentiment in market commentary has certainly improved in the last few months but we're yet to see this translate into our business this year. In Commercial, we have about a quarter of our revenue exposure to this sector. This also declined through the year but to a lesser extent than Residential. And the remainder of our Australian revenue is exposed to Infrastructure. And here, the volumes and outlook at the East Coast remain reasonably stable and we believe will remain that way for the medium term.

Against this market backdrop, Slide 17 shows the tough year we had in our Australian division. While revenue was flat in the tough market, earnings halved in the year. The sharp decline in the residential market resulted in much greater competitor intensity across the businesses. This limited the ability to achieve any significant price increases through the year. Margins were further impacted by increased input cost such as resin, fuel and steel, which were exasperated by depreciating Austrian dollar/U. S. dollar currency exchange rate. Against this backdrop, we made a decisive intervention to materially reset the cost base as well as continuing to selectively invest where opportunities present themselves. We outlined this in detail at our recent Investor Day where we flagged the expected bottom line improvements resulted from this activity to be around $15 million in FY '20 and $50 million in FY '21. At the year-end, this program was on track with over 60% of the identified initiatives implemented.

On Slide 18, we turn to the Formica and Roof Tile Group. As mentioned earlier, we complete the sale of these businesses through the year for very strong prices. We also provide here the final numbers on disposal of these businesses. In total, sale proceeds were $1.25 billion and when adjusted for historical carrying values, we incurred a $140 million as a result on their disposal.

With that, I'll now hand over to Bevan, who'll talk through some more details on our financial performance.

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Bevan McKenzie, Fletcher Building Limited - CFO [3]

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Thanks very much, Ross, and good morning, everyone. Turning first to Slide 20. We show the consolidated group P&L. As Ross has highlighted, the key elements of the group's result this year were our return to profitability with net earnings of $164 million and EBIT of $631 million, which was delivered within our guidance range. Given the high level of activity and change across the group during the year and especially the divestment of our international businesses and the reset of the Construction and Australia divisions, it is pleasing to have kept the core New Zealand operations on track and to have delivered a solid FY '19 result. Picking up 3 other key points on this slide.

Firstly, significant items of $234 million were comprised of the loss on sale of the international business of $140 million and $94 million of restructuring charges, which were mainly in connection with the Australia reset. Funding costs of $118 million in the year were 25% lower than the prior period and significantly below our initial guidance for FY '19 of $145 million to $155 million. This was made possible by early exits of some of our higher cost sources of debt. And in March, we also seized payment of additional interest charges, which had arisen from the debt covenant breach last year. Funding cost will continue to track down materially in FY '20 to around $80 million to $90 million as our debt reduction program continues. Finally, on this slide with the group returning to profitability in FY '19, we return to incurring a tax expense. This was $102 million compared to the tax benefit of $96 million we received in FY '18. As we will see shortly though, cash tax paid for the year remained low as a result of the B+ I losses.

On the next 2 slides, we lay up the group's cash flow performance. On Slide 21, we show the full year performance and in a moment on Slide 22, we will look at the performance in the second half of the year. We have presented these tables to first show our trading cash flows from continuing operations to allow for clear comparison of the group on a go-forward basis. And then show cash flows from legacy B+ I projects and from the divested international business as separate line items further down. Slide 21 shows that overall cash flows in FY '19 were down year-on-year with the main factor being the timing of creditor payments. We can see this in the middle of the table with creditor movements representing more than half of the year-on-year reduction in trading cash flow. Positively, an area of working capital that continues to show improvement is in debtors, which improved by $48 million compared to the prior year and reflects the business' strong focus on effective credit management and cash collection. The other key impacts on our cash flows in the year were: lower construction receipts, which was due to the timing of project payments, mainly in the Higgins and Brian Perry Civil businesses; our reduced contribution from our International division, which reflects a partial year's earnings and tough second half trading; and finally, lower cash tax and funding cost for the group as just discussed.

If we turn to Slide 22, you can see that the group's second half cash flow performance compared to the same period in FY '18. As we discussed at the half year results, the group held high creditor balances at June '18, which led to a material cash outflow in the first half of FY '19. We said that working capital would normalize in the second half of FY '19, which is what is being delivered. Looking at the middle of the table, debtors and inventories both improved half-on-half and our creditor inflows were at a lower level. Overall, this resulted in a trading cash flow from continuing operations of $516 million in the second half of FY '19, broadly in line with last year but with a higher quality working capital mix.

Slide 23 lays out the key working capital metrics for the Materials and Distribution divisions. Debtors, as I mentioned earlier, is an area of working capital, which remains well controlled and delivering sustained improvement. Overall, debtor's days improved by 1.6 days relative to last year. Inventory held steady in the group in the current period with higher stock levels in steel due to ongoing dual sourcing, as Ross has discussed, and building products due to increased resilience stock in Winstone Wallboards.

Slide 24 provides an update on forecast cash outflows resulting from the B+ I losses. The dotted column shows the EBIT impact of the B+ I provisioning in FY '17 and FY '18, while the solid columns show the cash outflows by period. As Ross has highlighted, there is no change to the B+ I provisions and we have now completed 10 of the 16 key legacy projects. In FY '19, net cash outflows from B+ I were $257 million with just over $250 million of forecast cash outflows remaining for these projects.

Turning now to Slide 25. Capital expenditure and depreciation were both within guidance for the year. Ross and I've spoken over the past 12 months of the need to reinvest in our core Australian and New Zealand businesses, especially on growth and operational improvement initiatives. Ross has talked to a number of these investments in the divisional results section. Overall, CapEx in our go-forward businesses in FY '19 was $285 million, an increase of $44 million on FY '18, but well within our guidance range for the year, which was $275 million to $325 million. Ross and I have also talked about our focus on making logical bolt-on acquisitions with a $26 million this year relating to an acquisition of a sand quarry in the Waikato region of New Zealand and a store acquisition in the PlaceMakers business as we continue to look at -- to fill out our merchant distribution network.

Looking ahead to FY '20, we expect CapEx to be in the range of $275 million to $325 million, excluding the first phase of investment for the new Winstone Wallboards plant. Depreciation and amortization on continuing operations is expected to lift from $174 million in FY '19 to around $200 million in FY '20, reflecting the flow through of increased investment in recent periods. I do note that this depreciation guidance is prior to the impact of IFRS 16 lease accounting standard, which I will cover off later in the presentation.

Turning to Slide 26. A key priority in FY '19 was to materially strengthen the group's balance sheet and provide robust base for the execution of the go-forward strategy. We show here that as a result of the highly successful Formica divestment, our group net debt decreased from $1.3 billion in June 18 to $325 million currently. And our group leverage ratio reduced to 0.4x. At the Investor Day in June, we guided to closing net debt between $300 million and $400 million and leverage of 0.5x, hence both positions landed as expected and provided the strong foundation for the go-forward business. The group will continue to maintain a prudent approach to balance sheet management as we execute the strategy.

On Slide 27, we talk to the other key dimensions about balance sheet management. Over the past 12 months, we have worked not just on reducing our net debt, but also on lowering our gross debt levels and our cost of funding and on securing a strong liquidity and debt maturity profile. Again, this is being part of the focus on securing a strong base to execute against the group's strategy and each of these elements has been successfully delivered. In the chart here, we show the maturity profile of the group's debt. Following the refinance of our syndicated banking facility, which was completed in July, we now have total secured facilities of $2.3 billion, of which $667 million were undrawn at June '19. Importantly, 3 quarters of these facilities mature in FY '23 and beyond, meaning the group has secured a strong liquidity profile for the medium term. At the same time, as a result of exiting some higher cost sources of debt, our average interest rate has reduced to 5.0%, which is a much improved rate from 6.3% at the half year. We spoke at our Investor Day in June of our commitment to reduce the group's gross debt by around $700 million to $800 million over the course of FY '19 and FY '20. In FY '19, we repaid $415 million of debt, which included favorable early repayment of 2 tranches about USPP debt, totaling $334 million. We will continue to reduce group debt by between $300 million and $400 million over the course of FY '20. I do note that this excludes our retail capital notes program, which we intend to retain as the perennial nature of the program is important to the group's ongoing funding strategy.

On Slide 28, as Ross has noted, the group will pay a final dividend of $0.15 per share. Combined with the interim dividend, this is a total of $0.23 per share for the year. Our dividend policy remains unchanged, which is to pay up between 50% and 75% of net profit before significant items having regard to available cash flows in the period. In sizing the dividend, the Board has considered the group's strong financial position, the efficiency of returns to shareholder and has weighted the dividend to the final payment due to the timing of receipt of the Formica proceeds. Since the group does not currently have tax credits available, the final dividend will be unimputed and unfranked. And the dividend reinvestment plan will not be operative for this dividend. We're also confirming today the announcement we made at the June Investor Day that the group will redistribute up to $300 million to shareholders through an on-market share buyback program. The completion of the full market transactions this year has materially de levered the group's balance sheet and after careful consideration through the lens of our capital allocation framework, we consider this incremental capital is available to be distributed. Our disclosure document has been released today, which gives further details to shareholders and the group will commence the on-market buyback from the 9th of September.

Finally, on Slide 29, just a reminder of some of the key points of the impact of the new IFRS 16 lease accounting standard on the group's financial statements. Fletcher Building has a total of around 4,800 operating leases. The impact on the balance sheet from the new standard will be to recognize the right-of-use asset of between $1.4 billion and $1.5 billion and a lease liability of between $1.7 billion and $1.8 billion with a difference of around $300 million taken as an adjustment to retained earnings. This difference ensure reflects the front loading of lease interest expense under IFRS 16 treatment. In the income statement, operating lease expense will, from FY '20, be treated as depreciation and interest charges, which will lead to a $235 million increase in group EBITDA and around a $50 million increase in group EBIT. There'll be a small reduction of around $15 million in net profit before tax, which again reflects the front loading of the lease interest expense. In terms of cash flows, there's no impact on underlying group cash flows but the new lease arrangement will result in operating cash flows increasing by the principal payment amount with an offsetting outflow in financing cash flows. While we will not be restating our FY '19 numbers, in the appendix, we illustrate what our headline FY '19 numbers would have looked like with the impact of IFRS 16.

With that, I'll hand back to Ross for concluding remarks.

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Ross H. Taylor, Fletcher Building Limited - CEO [4]

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Thanks, Bevan. On Slide 31 are provided the plan we've been working to for the last 18 months. With the businesses successfully stabilized and refocused on New Zealand and Australia through FY '19, our emphasis in the coming year now move to driving consistent performance across all of our businesses and ensuring we set ourselves up to achieve credible growth path from FY '21 and beyond. A key part of this is ensuring we continue to work on what we described as our key enablers, these are shown on Slide 32. Through the coming year, we look to make strong progress in each 6 of the areas shown on this slide. We'll deliver a complete reset of our safety programs, we'll continue to increase employee engagement, develop our people, improve diversity, attract top talent and generally improve our overall bench strength; we'll continue to progress on both our backbone systems and our customer facing processes systems and digital enhancements; we'll lift our operational performance across all businesses, progressively driving to a consistent and quality level of performance in all parts of the Fletcher group; we'll bring innovation and local adaptation to life, ensuring we grab competitive advantage whenever and wherever we can. And during this, make sure these steps align and progress the environmental leadership position we are aspiring for; and finally, we'll continue to advance on our customer service and customer promises across all businesses, channels and segments. We'll bring our progress against all of these to lie through the year as we report against our balanced scorecard.

Finally, on Slide 33, we summarize our market expectations for FY '20. In summary, and world shocks aside, it looks to be broadly more of the same. In New Zealand, we expect residential consents to ease slightly off peaks with Auckland remaining strong. We expect nonresidential construction to remain at similar levels and in Infrastructure, we expect to see spending ease in major roading but see increased spend in road safety, water and rail.

And in Australia, we're planning for the contraction in residential to continue. We expect that the nonresidential market to be broadly flat in FY '20 and we expect East Coast infrastructure work to also remain broadly flat on the established project pipeline. We will of course progressively update our guidance and outlook for FY '20 as we move through the coming financial year.

With that, I'd now like to hand back to the moderator to allow us to take the questions.

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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 Aaron Ibbotson from UBS.

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Aaron Ibbotson, UBS Investment Bank, Research Division - Director & Research Analyst [2]

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I just had a quick sort of a clarification, I guess, follow up on your dividend policy there, which you sort of restated at 50% to 75%. And I basically just got 2 very quick question. So the first one of them -- and answer as you see fit. Is there any reason we shouldn't believe that you would be in the very upper end of this, 75% is [50%] above 50, so there's quite a wide range. So just wondering -- looking at your current cash generation and net debt situation, if there would be any reason why we wouldn't expect this to be towards the upper end? And secondly, and maybe this is a question for Bevan. I don't know, it's primarily out of curiosity, and these major IFRS changes that are coming through particularly on the balance sheet I guess. Has there been any discussion from your side with rating agencies or anything like that? How the various net debt-to-EBITDA ratios will be considered what these lease liabilities will be classified as? Because in my book they are financial liability, so just curious to hear, if you expected any sort of impact from that on your various ratios?

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Bevan McKenzie, Fletcher Building Limited - CFO [3]

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Sure. Thanks, Aaron. I'll take the second question and then come back to the first. Second is straight forward, as you know, we don't have a formal credit rating. We target strong BBB metrics but with no formal rating. So there is no reason for us to be discussing that with the credit agencies. We have an explicit carve out for accounting changes like this under our financing agreements, so they won't impact our banking arrangements is the long and the short of it. On the dividend policies, I mentioned earlier, we'd always said we were going to wait the payment to the final dividend. We have with $0.15 per share. So that's a good strong result. I guess to your point about, where on the payout range it landed? One of the key point there is because we don't have imputation credits available. And obviously looking to the buyback program, clearly, efficiency, tax efficiency for shareholders was a key consideration as well. So those are really the key factors that the Board gave consideration to as it sized the dividend.

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Operator [4]

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Your next question comes from the line of Matt Henry from Forsyth Barr.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [5]

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I have few questions. Can I start with Construction? It's a bit of a black box for us in terms of, I guess, your forecasting expectations. If you look at the 3 major infrastructure projects, they are all 50% to 60% complete. And given there's no positive contribution from those or meeting for positive contribution this year, suggested they are sort of close to delivering 0? You haven't given us any set expectations to how you think that profile looks like for the next year or 2?

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Ross H. Taylor, Fletcher Building Limited - CEO [6]

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All right. Okay. I'll answer that. Sure -- thought you are going to give this a list of questions. So look, so with the Infrastructure projects, we've been quite clear about this like take [two of what] we work with, very strong earthquake season. We moved 4 million cubic meters, so that's going well on program. We continue to take new margin on that simply because we've got a number of variations and other things to work through with the customer. Until we do that, we just don't want to get ahead of ourselves. And because the other nature of some of the other bigger projects are similar. We're just taking, what I call, a prudent approach to that. So we'll wait for those projects to continue across all 3 of the big ones, just till we get through, probably this next year before we start making final decisions on that. So that's about as far as we go because we don't talk about specific projects.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [7]

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No, I was more meaning -- just to wrap it all up. Do we expect to see that construction, which I said is a bit of a black box for us, do you expect to see that improve in the next couple of years? I'm sure we see as problematic projects roll off, does that -- to hit back towards the normalized number or we lost it?

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Ross H. Taylor, Fletcher Building Limited - CEO [8]

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Yes. Look at -- absolutely, should. I mean you'll see 2 -- a couple of themes going on. We've progressively -- we've got about $400 million of B+ I work to work through. So that'll -- that's all zero margins. So what you'll start to see is as we win work and work through other projects and continue to go forward, we'll basically purge the 0 margin or low margin work from our book and replace it with margin projects. So what you'd expect to see over the next 2 to 3 years is all the 0 margin were going to [nil end] up being replaced with project margin. So you'd expect that progressively to return to what I call normal profit levels.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [9]

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Can you give us any sort of guidance on normal profit level?

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Ross H. Taylor, Fletcher Building Limited - CEO [10]

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Yes. I think I've been quite frank, I mean, I think these businesses should make about 3%, 4% EBIT margins as where we should get to.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [11]

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Okay. On the home building, you did say that there is no underlying margin pressure there and the headline margin decline was due to mix. What's your sort of expectation as you look into FY '20? Glad that the [softer will] come out, healthy markets readily apparent these days of inventory particularly at higher price points sort of building. Do you expect to see margin pressure coming through in that business in the near term?

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Ross H. Taylor, Fletcher Building Limited - CEO [12]

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When we look at rest of the features being -- removing the [nil stock] down in Christchurch, which have been going well at, which has given us some of the compression. But when we look at the $600,000 to $900,000, most of our stock is actually in, what I call, the mid-range. And we are seeing margins hold up pretty well there. So certainly, as you talk about there's being issues in the larger value housing around Auckland but our business position looks pretty robust. That said, I think there's a bit of cost pressure in there and there's not a lot of option to keep prices going. But we feel pretty good about where our margins are present in that business in that mid-sector, which is where our volumes are.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [13]

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Okay. And just on Steel like, I guess, those of us who are watching the industry for a while, we appreciate the dynamics in that industry can change very quickly. Have you noticed any improvement in recent months on those compared to those pressures that impacted it, particularly in the second half?

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Ross H. Taylor, Fletcher Building Limited - CEO [14]

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We're seeing some signs but I don't -- we're not calling it. I just want to see how it plays out over the coming few months. Not that mean -- I'm not trying to avoid it, I mean, i think it's got a chance of getting better. But we just need to see that manifest itself. We're seeing some behavioral changes out there.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [15]

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Okay. And then -- sorry a couple more. You highlighted Winstone -- sorry the CapEx guidance doesn't include Winstone Wallboards. Are you able to give us sort of some indication around what the total of that Winstone Wallboards CapEx is and what the timing profile looks like?

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Ross H. Taylor, Fletcher Building Limited - CEO [16]

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So we sort of haven't really got into the details of that in terms of the overall envelop, what we have said is that the timing though is we'll expect to -- towards -- through this first half of the financial year through to the end of this calendar year. We should lock that down and make all our final decisions on that. And once we do that, we'll announce it quite fulsomely because we've worked out then what we're thinking in terms of what's on balance sheet, off balance sheet and how we are structuring it. Because we had a few options in there and we just need to work through that, and I also don't want to get into disclosing it because we are out competitively procuring big chunks of equipment and stuff like that. I sort of want to not get that out there too soon. So it's not about being mystical, I'm doing that for deliberate reasons. But we'll be very fulsome in our disclosures on that in the coming months.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [17]

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Okay. Now I understand. Last 2, last couple. When do you think -- or what would be your ability to peak dividends next year? And then just lastly, when you look at the range of expectations out there from the analyst community, it's quite broad? Did you think at all about -- what was your thought process around maybe narrowing them?

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Bevan McKenzie, Fletcher Building Limited - CFO [18]

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Sure, Matt. I'll take that one. Look the -- as you well know, we're in a -- we're currently in a prepaid tax situation that arose at the end of FY '17. When we make each and every dividend decision, we give obviously due consideration to whether it makes sense to further prepay. I wouldn't like to prejudge what we would do either at the half or the, at the full year. But we are looking to maintain. We simply don't want to give that prepaid balance too high. And then in terms of the expectations, look our focus is going to be on driving the business well, so that we can pay the best dividend possible.

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Matthew Allan Henry, Forsyth Barr Group Ltd., Research Division - Head of Wealth Management Research [19]

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So I realize the expectations as more meaning the -- [I was meaning the] sort of any of these expectations?

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Ross H. Taylor, Fletcher Building Limited - CEO [20]

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Okay. So just with -- where I'd take you on that is, we've got no real updates from what we show at the Investor Day and you'll see in the slide deck, and you may not have got to it yet, I think it's Slide 36. What we've done is just played back there and summarized what we've said already. So we don't intend to update that. At this point, it still holds as far as we are concerned. And our view is that we just want to get a few months under our belt and so as that happens, we will look to update later where we are at the ASM. So that's sort of -- so I'd just point you to back to those statements.

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Operator [21]

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Your next question comes from the line of Arie Dekker from Jarden.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [22]

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Yes. Just in terms of CapEx envelop for FY '20, how much of that do you think you'll be investing in Australia?

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Bevan McKenzie, Fletcher Building Limited - CFO [23]

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Arie, Bevan here. We've been quite clear on that, but we're targeting between $80 million and $100 million of CapEx on the Australian business. I think this year was around the middle of that range with $91 million. So we continue to target that. We pull that back, as you know, slightly from what we said last year. That's just reflective of where the market is at. But where there are good opportunities and we have a number of them, we're going to continue to invest.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [24]

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Yes. So that's consistent, I guess, with the guidance you gave over a 3-year range as well. So just in terms of the sort of $80 million to $100 million you're investing this year, can you just go through, I guess, the 2 or 3 key projects that will consume most of that?

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Bevan McKenzie, Fletcher Building Limited - CFO [25]

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Look, there is some -- there's not 1 or 2 or 3 major projects in there. There is, as always, a share of what we call stay-in business or maintenance CapEx. We've got some large manufacturing facilities over there, particularly in Laminex that we need to sustain and keep efficient. Our real focus is around driving efficiency, new product development and particularly improving our customer end with our digital engagement. So you've seen in the past 12 months that's happened in Laminex. We're going to continue those investments. We've also spoken to the continued rollout of the Tradelink network, putting stores and growth notes, and we'll continue to do that. That's not high capital spend, it's sort of around $200,000 to $300,000 per store. But Tradelink's had good success in doing that, and we'll continue to do so.

Ross has put a real focus on driving more innovation within the business, and you're starting to see some of those projects roll through. So Stramit, for example, has got some interesting new profiles that it's working on, which we'll invest in, in the coming year.

And within the Iplex business, Arie, Nicole and [Fraser] continue to drive efficiency in there. So we continue to invest, for example, in phone call lines in that business. And that's -- there's a whole lot of those projects across Australia, but with a particular focus on, as I say, efficiency, new product development and getting that front-end to the business better digitally for engagement with our customers.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [26]

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Sure. Just with regards to reentry into B+ I, can you just sort of perhaps comment on how much tendering activity you are sort of involved in at this point. And I mean there's always lead times with that and uncertainty in terms of being successful. But when you might -- as it sort of sits together whether you sort of expect to be sort of doing much at the back end of this year in that area?

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Ross H. Taylor, Fletcher Building Limited - CEO [27]

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Yes. Look, we're not a lot -- in fact, I mean, tendering, we're not really tendering. I mean the way we're approaching is there's been a number of customers that are really keen to see us back in the market, and we're advancing on discussions with a select couple is the way I'd characterize it. We just can't afford to get too far ahead of ourselves here. We've got 5 or so really strong teams. They progressively free up, and we'll only look to secure work as we confidently free them up because we just don't need to fumble the completion of the present term portfolio projects. So I mean in a perfect world, we'd have something secured by the end of this year, early next year, but that's sort of the -- that will be the way it will play up.

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Operator [28]

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Your next question comes from the line of Keith Chau from MST Marquee.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [29]

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Lots of quick question on plaster board in New Zealand. I think the first half result is talk about competition with the net market, but I think in the full year result, the numbers were actually quite strong. So I'm just wondering if you can characterize what happens within that particular sector there.

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Ross H. Taylor, Fletcher Building Limited - CEO [30]

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Yes. Look, I mean the -- your comments were all -- you can see our volumes have remained strong, our market share is broadly held. But it remains really competitive, and it always has. I mean there is -- you never get a free lunch in that sector and you've got to stay on your toes, and the customer service is critical, the way we look at the breadth and width of our offering is critical and the way we deliver the site is centered in the way we optimize our manufacturing. So it's basically, i don't know, simplify, it's more of the same. And I don't see that relenting but equally, I don't see our position eroding either. So -- and that's sort of what the lens we're using as we look at the investment in the wallboards plant. I think it's quite important to make that investment and keep our manufacturing facilities efficient and as effective as possible.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [31]

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Okay. And then just the second one the cost outlook, largely, obviously, hit by quite a few different input cost big energy, resin and gypsum. Are you able to give us a sense of what your cost outlook is for FY '20 and where you may or may not be seeing release?

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Ross H. Taylor, Fletcher Building Limited - CEO [32]

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Look, so I think the theme is that we've seen cost get up high, I don't think there'll be a relatively huge move year-on-year, but certainly I don't see them coming off materially. And we're seeing a bit of a win in resin, but certainly energy is still pricy and all over the place up and down. So our background assumption is there'll be swings and roundabouts, but broadly it will stay at this sort of levels that is at present.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [33]

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Okay. And then Just on the penalization opportunity. I mean encouraging that Fletcher is investing in that business at the moment. So $3 million in cost there. Just wondering if you can categorize the outlook for that business, how quickly do you think we can start to see some meaningful revenue going to that business, so perhaps tricky milestones being the breakeven point for that business opportunity and also where we should start to see some profits slightly.

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Ross H. Taylor, Fletcher Building Limited - CEO [34]

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Yes. So the way we look at it is we can break even on this business of, say, our own volumes. And where we -- what we're thinking was about 200 -- we think we can do 200 houses give or take in our annual throughput of, say, 800. So the whole premise of the plant was to use our own internal volumes to get it working, prove it up and get its cost covered. So that's really year 1, so through this financial year and probably a bit into next year. And then what I'd then look to do is once we know we're delivering efficiently, we've ironed out the details and the chinks on ourselves, then we'll look to start selling that in the broader market. So that would be year 2.

And then really the profits we make are really all about the volumes, and we just need to get through the first year before we start talking that up too much. But I'm very positive about it. And not just in the profit terms, it's also a really important component of how we then think about distributing our own building products because you start to assemble them and deliver them into the market that way. So it's both a profit opportunity and an important channel to market theme for us as well.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [35]

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Okay. And maybe just a couple of questions on Construction. I noticed that the Construction provisions, we're still expecting, I think, the last chunk of it to be incurred in FY '20. I think based on SKYCITY's disclosure, that project isn't due to finish until the end of 2020. So until Fletcher buildings [depart 21 year]. Is it a case that SKYCITY is being a bit more conservative on the completion of that project? Or is Fletcher building a bit more confident such that those provisions won't leak into -- or the provisions released won't leak into FY '21?

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Ross H. Taylor, Fletcher Building Limited - CEO [36]

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I dutifully and consistently don't comment on clients' construction forecast, so you've got to take SKYCITY's comments as they are. And yes, so I'll leave it alone at there.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [37]

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Okay. That's fine. And perhaps, just a couple of quick ones. Just following on with the Construction division outlook, it doesn't sound like the backlog is going to move too much beyond of being drawn down this year. But I guess as we look kind of 2, 3 years ahead, and maybe I'm getting a bit ahead myself here, but that backlog at one point in time reached $2.7 billion, it's currently down at $1.4 billion and continued to be drawn down on. So we've talked about margins being 3% to 4%. But what are you envision a more normalized level for that backlog for that going forward?

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Ross H. Taylor, Fletcher Building Limited - CEO [38]

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Yes. Look, I think a good backlog in a Construction business is about 2x annual revenues. But when you look at our business mix, we've got a number of businesses like Higgins and Brian Perry, and those which are smaller projects so they don't have -- there should have been. So I think for the Fletcher portfolio when I look at the mix, I reckon about 1.5x its annual revenues probably about where it will land to be my guess, give or take. So that's sort of where I think it will hopefully stabilize. And that -- and yes, we need to start to work towards that because, as you say, we've been quite focused on just clearing the decks in B+ I, and now we're sort of saying to pivot to think about how we just get focused on getting a good order book of appropriate work.

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Operator [39]

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Your next question comes from the line of Stephen Hudson from Macquarie.

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Stephen Hudson, Macquarie Research - Head of Research [40]

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Ross and Bevan, I've just got a handful of questions, just firstly on the second half New Zealand revenue performance. Apart from steel, it looked like revenue growth was better than the first half. And I just wondered if you could characterize how you're seeing your own businesses performance versus market. In many instances, it's hard for us to actually engage how you're doing versus market, but it definitely looks if you've regained your footing there. And I just wondered if you can give us some color on what you're seeing?

Secondly, just in terms of land development normalization, I just wondered if you thought sort of a minus 31 kind of normalization this year still makes sense. And then just lastly on your land purchase obligations -- your unconditional land purchase obligations, it looks if they've risen quite sharply over the 6 months. I just wondered if you can give us some color on what's going on there.

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Ross H. Taylor, Fletcher Building Limited - CEO [41]

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I'll start with the few general questions then Bevan hopefully gets a few of the details sorted. So we do have this question. Look, on the first half, second half comment you made in New Zealand, I think that's accurate. We -- there was a -- as the -- the consents particularly in Auckland was very strong in this -- in the second half. And as those consents continue to rise, you saw that flow through the businesses in the second half. So we end up with a bit of a second half tailwind, which we managed to capture broadly. So -- and the other theme I'd say is we generally are a first-- second half-weighted businesses. I think we're always around about 56% in the second half. So I think those 2 came together to give us a pretty solid run home.

On the unconditional land purchases, I -- there's nothing particular I can think of. So I wouldn't say there's any particularly going on there. So we haven't sort of -- that shouldn't have changed much.

And then on the normalization comment, yes, we still think the background development earnings will head towards 20 to 25 at a sustainable level of EBIT going forward. I don't know if there's anything you'd add, Bevan.

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Bevan McKenzie, Fletcher Building Limited - CFO [42]

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Yes, I'll just reinforce perhaps, Stephen, the answer to the first question. For us, it's your earnings. Typically, you see a 45-55 split within the core businesses. On a revenue basis, I just look to the numbers. I mean we were 48% H2 weighted last year on the revenue line in the core businesses products and distribution in the New Zealand, and we're 49% in FY '19. So there was a little bit of a step-up there, but broadly consistent. I think the key thing for us is in a competitive environment, the businesses did a good job of holding their position and obviously was been a very positive environment to trade in.

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Stephen Hudson, Macquarie Research - Head of Research [43]

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That's useful guys. Sorry, just one final one. You've talked about some investment in the -- in your cement business in terms of new products and allusion to perhaps further core reinvestment. Can you outline sort of -- or spice that up, I suppose, and give us a bit more detail? And sorry, just on the unconditional land purchase, it looks like it's gone from about 900 to about 1,700 in 6 months.

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Bevan McKenzie, Fletcher Building Limited - CFO [44]

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So in terms of the investment in concrete, there's obviously a chunk of investment there, Stephen, which is kind of really BAU, and that's particularly around stripping of the quarry assets. And we've been pretty focused on that, that's obviously a really good market for aggregates out there at the moment. You've had a great results within that business.

Beyond BAU, we're very focused on driving efficiencies through that business. And in prior years, we've built out our supply chain investments, and you're seeing some of the benefits of that coming through now. Looking ahead, the big project that we've focused on, obviously, it's the Tyre Derived Fuel in Portland that will burn north of 50% of New Zealand's waste tyres by the time it's up to speed. And there's a number of other projects that Ian and the team are looking at. We think that the environmental footprint of cements is going to be really important, and so we've got a number of irons on the fire on that front.

In terms of the step-up in unconditional land purchase, I think there might just be a classification issue. We're really running a steady ship there. As we note in the presentation, we target to have about 5 years' worth of supply and to keep about 3 quarters of those on balance sheet. That's consistent with what we guided to at the Investor Day.

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Operator [45]

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Your next question comes from the line of Rohan Koreman-Smit from Goldman Sachs.

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Rohan Koreman-Smit, Goldman Sachs Group Inc., Research Division - Industrial Analyst [46]

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Just a couple of quick ones. Firstly, in the building products division, just trying to square away the pretty solid volume growth from the board sales concrete pipe and glass wool with the fact that gross revenue was backward slightly. Can you just talk to the pricing outcomes you're achieving?

Secondly, residential, is 1,000 still the target in terms of total sales just given the Auckland's slower market? Or have you kind of pushed out, the target date for achieving that?

And then thirdly, just on Construction, Precinct talk to about $36 million of liquidated damages with their result. Just wondering, is that within provisions that you currently have?

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Ross H. Taylor, Fletcher Building Limited - CEO [47]

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Yes. I'll deal with the second, and I'll let Bevan just briefly talk to your first question. So starting with Precinct, again, no comment on specific projects. But again, we said we will stay within provision. So the answer is yes.

On the resi target, we think -- it's rather than -- the way I look at the residential businesses, it's not so much we have to get to 1,000. It's more -- that's 800 to 1,000 sort of what I think is the sort of the right position we should have in the residential, what I call, low-rise market and footprint. So my reaction to that is that it will actually depend on -- the volumes will depend on the particular development mix in any 1 year. And it might get up to a 1,000, but could equally be the year later 900. So I'd suggest that what we're looking for there is around 800 to 1,000 through that business, and the other part of the puzzle is keeping within that capital envelop we've talked about, the $750 million. So they're the sort of the metrics that we look at for that business. And then I'll let Bevan pick up the first one.

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Bevan McKenzie, Fletcher Building Limited - CFO [48]

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Yes. A couple of comments on your first question, Rohan. Firstly, really the key driver of year-on-year revenue outside of those good improvements that you mentioned was around the pipes businesses. So we alluded to some one-off project revenue in the prior period, which didn't repeat in FY '19. So that's the main driver of that decline. That was about $20 million year-on-year within the pipes business. If you strip that out, you did see that good solid growth in the other businesses. On pricing, it really varies, it really depends where are you looking, in some areas we've got price, which has been broadly flat year-on-year. Wallboards, we've seen prices left around 2% to 3%., so broadly in line with inflation through the prior year. But Ross' comment earlier, it does remain a competitive environment out there and we've got to be mindful of that with obviously some very strong share positions there.

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Operator [49]

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There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.

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Ross H. Taylor, Fletcher Building Limited - CEO [50]

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Just to say thanks for attending this, and I know we'll be seeing many of you over the next 1.5 weeks as we get out in about on our results road show. So look forward to seeing you then.