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Edited Transcript of VLW.AX earnings conference call or presentation 20-Aug-19 3:00am GMT

Full Year 2019 Villa World Ltd Earnings Call

Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Villa World Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 3:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Craig Treasure

Villa World Limited - CEO, MD & Executive Director

* Lorelei Nieves

Villa World Limited - CFO

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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 Villa World FY '19 results presentation. (Operator Instructions)

I'd now like to hand the conference over to your first speaker today, Craig Treasure, CEO and Managing Director. Thank you. Please go ahead.

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Craig Treasure, Villa World Limited - CEO, MD & Executive Director [2]

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Good afternoon. My name is Craig Treasure, Managing Director and CEO of Villa World. Thank you to those in attendance and also welcome to those watching this FY '19 full year results presentation via webcast.

Today, I'll be providing a high-level overview of Villa World's strategic direction and our progress before handing over to Chief Financial Officer, Lorelei Nieves, for more detailed commentary on this year's results.

I said at our half year presentation back in February that the variable market conditions are part of the cyclical nature of the residential housing industry. The compounding factors that I indicated at that time were influencing the property market have continued to have a bearing on the full year picture.

Consumer confidence remained low throughout the year. And despite positive underlying fundamentals of low interest rates, low unemployment and first home buyer incentives, buyers were affected by the impacts of the banking royal commission and difficult lending conditions.

Villa World's strategy and scalable business model has served the company well given the challenging market, enabling us to deliver a solid full year result.

During the past year, the Villa World team set about executing and implementing our strategic purpose and 6 core business beliefs centered around Helping People Reach Home. I remain convinced that one of the important strengths of our company comes from the culture, values and behaviors of our people.

Villa World's strong brand and its customer and people-focused operations have made the company an attractive proposition. It comes as no surprise that AVID Property Group was attracted by Villa World's innovative housing platform and exposure to greenfield East Coast growth corridors.

Likewise, Villa World's building efficiencies, astute acquisitions and disciplined capital management have helped us to actively manage the company through the current headwinds.

Villa World began a significant business transformation 7 years ago, committing to and delivering on an undertaking to recommence dividends by strategically focusing on its core product and scalable business model. There is no doubt that Villa World has enjoyed outstanding revenue results over the past 5 years.

The softer market conditions experienced during FY '19 have brought our numbers back this year with a net profit after tax result of $23 million.

As I said, the company's scalable business model, our strong customer and people focus and good strategy execution provided some firm underpinnings to navigate the challenging market conditions of FY '19.

A reduction in sales inquiries in late 2018 had a flow-on effect with FY '19 sales reduced to 870 lots from the record high at the previous year. And while we are seeing that sales inquiries have started to improve across Villa World's projects, buyers are remaining cautious. We will carry forward 992 sales contracts worth $291.4 million into FY '20.

We continue to meet the everyday housing needs of Australians, particularly first home buyers, owner occupiers, domestic investors and builders through consistent delivery of high-quality, affordably priced completed designer homes.

Villa World's award-winning design offering and projects that promote healthy active lifestyles are set to continue to attract value-driven buyers and investors.

Across our 3 state markets, demand in Victoria moderated from the cyclical highs seen in financial year '18. This was influenced by the tight credit conditions, stubbornly low consumer confidence and strong price growth over recent years, which has had an impact on affordability.

Queensland flagship projects, including The Meadows at Strathpine, Killara at Logan and Arundel Springs on the Gold Coast have sold well. However, an anticipated uplift in the Queensland market is still yet to eventuate.

The New South Wales market remains challenging in the southwest of Sydney.

I'll now ask Lorelei to step you through the results in more detail. Welcome, Lorelei.

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Lorelei Nieves, Villa World Limited - CFO [3]

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Thank you, Craig. Villa World reported a statutory net profit after tax of $23 million for the year ended 30 June 2019 with EPS at $0.182 per share.

Revenue, NPAT and EPS results for FY '19 reflects a new revenue recognition standard, AASB 15, with house-and-land and land-only contracts being recognized upon cash settlement.

Prior period's revenue recognition is under the former AASB 8 -- 118. The results are driven by revenue of $391.6 million and a reported gross margin of $93 million or 23.7%, within the target range of 23% to 25%.

Villa World continues to deploy development skills into joint venture arrangements. During the period, these ventures contributed $3.4 million to profit, comprising fee income of $1.3 million and share of profit of $2.1 million related to the settlement from Covella joint venture and the final settlement at the completed Rochedale joint venture.

I refer to Slide 21 of the annexures for details of the carried forward sales.

We entered the year with 992 contracts carried forward, which are valued at $291.4 million. The company is carrying forward significant unconditional sales from its Sienna Rise, Sienna North and Lilium projects in Victoria.

Settlements at Lilium commenced in May 2019 with the delivery of the initial 4 stages. Settlements are progressing well and although some defaults have been recorded, the impact has been mitigated through the retention of deposits and the lots being resold.

Settlements at the initial stages of Sienna Rise and Sienna North are expected to commence in first half '20.

The Villa World Board has decided not to pay a final dividend for the year, making total dividends for FY '19 of $0.08 per share fully franked. This represents a payout of 44% of NPAT, which is outside the company's stated dividend policy of 50% to 75%.

As Craig detailed earlier, the company recorded 870 sales during FY '19 and settled 1,158 lots.

The company's product mix is consistent with the prior year and reflects the continued focus on the core capabilities in house-and-land as well as land-only sales across all states.

The average revenue per lot has increased by 11% to $353,100, which was driven by increases in both the average house-and-land and land-only revenue. This is a result of increased contribution from our New South Wales projects, plus Arundel Springs on the Gold Coast and Lilium in Melbourne, where average sale prices are [higher].

During the period, the company operated the $190 million senior debt facility with ANZ and Westpac, which had a staggered maturity profile through to March 2022. On the 13th of August 2019, Villa World secured an increase in the ANZ facility to $190 million and extended the staged maturity profile through to October 2023. ANZ is now the sole lender under the arrangement.

In addition to the cost facility, the company has $50 million of simple corporate bonds on issue. The bonds are 5-year floating-rate instruments, which mature in April 2022.

As reported last August, capital expenditure during FY '19 will be focused on the development of Villa World's current portfolio, especially in relation to Lilium and Sienna, where we carry forward significant unconditional sale.

As expected, stages 1 to 4 at Lilium commenced settling in May 2019 and have contributed to lowering the gearing level from near 30% down to 24.1% at the close. This result is well within the target range of 15% to 30%.

We expect to continue to receive significant cash inflows in first half '20 as settlement of carried forward sales on Sienna commence and settlements at Lilium continue.

At year-end, net debt was $115.3 million with $102.8 million of undrawn capacity in the debt facility. The company's debt and bond covenants remain within limits.

In October, the company commenced an on-market share buyback of up to 5% of shares on issue. The company seeks to buy back shares under the on-market share buyback in March 2019, at which time 1.77 million shares at an average price of $1.91 have been purchased. The buyback represented a prudent deployment of capital being NTA and earnings per share accretive. At year-end, net tangible assets equated to $2.28 per share.

Now looking at the cash flow. A strong net cash flow from trading activities of $126.3 million has been achieved as a result of disciplined cost management and settlement of carried forward sales. This has supported expenditure of $29.9 million on value-accretive projects, which were mostly contracted in the prior period.

The balance sheet is well positioned to support the company with its strategy of smart growth and delivery of carried forward sales with low net debt and significant headroom in the current debt facility.

I'll now hand you back to Craig to discuss the market outlook. Thank you.

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Craig Treasure, Villa World Limited - CEO, MD & Executive Director [4]

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Thanks, Lorelei. I've made reference to the softening market conditions and headwinds impacting our sector. I'll now touch on those a little further.

During the past year, customers have been impacted by reduced credit availability, delayed finance approvals and more stringent assessment criteria.

Key market fundamentals of low interest rates, population growth and low unemployment has been positive during the period, but this has been overshadowed by low consumer confidence.

Given the market conditions, the company look to ensure that its cost structure's adjusted to meet requirements. This included a significant reduction in head count, which is set to benefit FY '20.

Since the May Federal Election and finalization of the banking royal commission, we have seen lending conditions improve with amendments to APRA's serviceability test, new tax offsets and interest rate cuts. Although we have seen an improvement in sales inquiries, consumer confidence remains low and we've yet to see an increase in confirmed sales.

Villa World will continue to focus on operational delivery and cash settlement of its carried forward sales.

The company expects that the upturn in sales inquiry I mentioned, may convert to an increase in sales rates during FY '20, although buyers remain cautious. The company expects its FY '20 gross margin to be within the 23% to 25% guidance range.

Development management fees and share of joint venture profits will continue to provide an ongoing revenue stream as the company pursues capital-efficient growth opportunities that provide a strong return on assets.

We know that our projects are located where people want to live. Our homes are priced within the reach of customers and our turnkey homes offer a unique customer experience. The transaction with AVID recognizes these strengths and provides our shareholders the opportunity to realize their investment in Villa World at an attractive and certain price.

On the 8th of July, 2019, Villa World announced that it had entered into a binding Scheme Implementation Agreement with AVID, under which AVID proposes to acquire all shares in Villa World for $2.345 per share. The Villa World Board has announced that it intends to declare a $0.31 per share fully franked special dividend, if the scheme becomes effective. If declared, shareholders will receive the special dividend and reduced scheme consideration of $2.035 per share to form the total cash consideration of $2.345 per share.

The special dividend should enable most shareholders to benefit from Villa World's franking credits, subject to a favorable class ruling from the Australian Taxation Office and subject to individual shareholder circumstances.

The Board unanimously recommends that its shareholders vote in favor of the scheme. In making this recommendation, the Board considered several factors, including the premium to shareholders, certainty of value and the opportunity for the Board to declare a special dividend.

Villa World expects to dispatch the scheme booklet to Villa World shareholders in September 2019. We anticipate that the scheme meeting will be held in mid-October 2019, which will provide shareholders with an opportunity to vote on the scheme. Subject to shareholder approval and the conditions of the scheme being satisfied, the scheme is expected to be implemented in late October or early November 2019.

Consistent with the Scheme Implementation Agreement, Villa World is assisting AVID with their efforts to redeem and prepay interest on the Villa World bonds as at the date of implementation, if the scheme becomes effective.

The transaction with AVID recognizes the strengths of the Villa World business and provides our shareholders the opportunity to realize their investment in Villa World at an attractive and certain price.

Finally, I would like to thank the entire Villa World staff for all their efforts this year. As a team, we are focused on delivering our carried forward sales and continuing to achieve sales through our unique customer experience and turnkey product offering in a very tough market.

I'm happy to take any questions and also note that we are now joined by our Company Secretary and General Counsel, Brad Scale, who is available to assist us with questions on the scheme of arrangement, if there are any. That's it from us.

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Operator [5]

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(Operator Instructions)

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Craig Treasure, Villa World Limited - CEO, MD & Executive Director [6]

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Okay. I think if there's no questions, we'll probably wrap up there.

I'd like to thank everyone listening today. And we look forward to communicating further with you following the release of our scheme booklet in the coming months. Thank you.

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Operator [7]

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Thank you so much. Ladies and gentlemen, that does conclude the call for today. Thank you so much for your attendance. You may now disconnect.