FY earnings transcript

FYI

TEXT version of Transcript
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Corporate Participants
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* David Mariner
Boral Limited - President & CEO of Boral Industries Inc
* Frédéric de Rougemont
Boral Limited - CEO of USG Boral Building Products
* Michael Kane
Boral Limited - CEO, MD & Director
* Wayne Manners
Boral Limited - Executive General Manager for Western Australia
* Yuen Ling Ng
Boral Limited - Group President Ventures & CFO
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Conference Call Participants
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* Andrew Geoffrey Scott
Morgan Stanley, Research Division - Executive Director
* Brook Campbell-Crawford
JP Morgan Chase & Co, Research Division - Analyst
* Daniel Kang
Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research
* Keith Chau
MST Marquee - Building Materials & Packaging Analyst
* Peter Wilson
Crédit Suisse AG, Research Division - Associate
* Peter Steyn
Macquarie Research - Analyst
* Rohan Koreman-Smit
Goldman Sachs Group Inc., Research Division - Industrial Analyst
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Presentation
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Michael Kane, Boral Limited - CEO, MD & Director [1]
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Good morning. Thank you for joining us today. We appreciate UBS hosting us in their Sydney office. I'm joined by Ros Ng, Group President, Ventures and CFO, as well as other members of the senior management team, including Ross Harper, Group President of Operations; Wayne Manners, President and CEO, Boral Australia; David Mariner, President and CEO, Boral North America; and Frédéric de Rougemont, CEO of USG Boral.
Today, we've announced our results for the full year to 30 June 2019. We've also announced that we've reached agreement with Knauf to form an expanded gypsum joint venture in Asia and for Boral to return to 100% ownership of the gypsum business in Australia. I'd like the cover both, starting with the results.
As our usual format, I'll provide an overview of group and divisional performance and comment on outlook and Ros will present the financials in between. Ros and I will then talk through the transaction with Knauf.
This year, in line with our strategy to exit noncore businesses, we sold the Denver construction materials business and the U.S. Block business for combined proceeds of USD 283 million. Our lower reported results, in part, reflected the sale of these businesses but excluded discontinued businesses. I am pleased to report revenue grew 4% to $5.8 billion and EBITDA was up 2% to $1.03 billion. This was despite a decline in both Australian and U.S. housing activity and a $30 million lower earnings from Property. Our reported revenue, which includes discontinued operations, was steady at $5.86 billion, EBITDA was down 2%, and net profit after tax, but before significant items, of $440 million declined 7%. Including significant items, net profit after tax of $272 million declined by 38%. After-tax significant items totaled $168 million, including $174 million impairment of the U.S. Meridian brick joint venture. The board has declared a final dividend of $0.135 per share, which takes the full year dividend to $0.265
As you know, safety is our first priority. Our full-year safety results demonstrate ongoing improvements, which is very pleasing. We reported an LTIFR, lost time injury frequency rate, of 1.3 which is approaching world-class performance and compares with 1.6 in financial year '18. Boral's combined employee and contractor recordable injury frequency rate of 7.5 is a 14% improvement on 8.7 in financial year '18. Pleasingly, the improved performance was evident across all divisions with USG Boral and Boral North America delivering significant improvements. In fact, Boral North America delivered an LTIFR of 0.7 and USG Boral delivered an LTIFR of 1.0, both standout results. Anything less than 1 is considered world-best practice.

Group EBITDA for continuing operations, $1.03 billion, was $18 million higher than the prior year. Higher earnings from Boral North America were offset by lower contributions from Boral Australia and USG Boral. Boral North America reported a $66 million uplift in EBITDA to AUD 415 million, a 19% increase which was helped by a favorable currency movement. In U.S. dollars, EBITDA was up 10%, underpinned by strong earnings in Roofing and synergies of USD 32 million, which was ahead of plan.
EBITDA growth was lower than we had expected as housing starts contracted for the first time in 8 years and extreme rainfall in our key U.S. states disrupted construction and building activity.
Boral Australia reported EBITDA of $593 million which was $41 million lower year-on-year, a 6% decrease. Excluding Property, Boral Australia's EBITDA declined 2% as lower volumes were largely offset by price growth and improvement initiatives.
Our share of USG Boral equity-accounted earnings of $57 million was $6 million lower year-on-year, reflecting a cyclical decline in South Korea and heightened competition in Asia, particularly in Indonesia, and partly offset by cost reduction initiatives.
During the year, we saw cyclical housing pressures across our key markets, while underlying activity in non-res and infrastructure construction remains solid in Australia and the U.S. In Australia, non-res activity was up 2%. The roads, highway, subdivisions and bridges market was down 6% and residential construction declined 15%. Starts in financial year 2019 are estimated at 196,000, which is still well above the 20-year average.
In the U.S, total housing starts declined 2.4% to an annualized rate of 1.22 million. Single-family starts, which drives around 40% of our U.S. business, were down 3%. The repair and remodel market lifted by around 2%, non-res activity grew 2% and U.S. infrastructure based on ready-mix concrete volumes increased 6%.
In Asia, conditions were mixed. Residential construction in South Korea slowed considerably. In China, economic growth remains positive but construction activity was impacted by regulatory controls and tighter lending policies. Activity in Thailand remains stable and India and Vietnam continue to grow.
For Boral Australia, EBITDA excluding property, was broadly steady as a focused effort on taking cost out of the business and price growth largely offset the impacts of lower volumes and cost increases. Average prices were 1% to 3% higher in Concrete and Cement and steady in Quarries, while wages and other deflationary costs increased around 2.5% to 3%.
At the half year, we said we needed to redouble our efforts to right-size and take costs out of the business. I congratulate Wayne Manners, Ross Harper and the team on the outstanding job done to deliver the result we've seen today, typically given Concrete volumes were down 6% last year. Shortly, I'll ask Wayne to make a few comments on the improvement initiatives, what's been delivered and what we can expect in financial year 2020 but first, let me run through the divisional results.
Boral Australia's revenue was broadly stable, down 0.5%. Higher contributions from Quarries and Cement offset lower revenues from Concrete and Placing, Asphalt and Building Products. In Concrete and Placing, earnings declined due to a 6% decrease in Concrete volumes and a higher proportion of revenue derived from the lower-margin Concrete Placing business. Lower Concrete volumes reflect softer residential demand, particularly in detached and multi-residential activity in Sydney. A marked decline in nonresidential activity in Southeast Queensland and completion or near completion of several major projects ahead of others coming online.
In Quarries, revenue grew and earnings increased modestly. In Asphalt, earning softened on a 5% reduction in revenue with lower volumes and softer margins in Queensland and Victoria, as well as higher cost and lower productivity due to delay on some Major Projects.
In Cement, revenue was up 7% and earnings moderatly higher with favorable pricing, higher external volumes and cost savings offsetting a lower contribution from Sunstate and higher fuel and clinker costs. Production at the Berrima kiln also returned to more normalized levels in the second half.
Building Products reported a decline in revenue and weaker earnings due to lower residential housing activity and higher costs. Property EBITDA of $33 million was $30 million lower than the prior year, with earnings from sales of our Jandakot and Donnybrook properties flowing through in the second half of financial year '19.
Overall, for Boral Australia, EBITDA margins were 16.8% or excluding property, were 15.8% broadly steady on last year.
Wayne, would you like to comment on improving programs in Boral Australia?
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Wayne Manners, Boral Limited - Executive General Manager for Western Australia [2]
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Sure. So ahead of the changes and the market conditions we're expecting, we undertook a number of initiatives around protecting our top line, but also controlling what we can control around our bottom line. I think supply chain is probably a really relevant example of that, which in FY '19 delivered in excess of $15 million in benefit to Boral Australia.
On top of that, in the second half of -- sorry, the second -- the latter part of first half of FY '19, we launched our organizational effectiveness project, which is really about realigning our overheads across Boral Australia. That, combined with some right-sizing across a number of the businesses across Australia, identified in excess of 300 roles to be made redundant and given the ongoing recruiting freezes and the like, in excess of 220 positions actually leaving, or people leaving the business. Overall, in FY '19 delivering a value of $13 million.
So the combination of all our right-sizing and other excellence projects delivered a combined value in excess of $60 million in FY '19. But clearly, that's not the end of the journey for us. With the softening in some markets, we're expecting to continue in FY '20. Those initiatives will continue and indeed, we'll be launching some other initiatives, which we've started already. We expect that to deliver in the order of $55 million in value into FY '20.
Now not all we're doing about is downsizing. Organizational effectiveness is about that, about being effective. So in areas such as procurement, we've actually increased our support to enable them to after further cost savings. That, combined with what is a very mature value improvement program, which has been underway for a number of years, will help us continue to deliver strong margins and indeed, grow and strengthen our margins into the future.
So what we've seen in this year in particular, is a very strong focus on timely execution of our programs, which is particularly important when you consider the infrastructure program that's coming out of some future years. During the year, there was a really strong focus on considered planning and execution to make sure we delivered value in FY '20 -- FY '19, not destroyed value. And going to FY '20, that focus will continue and even grow. Thank you.
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Michael Kane, Boral Limited - CEO, MD & Director [3]
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Thanks, Wayne. Turning now to Boral North America. We've previously talked about the impact of weather in our business and while we would rather avoid the topic, this year, we saw extended periods of extremely high levels of rainfall in the South, Midwest and Northeast with some parts the wettest on record. This caused significant delays in construction activity, particularly in Texas, our key U.S. state. The extended rains slowed volumes across all businesses and likely contributed to the contraction in U.S. housing starts.
Looking at the waterfall chart, EBITDA increased 10% or USD 27 million to USD 297 million. Price gains offset cost inflation, while the benefit of USD 32 million in synergies, together with cost savings, were somewhat eroded by an adverse volume impact and lower Meridian brick post-tax equity earnings. Embedded into the cost savings is a one-off, $10 million benefit associated with 3 legal cases related to the Headwaters acquisition which will resolve below expected cost outcomes.
With Florida largely unaffected by wet weather, we benefited from significant growth in Roofing, together with earnings growth from Windows, Stone and Light Building products. Boral North America's EBITDA margins of 18.6%, up from 17.5% last year, are the highest margins of our 3 divisions. In Fly Ash, we delivered strong price growth of 11%. This helped to offset lower volumes as the expected full-year impact of prior period utility closures in Texas flowed through, coupled with extremely wet weather conditions and unplanned power plant outages. While volumes were down 3% for the year, growth returned in the second half with 3% growth on the prior corresponding period. Fly Ash earnings were slightly lower and impacted by the completion of 2 large site service projects, known as [Barry] and Gaston ahead of new projects starting as well as higher costs. EBITDA margins of 22% compared to 24% in the prior year, excluding site services, revenues were up 7% and earnings were steady.
We made good progress to increase Fly Ash supply. Our landfill reclamation operation at Montour, in Pennsylvania was successfully commissioned with volumes ramping up by year end after a slow winter, and we're supplying the market with modest volumes of imports from Mexico. Pleasingly, our continued investment in Fly Ash storage has seen our total capacity reach 600,000 tons.
Roofing delivered strong earnings growth driven by a 15% increase in revenue. Concrete roofing volumes benefited from strong demand in Colorado, Nevada and the Florida markets and prices increased 5%. Manufacturing performance at the Okeechobee, Lake Wales and Oceanside metal roofing plants continue to improve.
Light Building Products reported stable revenue and modest increase in earnings. Double-digit volume growth for TruExterior, siding and trim; and good price gains in Versetta and TruExterior were highlights in a period where other product categories slowed due to weather and lower housing activity.
In Stone, we delivered steady revenue and a modest increase in earnings with price gains and cost savings associated with the rationalization of 2 distribution facilities and completion of the Greencastle plant upgrade in the prior period. This was partly offset by inflationary cost pressures, primarily from labor and raw materials and lower volumes reflecting lower activity in the U.S. and Canada.
The Windows business reported a 5% lift in revenue and higher earnings with market share gains partly offset by volume impact of adverse weather conditions.
The Meridian brick JV delivered a post-tax equity loss of USD 7 million compared with a loss of $1 million in the prior year. The result reflects a significant downturn in the Canadian housing market, which has historically contributed a significant portion of the earnings of the joint venture and softer U.S. housing starts.
In response to lower demand, a significant number of plants were temporarily closed in the second half, helping to address inventory and working capital but adversely impacting EBITDA due to lower fixed cost recovery. These factors, together with the recent decline in brick intensity per housing start in the U.S.A., triggered a net impairment of the investment in the Meridian brick joint venture of AUD 174 million, reported as a significant item.
As mentioned, we delivered cost and revenue synergies of USD 32 million, ahead of our targeted $25 million. In financial year 2020, we expect to deliver USD 20 million with our 4-year synergy target of $115 million remaining on track.
Now to USG Boral. In USG Boral, cost savings and improvement initiatives offset inflationary cost increases but were not enough to offset the impact of lower plasterboard volumes, primarily in South Korea, and softer price outcomes in South Korea and Indonesia.
Underlying revenue was up 2% with growth in Thailand, China, Vietnam and India, a steady contribution from Australia and a higher non-board sales. Underlying earnings were 6% lower, reflecting the cyclical slowdown in South Korea and higher costs.
Our 50% share of USG Boral's post-tax earnings of $57 million was down 10%. Australia/New Zealand delivered broadly steady revenue with strong volumes maintained as share gains offset a soft fourth quarter.
In South Korea, plasterboard volumes were down around 10% and prices were lower, reflecting declining market demand and intense competition as a competitor added new capacity. While margins contracted, the business maintained its market share and margins continued to be well above USG Boral's average margins.
China reported higher revenue due to growth in non-board product. However, earnings were lower with the reduction in plasterboard volumes and higher production costs. Both plasterboard demand and price growth were lower-than-expected as a number of competitor plants reopened following the implementation of environmental controls in the prior period.
In Thailand, revenue and earnings were higher, with margins improving and market share remaining strong.
Indonesia revenue and earnings declined as pricing pressures, underpinned by excess industry capacity, continued and raw material cost increased.
Vietnam reported revenue and earnings growth underpinned by double-digit volume gains and strong price improvement.
We continue to target returns that exceed the cost of capital through the cycle. Boral Australia delivered an EBIT return on funds employed of 15.1%, well above our ROFE equivalent cost of capital of around 9%. Boral North America, with an improved ROFE of 5.6%, up from 4.4%, remains well-placed to deliver above cost of capital returns over time through full realization of acquisition synergies and market growth.
USG Boral's underlying ROFE of 8.1% fell below Boral's cost of capital, reflecting the lower earnings performance. Group ROFE was at 8.2% for the year.
I'll now hand over to Ros to go through the financials.
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Yuen Ling Ng, Boral Limited - Group President Ventures & CFO [4]
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Thanks, Mike, and good morning, everyone.
Looking at the result in more detail. Reported revenue of just over $5.8 billion was steady and EBITDA of $1.04 billion was down 2%. Excluding discontinued operations, EBITDA increased 2%.
Depreciation and amortization of $316 million was up from $307 million reported last year. This excludes a $61 million of amortization of acquired intangibles relating to the Headwaters acquisition. Net interest of $103 million was broadly steady. Our interim tax expense of $116 million and effective tax rate of 21% were higher than the prior period. The effective tax rate was in line the guidance. If we exclude the benefit of further recognition of previously unrecognized tax losses and utilization of capital losses, our effective tax rate is around 24%.
Net profit after tax and net profit after tax before amortization, NPATA, were down 7% and 6% to $440 million and $486 million, respectively. Significant items, which I'll turn in the next slide, resulted in net loss of $168 million. Statutory net profit after tax was down 38% to $272 million from $441 million in the prior year.
Looking at significant items in more detail. The underperformance of the Meridian group business in the current year, reflecting a significant downturn in the Canadian market, softening of U.S. housing starts together with the continued decline in brick intensity triggered an impairment of investment in the Meridian bricks joint venture of AUD 196 million.
Headboard and integration costs, cost associated with cost reduction and right-sizing initiatives in Australia and USG Boral as well as USG Boral legal and consulting costs totaled $67 million. The sale of the Denver Construction Materials and U.S. Block businesses resulted in gains of $66 million and $4 million, respectively. Net of tax, we reported significant items of $168 million for the full year.
Turning to cash flow. Operating cash flow of $762 million increased 32% as a result of the reduction in Headwaters integration and acquisition cost; a decrease in working capital, interest and tax outflow compared to financial year '18. The current year's change in working capital was better than the prior year by $51 million. However, this year's working capital was unfavorably impacted by the settlement of several legal matters relating to the Headwaters acquisition. The underlying working capital was relatively stable compared to the prior year.
Interest paid was in line with last year, with tax paid decrease largely reflecting lower taxes installments in Australia as well as the continued utilization of tax losses in the U.S. Free cash flow of $712 million was $477 million higher as a result of the sale of the Denver Construction Materials and U.S. Block businesses. We also acquired a small Concrete Placing business in Queensland in the first half of this year, which is a relatively modest investment of $11 million. Net cash flow after dividends paid of $403 million was $457 million higher than 2019.
We continue to maintain a disciplined approach to capital management. Total capital expenditure increased 7% to $453 million. In Australia, our foreign investment in Orange Grove in Western Australia and Ormeau in Queensland were completed. Orange Grove is producing at nameplate capacity and almost has reached practical completion and continues to ramp up in line with expectations. We continue to progress construction of our new clinker and slag grinding and storage facility at Port Melbourne in Victoria, which is expected to be completed by end of calendar year 2020. We also made modest investments in Boral Concrete and Asphalt network, a new high-capacity Concrete batch plant at West Melbourne and a new Toowoomba asphalt plant. Both were commissioned during the year.
CapEx in Boral North America covered investments in Fly Ash, including our Montour reclaim facility, railcars and fixed storage. We also upgraded our Stonecraft plant in Ohio and our Rosarito manufactured stone plant in Mexico.
The USG Boral joint venture continues to self-fund its capital requirements. Our capital expenditure is expected to be lower in financial year 2020, in a range of $350 million to $400 million.
Now looking at the balance sheet. At 30 of June '19, Boral's net debt position was $2.19 billion, down from $2.45 billion at the 30 of June '18 due to the sale of the U.S. businesses, partially offset by a weaker exchange rate. We remain well within our group funding covenants with our principle debt gearing covenant of 29%, down from 31% at June '18. Significantly within our threshold, which is less than 60%. Our weighted average debt facility maturity is 4.5 years, down from around 5.5 years in June 2018.
Our balance sheet remains in a strong position and continues to put out existing BBB and Baa2 investment-grade credit rating. Our net interest covers 6.4x, is down from 6.6x in June. And our net gearing -- net debt over net debt plus equity was 27% at the end of June '19, down from around 30% at June 2018.
I'll now hand back to Mike.
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Michael Kane, Boral Limited - CEO, MD & Director [5]
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Thank you, Ros.
Outlook for 2020. Taking into account where we finished the year in financial year '19, the outlook for Boral's markets and financial year 2020 and trading conditions through July and August, we expect NPAT to be around 5% to 15% lower in financial year 2020 relative to financial year 2019. This reflects downward earnings pressure in Boral Australia and USG Boral but underlying earnings growth from Boral North America, together with higher depreciation charges as our quarry investments in Australia come online.
We expect Property earnings to be above the average $33 million per annum that we have delivered over the past 18 years and at the half year, we expect to be in some more -- to have more certainty around where that number may end up for the year. This outlook statement does not take into account any additional earnings from the announced USG Boral-Knauf transaction, which will depend on the timing of completion. There will also be implications of the new IFRS leasing standard that will impact our reported earnings, which are outlined in our discussion analysis and in the next back up slide.
I don't intend to talk through this slide, but it's here for your reference. Instead, let me turn to strategy.
During the year in Boral Australia, we made further progress on construction of a new, 1.3 million-ton clicker and slag grinding plant and storage facility at the Port of Geelong, which is expected to cost up to $130 million at the end of calendar year 2020.
Our Quarry reinvestments at Orange Grove quarry in Western Australia and Ormeau Quarry in Queensland were completed. Orange Grove is expected at targeted capacity and production in Ormeau is ramping up in line with expectations. Benefits will be delivered from financial year 2020.
In North America, we continue to deliver benefits from the Headwaters acquisition. We completed the first phase of plant network optimization in Stone. And in Roofing we launched our branding and channel-to-market strategies to grow our metal roofing line. Consolidation of back-office, finance and IT systems are continuing in line with our expectations. We've now delivered USD 71 million of acquisition synergies and remain on track to deliver our targeted year 4 synergies of USD 150 million per annum.
In the Fly Ash business, we are making progress to deliver our target of a net increase of 1.5 million to 2 million tons per annum on financial year 2018 volumes of available Fly Ash over the next 2 years. By the end of financial year '21, we expect to be supplying Fly Ash at a run rate of at least 8.6 million tons per annum, with volume growth coming from a range of initiatives including opportunistic imports, new contract volumes, fixed and mobile storage of off-season production, landfill reclamation and mining natural pozzolans to supplement ash production. In financial year 2020, we won't see a lot of growth as we still have to absorb the well-flagged closure of the Navajo plant in Nevada from December 2019, which will take 400,000 tons per annum of supply out of our network.
Also, in financial year 2020, site services revenue as a portion of total Fly Ash revenue, is expected to return to the longer term average of around 20% with the completion of the major site service project at the TVA Cumberland utility and the SynMat business, ahead of starting other potential work in the pipeline.
As previously mentioned, during the period, we continued the divestment of non-core businesses with the sale of Denver Construction Materials in July 2018 for USD 127 million. The divestment of the Texas-based U.S. Block business in November 2018 for USD 156 million and last week's announced divestment of Midland Brick for AUD 82 million, subject to closing conditions. Proceeds from these divestments total around USD 340 million, which will contribute to the funding of today's announced USG Boral transaction with Knauf.
Let me now talk about today's USG Boral announcement before asking Ros to go through details and Frédéric to give his perspective. The agreement with Knauf marks the completion of an exhaustive process of considering the full range of strategic options available to Boral and the USG Boral and I'm certain the agreement we've reached is the best outcome for Boral and for the JV.
While this opportunity only came about because of Knauf's acquisition of USG, the investment we are making in this business is completely aligned with Boral's stated strategy. We said we wanted to grow in low capital-intensive, higher-growth businesses and that is what we are doing. We said the USG Boral business was our long-term growth platform and we are strengthening that platform to deliver value today and in the future.
In Asia, we are forming an expanded 50-50 JV with Knauf, bringing together 2 highly complementary businesses: USG Boral in Asia; and Knauf Asia Plasterboard. Knauf is underlying -- undeniably the largest plasterboard player in the world and USG Boral has the most enviable position in plasterboard in Asia.
The JV is acquiring a highly profitable growth business in China and an emerging business to bolt on to existing operations in Southeast Asia. We expect to deliver USD 30 million of synergies in 4 years.
In Australia, Boral will acquire Knauf's 50% of USG Boral, returning Boral to 100% ownership of the business. When we last owned the business outright, we were the #2 player. Today, we have the leading brand in Sheetrock and a substantially strengthened position. We will continue to have R&D and IP support from USG, and we'll be well-placed to maintain USG Boral's strong position in Australia and emerging position in New Zealand.
We have agreed to purchase -- to a purchase price of USD 200 million, which represents an attractive EBITDA multiple of 5.7x. We've also agreed to grant Knauf a call option to return to 50% ownership of the business within 5 years. The granting and exercising of the call option are both subject to Australian and New Zealand regulatory approvals.
The total transaction delivers immediate EPS accretion to Boral of around 3% to 5% on financial year '19 pro forma financials.
Boral's total direct funding requirement is USD 335 million, which will be funded through debt and recent divestments. In fact, our 3 divestments of Colorado Construction Materials, U.S. Block and Midland Brick totaled $340 million, so we'll be drawing on debt by the equivalent amount of these non-core divestments. It's a great outcome.
Let me hand over to Ros to explain the transaction in more detail.