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Edited Transcript of BLD.AX earnings conference call or presentation 23-Aug-22 1:00am GMT

Full Year 2022 Boral Ltd Earnings Call Sydney Aug 23, 2022 (Thomson StreetEvents) -- Edited Transcript of Boral Ltd earnings conference call or presentation Tuesday, August 23, 2022 at 1:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jared Gashel Boral Limited - Acting CFO * Zlatko Todorcevski Boral Limited - CEO, MD & Director ================================================================================ Conference Call Participants ================================================================================ * Anderson Chow Jarden Limited, Research Division - Analyst * Brook Campbell-Crawford Barrenjoey Markets Pty Limited, Research Division - Head of Cyclical Industrials Research * Daniel Kang CLSA Limited, Research Division - Research Analyst * Keith Chau MST Marquee - Basic Industrial Analyst * Lee Power UBS Investment Bank, Research Division - Analyst * Lisa Huynh JPMorgan Chase & Co, Research Division - Analyst * Peter Steyn Macquarie Research - Analyst * Peter Wilson Crédit Suisse AG, Research Division - Associate * Samuel Seow Citigroup Inc. Exchange Research - Research Analyst * Scott Ryall Rimor Equity Research Pty Ltd - Principal * Simon Thackray Jefferies LLC, Research Division - Equity Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Boral Limited FY '22 Results Financial Community Conference Call. I would now like to hand the conference over to Mr. Zlatko Todorcevski, CEO and Managing Director. Please go ahead. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [2] -------------------------------------------------------------------------------- Good morning, and thank you for joining us. I'm talking to you from our office in North Ryde this morning. I'm here on (inaudible) land, and I'd like to acknowledge the traditional owners of the lands from which we're all joining today. We recognize and respect all aboriginal and Torres Strait Islander Peoples and their unique position in Australian culture and history, and pay our respects to their elders past, present and emerging. I'll provide a brief overview of Boral's full year results to 30 June 2022 and our progress on strategic priorities. Then Jared Gashel, Boral's acting CFO, will take you through some of the detail of the financial results and present our new property framework. I'll then outline our first half FY '23 priorities and our expectations for FY '23. At the end, we'll open up to Q&A. The slides I'll refer to are on our website and on the ASX platform. Turning first to our FY '22 overview on Slide 3. Boral's continuing operations EBIT, excluding property, of $107 million was in line with our revised earnings guidance announced on the 18th of May. While there was strong underlying demand across our end markets, particularly from infrastructure activity, our earnings were severely impacted by external operating challenges. These included extreme rainfall, particularly in New South Wales and Queensland, construction shutdowns in the first half and sharp increases in energy prices. Energy cost increases accelerated in the second half and are driving broader inflationary pressures expected to continue in FY '23. Supply chain constraints and labor shortages resulted in increasing costs, hampered our ability to meet customer demand and delayed completion of some of our capital projects. For example, we've experienced periods of driver shortages, impacting utilization of our agitator fleet, and the commissioning of our Geelong cement plant has been delayed by labor shortages, particularly for specialist skills. I'm pleased with the success we have seen more recently in some of our nontraditional recruitment initiatives, which is seeing better traction in employment and securing of trucking capacity. We've also taken actions to respond to the cost challenges. These include implementing pricing initiatives, accelerating our overheads review, notably by simplifying our corporate organizational structure and taking measures to mitigate energy costs. Looking at some of our key numbers on Slide 4. For continuing operations, reported revenue was up 1%, and on a comparable basis up 3% after adjusting for revenue from a Asphalt joint venture now equity accounted, but proportionately consolidated in the prior year. EBIT, excluding property of $107 million, equates to a sales margin of 3.6% compared to 5.4% in FY '21. And cash from operations declined 16% to $217 million. On a total operations basis, group statutory profit after tax was $961 million and included a post-tax gain of $811 million from significant items, primarily relating to the profit on sale of the Boral North American businesses. Net profit after tax of $150 million before significant items compared to $251 million in the prior year, reflecting the part year contribution from discontinued operations and lower earnings from the continuing construction materials business. In February, we returned $2.72 per share to shareholders following the divestment of noncore assets, of which $2.65 per share was by way of an equal capital reduction and not assessable as a dividend for Australian taxation purposes. Looking more closely at the impact of adverse weather in FY '22 on Page 5. Unprecedented rainfall across key regions in New South Wales and Queensland resulted in a negative EBIT impact of $45 million due to volume impacts and additional operating and repair costs. The additional costs included road transport to mitigate the closure of the train line from our Peppertree Quarry and mold and cement operations into the Sydney CBD, and operating impacts at some of our quarries. Adverse weather impacts were most notable between February and May. Due to the extreme level of rain, this impacted our ability to deliver to customers not only on rain days, but in subsequent days as customer sites were too wet to resume work. As we disclosed at our first half FY '22 results, construction industry shutdowns had an adverse EBIT impact of $33 million. Turning to Slide 6. The impact of higher energy prices and significant increases in cartage costs over and above typical inflation, resulted in a negative year-on-year EBIT impact of $58 million. Gross energy costs increased 71% to $200 million before a year-on-year hedging benefit of $35 million relating to diesel and electricity. We've also been impacted by significant increases in cartage costs in the second half, with the impact over and above typical historical inflation totaling $10 million. The reduced level of hedging in place in FY '22 reflected our decision in the previous year to reduce hedging for operational exposures based on our assessment of the evolving mix of energy needs, our earnings at risk and the cost to hedge over the longer term. Moving now to Slide 7. We've responded to the challenges by taking pricing actions, prioritizing our review of overhead costs and managing energy usage. For January and February out-of-cycle price increases exceeded our expectations, although this price increase was sized based on energy inflation in the first half, not the further sharp increases we experienced in the second half. In addition, we brought forward the annual price increase from October to August 2022. This increase is the largest price increase in a decade. We also introduced transport charges in late FY '22 to help recoup higher fuel prices. These pricing actions are supported by a more disciplined approach to pricing, which includes a new central deal desk, reduced levels of authority and a reduced quote validity period. We're incorporating inflation escalation measures in pricing major projects, ensuring there are regular price review triggers and we'll be adopting a more dynamic approach to pricing in response to inflation uncertainty, including opening existing contracts. In June 2022, we implemented a simplified corporate organizational structure, which resulted in a reduction of roles. This will deliver an annualized cost saving of $35 million, including $24 million in FY '23. The simplified corporate structure includes a streamlined executive leadership team that combined the previous executive committee and operational leadership team and became effective from the 1st of July. We're also taking actions to mitigate our energy costs by switching to more economical energy sources. For example, to mitigate the component of our gas supply that isn't fixed, we have recently shifted to partial use of coal at our Marulan lime kiln and are actively managing usage depending on market pricing. We're also implementing options for greater use of waste materials for energy. Turning to market activity on Slide 8. Looking at ABS value of work data for the 9 months to March 2022, activity across our end market segments grew 4%. The Roads, Highways, Subdivisions and Bridges segment reported significant growth of 14%. Overall, residential activity increased 2%, with a strong increase in detached housing and alterations and additions activity, partly offset by continued softening in multi-residential work. We're now observing a noticeable slowdown in the detached housing pipeline, although we're expecting activity to carry forward into the second half before we start to see some tapering off of demand. Offsetting detached housing, we're expecting a strong uptick in multi-residential in the current year off the back of strong starts, affordability issues with detached housing and emergent immigration. Nonresidential activity was up 2%, and the outlook for commercial work remains positive with a large pipeline of public and private projects expected to support activity in FY '23. Boral's revenue growth was largely driven by increased supply to the roads, highways, subdivisions and bridges, detached housing and alterations in addition segments. Bucking the national trend, the value of work done in New South Wales, where we have a greater exposure, declined by 3%, with nonresidential work down 6%, infrastructure activity down 2% and overall residential activity down 1%. Given our greatest exposure and strong integrated margin in New South Wales, there was a less favorable geographic shift away from New South Wales, with revenue from New South Wales declining to 40% of total revenue in FY '22 from 42% in the prior year. Turning now to major projects and the pipeline of work on Slide 9. Boral's major projects contributed 10% of continuing operations revenue, steady on the prior year, with construction materials intensity increasing slightly. We expect that some projects will be impacted by labor constraints and cost inflation. However, we are seeing increased tendering and award activity. We've recently won the Sydney Metro West western tunnel package precast supply and the HMAS Albatross asphalt upgrade work. These recently secured projects, in addition to others won earlier in the year, will contribute to an expected increase in major project work in FY '23. Our strategy of focusing on major projects that utilize mobile plant is proving successful and enables our fixed plant network to be preserved for existing customers. Additionally, there is a sizable pipeline of opportunities expected to commence in the second part of FY '23, which we're actively tendering for and well positioned to secure. Turning to Slide 10. We've made considerable progress towards our strategic priorities, which aim to build a more profitable, competitive and customer-focused business. We completed the Focus pillar of our strategy, which was to divesting our noncore assets and unlock value for shareholders. This was a significant divestment program encompassing 6 transactions, which have achieved combined sales proceeds of $5.5 billion, including $4.1 billion in FY '22. Our focus is now on the Position and Redefine pillars. The Position pillar of our strategy is aimed at delivering an improved focus on customers and stronger profitability. Our transformation program delivered benefits of $42 million net of inflation, excluding energy-related inflation, which was below the range we targeted at the start of the year of $60 million to $75 million. This was primarily due to delays in some initiatives, including due to COVID-related impacts and broader inflationary cost pressures. Boral's transformation program set in FY '21 was sized to deliver $200 million to $250 million in earnings benefits after inflation by 2025. While I'm pleased with the $223 million of gross initiatives we've delivered in the first 2 years of the program, the heightened inflationary environment we now face has required a rethink. We've reset our focus to more than offset total inflationary impacts through a combination of pricing actions and performance improvement initiatives to deliver improved earnings. These performance improvement initiatives include the cost benefit from the headcount reductions in FY '22, resulting in a $24 million benefit in FY '23. We're also focused on building a stronger foundation by investing in our network to optimize our integrated position. We acquired Hillview Sands for $30 million and operating sand quarry to enhance our sand position west of Melbourne. We also made strategic land purchases at Badgerys Creek to enhance our Western Sydney position and at Dunmore to access additional quarry reserves. We've also strengthened our cement position, completing the commissioning of Mill 1 at the Geelong clinker, grinding and storage facility and closing our Waurn Ponds operations. The second mill and the slag dryer at Geelong are expected to be completed in the second quarter of FY '23. The Redefine pillar of our strategy is to differentiate Boral through a clear focus on sustainability. In 2021, we set ambitious science-based 2030 carbon emissions reduction targets aligned with the goals of the Paris Agreement, which was subsequently approved by the science-based targets initiative. A key lever of our decarbonization pathway is to increase penetration of our lower carbon concretes, ENVISIA, Envirocrete Plus and Envirocrete. By the last week of June 2022, lower carbon concrete represented 19% of our concrete volumes compared to 4% in the prior comparable period. Our penetration has continued to grow in early FY '23 and will further accelerate as we launch in Sydney, Victoria and South Australia. To support this growth, we launched a major advertising campaign for ENVISIA in June. ENVISIA uses our proprietary ZEP binder technology to achieve superior engineering qualities that deliver significant performance and cost benefits for our customers, with lower embodied carbon and no handling precautions. As a result, it's delivering a pricing premium. In FY '22, we devised and piloted a materials management solution, which offers our customers waste materials collection and management solutions for demolition and site materials, such as concrete, bricks and soil. The success of the pilots has resulted in this service now becoming a standard offering. We're progressing work at our Berrima cement plant on a chlorine bypass system that will enable us to increase the use of alternative fuels from the current 15% to 30% and eventually up to 60% replacement of coal. This upgrade is expected to be fully commissioned by the fourth quarter of the current financial year, and we'll reduce our reliance on coal, reducing both our energy costs and carbon emissions. We also continue to assess opportunities to shift our electricity supply to renewable sources. Turning to sustainability on Slide 11. Our safety outcomes were not where they should be, and I'll cover this in more detail on the next slide. We've recently established a new diversity and inclusion strategy, which includes objectives to increase representation of diverse groups and provide equitable access to opportunities. Pleasingly, in FY '22, we continue to have favorable pay equity outcomes with no pay gap in the female to male average base salary equity ratio. As I already mentioned, we're making strong inroads in increasing customer adoption of our lower carbon concretes, and we're also working on further growing the quantity of materials at our recycling business processes for reuse. We're progressing our decarbonization pathway initiatives, which aim to deliver on our FY '30 targets approved by SBTi. Our greenhouse gas emissions footprint were republished in our sustainability report which will come out in late September 2022. In May '22, we were awarded a $30 million grant by the Australian government to use Calix's innovative technology to assess the viability of the commercial-scale carbon capture plant. Moving now to our safety outcomes on Slide 12. Zero Harm continues to be our foremost priority. Disappointingly, the recordable injury frequency rate in our continuing operations was up on the prior year to 11.8, and our actual CRS harm incidents increased to 6, up from 2 in the prior year. We acknowledge that we have to do better and improve our safety outcomes. In FY '23, we're refreshing our safe systems of work program and implementing more visible leadership. In FY '22, we implemented early intervention and management initiatives in parts of our cement and asphalt businesses to reduce the frequency of injuries, and these are delivering early positive results. Our environmental performance remained positive in FY '23. However, in the recent devastating floods in Lismore, New South Wales, several storage tanks and related infrastructure at Boral South Lismore Ashville Depot were damaged and bituminous material consequently discharged into floodwaters. Boral Ashville continues to work with residents, Lismore City Council and the New South Wales Environmental Protection Agency to address these impacts. With that, I'll now hand you over to Jared, who will take you through our full year financial performance and capital management. -------------------------------------------------------------------------------- Jared Gashel, Boral Limited - Acting CFO [3] -------------------------------------------------------------------------------- Thanks Zlatko, and good morning, everyone. Turning to the group's financial performance on Slide 14. Boral's Group results reflect the completion of the noncore divestments during the year. With the timing of completion of these transactions, limiting the comparability to the prior year results. EBIT of $263 million included EBIT of $151 million from discontinued operations compared to $263 million in FY '21. Pleasingly, net interest expense decreased by $48 million to $83 million, reflecting the benefit of measures taken to reduce gross debt and undrawn facilities following the sale of USG Boral in late FY '21, and the early repayment of USD 235 million in U.S. private placement bonds in April 2022. Net profit after tax before significant items was $150 million. Pretax significant items of $1.03 billion is primarily driven by the gain on sale of the North American businesses, partially offset by $75 million in transformation and restructure costs. These relate to personnel-related exit costs, consulting costs to support these initiatives in various IT-related transformation costs. Turning to continuing operations on Slide 15. On a comparable basis, revenue increased by 3%, primarily driven by higher activity in roads, highways, subdivisions and bridges across Queensland, Victoria and South Australia, which was partially offset by softer revenue in New South Wales. Like-for-like prices increased by 3% in quarries and 1% in concrete and cement, which reflected positive traction on price increases, including from the early Q3 FY '22 price increase. Excluding property, EBIT declined 32%, reflecting the significant adverse impact from challenging external conditions partly offset by the benefit from revenue growth and transformation initiatives. Property earnings of $6 million were $18 million lower than the previous year, and primarily reflected profits on the sale of land in Kiama in New South Wales and Noarlunga in South Australia. ROFE, excluding property, was 5.1%, reflecting the significant decline in earnings. Looking at the earnings bridge on Slide 16. From FY '21 to FY '22, the adverse earnings impact from adverse weather, energy and cartage cost increases, and the construction shutdowns is evident and totaled $136 million. Stronger prices had a $26 million benefit with $22 million in the second half. Although this was more than offset by a $43 million negative impact from a less favorable geographic and product mix and lower margins on some Asphalt and concrete placing projects. The volume benefit of $67 million primarily reflects higher volumes in Queensland and Victoria, where Boral has a weaker integrated position relative to New South Wales, and was largely offset by negative volume impacts from the construction shuts and exceptional rainfall. The business delivered $98 million of gross transformation benefits or $42 million net of inflation, excluding energy-related inflation. As Zlatko covered earlier, energy costs after year-on-year hedging benefits, combined with significant inflation in cartage costs had a negative $58 million EBIT impact. Turning to the group's cash flow on Slide 17. Group operating cash flow of $261 million compared to $654 million in FY '21 reflects the part year trading contribution from the businesses divested and lower earnings from continuing operations. Income tax paid increased by $70 million, primarily reflecting tax paid on disposal of the U.S. businesses, with the taxable gains exceeding available tax losses. Operating cash flow from continuing operations declined 16%, primarily reflecting lower EBITDA. Boral received cash proceeds on disposal of assets of approximately $4 billion, which primarily relates to the sale of the North American and Australian Building Products businesses. We returned $3 billion of surplus capital to shareholders and completed the on-market share buyback in July 2021, with a consideration of $353 million paid. Turning to Slide 18, continuing operations capital expenditure of $313 million, which includes lease additions of $12 million was up 70%. Capital investment included the acquisition of Hillview Sands for $30 million, which completed at the end of February, strategic land purchases, which totaled more than $50 million, including the acquisition of land at Badgerys Creek and Dunmore and investments in the Port of Geelong clinker, grinding and storage terminal in Victoria, the fly ash classifier plant at the Tarong Power Station and the chlorine bypass at Berrima. Moving to capital management. Boral's optimal capital structure is defined by the point where its cost of capital is at its lowest. This is defined as net debt at 2 to 2.5x EBITDA, where return on funds employed is equal to our weighted-average cost of capital. Net debt at 30 June 2022 of $476 million was below our net debt range, but is prudent in the current challenging environment and provides significant flexibility. We've recently taken steps to further reduce the gross debt on our balance sheet and reduce interest costs. This includes the repayment of USD 235 million of U.S. private placement bonds due in May 2025 in April 2022. And post year-end, the repayment of USD 300 million of 144A bonds due May 2028, which settled for a discount of more than 4%. Combined, these measures reduce interest costs by $31 million in FY '23. Further, we will repay the USD 127 million of 144A bonds that mature in November 2022. This will reduce gross debt to $965 million on a pro forma basis. We continue to maintain a Moody's investment grade rating of BAA. Turning to our new property framework on Slide 21, which outlines our refreshed approach to maximizing long-term value from our property assets and operational footprint. Our framework considers the 3 distinct points at which we create value in the life cycle of our property assets, acquiring properties to grow our leading integrated network in areas of future growth or to fill network gaps, how we optimize property assets that form part of our operating footprint to deliver increased recurring earnings and how we repurpose property assets where there is a higher and better use or they are surplus to our operational footprint. This pillar seeks to achieve the best combination of recurring and divestment earnings, depending on what the land is most suitable for and its location. The grow pillar of our property framework is focused on acquiring strategic land and operating assets to strengthen our long-term performance and profitability and relevant secure approvals. As mentioned earlier, we invested more than $80 million in FY '22 to acquire land and operating assets to fill gaps in our network and better position us to meet demand opportunities. The optimized pillar of the property framework aims to deliver increased recurring earnings from our operating property footprint by better utilizing those assets. Initiatives underway include optimizing our office footprint and our Earth Exchange Program. To date, we've consolidated our 2 Sydney offices into 1, and optimize the office space in Brisbane. These optimizations better reflect our industrial business and are delivering significant savings with a run rate savings in FY '23 of $3 million. The Earth Exchange Program delivers gate fees by accepting excavation soils into Boral's quarry voids and supports our quarry rehabilitation efforts by avoiding costs. We are also assessing new initiatives for site use optimization. Our efforts in FY '23 will focus on development of a national plan for optimizing use of underutilized sites. Moving to the repurpose pillar on Slide 24. Our approach to repurpose surplus land assets will be to either develop and retain or develop and divest properties. Notably, for sites with industrial or commercial potential, we will pivot to retain these properties to create recurring income, either via structured payment arrangements or rental income. This contrasts with our previous approach over the last several years to divest a significant number of surplus sites. For properties with residential development opportunity in metro or growth regions, we will develop and divest these, focusing on the optimal point at which to divest. We may partner to develop these properties where this makes commercial sense. This is consistent with the approach we have taken to optimize value at our Donnybrook and Scoresby sites in Victoria, for which we entered into development agreements in 2018 and 2019, respectively. On this basis, we estimate that our current portfolio of about 30 surplus properties is valued at more than $1 billion, estimated based upon a combination of contractual terms, third-party valuations, comparable property prices and management's estimate of timing of realization. Of this estimated value, about $400 million relates to Donnybrook and Scoresby. Boral's 338 hectares of land at Donnybrook forms part of Mirvac's Olivine master-planned estate, with Boral's land expected to support about 3,000 dwellings. We expect to receive approximately $10 million per annum EBIT from FY '25 to FY '27 and further significant earnings from FY '29 to FY '37. At Scoresby, approximately half of the 171-hectare site is being rezoned for residential development, with rezoning expected to be completed in 2024, and earnings expected from FY '27 to FY '37. We estimate that the value of our uncontracted surplus properties is more than $600 million, with 1 ponds and our 40% interest in Penrith Lakes being 2 of the larger sites with long-term development plans. And with that, let me hand back to Zlatko. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [4] -------------------------------------------------------------------------------- Thanks, Jared. Turning to our priorities for the next 6 months on Slide 26. To progress the Position pillar, our focus is on 4 key elements. We're working to maximize realization of our announced pricing actions, which will benefit from initiatives implemented in FY '22 to also strengthen pricing disciplines. Our key performance improvement initiatives during the half will include completing the commissioning of Mill 2 at the Geelong Cement facility, which will reduce operating costs and enhance our cement position in Victoria in South Australia, and progressing the deployment of our supply chain automated allocations across our operations with commencement targeted for late calendar 2022. We'll also be working to develop a national plan for optimizing use of underutilized rural and urban sites and further developing our approach and approvals for maximizing surplus properties. Our redefined priorities for the half are focused on 3 key areas. Firstly, we're working to further increase penetration of our lower carbon concrete products with the launch of our product suite in Sydney, Victoria and South Australia. Secondly, we continue to progress our decarbonization initiatives, including completing the chlorine bypass system at Berrima expected to be commissioned by the end of FY '23, assessing opportunities to transition to renewable electricity and continuing to evaluate the potential to mineralize carbon products at scale. Thirdly, we're growing our materials management service, which is now a standard offering to support customers in their construction and demolition processes while expanding our Earth Exchange Program. In terms of our outlook on FY '27, on Slide 27. In FY '23, Boral expects revenue to be higher than FY '22, driven by strong price growth and increased volumes, with volumes to benefit from less disruption, including no construction shutdowns and higher construction demand. Stronger infrastructure demand, including accelerating major projects work and improve nonresidential activity to more than offset softening detached housing demand in the second half of FY '23. A high risk of further adverse impacts due to exceptional rainfall, with July 2022, the wettest July on record in Sydney. And finally, the benefit of price increases, coupled with performance improvement initiatives to more than offset the impact of significant total cost inflation, with energy costs remaining elevated. In addition, based on our new property strategy, we expect no property divestments in FY '23. On that note, we're now happy to take questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Brook Campbell-Crawford with Barrenjoey. -------------------------------------------------------------------------------- Brook Campbell-Crawford, Barrenjoey Markets Pty Limited, Research Division - Head of Cyclical Industrials Research [2] -------------------------------------------------------------------------------- Just on Slide 27, the expectation for price and benefits from improvement initiatives to offset cost inflation. I guess there's 3 parts to that. Can you provide a sense of maybe your range or what you're expecting across the 3 of those buckets that will net to a positive outcome in FY '23? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [3] -------------------------------------------------------------------------------- Yes. We're not going to provide the details, Brook. But what I can say is what we are aiming to do with the, I guess, the rethink around the transformation program because we've seen heightened inflation, particularly energy, we expect that to continue in '23. What we are looking to do is offset that with continuing focus on some of these performance improvement opportunities plus the accelerated focus on pricing. So not sure what will happen with energy costs. I don't think they're going to moderate significantly, but we want both pricing and improvement opportunities to more than offset those. -------------------------------------------------------------------------------- Brook Campbell-Crawford, Barrenjoey Markets Pty Limited, Research Division - Head of Cyclical Industrials Research [4] -------------------------------------------------------------------------------- Yes. Okay. Let's say, for price, for example, what sort of realization are you assuming because that's obviously been an issue for the industry over a long period of time. So you're enhancing a lot of price increases, but what -- do you think there's going to be better realization than in the past? Or what sort of level of realization are you expecting? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [5] -------------------------------------------------------------------------------- Yes. No, I think it's a great point, Brook. We absolutely are focused on realization. And I think if you look at the industry historically, there have been a lot of announcements about headline pricing, then doesn't fall to the bottom line. And I called out earlier in the presentation that some of the work we've done over the last 12 months is really about building more visibility in a more disciplined approach. So for example, we have now stood up a national centralized deal desk that we'll be dealing with pricing that's outside of our target so that sales individuals don't have autonomy to price outside of what we're guiding. We've reduced quote validity period. In some cases, for projects we might have had 12 to 24 months' worth of pricing validity. We're down now to almost 30 days in, I'm going to say in almost every case now, just because we can't keep pricing open. And we've got really good visibility now relative to what we had 2 years ago when I joined to identify price exceptions and particularly individual sales people's decisions around service charges, all of that now gets raised around as an exception and our sales and marketing team jump on that. So I'm very confident we've now got the tools to make sure we get much better traction than we had historically. -------------------------------------------------------------------------------- Brook Campbell-Crawford, Barrenjoey Markets Pty Limited, Research Division - Head of Cyclical Industrials Research [6] -------------------------------------------------------------------------------- Maybe just last for Jared. Just on the property portfolio, the last estimate provided by yourselves, I believe, was $850 million or greater than that $850 million, now it's greater than $1 billion. What's the sort of key driver of the uplift there? Is there a certain sites that you think are worth more than before and if methodology, yes, just some color on the uplift would be great. -------------------------------------------------------------------------------- Jared Gashel, Boral Limited - Acting CFO [7] -------------------------------------------------------------------------------- Yes, Brook, thanks for the question. I think it's -- I would put it into 2 things. One, these are all sort of values created on an NPV basis. So you have an additional 18 months of unwind since we did the target statement. And the second piece is the property values, particularly in Melbourne, have increased significantly over the last 18 months. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Your next question comes from Lee Power with UBS. -------------------------------------------------------------------------------- Lee Power, UBS Investment Bank, Research Division - Analyst [9] -------------------------------------------------------------------------------- Maybe just a follow-up on Brook's question around price. I get that you're being a lot more disciplined and you've got this new approach. Do you want to maybe talk about how you think the industry as a whole has changed around discipline? And I just -- I mean I'm kind of the same in thinking about strong price growth when we compare that to FY '22 like-for-like prices of 1% for concrete, I think at the half, it was flat. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [10] -------------------------------------------------------------------------------- Yes. So maybe let me just unravel that and give you a little bit of context, Lee. So if you go back to end of calendar 2021, and we spoke about this at the half year results. We priced the out-of-cycle increases in January and February based on what we were seeing at that point in time at the end of '21 in inflation around energy costs. And we reported in the first half energy inflation was about $6 million worse than we had expected. So we priced and scaled the out-of-cycle increases off that based on what we also expected to see in the second half of the year. So the pleasing thing was we got hell of a lot more pricing traction in the second half. It was roughly $22 million versus the $4 million in the first half. But at the end of the day, energy inflation, in particular, was a lot faster and a lot sharper accelerating into the fourth quarter relative to what we saw at the end of '21. So we immediately started doing work on what the next pricing increase would look like. And we announced those in a period around May, June to be effective from the first of August. So if I go back to your question around industry discipline and what we've seen. When we went out with our out-of-cycle increases in January and February, we didn't see a lot of reaction from others in the market. We started to see some pricing actions, and they're quite variable in different geographies. We started to see some pricing actions towards the end of FY '22. And in some cases, they were probably more akin to what we would have expected see in other cases that were much more moderate. But I guess we're focusing on what we can control and making sure we're disciplined about the prices that we're staying ahead of the curve as soon as we can for projects that we ensure we've got reopeners and the like. So I feel good about where we sit. But at the end of the day, we'll come back in 6 months' time and talk about what we actually realized, that's really the proof in the pudding. -------------------------------------------------------------------------------- Lee Power, UBS Investment Bank, Research Division - Analyst [11] -------------------------------------------------------------------------------- Excellent. And then maybe the mix point, like how should we think about that going forward? And if it's easy to speak to the geographic component and the product component of that, then that would be useful. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [12] -------------------------------------------------------------------------------- Yes. So basically, geographic and product impact were similar half-on-half. And it's really reflecting the swing between, as you all know, New South Wales is an important market for us, but with all the disruptions around COVID shuts and weather, the mix hasn't been favorable. So that's really the geographic product mix. That occurred in both halves. That was fairly similar. We saw more of a mix impact in the first half relative to the prior year because it was the cycling of some very, very good, particularly asphalt contracts in the prior year that we had a cycle out of in the first half that we didn't see in the second half. So that's kind of explaining what happened in '22. We do expect to see more activity in some of our better markets during FY '23, but exactly how that plays out, and the timing of demand, especially for quarry products, so thinking about road-based versus high-value aggregates, it's hard to predict that. It really depends on when certain projects get to demand points. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Your next question comes from Keith Chau with MST Marquee. -------------------------------------------------------------------------------- Keith Chau, MST Marquee - Basic Industrial Analyst [14] -------------------------------------------------------------------------------- Zlatko and Jared. Two questions for me. The first one just on the cost inflationary pressures. I mean last year was helped by $35 million hedging benefit, which I suspect will unwind in FY '23 or at least you won't have the benefit of that in FY '23. What else sign of that, can you help me understand if you assume current spot rates for your key inputs or energy imports being coal, diesel, electricity and gas, what the implied headwind would be for FY '23. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [15] -------------------------------------------------------------------------------- Yes. We haven't quantified that, Keith. And obviously, we're not going to and aren't in a position to try and guess what's going to happen with energy. I know you said spot. We've kind of looked at forward curves and assume that's the best information in the market. So as we think about pricing and then the cost reduction programs that will continue to push, there have been sized off the basis of the magnitude of year-on-year energy inflation and other inflation we're expecting to see, and the reason we're guiding that we should offset more than that inflation is we need to have a buffer and that will ensure we don't get caught short again. -------------------------------------------------------------------------------- Keith Chau, MST Marquee - Basic Industrial Analyst [16] -------------------------------------------------------------------------------- The exercise of Ford care, if you got an estimate of what the cost possibly on Ford care. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [17] -------------------------------------------------------------------------------- No, we haven't quantified that for the market. We've obviously done that internally. -------------------------------------------------------------------------------- Keith Chau, MST Marquee - Basic Industrial Analyst [18] -------------------------------------------------------------------------------- And then coming back to your points around -- or everyone's point on price increases. Obviously, a lot of question given how important that is on the performance of the industry in the past. Can you help us understand the quantum of price increases that have been announced, both on a dollar basis and a percentage basis across cement, concrete and aggregates please. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [19] -------------------------------------------------------------------------------- Yes. And once again, Keith, we haven't gone into that level of detail with the market. We've obviously communicated it to all of our customers. But these are some of the largest pricing increases by geography, by product line that we've put in the market over the last 5 years. And I think that's appropriate. And I think it's reflective of the inflationary environment we're facing. So as I said to some of the prior questions, we're focused on not only getting the magnitude of that, but ensuring we've got a discipline in the background to realize it, which, frankly, Boral and the industry more generally hasn't done in the past. -------------------------------------------------------------------------------- Keith Chau, MST Marquee - Basic Industrial Analyst [20] -------------------------------------------------------------------------------- I guess it's just tricky for us to triangulate what you mean by the largest price increases because some of the increases that have been put through in the past have been considered large, but realization has been poor. Now I understand that the target is to realize more. But for us to get a gauge of what the earnings power of the business is, even over the short term, I guess it's quite tricky for us to do that without the component parts. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [21] -------------------------------------------------------------------------------- Yes, I'll get that. And I completely understand the question, Keith. Unfortunately, we're not in a position where we can share the magnitude of that. But rest assured, we're not focused on headline price increases. It's the ultimate realized value that's important to us, and the discipline behind that to identify exceptions and ensure we're getting appropriate pricing from customers in different geographies -- that's what the sales and marketing teams are focused on. -------------------------------------------------------------------------------- Keith Chau, MST Marquee - Basic Industrial Analyst [22] -------------------------------------------------------------------------------- Okay. Understood. That's the second question on that pricing discipline. You've obviously got, I guess, more centralized control over what price levels you're willing to put into the market. Is there a point where you just go back and say, no, we're not going to supply those volumes to XYZ customer. And would you prepare to see -- prepare to see share if it means you can retain pricing discipline? Is that the level of control and the level of discipline you're looking at? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [23] -------------------------------------------------------------------------------- Yes, that's exactly right, Keith. So if I think about some of the examples that we've seen more recently, there was a lot of discretion and a lot of authority within Boral to relatively junior salespeople who are well intentioned, but obviously, we're trying to support their customers. We can't afford that anymore. We can't afford to have mispricing to customers or lack of recognition of what it takes to service a customer, particularly with a high cost to serve. So that's why we've taken the more centralized pricing approach. It has resulted, and in some cases, us losing volumes. So we are seeing customer churn. The great thing in the current market context is we're picking up other customers. So customers were being mispriced or we weren't getting appropriate returns and we're trading out to customers that are better priced of a better value for us, I don't mind that. -------------------------------------------------------------------------------- Keith Chau, MST Marquee - Basic Industrial Analyst [24] -------------------------------------------------------------------------------- No, indeed. And perhaps just following up on that one. Is there a limit on share loss that you would say, "Okay, well, enough, we need to retain share?" Or is this strictly about value and seeing value over the longer term? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [25] -------------------------------------------------------------------------------- It's absolutely about value, Keith. So the worst thing we can do here is say we're going to increase prices and get wobbly need where we see a couple of customers walk. We're all holding enhancing in comber at the moment because it's just unprecedented times in the industry. And what we're focused on is holding prices, getting the realizations we need. And if we see customer churn, but we're winning other customers, I feel good about that. If there are certain geographies where we're seeing significant declines, then we'll make a call about what we do. I don't think it will be a price change though. It might be ratcheting back on capacity and the like, but holding value and realizing price is absolutely priority 1, 2 and 3 for us. -------------------------------------------------------------------------------- Keith Chau, MST Marquee - Basic Industrial Analyst [26] -------------------------------------------------------------------------------- And one last one, if I may, on industry capacity. There's obviously quite a bit of movement within the competitive landscape across all states, including Boral's new assets in Geelong. How would you rate competitive intensity in the market at the moment? Are there any particular pockets of pressure that are causing an issue? And with respect to your strategy, with almost doubling capacity at Geelong, how do you intend to sell that asset will run back closer to capacity? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [27] -------------------------------------------------------------------------------- Well, maybe if I start in Geelong, Keith. So feel good about where we stand with the clinker import and grinding facility by the end of this calendar year, we'll have slag up and operational as well. So we'll be completely self-sufficient as well as having capacity to supply the market more generally. So I feel good about capacity utilization there. But we're essentially replacing what we were previously getting out of Waurn Pond. So that's not really adding capacity. It's more upgrading and making it more commercial for ourselves. You'd be aware that there have been particularly cement and clinker import facilities constructed in SEQ and New South Wales. And if I go back a year or so ago, we're having conversations around is that going to be disruptive? What's the future going to look like? Our view was people are always going to be able to invest the capital to build these facilities. The issue is, can you run them and make the appropriate returns through the cycle. And I guess what we're seeing at the moment is it's a really challenging cycle. And we know of instances where some of these importers, particularly the independent back ones have not been operational for a good 9, 10 months. And in some cases, have done a number of import shipments that have been extremely costly and are looking for alternatives at the moment. So it's the market dynamic at the moment where I think upstream, particularly in cement, it probably favors domestic production as I think it should. And whilst there continues to be capacity growth in concrete, I don't think there's anything there that we're seeing that I'd be really concerned about. The one that the whole industry, I think, is focused on is quarry materials. And when you think about the lack of consenting of new quarries in, say, New South Wales or Victoria, that's just something the industry and various state governments are going to have to face into before supply really curtails. So I don't think there's anything unusual unique there in capacity across the different markets, except with some of these more recent cement capacities that have been added that have probably been challenged. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Your next question comes from Lisa Huynh with JPMorgan. -------------------------------------------------------------------------------- Lisa Huynh, JPMorgan Chase & Co, Research Division - Analyst [29] -------------------------------------------------------------------------------- Sorry, I'm going to follow up on price. But I guess -- if we kind of look at the price rises you pulled forward into August, have you built in some catch-up to the cost headwinds in '22? Or is it just what's happening to the forward curve for cost inflation for '23. I guess, if everything kind of goes to plan, should we expect a net neutral earnings outcome by the end of '23? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [30] -------------------------------------------------------------------------------- Yes. So the way we sized it, Lisa, was not to recover the inflation we saw in '22. It's to offset the inflation we're seeing in '23, recognizing some of these performance improvement projects. So it's not the catch-up, it's the -- what we're expecting in-year inflation to be in '23. -------------------------------------------------------------------------------- Lisa Huynh, JPMorgan Chase & Co, Research Division - Analyst [31] -------------------------------------------------------------------------------- Okay, sure. And I guess, on Slide 6, just the energy cost buckets, the $200 million of unhedged energy costs. Have you disclosed the total energy spend anywhere, which includes the hedging you have in place? And I guess just given the volatility, is the view just to kind of where the higher commodity costs into the next 12 months? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [32] -------------------------------------------------------------------------------- Yes. So maybe just to clarify, what's on Slide 6 is the gross energy cost, that's unhedged. So we had $200 million in FY '22 relative to $117 million in the prior year. So that's the underlying 70% increase in energy costs. Offsetting that, we had $35 million of hedging benefits. So net-net, we saw a $48 million increase after hedging within the year. But once again, I don't think it's our place to guide what we think energy cost is going to be in '23. We look at forward curve, we read kind of same research you guys probably got access to. But what we want to do is make sure that we're in a position where we aim to offset that, particularly with pricing. -------------------------------------------------------------------------------- Lisa Huynh, JPMorgan Chase & Co, Research Division - Analyst [33] -------------------------------------------------------------------------------- Okay, sure. And just, I guess, the last one for me. So is the energy cost really the main reason around holding a conservative stance on the balance sheet for now? I guess, what else do we come on need to see before you decide to maybe unlock some of that excess balance sheet capacity? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [34] -------------------------------------------------------------------------------- Yes. I'll let Jared share some comments in a moment as well, Lisa, but we have a financial framework that we work to. Based on that framework, you might say that we're underleveraged at the moment. But frankly, we're not delivering the earnings that, that framework is based off. So we need to see better improvement in underlying earnings that will then be consistent with what we're assuming in the financial framework, which will then give us the confidence to think about leverage or what else we might do. But we're not there yet. Jared, you want to share some words? -------------------------------------------------------------------------------- Lisa Huynh, JPMorgan Chase & Co, Research Division - Analyst [35] -------------------------------------------------------------------------------- Okay. So effectively, we want to see ROFE equal WAC first. Is that effectively what you're saying Zlatko? -------------------------------------------------------------------------------- Jared Gashel, Boral Limited - Acting CFO [36] -------------------------------------------------------------------------------- I mean I think that's the path we're on, for sure, Lisa. I mean the one thing I would say is we're not sort of sitting idle on the balance sheet. I think you'll see that we, in July, tendered some of our 144A debt sort of opportunistically at more than 4% discount. So there is sort of activity happening to sort of manage our balance sheet effectively. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Your next question comes from Peter Steyn with Macquarie. -------------------------------------------------------------------------------- Peter Steyn, Macquarie Research - Analyst [38] -------------------------------------------------------------------------------- I may just carry on that vein. The 144A maturity in November, Jared, could you give us a sense of what you're expecting as a replacement source? Will it essentially be your bank lines? And what is your expectation on cost? And how does that sort of play into the 31 million that you've already indicated increased. -------------------------------------------------------------------------------- Jared Gashel, Boral Limited - Acting CFO [39] -------------------------------------------------------------------------------- Yes. So Peter, on the 144A that matures in November, we can pay that back 1 month early. We're holding the cash currently in U.S. dollars to offset that. The U.S. dollar loan. We won't, at this stage, plan to replace it. So we have the surplus liquidity to manage without. -------------------------------------------------------------------------------- Peter Steyn, Macquarie Research - Analyst [40] -------------------------------------------------------------------------------- Okay. So it will just be a straight interest saving because you've essentially been positioned for it. -------------------------------------------------------------------------------- Jared Gashel, Boral Limited - Acting CFO [41] -------------------------------------------------------------------------------- Yes, that's correct. -------------------------------------------------------------------------------- Peter Steyn, Macquarie Research - Analyst [42] -------------------------------------------------------------------------------- Yes. And then perhaps just a second question, Zlatko. From your perspective, there's been a lot of change at Boral, and I suppose more to come -- just curious how you would describe morale in the organization, how the focus has been and maybe some clients on regretted loss trends both your July '21 restructuring and then the more recent one, what you've seen there? . -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [43] -------------------------------------------------------------------------------- Yes, there's a lot in that question, Peter. Let me kind of unravel that and give you some insight. So the July 2021 changes were all about trying to drive operations excellence within Boral by having a national product line focus, and I'm really pleased with the visibility we're now getting. So for example, call centers that service customers, we're doing that in a consistent way, which means we can balance calls right across the nation where we couldn't do that previously. We had to deal with them location by location. It's giving us visibility into opportunities as diverse as how we execute drill and blasting quarries nationally, how we think about remote operations within batch plants and the like. We didn't really have that visibility previously. So that's what the national product lines gave us. I guess the more recent changes, we're then focused on the support functions and recognizing as somebody crudely described, there's a Boral complexifier. And over the years, we've created bureaucracy and approaches that probably don't reflect the more simplified business we need to be and the nimbleness that we need to move forward with. So some of the more recent changes were about reducing layers to particularly get senior executives closer to the business to be able to do away with some of the work that or activity internally that was probably not value adding, and make sure that we're starting on that journey of being much more streamlined in Australia. So all of that work more recently has obviously come at a time when there is strong demand for people in the market and the shortage of labor. So there have been some regretted losses. But if I look at our voluntary turnover versus peers and what we see in other industrial companies, it's not too dissimilar. So I don't think we're seeing anything untoward within Boral there that is concerning at the moment. I think the mood will improve. I've got no doubt about that, Peter. But when you overlay COVID construction shuts with adverse where there are heightened inflation, a number of years now where executives haven't seen incentives, that's just been a challenging period. But when you unpack it and you look at what's happened within the business and what are people working on each day, the progress we have made on penetration of low-carbon concrete, the work we've done to fix the network, some of the feedback we're getting from customers at the moment, that all gives me really strong motivation excitement for what '23 to '24 can look like. So I think there's some temporal issues that the industry and the company are facing, but the underlying basis of the business is really strong. -------------------------------------------------------------------------------- Peter Steyn, Macquarie Research - Analyst [44] -------------------------------------------------------------------------------- Sorry, I just jump in with 1 last quick question. We didn't get all the detail on your cost breakdown as you have before, Jared. Just curious whether there's anything notable on some of the other cost lines to think about, maybe just the directional comment on payroll, repairs and maintenance, some of your other costs. -------------------------------------------------------------------------------- Jared Gashel, Boral Limited - Acting CFO [45] -------------------------------------------------------------------------------- Yes. And I appreciate the question, Peter. So look, there's nothing we'd call out in those other categories. So the ones that we have called out are the more noticeable ones, particularly energy and transportation costs. They grew at a rate that is unusual and kind of reflects the current situation. On payroll, I had a question earlier from somebody else around enterprise agreements. I think we renegotiated about 15 of those during FY '22. And if I think about the increases that were agreed in the first year, they range from 2% to 3%. So we're not seeing anything unusual or unexpected there. And if I look at most of the other cost categories, Jared, I don't think there's anything unusual to call out. It's really transport and inflation are probably unusual ones. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [46] -------------------------------------------------------------------------------- Yes, that's correct. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Your next question comes from Daniel Kang with CLSA. -------------------------------------------------------------------------------- Daniel Kang, CLSA Limited, Research Division - Research Analyst [48] -------------------------------------------------------------------------------- Good morning, everyone. Firstly, perhaps 1 for you, Zlatko. I mean, I recognize that we've not been in anything close to normal over the past few years, but interested in how you assess what Boral's achievable normalized through-cycle EBIT could look like? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [49] -------------------------------------------------------------------------------- Yes, great question, Daniel. And if you had asked me 12 or even 6 months ago, I probably would have given you a different answer. Look, frankly, I still feel really positive about the underlying performance improvement opportunities that were the foundation for the transformation program. So while inflation has really hit us to a degree that we didn't expect, and I don't think anyone else expected, the opportunities in the business is still there. So delivering on Geelong, the implementation of automated allocations, all of those other opportunities that we're executing in FY '23 will deliver benefits. The big swing factor for me is will we see energy and other inflation normalize? And I suspect it will at some point. I just don't know when. And that will be the double whammy that we've been expecting all along, where we improved the underlying performance of Boral, and we see more normalized inflation than we saw in FY '22. And ideally, without disruptions like COVID shuts and adverse weather. If we see all of that, this can be a really strong performing business. -------------------------------------------------------------------------------- Daniel Kang, CLSA Limited, Research Division - Research Analyst [50] -------------------------------------------------------------------------------- Absolutely. Just a second one, in terms of your target leverage ratio of 2 to 2.5, you sort of discussed this earlier, but it does imply that you've got service capital of around $500 million. Is this the right leverage ratio, given that we're walking into a housing downturn or the Board decided to take more prudent stance with a leveraged position. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [51] -------------------------------------------------------------------------------- Yes. So let me add some comments and then Jared will share his views. But look, I think it's absolutely important to be prudent at the moment because as I said to an earlier question, we're not delivering the returns or the underlying earnings that would support that framework. So I think we're necessarily being prudent. Your question on housing downturn though, I think we're all expecting that to happen based on feedback we're getting from our detached housing builder customers' activity. It looks like it's still going to be good for the first half of FY '23, probably some tailing off in the second half. But what we're seeing in the other segments is quite positive at the moment, good infrastructure activity, good nonresidential construction, good engineering work. So net-net, I'm expecting volumes to be quite good in '23 despite detached likely trailing off in the second half. So that doesn't concern me, but I think it's important to be prudent at the moment when you are seeing some builders going to administration not being able to perform. Jared, your view on leverage? -------------------------------------------------------------------------------- Jared Gashel, Boral Limited - Acting CFO [52] -------------------------------------------------------------------------------- Yes, I think that's exactly right. I think the surplus is key and prudence is key given the current operating environment. And it also gives us flexibility to look at a few things around the network as they come on the market. -------------------------------------------------------------------------------- Daniel Kang, CLSA Limited, Research Division - Research Analyst [53] -------------------------------------------------------------------------------- Got it. Great. And if I could sneak 1 last one. In terms of the July rain, are you able to quantify the impact? Have you seen a recovery through August? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [54] -------------------------------------------------------------------------------- I can't quantify the impact, but wettest July in Sydney on record. So when you think about 40% of our revenue coming from New South Wales, you should expect it's going to have an impact. We've actually been really pleased with August performance. Looking at the window, I still see blue sky. So 3 weeks in, it's actually been a good month so far. But once again, if you look at the forecast for next week, if you look at the Bureau of Meteorology's outlook for the next couple of months, it looks like it's going to be wetter than average. So I think we'll see how Q1 pans out, but August is definitely better than July. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- Your next question comes from Sam Seow with Citi. -------------------------------------------------------------------------------- Samuel Seow, Citigroup Inc. Exchange Research - Research Analyst [56] -------------------------------------------------------------------------------- Just a couple of quick ones given the time. The mix impact there. Can you perhaps talk us through what you expect going forward, given, I guess, the regional mix in your order book that you can see. I mean, do you think that's going to be a tailwind or a headwind? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [57] -------------------------------------------------------------------------------- Yes. Look, I don't know, it is a short answer, Sam. So if you look at the mix impact in FY '22, it was more notable in the first half than the second half. We had broadly similar geographic and product mix impacts in both halves. But as I said earlier, we had the cycling of a really profitable asphalt contract in the prior year in the first half that impacted and then some legacy concrete placing contracts that round off in the first half, which didn't repeat in the second half. So how do we see that into '23? I'm hopeful that the New South Wales market, in particular, starts to rebound, and I feel good about what we're seeing there to see value of work done in New South Wales decline 3% and be the only geography in Australia that went backwards, that doesn't work for us when 40% of our revenue is in New South Wales. But we are seeing a pickup in infrastructure projects. We're seeing good nonresidential demand in New South Wales. And we're seeing a particularly good pipeline around starts and approvals for multi-res even though there wasn't the value of work done in '22. So there are enough signs there where I feel good about New South Wales. We just need to see the volumes come through. -------------------------------------------------------------------------------- Samuel Seow, Citigroup Inc. Exchange Research - Research Analyst [58] -------------------------------------------------------------------------------- Sure. And then quickly, the headcount reduction, $24 million, is that additional to the transformation that you originally had? Or are you guys kind of stepping away completely from the transformation? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [59] -------------------------------------------------------------------------------- No. So yes, I'll answer both those questions. So the $24 million was contemplated within the broader transformation program. We accelerated that and brought that forward when we saw the heightened energy inflation, Sam. We're not walking away from transformation, but we're recognizing that the way that we had established those targets of $200 million to $250 million after inflation in the current environment doesn't make sense. Heightened inflation more aggressive than, frankly, we've ever seen, it requires a rethink. So thinking that all of the projects that we continue to execute alone will be sufficient to offset inflation and deliver that $200 million, $250 million is just flawed logic at the moment. So the way we're reshaping is to say that we will continue to deliver on those performance improvement projects, but we need more aggressive pricing into the market to deliver the earnings uplift that we think this business can deliver. -------------------------------------------------------------------------------- Samuel Seow, Citigroup Inc. Exchange Research - Research Analyst [60] -------------------------------------------------------------------------------- Sorry. And just so $24 million for FY '23 and the original kind of $25 million to $35 million transformation, that's kind of business as usual. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [61] -------------------------------------------------------------------------------- Yes. As I said, I can't recall the exact phasing, but the overhead reductions were part of what we had contemplated in '23 and '24. -------------------------------------------------------------------------------- Samuel Seow, Citigroup Inc. Exchange Research - Research Analyst [62] -------------------------------------------------------------------------------- And just one quick one. Just curious, did the board have any correspondence, I guess, with the new CEO regarding company's guidance that you're aware of? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [63] -------------------------------------------------------------------------------- I don't know if the Board did. Obviously, I talk to Vik weekly at the moment. So making sure that he's abreast of the issues and understands how we're framing things and is ready to hit the ground running when he's able to start. I obviously didn't feel it was appropriate to put quantitative guidance into the market, particularly with the CEO transition happening later in the year, and I suspect Vik will be supportive of that. -------------------------------------------------------------------------------- Operator [64] -------------------------------------------------------------------------------- Your next question comes from Peter Wilson with Credit Suisse. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [65] -------------------------------------------------------------------------------- Jared, I'll start with 1 for you, if I could, on property. Should we expect basically 0 EBIT until Donnybrook starts to come through in FY '25? Or is this something else I should be considering? And also a related question on cash flow. What kind of cash flow should we expect in the next 3 years, net of any remediation and development CapEx? -------------------------------------------------------------------------------- Jared Gashel, Boral Limited - Acting CFO [66] -------------------------------------------------------------------------------- Thanks, Peter. Let me start with property. I think from the property front, it's difficult to say at the moment. I would say the only thing that is in the sort of line of sight is Donnybrook from FY '25, but we're obviously working on a number of opportunities across the 30 surplus sites. From a cash flow perspective, I mean, it's a bit, again, difficult to forecast. I mean, we're hoping that we drift sort of closer to an EBITDA less some level of normalized CapEx with net working capital relatively stable. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [67] -------------------------------------------------------------------------------- Okay. Good. I'd actually like to, I guess, specific to property, the net cash flows from your property program. -------------------------------------------------------------------------------- Jared Gashel, Boral Limited - Acting CFO [68] -------------------------------------------------------------------------------- Yes. I guess from a -- with no earnings, we don't really have any cash coming in until that $10 million stream. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [69] -------------------------------------------------------------------------------- Okay. And none out by the sounds of it? -------------------------------------------------------------------------------- Jared Gashel, Boral Limited - Acting CFO [70] -------------------------------------------------------------------------------- Yes. I mean we have a small team that obviously manages the portfolio that's working in the background. But the cost is not overly significant. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [71] -------------------------------------------------------------------------------- Okay. Good. And Zlatko, one to you. Just a follow-up on your questions, unfortunately, about price, but -- it seems your message is that Boral has been somewhat of a price leader in that it took those prices in January and Feb and no one followed. And you're staying ahead of the curve, I think, was your comment. It's interesting, I guess, you would have seen comments from one of your elicit peers, accusing Boral effectively being a laggard with respect to pricing. So just curious what you make of those comments versus your experience? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [72] -------------------------------------------------------------------------------- Yes. My experience has been completely different to some of those comments. And I stand by the comments. So we went out January, February. We didn't see a lot of response in cement in quarries and in concrete. We saw some response in a quite a variable response towards the end of FY '22 from some. And then as I said, we had been working on our price increases from the first of August, which we're communicating to customers through June and July and were effective 3 weeks ago. So at the end of the day, I have a peer that runs another company who has a completely different view to what my experience is and we'll see what the results look like in 6 months' time. -------------------------------------------------------------------------------- Operator [73] -------------------------------------------------------------------------------- Your next question comes from Simon Thackray with Jefferies. -------------------------------------------------------------------------------- Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [74] -------------------------------------------------------------------------------- Zlatko, got an easy 1 for you because I know you can answer this, given that major projects are only a subset of your total roads, highways, subdivisions and bridges. You've got a long lead time on the projects. You've talked about pricing discipline. You've talked about growth in '23. Just in that major project sector, given your long line of sight and your expectations for price, what are you thinking about in '23 with this acceleration of projects in terms of volume and price versus PCP for major projects? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [75] -------------------------------------------------------------------------------- Yes. I appreciate the question, Simon. I feel really good about the projects that we've won. So we spoke about a couple of the half year results. Since then, we've also won HMAS Albatross, a bunch of asphalt work into that project. And also the concrete supply into the precast for the Western Tunnel project. So we have now secured 2 of the concrete supply for precast elements of that project out of the 3. And the important thing for me, Simon, is the vast majority of new opportunities were captured are being supported through mobile concrete plants or mobile asphalt plants. So purely incremental volumes and revenue. We're not displacing BAU or other opportunities to chase merger projects, which I think in the current context is important. So I feel good about the projects we've won. If I look at the pipeline and we spoke about this on Slide 9 in the deck, there are some mega projects in there and some quite large ones, many of which started in FY '23. So some of them are asphalt based, a lot of them like a Northeast Link, have concrete, cement, spoil and quarry material supplies, they're multifaceted. So we're being selective about the ones that we chase. We're being disciplined on the price and returns we expect. And frankly, we don't win everything that we bid on, but we're pricing stuff appropriately. So if we don't win, then I feel good about the fact that we don't want to be chasing business just for volumes where we don't have to. -------------------------------------------------------------------------------- Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [76] -------------------------------------------------------------------------------- Yes. I get the theme. I get the vibe of that. But just in terms of your expectations, like-for-like volume and price in terms of order of magnitude? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [77] -------------------------------------------------------------------------------- Well, once again, we haven't quantified that. But if you look at the number of projects that we've won that are starting in '23 and you look at a number of the ones that we're actively tendering on that start in '23, and thinking about the fact that these are incremental to the fixed plant network, you should expect an uplift in volumes and revenue off the back of major projects. -------------------------------------------------------------------------------- Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [78] -------------------------------------------------------------------------------- Right. And then just turning to property. You've got your strategy pivot now, as you call it, to develop and retain commercial industrial property. Now you don't -- clearly don't have any sort of established pedigree in doing that kind of thing. And we've talked about the balance sheet at length on this call, I know it looks a bit future-dated, but what sort of capital allocation are you thinking about in terms of that pivot? And what sort of capability does it require to achieve that? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [79] -------------------------------------------------------------------------------- So I'll let Jared respond. He's been running with property for at least the last year, Simon. But look, we're not looking to build capability and be property developers. So maybe if we describe what we've done with Donnybrook and Scoresby and then extrapolate that to some of the other sites that might be helpful for you. -------------------------------------------------------------------------------- Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [80] -------------------------------------------------------------------------------- Sorry, Zlatko, isn't it commercial and industrial there, that's different for the -- from what you're referring to because these are to develop and retain. I understand from your slide deck. -------------------------------------------------------------------------------- Jared Gashel, Boral Limited - Acting CFO [81] -------------------------------------------------------------------------------- Yes. I think the logic is quite similar, though, Simon, I think the view is, as Zlatko said, we're not sort of getting into the property development business. So I think it's fair to assume at this stage that where something has significant scale, we will be looking in some form of a structure to work with somebody that's a specialist in that space. -------------------------------------------------------------------------------- Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [82] -------------------------------------------------------------------------------- Right. So an external. So third party to come in to assist you with that retaining properly and building some kind of commercial and industrial parks for one of the better concept. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [83] -------------------------------------------------------------------------------- Yes. And if you have a look at those residential opportunities we referred to as well, Simon, yes, we're not putting the capital into that. That's being funded by the partner. So we'd be definitely looking for those kind of arrangements, irrespective of whether it's residential or commercial and industrial. -------------------------------------------------------------------------------- Operator [84] -------------------------------------------------------------------------------- Your next question comes from Anderson Chow with Jarden Group. -------------------------------------------------------------------------------- Anderson Chow, Jarden Limited, Research Division - Analyst [85] -------------------------------------------------------------------------------- I have a couple of questions regarding this low-carbon concrete penetration rate, which seems -- our penetration seems to be quite strong compared to competitors. In terms of winning these projects, are we deliberately bidding for more projects that require low-carbon concrete or is there something else that maybe on the pricing or something that's helping us to gain a foothold so quickly? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [86] -------------------------------------------------------------------------------- Yes. That's a great question, Anderson. Let me kind of unpack that and give you a little bit of history. So our kind of top-tier product, ENVISIA, was created about a decade or so ago. We launched it in 2015, and then we pulled it in 2016. What happened there was, I think we felt really proud of the product that we created and its technical performance, but we also mispriced that and tried to charge a significant premium into the market where, frankly, we could not really articulate the value proposition to customers. So if I think about ENVISIA today and why we've got such good penetration on LCCs is we're more thoughtful about not only the green credentials of these 3 products in our suite and how they perform relative to more traditional concrete, but the nongreen value that they had for customers and ENVISIA, for example, low shrink, early strength bunch of other properties, including aesthetics that architects like. When you think about all of those value elements and the fact that it enables builders to strip form work faster and create more productivity, particularly on high-rise buildings, Being able to articulate all of that is much more important than just talking about cement replacement. So the work we've done in the last 12 months, I feel really good about. We're able to articulate value proposition by different customer segment. It's giving us access to customers and projects that we probably couldn't pick up 3, 4, 5 years ago, but the important thing not to lose sight of is we've also got a track record. So when you think about government work, in particular infrastructure, some road authorities are more conservative and want to see a run rate of 5 to 6 years of history before they're willing to specify a project. We've now got that. We've seen ENVISIA in place for 7 years. We can prove the longevity, the performance of the product and it's now getting specified by different state road authorities like transport for New South Wales, et cetera. So I think there are a bunch of different reasons why it's all seeming to be coming together, but seeing that acceleration of penetration customers particularly paying a premium for ENVISIA and specifying the projects, we weren't seeing that 2 years ago. -------------------------------------------------------------------------------- Anderson Chow, Jarden Limited, Research Division - Analyst [87] -------------------------------------------------------------------------------- Right. Yes. Could I get a rough sense of what sort of premium we are at, at the moment with ENVISIA versus sort of a nongreen concrete. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [88] -------------------------------------------------------------------------------- No, we're not sharing that detail and partly because there's a really broad range. There are some projects where we're getting significant premiums on, other projects where we're getting lower premiums, but that's been more about piloting the sales process and how we communicate the value proposition. So I don't think it's representative of what we expect going forward. -------------------------------------------------------------------------------- Anderson Chow, Jarden Limited, Research Division - Analyst [89] -------------------------------------------------------------------------------- Okay. Is there any likelihood that there could be a change in building code or regulation that would kind of compulsory -- kind of have a compulsory requirement for low carbon concrete in Australia in the coming 3 years, let's say. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [90] -------------------------------------------------------------------------------- Well, we're obviously advocating for that. We're members of the Green Business Building Council and other bodies. We have conversations regularly with both federal and state infrastructure authorities. And everybody recognizes that sustainability and lower carbon products is an element that's considered when materials are bid for these projects. But the weighting of it historically, Anderson, has been quite low. So we want to make sure it gets broader recognition. It's not there yet, but I think the recognition is growing. -------------------------------------------------------------------------------- Anderson Chow, Jarden Limited, Research Division - Analyst [91] -------------------------------------------------------------------------------- Just last question on probably more to do with accounting. The introduction of the transportation surcharge. Is that likely to be a kind of a new revenue item in the P&L in 2023? Or do we just sort of see a net cost or reduction in the diesel and liquid fuel costs under energy in 2023? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [92] -------------------------------------------------------------------------------- It sounds like a question for the CFO. -------------------------------------------------------------------------------- Jared Gashel, Boral Limited - Acting CFO [93] -------------------------------------------------------------------------------- Yes. It will be a part of revenue. -------------------------------------------------------------------------------- Anderson Chow, Jarden Limited, Research Division - Analyst [94] -------------------------------------------------------------------------------- Part of revenue. So there will be a new line. -------------------------------------------------------------------------------- Jared Gashel, Boral Limited - Acting CFO [95] -------------------------------------------------------------------------------- I don't think it's going to -- sorry, Anderson. I don't think it's going to reach a level where it will be split out by itself, but it will just be part of the revenue. -------------------------------------------------------------------------------- Anderson Chow, Jarden Limited, Research Division - Analyst [96] -------------------------------------------------------------------------------- Okay. So it wouldn't be like if I look at 2022, $77 million, it wouldn't be the whole lot, but it will be kind of part of that revenue line in 2023? -------------------------------------------------------------------------------- Jared Gashel, Boral Limited - Acting CFO [97] -------------------------------------------------------------------------------- I think the -- I would just say it's part of the broader revenue. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [98] -------------------------------------------------------------------------------- Yes. We're not going to break it out, Anderson. -------------------------------------------------------------------------------- Anderson Chow, Jarden Limited, Research Division - Analyst [99] -------------------------------------------------------------------------------- Oh, you're not going to break it out as a separate item. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [100] -------------------------------------------------------------------------------- We'll show obviously and continue to show costs, so we'll show you what the diesel cost has been, but I don't think it's appropriate to show what the transport surcharges to our customers. -------------------------------------------------------------------------------- Operator [101] -------------------------------------------------------------------------------- Your next question comes from Scott Ryall with Rimor Equity Research. -------------------------------------------------------------------------------- Scott Ryall, Rimor Equity Research Pty Ltd - Principal [102] -------------------------------------------------------------------------------- Zlatko, I just want to give you a chance to look forward a little bit longer than some of the questions. Obviously, the last 12 or 18 months has been pretty transformational for Boral's positioning in the market and as an investment proposition. So I was hoping you could just give me the 2 or 3 things that you feel like have positioned the current operations for the next 3 to 5 years of success, please? -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [103] -------------------------------------------------------------------------------- Yes, it's a great question, Scott. There are a couple of things I feel good about, and that I'd point to. So Look, we're not delivering financial performance to the degree I would have liked and there's a couple of external challenges. So if you kind of normalize COVID shuts and adverse weather, I think we're seeing momentum, albeit it's not where it needs to be. But the things I'd point to is this recognition of the importance of the customer and how we as Boral face up to the customer. We've always had a focus on delivering on time and developing products, which is important. But understanding the customer, their pain points and how we develop solutions, that feels like it's relatively new, but I think that will stand us in good stead, particularly as we ramp up recycling activities, as we think about this materials management concept more deeply, as we execute on Earth Exchange. I think that pivot to a deeper understanding of customers and rather than selling products, solving their problems, that's something that will continue to be important for Boral. I think the more unified and aligned approach to how we run the business is important. So we kind of embarked on that journey, middle of last year with the national product lines, and I'm not -- definitely not declaring victory on that front. But the deeper understanding we're seeing around opportunities, the focus on operations excellence, which I don't think existed the way I would have anticipated at the time I joined. Once again, more work to do, but I think we're seeing opportunities that probably weren't visible. And then I think this recognition that as a business, you just can't be complacent. I've heard comments from people inside the company, outside the company that we're delivering acceptable performance in the past and doing okay. Doing okay is kind of not the benchmark. So constantly challenging ourselves to think about our network where growth corridors are, where our customers are going, how we think about building new operations or closing down other operations, not taking that for granted just being constantly paranoid. Once again, I think there's more work to do there, but focusing and not being complacent and accepting a performance, that's something that definitely will continue to be a feature in the future. -------------------------------------------------------------------------------- Operator [104] -------------------------------------------------------------------------------- Thank you. There are no further questions at this time. I'll now hand back to Mr. Todorcevski for closing remarks. -------------------------------------------------------------------------------- Zlatko Todorcevski, Boral Limited - CEO, MD & Director [105] -------------------------------------------------------------------------------- Everybody, thanks for your time. I really appreciate the breadth and depth of the questions. And look -- in some cases, we can't share detail as we see in the business, but always appreciate understanding what some people's minds. And this could be my last results presentation. So I just wanted to thank everyone for the support that I've had over the 2 and a bit years I've been here and I feel really good about the state of the business relative to what I saw 2 years ago and the state we're handing off to Vik. Vik's got a fantastic history of delivering value for shareholders from his time in Cleanaway. So I've got no doubt he'll do an outstanding job when he joins us. Thanks very much.