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1 23 March 2017 Australian Securities Exchange Attention: Companies Department BY ELECTRONIC LODGEMENT Dear Sir / Madam Please find attached a presentation and additional comments to be presented to analysts today regarding Brickworks Limited s financial results for the half year ended 31 January 2017, for immediate release to the market. Yours faithfully BRICKWORKS LIMITED Susan Leppinus Company Secretary

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3 Good Afternoon Ladies and Gentlemen and welcome to the Brickworks analyst briefing for the half year ended 31 January Today I will provide an overview of the Brickworks results, before providing more detail on the performance of each of our divisions. Mr. Robert Bakewell, our Chief Financial Officer is also here to answer any questions at the conclusion of the presentation. 2

4 There are three main parts to the Brickworks business model: The Building Products Group; Land & Development; and Investments. The Building Products Group consists of Austral Bricks, Austral Masonry, Bristile Roofing, Austral Precast, Auswest Timbers and Specialised Building Systems. The Land & Development business includes a 50% share of an Industrial Property Trust that has a total asset value in excess of $1.3 billion. The Group s main function is to maximise the value of land that is surplus to the Building Products business. Investments consists primarily of a 42.7% interest in Washington H. Soul Pattinson, an ASX listed company with market capitalisation of around $4.2 billion. This investment provides a stable and diversified earnings stream and has provided Brickworks with superior returns and security to weather periods of weaker building products demand. 3

5 The underlying Net Profit After Tax increased by 48% to a record $111 million for the half. A feature of the result was the increased earnings in all three divisions. After including the impact of significant items, the statutory Net Profit After Tax was $104 million, up 35%. Underlying Earnings Per Share increased by 48% to 75 cents per share. Statutory Earnings Per Share was up by 35% to 70 cents per share. 4

6 The Directors have resolved to increase the interim dividend by 1 cent per share to 17 cents fully franked. The chart on the screen shows our dividend history going back 20 years. We are proud of the fact that we have not decreased normal dividends throughout this period. 5

7 Brickworks continues to outperform the All Ordinaries Accumulation Index in terms of total shareholder return over the long term. Over 15 years, Brickworks has delivered returns of 8.1% per annum, compared to index returns of 7.9% per annum. Whilst performance over the past 12 has been disappointing, I am confident that the company has a strategy in place that will continue to deliver strong returns to shareholders over the long term. I note that as at the close of trading on Tuesday, the share price had rebounded by 10% compared to the end of the half, against an index increase of 4% over that period. 6

8 Looking now at our results in more detail. 7

9 Building Products earnings before interest, tax and significant items was $33 million, up marginally on the prior corresponding period. Higher earnings on the east coast were offset by lower earnings in Western Australia and a number of one-off costs. Land and Development EBIT was up 48% to $67 million, due primarily to the sale of Oakdale West into the Industrial Property Trust in December. Investment EBIT was up 78% to $48 million due to higher earnings from New Hope Coal and TPG Telecom. Total borrowing costs were $6 million, with higher interest costs offset by a small gain in the mark to market valuation of swaps. As I previously mentioned, the underlying net profit after tax was a new record of $111 million, up 48% on the prior period. Including significant items, statutory net profit after tax was up 35% to $104 million. 8

10 The charts on screen show the underlying EBIT history of the Building Products, Land and Development and Investment Groups over the past five years. Since the cyclical low point in 2012 and 2013, Building Products first half EBIT has more than doubled, from $14.0 million in the first half of 2013 to $33.3 million for the latest corresponding period. The Land and Development Group has delivered strong and consistent earnings over the past five first half periods, as a result of capitalisation rate compression and land sales. During this five year period, Brickworks net asset value in the Industrial Property Trust has increased in value by over $210 million, including $133 million over the past 6 months. The contribution from Investments has been impacted by the volatility of coal and commodity prices on some of WHSP s major shareholdings. The significant uplift in the first half illustrates this point, with New Hope Coal benefitting from an increase in coal prices after a number of years difficult conditions. In addition to the earnings contribution from Investments, Brickworks stake in WHSP has increased in value by almost $400 million since January 2013, and $220 million in dividends have been received. 9

11 Turning back to the first half of 2017, significant items decreased NPAT by $7.2 million for the period. This includes significant restructuring activities within Austral Bricks Western Australia and Auswest Timbers. Other significant items include costs associated with the Perpetual litigation and items relating to WHSP. 10

12 Looking at our Key Financial Indicators. Net tangible assets per share was up 6% to $ Shareholders equity increased to $1.904 billion at the end of the year which represents $12.78 per share. Underlying return on shareholders equity was up to 12% as a result of improved earnings. Total net cash flow from operating activities was $50 million, down from $92 million in the previous corresponding period. Excluding proceeds from the sale of the Coles CDC facility in the prior period, operating cash flow marginally higher, with the increased earnings from Building Products partially offset by an increase in working capital. During the half finished goods inventory increased by $13 million, with most factories operating through the Christmas and New Year holiday period to build stock to meet the strong order book. In addition there was a build up of stock to support the new Specialised Building Systems division. Net debt increased to $306 million with net debt to capital employed at 14% at the end of the period. Interest cover increased to a conservative 17 times. 11

13 Building Products capital expenditure was $36 million for the half, on the back of an increase in major upgrade projects. Spend on these projects totalled $21 million, primarily consisting of upgrades to the Cardup brick plant in Western Australia, the consolidation of Auswest Timbers operations to the Greenbushes site, also in Western Australia, and upgrades to the Rochedale brick plant in Queensland. Stay in business capital expenditure was $15 million, approximately in line with depreciation. 12

14 Turning now to Building Products. 13

15 Revenue for the half year was up 3% to a record $370 million. EBIT was $33 million, up 2% on the prior corresponding period, and EBITDA was $47 million. Unit margins were relatively steady for the period. Building Products underlying Return on Net Tangible Assets was 10% for the period, slightly lower than the prior period, as a result of the higher asset base. Full time equivalent employees was flat at 1,490 compared to 31 July 2016, with an increase in employees on the east coast offsetting the reduction in Western Australia as a result of restructuring activities in Austral Bricks and Auswest Timbers. There were 3 Lost Time Injuries during the half. This translated into an increase in the Lost Time Injury Frequency Rate to 2, compared to 1.6 in the 2016 financial year. 14

16 Turning now to market conditions. The chart on screen shows Australian dwelling approvals by month for the past 30 years. The orange line shows detached houses, the green line shows other residential and the blue line shows the total. As can be seen by the blue line, overall residential approvals remained at elevated levels during the first half of financial year The sharp increase in approvals over the past three years has been driven primarily by high rise residential developments in the major capital cities. The convergence of the green and orange lines on screen shows that other residential approvals now make up around 50% of total approvals, compared to less than 30% just six years ago. By contrast the growth in detached housing from near record lows in 2012 has been more modest. At around 10,000 approvals per month, the level of detached house building approvals still remains well below prior peaks, however has remained elevated for a longer period of time. 15

17 The chart on screen shows the same approvals data, but broken down to show the east coast states vs Western Australia. This shows a clear divide across the country with strong and sustained building conditions on the east coast contrasting with cyclical decline in Western Australia. Activity on the east coast has been driven by the major capitals of Sydney, Melbourne and Brisbane where conditions in most market segments remains strong. Historically, the Western Australian housing cycle has moved approximately in line with the east coast. However the chart clearly shows that this relationship has broken down dramatically over the past two years, with Western Australia being significantly impacted by the downturn in the mining, causing negative net migration. This has created very challenging conditions for operations in that state. 16

18 The chart on screen shows a breakdown of Building Products key profit impacts in the first half. In total, volume increases delivered a positive EBIT impact of almost $1 million compared to the previous corresponding period. Sales were higher across most east coast operations and remain at elevated levels. However sales volume is failing to keep pace with order intake and it is clear that the industry is operating at natural capacity on the east coast, limited by supply chain, trade shortages and a lack of land supply. An increase in unit margins delivered a positive EBIT impact of just over $6 million compared to the prior half. Margin growth in Austral Bricks was particularly strong, supported by the growth of premium, higher priced products following a sustained investment in product development and marketing over many years to position Brickworks as the leading style brand in the industry. This investment in marketing and branding was further expanded during the period, contributing to a $3 million increase in sales and overhead costs. Excluding the impact of the higher marketing spend, sales and overhead costs were held steady as a percentage of sales. The first half result also includes the recognition of a $1 million bad debt resulting from the collapse of the Home Australia Group and a decrease in earnings from export and tolling. Austral Bricks also generates gate fee income from clay sourced from building site excavations. This material is recycled and utilised in the production of bricks. During the period income generated from these gate fees decreased by around half a million dollars. 17

19 Austral Bricks delivered a 17% increase in earnings, with sales revenue up 2% to $198 million. A focus on innovation and development of premium products has continued to drive up sales margins, through increased prices. Performance on the east coast was particularly strong, with all major states achieving higher earnings. A strong result in Queensland was particularly pleasing, and follows the completion of the first phase of the Rochedale plant upgrades, resulting in much improved product quality and lower unit production costs. The final phase of the refurbishment program is planned for the second half of financial year In Western Australia the sharp downturn in building activity resulted in a decline in sales and margins, with intense competition for sales. Extensive restructuring initiatives have been undertaken in this state during the first half, including the upgrade of the Cardup plant and closure of Malaga. Commissioning of Cardup plant is underway, and is expected to deliver much improved product quality and lower production costs. 18

20 Austral Masonry earnings were higher, on sales revenue of $44 million, down 2% on the prior half. Sales revenue in New South Wales and Victoria increased, buoyed by the elevated levels of multi-residential building in these states, offset by a decline in revenue from North Queensland where conditions were soft. Just like in Austral Bricks, this business is focussed on development of premium, higher margin products, and this contributed to an uplift in selling prices over the period. 19

21 Bristile Roofing earnings decreased on the prior half, despite a marginal increase in revenue to $59 million. Demand in Victoria was particularly strong, driving higher earnings growth in this state. However in Queensland, earnings were adversely impacted by poor plant performance leading up to planned upgrade works. Since the upgrade works were carried out, product quality and production throughput has improved dramatically. The difficult conditions in Western Australia resulted in a significant decline in sales volume in this state, and despite improved operational performance, earnings were lower in this sate. Over the past 18 months, Bristile Roofing has diversified its product offering, with the acquisition of a number of metal roofing and fascia and gutter installers in New South Wales and Queensland. As a result, metal sales now make up 12% of total Bristile Roofing revenue, and offer a significant growth opportunity in the years ahead. 20

22 Austral Precast earnings were also lower, despite a 20% increase in revenue to $44 million. A significant uplift in earnings was achieved in New South Wales, on the back of strong sales growth and continued operational improvements at the Wetherill Park plant. Further robotic automation is scheduled for commissioning during the final quarter of 2017 and will bring further scale and cost advantages to this plant. The improved result in New South Wales was offset by weaker earnings in other states. A number of large projects in Brisbane have been delayed, impacting sales volume and production efficiency from Queensland operations. Market conditions in Western Australia and Victoria are particularly difficult, with strong competition impacting project margins. However recent major project wins, particularly in Western Australia, has significantly boosted the order book. 21

23 Auswest Timbers earnings decreased for the half, with revenue down 10% to $25 million. During the period, significant rationalisation activities were completed, with the consolidation of four operations in Western Australia onto one site at Greenbushes. Despite the disruption to operations in Western Australia, and a 40% decline in roof tile batten sales, earnings in this state were held steady. Victorian operations were hampered by operational issues caused by a decreasing log feedstock size, impacting recovery at Orbost and downstream processing at Bairnsdale. VicForests and Auswest are in negotiations for a long term log supply contract from July 2017, on terms currently being considered by the Company. 22

24 Turning now to the Building Products strategy and outlook. 23

25 Our Building Products strategy underpinned by a clear set of strategic pillars that support superior performance and earnings growth: Strengthening the core businesses; Building new growth businesses; and Sustaining our strong culture. We have made good progress this half to strengthen our core businesses, with operational excellence initiatives such as the restructuring in Western Australia and plant upgrades in Bristile Roofing. I have already mentioned consolidation and growth opportunities we are pursuing within our core business such as metal roofing, fascia and gutter acquisitions. And our long term investments in customer relationships, style and product development is supporting price and margin growth across our businesses. In growing beyond the existing core, Brickworks continues to actively seek investment opportunities in affiliated businesses but maintains a diligent and conservative approach to assessing potential acquisitions. Recent growth has utilised a low capital model, through establishing partnerships with best in class international manufacturers and leveraging Brickworks market leading customer relationships and distribution network. 24

26 Following repeated warnings from industry for many years, the Australian east coast gas supply crunch has now arrived, as illustrated by our recent east coast contract negotiations. Only one of the three major retailers was able to provide Brickworks with a firm offer for gas. And although gas has now been secured across all operations until the start of 2020, price increases are up 76% on average compared to Brickworks also face very sharp increases in electricity prices, with ASX forward price curves indicating average price increases in calendar year 2018 are likely to be over 80% along the east coast. In total, energy price increases will add around $20 million to Brickworks manufacturing costs by In the face of these increases, the company is urgently investigating a range of mitigation strategies including investments in new fuel efficient kilns, the use of alternative fuel sources, increasing imports and even offshore manufacturing to minimise price increases to customers. 25

27 Conditions across the country are mixed, characterised by strong east coast demand, offset by weakness in Western Australia. These conditions are reflected in a full order book in all east coast divisions. As such sales in these markets are expected to remain very strong in the second half of financial year In Western Australia, conditions appear to have stabilised over the past few months and building activity is not expected to decline further. The extensive restructuring initiatives undertaken in Western Australian operations during the first half will result in lower unit production costs in Austral Bricks and Auswest Timbers in the second half. Overall, the short term outlook for Building Products remains positive, with the strong order book at higher margins in our major east coast markets set to support earnings in financial year Beyond the 2017 calendar year, the significant cost impost of higher energy prices will begin to take effect. As mentioned, this will require a range of cost mitigation initiatives and price increases in order to maintain profit margins. 26

28 I will now go through our Property results. 27

29 Land and Development delivered an EBIT of $67 million for the half year. The improved result was due to the sale of Oakdale West into the Property Trust, which contributed an EBIT of $50.1 million from Land Sales. This 90 hectare site at Eastern Creek will be developed by the Property Trust as an industrial estate over the coming years. The Property Trust generated an EBIT of $19 million, down 58% from $45 million, due primarily to a lower revaluation profit. Royalty payments in relation to the Horsley Park landfill, operated by Veolia, ended in January 2016 and therefore this facility no longer generates earnings to Brickworks. 28

30 Looking now at the Property Trust in more detail. The Net Trust Income was $9 million, an increase of 37% on the prior period, primarily as a result of two new DHL facilities at Oakdale and the Beaumont Tiles facility at Rochedale, all completed in mid Following two years of capitalisation rate compression that delivered strong revaluation profits in recent periods, rates during the first half of 2017 stabilised, resulting in a lower revaluation profit of $6.8 million. A development profit on completion of Trust facilities generated $3 million EBIT, and a small profit was made on the sale of the Wacol distribution facility from the Property Trust. 29

31 The total value of assets held within the Property Trust at 31 January 2017 was $1.309 billion. This includes $789 million in leased properties and a further $520 million in land to be developed. Borrowings of $379 million are held within the Property Trust, giving a total net asset value of $930 million. Brickworks Group share of net asset value was $465 million, up $133 million from $332 million at 31 July The increase in value during the half is primarily due to the sale of the Oakdale West land to the Property Trust. 30

32 Construction activity within the Property Trust is now at unprecedented levels. At Oakdale Central in New South Wales, a total of 84,000 square metres of new developments have been commenced during the first half, with a further 63,000 square metres also under construction in Rochedale, Queensland. All of these developments will be completed over the next 18 months and are expected to provide strong revaluation profits upon completion. Once completed, these new developments will contribute in excess of $16 million in gross rental income to the Property Trust. Together with the significantly lower interest payments within the Property Trust, net trust income attributable to Brickworks will grow strongly. Meanwhile, the longer term growth prospects of the Property Trust are strong. Development at Oakdale South commenced in January 2017, with earthworks and site servicing due for completion by the end of Development of this land will likely to extend for around 5 years. An artistic impression of the developed Oakdale South site is shown on screen. Additional growth for another decade will then be generated through the Oakdale West Estate, following the sale of this property into the Trust in the first half. 31

33 I will now go through our Investment results. 32

34 Brickworks Investments Group consist primarily of a 42.7% stake in Washington H Soul Pattinson, a core asset of Brickworks that has brought diversity and reliable earnings to the company. WHSP is a diversified investment house with interests in a wide range of companies, including a 27% investment in TPG Telecom and a 60% interest in New Hope Corporation. The underlying EBIT from total investments was $48 million for the half, up by 78%. The increased contribution was driven mainly by higher earnings from New Hope Coal. Brickworks received fully franked dividends totaling $32 million from WHSP during the period. The market value of Brickworks investment in WHSP was almost $1.6 billion at 31 st January Subsequent to the end of the period, the value has increased to almost $1.8 billion. 33

35 WHSP has delivered outstanding returns to its shareholders over the long term. Fifteen year returns of 12.6% per annum are 4.7% ahead of the All Ordinaries Accumulation Index to the end of the period, with further outperformance recorded since that date. 34

36 Turning now to the outlook for the Brickworks Group. 35

37 Building Products earnings for the 2017 financial year will be underpinned by the strong order book and higher margins in major east coast divisions. Land and Development earnings are expected to be higher for full year 2017, following the strong first half. Higher earnings from TPG Telecom and New Hope Corporation, as seen in the first half, will boost Investment earnings in Over the longer term, Brickworks stake in WHSP should continue to deliver steadily increasing earnings and dividends. 36

38 I will now take any questions. 37

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