Boral Limited (ASX: BLD) shares have lifted slightly in morning trade, up 0.51% at the time of writing, following the release of its half year results for the period ended 31 December 2019. The building products company downgraded guidance earlier this month for the 5th time in 2 years.
The company's half-year results were broadly in line with its downgraded guidance, however Boral faced a challenging start to the second half, requiring a focus on strengthening performance. While revenue was up marginally, profits nosedived and the interim dividend was cut.
Boral faced a difficult first half with an accounting scandal uncovered in its North American windows business while it also contended with tough market conditions. Chief executive Mike Kane announced his departure earlier this month after presiding over multiple profit downgrades. He is expected to vacate his position and US$1.4 million salary by August.
Revenue up, profits down
Revenue from continuing operations increased marginally to $2.690 million, up 2% from $2,897 million in 1HFY19. Excluding the impact of AASB 16 on the accounting treatment of leases, earnings before interest tax depreciation and amortisation (EBITDA) declined 8% to $439 million from $465 million.
Net profit after tax (NPAT) declined 18% to $159 million from $192 million, while statutory NPAT fell 39% to $139 million from $229 million in the prior corresponding period. Earnings per share were down 28% to 13.5 cents per share from 16.4 cents per share. The interim dividend was slashed to 9.5 cents per share, down 27% from 13 cents per share in the prior corresponding half.
Geographic performance
Boral reported that underlying activity in most markets remains solid, albeit with cyclical downturns in Australia and South Korea. Boral Australia revenue decreased by 2% to $1,752 million with a high contribution from Asphalt primarily offset by lower revenues in Concrete and Building Products. Concrete volumes were 7% lower and one-off costs of $11 million were incurred due to business interruption.
In North America, revenue increased 4% due to sales in light building products and fly ash. Fly ash volumes were up 5%, while the price was up 10%. Earnings were however impacted by a 10% decline in stone volumes, one-off costs of US$10 million and a lower contribution from Meridian Brick.
USG Boral saw revenue decline 2% reflecting cyclical declines in South Korea and Australia. In Australia, revenue declined 10% due to lower housing starts. In Asia, revenue was up 2% with strong growth in China and growth in Thailand and India, largely offset by a decline in South Korea.
Balance sheet
Boral reported net debt of $2.32 billion at 31 December, up from $2.19 billion at 30 June 2019. The company's credit rating remains strong at BBB/Baa2, however net interest cover has decreased to 4.7x from 6.1x at the end of the prior corresponding period. The weighted average debt facility maturity is 4 years.
Boral is reinstating its dividend reinvestment plan, which will be underwritten for the interim and final FY20 dividends.
North American accounting scandal
Boral announced the discovery of financial irregularities in the North American windows business in December. These included misreporting in relation to inventory levels and costs associated with raw materials and labor.
The investigation into the misreporting was substantially completed earlier this month and determined that finance personnel within the windows business manipulated accounts and financial statements to artificially inflate the profitability and health of the business.
The misconduct occurred over the 20 month period to the end of October 2019. Boral has confirmed that the financial misreporting is limited to the windows business. The impact of the misconduct is that pre-tax earnings were overstated by US$24.4 million between March 2018 and October 2019. The costs of the investigation were around US$1 million.
Boral has restated its comparative financial information to incorporate the correction of the windows earnings in its underlying results. Historical pre-tax earnings were reduced by US$22.6 million, with US$18.8 million relating to FY19 and US$3.8 million relating to FY18.
The employment of both the vice president finance and the financial controller in the windows business was terminated. The windows business is expected to deliver only low single digit EBITDA margins for FY20. Under windows' new lead, Joel Charlton, the team is establishing a plan for the business to return to acceptable margins. The margin recovery plan is expected to see the business achieve double digit margins in the medium term.
Strategic priorities
In Australia, Boral is aiming to harness its leading position to maintain attractive, above cost of capital returns and margins. Programs are in place which focus on rightsizing, supply chain optimisation, and organisational effectiveness. Value improvement projects delivered procurement savings of $30 million in 1HFY20, with more than $80 million in savings expected to be delivered in FY2020. The property pipeline remains a strong source of earnings with $55–$65 million expected in FY2020.
In North America, Boral is prioritising leveraging growth from the Headwaters acquisition including delivery of the $115 million synergy target. Thus far $78 million in synergies have been delivered. Boral plans to increase fly ash supply volumes by 1.5 – 2 million tonnes by the end of FY2021. In the meantime more than 50 improvement initiatives are ongoing which span procurement savings, product penetration and marketing, product weight/design improvements, and sales and margin enhancements.
Outlook
Boral expects its FY2020 EBITDA to be down relative to FY2019, with lower reported EBITDA in all 3 divisions. Higher depreciation charges means an NPAT of $320–$340 million is expected in FY2020, compared to FY2019's restated NPAT of $420 million, after adjusting for the windows misreporting.
Depreciation and amortisation is expected to be in the range of $400–$410 million in FY2020, reflecting the completion of quarry upgrades in Australia. Capital expenditure is expected to be around $400 million.
Boral experienced a challenging start to the second half in Australia due to the bushfires and extreme weather, with January concrete volumes down 30% on the prior corresponding period. Boral has confirmed it is monitoring the potential direct and indirect impacts of the coronavirus, which have not been factored into outlook guidance.
