With the risk of this website becoming a website solely focussed on Brickworks (I swear I write about other companies) I thought I would give an overview of Brickworks most recent results for the half-year ended 31 January 2020 and their recent trading update to 31 May 2020. Overall, not much has changed at Brickworks since I last wrote about them.
The property trust is the real jewel in the crown for Brickworks. As a reminder, the property trust consists of six estates: M7 Hub, Interlink Park, Oakdale Central, Oakdale South, Rochedale and the new Oakdale West estate. Rochedale is in the southern suburbs of Brisbane while the rest of the properties are in Western Sydney. The details of these estates are in the below table from Brickworks. Brickworks profits from this trust in three ways: rental income, development profits and revaluation profits. The property trust has been fairly unaffected by COVID-19 and will grow substantially over the next 5+ years. Importantly, this growth will provide Brickworks with a consistent stream of rental income which underpins Brickworks’ dividend.
The property segment had a strong result this half, with total EBIT of approx. $90 million for the period consisting of $52 million of revaluation profit, $24 million of development profit and $15 million of rental income (amounts rounded). The revaluation profit was due to continued capitalisation rate compression largely attributable to reductions in the cash rate and high demand for these facilities. Brickworks’ rental return on the property trust is 6%, which considering the blue-chip nature of these properties is very respectable. Rental income was up 25% on 1H19 and helps underpin the dividend.
At Oakdale West, pad construction for the 66,000 m2 Coles facility is underway with building construction to commence in 2021. The JV has also secured a 20-year lease with Amazon for 53,300 m2 facilitiy with 191,170 m2 of useable floor space. Oakdale West is a very large development with development expected to take up to 10 years. Oakdale West will be a key source of growth for Brickworks this decade.
Even at the JV’s existing estates there is still some growth possibilities. At Oakdale South the JV is seeking a tenant for an approved 30,000 m2 facility while a further 73,000 m2 are also available for development if there is demand. At Rochedale the JV is seeking to develop 35,000 m2 of mixed-use buildings. Once Oakdale West and the rest of the broader Oakdale estate is developed the total value of the estate will be over $3 billion. This compares to the current ≈ $1.2 billion valuation – a 2.5-fold increase. Of course there will be some debt incurred within the trust to develop the property.
Building Products Australia
The Australian building products segment had very poor results with EBIT of $10 million and EBIT margins decreasing to just 3%. This was expected and was due to a decline in revenue across Austral Bricks, Bristile Roofing and Austral Precast. Austral Masonry revenue increased due to the integration of Aussie Concrete Products although EBIT was still down.
In the past half Brickworks continued making capital investments in its plants. At the Bristile Roofing Wacol plant an automated packing machine was installed while engineering improvements and an extrusion plant upgrade were made at the Austral Bricks Golden Grove plant. At Horsley Park Plant 3 a refractory reline of the Ceric kiln was completed and a new high voltage sub-station was installed at the Rochedale plant. Both the new substation and reline were completed to meet regulatory requirements.
Austral Bricks revenue was relatively resilient with revenue ‘only’ down 10% to $193 million. There were multiple extended plant shutdowns over the period however – Horsley Park Plant 3 was closed for the above mentioned refractory reline and Rochedale was closed to install the new sub-station. The Wollert West kiln in Victoria was also closed for inspection, prior to its warranty period expiring. These once-off plant shutdowns negatively impacted earnings but will ensure reliable production over the medium to long term. With the benefit of hindsight, Brickworks would probably have delayed some of these shutdowns due to the current COVID-19 induced reduction in demand expected to occur once current construction projects come to completion. Oh well.
Brickworks has also postponed its $125 million investment in a new face brick plant at Horsley Park Plant 2. This facility will be the most advanced brick manufacturing facility in the world. This upgrade will improve efficiency and allow Austral Bricks to continue manufacturing bricks despite the high gas and electricity costs. Brickworks is also investing $75 million in a new masonry plant on JV land at Oakdale East. Personally, I am looking forward to Austral Bricks having a fully modernised plant network which hopefully will not require so much capital investments in the coming decade.
More recently, rumours have surfaced in The Australian that Brickworks has approached German plasterboard manufacturer Knauf to buy its Australian assets. Knauf is reportedly wanting $400 million for the assets – which seems a bit rich considering the business reportedly only generates $40 million of EBITDA a year.
Brickworks North America
The second most important part of the announcement (behind the property division update) was the update on the performance of the North America business. As expected, Brickworks has made substantial operational efficiency improvements at the Glen-Gery plants with efficiency across the business improved considerably. The fact that these efficiencies could be gained in such a short amount of time indicates that the facilities were not optimally managed by Ibstock and/or they weren’t willing to make the necessary capital investments to improve efficiency. Plant rationalisations likely played a big part in this improvement.
In the previous half, minor upgrades were made at the Marseilles (Illinois) and Hanley (Pennsylvania) plants. The Iberia (Ohio) plant had a new extruder and pugmill installed as well as a new even feeder and moisture control system and waste return system which will support increased efficiency and an expanded product range. These improvements also bring the plant in line with the Brickworks Group of standard machinery. The closure of Glen-Gery’s Redfield plant in Iowa and subsequent shifting of production to the newly acquired Adel plant also resulted in the Adel plant’s (pre-COVID) utilisation rate reaching 100% based on the plants current one kiln operation. More recently, Brickworks announced that they have closed the Bigler plant and converted the York plant to one kiln only. This was due to the planned plant rationalisation initiatives being rolled out more quickly due to COVID-19.
More recently, Glen-Gery announced a USD $10 million upgrade to the Hanley plant to increase capacity by 25% (15 million brick a year). The project will commence in May and complete in early 2021. Mark Ellenor, President Brickworks North America says:
“Hanley is the brick industry’s premier architectural brick plant with products used on many well-known projects across the U.S. This investment will ensure opportunities for the next generation of brick makers and allow us to continue supplying high quality products and meet future demand.”
Glen-Gery also announced plans to start up a second kiln at the Mid-Atlantic plant due to rising demand for wood molded facebrick and shapes. On 14 July Glen-Gery announced that the kiln has been fired up. The investment will increase production by 40 million brick a year and create 30 new jobs. Mark Ellenor said:
“We are excited to create new job opportunities through our investment in Glen-Gery. Demand for wood molded brick, including our premium Cushwa brand, has seen an increase as we expand our marketing and develop new innovative colours. We have great distribution partners throughout North America who have helped create demand for our products and we value these relationships.”
These new jobs in part offset the 100 or so people who have been made redundant due to the previously announced closure of the Cushwa plant in Maryland. The Cushwa plant in Maryland was acquired as part of the Redland Brick purchase and was an old plant which was too expensive to modernise. According to the announcement, molded brick production from Cushwa will shift to the Mid-Atlantic plant while handmade brick production will shift to the York plant which can produce these products more efficiently than Cushwa. Interestingly, the Cushwa property will not be sold due to the clay remaining there and a call centre and key staff will stay on the property. Basically, they are rationalising the plants to increase production efficiency – which is exactly what they said they’d do. These investments are necessary to modernise the plants since minimal capital investments were made since the GFC (along with the rest of the industry).Glen-Gery Competitors
The brick business is a regional one – Glen-Gery is effectively a collection of small regional businesses. As result, Glen-Gery doesn’t actually have as many competitors as first appears when you look at the number of brick manufacturers in the U.S. They only compete with manufacturers in their region. Their major clay brick competitors in the United States are Belden Brick and General Shale (a subsidiary of Wienerberger). Meridian Brick, Brampton Brick, Endicott Brick and other smaller manufacturers also compete but I will focus on Belden and General Shale here. I should also note that Boral’s investors are urging the new CEO Zlatko Todorcevski to either demerge or sell parts of their North American business – which may be of interest of Brickworks.
General Shale (Wienerberger)
In their 2019 Annual Report, Wienerberger again noted that they have the #1 market position in their core market east of the Mississippi. Their primary target markets are premium single- and two-bedroom homes east of the Mississippi. Importantly for Brickworks they also stated that General Shale intends to further increase its share of the commercial brick market. Like they said in the 2018 Annual Report, Wienerberger considers the North American market an attractive market for value-enhancing acquisitions which they believe will be a major source of growth.
Wienerberger reported a ‘strong contribution to earnings from the acquisition of a brick producer in Pennsylvania, which enabled us to enter important new markets in the northeast of the USA and in Canada’. This is referring to their recent acquisition of Watsontown Brick in Pennsylvania. This is especially important for Brickworks since the North East is Glen-Gery’s key region. Fortunately for Brickworks there simply are not many other medium to large sized brick manufactures left for Wienerberger to acquire in the North East to further increase their market share. I should also note that Wienerberger did not publish what their market positions in each state were like they did last year – I’m not sure if I should read anything into this though.
Overall, not much has changed. General Shale is looking to acquire companies, is looking to expand into the commercial brick market and are keen on entering the North East market. General Shale appears to be well-run and is certainly performing better financially than Meridian Brick which competes in similar markets. General Shale and Glen-Gery will likely compete more and more over the years.
The defining event for Belden Brick recently was the sale of Redland Brick to Brickworks. Belden Brick is (as far as I can tell) a well-run family-owned brick manufacturer. In recent years Belden has made significant investments at their Plant 8 to supply the market with a full range of single-fired glazed brick. Prior to this Belden’s glazed and claycoat range of coloured bricks were manufactured at both Plant 6 and Plant 8. Now that their major investment in Plant 8 is complete Belden now has a stronger range of glazed and claycoat brick, all manufactured at Plant 8. According to Belden Brick, glazed brick is popular in Canada while claycoat brick is popular in New York with grey, black and white claycoat colours being in demand as of late 2019 (Source). Endicott Brick in Nebraska has also announced a new glazed brick range. White, black, light and mid-to dark grey bricks are all the rage at the moment, according to the Brick Industry Association.
As an industry outsider looking in, Belden Brick appears to be a well-run family company that provides Glen-Gery with some competition. Unlike so many other brick companies, Belden has made capital investments in some of their plants (in Sugarcreek, Ohio) to maintain competitiveness.
Two thirds of the Glen-Gery business is heritage repair work and construction of commercial buildings. The heritage repair business primarily involves manufacturing bricks to match existing bricks used in heritage buildings during repairs and expansion of those buildings. In New York, buildings must be inspected every five years and repairs are generally made with the same brick used originally where possible. This is a great source of recurring income for Glen-Gery. In the construction of commercial buildings Glen-Gery brick is specified by architects. Commercial buildings include hospitals, schools, fast food joints and other commercial buildings. Commercial building construction is not perfectly correlated with residential construction so is a source of diversification for Glen-Gery. New York construction was hit hard by COVID-19 in the early days and it remains to be seen if we are through the worst of it. However, the plant rationalisations, improved marketing and the recurring income aspect of the heritage repair business will help Glen-Gery get through this period. As far as brick businesses go, this is a fairly high quality business. While I don’t know what the Glen-Gery results will be in the short term, in the long term I believe that this business will be a major contributor to Brickworks’ growth.
As I’ve stated previously, in the long term I expect Glen-Gery to move into other regions of the U.S now that they have established a strong position in the north east. In particular, I expect them to move South as this market is very attractive to a brick manufacturer. The benefit the brick manufacturers have in the South is that brick use is much more entrenched in residential building and they have milder winters allowing them to operate more or less year-round. On the flip side there is also more competition in this region as the larger market allows smaller manufacturers to become large enough to gain some economies of scale.
Ultimately, Brickworks’ ability to succeed in the North American market will be determined by how well it manages the planned rationalisation of its plants, including maintaining its relationships with distributors, customers, existing employees and the broader brick industry. After all, today’s competitors could be tomorrow’s acquisitions. For example, I have heard that one of Brickworks’ smaller competitors has added a number of distributors due to Brickworks’ closure of the Cushwa plant. The hand moulded and wood moulded brick no longer being made at Cushwa is now at least to a small extent being serviced by competitors who make similar products. Whether or not this is a temporary issue which will resolve itself once production from the Mid-Atlantic and York plants kick in or is just hyperbole from Brickworks’ competitors remains to be seen. Even if a small amount of poaching does occur, the efficiency benefits likely outweigh these costs. If Brickworks can execute its strategy well, the North America business will be a key earning driver in the coming decade – albeit to a lesser extent than the property segment.
Brickworks’ investment in Soul Pattinson continues to be the largest part of Brickworks by asset value. The main event which happened last half was the successful merger of TPG and Vodafone. This merger will likely position TPG in a much better position vis a vis Teltstra. It is expected that the merger will reduce the capital investment requirements of the business, which will may mean increased dividends in the medium term. Due to Soul Patt’s change to its accounting treatment of TPG, Brickworks will have a once-off after-tax profit in the range of $323 million to $337 million as a result of the merger. Profits in future years are expected to be materially less due to the accounting change.
New Hope still hasn’t got approval for its New Acland Stage 3 expansion with the High Court granting special leave to appeal to Oakey Coal Action Alliance. Despite this setback, in light of the current state of Queensland’s economy this development looks more likely to be approved in the near term. I should also note that the thermal coal price has dropped considerably in recent months which will mean reduced dividends from New Hope. Overall, Soul Patts is performing as it always has and will likely pay a stable dividend to Brickworks as it always has. The special dividend Soul Patts received from TPG will likely make up for the expected reduction from New Hope.
Brickworks is a steady grower which will face difficult times in its building product businesses in the near term. Making up for this is the performance and growth in the Property segment and the reliable dividends from Soul Pattinson.