Tag Archives | Fletcher Building

Fletcher Building cuts earnings guidance by $110 million

Fletcher Building Ltd has dropped its range earnings guidance for the year to June by $110 million (before interest, tax & significant items).

The range when chief executive Mark Adamson (above) delivered the half-year results on 22 February was $720-760 million. The range now is $610-650 million.

Mr Adamson said today: “The revised guidance is due to the identification of additional estimated losses & downside risk in the buildings & interiors business unit of the construction division.

“A thorough review of the buildings & interiors business & projects began in late calendar year 2016 and led to new management & governance processes. A significant loss was recorded for buildings & interiors in the half-year results based on the best estimate available at the time. However, management has now identified an increase in the estimated loss on the major construction project which was referenced at the time of the announcement of the first-half results, and the identification of downside risk on other buildings & interiors projects, with the majority being a provision for expected losses on one other major project….

“For reasons of client confidentiality, we will not name the projects. We expect one of the projects to complete within the next few months, and the other is targeting completion in the 2019 financial year.”

The second project had been expected to make a $10 million ebit contribution to 2018 earnings.

Mr Adamson said all other business units within the construction division had continued their strong trading performance. “However, taking into account the new estimates of profitability for the commercial construction projects, it is now expected that the construction division as a whole will report a loss at the ebit level for the 2017 financial year.

“Trading for Fletcher Building’s other divisions remains in line with expectations previously discussed in the first-half earnings commentary.”

Specific questions

In a Q&A section of his release, Mr Adamson said: “The major projects involved are large & highly complex. Project reports & reviews received since the half-year results announcement have indicated significantly higher costs to complete the projects, and have also enabled improved quantification of remaining risks. In addition, the detailed review by new management has led to downward revisions in expected profits on a number of smaller projects.

“The most significant issues relate to complexity in design, subcontractor management and building programme delivery on key projects. This has led to an extension of project timelines and increase in project resource requirements & costs, relative to original budgets. The extent of this has become more apparent since the half-year announcement as new management & processes have bedded in.”

As a result of this debacle, Mr Adamson said Fletcher Building had appointed a chief operating officer for the construction division, a new head of risk & governance in the construction division, and a new general manager of the buildings & interiors business unit would start shortly. We have new finance leadership & processes along with the recent implementation of a new financial management reporting system. The criteria for bidding major construction projects have been made more stringent, and internal review processes for proposed & existing projects have been strengthened. We believe these changes will drive improvement in future periods.”

Would the update also impact the outlook for financial year 2018? Mr Adamson said: “Fletcher Building does not provide guidance beyond the current financial year, however we have tried to be conservative in estimating the losses in the current construction book, and trading in our other divisions remains in line with our expectations.”

Mr Adamson said he wouldn’t discuss potential claims: “We do not discuss matters related to claims publicly. Whenever we have issues on a construction project, we endeavour to work constructively with our clients & other relevant parties to resolve them. Where we have a robust basis for a claim we will consider our position carefully.

Do these issues point to a systemic issue in your construction book? “We don’t think these issues are systemic because they are primarily related to programme & design challenges on a small number of major projects. We are very cognisant of pressure on labour & sub-contractor resource in the New Zealand construction industry at present, and need to ensure we manage this effectively in current projects & future bids. We believe that the changes we are making to strengthen our governance, management processes & bidding criteria and review & approval processes will enable improved performance in the future.

What proportion of the contracts in the construction book are fixed price? “Our current construction backlog is about $2.7 billion. Of this, about $1.5 billion is in the buildings & interiors business. All but one of our major projects underway in buildings & interiors is either a ‘fixed price lump sum’ or ‘guaranteed maximum price’ contract. This is standard in the commercial construction industry. We do not believe the issues we have uncovered relate to contract type, but rather challenges related to programme & design complexity in key projects.”

Has the growth in the buildings & interiors business been driven by a deliberate strategy to boost volume growth for the building products division? “Building products operates as an independent division to construction and supplies product to the construction division’s projects on arm’s length terms. We estimate that sales from building products businesses to buildings & interiors make up less than 5% of total building products revenue.”

Despite the reduction in forecast cashflows from the construction division in financial year 2017, Mr Adamson said the company remained comfortably within its banking covenants & target debt metrics and expected to continue to do so: “Based on the updated guidance range, we expect the ratio of net debt:net debt + equity to be around 34% at the end of financial year 2017, and the ratio of net debt:ebitda to be about 2.4 times.”

Earlier story:
19 July 2017: Fletcher Building to explain construction loss Monday morning

Attribution: Company release.

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Fletcher Building to explain construction loss Monday morning

Fletcher Building Ltd expects to make an announcement on earnings guidance on Monday morning after asking for a trading halt on its shares on the NZX & ASX exchanges on Friday.

The company sought the trading halt while it completed a review of the financial performance of its construction division & impact on earnings guidance.

Chief executive Mark Adamson was more concerned about when construction losses had to appear on the company’s books when he presented the company’s half-year results on 22 February, than explaining how they’d arisen.

“You have to take all of that loss in to the books in the first half,” he said then. “It is in the order of 10s of millions of dollars. It’s a really detailed programme management issue.”

In the results media release, Mr Adamson said: “Construction operating earnings reduced due to the timing of earnings from certain projects being recognised, expensed bid costs, a reduced contribution from Fletcher EQR (Earthquake Recovery in Christchurch) and losses incurred on a major construction project.”

Mr Adamson wouldn’t say whether that one project where the full losses had to be reported for the interim result was the only one where this nature of impact was occurring – and he wouldn’t explain how the country’s biggest construction company could make a loss entering a new site such as SkyCity Entertainment Group Ltd’s International Convention Centre or Precinct Properties NZ Ltd’s Commercial Bay.

According to the interim accounts, the construction division increased revenue by 54%, from $748 million in the December 2015 half-year to $1.15 billion in the December 2016 half. Reported operating earnings, and operating earnings on the non-GAAP measure before significant items, were down 33%, from $36 million to $24 million. The group’s $16 million of significant items related to site closures at Fletcher Insulation & Rocla Products ($15 million) and costs associated with acquiring the Higgins business ($1 million).

New Zealand construction operating earnings fell from $26 million in the 2015 half to $1 million in the latest period, while South Pacific construction earnings rose from $10 million to $23 million.

Attribution: Company accounts, release, interim results briefing.

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Fletcher Building net up 2% after site closures

Fletcher Building Ltd lifted net earnings by 18% in the December half-year, then reduced the figure to 2% through the closure of sites in 2 divisions.

The company reported net earnings of $176 million ($172 million in the December 2015 half), but said earnings would have been $11 million higher but for the net loss from significant items – costs associated with site closures in Rocla Products & Fletcher Insulation.

Highlights:

  • Operating earnings (earnings before interest, tax & significant items) rose 12% to $310 million ($278 million)
  • Revenue rose 4% to $4.613 billion
  • Operating earnings from the distribution & international divisions both rose over 30%
  • Construction result impacted by losses on a major project
  • Cashflow from operations, negative $67 million ($170 million)
  • Basic earnings/share before significant items 27c (23c)
  • Interim dividend up 5% to 20c/share.

Chief executive Mark Adamson said the result reflected a sustained improvement across almost all parts of the portfolio, “signalling the benefit that businesses are getting from a strong New Zealand economy, improved customer propositions, operational efficiencies, cost reductions, and in some cases organisational restructuring”.

The increase in revenue reflected sales growth in the New Zealand businesses and the acquisition of the Higgins contracting business, which operates in New Zealand & the South Pacific and was effective from 29 July 2016.

Despite mixed economic conditions in Australia, operating earnings there rose from $64 million to $84 million.

“The International division is now starting to show the benefit of cost reductions, operational efficiencies, restructures & new product initiatives across the Formica & Laminex group of companies. The 32% improvement in operating earnings in the first half of this year was primarily driven by year-on-year improvements at Formica Europe & Formica Asia.

“Across New Zealand we were pleased to see operating earnings – excluding the performance of the construction division and divested & acquired businesses – increase 20% year on year, indicating the positive impact of continued demand across the residential building & infrastructure sectors.”

Construction operating earnings were reduced due to the timing of earnings from certain projects being recognised, expensed bid costs, a reduced contribution from Fletcher EQR, and losses incurred on a major construction project.

Consistent with guidance provided at the annual meeting last October, operating earnings (earnings before interest, tax & significant items) for the 2017 financial year are expected to be in the range of $720-760 million.

Link:
Fletcher Building financial results

Attribution: Company release.

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Fletcher Residential completes Oruarangi purchase

Fletcher Residential Ltd has completed the purchase of 33.8ha for its residential development in Oruarangi Rd, Mangere.

Image above: Map of the development showing the buffer zones & other protected areas.

General manager Ken Lotu-I’iga said yesterday the purchase last week followed Auckland Council consent approvals granted in May.

He said Fletcher Residential, a subsidiary of Fletcher Building Ltd, was pleased with the continued progress: “It is well known that Auckland needs more houses, and we believe this will be a wonderful new neighbourhood, sensitive to the surrounding area. It will also include affordable housing which so many Aucklanders so desperately need.”

The deal has been hotly contested by local residents, particularly members of SOUL (Save Our Unique Landscape), who argued that the rezoning at 545-561 Oruarangi Rd from future urban to a combination of mixed housing suburban, public open space:conservation, and green infrastructure corridor would provide housing at a far lower density than most others in the same tranche of special housing areas approved in 2014.

Fletcher Residential intends to build up to 480 homes in a mix of standalones & terrace housing, and including about 48 affordable homes.

In a list of 18 other development proposals under the housing accord, SOUL found only 4 with densities below 40 dwellings/ha, 8 with densities over 200 dwellings/ha: “The only special housing area approved by Auckland Council & the NZ Government as a low density development is special housing area 62, Oruarangi Rd, Mangere: 480 dwellings on 32ha, density 15 = low.”

The Wallace family farmed this land for over 150 years and it was zoned for future residential development in 2011. Mr Lotu-I’iga said a small part of the residential development land bordered the Stonefields Reserve, and the stonefields were an important part of the history of Aotearoa: “We applaud the Auckland Council for acquiring the stonefields and making them a reserve for all to enjoy. In keeping with this history of protection, we have set aside more than 25% of the development land to provide a buffer zone for the reserve.

“Comprehensive preparations & planning have already been undertaken to protect the culturally significant geological features of the area, including the adjacent Stonefields Reserve. Fletcher Residential has commissioned reports from archaeologists, Heritage NZ, lizard experts, engineers & others, and incorporated these recommendations into the development plans.

“The company has been working with Maori leaders who have the mandate to represent their iwi. We have walked the site with mandated representatives and used ground-penetrating radar to confirm the exact location of caves & midden. We are not building on any of these areas. We are also protecting the old farmhouse & some significant trees. We have comprehensive protocols in place for the discovery & protection of anything of significance found on site, including having an archaeologist on site.

“We believe Auckland can have both history & houses. We are committed to creating a new neighbourhood that reflects these values. While we understand there is some local opposition from people who don’t want any development at all, we believe that the redevelopment of this site has been carefully considered and provides a good outcome for Aucklanders. We will continue to discuss our plans with mandated stakeholders.”

Earlier stories:
25 May 2016: Fletcher wins approval for subdivision next to Mangere stonefields
29 January 2016: Opponents say Ihumatao alone as low-density special housing area proposal

Attribution: Company release.

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Fletcher message is steady rather than gains from innovative performance

One thing I was looking for out of Fletcher Building Ltd’s briefing today on its annual result was an indication that the outlook is better than running with the tide.

Shifting $81 million of working capital, released when Pacific Steel closed, into cashflow from operations was one big help. The $85 million increase in cashflow from operations was one of the company’s financial highlights for the year but, given the source of most of it, that’s a weak highlight.

On to the next year, then. Chief financial officer Gerry Bollman spoke about how the Accelerate programme would help lift Fletcher Building’s performance, but the outlook is for…. rising & falling with the tide, depending on the country or continent.

The Accelerate message, I said, was fine words, but what did they mean? Mr Bollman tried again. There was a focus on things like external procurement, and also on reducing internal costs. In dollar terms & business effectiveness, your guess is as good as mine.

When chief executive Mark Adamson arrived in Auckland to take over running the business in 2012, his first mission was to change value by driving efficiency, and FBUnite was the mechanism. Accelerate – “building better, together, faster” – adds “art of the possible” bottom up analysis & “top down” validation to the mix, “harnessing the power of the centralised functions & centres of excellence”, co-ordinating it all through the company’s group transformation office, tracking it “consistently across all businesses with a weekly cadence”.

It might equate to more than hocus pocus if it had been related to something concrete like financial returns, or growth in skills, or less downtime, or more pay for staff through their suggestions of how they could perform better for the company.

Housing consents outlook

Fletcher Building – which began as a builder, got right out of that post-1987 then returned with a vengeance in recent years as it saw opportunities to develop housing on golfcourses and in old quarries – has a different perspective from the Government & Auckland Council on the near future for the residential construction sector.

The unitary plan, which the council mostly passed this week, provides for enough land around the region to become available to build 420,000  homes over the next 30 years – an average of 14,000/year built, not just consented. Even as Auckland consents have lifted from a low point of about 3400 in 2011 to 9600 in the year to June, they’re well short of the 39,000 target (including sections) for the 3 years of the housing accord that ends next month.

Fletcher Building expects residential consents nationally to peak in the June 2018 year (after already peaking in Christchurch), but Mr Adamson said a lag in construction could mean the peak is delayed.

He forecast non-residential activity to remain elevated & steady, and infrastructure work to continue growing.

Fletcher Building is forecasting a gradual decline in residential activity in Australia after peaking this year, and expects little non-residential growth. Elsewhere around the world, the company expects growth at best to be modest.

Fletcher Residential’s NZ operating earnings rose 12% to $74 million for the year on revenue up 44%, from $238 million to $343 million, as the Stonefields development in Auckland’s east winds down to completion in about 18 months, offset by an accelerated building programme that includes sales at a number of new locations. The business has a construction target of 1500 houses/year.

Link:
Fletcher Building results

Earlier story today:
Australia & NZ lift Fletcher earnings

Attribution: Company results, briefing.

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Australia & NZ lift Fletcher earnings

Fletcher Building Ltd reported net earnings for the June year up 71% to $462 million ($270 million last year), including significant items totalling $37 million. Net earnings before those items were up 5% to $418 million ($399 million).

Highlights:

Revenue, up 4% to $9 billion ($8.7 billion)
Net earnings, up 71% to $462 million ($270 million)
Net earnings before significant items, up 5% to $418 million ($399 million)
Operating earnings (ebit), up 43% to $719 million ($503 million)
Operating earnings (ebit) before significant items, up 4% to $682 million ($653 million)
Cashflow from operations, $660 million ($575 million)
Basic earnings/share before significant items, up 4% to 60.6c/share (58c/share)
Earnings/share, up 71% to 67c/share (39.2c/share)
Capex, up 8% to $300 million ($278 million)
Final dividend, 20c/share, fully imputed

Chief executive Mark Adamson said a 29% uplift in operating earnings from the company’s Australian businesses drove the higher result, coupled with strong growth in operating earnings in New Zealand in the distribution, residential & construction divisions.

“While the macro-economic environment in Australia was mixed, we delivered strong earnings growth from our Australian business portfolio, which was the result of our focus on improving the performance & capability of our businesses in that market.

“What was equally pleasing was the continued growth in earnings from our New Zealand distribution, residential development & construction businesses. These are all areas we have highlighted as offering strong growth potential.

“Cashflow generation was another highlight of the year, with cashflow from operations up 15%.

“We made good progress during the year in completing our portfolio rationalisation. With the sale of Rocla Quarries completed in January and the acquisition of Higgins completed last month, we have now largely concluded the restructure of our business portfolio.”

I’ll have further details from a briefing later today.

Link:
Fletcher Building, full results

Attribution: Company release.

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Commission clears Fletcher to buy Higgins

The Commerce Commission cleared Fletcher Building Ltd yesterday to acquire Higgins Group Holdings Ltd.

The clearance covers Higgins’ road surfacing & road maintenance, civil structure & construction products, including most of its aggregates & bitumen businesses. Higgins has not sold its readymix concrete business & property businesses, which will be transferred to existing Higgins shareholders before the acquisition.

Fletcher Building also originally applied for clearance to acquire Horokiwi Quarries Ltd in Wellington, but amended its application to remove this quarry during the commission’s consideration.

The commission said today it focused its consideration of the merger on the competitive effects in the supply of aggregates in regions where Fletcher Building (operating as Winstones) & Higgins overlap – namely North Waikato, Napier, Manawatu-Whanganui, Kapiti & Christchurch. In particular, the commission considered whether the loss of Higgins’ quarry operations in these regions would make it easier for Fletcher Building to raise prices to external aggregate customers such as roading contractors.

Commission chair Mark Berry said the commission was satisfied the merger wouldn’t have, or wouldn’t be likely to have, the effect of substantially lessening competition in the affected markets.

“Higgins & Fletcher Building are key competitors of aggregate products in particular regions. However, we consider that strong competition would continue in these regions from existing competitors and the ability of customers to self-supply.”

Link: Commerce Commission clearance register, decision

Attribution: Commission release.

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Fletcher & NALCO unveil aluminium joint venture

Fletcher Building Ltd said today it had reached agreement to create a 50-50 joint venture between its Fletcher Aluminium windows & doors business and NALCO Ltd.

NALCO managing director Ron Holden will become managing director of the new entity.

Fletcher Building chief executive Mark Adamson said it was proposed that the Fletcher Building manufacturing site in Auckland would close in the 18 months following formation of the joint venture.

He said Fletcher Building would fund its share of the capital expenditure to expand NALCO’s Hamilton manufacturing facility. The new entity will have 2 key manufacturing sites – an extrusion & powdercoating facility in Hamilton and a powdercoating facility in Christchurch.

In its first full year of operation the new entity is expected to have sales of $190 million. The joint venture is expected to be formed by June and is conditional on a number of matters, including Commerce Commission approval if required.

Attribution: Company release.

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Fletcher Building creates new 5-division structure

Fletcher Building Ltd announced changes today to its divisional structure & executive officers.

Chief executive Mark Adamson said they followed the evolution of the group’s business portfolio, including the completion of the sale of Rocla Quarry Products last week and the acquisition of Higgins, announced today.

Under the new structure, Fletcher Building will be organised into 5 divisions centred on the manufacture of building products, distribution, residential & land development, construction and the group’s international businesses. The 5 new divisions are:

Building Products: manufacture of light & heavy building materials in New Zealand & Australia. This division will be led by Matt Crockett, currently chief executive of the heavy building products division.

International: encompasses Fletcher Building’s Laminex, Formica and Roof Tiles businesses. Francisco Irazusta has been appointed chief executive of this division.

Distribution: building materials, plumbing supplies & steel distribution activities in New Zealand & Australia. Dean Fradgley will continue as chief executive of this division, which will also include the Stramit and Tasman Sinkware businesses in Australia and Dimond Roofing in New Zealand.

Residential & land development: residential development business in New Zealand, together with the development of existing non-residential landholdings. Fletcher Living chief operating officer Steve Evans has been appointed chief executive of this division.

Construction: building & engineering construction activities in New Zealand & the South Pacific, together with the Higgins contracting businesses in New Zealand & Fiji. Graham Darlow will continue as chief executive of this division.

Transformation officer appointed

In addition, Fletcher Building has appointed Lee Finney to the new role of chief transformation officer, with responsibility for all the group’s centres of excellence, including the marketing, operations excellence & procurement functions. He will also be responsible for the acceleration of the growth & cost reduction initiatives and will lead a core team of business transformation specialists.

Mr Finney has extensive experience in transforming the operational performance of international businesses, most recently with brewer Molson Coors, where he has been chief supply officer for the Canadian & European divisions since 2010. Before that, he held senior supply chain leadership roles for Goodman Fielder in New Zealand and for Campbell’s in Europe & the US. He has an MBA (Warwick, UK) and has completed the advanced management programme (INSEAD, France).

As a result of these changes, the role of laminates & panels chief executive, based in Melbourne, has been disestablished and Paul Zuckerman has decided to leave Fletcher Building.

Mr Adamson said the new divisional structure reflected the changes to the business portfolio, with a number of businesses divested over the last 2 years and the acquisition of Higgins announced today.

“Under the new structure, Matt Crockett will have responsibility for all of our core manufacturing operations in New Zealand & Australia. Dean Fradgley will have all distribution activities reporting into him. It has become increasingly clear that some of our businesses that were seen as manufacturing operations are really driven by end-to-end service propositions, with less manufacturing input and greater value provided by the service offering. As such, it makes sense to group these activities within the distribution division.

“We have also taken the opportunity to combine our international businesses under one executive. Francisco Irazusta will have responsibility for the Laminex and Formica businesses as well as our Roof Tiles business. Given their global span of operations, there is a clear benefit in having these businesses managed under one senior leader.

“Our residential development business has grown substantially, and we expect to continue to expand earnings from this activity over the next several years. In addition, we have identified the opportunity to further develop our existing commercial & industrial landholdings, and Steve Evans will pick up responsibility for this in his new role.

“With the creation of the chief transformation officer role, we will have a dedicated senior executive who will be focused on accelerating the growth &d cost reduction initiatives. Building on the FBUnite transformation programme, we have identified significant further opportunity to eliminate inefficiencies and improve our sales & marketing capabilities. Lee Finney will be responsible for delivering on these opportunities.”

Mr Adamson said Fletcher Building would report its half-year results on the basis of the new divisional structure.

Links:
Fletcher Building restatement
Fletcher Building divisional structure

Related story today: Fletcher Building buys Higgins roading business

Attribution: Company release.

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Fletcher Building buys Higgins roading business

Fletcher Building Ltd will acquire the New Zealand road construction & maintenance business Higgins Group Holdings & related assets, together with Higgins’ Fiji contracting business, for a total consideration of $315 million.

The businesses being acquired as part of this transaction comprise principally:

  • Higgins’ road construction & maintenance operations in New Zealand, including asphalt & bitumen plants
  • Road construction & maintenance operations in Fiji
  • Higgins’ aggregates business, which includes 16 operational quarries, and
  • Other related businesses, including the manufacture of traffic signs, and bitumen tanks & sprayers.

Higgins’ ready-mix concrete & property businesses are excluded from the transaction.

Higgins is the third largest participant in the New Zealand road construction & maintenance sector and is integrated with its quarry operations. Fletcher chief executive Mark Adamson said the business had had a strong growth trajectory in recent years, driven by the expansion of its base from the lower North Island into the Auckland, Waikato, Bay of Plenty & Canterbury regions and augmented by strong growth in its Fiji operations, where it’s won 2 major contracts.

Higgins recorded revenue of $391 million and underlying operating earnings (ebit) of $35 million in the 2015 financial year, and is expected to generate operating earnings of $40 million in 2016. The price being paid for the business represents a multiple of 7.9 times forecast 2016 ebit, and Fletcher Building anticipates the transaction will be earnings/share accretive from its first year. It will fund the acquisition from its existing cash & debt facilities.

The agreement is conditional on a number of factors, including Overseas Investment Office & Commerce Commission consent. Mr Adamson anticipated the acquisition would be completed by about 30 June.

He said Fletcher Building had partnered with Higgins on road construction projects for over 25 years, and had forged a close working relationship with the business over that time: “We have signalled for some time our desire to extend our activities into the road construction & maintenance sector, where we have identified significant opportunity. Higgins was a logical choice for Fletcher Building to talk with, given our strong history of working together.

“We believe that a combination of Fletcher Building & Higgins will provide our customers with a stronger proposition for both new road projects and maintenance contracts. We also see further benefits for a number of group businesses in being able to work more closely with Higgins, and believe that we can derive further value from the acquisition through operational synergies.

“Higgins has achieved strong growth in Fiji, and this business complements our existing South Pacific construction activities. We will be looking to extend the sphere of operations beyond Fiji into other South Pacific territories over the next few years.”

Attribution: Company release.

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