Tag Archives | Mark Adamson

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 chief looks at a better-based future

Fletcher Building Ltd chief executive Mark Adamson (above) couldn’t answer on the rationale for some of the big investment decisions his predecessors made, when he gave a briefing on the group’s results on Wednesday.

Fletcher Building hired him for the top job 3 years ago from his role heading the laminates division. His business record is that of a change merchant, which means both that he can be expected to move on soon and that getting the building products company shipshape has been a rapid revolution.

During the briefing, a news release was handed out on Fletcher’s decision to sell Rocla Quarry Products for $A203 million. In that release Mr Adamson said: “Rocla Quarry Products is a great business with a proud heritage, but it is not a strategic part of our Australian portfolio.”

It came in the $1.3 billion package of the Crane Group, which Fletcher bought in 2007, heading into the global financial crisis. Parts of Crane have been merged with existing Fletcher businesses and others have been sold.

Ralph Waters, retiring as Fletcher chairman in 2012 after being the first chief executive of the remodelled group in 2001, said the Crane acquisition “has been the result of years of patience. We bought the business of Crane to own it forever and it was at a very good price”.

As Mr Adamson went through the latest results, he noted Australian closures which were central to a $150 million writedown, including one Crane plant and 2 Iplex Pipelines plants (Iplex was also a Crane company), and commented: “I’ve got no idea of what was going through the minds of individuals [buying those businesses, before his arrival in Auckland].”

For Mr Adamson, change that will greatly improve the bottom line is not about reshuffling but, primarily, about getting the right managers with a different outlook, and having the appropriate marketing channels.

“Over the last 3 years we have managed to exit an awful lot of businesses from the ‘naughty file’. We have a decent track record of trying to resolve them [but] we have not been shy in addressing those changes.

“80% of my management team is new. We’re now in a stable position – by & large I’m done with [appointing] my management team. In turn, the new guys come in and look at their management teams. I would say we’re almost done with that.”

Mr Adamson said the group was in a stage of consolidation: “We have some divestments to make – to buy businesses in the state we were in was the wrong approach.”

Within the group now, attention was placed on better products & innovation and much stronger earnings would result.

Over the decades of the Fletcher Challenge conglomerate and the 14 years of Fletcher Building, the group has made (in hindsight) some dreadful, costly decisions, but has obviously made enough good ones to remain afloat. Through much of that time it’s been an arrogant outfit, parading as a ‘natural owner’ of various business lines to the tune, ‘We know best, therefore the decision’s right’.

Mr Adamson turned that around: “I think one of the things businesses fail to do is talk to their customers. Their customers are marching ahead, their business models are changing. You’ve got really sophisticated builders who say, ‘We’re not really interested in your products. We want solutions’.”

That is where the marketing, the matching of product to need, comes in.

Often, over the years, Fletcher chiefs would set out targets for products & divisions – sometimes publicly so the analysts could work their calculations – but Mr Adamson said the revised business model turned that around too, so shareholder return was the starting point, working back to how to get there.

It means not being wedded to any asset or activity, but examining how they perform: “If we can improve them we’ll keep ‘em, and if not we’ll let ‘em go.”

One part of the business which is having a greater role these days is construction. Mr Adamson wants to lift Fletcher’s housing output from 300/year to 1800/year. As part of that, it’s talking to the Government about unlocking the value of Crown land and how to replace tired housing stock.

For Mr Adamson, this is one of the most exciting prospects, and it doesn’t involve any merger or acquisition.

Looking at the future of the group, he said it less an issue of size, more about performance: “My principal goal was to get the right sort of leadership in this business. We’ve got some stellar assets that have performed extraordinarily well. We do have others that are struggling because of changes in industry structure or changes in demand.”

Fletcher has made some big acquisitions over the years – Crane, Laminex & Formica among the most recent, all involving major restructuring to turn them round – and Mr Adamson said the company was “very close” to signing a new one. But, he warned, “mergers & acquisitions is very difficult to grow earnings from”.

Some of the existing core businesses will require capital input to achieve organic growth, and a number of opportunities were being reviewed.

Earlier story, 19 August 2015: Impairments & closures cut Fletcher Building earnings

Link: Fletcher Building, annual results

Attribution: Briefing.

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