Archive | Fletcher Building

Institutional bookbuild puts $1.35 premium on Fletcher shares

Fletcher Building Ltd shares resumed trading today after the institutional shortfall bookbuild of the company’s $750 million fully underwritten pro rata accelerated 1:4.46 entitlement offer of new shares.

The clearing price under the shortfall bookbuild of 2.2 million entitlements was $6.15/share, a $1.35 premium over the entitlement offer price of $4.80, and a premium over the theoretical ex-rights price of $6.

Following ongoing shareholder reconciliations, the gross proceeds (excluding the premium) raised in the institutional entitlement offer & institutional bookbuild has increased from the expected $500 million to $515 million.

The retail entitlement offer, at the same offer price & offer ratio as the institutional entitlement offer, will open on Monday 23 April and close on Friday 11 May.

Earlier stories:
18 April 2018: Big Fletcher fundraiser plus divestments intended to stabilise construction’s fallen giant
4 April 2018: Lenders give Fletcher Building 2-month waiver extension

Fletcher links:
News: 1:4.46 entitlement offer
Offer document

NZX documents:
Investor presentation
Offer document
NZX appendix 7
ASX appendix 3B

Attribution: Company releases.

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Big Fletcher fundraiser plus divestments intended to stabilise construction’s fallen giant

Fletcher Building Ltd announced a fully underwritten $750 million equity-raising yesterday.

It will open next Monday, 23 April, and close on Friday 11 May.

The offer price of $4.80/share represents a 23.4% discount to the closing price on Monday and a 20.0% discount to the theoretical ex-rights price of $6. The underwriter is Macquarie Securities (NZ) Ltd.

As a rescue or stabilisation issue, those are hefty discounts. But if you compare the $4.80 price with Fletcher Building before its troubles were unveiled, it’s a steal (assuming it rights itself): $4.80 is a 56% discount to the opening price in January 2017, $10.80.

The company’s shares – which have taken a drubbing since the first revelations of extraordinary Building + Interiors division losses way back in March 2017 – gained 50c to $6.34 at the end of last week on news that Australian company Wesfarmers may have taken a stake in Fletcher (which turned out to be held by an enterprising Australian investor). The price was back at $6.27 at the close yesterday.

The shares were up at $11.02 in September 2016 but declined steeply in February 2017 as rumours came out of construction losses, were at $8.64 at the start of May last year and $7.56 at the end of that month, and were at $5.78 on 4 April, immediately after Easter.

In a long list of points about the fundraiser, the troubled building sector company said it had a new $500 million standby bank facility and could redeem all the US private placement (USPP) notes if required.

As predecessor Fletcher Challenge did after the 1987 sharemarket & property sector crashes, Fletcher Building also noted its intention to pull back from its internationally expansive tendencies. In the 1980s, Fletcher Challenge had interests in 3 broad sectors – construction, forestry & energy – but started the pullback by withdrawing from overseas construction, and continued in the 1990s by exiting its North American forest interests and separating the pulp & paper sector, and also exiting energy.

In this round, it will start the divestment process for its Formica and Roof Tile Group businesses.

Key principles

Chief executive Ross Taylor & chief financial officer Bevan McKenzie said in the company’s online presentation yesterday: “While work remains to be done to complete the strategic review that the company has been undertaking, the board has approved the following key principles:

  • A focus of the group’s activities on New Zealand & Australia
  • In New Zealand: – actively defending & growing the Building Products & Distribution core – vertically integrating around this core where this provides the group with: competitive advantage, stronger growth & better outcomes for customers. As such, the group’s positions in the Concrete value chain and in Residential Development remain an essential part of its overall NZ strategy; – stabilising the Construction business and returning it to sound operating performance
  • In Australia: improving the performance of the Australian businesses through greater focus, synergies & investment, such that the company can maintain & grow leading positions in the Building Products & Distribution core
  • This focus on New Zealand & Australia means the company will undertake divestment processes for its Formica & Roof Tile Group businesses.

What you can see, and where

There are some peculiarities to the announcement. You can open the offer document directly on the NZX website, but on Fletcher Building’s website you have to go through a process of confirming you’re not in the US and won’t release the document over there.

The company’s investor presentation can be opened directly on the NZX website, but I can’t find it on the company website. It doesn’t count as news yet on the company website – last entry in that section was chair Sir Ralph Norris’s letter to shareholders on 28 February.

In a release headed Fletcher Building Ltd moves to strengthen balance sheet and focus portfolio, the company said it was “undertaking actions to strengthen its balance sheet and better enable it to execute its immediate & longer-term strategic objectives”.

Key points:

  • Raising $750 million through a fully underwritten pro rata 1:4.46 accelerated entitlement offer at $4.80/share
  • Institutional & retail entitlement offers with bookbuilds for any shortfall
  • The company will use proceeds from the offer to repay debt
  • Commitments obtained from the required majority of lenders to a permanent solution of the current breach under the syndicated facility agreement
  • New standby banking facility of $500 million established with ANZ, MUFG Bank (Mitsubishi UFJ Trust & Banking Corp) & Westpac
  • Discussions with the USPP noteholders are ongoing and Fletcher Building’s objective & expectation are that it will achieve a mutually acceptable outcome
  • While not expected to be needed, proceeds from the offer & standby facility are sufficient to redeem all USPP notes and pay associated costs if required
  • Key principles of group strategy approved by the board: focus activities on New Zealand & Australia, with divestment processes to be undertaken for the Formica & Roof Tile Group businesses
  • No change to estimated 2018 financial year group ebit (excluding Building + Interiors & significant items) of $680-720 million and estimated loss for B+I of $660 million.

Company expects to cut leverage

Mr Taylor said the company expected normalised leverage (excluding the Building + Interiors business) to reduce to 1.6x, at the lower end of its revised target range of 1.5-2.5x.

He said discussions with the USPP noteholders were ongoing, and Fletcher Building’s “objective & expectation is that it will achieve a mutually acceptable outcome by 31 May”. While the company didn’t expect it would need the standby facility, it had been put in place to ensure that, together with the net equity proceeds of the offer, the company would be able to redeem all USPP notes and pay associated costs if required.

Mr Taylor said the company’s strategic review was progressing well and he expected to announce it in full in June.

Trading update discloses no margin on highway job

In a group trading update, Mr Taylor warned that Fletcher Building expected to get no profit margin from one infrastructure project, The Puhoi-Warkworth (P2W) project – the road of national significance extending the motorway-style State Highway 1 closer to Northland – where Fletcher Construction is in a 50:50 joint venture with Spanish company Acciona SA.

“The reset of the Construction business continues and regular internally led project reviews are now established across the business.

“With respect to the B+I business, there is no change to the project provisions announced in the 14 February trading update, and no change to the estimated FY18 B+I ebit loss of $660 million.”

Of the 16 key projects identified in that trading update:

  • 5 projects now complete, including the Justice Precinct in Christchurch – all completed within 14 February provisions
  • 7 projects targeting completion by end of calendar 2018 – all currently operating within 14 February provisions
  • 4 remaining projects including NZ International Convention Centre & Commercial Bay – all currently operating within 14 February provisions.

The announcement is on the Fletcher Building website, but you won’t find it, or the presentation sent to the NZX, instantly. The company hasn’t updated its announcements on the website since chair Sir Ralph Norris’s letter to shareholders on 28 February.

Fletcher links:
News: 1:4.46 entitlement offer
Offer document

NZX documents:
Investor presentation
Offer document
NZX appendix 7
ASX appendix 3B

Attribution: Company release, presentation, offer document.

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Lenders give Fletcher Building 2-month waiver extension

Fletcher Building Ltd said last Thursday it had obtained a 2-month extension to the waivers of the breach of financial covenants under its US private placement & bank syndicate funding arrangements.

The company breached its covenants when it provided for expected losses incurred by its Building & Interiors (B+I) business, as announced on 14 February & included in the its financial statements for the December half-year.

The breaches were initially waived until 31 March and have now been extended until 31 May with both the private placement & bank syndicate lenders. Fletcher Building said that, as with the initial waiver, if new terms are not agreed by 31 May a further extension would need to be agreed with the lenders.

The company said in a statement it had made progress in discussions with the lenders on amendments to the funding arrangements.

Under the terms of the new waiver, the syndicate lenders have now provided access to the company’s full syndicate funding facilities.

Fletcher Building confirmed that it hadn’t changed its estimate of 2018 group earnings before income tax & significant items, excluding B+I, of $680-720 million, and no change to the estimated ebit loss for the B+I business of $660 million.

Earlier stories:
2 March 2018: Fletcher gets US waiver, still negotiating funding terms
21 February 2018: Fletcher half-year loss $322 million
14 February 2018: Another $486 million of losses for Fletcher Building, and Norris resigns

Attribution: Company release.

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Fletcher gets US waiver, still negotiating funding terms

Fletcher Building said yesterday it had received a waiver of the breach of covenants under its US private placement (USPP) funding arrangements, subject to conditions, which the company expected to satisfy over the next few days.

The breach of covenants occurred as a result of the provision for losses incurred by Fletcher Building’s Building + Interiors business, which were announced on 14 February and included in the company’s financial statements for the December half-year.

Fletcher Building’s bank syndicate gave the company an equivalent waiver on 13 February.

The company said in a release yesterday it was now discussing amendments to the terms of its funding arrangements with both its bank syndicate & USPP noteholders.

If the company doesn’t agree on the amendments by 31 March, it will need to seek an extension of the waiver from the bank syndicate & the USPP noteholders.

Attribution: Company release.

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Fletcher half-year loss $322 million


Fletcher Building Ltd posted a half-year operating loss of $322 million today, down from a $310 profit for the December 2016 half before significant items.

That outcome was on revenue up 6% to $4.889 billion. The net loss before significant items was $273 million, down from a $187 million profit.

Chief executive Ross Taylor said these results incorporated a $631 million loss of Building + Interiors (B+I) division losses.

He expected an additional $29 million of overhead & transition costs in the second half would take the full-year loss for B+I to $660 million.

Excluding B+I, operating earnings fell 13% to $309 million.

Mr Taylor said: “Outside the challenges experienced in B+I, the broader Fletcher Building business continues to perform to guidance. While it is pleasing to see an increase in sales revenues, operating earnings have decreased due to lower profits in the Construction Division, outside of B+I, as well as the Building Products Division.

“In the Infrastructure & South Pacific businesses of our Construction Division we are rolling off major projects from the 2017 financial year, and we are only in the early stages of new ones. In Building Products we have seen gross margins compress as a result of higher input costs and costs associated with increasing supply chain capacity to meet increased demand.”

The Building Products Division reported a 13% increase in gross revenues from $1.108 billion to $1.25 billion. Operating earnings declined 9% from $129 million to $118 million. This was driven by additional costs incurred in various businesses to alleviate capacity constraints, increased energy costs, one-off redundancy costs in Fletcher Insulation Australia and a fire at Humes’ Penrose site.

“Earnings in the International Division are largely flat, while Distribution & Residential continue to post strong growth.”

The Distribution Division increased gross revenues by 7% to $1.757 billion and operating earnings by 6% to $89 million.

The Residential & Land Development Division increased gross revenues by 45%, from $163 million to $236 million. Operating earnings increased 57% to $47 million.

Mr Taylor reiterated the company’s expectation full-year operating earnings excluding B+I would be between $680-720 million.

As announced on 14 February, no interim dividend will be paid.

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Another $486 million of losses for Fletcher Building, and Norris resigns

Fletcher Building Ltd added $486 million today to the projected losses by its Building + Interiors division for this financial year, and company chair Sir Ralph Norris said he would resign.

Image above: Sir Ralph Norris at the results announcement in August 2017.

The extra losses will take the B+I provisions for the full year to $660 million.

The company said in its release to the NZX this morning it expected earnings before interest & tax (ebit) for the rest of the group to remain in the range of $680-720 million.

Aside from the increased loss, the notable point today was that Fletcher Building would stop bidding for new vertical construction projects.

Key points in today’s release:

  • B+I business refocused solely on delivery of remaining projects – bidding for all vertical construction in New Zealand to cease
  • Waiver received from commercial banking syndicate following breach of covenants
  • No interim dividend payment for this financial year
  • Sir Ralph Norris announced he would step down “no later than the 2018 annual shareholders meeting” (usually held in November).

Fletcher Building chief executive Ross Taylor said the new provisioning was informed by a review of 16 B+I projects, accounting for about 90% of the construction backlog, and incorporating external input from independent construction experts & accountancy firm KPMG.

“The provisions we have announced today are informed by a considerable amount of further project analysis and, while we continue to target agreed completion dates across the portfolio, we have factored in significant cost & timeline contingencies.

“Our absolute focus is finishing our remaining B+I projects within these provisions and to a high quality for our customers. To achieve this, we are refocusing the entire B+I business on project delivery only, and ceasing all bidding on vertical construction projects in New Zealand. This will allow us to direct all resources in B+I to the completion of the current book.

“While our broader construction businesses continue to benefit from favourable market conditions & strong growth, the B+I market sector remains characterised by high contract risk & low margins. Unless these dynamics change we will no longer work in this sector.”

Mr Taylor said the projected B+I ebit loss had resulted in a breach of Fletcher Building’s financial covenants given to its commercial banking syndicate & US private placement noteholders. However,he said: “The strength of the broader business & the phasing of the cash impact of the B+I provisions means the company remains well capitalised & solvent.

“We have strong & predictable cashflows across the Fletcher Building group. While the B+I provisions are large, they are phased over a number of years and do not impact our ability to trade with our customers or suppliers or pay our bills.”

In line with the company’s dividend policy the Board has determined that it will not be declaring an HY18 dividend.

“Our discussions with the banks have been constructive. We have received a waiver from our commercial banking syndicate for the breach of covenants and they have confirmed the availability of continued funding while we renegotiate terms. We have also commenced discussions with our USPP noteholders to obtain a similar waiver for the covenant breach. We are targeting to successfully complete renegotiations with all lenders by the end of March.”

3 core drivers

Commenting on the reasons for the additional provisions, Mr Taylor said: “There are many nuances by project, but 3 core drivers.

“Following further project reviews, we have taken a more pragmatic view on programme delivery & resulting cost contingencies. While we will pursue our contract entitlements vigorously, we have also taken a less optimistic view on client claims & variations. And lastly, since October we have seen further material price escalation across trade finishing costs, which have now been incorporated into cost forecasts.”

Norris wants transition, not instant change

Company chair Sir Ralph Norris issued a separate statement on his decision to resign:

“The Fletcher Building board understands the disappointment of our shareholders regarding the latest provisioning in the Building + Interiors (B+I) business.

“As chairman of Fletcher Building, our shareholders place significant faith in me to act in their best interests. This has always been my priority. I also know shareholders expect accountability from the board for all aspects of the company’s performance.

“In this context, I wish to announce that I will stand down as chairman. To allow an orderly transition of the board, this will occur no later than the 2018 annual shareholders’ meeting.

“I said at our last annual shareholders meeting in October that I felt a sense of obligation to see the business through these challenging circumstances and to complete the CEO transition & board refresh I had commenced.

“We have appointed a new CEO, Ross Taylor, who is now ably leading the business, and 3 new directors and a new chairman will be appointed in the coming months.

“I remain committed to providing leadership continuity during this time, and will continue to support my fellow directors & management in setting a new strategic direction for the company.

“Fletcher Building remains a great & solid business. I have every confidence it will weather this storm, and once again deliver our shareholders the value they expect & deserve.”

Background:

I normally flag company-supplied question & answer pieces because they’re normally obsequious. This list of questions & answers goes against the norm and is helpful.

Q: Which 16 projects were reviewed?
A: The Justice & Emergency Services Precinct (Christchurch) and the NZ International Convention Centre (NZICC, for SkyCity Entertainment Group Ltd in Auckland) projects continue to be the main contributors to the losses. In addition to these 2 projects, the company reviewed Commercial Bay, Auckland East Prison, Auckland Airport, Christchurch Airport Hotel, Wellington Airport carpark, and a remaining group of smaller projects.

Q: Which projects did KPMG review?
A: In the latest review, KPMG focused solely on B+I projects, including the 2 previously reviewed – NZICC & Commercial Bay – as well as the Christchurch Airport Hotel, Auckland East Prison & Auckland Airport projects.

Q: Does this mean Commercial Bay is now lossmaking?
A: We continue to target a profitable completion of this project. However, given it has a long way to go, we have provisioned for contingencies.

Q: Are the timelines for NZICC or Commercial Bay impacted by this announcement?
A: We continue to target the completion dates we have agreed with our customers, but we have provisioned for significant cost & timeline contingencies.

Q: When will the Justice Precinct complete?
A: The project is 99% complete and the client is occupying the building. We expect practical completion to be awarded at the end of February.

Q: Does the end of bidding on vertical construction projects mean the Fletcher Construction Co will close?
A: No. The Fletcher Construction Co includes 4 businesses – B+I, Infrastructure, Higgins & South Pacific. The only business impacted by this announcement is B+I.

Q: Will Fletcher Building ever consider bidding on a vertical construction project in the future?
A: We have made the decision to refocus B+I solely on project completion, to ensure our resources are completely focused on this task. While the B+I market sector remains characterised by high contract risk & low margins we will no longer participate. If these market dynamics change in the future we would reconsider our position.

Q: Does this change impact residential construction or infrastructure?
A: No. Our Residential Division will continue to operate as it does today. Likewise, our Infrastructure business will continue to complete existing projects and bid for new ones. The infrastructure sector benefits from more appropriate margins, better contract conditions and alliance models that reduce risk. As our B+I projects complete we will redeploy key talent to these growth opportunities.

Q: How is Fletcher Building’s debt structured?
A: Funding facilities are: capital notes ($622 million), US Private Placement ($1.13 billion), a commercial banking syndicate ($1.27 billion) and other loans ($103 million).

Q: Which of these debt structures has Fletcher Building breached covenants on?
A: USPP & the commercial banking syndicate.

Q: Which specific metrics have been breached?
A: Senior net debt:ebitda, ebit:senior interest, ebit:total interest & guaranteeing group ebitda.

Q: What happens if you do not agree new terms with your lenders by 31 March 2018?
A: In consideration of the waiver, we have agreed to negotiate changes to our agreements with our lenders by 31 March. If we do not agree new terms by 31 March, we would then be in breach of the terms of our waiver. This would be an event of default with our commercial banking syndicate. However, the banks have moved quickly to grant us the waiver and we expect discussions to continue to be constructive.

Q: Which banks are included in the commercial banking syndicate?
A: ANZ Bank NZ Ltd, The Bank of Tokyo-Mitsubishi UFJ Ltd, Bank of NZ, Commonwealth Bank of Australia, Citibank NA, The Hong Kong & Shanghai Banking Corp Ltd, Westpac NZ Ltd, Bank of China and China Construction Bank.

Fletcher Building chief executive Ross Taylor will host a teleconference call for investors & analysts at 1pm today to provide more detail on this announcement.

Links:
Fletcher Building presentation 14 February 2018
Fletcher Building trading update 14 February 2018

Earlier stories:
12 February 2018: Fletcher Building gets 2 more days to unveil further losses
8 February 2018: Fletcher Building warns of worse to come

Attribution: Company release.

  • This story is running, should be completed in the next half hour.
  • 9.38am: complete.
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Fletcher Building gets 2 more days to unveil further losses

Fletcher Building Ltd asked this morning for – and received – a 2-day extension to the trading halt on its shares & capital notes on both the NZX & ASX, saying its review wasn’t complete.

The company asked for the trading halt last Thursday after indicating more bad news to come. Today it said in an NZX notice the review of the key projects in its Building & Interiors (B+I) business as part of the preparation of the group accounts for the 6 months to 31 December wasn’t yet complete.

It reiterated: “As announced on 8 February, the current expectation of the board is that there will be further material losses in the B+I business beyond what was provided for in October 2017, and that once those further losses are determined & provided for, this will result in a breach of one or more of the covenants in the group’s financing arrangements.

“Since making the 8 February announcement, the company has commenced discussions with its lenders in relation to the expected covenant breaches.”

Earlier story:
8 February 2018: Fletcher Building warns of worse to come

Attribution: Company & NZX releases.

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Fletcher Building warns of worse to come

Fletcher Building Ltd has given itself until the sharemarket opening on Monday to release details of further losses on construction projects. It expects this will mean it’s breached covenants.

The company asked for a trading halt for its shares & capital notes yesterday after indicating more bad news to come.

Fletcher Building disclosed in March 2017 that it had been reviewing its buildings & interiors business & projects in late calendar year 2016. At that point it cut its full-year earnings guidance by $110 million. It lopped another $85-125 million off the guidance in July, when chief executive & managing director Mark Adamson was ousted, and reported in August that net earnings were down 80%. The Building + Interiors (B+I) business unit within the Construction division reported a $292 million loss

Yesterday, Fletcher Building said it sought the trading halt because the company was in the process of reviewing the key projects in the B+I business as part of the preparation of the group accounts for the 6 months to 31 December 2017.

“Although the project reviews are not yet complete, the current expectation of the board is that there will be further material losses in the B+I business beyond what was provided for in October 2017. Once the extent of those further losses is determined & provided for, it is expected that this would result in a breach of one or more of the covenants in the group’s financing arrangements.”

Earlier stories:
19 January 2018: Regulator clears Fletcher Building of continuous disclosure breach
27 October 2017: Sheppard turns Fletcher meeting into “absolution or exorcism” exercise
25 October 2017: Fletcher issues guidance, names new chief executive
25 October 2017: Fletcher shares in trading halt on eve of AGM
21 September 2017: A year on, Fletcher board still has ‘construction nous vacancy’ pencilled in
17 August 2017: ‘Fessed up, time to move on, says an unconvincing Fletcher boss
21 July 2017: Fletcher Building takes axe again to construction earnings, Adamson ousted
20 March 2017: Fletcher Building cuts earnings guidance by $110 million
19 March 2017: Fletcher Building to explain construction loss Monday morning
22 February 2017: Fletcher Building net up 2% after site closures

Attribution: Company & NZX releases.

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Regulator clears Fletcher Building of continuous disclosure breach

Fletcher Building Ltd’s board became aware in late 2016 of issues affecting performance of the Building & Interiors unit (B+I) of its construction division, but NZX Regulation has found the company didn’t breach its continuous disclosure obligations by announcing a consequent profit downgrade only in March 2017.

The company issued a second downgrade notice in July.

NZX Regulation published its findings yesterday following investigations of Fletcher Building’s disclosure of the material forecast earnings downgrades.

NZX Regulation assessed what information was material to Fletcher Building, and when it came into the possession of Fletcher Building’s senior executives & directors to trigger the disclosure requirement.

The regulator concluded that Fletcher Building released the material information promptly & without delay, as required under the listing rules. You can click on its full investigation report below.

Fletcher Building, not surprisingly, welcomed the findings.

The revelations

On 22 February 2017, Fletcher Building released its half-year financial results, confirming guidance it had previously given to the market, that operating earnings were expected to be in the range of $720-760 million for the 2017 financial year.

The company sought an urgent trading halt on Friday 17 March, saying it was reviewing the financial performance of its Construction division & its impact on earnings guidance previously provided to the market. The following Monday, 20 March, the company announced an earnings guidance update, including details of a downgrade in forecast earnings to a revised range of $610-650 million. Fletcher Building’s share price declined 13%, opening at $9.22, hitting a low of $8.00 during the day and closing at $8.28.

On 20 July, Fletcher Building announced a trading update & the departure of chief executive Mark Adamson. That announcement included details of a further downgrade in forecast earnings, to $525 million. The share price declined 8.8% from an opening price of $8.09 to a low of $7.38 before closing at $7.59.

The earnings forecast downgrades reflected losses being accrued in a number of projects within the B+I unit. NZX Regulation concluded: “We consider that information about those specific losses was not separately material information for Fletcher Building. This recognises the specific facts & circumstances relevant to Fletcher Building and how market expectations of its financial performance were set, which will necessarily differ from issuer to issuer.

“Market expectations of Fletcher Building’s financial performance were set by the published group level earnings forecasts. In these circumstances, we consider that financial performance at a business division level would need to be assessed in relation to how the performance impacted the group earnings forecasts in order for that information to be material information for Fletcher Building.

NZX investigation’s limits

NZX Regulation said its investigation was limited to assessing compliance with the NZX rules, and note:

  • Rumours relating to progress on the status of particular Fletcher Building projects are not the same as rumours about Fletcher Building’s financial performance at a group level
  • Rumours about financial performance measures must have a sufficient degree of credibility, specificity & certainty in order to give rise to potential disclosure obligations, and
  • In any case, in order for Fletcher Building to have a disclosure obligation, the information must be in the possession of Fletcher Building’s executive officers or directors.

The regulator concluded: “We have not identified any evidence that executive officers or directors of Fletcher Building were in possession of material information as a result of the rumours & speculation relating to its progress on particular projects.”

NZX view of how the 2016 events unfolded

NZX Regulation said a number of matters relating to the Construction division were brought to the attention of the Fletcher Building board as a result of a review in late 2016: “That review focused on issues relating to personnel, organisational structure, and management & governance processes within the Construction division.

“Those issues led to a strategic review of the Construction division, including the B+I unit. During the strategic review, the performance of the B+I unit & specific projects within that business unit became an increasing focus for senior Fletcher Building executive officers & the Fletcher Building board. This included an in-depth project-by-project review of the Construction division, and changes to the senior leadership team & senior management functions within the Construction division.

“As a result of this process, Fletcher Building senior executives became aware of information relating to the financial performance of the B+I unit, and the impact of certain major projects on that performance.

“Determining margins on construction projects is complex, requiring subjective assessments & prudent judgments to be made on future events. These assessments need rigorous testing by management to ensure appropriate judgments are made. Due to financial reporting standards that apply to construction projects, any projected losses must be immediately accounted for. Fletcher Building tracked these projects & the estimated impact of projected losses on the group earnings forecast.

“Although losses were being recognised for certain projects in the B+I unit during late 2016 & early 2017, these did not initially have a material impact on the group earnings forecast, which remained within the published guidance range. As the review continued throughout the first quarter of 2017, additional information & estimates relating to the financial performance of the Construction division became available to executive officers….

“Our investigation identified that Fletcher Building acted promptly when information relevant to Fletcher Building’s financial performance & earnings forecasts came into the possession of executive officers & directors. This included Fletcher Building assessing that information in light of Fletcher Building’s continuous disclosure obligations.

“Following our investigation, we determined that, for the purposes of the rules:

“March 2017 downgrade: Fletcher Building first became aware on the evening of 16 March that there was a material risk that its actual group earnings results would materially differ from its published forecast. That awareness arose when information was provided to Fletcher Building executive officers that evening on additional projected losses on a key Construction division project. In order to manage its disclosure obligations, and in accordance with NZX Regulation guidance, Fletcher Building applied for a trading halt while it sought further information to confirm its revised forecast. This included assessing information relating to provisions against future losses. The actual change to Fletcher Building’s earnings forecast was confirmed while the trading halt was in place. Fletcher Building released its announcement on the earnings forecast downgrade before market open on 20 March, at which time the trading halt was lifted, and

“July 2017 downgrade: Fletcher Building first became aware on the evening of 19 July that there was a material risk that its actual group earnings results would materially differ from the revised earnings forecasts that had been published on 20 March. That awareness arose when information was provided to Fletcher Building executive officers as a result of regular project reviews, regarding projected losses in various of those projects. Following engagement with management & Fletcher Building’s auditors, the Fletcher Building board determined that additional loss provisioning would also be required. Fletcher Building released its announcement on this subsequent earnings forecast downgrade before market open on 20 July.”

Link:
NZX Regulation investigation report Fletcher Building Ltd – continuous disclosure

Earlier stories:
27 October 2017: Sheppard turns Fletcher meeting into “absolution or exorcism” exercise
25 October 2017: Fletcher issues guidance, names new chief executive
25 October 2017: Fletcher shares in trading halt on eve of AGM
21 September 2017: A year on, Fletcher board still has ‘construction nous vacancy’ pencilled in
17 August 2017: ‘Fessed up, time to move on, says an unconvincing Fletcher boss
21 July 2017: Fletcher Building takes axe again to construction earnings, Adamson ousted
20 March 2017: Fletcher Building cuts earnings guidance by $110 million
19 March 2017: Fletcher Building to explain construction loss Monday morning
22 February 2017: Fletcher Building net up 2% after site closures

Attribution: NZX Regulation report.

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Sheppard turns Fletcher meeting into “absolution or exorcism” exercise

Angst laid on thick, the introduction of monthly reviews (as if they weren’t once the norm), an unprecedented voluntary 20% cut in directors’ fees, an annual meeting chaired with aplomb & eventually giving space to the voices of protest.

Fletcher Building Ltd chair Sir Ralph Norris apologised on Wednesday to the hundreds of shareholders in the Auckland War Memorial Museum event centre for the performance of the company’s construction division, and the losses incurred on major projects by that division’s building & interiors business (B+I).

Father Bruce

Shareholders Association founder Bruce Sheppard chose priest’s garb to deliver his message.

Shareholders Association founder Bruce Sheppard turned up in priest’s garb to perform rites on the company, providing the elan that his successors never manage. Rising to speak to a director’s re-election, Mr Sheppard told Sir Ralph: “Big is not beautiful” and “Too much debt always kills business”.

Then he went on to explain his garb: “This is an A&E meeting, and I don’t mean accident & emergency. I mean absolution & exorcism.”

Boards at big listed companies are innately secure – they mostly hire people they’re going to get along with, they mostly have the votes tied up and it’s rare for a director to be elected on less than 98% support.

But, turning to the assembled shareholders at the museum before the vote on re-electing Cecilia Tarrant, who’s a member of the company’s audit & risk committee, Mr Sheppard conducted an absolution or exorcism test.

New Shareholders Association chief executive Michael Midgley, a retired lawyer, told the meeting that if the former audit & risk chair John Judge had been up for re-election the association would have campaigned for proxies opposing it. For Ms Tarrant, Mr Midgley said: “It’s our view that her position is untenable.”

Mr Sheppard told Ms Tarrant that, while “it pains me to put an alternative view to the organisation I founded, perhaps you could forfeit more fees than the rest of the board – but that is to your conscience”.

Asking his audience to raise their hands in favour of absolution or exorcism, he found the room evenly divided. In the official count, Ms Tarrant collected 99.13% of the votes. Former PWC NZ chief executive Bruce Hassall, who joined the board and its audit & risk committee in March and was therefore not part of the Building + Interiors problem, was up for election for the first time and scored only 96.14% support.

Both Ms Tarrant & Mr Hassall spoke forthrightly before the votes. Mr Hassall had gone to the trouble of meeting most of the finance executives across the group, and commented: “It is clear we have a lot of businesses which need to do a lot better.” On B+I he said: “Mistakes have clearly been made on contracts in the past.” He said his job was to make sure downside was minimised and that the mistakes “never occur again”.

The construction losses to continue

Fletcher Building split its earnings guidance on Wednesday to show B+I losing $160 million ebit (earnings before interest & tax and excluding “significant” items) in the 2018 financial year – and Sir Ralph said it could be more than that – while the rest of the group was expected to make $680-720 million.

The company expects 80% of the extra $125 million of project losses to come from 2 projects, construction of the NZ International Convention Centre in Auckland for SkyCity Entertainment Ltd, and the Justice precinct in Christchurch. The $35 million balance of anticipated ebit loss will come from extra B+I overheads.

The line – “so it won’t happen again” – is a nice, comforting one. Small shareholders invest in a company like Fletcher Building because it’s a secure large corporate, supposedly well managed.

Mr Hassall’s arrival on the board replaces one supposed accounting strength (John Judge) with another, but the board is still looking for a new director with construction sector nous.

It’s an extraordinary hallucination that a company of Fletcher’s size, with its origins, its company name, its basis for being before the gathering of product divisions that made it a vertically integrated conglomerate, should go a whole year since it discovered a gigantic gap in project management expertise without adequately stemming the flow of funds through that gap.

As one gnarly oldtimer commented to me on the way out the door: “What’s their job if not to manage the business? Monthly reports? We always had them.”

Sir Ralph Norris presenting the annual result in August.

Ihumatao versus the food trolley

But for all that, Sir Ralph ran a subdued meeting, giving a long explanation of negative construction project events but also spending considerably more time going through the performance of other divisions than they’d normally get at the annual meeting, allowing protesters over the housing division planned for Ihumatao, near Auckland Airport, to air their views & ask their questions rather than trying to shut them down, but also giving his own contrary opinion on Ihumatao and to a representative of striking drivers.

To the truck drivers, he said: “Increases have been significantly above the rate of inflation over the last 5-6 years. The company will come back in good faith.”

Then, after 130 minutes, the strident voice of SOUL (Save Our Unique Landscape) campaigner Pania Newton from a raised standpoint at the side of the room became too much for Sir Ralph as she accused the company of corruption & stealing land. It was also too much for most of the suddenly grumbling elderly shareholders who resented the attack and began to make their way to the food trolley. Sir Ralph closed the meeting.

The event was a success for allowing some important issues to be aired and some necessary explanations to be made. But both Sir Ralph & the company have a long way to go before Fletcher Building gets back on track – or, better, on to a positive new track that takes more considered account of affected communities & workforce relativities.

Earlier stories:
25 October 2017: Fletcher issues guidance, names new chief executive
25 October 2017: Fletcher shares in trading halt on eve of AGM
21 September 2017: A year on, Fletcher board still has ‘construction nous vacancy’ pencilled in
17 August 2017: ‘Fessed up, time to move on, says an unconvincing Fletcher boss
21 July 2017: Fletcher Building takes axe again to construction earnings, Adamson ousted
20 March 2017: Fletcher Building cuts earnings guidance by $110 million
19 March 2017: Fletcher Building to explain construction loss Monday morning
22 February 2017: Fletcher Building net up 2% after site closures

21 December 2016: Fletcher Residential completes Oruarangi purchase
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

Link: Fletcher Building

Attribution: Fletcher AGM.

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