Fletcher Building Ltd said today it made a $55 million operating loss before interest & tax in April.
Chief executive Ross Taylor said, in an update on trading & the reset of the organisation, the group’s New Zealand businesses were trading this month at about 80% of forecast revenues, and its Australian business at about 90% of pre-Covid-19 expectations.
Mr Taylor said the company expects to cut its New Zealand workforce by about 10% – 1000 jobs – and by 500 jobs in Australia.
The update below (from ttrading update down) contains more detail from this morning’s announcement – on trading, on resetting the business, which includes laying off staff, and on the broader economic outlook & the company’s own financial picture.
Sharp downturn expected for June 2021 year
“While there is a lot of uncertainty over the economic outlook, we expect Covid-19 will lead to a sharp downturn in the 2021 financial year and potentially beyond. Looking to the next financial year, we are planning for an environment that will see a shrinking economy, substantially reduced customer demand across all our businesses & sustained lower levels of productivity.
“In New Zealand, residential consents at the time of the level 4 lockdown were tracking at all-time highs of around 37,000/year. As we look ahead, our base case estimate for residential consents in New Zealand is that they will drop by around 30% to about 25,000 in the year to June 2021.
“We expect New Zealand commercial building activity to be impacted by a reduced project pipeline in the private sector, with our base case factoring in about a 15% decline in the value of commercial work put in place in the June 2021 year.
“Meanwhile we expect the NZ Government commitment to infrastructure spend to support our businesses exposed to that sector. However, we expect work put in place to decrease by about 10% in the 2021 year as new projects take time to ramp up.
“In Australia, residential approvals prior to Covid-19 had been showing signs of renewed growth from a base of around 150,000. Our base case is that we now expect approvals to fall by a further 15% to about 129,000 in the 2021 year.
“In commercial & infrastructure, we expect a similar dynamic to that of New Zealand, with the value of work done declining by similar percentages in both sectors.
“These are our base case estimates for the 2021 financial year, though we acknowledge that there is a lot of uncertainty over the outlook and that actual activity levels may be materially different. We will be looking hard at the trends in activity over the next few months and will be ready to respond if needed.”
As outlined in the company’s 25 March update, the group’s businesses had traded largely in line with expectations until then, Mr Taylor said.
“However, with no revenue across most of our NZ operations during the level 4 lockdown and Australia revenues running at around 90% of pre-Covid-19 expectations, the group recorded an operating ebit loss for April (unaudited & prior to significant items) of about $55 million. The result consisted of an about-$55 million loss in New Zealand and an approximately breakeven result in Australia.
“Costs incurred during this period relate mainly to employee costs, with about 90% of NZ employees placed on the group’s bridging pay programme. This ensured our employees who were not working received at least 80% of their base pay for the first 4 weeks, and a minimum of 50% for the subsequent 4 weeks.
“Providing certainty for our employees during this period was a priority and the NZ Government’s wage subsidy scheme made a significant difference, enabling us to retain our people during that time.”
Current trading picture
Since the move to level 3 on 28 April, the New Zealand construction sector has been able to return to work. The ramp up has been gradual, with health & safety & physical distancing protocols creating reduced productivity & additional costs across the business.
“The group’s NZ businesses are currently trading at around 80% of forecast revenues in May, while Australia continues to trade at around 90% of pre-Covid-19 expectations. The group’s core manufacturing & distribution businesses are expected to record positive ebit before significant items across May & June, though at lower levels than normal due to the gradual ramp-up in activity and ongoing Covd-19 restrictions.
“Residential house sales by Fletcher Living, which were not possible under the level 4 lockdown, have now restarted. There is no change to the construction provisions on legacy projects at this stage, however the group is currently working through any impacts from project delays & other risks through the lockdown & subsequent periods for all its construction businesses.”
Mr Taylor said Covd-19 would likely have a significant impact on the group’s markets in both New Zealand & Australia.
Resetting the business
“It is imperative that the group is positioned for the expected market downturn, which has meant making some very difficult decisions, including reviewing the number of people it employs.
“Like any business facing much lower revenue ahead, we need to reduce our spending to prepare for these tough times. Our first goal has been to implement cost-saving measures that would allow us to retain as many of our people as possible.
“These include looking hard at our operational footprint, exiting some offices to make better use of the space we have in places like the group’s Penrose headquarters, making improvements to the efficiency of our supply chains so that we need fewer warehouses & depots, and ceasing some unprofitable product lines.
“We will also reduce spend in discretionary areas such as external fees, marketing & travel and we will not be paying any short-term incentives across our businesses for the 2020 financial year. Reductions of 30% to board & chief executive pay will remain in place through to the end of September.
“While we looked at all parts of our business to remove costs, regrettably we believe we will not be able to support the same number of people. We have to make some very difficult decisions, which include looking at reducing the number of people we employ by about 10%. This will equate to around 1000 positions across New Zealand.
“In Australia, we are undertaking a comprehensive review of our operations and expect this would result in a workforce reduction in the order of 500. I acknowledge this news will be hard to hear and that this is an unsettling time for all involved.
“Moving ahead as proposed would mean losing talented & hard-working people from Fletcher Building. Any of our people affected will have made a difference to our company, their teammates & our customers; these decisions are not a reflection of their value or contribution.
“We are beginning consultation with some of our people & unions this week. In New Zealand, we will honour our obligations under the Government wage subsidy scheme by retaining our people through the 12-week subsidy period ending 26 June.
“We are committed to supporting our people as they leave us and will endeavour to do what we can to help them secure their next opportunity. This will include every permanent employee leaving Fletcher Building being paid their redundancy entitlement under the terms of their employment or a payment equivalent to 4 weeks’ base salary, whichever is higher, to recognise & support our people given the exceptional circumstances. We will also be providing a comprehensive range of outplacement & other support services.
“The redundancy & restructuring activities will result in some one-off costs, which are yet to be determined but will be disclosed as part of the group’s 2020 full-year results in August.”
Mr Taylor then moved on to the company’s broader financial outlook:
“Alongside this, the group has continued to focus on preserving cash & liquidity through not only the lockdown period but as we look ahead. In addition to the already cancelled interim dividend payment and suspension of the on-market share buyback programme, the group has revised its capital expenditure outlook.
“In the fourth quarter of the 2020 financial year, capex has been reduced by about $60 million, which means total expenditure for the year is now expected to be $240 million compared to a pre-Covid-19 expectation of about $300 million.
“In the 2021 financial year, the group expects its core capex envelope to be in a range of $125-150 million, focused on only the most important investments in safety, maintenance & key strategic initiatives. In addition, $50 million will be invested in the new Winstone Wallboards plant in Tauranga in the 2021 year.
“As at 30 April, the group’s unaudited net debt was about $650 million and the group’s leverage ratio (net debt/rbitda) was 0.8 times, compared to a target range of 1.0-2.0 times. At 30 April, the group had unaudited cash on hand of $970 million and undrawn credit lines of $525 million, providing total liquidity of about $1.5 billion. The average maturity of the group’s debt facilities is currently 3.7 years.”
Attribution: Company release.