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.
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.”
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.