The mood Fletcher Building Ltd tried to convey to its shareholders at their annual meeting yesterday was of a company enthusiastically looking forward, with a clear strategy in place.
The 2 men who took the helm in 2017-18, chair Bruce Hassall appointed last year and chief executive Ross Taylor, who started in November 2017, didn’t paper over the cracks opened up over the last 3 years:
- the fiasco of a $190 million loss in 2018 arising from its building & interiors division’s performance
- the damage to its reputation as a commercial construction contractor through its still-unfinished Commercial Bay project & the fire at the SkyCity International Convention Centre, and
- what looks like a protesters’ victory over a residential subdivision on contested land at Ihumatao near Auckland Airport.
But their motivation was forward, and how to do that better.
A year ago, Mr Hassall introduced Fletcher Building’s vision, “to be the undisputed leader in New Zealand & Australian building solutions, with products & distribution at our core”.
Yesterday, Mr Taylor concentrated on that vision & how to implement it.
From the duo’s speeches to yesterday’s annual meeting at Eden Park, I’ve drawn content which I think will best indicate that direction, starting with trading in the first 2 months of the new financial year.
A second piece covers some of the issues shareholders raised, and the responses.
First, the overall picture from the company’s release on the meeting:
Trading to date:
“Fletcher Building’s NZ core divisions (Building Products, Concrete and Distribution) remain on track against a solid market backdrop. Activity for residential & commercial finishing trades remains strong, supporting good performance in plasterboard, insulation & laminates.
“Activity for civil, infrastructure & starting trades is trending slightly lower as expected, leading to a slight easing in demand for concrete & pipes. In addition, the steel market remains highly competitive.
“In the Residential & Land Development division, demand for housing in key target segments remains strong and prices remain supportive. In Construction, Higgins experienced a slower start to the year due to a wet first quarter. Based on information currently available, there is no change to the B+I provisions announced in February 2018.
“In Australia, the division’s cost-out programme is progressing to plan and there is good turnaround momentum in Laminex & Fletcher Insulation. Intense competitor activity in the declining residential market is placing ongoing pressure on price & margin in Stramit & Tradelink, while infrastructure project delays are expected to have some near-term impact on Iplex & Rocla in FY20 (I normal translate these references into, eg, the 2020 financial year, but have left the in place today).
“Fletcher Building expects EBIT before significant items for FY20 to be in the range of $515-565 million. In FY19 EBIT before significant items (after adjusting for discontinued operations) was $549 million.”
From Mr Hassall’s address:
Balance sheet strength
“A key priority in FY19 was to materially strengthen the group’s balance sheet and provide a robust platform for the execution of the go-forward strategy. Largely as a result of the highly successful Formica divestment, our group net debt decreased from $1.3 billion at June 2018 to $325 million at June 2019. Overall this provides a really strong foundation for growth.
“The group will continue to maintain a prudent approach to balance sheet management as we execute the strategy. Meanwhile our return on funds at 11.8% was lower than we target, and this was mainly a reflection of the underperformance of our Australia businesses.
“Our dividend policy remains unchanged, which is to pay out 50-75% of net profit (before significant items), having regard to available cash flows in the period.
“We are retiring all debt where it is sensible to do so, and we will only allocate capital to investment opportunities that make strategic sense.
“After careful consideration, we decided that there was incremental capital available to be distributed, with the most optimal way being via a share buyback. This will deliver value to shareholders and drive accretion in earnings/share. The group intends to redistribute up to $300 million to shareholders through this programme. So far, we are making excellent progress in the programme, with a total value of $106 million of shares already acquired.”
“In Australia, we had a tough year. While revenue was maintained, earnings halved. The sharp decline in the residential market resulted in much greater competitor intensity across the businesses, which limited the ability to achieve any significant price increases through the year.
“Margins were further impacted by increased input costs. Against this backdrop we made a decisive intervention to materially reset the cost base as well as continuing to selectively invest where opportunities present themselves. Lifting the performance of our Australian business is a key area of focus of management & the board.
Deaths jolt company in safety focus
The deaths of 5 men on site during the last year was a serious jolt for Fletcher Construction, which had prided itself on its safety record.
“As a result of these events we have looked even harder at our safety programme, Protect. The board & executive have resolved to carry out a business-wide reset of safety across the entire Fletcher Building business. This has already commenced and is known as the Protect Reset. This programme of work has the full support & oversight of the board & executive, and is of the highest priority.”
Our sustainability strategy focuses on 6 key priorities:
- People & communities (by the end of this financial year we will have a comprehensive gender pay parity plan in place)
- Improving the transparency of our environmental, social & governance reporting, including the implementation of integrated reporting
- Becoming the leader in making sustainable building products is critically important and will see us pursue sustainability product certifications across our portfolio. This will not only reduce the environmental impact of our products, but give them a competitive advantage in the marketplace
- Careful management of our resources & emissions – we have committed to science-based targets for reducing our carbon emissions; in addition to this, we have set reduction targets for water use & waste
- We will partner with our supply chain to improve reporting and deliver more sustainable outcomes; we will continue our work against modern slavery and to improve human rights in our supply chain
- We will ensure we are building healthy homes & sustainable infrastructure – including meeting a consistent sustainability standard for our construction projects.
The improvements we are making on sustainability have recently been recognised with Fletcher Building being included in the Dow Jones Sustainability Australia index for the first time.
A solid agenda included:
- Strengthened governance, including revitalised delegated financial authorities, the implementation of commercial golden rules & a policy refresh
- Comprehensive induction of the new board and the reorganisation & composition of board committees
FY19 was about focusing & stabilising the business and putting in place the strong foundations we need to move into growth. It was about staying focused on the core NZ operations, stabilising Construction and getting it back to profits, setting the Australia division up for turnaround and getting the noncore businesses, which created geographic complexity, sold. Pleasingly we achieved all of this. This has set us up for FY20 & beyond, where our focus has shifted to performance.
“Our overall aim remains unchanged and that is, “To be the undisputed leader in NZ & Australian building solutions – with products & distribution at our core”. We continue to believe this vision is compelling, achievable, and will create shareholder value over the medium term.
“It is leveraged to upside as we have multiple opportunities for growth and are not dependent on a single bet – we have growth opportunities in our NZ core businesses, we have a significant turnaround opportunity & prize in Australia, our NZ residential business has a number of growth opportunities in adjacencies around its present core, and Construction, once clear of the legacy projects & refocused for consistent performance – will provide a further NZ growth opportunity.
“All of this is underpinned by a very strong balance sheet and strong underlying cashflows. And we are positioned well for key macro trends.
“The combination of our scale ‘in market’ positions, and the relative geographic isolation of NZ & Australia, means we can be a ‘fast follower’ & identify & take advantage of these trends ahead of the competition in our home markets. We continue to believe this strategy can achieve above-market revenue growth & a material lift in profitability over the next few years.
Medium-term market outlook forecast to be supportive
On a positive note, the medium-term outlook looks set to remain supportive with economic forecasters expecting our key markets to grow for the next few years at least. In New Zealand, our key sectors by & large are forecast to remain pretty robust.
“In Australia, the combination of the residential market returning to growth from FY21, and increasing levels of infrastructure spend, have resulted in forecasters predicting a relatively strong outlook in the medium term.
“And finally, with population continuing to grow in both NZ & Australia, underpinned by continued immigration, we should see a supportive backdrop for ongoing gdp growth in both countries.
Focus now on driving consistent performance and setting up for growth
“We have a very strong set of businesses that we now need to ensure are performing consistently and well and are doing things now, that will set us up to achieve growth in future years.
“The broad themes outlined here are:
- a focus through this financial year on fixing performance issues where we have them, and then
- from FY21 onwards, deliver both performance improvements & growth.
“I have continued to evolve the executive team. We now have in place a team that is a blend of proven long-term Fletcher executives, combined with some more recent additions.
“NZ core has good market positions, but margins under pressure… The distractions of the last 2-3 years have caused us to lose focus on driving product innovation and looking for sensible adjacent opportunities.
Positioning the NZ core for margin improvement & growth
“We are focused on turning this tide, by focusing on 4 consistent themes:
- Driving operational excellence across manufacturing, pricing, logistics & customer performance
- Rebooting innovation & new product development across the businesses, and we are already seeing some exciting recent examples, such as the Iplex mobile pipe extrusion plant in the South Island – which not only has an extremely competitive manufacturing price point, but allows us to move the plant to where the bigger projects are occurring; and the recent Laminex range update which also allowed us the efficiency benefit of reducing the number of SKU’s we offer
- Making significant investments across e-commerce, digitisation & automation
- Continue to look at logical adjacencies around our present areas – a good example is Wallboards GIB Weather-line product, which has allowed them to successfully move into the cladding product adjacency.
Highly successful Residential & Development Division
“Our Residential & Development division has been a real success story over the last 5 years, where we have successfully created New Zealand’s number 2 house developer, and also put in place a strong industrial land development capability. The team has a great customer focus, very strong operating skills & good financial disciplines. All this underpinned 755 sales through FY19, and generated EBIT of $137 million.
“Looking forward, we have around 5000 future lots under our control, and we expect to be able to progressively increase this. Importantly, this gives us a solid base to allow the Residential business to continue to operate at these levels.
Ability to scale Residential further
“Looking ahead, our focus is firmly on where we can now take this business. Firstly, we want to grow our base residential business to around 1000 units/year. Then we want to see our land development pipeline continue to generate sustainable profits at around $25 million/year. Thirdly, we want to scale up the volume through our recently opened housing manufacturing plant, both working on houses for our own business as well as others.
“This is a great example of being a fast follower, where we have imported world leading practices and localised them for the NZ market. This technology allows us to both increase quality and halve the time to build a house. It also provides a possible future next step into our Australian businesses. This is a very exciting step for us.
Intensification market innovation
“And finally, we are also actively working on tapping into the housing densification trend. Here we are hoping to crack the apartment market through innovative modular construction systems. To this end we are looking at both modular timber & modular steel construction systems, to see if we can’t bring down construction time & price points to a level that we believe makes investment in this sector compelling. All in all, this represents an exciting opportunity for Fletcher Building.
Pivoting Construction to a more balanced portfolio
“This is a business that is well positioned in New Zealand, with about 10% market share, and it enjoys strong positions across roading, infrastructure & vertical construction. While its problems have been well publicised, we are now getting to a position where we can properly focus on the future of this division.
“A key part of this future is to focus on winning a mix of projects that will ultimately position the overall business with a more balanced portfolio of work 1/3 risk, 1/3 alliance & 1/3rd maintenance.
As the legacy & nil margin risk projects are completed we should see this business have a pretty clean revenue stream by FY21, and by the time we get to FY23 we would expect to see the division with a well balanced & sustainable revenue profile.
Growing Construction in profitable sectors
“To ensure we achieve this we are working across 4 key areas:
- Rebuilding the talent & skills across the business, through training & development as well as selective recruitment from the external marketplace
- Improving all elements of our operating disciplines, our governance & our risk management. This is quite holistic & covers all elements of a projects lifecycle, from the bid through construction and to the ultimate handover & commissioning process.
- Then we want to ensure we build the revenue & work profile. Pleasingly we are making good progress, and with wins like the $2.4 billion, 10-year Watercare partnership contract we are on track to achieve this transition.
- And finally, we remain focused to completing the legacy projects within the provisions we raised back in February 2018.”
Attribution: Annual meeting.