Archive | Fletcher Building

A year on, Fletcher board still has ‘construction nous vacancy’ pencilled in

A year after Fletcher Building Ltd’s board became aware of construction contract blowouts, the company is no nearer to appointing someone with construction nous as a director.

Sir Ralph Norris presenting the annual result in August.

Company chair Sir Ralph Norris confessed to not understanding the world of construction accounting when he addressed media on the annual result in August. He said then that the problems at the building + interiors business unit within the construction division had all come about in the 2017 financial year, first noticed in September but the extent not realised immediately.

When the half-year result was released in February, chief executive Mark Adamson said construction operating earnings were reduced due to the timing of earnings from certain projects being recognised, expensed bid costs, a reduced contribution from Fletcher EQR, and losses incurred on a major construction project.

In March, Mr Adamson had the task of explaining the blowouts. When the greater extent of the blowouts was recognised in July, Mr Adamson’s contract was ended.

At the August briefing, I asked Sir Ralph what Fletcher had done to fill the void of construction nous in its senior executive ranks, and what steps it was taking to fill that void within the board’s ranks.

Sir Ralph rattled off a long list of recent appointments to demonstrate how the company had tackled a problem aggressively, most of which the suddenly departing former chief executive, Mark Adamson, had listed when he announced a cut in earnings guidance in March, shortly before his exit.

In addition, I wanted to know how the board would acquire more construction understanding than it apparently had. Sir Ralph skirted that question, saying only that “we will have board members stepping down. We are in the process of looking at candidates – somebody with construction experience would be a very good addition to the board.”

Changes, but still a vacuum

Yesterday, Fletcher Building announced board changes – but the construction nous vacuum remained.

John Judge had already indicated he’d retire after 9 years on the board, and Kate Spargo has joined him. Mr Judge’s retirement takes effect at the end of the annual meeting on 25 October, Ms Spargo’s took effect yesterday because she was appointed yesterday as a director of ASX-listed Cimic Group Ltd, a competitor. She had chaired engineering services company UGL Ltd until Cimic acquired it early this year.

Cimic is 73% owned by Hochtief AG of Germany, which in turn is now 71.8% owned by ACS Group SA of Spain. Those stakes make the Spanish group 52.2% owner of Cimic. The former Leighton Construction, which changed its name to CPB Contractors Pty Ltd last year, won the $240 million contract to complete the design & construction of the Christchurch Convention & Exhibition Centre last month.

Bruce Hassall, appointed to the Fletcher board in March and therefore up for election at the annual meeting, will take over from Mr Judge as chair of Fletcher’s audit & risk committee.

Cecilia Tarrant, a director since 2011, is up for re-election under the rotation process. She will take over as chair of the safety, health and environment & sustainability committee from Ms Spargo.

And then came the announcement about the hunt for construction expertise: “With the retirement of John Judge & Kate Spargo, the Fletcher Building board will have 6 directors. The board is currently engaged in a process to extend its skills & experience, particularly in the area of construction & contracting.”

Online voting

2 changes that will happen at the company’s annual meeting are in attendance & voting.

Fletcher Building has told shareholders in its notice of meeting: “To encourage the widest possible participation in the shareholders’ meeting, this year Fletcher Building is introducing a hybrid meeting format where shareholders can participate by attending either in person or remotely online via Lumi AGM.

“By using Lumi AGM, shareholders will be able to watch the meeting, vote & ask questions remotely from a smartphone, tablet or desktop device.”

Earlier stories:
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: Fletcher release & notice of meeting, Cimic release.

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Fletcher Building adds new facilities to already worse debt position

Fletcher Building Ltd said on Friday it had arranged additional debt facilities of $345 million with 3 banks from its existing syndicate – ANZ, HSBC & Westpac Bank.

The new facility was finalised 3 weeks after Fletcher Building issued its annual report, which showed substantial available funding but a much worse debt position than a year earlier, including leverage beyond its target range.

Chief financial officer Bevan McKenzie said the company had put the debt facilities in place in line with its scheduled refinancing programme, and they’d allow the company to work with its lenders to access longer-term funding solutions: “We are very pleased to have put these facilities in place, which show the continued support we have from our lenders. Fletcher Building has a strong funding profile and will continue to work with our lenders to maintain our diverse sources of debt funding.”

Balance date figures:

The annual report, released on 16 August, showed Fletcher Building had total available funding of $2.666 billion at its 30 June balance date, of which $536 million was undrawn. It had an additional $219 million of cash on hand.

The annual report showed $198 million of drawn debt facilities maturing within the next 12 months and a further $71 million of capital notes subject to interest rate & term reset.

The group’s gearing was 35.3% (27.3% at the 2016 balance date). Gearing has returned to the target range following completion of the Higgins acquisition. Gearing is interest-bearing net debt (including capital notes):interest-bearing net debt (including capital notes) & equity.

The group’s leverage was 2.7 times (1.6 times in 2016) interest-bearing net debt (including capital notes):ebitda before significant items. The company noted in its annual report: “Whilst just outside the target range of 2.0–2.5 times, the expectation is that this will return to within the range in 2018. The average maturity of the debt is 4.7 years.”

Interest coverage was 4.7 times (5.9 times in 2016). Interest coverage is the ratio of ebit before significant items:total interest paid (including capital notes interest).

Attribution: Company release, annual report.

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Fletcher Building – how the rest of the business went

The focus in Fletcher Building Ltd’s full-year results announcement last week was on events in its construction division, which went from a $78 million ebit (earnings before interest & tax) profit – before significant items – in 2016 to a $204 million ebit loss in 2017.

Other divisional ebit results were:

  • Building products up 6% to $267 million ($252 million after adjustment for sales of Rocla Quarries & Pacific Steel)
  • International up 27% to $169 million ($133 million)
  • Distribution up 10% to $193 million ($176 million)
  • Residential & land development up 55% to $130 million ($84 million), and
  • The corporate expense down from $63 million to $30 million.

Overall, the group’s operating earnings before significant items fell 23% to $525 million ($682 million).

And those significant items made a big difference – a $37 million gain last year, a $252 million cost this year, taking ebit down 62% to $273 million ($719 million) – a $446 million difference in outcomes.

Fletcher Building had slightly higher funding costs at $115 million ($111 million) and paid 56% more tax, $131 million ($57 million).

The fall in net earnings before significant items was 23% to $321 million ($418 million), and after those items 80% to $94 million ($462 million).

Earnings/share before those significant items fell 24% to 46.3c (60.6c).

Earnings/share after those significant items fell 80% to 13.5c (67c)

Gross revenue for the group rose 5% to $10.25 billion ($9.76 billion). Intercompany sales rose by 12% to $850 million ($757 million), reducing revenue from external sources to $9.4 billion (still up 4% from $9 billion).

Building products

In the building products division, the company reported negative significant items of $98 million from the impairment of Iplex Australia intangible assets ($69 million), costs relating to the closure of 3 sites in Australia ($17 million) and costs incurred in Fletcher Insulation as a result of prolonged industrial action at one of the business’s manufacturing sites ($12 million). This compared to a net gain of $79 million in 2016, primarily attributable to the sale of Rocla Quarries.

International

In the international division, the improved earnings resulted primarily from the turnaround of Formica Europe and improvement of the Laminex businesses. Operating earnings in Laminex Australia rose 6% to $76 million, but gross revenue in Australia fell 4% in local money, due largely to continuing weaknesses in the West Australian residential sector offset by growth in the eastern states. Gross revenue in New Zealand increased by 6%. Operating earnings excluding significant items for Formica rose 42% to $88 million, but overall gross revenue in local money rose only 3%.

Distribution

In the distribution division, operating earnings fell to $40 million ($175 million), primarily from the $153 million cost of impairment of intangible assets in the Tradelink business. The New Zealand building supplies businesses reported increased operating earnings of 22%, Placemakers’ gross revenue rose 6% to $1.2 billion, Mico’s gross revenue rose 6% to $250 million, and the New Zealand steel distribution businesses grew operating earnings before significant items by 23% to $54 million.

Across the division, the company said its focus on targeted growth & operating improvements saw 20 new Tradelink branches open in Australia and significant refurbishment & reinvestment in over 20 branches in New Zealand.

Residential & land development

In the residential & land development division, New Zealand residential operating earnings rose 3% to $76 million from more sales in the new developments of Swanson, Whenuapai, Beachlands & Red Beach, offsetting a decrease in volumes sold at Greenhithe & Stonefields.

“Overall, New Zealand residential sales volumes were behind expectations due to the delayed delivery of land. Average margins, however, were ahead of expectations, driven by continued strong Auckland pricing. The rate of increase in the residential market has slowed since January, signalling a return to more normal market conditions.”

Land development operating earnings were $54 million: “This business comprises a combination of residential & commercial land developments for onsale to third parties. This included the sale of the final lot at the James Fletcher Drive development and the sale of the first lot at the Wiri North development. Whilst land development earnings will be irregular in nature, it is anticipated that the business will earn at least $25 million/year over the next 5 years. At year end there were 3842 lots on balance sheet with a further 2227 lots under unconditional agreements, to be delivered over the next 5 years.”

Earlier stories:
17 August 2017: ‘Fessed up, time to move on, says an unconvincing Fletcher boss
16 August 2017: Fletcher – the bald results

Attribution: Company briefing.

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‘Fessed up, time to move on, says an unconvincing Fletcher boss

After an hour of a media briefing on Fletcher Building Ltd’s slashed annual profit yesterday, group chair Sir Ralph Norris (above) thought it was time to move on.

There’d been one topic of discussion, the failure to rein in loss-making practices at the construction division until it had cost the group $292 million. Most of the group’s other businesses had performed well, but nobody was interested.

Sir Ralph wanted to look forward, but the company calls the customary briefing to explain its past – the money it made or didn’t make over the last year, the performance of its divisions – with only a brief look forward.

The 2 central questions I wanted him to answer, when it came to the post-briefing media questions, were these, both forward-looking with an acknowledgement of aberrations:

What had Fletcher done to fill the void of construction nous in its senior executive ranks?

And what steps was the board taking to fill that void within the board’s ranks?

Sir Ralph rattled off a long list of recent appointments to demonstrate how the company had tackled a problem aggressively, most of which the suddenly departing former chief executive, Mark Adamson, had listed when he announced a cut in earnings guidance in March, shortly before his exit.

In addition, I wanted to know how the board would acquire more construction understanding than it apparently had. Sir Ralph skirted that question, saying only that “we will have board members stepping down. We are in the process of looking at candidates – somebody with construction experience would be a very good addition to the board.” The company will hold its annual meeting on 25 October.

“If you strip out B+I, we would have….”

Fletcher Building reported net earnings before significant items down 23% to $321 million: “Performance was impacted by the Building + Interiors (B+I) business unit within the Construction division, which reported a $292 million loss during the year. The loss resulted from a combination of complex design issues, inadequate project management and stretched resourcing in a capacity-constrained New Zealand construction market – which negatively impacted 2 major projects in Christchurch [unnamed for business confidentiality reasons, Sir Ralph said] & Auckland [SkyCity International Convention Centre] and a number of smaller projects across the B+I portfolio.

“The challenges in B+I masked a robust performance across the remaining portfolio, with Building Products (+6%), International (+27%), Distribution (+10%) and Residential & Land Development (+55%) all posting strong earnings growth.”

Sir Ralph commented: “If you strip out B+I, we would have increased our earnings about 30% in New Zealand and overall by 20%.”

The rejoinder is that, if the board had paid more attention to the operations of a core business sector, or tried harder to understand how that sector works, no stripping out would be needed.

The man in charge’s belated lesson on construction accounting

After saying “The past is the past, we’re going through a process of rebuilding,” Sir Ralph was reluctant to leave the construction division’s losses without some more explanation: “A boom in any business is almost as bad as a bust. In the end, in a situation where resources get short…. blocks & hurdles, which measure time, go against you.

“The demand for resources in a boom are significantly higher.

“These contracts were entered into some years ago… And one thing I have learned about construction is, construction accounting is more of an art than a science – when you decide to take profit into your books, when to take a loss.

“It’s a process that does take a fair degree of complexity to it.”

Sir Ralph said Fletcher had taken “a very exhaustive approach” to its construction division problems: “The amount of time I’ve taken in this business this year, I feel I’ve been an executive rather than a director.”

He said the problems at B+I had all come about this financial year, first noticed in September but the extent not realised immediately: “Up until this year, B+I has performed very well,” he said.

The issues surfaced last September, but the company thought it would get payment for extensions of time, liquidated damages or any other redress for rising costs.

However, in March, management realised none of those ways of making up for onsite losses were going to happen, and the board was informed. Come July, “we took the view there would be no extensions of time, no liquidated damages, no redress. But, as I said at the outset [of the briefing], construction accounting is not simple.”

The reaction was to make a series of executive appointments and to bring in “an independent group of seasoned construction experts, some from Higgins [acquired during the year]”.

At the SkyCity international convention centre in Auckland, Sir Ralph said: “That project has nearly 2 years to run. We have changed the team on that project. We identified a start date earlier than we should have committed to. We weren’t able to staff up. By the time we got to the scheduled start date, we weren’t able to staff up.”

And, after saying the cost of that lapse “hasn’t left our bank account yet”, Sir Ralph said: “I’d like to think we’ve covered the past and get on with the future.”

Interim chief executive talks up the positive

Francisco Irazusta, Fletcher Building’s interim chief executive.

The future of the group, for the moment, is in the hands an interim chief executive, Francisco Irazusta, who was enthusiastic & positive about Fletcher’s future. The problems had been uncovered, issues investigated and now being fixed: “We have improved our project governance and the way we bid for projects,” he said. B+I would become more focused.

And then, from Mr Irazusta, a culture shift.

Over the last 3 decades, Fletcher Building has flushed out businesses, flushed out staff when head office didn’t understand a business the group was running or wanted to change direction – distribution was one segment that caused the group many headaches, the risks of oil exploration looked too risky (in the dying days of the old Fletcher Challenge) and it wasn’t convinced of how to run a petrol station portfolio.

Now, with Mr Irazusta, a bright future dawns: “This remains a great business,” he said yesterday. “Our fundamentals are still strong. We are very focused on our people. We have great, great teams of people. They are passionate in what they do. We focus on safety. Safety is No 1.

“We are developing our ideas. We are developing our talent. We are embracing diversity…

“We will review our customer satisfaction in every business unit. We are putting actions in place to fulfil our customers’ requirements. We want to have more suitable products, more suitable services.

“We are becoming much closer to our customers.”

So, all will be rosy.

Mr Irazusta said the Iplex Australian operations had posted positive earnings for the first time since 2014. Mico & Steel were benefiting from increased residential construction in New Zealand, earnings from Fletcher Living & residential land development were up 55%, corporate costs were down (primarily due to lower incentives paid to staff because of lower earnings).

Australian impairment

Aside from the heavy focus on construction failings and Mr Irazusta’s insistence on a bright future, other troublesome areas of the business were ignored.

The company confirmed an impairment charge of $222 million for its Tradelink & Iplex Australia businesses, representing about 3% of the group’s total assets as at 30 June. The impairment, reported below the ebit line, will have no impact on cash earnings.

The company release said: “In taking these impairments, we are addressing the gap between the balance sheet carrying values of Tradelink & Iplex Australia and their near- to medium-term profitability in a tightening Australian economy.

“Despite these charges, both businesses are progressing well against their turnaround strategies. Tradelink has opened 20 new stores in the 2017 financial year, improved its customer proposition and taken market share, while Iplex Australia has returned to profitability for the first time since 2014.”

Sir Ralph, in his opening foray for the media briefing, summed up the state of play: “Our fundamentals are strong and the majority of our businesses are in growth. We will emerge stronger and we will work to win back the trust of our shareholders.”

That, and Mr Irazusta’s positivity, were exhortations. The Australian impairments and the failure at the highest level to understand basics of the construction business are far more serious than casual stumbles.

Image at top: Fletcher chair Sir Ralph Norris, pensive as his interim chief executive speaks.

Links: Fletcher Building
Results presentation

Earlier stories:
16 August 2017: Fletcher – the bald results
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 briefing.

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Fletcher – the bald results

Fletcher Building Ltd still came out ahead in the year to June despite a $292 million loss by its construction division.

Below is the baldest version of Fletcher Building’s annual results. I’ll follow up later today with more financial detail, including the performance of the group’s no-construction businesses, which fared well.

I’ll also go into some detail on the frank assessment by chair Sir Ralph Norris of things that went wrong.

The company reported:

  • Underlying operating earnings down 23% to $525 million ($682 million)
  • Net earnings before significant items down 23% to $321 million ($418 million)
  • Significant items a $252 million debit ($37 million gain)
  • Earnings before interest & tax (ebit) down 62% to $273 million ($719 million)
  • Net earnings down 80% to $94 million ($462 million)
  • Earnings/share before significant items down 24% to $46.3 million ($60.6 million)
  • Operating margin down 26% to 5.6% (7.6%).

Attribution: Company briefing.

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Convention centre project delayed but “on budget”

Aside from the financial upheaval in the construction division of Fletcher Building Ltd, subsidiary company The Fletcher Construction Co Ltd told SkyCity Entertainment Group Ltd last Thursday that completion of its NZ international convention centre would be delayed.

When work on site, between Hobson & Nelson Sts, began in February 2016, the total project cost of the convention centre plus associated hotel, laneway & extra carparks was $700 million, with an opening date in 2019.

SkyCity said on Thursday an updated programme of works was still being reviewed, but it currently indicated practical completion for both the convention centre and the Hobson St hotel around the middle of 2019.

SkyCity said it remained comfortable with the contractual arrangements with Fletcher Construction and the project remained on-budget. It said the slight delay wouldn’t impact on any of the convention centre’s confirmed bookings.

Attribution: Company release.

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Fletcher Building takes axe again to construction earnings, Adamson ousted

Fletcher Building Ltd announced its second hefty cut in earnings guidance for the year yesterday, but cushioned it by issuing a statement that ignored the first target in the opening comparison – before its contracting ploys went disastrously wrong.

Chief executive & managing director Mark Adamson – very oddly – presented the company viewpoint on the first guidance cut in March as if the cause was something peculiar to the company’s construction division.

Yesterday, Mr Adamson was gone and company chair Sir Ralph Norris was the frontman, as he should have been previously.

The cause?

One can surmise, because the company hasn’t said: The failure to make the required earnings on major contracts could arise only from bidding low to win the contract, and being prepared to lock in costs when costs across the sector were rising.

That goes to company ethos, an historic view that Fletcher is the rightful owner of certain areas of business. On this occasion Mr Adamson was the fallguy, but the company ethos tells you that the board – and especially the chair – would have set the direction.

The guidance trail

The new guidance for operating earnings for the year that ended on 30 June is $525 million.

The previous guidance, on 20 March, was $610-650 million.

The original guidance when the half-year results were presented, on 22 February, was $720-760 million.

Sir Ralph said the company also expected likely impairment of up to $220 million relating to the Iplex Australia & Tradelink business units.

The company’s earnings review

According to the company statement yesterday, trading in the building products, international, distribution and residential & land development divisions, as well as 3 of the 4 business units in the construction division (infrastructure, Higgins & South Pacific), is “in line with the company’s expectations, previously provided at the time of the interim results on 22 February.

“However, as work on major projects in the Building + Interiors (B+I) business unit has progressed, it has become apparent that losses in B+I will exceed those previously estimated. The deterioration is due to:

  • a major project subject to previous writedowns, which has required an increase in project resourcing and therefore cost as it nears completion
  • a second major project where construction timelines and the likely completion date have been extended
  • reduced profit expectations on a number of smaller projects in the remainder of the B+I portfolio.

Sir Ralph said: “It is very disappointing to see further losses being reported in our B+I business, particularly when the vast majority of the remaining Fletcher Building business units have performed so well during the year. I know our people in B+I are working incredibly hard to deliver a number of projects for our clients and I would like to acknowledge their efforts.”

In addition, consistent with its standard practice at the end of each financial period, Fletcher Building said it had undertaken a review of the balance sheet carrying values of its business units: “This review has indicated that the value of 2 business units, Iplex Australia & Tradelink, are likely to be subject to an impairment charge of about $220 million when the company finalises its financial statements in August. An impairment of this nature would be reported below the ebit line and have no impact on cash earnings.

“An impairment charge of $220 million would represent about 3% of the group’s total assets as at 30 June. The amount of asset impairment is indicative at this stage and is subject to finalisation of the year-end audit.
“With regards to the impairment of Iplex Australia and Tradelink, while we do see progress in these business units, the board felt it was prudent to recognise that the near- to medium-term estimates of profitability in each business are not aligned with current carrying values.”

Norris & Adamson on Adamson

On Mr Adamson’s departure, Sir Ralph said: “The board believes it is the right time for Mark to leave the company, to allow a new chief executive to lead Fletcher Building through this period and into the next phase of its strategy. The board would like to thank Mark for his work and we wish him the best in his future endeavours.”

Mr Adamson said in the company release: “I am disappointed to finish my tenure on the back of a challenging result in the construction division. However I am proud of what has been achieved over the last 5 years – most notably the turnaround of Formica, double-digit earnings growth in distribution, our acquisition of Higgins and the significant progress in our residential development division.”

Francisco Irazusta takes over as interim chief executive next Monday, 24 July.

Fletcher-posed questions & answers

In a question & answer segment of yesterday’s release, Fletcher Building said: “What are the 2 major projects and when will they be completed? For reasons of client confidentiality, we will not name the projects. One of the projects is close to completion, and the other is targeting completion in the 2019 financial year.

“Are the 2 major projects, and associated issues, the same as those referenced in the 20 March update? Yes. The most significant issues remain complexity in design, subcontractor management & building programme delivery, which has led to an extension of project timelines and increase in project resource requirements & costs, relative to original budgets.

“How can you be sure this new provision will capture all potential future losses? One of the major projects is close to completion, which provides greater certainty over the ultimate cost. A review of remaining projects has been completed, and the construction timelines and the likely completion date extended on a second major project.

“Why are you booking such a large provision now? Under accounting rules, profit on a construction contract is recognised progressively through the life of the project, whereas when it is probable that a contract will incur a loss, the expected loss must be recognised immediately as an expense.

“What has been done to address the issues in B+I since the last update? In addition to the initiatives outlined in our March update, the construction division is benefiting from the leadership & robust management expertise of chief executive Michele Kernahan and B+I has a newly appointed general manager, David Kennedy, who brings with him 30 years’ experience in the construction industry across multiple markets.

“Is there a future for B+I in the Fletcher Building portfolio? We continue to believe that there is a future for the B+I business in the Fletcher Building portfolio, but it is likely to be a more focused business, targeting key clients & sectors.

“What will Mark Adamson receive upon departure? Mark will receive his contractual entitlements. All of his share options will lapse and he will forfeit all shares in the company’s long-term incentive scheme. No short-term incentive will be paid in respect of the 2017 financial year.

“Does this downgrade to earnings guidance pose a risk to your banking or debt covenants? Despite the further reduction in forecast cashflows from these additional B+I losses in the 2017 financial year, the company remains well within its banking covenants, and expects to continue to do so. Based on the updated guidance range, we expect the ratio of net debt:net debt + equity to be around 36% at the end of the 2017 financial year, and the ratio of net debt:ebitda to be about 2.7 times.”

Mark Adamson

Mark Adamson.

Mr Adamson found himself auditing multi-nationals as a young accountant at Deloittes in London 30 years ago. After 5 years at Deloittes, including time managing a number of companies in receivership post-1987, he moved to pharmaceuticals company Glaxo Wellcome plc for 6 years, staying in finance roles, then had his first taste of laminates at Perstorp Ltd, the UK holding company of a Swedish multinational.

In 2000 he moved to Formica Corp as chief financial officer, moving up to managing director then president for the UK & Europe. When Fletcher Building took over Formica in 2008, he was promoted to chief executive with responsibility for all Formica’s operations in North America, Europe & Asia.

In October 2011 he was made chief executive of Fletcher Building’s laminates & panels division, responsible for the Laminex Group business in Australia & New Zealand and for Formica worldwide, and in October 2012 he took over as chief executive of the whole group.

In 2015, I wrote that Mr Adamson’s business record was that of a change merchant, which meant both that he could be expected to move on soon and that getting the building products company shipshape had been a rapid revolution. His views then (see the story link below) give an insight into his thinking on how to turn the Fletcher worldview around.

One thing he wasn’t was a construction man, though among his aims at Fletcher Building was a sharp lift in the company’s own residential construction business, which he achieved.

Francisco Irazusta.

The new chief

His replacement as interim chief executive, Francisco Irazusta, joined Fletcher Building in March 2015. According to the company’s website: “He has enjoyed an impressive career in global building products in both North America & Europe. Prior to joining Fletcher Building, Francisco steered CRH plc’s European building products business through tough times, driving performance improvement throughout his tenure.”

He holds an MSc in industrial engineering from the State University of New York.

Earlier stories:
20 March 2017: Fletcher Building cuts earnings guidance by $110 million
19 March 2017: Fletcher Building to explain construction loss Monday morning
17 August 2016: Fletcher message is steady rather than gains from innovative performance
21 August 2015: Fletcher chief looks at a better-based future
21 February 2013: Adamson wants Fletcher Unite to reshape group
21 November 2012: Adamson looks at local property rationalisation as first step to lift Fletcher Building
18 June 2012: Ling exits Fletcher Building, laminates chief Adamson moves up – and the big words are “patience” & “innovation”

Attribution: Company release.

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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 March 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 Building net up 2% after site closures

Fletcher Building Ltd lifted net earnings by 18% in the December half-year, then reduced the figure to 2% through the closure of sites in 2 divisions.

The company reported net earnings of $176 million ($172 million in the December 2015 half), but said earnings would have been $11 million higher but for the net loss from significant items – costs associated with site closures in Rocla Products & Fletcher Insulation.

Highlights:

  • Operating earnings (earnings before interest, tax & significant items) rose 12% to $310 million ($278 million)
  • Revenue rose 4% to $4.613 billion
  • Operating earnings from the distribution & international divisions both rose over 30%
  • Construction result impacted by losses on a major project
  • Cashflow from operations, negative $67 million ($170 million)
  • Basic earnings/share before significant items 27c (23c)
  • Interim dividend up 5% to 20c/share.

Chief executive Mark Adamson said the result reflected a sustained improvement across almost all parts of the portfolio, “signalling the benefit that businesses are getting from a strong New Zealand economy, improved customer propositions, operational efficiencies, cost reductions, and in some cases organisational restructuring”.

The increase in revenue reflected sales growth in the New Zealand businesses and the acquisition of the Higgins contracting business, which operates in New Zealand & the South Pacific and was effective from 29 July 2016.

Despite mixed economic conditions in Australia, operating earnings there rose from $64 million to $84 million.

“The International division is now starting to show the benefit of cost reductions, operational efficiencies, restructures & new product initiatives across the Formica & Laminex group of companies. The 32% improvement in operating earnings in the first half of this year was primarily driven by year-on-year improvements at Formica Europe & Formica Asia.

“Across New Zealand we were pleased to see operating earnings – excluding the performance of the construction division and divested & acquired businesses – increase 20% year on year, indicating the positive impact of continued demand across the residential building & infrastructure sectors.”

Construction operating earnings were reduced due to the timing of earnings from certain projects being recognised, expensed bid costs, a reduced contribution from Fletcher EQR, and losses incurred on a major construction project.

Consistent with guidance provided at the annual meeting last October, operating earnings (earnings before interest, tax & significant items) for the 2017 financial year are expected to be in the range of $720-760 million.

Link:
Fletcher Building financial results

Attribution: Company release.

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