Sir Ralph Norris presenting the annual result in August.

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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