Fletcher Building Ltd chief executive Ross Taylor said in a presentation in Sydney yesterday the group intended to grow its Australian business over the next 5 years to be bigger than its New Zealand construction & building products business.
To do so, he expects to take a leaf out of the New Zealand business’s success, the vertical integration & intercompany trading which make up 11% of its business here but only 3% in Australia.
Fletcher Building chief executive Ross Taylor.
Mr Taylor & chief financial officer Bevan McKenzie gave 2 presentations, to media and then to analysts, on the company’s 5-year strategy.
At the end of the first presentation, Mr Taylor said: “We’d expect, 5 years out, Australia to be bigger than New Zealand. You’ve got to say that’s the vision for Fletcher Building. That puts a marker here, that we want to be bigger in Australia.”
In a pre-presentation story on the documents yesterday, I characterised the strategy as spring-cleaning. After one streamed presentation and going through the similar documentation presented to analysts, that remains a reasonable view of it.
Some of the “strategy” amounts to exhortation to do better, as in this from Mr Taylor: “25% of our businesses have a culture of innovation. We need to drive this to 100% over the next couple of years.”
The company has already announced parts to be sold – Formica and the Roof Tile Group.
Fletcher has stopped seeking new work for its commercial vertical construction business, the exceptionally troubled part of the Building + Interiors division, and will continue to wind it down.
That leaves the strategy focus on getting the remaining New Zealand businesses to perform better, and lifting output in Australia. The starting point is the departure of about 90 staff – either gone or leaving – and the repositioning of the multi-business structure, with new appointments, titles & selection of business segments to command.
From the outside, what do you see in Fletcher Building? If it’s not in your segment of the market but might decide to enter it, you need to be wary of possible outcomes. In New Zealand construction-related business beyond the troubled commercial construction segment, Fletcher is not looking at downsizing.
At one point, Mr Taylor said Fletcher would assess “everything we do through a customer lens” [versus the control temperament which has driven the Fletcher business model for decades]. But mostly the presentations were about clarifying business portfolios and driving the businesses within them harder.
How the strategy looks
Below are excerpts from the presentations, with some explanatory comment.
Any portfolio decisions need to position us to take advantage of key macro trends:
Product innovation:
- Green & efficient buildings: regulation & changing consumer preferences drive innovation in energy efficiency
- Moving into an era of advanced functional materials & more resilient systems
Service & channel innovation:
- Personalised service expectations are growing. Customers interact with a brand (not a channel) and expect the same experience no matter what channel
- Incumbents & new low-cost entrants offering digital services & online purchasing to end consumers
Labour productivity:
- Pre-assembled structures reduce the need for onsite labour and speed up construction times
- Value shift in favour of larger manufacturing entities able to invest in offsite production facilities
Global supply chains:
- Low cost country (LCC) sourcing for inputs continues to present large cost reduction opportunities
- Globalisation of competition from LCC producers & Western players threaten share & margin erosion
Continuing to manage multiple platforms across multiple geographies from a capital & capability perspective was likely to be challenging. Therefore we have decided to focus the business.
Our starting point: a portfolio made complex through lack of a clear strategy.
With Fletcher Building at only 15% of the overall NZ market & 1% of Australia in residential, non-residential and infrastructure & other, there are ample opportunities to grow share and pursue new “adjacencies”.
Adjacencies? What Mr Taylor presented was a chart (below) showing market segments where Fletcher Building has a presence, and those where it doesn’t – and therefore might expand.
“Our first priority will be to refocus on our core, and actively defend and grow NZ Building Products & Distribution.
“In New Zealand, we will continue to leverage businesses that are complementary to our core and strong performers in their own right. Golden Bay Cement-Winstone is a strong performer. The core adds value by generating pull-through. Residential & Development is a strong performer that adds value to the core by generating pull-through and driving innovation (eg, panelisation). In Construction, we have strong market positions and generate pull-through, but we have to get it performing.”
The decision to exit market sectors
“Finally, we had a choice to make. We had 2 legitimate plays relative to the core, but we couldn’t do both given constraints around capital & capability.”
Option 1: Turn around & grow Australia as a natural extension to the Fletcher Building core
Option 2: Drive Formica to full potential with focus & capital
The decision: Australia is the preferred growth platform.
Intercompany sales
An important factor was a comparison between the opportunity to drive sales between Fletcher companies. At Formica the opportunity was minimal, whereas in Australia it was high. Compared to intercompany sales in New Zealand – $660 million, 11% of total sales of $6.2 billion – Australian intercompany sales last year were worth only $80 million, or 3% of $3.1 billion total sales.
From there, the vision, and that is “to be the undisputed leader in NZ & Australian building solutions – with Products & Distribution at our core”. Under that heading, Mr Taylor pointed to “where to play” and then to “how to win”.
Where to play:
Refocus on the core:
- Defend & grow NZ Building Products & Distribution
- Leverage complementary positions in Concrete & Residential
Stabilise Construction:
- Close out B+I within provisions
- Grow infrastructure & roading businesses
Strengthen Australia:
- Achieve a successful turnaround
- Replicate select NZ positions in Australia
Exit non-core businesses:
- Divest Formica & Roof Tile Group
From there, Mr Taylor said the next step was “how to win”, which came with 5 bullet points:
- A simpler & leaner, decentralised operating model
- Innovating to achieve continuous improvement and take advantage of key macro trends
- Disciplined performance improvements in safety, sustainability, procurement & operations
- Growth capex focused on strategically important, high returning business units
- Adding infills & adjacencies.
He said Fletcher Building saw 3 broad stages to advance those intents over the next 3 years (June balance dates):
2019: stabilising – turnaround or exit
2020: solid performance
2021: growth
Cutting central control
One key element of these changes is to reduce “an overweight central overhead” – that “overhead” will be moved closer to the front line for an annualised cost saving estimated at $30 million, expressed this way: “Moving front line-focused activity back to the divisions & business units to better serve our customers, control risks & grab opportunities”.
Mr Taylor said: “25% of our businesses have a culture of innovation. We need to drive this to 100% over the next couple of years.”
Existing examples of innovation include:
- Laminate exterior cladding
- Mobile PVC manufacturing
- Gypsum-based rigid air barriers
- Benchtop, roofing & façade integrated photovoltaics
- Lightweight flooring systems
- Self-cleaning steel roof panels
- 3D concrete printing
Offsite construction impetus
“Panelisation” – more factory completion of buildings or building components – fell under the heading of labour productivity rather than innovation. Mr Taylor said the company had completed 2 successful prototypes, had tested modularised vertical construction and was looking for a factory site in Auckland. He expected it would cost $15-20 million to build.
“We’ve trialled panels on a number of houses. Of the 1000 houses we’re doing, we’ve got 300-350 houses/year we can panel – you can’t do it on every house. We’re testing it on our own houses. Over the next 12 months it will be operating fully.
“You get savings when you get scale of throughput and you drop it [the house construction timeframe] from 22 weeks to 9.”
The big projects
On the group’s lossmaking issues with vertical, large commercial construction, chief financial officer Bevan McKenzie said confidentiality agreements meant it wasn’t for Fletcher to make announcements. However, he said the Building + Interiors division had completed 7 of 16 projects it had underway when the company revealed the division’s exponential lossmaking last year, 5 more would be completed this year and 4 would be completed in 2019, including the major pair in Auckland, SkyCity Entertainment Ltd’s NZ International Convention Centre and Precinct Properties NZ Ltd’s Commercial Bay redevelopment of the old Downtown Shopping Centre.
Link:
21 June 2018, Fletcher Building strategy presentation slides
Earlier stories:
21 June 2018: Fletcher Building strategy amounts to a spring clean – board announcement tomorrow
20 April 2018: Institutional bookbuild puts $1.35 premium on Fletcher shares
18 April 2018: Big Fletcher fundraiser plus divestments intended to stabilise construction’s fallen giant
4 April 2018: Lenders give Fletcher Building 2-month waiver extension
2 March 2018: Fletcher gets US waiver, still negotiating funding terms
21 February 2018: Fletcher half-year loss $322 million
14 February 2018: Another $486 million of losses for Fletcher Building, and Norris resigns
8 February 2018: Fletcher Building warns of worse to come
19 January 2018: Regulator clears Fletcher Building of continuous disclosure breach
27 October 2017: Sheppard turns Fletcher meeting into “absolution or exorcism” exercise
25 October 2017: Fletcher issues guidance, names new chief executive
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: Company presentation, live stream.
