It was an acquisition made for the right strategic reasons, but Fletcher Building’s recently acquired US Formica USA subsidiary will cut $60 million from full-year profit.
In an update to the market Fletcher said that it would still make its full year guidance of earnings between $450 million and $460 million because of one-off gains of around $58 million, mainly from property transactions, (and) a lower tax charge, that will save $11 million.
In the words of an analyst, that will be a ‘low quality result’ with recurrent earnings clearly falling short of forecast.
The market reacted and sold off the shares to $6.63. That’s down 30c on the day or 4% and puts the shares close to the two year lows reached last week on speculation that the company would not make guidance because of the housing slumps in the US and in NZ.
In a statement yesterday morning to stock exchanges, Fletcher said earnings would be lower at its subsidiary Formica USA, bought in May of last year for $700 million.
The company said the severe housing and construction downturn in the US off the back of the subprime crisis and credit crunch, would adversely affect net profit by $21 million for the full year to June, and costs associated with restructuring Formica would cut a further $29 million from profit.
"As part of the Half Year results announcement directors advised that provided there was no significant change in economic conditions the 2008 year would produce another satisfactory result, and that the board was comfortable with the then consensus of analysts’ forecasts for net earnings in the range of $450 – $460 million.
"Following a review of the April 2008 results, and the outlook for the next two months, directors are of the view that net earnings for the 2008 financial year will still be in the range of $450 – $460 million.
However this outcome will reflect:
• Expected one-off gains, primarily from property transactions, of $58 million net of tax, an increase of $43 million net of tax over the prior year;
• A reduction in Formica USA’s earnings due to
• The severe downturn in the USA markets, adversely affecting results by around $21 million net of tax;
• Restructuring costs and continued additional operating costs from the consolidation of Formica’s North American operations, of around $29 million net of tax; and – reduced group taxation expense of around $11 million.
"The Group, with the exception of Formica’s USA operations, has performed satisfactorily. After taking into account all of these matters, operating earnings (earnings before interest and tax) are expected to be in the range of $750-$760 million.
"While Formica’s initial trading and operational results have been disappointing, and conditions in the USA market in particular are tougher than the acquisition assumptions, directors are still confident the synergies and improvements identified on acquisition will be achieved."
James Hardie, which also operates in the US, is due to reveal its 2008 earnings in a day and is expected to show the damage done by the housing crunch.
Boral’s US building products business is now understood to be making a loss and part of the reason for the recent earnings downgrade (along with the sluggish NSW home building and commercial property market).
