Fletcher Building Lowers Guidance Again

Shares in embattled New Zealand building products giant, Fletcher Building (FBU) sold off yesterday after the company produced weaker than expected guidance at its 2017-18 annual meeting.

In New Zealand the shares had fallen more than 10%, wiping about $NZ500 million from its market capitalisation.

Fletcher shares closed at $NZ4.93, down 62c, after the company said its earnings before interest and tax for the year to June 2019 are expected to be $NZ630-$NZ690 million before any significant items, down from the $NZ710m in the June 30 year.

In Australia, it was a similar story – the shares down 10.8% at $A4.62 or 55 cents.

It was not the news shareholders would have wanted to hear from a company still on probation so far as investors are concerned. Fletcher is still in recovery mode from the mauling cost overruns and huge losses in its Building and Interiors business in 2016-2018.

The company blamed the lowered earnings guidance on challenging Australian trading conditions, the timing of house sales in its residential division and a production outage at its Golden Bay cement plant in NZ’s North Island.

“There is no change to the B+I provisions announced in February 2018. While the company continues to target a result at the top end of this range, it is prudent at this stage in the year to highlight that FY2019 EBIT will be impacted by the outage at the Golden Bay Cement plant, the slowdown in the Australian residential market, and the reduction in Land Development earnings compared to last year,” the company said in a statement before the annual meeting, and then in comments made to the AGM by CEO, Ross Taylor.

“Fletcher Building is aiming to recommence dividend payments in FY2019. This will be subject to satisfactory trading conditions and group cashflows. An update on this will be given at the Company’s half-year results in February 2019. The dividend policy of paying dividends in the range of 50-75% of net earnings before significant items, with consideration of available cash flow in the same period remains unchanged.

“In FY19, we are concentrating on getting the overall business refocused and stabilised. We want to exit the year; with good momentum and performance in our core New Zealand businesses, getting all the construction business set up to perform, while keeping them within the provisions we made in FY18, having achieved a reset of the Australian businesses to ensure their performance will improve through FY20, and successfully concluding the sale of the Formica business.

“If we do this well then in FY20 we would expect to see signs of performance improvements and market share gains across all our businesses, which will, in turn, set us up for growth from FY21 and beyond.

“While there is a lot to do here, I feel the focus resulting from the new strategy, combined with the team we have in place, gives a very strong likelihood of success.

“In Australia, residential activity accounts for about 40% of our end market exposure. Here we have seen a sharp contraction in new residential consents in the most recent quarter. This is particularly evident in the apartment or the multifamily portion of the market.

“This is currently impacting our Australian businesses, particularly Stramit, Laminex, and Tradelink, and feels like a medium-term trend that has some distance to run yet… they’re factoring in a weaker Australian residential market than we had previously assumed.

“In contrast to this, the strength of the infrastructure project pipeline on the Eastern Seaboard continues to look strong for the medium term and provides some offset to what we are seeing in the residential sector.

“Our trading to the end of October has broadly reflected the market trends I outlined on the previous slides. In New Zealand, our businesses have generally been trading in line with our expectations which we forecast to be flat to slightly down on last year.

“The volume of houses we’ve sold to date in our Fletcher Living business has been a little lower than last year, but this is a stock issue rather than a market issue, and we expect this to catch up as we complete house construction and new stock becomes available to sell through the year.

“Our cement plant at Portland, north of Auckland, was affected by a four-week outage of the cement mill in September, and while we have insurance for this, we think it will still impact us between $NZ8m to $NZ11m this year.

“In Australia, the recent months have proved challenging…The combination of continuing input price rises and the cooling residential sector have placed pressure on both margins and volumes across our Australian businesses.

“The sale of our international businesses continue to track to plan… RTG is now sold, and Formica continues to track on its sale process,“ directors said.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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