Fletcher building is looking at big losses from its Australian operations after a clean out and restructuring.
The downturn in the Australian home building and construction sector, weakening house prices and a slide in renovations, plus the parent company’s woes in NZ, have triggered a massive revamp of the Australian business.
In a presentation yesterday to an investor day in Sydney, CEO Ross Taylor said that while the “upside opportunity for Fletcher Building in Australia remains, the starting point for the turnaround is worse than anticipated”
He estimated earnings before interest and tax before one-off items of around $NZ55 million for the year to June.
Group restructuring charges “predominantly in the Australian division” will be around $NZ100 million and a loss of $NZ50 million or more.
Group revenue in Australia will be around $NZ3 billion (no comparison was given) and the company is looking to take upwards of $NZ100 million costs out of the Australian business between 2018-19 and the end of next financial year.
Fletcher reckons of that $100 million cost, $50 million will drop to the earnings line in 2021.
The company said in the presentation that the Australian business had had to cope with the “sharp decline in the residential market, plus higher input costs” all of which had led to price and margin pressures.
On top of that, there were what Fletcher termed “Poor business disciplines in certain areas”. Analysts took that to mean poor oversight of contracts and bidding on slim margins to win business (a common tactic in the industry) with losses that could not be recovered via subsequent price variation deals with clients.
The major change in Australia is that all the businesses have now been united under one group in Australia with “new leadership and governance.”
“Decisive intervention in FY19 to set the businesses up for performance improvement and growth: clear BU priorities, cost-out programme, and targeted growth investment,” Fletcher said in the investor day briefing document.
Despite the sliding levels of construction activity, especially home building and cost pressures, Fletcher expects to make what it calls “a modest” profit in Australia in 2019-20 thanks to what it calls a “Lean and focused business set up for forecast market recovery in FY20” and continuing “to target business generating 7% EBIT margin in the medium term.”
That 7% EBIT margin in 2021 will be three and a half times the 2% to be reported for 2018-19.
