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Fletcher Building's Ling says deleveraging holding back the recovery

Fletcher Building's Ling says deleveraging holding back the recovery

New Zealanders’ concerns about debt are restraining the economic recovery as people focus on deleveraging rather than spending money, according to the chief executive of the country's biggest listed company and largest building materials maker.

Speaking in a Double Shot interview with, Fletcher Building CEO Jonathan Ling said with economic signals mixed, Fletcher was seeing a slow and wobbly recovery.

When releasing its interim results in February, the building materials manufacturer and distributor whose businesses and products include PlaceMakers, Fletcher Construction, Golden Bay Cement, Winstone Wallboards, Pink Batts and Gerard Roofs, noted it had seen a noticeable pick up in trading between October and December.

Asked if this had continued since then Ling said there were a lot of mixed signals.

“It (trading) hasn’t dropped again but it’s not really improving at the moment either,” Ling said.

“I think as we go forward into 2011 (financial year), and that’s where we’re focused on at the moment, we’re not going to see the rapid recoveries that we might have seen in previous recessions.”

The diverse economic signals were especially noticeable in the residential building sector.

“Interest rates are starting to go up. Interestingly house prices haven’t really come down so affordability remains quite a significant issue,” said Ling.'s housing affordability measure shows home loan affordability improved marginally in May from April as house prices edged lower for the second month running.

“I think what we’re seeing across the company is New Zealanders' starting to deleverage," Ling said.

"They’re concerned about debt. And so in terms of their pockets, with tax cuts and previously lower interest rates, they’re actually paying off debt rather than (getting) back in the markets spending money.”

Because of this he expected the economic recovery to be "forwards and upwards" but reasonably slow, and probably a "bit wobbly" at times.

As the end of its financial year on June 30 rapidly approaches, Ling said Fletcher remained comfortable with February’s forecast for full-year net earnings, after tax but excluding unusual items, to be between NZ$278 million and NZ$303 million.

“[But] I think sometimes we might have hoped for it to be a little better this time but it hasn’t been.”

Fletcher's profit last year was slightly higher than this year's forecast at NZ$314 million. The annual result will be released on August 18.

For the 2011 financial year Ling expects Fletcher’s major source of earnings growth to stem from cost cutting. However, this wouldn't necessarily be through more redundancies and factory closures. Fletcher shut two factories and laid off 500 staff in the six months to December leaving it with 16,000 employees. Since then it has scaled back manufacturing at a Melbourne insulation plant and is reducing capacity at the two Spanish factories run by its laminated board making subsidiary Formica.

Ling said further cost cutting was focused on the group's “business transformation strategies” which were targeting finding better ways to distribute products, reduce logistics costs, stopping the multiple handling of products between Fletcher’s factories and customers and improving its methods of getting information to customers.

“That will deliver a wave of earnings improvement over the next few years,” Ling said.

“That probably will be the primary source of earnings improvement.”

Macquarie equities analyst Stephen Hudson also forecasts, however, that Fletcher will secure 0.1% and 0.2% price increases for its manufactured products over the 2010 and 2011 financial years. That would see a "meaningful" NZ$21 million increase in earnings before interest and tax in 2011 from 2010, Hudson adds.

Hudson notes Fletcher's Golden Bay Cement unit has matched a 4% price increase for cement introduced by rival Holcim. Fletcher's increase kicks in on August 1 and Holcim's a month earlier.


Meanwhile, Formica, which Fletcher bought for NZ$1 billion in 2007, is expanding in India. Although the brand had been in India through a licencing arrangement since the early 1970s, Ling said Fletcher had decided to “go there ourselves” and now had its own branch and distribution business in India, selling products that were mainly imported from Europe.

“It (India) is a great growing market. We think we should be there,” Ling said.

“We’re trying to build up an early presence with a view to building a factory, probably in three to five years time. We need to build a critical mass of volume before we start to look at manufacturing capability there.”

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