Construction giant Fletcher Building has taken the most unusual step of announcing what its financial result will be, just eight days before it officially releases that result.
The company says after taking a $276 million hit to earnings - largely due to the impacts of Covid-19 - it will record a net loss for the year to June 2020 of $196 million.
The statement from Fletcher to the NZX released on Tuesday said the staff cuts had been "tough but necessary decisions to right-size our business", and it was expected the moves would deliver a permanent reduction in the company's cost base in the next financial year of about $300 million.
The company didn't give any reason for why it was putting out news of its loss little more than a week ahead of the official announcement, which is still set for August 19.
This is the full statement from the company:
Fletcher Building today announced key aspects of its expected FY20 annual results, which will be released in full on 19 August 2020.
The result, which remains subject to final audit sign-off and approval by the Board, is expected to be a net earnings loss for the year ended 30 June 2020 of $196 million, due predominantly to the impacts of COVID-19. These impacts include significant lost revenues, especially during the New Zealand lockdown and start-up period; lower productivity leading to additional provisioning on the legacy construction projects; and one-off restructuring costs as the Company prepares for reduced market activity.
Despite lower earnings, the Company’s cash flow performance and balance sheet position has remained very strong. Operating cash flows are expected to increase in FY20 to $410 million, driven particularly by effective working capital management through the COVID-19 disruptions. The Group’s leverage ratio at 30 June is expected to be 0.9x, below the target range of 1.0x–2.0x.
Fletcher Building Unaudited FY20 Annual Results (NZ$ million)
EBIT before Significant Items and before Construction Provisions: 310
Construction Provisions: (150)
EBIT before Significant Items: 160
Cash Flows from Operating Activities: 410
Capital Expenditure: 232
Net Debt: 497
Leverage (Net Debt / EBITDA): 0.9x
Fletcher Building CEO Ross Taylor said: “Prior to March, the business was trading in line with expectations and making good progress with operating efficiencies. As COVID-19 crossed New Zealand and Australian borders, we moved quickly to protect our people and ensure we are well positioned to successfully navigate the market uncertainty in FY21 and beyond. Our people have done an exceptional job of serving our customers, safely managing our operations, and resetting the business through a period of considerable disruption.”
“Anticipating lower market activity ahead, we have taken some difficult but decisive actions to reset the cost base of the business. This has included closure of some supply chain and manufacturing facilities; ceasing of some unprofitable product lines; a reduction in office space; and, regrettably, a planned reduction in our workforce by around 1,500 positions. These have been tough but necessary decisions to right-size our business, and we expect them to deliver a permanent reduction in our cost base in FY21 of c$300m p.a. We expect that FY20 significant items charges in respect of these actions will be $187 million. Together with asset impairments of $59 million in the Rocla business that we are divesting, and $30 million of costs on our early exit of the USPP 2012 notes, we expect total FY20 significant items to be $276 million. An additional c$90 million of significant items is expected in FY21 as the final cost-out actions are completed.”
Mr. Taylor said that the Construction division had continued to make progress in working through its legacy, loss-making projects. “The value of legacy Buildings and Infrastructure work to complete has been reduced from approximately $2.2 billion in February 2018 to approximately $0.6 billion currently. The division’s forward order book outside of the legacy projects has been rebuilt to comprise around $2.4 billion of work with a materially better margin outlook, and significantly lower and more appropriate risk profile.”
“Through the FY20 year-end process we have decided to increase the provisions to complete our historical construction projects. This is expected to reduce our FY20 EBIT result by $150 million. Three factors have led to these increased provisions. Around 50% is due to reduced productivities on key legacy projects, which were significantly disrupted by COVID-19 in FY20, and we expect ongoing challenges in FY21 across our supply chains and project resourcing. Around 20% of the additional provisions are due to issues which have arisen on a handful of historically completed projects. The final 30% consists of a prudent risk provision across our portfolio of legacy work.”
The Company has maintained a strong cash flow and balance sheet position through the COVID-19 disruption. Operating cash flows in FY20 are expected to be $410 million, supported particularly by effective working capital management. FY20 capital expenditure is expected to be $232 million, substantially below the initial market guidance for FY20 of $275 to $325 million. The Group’s net debt at 30 June 2020 is expected to be $497 million and liquidity is expected to be $1.6 billion, including $1.1 billion of cash on hand. The Group’s leverage ratio of Net Debt to EBITDA is expected to be 0.9x, below the target range of 1.0x – 2.0x.
Mr. Taylor concluded that the Company remains in a strong position to continue driving its strategy and performance improvement. “Our focus in the past few months has been on the safety and well-being of our people, and acting quickly to preserve profitability and balance sheet strength. We have ensured our cost base is set for expected lower market activity, and kept cash flows and liquidity strong. We will watch the market closely, as the environment does remain uncertain, but we also believe it will provide opportunities for growth and the business is in a good position to capitalise on those.”