Fletcher Building moves to 'right size' its business as low volumes, weak markets and strong NZ and Aussie dollars take a toll

Fletcher Building moves to 'right size' its business as low volumes, weak markets and strong NZ and Aussie dollars take a toll

By Gareth Vaughan

On top of facing weakened demand for its products due to soft residential construction activity, Fletcher Building is feeling the pinch from the strong New Zealand and Australian dollars as rivals get a 40% competitiveness boost through imports, CEO Jonathan Ling says.

But despite the current tough operating environment highlighted by the lowest New Zealand residential building activity in 46 years, Ling says the "boom times" will eventually return.

Speaking to interest.co.nz after Fletcher released its half-year financial results yesterday, Ling said in the meantime as it battles low volumes, depressed markets and strong currencies, Fletcher is moving to "right size" its business for a longer, harder and slower economic recovery than initially expected. This will see jobs go and Fletcher spending up to NZ$50 million in the second-half of its financial year restructuring its Laminex (laminates and panels business) and insulation businesses, on top of the the NZ$21 million spent restructuring Laminex during the first half-year.

"The global recovery is going to be longer, harder and slower than everyone thought so we, in terms of our business, have to adjust to that lower growth environment," said Ling. "The restructuring or 'right sizing exercises' we're doing in Laminex and insulation, is probably going to go across the whole group over the next few years."

Fletcher reported a NZ$22 million, or 13%, fall in net earnings after tax for the six months to December 31 of NZ$144 million. This came despite a NZ$1 billion, or 30%, rise in revenue to NZ$4.5 billion after Fletcher completed the NZ$1.2 billion hostile takeover of Australia's Crane Group last May.

The company also said full-year net earnings before unusual items were expected to be between NZ$19 million and NZ$49 million, or 5% and 14%, lower than the NZ$359 million recorded in the year to June 2011. That's down from a forecast given by Fletcher chairman Ralph Waters at November's annual meeting when he said annual earnings would be "similar" to last year's. Waters had also predicted half-year earnings down 10%, less than the 13% drop that materialised. See Fletcher's full results presentation here.

Strong NZ and Aussie dollars bite; 'Constrain prices'

Building materials manufacturer and distributor Fletcher, whose businesses include Fletcher Construction, Formica and PlaceMakers and whose products include Pink Batts, Winstone Wallboards and Golden Bay Cement, is feeling a "significant impact" from the strength of the Australian and New Zealand dollars, Ling said as importing rivals become more competitive. Fletcher made 86% of its NZ$7.4 billion June 2011 year revenue in Australia and New Zealand and has manufacturing operations in both countries.

"What it (NZ and Aussie dollar strength) does essentially is make it a lot more attractive for imports to enter the markets and in particular it puts a real constraint on prices because the importers have achieved competitiveness improvements of 40% and more and certainly that makes life very difficult in what is already a low volume environment," Ling said.

The imported products were coming in through the likes of the Wesfarmers-owned Bunnings Warehouse, JB Hi-Fi and Harvey Norman, he added.

"I think one of the issues facing both New Zealand and Australia, is if these strong currencies persist for a long period of time, and in Australia it has been going on now for about three years and in New Zealand a couple of years, what happens is you have structural change in your economies," added Ling.

"It's very hard for tourism, it's very hard for selling the education services out of this country, it's very hard for manufacturers in these countries - both Australia and New Zealand - to compete in that environment. And the thing  you have to worry about is if commodities do come off, and the currency goes back to where it was, then life can be difficult without some of these industries that don't survive."

In interest.co.nz's latest weekly never a dull moment currency report, HiFX's Dan Bell pointed out the New Zealand dollar, on a trade weighted basis, is up in a range where it has only ever spent 1% of its life. It's at lofty levels against the US dollar, Euro and British pound. The Australian dollar, meanwhile, is trading well above parity with the US dollar.

'Reducing our break even point' before the 'boom times' come back

The strength of the two currencies comes at a time when activity levels in the New Zealand residential construction market at their lowest levels since records began 46 years ago and with Australian residential building consents falling 16% year-on-year in 2011.

"We've got to right size our organisation to be able to achieve acceptable returns in this much more difficult outlook for the next few years," said Ling. "And to do that we'll take our (Laminex) business back to the core high pressure laminate and decorative boards. We will be exiting some aspects of the business, certainly looking at all our fixed costs across the business. We've essentially got to reduce our break-even point."

Staff numbers at Laminex's New Zealand operations are down 75 since June 2010 to 322. Fletcher announced last September it was merging Laminex and Formica to create one laminate & panels division with a single global leadership structure under Formica CEO Mark Adamson.

Ling said, however, that parts of Fletcher's operations were doing well, notably those that supply the Australian resources sector and the New Zealand agriculture sector.

With the gloomy global economic picture Ling said Fletcher was striving to determine whether some of the changes, including weaker demand, were permanent or temporary.

"I think some of the changes are permanent and that's going to be difficult," he said.

"(But) the building industry is a cyclical industry. We had really tough times back in 1991 post the 87 sharemarket crash (and) I don't think we're seeing anything particularly different now. The boom times will come back, but it's still some way off."

'Christchurch EQC work going well'

Meanwhile in Christchurch, Fletcher Construction is running the Earthquake Commission's earthquake project management office and is one of five companies working with the Christchurch City Council and the New Zealand Transport Agency on infrastructure repairs. Ling said The EQC repairs were going well, but the rebuild is taking longer than expected in what may be an "unprecedented" situation.

"The EQC repairs are actually going very well. We have 20 hubs now operating, we've got about 500 employees on the ground in the EQR (Earthquake Recovery Team), we've got something like 11,000 tradesmen working there, (and) they've completed 8,000 permanent jobs so far and 35,000 emergency repairs," said Ling.

"They're completing between NZ$40 million and NZ$50 million a month in work. The EQC is targeting getting all the major work done by 2015 and 80% of all (100,000 homes in the managed repair programme) by 2014. They are quite ambitious targets," added Ling, implying "quite a strong ramp up" in activity levels.

"(But) we're in control of that and that's going well."

'Complex insurance situation'

However, building new houses and the replacing of infrastructure such as roads and pipes was much more difficult.

"It's very complex in terms of the insurance situation," Ling said. "Who pays for what - reinsurers versus insurers versus government, what you can build to - what the new building codes should be - not only for housing but for pipes and roads  and all those sorts of things, so there's a lot of technical issues involved."

"There's (also) a lot of geo-science now involved requiring geo-technical analysis and approvals and all this sort of stuff before you can build. I think it's still going to take a while to get all that sorted out, exasperated by the fact that the aftershocks continue."

"It is almost unprecedented that you would have major aftershocks some 15 months after the first earthquake in September 2010 and there's still no real sign that they're abating."

Christchurch experienced another 4.1 magnitude aftershock this morning at 5.21 am.

Then there's another six to 12 months of building demolition work in the central business district with about 350 buildings, including many of the bigger and more complex ones, still to go.

"In the end it's one in three buildings in the CBD that will be a vacant block of land," said Ling.

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I have no sympathy for Fletchers whatsoever , and if they went into liquidation , New Zeland would be better off without them .
I have had the unpleasant experince of doing renovations to our home in Auckland , and I will never again set foot  in a Placemkers store  
They are "super de luxe ripoff artists" , their Placemekers subsidiary is so expensive its a joke ... stuff them I hope they go bust 

I agree, would not willingly trade with them again if there was another choice. Mega expensive and unpleasant to deal with. The ITM down the road from them wins on price and service.

The boom times will come back, but it's still some way off
No they won't, Mr Ling. For a whole lot of reasons (demographic, economic, regulatory etc). Nice try though.
Things will get better eventually for housing construction, I think. But we will never see the "boom times" again, well at least not for a very long time.
 
 

Is Laminex the US business that Fletchers bought for $1 billion?  If so spending another $71 million re-structuring it makes it a very expensive purchase.  Caveat Emptor

No, you're thinking of Formica. Fletcher bought Laminex in 2002 for A$645 million.

I don't hve much sympathy for Fletchers either.
I seem to remember about 10yrs ago Fletchers were caught inflating the prices paid on residential property they were developing as house and land packages. They only care about their bottom line and are allowed to continue ripping off the NZ public. They are prpbably some of the reason our building costs are 40% more than in Austrailia. 
There seem to be a few large corporations in NZ, Fletchers, James Hardie, Fonterra to name a few, that our governments allow to rip us off. Why is this?How much longer are we meant to put up with it?
The boom times will not be back for a long time. They have had their fill, we cannot afford more debt. 

Oh yes we can,
The banks are very graciously lowering their interest rates so we can all stock up a bit more on that debt stuff.  Jolly decent of them I must say.

Could not agree more.  They have had all their own way for far too long.  It is well past the time that they faced some stiff competition.  They need to start making and selling their products at prices that Kiwis can afford.  If not, then they will deservedly be decimated by cheap imports. (as it is they have the natural protection of the freight costs of imports)  
 
The problem with monopolistic market posistions is that sooner or later this changes and companies like this may have become bloated/complacent/arrogant and thereby  very vulnerable to competition.  If you can survive with good honest competition then your buisness is far more secure.

Placemakers have a complacency issue at head office.Time for a clean out.
The buyers are too smug. Our company sells some core products to them,but we cant  get them to discuss other opportunities.
They just fob you off with 'well we support our preferred supliers and if you come to us with a new product or suggestion we would need to give the opportuntiy to our incumbent supplier first".So whats the point of putting forward products-your just showing your hand to your competitor.
If the product is imported you are likely to get 'well that isnt very good for local industry".
If you suggest wideing the range you get ' we are focued on the trade"
They dont do regular reviews of ranges.They probably think they do but the buyers only invite the suppliers to submit that they currently work with or want to work with.
Placemakers is not getting its fair share of the renovation or diy market.They have chosen to not chase it.Alot of small contractors probably go to Bunnings now because they dont need to screw around with trade discounts.Bunnings model if every day low price so you dont need an account or a special pre loaded discount.You got the cash,you can get a good product at a great price.I guess that suits people doing cash jobs just fine??
Just getting Placemakers to reply to emails is also a mission.
Bunnings on the other hand is a different beast.Professional,energetic and wanting to win.They really want the best value propostion for their customers.
Bunnings also have their buyers work as teams.One makes the decisions,and one does the donkey work of uploading SKus,data into the system.If the buyers dont perform they clean them out as they recently did to some.I think most of the NZ owned chains employ buyers who dont really want to make any change to the range because it just means more work.So we dont have a competitive market.Alot of business done is on the old boys network and keeping the status quo.
NZ isnt big enough to have five chains.Expect awar of attrition that will see Placemakers vs Bunnings in the end. Might take ten/twenty years though?
 

More competition coming for Fletcher in laminates:
Mercer Group gains distribution rights for Wilsonart in New Zealand

In gearing up for the anticipated boom in housing construction in New Zealand, effective 30th April, the Mercer Group has secured the distribution rights of Wilsonart, a world leader in the manufacture of high pressure laminates.
 
Mercer, through its Christchurch manufacturing plant, is New Zealand’s leading supplier of stainless steel bowls and stainless steel kitchen tops.
 
Rodger Shepherd, chief executive of the Mercer Group, said that “securing the contract would have a significant impact on the company, especially with the anticipated huge house building programme in Christchurch over the next few years and the need for a sharp lift in home dwelling construction in Auckland to keep up with demand.
 
“We will be looking to strengthen the sales team of our Mercer Kitchen, Bathroom and Laundry Division over the next few months as we gear up to match the expected demand.”
 
Wilsonart is the No. 1 laminate brand in the United States and one of the leading brands worldwide offering a superior quality and wide choice of over 200 different decorations for use in both residential and commercial kitchens, bathrooms, shopfittings and office fitouts.
 
Hayden Searle, General Manager of the Kitchen, Bathroom and Laundry Division, said that Mercer would be buying directly from Wilsonart.
 
“This is a huge vote of confidence by them in Mercer. Our staff are extremely excited about securing these distribution rights and can see great value in the synergies between the two companies.
 
“When we combine our customer base with that of Wilsonart, we expect to capture at least 20% of the laminate market in New Zealand.
 
“Over the coming months New Zealand consumers will be introduced to the huge range that Wilsonart has to offer, including their Wilsonart HD Laminate, acrylic solid surface, decorative metals, compact and other accessories,” he said.
 
Mercer’s existing range of Bisonne laminates will be phased out and replaced with Wilsonart over the next six months.