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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