Construction giant Fletcher Building says chief executive Mark Adamson is leaving immediately, while the company's now forecasting operating earnings of around $100 million less than its last forecast.
Additionally, the company says it's writing down the value of two business units by about $220 million. This will not be a 'cash' loss per se, but will carve about 3% off the value of the company's assets.
The share price fell - down about 8.5% to $7.40.
Adamson, who has presided over a series of write-downs and gloomy announcements this year, said he was "disappointed to finish my tenure on the back of a challenging result in the Construction Division, however I am proud of what has been achieved over the last five years – most notably the turnaround of Formica, double-digit earnings growth in Distribution, our acquisition of Higgins and the significant progress in our residential development division".
Fletcher says that in terms of his leaving, and what he will get, Adamson "will receive his contractual entitlements".
According to last year's Fletcher Building Annual Report, Adamson’s base salary was $1,975,000. The report outlined these as payments he received in the 2016 financial year:
- Base remuneration $1,956,250
- Short-term variable incentive (STI) FY15 – paid September 2015 $2,008,341
- Executive Long-Term Share Scheme (ELSS) 2012 – paid October 2015 $749,999
- Medical insurance benefit $5,672
"All of his share options will lapse and he will forfeit all shares in the Company’s long term incentive scheme. No short term incentive will be paid in respect of FY17."
The $220 million write-down relates to the Iplex Australia and Tradelink subsidiaries.
Government projects cost dearly
Fletcher indicated that most of the reduced earnings forecast would come through two major projects: "A major project subject to previous write-downs, which has required an increase in project resourcing and therefore cost as it nears completion," and "a second major project where construction timelines and the likely completion date have been extended".
This is the third major profit warning the company has issued this financial year. After the last one in March it was speculated - and never denied by the company - that the two projects causing the biggest problems were Government projects; namely the new Sky City International Convention Centre in Auckland and the new Justice and Emergency precinct in Christchurch.
While Fletcher was again refusing to name the projects involved, again citing "client confidentiality", Sky City appeared to identify the Convention Centre as indeed being one of the projects, when it separately put out an "update" to the NZX on Thursday.
The update said that Fletcher Construction had provided SKYCITY with an updated programme of works for the New Zealand International Convention Centre (NZICC), which is still being reviewed.
"The updated programme currently indicates practical completion for both the NZICC and the Hobson Street hotel around the middle of 2019. SKYCITY remains comfortable with the contractual arrangements we have with Fletcher Construction and the project remains on-budget. This slight delay will not impact on any of the NZICC’s confirmed bookings to date."
And this is the statement Fletcher Building released on Thursday:
- Fletcher Building announces expected earnings for the financial year ended 30 June 2017
- Operating earnings expected to be approximately $525 million, down from previous guidance of $610-$650 million
- Likely impairment up to $220 million relating to Iplex Australia and Tradelink business units
- Departure of Chief Executive Officer (CEO) and Managing Director Mark Adamson
- Appointment of Francisco Irazusta as interim CEO, effective Monday 24 July 2017
Fletcher Building has today announced it expects operating earnings before interest, tax and significant items (‘EBIT’) to be approximately $525 million for the year ended 30 June 2017.
Trading in the Building Products, International, Distribution and Residential and Land Development divisions, as well as three of the four business units in the Construction division (Infrastructure, Higgins and South Pacific), are in line with the Company’s expectations, previously provided at the time of the interim results on 22 February 2017.
However, as work on major projects in the Building + Interiors (‘B+I’) business unit has progressed, it has become apparent that losses in B+I will exceed those previously estimated. The deterioration is due to:
- A major project subject to previous write-downs, which has required an increase in project resourcing and therefore cost as it nears completion;
- A second major project where construction timelines and the likely completion date have been extended;
- Reduced profit expectations on a number of smaller projects in the remainder of the B+I portfolio.
Fletcher Building Chairman Sir Ralph Norris said: “It is very disappointing to see further losses being reported in our B+I business, particularly when the vast majority of the remaining Fletcher Building business units have performed so well during the year. I know our people in B+I are working incredibly hard to deliver a number of projects for our clients and I would like to acknowledge their efforts.”
In addition, consistent with standard practice at the end of each financial period, Fletcher Building has undertaken a review of the Balance Sheet carrying values of its business units. This review has indicated that the value of two business units, Iplex Australia and Tradelink, are likely to be subject to an impairment charge of approximately $220 million, when the company finalises its financial statements in August. An impairment of this nature would be reported below the EBIT line and have no impact on cash earnings.
An impairment charge of $220 million would represent approximately 3% of the group’s total assets as at 30 June 2017. The amount of asset impairment is indicative at this stage and is subject to finalisation of the year-end audit.
“With regards to the impairment of Iplex Australia and Tradelink, while we do see progress in these business units the Board felt it was prudent to recognise that the near to medium term estimates of profitability in each business are not aligned with current carrying values,” continued Sir Ralph.
The Board also announced the departure of Chief Executive Officer (CEO) and Managing Director, Mark Adamson.
Sir Ralph Norris said: “The Board believes it is the right time for Mark to leave the Company, to allow a new CEO to lead Fletcher Building through this period and into the next phase of its strategy. The Board would like to thank Mark for his work and we wish him the best in his future endeavours.”
Mark Adamson said: “I am disappointed to finish my tenure on the back of a challenging result in the Construction Division, however I am proud of what has been achieved over the last five years – most notably the turnaround of Formica, double-digit earnings growth in Distribution, our acquisition of Higgins and the significant progress in our residential development division.”
The Board has appointed Francisco Irazusta interim CEO effective Monday 24 July 2017.
“Francisco joined Fletcher Building in March 2015 and is currently Chief Executive of the International Division. Prior to joining the Company he held senior leadership positions with a number of building products companies in North America and Europe and will provide stable leadership for the business during this transition, with the support of myself and the Board,” finished Sir Ralph.
The Board will now commence a process to appoint a new CEO.