Fletcher Building has announced the immediate departure of chief executive Mark Adamson and says operating earnings this year will be around $100 mln less than previously indicated

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.

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23 Comments

Christchurch gravy train drying up?

Fletcher the "Moa in the Coalmine"?

Toronto House Prices Crash 192k since April.
https://www.youtube.com/watch?v=hGL0ysImPCo

Auckland Albany House Prices Dive 13.5%
https://www.stuff.co.nz/business/property/94154549/house-prices-dive-in-...

The Crash Is Coming.

Be nice to have a graph. Its interesting however that it isnt only here and Toronto, even London is slowing apparently,

http://www.telegraph.co.uk/property/house-prices/house-prices-continue-s...

and OZ?,

http://www.abc.net.au/news/2017-06-01/home-prices-fall-in-may-corelogic/...

The Q is is this indeed a global happening? or just co-incidence? rather fascinated by the apparent timing.....

Sounds like a lot of Chinese money has been flowing to the USA instead, which is interesting.

was a very long term holder but i sold out not long after this guy took the reins, he wasted a few years to grow fletchers (did the reverse) and was trying to change the culture (did that changed it the wrong way)
so now will sit and watch to see who comes in to turn this around and whether its worthwhile buying back in

Interesting! A so called strong property market and their forecasts are lower. I would hate to see a recession looming and lower margins and profitability. An eyebrow raised to take note.

Local Christchurch goss has it that one of the 'problem children' projects is the Justice Precinct building. But then, as the late lamented LC useta sing -

Now, you can say that I've grown bitter but of this you may be sure
The rich have got their channels in the bedrooms of the poor
And there's a mighty judgment coming, but I may be wrong
You see, you hear these funny voices in the Tower of Song

https://www.youtube.com/watch?v=SBl66AksKVM

With the housing slowdown, not surprising their profits have taken a beating... first sign of more trouble to come?

No this has nothing to do with housing, it is all to do with the toxic business models of large construction businesses. While the volume of work has increased their margins haven't, so they still bid work on a basis that produces a final profit margin of about 1-2%. The mega bucks that have flowed into these business have mostly flowed straight out again in build costs, esp wages (for them and their subs). At a gross margin of 8 % or whatever it is, plus a pricing allowance for "risk", one or more bad or seriously bad projects can utterly destroy you. Which is what has happened here. This business sector is a dog. Many businesses go well for a while (ie they get away with risk underpricing for a while) then they blow up. The summarily dismissal of senior management indicates to me there has been some "extend and pretend" going on in the business unit for some time, and it finally got found out.

I suspect the same dynamics apply to the smaller companies. Their margins may be higher, don't know, but again the mega bucks will flow straight though these companies and their margins are probably the same % as they have ever been.

They went on a buying spree thinking they could build 1000 houses a year just in Auckland

No these losses are to do with specific major projects like the convention centre where they are going to take a bath. They continually underprice risk, and eventually there is an explosion which destroys all the margin the had previously earned, and them some.

More than likely employing the wrong people who do not have the right project management experience/ background. Fullstop.
So that reflects the companies hiring philosophies (incl the motivational policies such as the KPIs in the bonus payments) , the HR group, the appropriateness of the candidates to the positions etc.

No, they are no better or worse than others in the industry. Probably better. Underpricing of risk is endemic in the industry

You're right Fletcher have been buying projects on the hope of picking up extras. It's a bad model and when there are no extras to claim then they wear a loss. Why buy projects on the claim that they need to compete? It's better to miss out on a project than risk a loss. They never used to operate that way and had plenty of work.

So the poor guy has to survive on revolving only $2mill salary? Oh the humanity!

Fletchers is a dog !

This was expected, but I guess the surprise is in the size of the loss and the dumping of CEO ... One of their draw backs was due a faulty concrete testing process that had them to pay mega bucks to replace already poured concrete in a couple of places , one was Auck New Uni in newmarket ( I think) ... that was a very expensive stuff-up and was announced few months back ... this will take some time to recover, But it affects every Kiwisaver account in the country as they all have FBU in their portfolio ...

Right on bobster, or is it boob ster, of course it all adds to a slow down

How accountable is Norris???

Doesn't he just try to herd the cats ?

Maybe they need Gareth Morgan to do a bit of cat herding; looks like one cat has just run off with about 5mill for doing what??? watch for a few more cats to go as astray as the hundreds of millions

Tama Willis of Devon Funds described the situation as a very disappointing outcome from Fletcher.

"The business needs to be simplified and in our view, the board needs to conduct a strategic review to realise full value for shareholders," Willis said.

"All options including a break-up of the company should be on the table."
There will be a few pissed off fund managers around I reckon

Looks like over 2 years the market cap has gone from around 7 billion to a bit over 5 billion, why the 2mill bonus for this guy Mr Norris? not to mention yours??