Beleaguered Fletcher Building puts all of the losses from its building and interior division in its result for the first half of the year; reports after tax loss of $322 million

By David Hargreaves

Fletcher Building has taken all the write-offs in its ailing Building and Interiors division into the group's result for the first half of the financial year, resulting an an all-up, after-tax loss for the company of $322 million for the six months to December 31.

The losses specific to B&I - as earlier indicated by Fletcher - are $660 million.

The company, which didn't add significant new detail on top of the comprehensive update it provided last week on the scope of problems in the B&I division, reiterated its expectation that FY18 Group operating earnings excluding B+I will be between $680 million and $720 million for the full year to June.

It also reiterated that it would not be paying a dividend to shareholders for the first half of the year. And separately, it said discussions with lenders over the breaches of its lending covenants were continuing and it was still hoped to have new arrangements in place by the end of March.

This was the statement the company made to NZX on Wednesday:

Fletcher Building announces FY18 half year results

Auckland, February 21 2018: Fletcher Building today announced an operating earnings loss of ($322) million for the six months ended 31 December 2017, down from a $310 million profit before significant items for the first half of FY17. Revenue for the first half was $4,889 million, up 6% versus the prior corresponding period. Net earnings before significant items were ($273) million, down from a profit of $187 million in HY17.

These results incorporate ($631) million of Building + Interiors (B+I) losses, with an additional ($29) million of overhead and transition costs expected in 2H18, resulting in an expected full-year loss for B+I of ($660) million.

Excluding B+I, operating earnings were $309 million, down 13% versus the first half of FY17.

CEO Ross Taylor said: “Outside the challenges experienced in B+I, the broader Fletcher Building business continues to perform to guidance. While it is pleasing to see an increase in sales revenues, operating earnings have decreased due to lower profits in the Construction Division, outside of B+I, as well as the Building Products Division.

“In the Infrastructure and South Pacific businesses of our Construction Division we are rolling off major projects from FY17, and we are only in the early stages of new ones. In Building Products we have seen gross margins compress as a result of higher input costs and costs associated with increasing supply chain capacity to meet increased demand.”

The Building Products Division reported a 13% increase in gross revenues from $1,108 million in HY17 to $1,250 million in FY18. Operating earnings declined 9% from $129 million in HY17 to $118 million in HY18. This was driven by additional costs incurred in various businesses to alleviate capacity constraints, increased energy costs, one-off redundancy costs in Fletcher Insulation Australia and a fire at Humes’ Penrose site.

Taylor continued: “Earnings in the International Division are largely flat, while Distribution and Residential continue to post strong growth.”

Following a record performance in FY17 the Distribution Division remained a standout, with gross revenues increasing 7% to $1,757 million and operating earnings up 6% to $89 million in HY18. The Division continues to benefit from strong momentum across its PlaceMakers, Mico and steel distribution businesses, while the turnaround of Tradelink is progressing to plan.

The Residential and Land Development Division posted strong growth, with gross revenues of $236 million in HY18, up from $163 million in HY17. Operating earnings also increased 57% to $47 million. Growth was supported by an increase in unit and land development sales.

The International Division grew gross revenues by 4%, with strong performances from Formica and robust Laminex sales across the Eastern Seaboard of Australia. Operating earnings for the Division were consistent with HY17 at $69 million.

Fletcher Building reiterated its expectation that FY18 Group operating earnings excluding B+I will be between $680 million and $720 million.

Commenting on the market outlook, Taylor said residential, commercial and infrastructure activity levels across Fletcher Building’s core markets of New Zealand and Australia remained in line with expectations. Growth in activity in 2H18 is expected to be limited, particularly with the New Zealand building sector operating at or near capacity.

“In New Zealand residential consents are up 3%, and while there has been some softening of house price growth we believe this is a sign of the market normalising.

“In Australia residential activity is declining, but standalone approvals remain resilient. Growth in the infrastructure and commercial sectors remains robust in all states outside Western Australia.”

As announced on February 14, and in line with the Company’s Dividend Policy, the Board has declared there will be no interim dividend for FY18.

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I wonder if it's Fletchers who have pulled out of the Auckland Central Rail Link bidding process.
Whether or not that's the case, expect all the bidders to take heed of the problems that Fletchers has been having in construction contracts. No low fixed price bids for this contract!
I anticipate that the price of the project will be higher than budgeted. And for the cost/benefit ratio to be even more negative.

Spot on.
I think you can all but guarantee that it was Fletchers with that contract. Annnd...all but guarantee that the cost of the project is going to increase accordingly.
I think you are wrong about the 'negative' BCR, though...You may want to look into that.

Otherwise, why else would the process be held up?
If an entity pulls out that weren't a winning bidder, what does it matter to the process?

Which link is it?
The former shows BCR below unity (I assume what you mean by negative).
The latter shows a BCR as above unity according to the business case.

".. Based on joint work conducted between government and Auckland Council in 2011 and 2012, Treasury and the Ministry of Transport consider that the likely benefit to cost ratio for the project would be somewhere between 0.4 and 0.9."
Yeah sorry I was thinking in terms of NPV.
Lets see what the cost comes in at. Could well be above $3.4 billion. Operating costs may well be the next blow out after that.

We still know very little about the Fletchers issues ............ we have seen scores of articles ( including much speculation) about what went wrong , and its as clear as mud .

Rumours doing the rounds indicate that Fletchers did not was the Aussie bidder to get the conference centre contract because the Aussies had bid on the basis that the materials ( supply chain ) would be shipped from Aussie where materials are 30 % cheaper or Asia where they are as much as 70% cheaper .

So Fletchers cut their bid to break -even to keep the Aussies out and ensure that materials ( much of it controlled by Fletchers ) would be bought locally from subsidiaries .

If thats true , then they have got what they deserved

What we do know is that when it all comes out and is factually documented , its going to make an interesting Business School case study .


I still have questions about the decision to maintain the 2017 Dividend .......... the Board must have known the problems existed 10 months ago , and paying a dividend was a breach of of their own rules and to be frank it was at best deceptive and at worst reckless .

Deceptive because they did not want a share sell off , or reckless because if there was no plan to sort the mess out , and they declared the dividend anyway

Most importantly , what input did the auditors have in this, they must have known that debt levels were breaching safe ratios and maintaining the dividend would exacerbate the problems ?

Why are we being kept in the dark about the auditors advice to the board regarding debt and capital adequacy ratios ?

Have the directors been reckless or just careless or is it something else ?

I tend to agree, though there is always the danger of ascribing to malice what can be better explained by incompetence - and for those running projects and earning big money they hate to report problems upwards. It could have been hidden for a long time and then only shown up to board when they asked for a detailed report or audit on all projects having been made nervous for some reason.

Boatman. Your para3 comment about Fletchers strategy to facilitate their own subsidiaries becoming suppliers to large contracts, is interesting. I am a stakeholder in a substantial business that supplies the construction trade, in competition with Fletcher subsidiaries. Quoting larger Fletcher construction jobs is usually a waste of time given their 'keep it within the family' approach so we will often work preferentially with competing lead contractors.

A speculation is that this Fletcher policy (which presumably applies across all sub trade suppliers) has opened the door to offshore contractors to a greater extent than might otherwise be the case. It also raises other questions; such as the extent to which some of the other Fletcher owned supplier subsidiaries would have achieved their EBIT targets , if it were not for big momma helping them into the large jobs. And also the extent to which B&I were directed by HQ to take the risk they did by pricing some of these contracts with very fine or non existent margins as a deliberate policy, on the basis that Fletcher subsidiaries would make a healthy profit on materials supplied. B&I heads have rolled on the basis they alone were responsible but is that the full story?

Just how profitable some of these subsidiaries really will be when the B&I stairway to heaven no longer exists and they are forced to compete in the dog eat dog real world, is open to speculation.

Blatant white collar crime

... from Feltchers 2017 annual report ... there are 10 worthy souls being remunerated to the tune of an icy cool $ Million or more ... annually ... and a further 47 on packages in the $ 500 000 to $ Million range ...

No wonder the good ship SS Fletchers is tracking so well ... with all these highly paid staff at the helm ...

... a bit worried though ... as these are the economic good times for them ... how they'd track if we hit recession ...

SS Fletchers to ice berg : Poop poop .... gluck gluck .... gurgle gurgle ...

That's a corker of a misspell in your opening line there Gummy, if it was deliberate hats off to you, even if it wasn't it's hilarious, word to the wise don't google the misspelling of Fletchers in the opening line there.

Turned out to be very expensive bridges

... a friend said that a large firm of Italian stonemasons/engineers had wanted to rebuild the smaller bridges around Christchurch , and to give them a unique architectural flair , but the CCC preferred to give locals Fletchers and Fulton Hogan a " fair go " , instead ... sensible cold grey concrete is the order of the day ...

Gummy Bear Hero June 2014

I'm starting to wonder if this is just phase one in "someone's" plan to break Fletcher Building up.

AAH27588. Read Foyle's comment above. From long experience of working in large corporates, I'd bet on it being an old fashioned SNAFU rather than a conspiracy. It'd be a very high risk, messy and capital destroying approach to breaking up a company

Fletchers history is replete with divestiture of various businesses and many a corporate commentator and shareholder has advocated further such action. However agree with Middleman, I don’t believe that is on the current agenda at this particular time. Also, as far as the speculation that Middleman raised there is certainly some truth in that view. It is a widely shared observation that there still exists a tension between Fletcher legacy culture and the ‘new breed’ which under Adamson did not settle well. Fletcher governance is at a crossroads and has been for a number of years and appears to be grappling with an authentic desire to fully commit itself to inward change. With certain accommodations and privaleges the company has availed itself of over the years it partly explains why there has been such a blurred shift to a more streamlined and focused corporate entity which it has been actively attempting to do. I agree that, as a business it has used its position to the detriment of competitors and innovators alike which is unsurprising given the nature of many of its board members, both former and current, and the often, conflicting remit which I believe a succession of its CEOs found themselves saddled with. Someone commented that Fletcher performance is particularly woeful given the context of the ‘boom’ times in which it has been operating in recent years. It is true however that construction in these times is a very different beast and poses unique challenges to the bottom line. That being said, the prevailing Fletcher modus operandi is more countenanced for steady as she goes through the mean times. In some respects Fletcher remains a dinosaur, a throwback to a corporate culture from yesteryear. The degree to which that, and other aspects, can be honed by the incumbent, Mr Taylor, and a suitably reinvigorated board, will be eagerly awaited.

To be extra pithy, if you can stomach it, Fletcher is its own worst enemy.

... Fletchers should've known better when Jumbo Gerry handed them the reins of the Christchurch rebuild ...

With friends 'like National , who needs enemas ...

What better arrangement than to be appointed a SCIRT alliance member and be tasked with issuing works packages by way of tender process, especially when you also own suppliers, contractors (Brian Perry Civil and Pipetech to name a couple) and factories. Wonder how many external bids were shared amongst their own internal bidders?

I dont know why the Chair and CEO are taking such a laissez faire approach to the enormous losses facing stakeholders in Fletchers. They shoud be seen to be actively mitigating these losses, for example, indicating their intention to look very closely at the 2016/17 external audit report. The company paid 3.7m for this and yet it was unable to identify the inadequacy of contract loss provisioning which must have been apparent then. Time for the gloves to come off