Fletcher Building ups earnings through trebling house builds, trialling social housing

Tuesday 21st October 2014

Fletcher Building, New Zealand's biggest company, is forecasting an upturn in earnings as it moves to triple the pace of home building in New Zealand and pilots a social housing project with government in Christchurch.

The Auckland-based construction and building materials company told shareholders at their annual meeting today that full-year operating earnings in this financial year could rise by as much as 11 per cent to a range of $650 million to $690 million, compared to $624 million in the 2014 year.

Chief executive Mark Adamson also said the company wants to build and sell more than 1,000 homes this year compared to the 300 it has historically to capitalise on strong housing demand across the country, but particularly in Auckland and Christchurch. "We want more focus on choice," he said, with the company broadening the types and prices of homes on offer from apartments to terrace houses to stand alone dwellings.

“To meet this goal we need to increase our investment in land and we have successfully negotiated a number of land purchase in the past year,” said Adamson.

One of those purchases was land in Christchurch to build social housing as a trial run to "see if our concepts work before we get deeper into it," he said. "We have to be able to make adequate shareholder returns while still meeting the social requirements."

The government passed legislation reforming social housing earlier this year which allows community providers to be paid the same subsidy as Housing NZ for income-related rents.

Departing chairman Ralph Waters in his final address to shareholders said with three months of the 2015 financial year completed, earnings in the first half would be broadly flat, reflecting "weak demand for coal seam gas pipes and lower volumes in the steel roll-forming and concrete products businesses" that offset growth in New Zealand earnings and a stable contribution from the rest of the world. But earnings in the second half were expected to be significantly ahead.

The board got some flak from some shareholders over their 9 percent shareholder return in the last financial year and the share price sitting well below $9. Waters said the company produced a 51 percent shareholder return in 2013 so a 30 percent return per year over the past two years couldn't be complained about.

The shares rose 0.2 percent to $8.68 today, and have gained 1.8 percent this year.

Waters said Fletcher had faced substantially more competition since 2006, and the global financial crisis had had an impact across the construction sector as a whole.

"We haven't got back to the heights we saw prior to 2008 and neither has anyone else in our sector. It's a mixture of cyclical factors and that the level of competition that manufacturing businesses now face from every part of the world. In 2005 there was no imported cement coming into New Zealand and now Holcim is closing its manufacturing plant and importing cement from Asia."

But he admitted they had made two acquisitions – Formica and Crane – which had failed to make the initial returns that had been expected.

“They’re both going to be valuable assets in the long-term. The early implementation work on Crane was not as good as it should have been but Mark and his team have spent an enormous amount of time in Australia on Crane in the past year.”

In New Zealand, strong activity levels from last year were expected to continue with the positive trend in residential housing consents in the second half of last year likely to flow through to housing construction. However in Australia the outlook is more patchy with residential housing consents positive but non-residential less rosy.

Waters said the company didn’t expect a marked improvement in commercial construction in the next year with declining private sector mining investment and relatively low levels of government expenditure on core road and rail projects.

The company also expects a moderation in the rate of increase in new housing construction in North America and a sustained upturn on commercial construction activity, the biggest driver of Formica’s revenues, remained elusive, he said.

The business transformation programme, FBUnite, delivered $25 million of benefits in the past year, offset partly by increased operating costs of $10 million, and it is expected to deliver a further $25 million reduction in costs in the current financial year.

Adamson said his priorities would now pivot from delivering cost-cutting to delivering organic growth which was cheaper and less risky than acquisitions. He's planning a strong marketing push in the next two years, based around a new digital platform where Fletcher wanted to lead the way in the building sector. One example would be a smartphone app to make it easier for tradesmen to order something they needed while still on the job and get it delivered rather than having to jump in their ute and waste time sourcing it.

"We won't be trying to boil the ocean. We're looking at small digital apps while we build a much stronger IT infrastructure," he said.

BusinessDesk.co.nz

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