Fletcher Building boss finds a handyman's dream come true and tightens the screws

Friday 15th February 2002

Fletcher Building may have presented shareholders with an $82 million earnings turnaround but Ralph Waters, its pragmatic Australian chief executive, is remaining rationally unexuberant.

At results briefings on Wednesday Waters told analysts and media he didn't want to oversell the company's potential. He no doubt had an eye on the share price, which has run up from $2 to $3 over the past year.

Most analysts had given Waters, who joined the company only last year, three years to deal with Building's problem children and restore the company to a position where it's covering its cost of capital - something it hasn't done in many years.

Waters said Building had shaved a year off that forecast. But there's a long way to go yet.

December first-half operating earnings before one-offs were $78 million, more than double last year's $37 million, but the improvement was patchy across the group.

The stand-out performer was the construction division, which contributed $13 million of pre-tax earnings after losing $5 million a year ago.

Waters said that reflected an uplift from "a terribly low-demand period" a year ago but warned; "This is not a boom environment" - particularly in Auckland.

In fact all the divisions that did well - for example, concrete-products maker Firth and pipemaker Humes - said they'd been carried along by the strength of the regions, not by Auckland.

Much of the earnings lift came from cost cuts, which Waters appears to have come by effortlessly enough to suggest Building was run as a pretty loose ship under the old Fletcher Challenge corporate structure.

Revenue, adjusting for the consolidation of Placemakers, was up 21% to $1.31 billion, with most of the rise coming from the risky and volatile construction business.

One issue the market will be watching is Auckland roading. Fletcher Building loves roads because it supplies the concrete and aggregates from which they are made so Waters bemoaned the "extremely disappointing" spend, which was half of what it had been in years gone by.

Any big lift will have to come from the government through Transfund. There has been no indication yet this year's Budget will deliver higher spending - the only good news is that Turkey has displaced New Zealand at last place in the OECD road-spending league.

Auckland's new road-friendly mayor John Banks wants to build roads using the cash locked up in the city's Auckland Airport shares but whether he has the numbers in council to sell them remains to be seen.

With the regions picked to slow down as commodity prices soften, and little about to suggest Auckland is going to go into a frenzy of activity, Waters can't rely on the New Zealand economy to deliver further earnings improvement. So he's ploughing on with the dreary job of knocking Building into shape after years of neglect.

Sales of underperforming businesses have long been slated but Waters isn't desperate and is working on lifting their performance to a point where he can get a decent price for them.

South America, that graveyard of many a New Zealand corporate dollar, cost Building a mere $1 million of pre-tax earnings in the first half, down from a $8 million loss a year ago. Waters noted that, in the wake of Argentina's default, now was hardly a propitious time to look for buyers but ABN Amro's Sao Paulo office has been hired to stir up interest nonetheless.

Building is determined to get it sold off by the end of this financial year or at least sold down to an insignificant level. In any case it was no longer draining cash from the group, Waters said.

The sale of South America will almost complete Building's withdrawal from loss-making overseas ventures. So eyebrows will be raised at Water's signalling of an expansion into Australia.

Waters is plainly aware of this and has his arguments honed. Just because it hasn't been done well before, he insists, doesn't mean it can't be done well now.

The trick, he reckons, is to get into businesses where Building can be a major, not a minnow.

That specifically doesn't include construction - "there will come a time when we're out of Australian construction" - and commodity businesses like concrete and wallboards.

In any case, he reckons, Building has to be somewhere else.

"New Zealand businesses are hostage to a low-growth economy," he told media on Wednesday.

"That's the problem, not NZSE issues."

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