NZ’s largest construction company has made a record $billion loss.
will have downstream effects for contractors etc. and for the NZ
economy - the real economy, I’m talking about
would not expect any reports from Gyles Beckford and Radio NZ to
reflect more than a shadow of the real situation
example, how could a company that has lost a billion dollars in 2
years be seen as a "good risk"?!
shares last traded at $7.70 per share. Who knows how much of a
hammering the share price may take when they are finally traded
again, and while you may not be one of Fletcher’s long-time mum and
dad shareholders (about 17,000 shareholders hold up to 1000 shares)
you may well have a slice of this iconic Kiwi company through your
KiwiSaver. In total the company has 38,100 shareholders including our
Accident Compensation Corporation (ACC).”
Fletcher Building's own Valentines Day Massacre
14 February, 2018
Analysis: The profitability, economic value and reputation of New Zealand's biggest construction company have been gunned down today, writes Gyles Beckford.
Today has turned out to be Fletcher Building's St Valentine's Day massacre.
It's the day the company's profitability, economic value, reputation and integrity as a public investment were gunned down.
Its shares today closed down 72 cents - or 9.2 percent - at $7.05.
The writing has been on the wall for some time as it drip-fed the bad news of cost overruns, writedown in asset values and restructuring costs as it battled the vagaries of the global construction and building products markets.
It's had to contend with cheap competition from the likes of China, the slowdown in housing markets around the world following the global financial crisis and the fluctuations in currencies on its multinational business.
But it often crowed about the benefits of its multi-billion dollar pipeline of big construction projects here and abroad, which were the backstop and defence against fickle markets and demand.
It is now clear that Fletcher Building chased almost any and every big job going. It was lead contractor in the Christchurch earthquake rebuild, the International Convention Centre in Auckland, airport developments in the three major cities, a new prison and a new apartment and commercial development on Auckland's waterfront.
But by its own admission the company has botched the basics of pricing, scheduling, and supply.
Sir Ralph Norris, the Fletcher chairman, has spoken of quantity surveyor estimates, which were as much as 100 percent wrong, rising building costs and the flow of communication from management to the board as some of the reasons for losses.
Those losses have hit $952 million in two years - $292 million in 2016 and $660 million in the current year.
Fletcher's stock has now fallen 35 percent in the past year, wiping roughly $2.5 billion off its value.
Friendly banks see Fletcher as a good risk
One of the most serious aspects of the current saga is Fletcher Building's breaching of its banking covenants.
These are the conditions that lenders attach to their loans. In Fletcher's case its lenders have stipulated the company must keep its operating earnings at certain ratios to its debt and as the earnings fall the covenants have been breached - four of them.
The group's debt levels are expected to peak at around $2.4 billion this year and it has total debt facilities of $3.1bn it can call on, but it's currently talking to the banks on new lending conditions. For the time being they are supportive and giving the company the benefit of the doubt.
The saving grace for Fletcher Building is that the rest of the business - which includes well-known names such as roading company Higgins, hardware chain Placemakers and laminates business Formica - are performing well. The earnings from these operations are expected to deliver operating earnings between $680m to $720m.
That cash flow and the scale of the bad news that has been disclosed will have persuaded the lenders that Fletcher Building remains a good risk, albeit with likely more stringent conditions and supervision than before.
In a headline sense, Sir Ralph has fallen on his sword and said he will step down. Some said he should have gone last year when then-chief executive Mark Adamson was abruptly shown the door in July, when the company had its second profit warning in a few months.
But long-suffering shareholders are losers because they will forego a part-dividend this year and may miss out on the full-year payment. And shareholders have also had the value of their investments savaged by the slump in the share price - it's fallen by a third in a year.
New chief executive Ross Taylor has said this should be as bad as it gets, but the suspicions and fears of more skeletons will linger.
And it may be that New Zealand's ability to get big projects done will get that little bit harder.
Mr Taylor has said Fletcher Building will not be chasing any more big project work other than being a participant or partner.
Thirty years ago the Fletcher Challenge conglomerate stood as a corporate colossus over much of New Zealand's economy - with vast forests, timber and paper mills, steel works, quarries, natural gas and synthetic petrol, house, and office and road building.
There was barely a sector it did not touch.
Today it's a severely wounded corporate set to remain in intensive care for a while to come.
Ten numbers that tell the story of Fletcher Building’s astounding $660m loss
15 February, 2018
Fletcher. The name is synonymous with construction and building in New Zealand, and has been since, well, forever. But it’s been in the news for all the wrong reasons lately – here are ten numbers that sum up the company’s bad news streak.
This morning, Fletcher Building announced losses from its Building and Interiors (B+I) business would amount to $660 million for the 2018 financial year, and its chairman Sir Ralph Norris (ex Commonwealth Bank of Australia, ASB, Air New Zealand) would be stepping down, noting shareholders’ demands for accountability. This caps an ugly gush of losses from the company’s high profile construction unit, responsible for delivering many large scale projects in New Zealand including the new international convention centre in Auckland and the Justice Precinct in Christchurch. It has already haemorrhaged $292m in 2017 due to “underperformance in the management of two key contracts: one in Christchurch and one in Auckland”. It will also cease to bid on projects, and concentrate on finishing off those not completed.
If only that had been the number! Fletcher had flagged in its 2018 earnings guidance announcement in October 2017 that losses for the building and interiors business would total about $160m in 2018 (after a previous trading halt to review “the financial performance of its Building + Interiors business unit”). Then, last week, it asked for another trading halt on shares due to expected losses in B+I, which it has extended twice since. It has also had to have a wee chat to its banks. Gulp.
Is the year that Fletcher’s Treasury team scooped the award for Excellence in Treasury at the black-tie 2017 Institute of Financial Professionals Inc. New Zealand (IFINZ) Awards dinner – the “highlight of the financial calendar”. The treasury team, the company’s press release said, is responsible for financial risk management. “The team works with business units to identify and appropriately manage financial risks, to guide strong business decisions and to help Fletcher Building’s businesses to operate in all economic climates.” It is “also responsible for ensuring Fletcher Building’s funding requirements are met, there is a diversity of funding sources, and the group is funded cost effectively”. Mmmkay.
But it’s not all doom and gloom, Fletchers would like you to know. In a letter to shareholders last year, chairman Sir Ralph Norris pointed out four out of five of its divisions made a profit thank you very much! Sir Ralph: “The reality is that in FY17, excluding the losses incurred in B+I, the Group’s operating earnings increased by approximately 20%, and operating earnings from the New Zealand businesses increased by around 30% … On average, these other four divisions outside of Construction delivered over 90% of the Group’s annual operating earnings in the years from 2011 to 2016. In addition, three out of the four business units in the Construction division performed well in FY17, particularly our new acquisition Higgins, which posted operating earnings of $39 million for the year.”
Fletcher shares last traded at $7.70 per share. Who knows how much of a hammering the share price may take when they are finally traded again, and while you may not be one of Fletcher’s long-time mum and dad shareholders (about 17,000 shareholders hold up to 1000 shares) you may well have a slice of this iconic Kiwi company through your KiwiSaver. In total the company has 38,100 shareholders including our Accident Compensation Corporation (ACC).
The number of people on the construction giant’s board that have building industry experience – and that’s Tony Carter – the former chairman of Mitre10, so not exactly a construction company but a building supplies retailer. Company critics say one of modern-day Fletcher’s weaknesses is a lack of building and construction industry people in its executive and governance team. Over time, the company has recruited heavily from banking/accounting/management firms (PWC, Deloitte, Boston Consulting Group to name a few). This lack of industry-specific experience has led to some of the issues with its large construction projects, and them going awry and making losses, critics say. That said, new CEO Ross Taylor (no, not that Ross Taylor) has a long background in the industry.
This was former Fletcher boss Mark Adamson’s BASE salary before he abruptly left last year after a run of disappointing results. On top of the base, Adamson was paid about $2.2m more in short term incentives. He didn’t get the $8m he was owed in long term incentives! But he did get a further $2.9m as part of an exit package. Board remuneration for the financial year ended June 2017 totalled about $1.8m, with Sir Ralph receiving about $435,000 of that. As you can imagine, the company’s results have left shareholders not best pleased with the salaries, or performance, of its executives and board.
The number of people at Fletcher Building who earn $100,000 or more. But the number we really need to get amongst is the 146 people who are paid $300,000 or more per year, or hell, what about the 46 who earn more than $400,000 annually. Critics have pointed to high salaries and an out-of-touch culture as contributing to the company’s poor performance for shareholders.
The number of employees Fletcher has across “hundreds of sites” across the globe. We like to think of Fletchers as being our national builder of everything, but it is a huge company with a presence in manufacturing (it owns Formica, you remember Formica?), building products, distribution and infrastructure to name a few. Its international division has more than 5000 staff, the building division almost 4000, and more than 6000 work in its distribution businesses, with a further 4500 or so in construction. It’s a huge business, and huge businesses come with huge risks.
But it all started a long, long time ago. The company was founded in 1915 by James Fletcher and his brothers, after James Fletcher (and Albert Morris) won a contract to build a villa near Dunedin. From that humble start, “the company built many of New Zealand’s public and private buildings railway stations, universities, hospitals, banks and office blocks. The company expanded and bought businesses that supplied building materials, such as timber, marble, brick and concrete works, and employed hundreds of people in associated trades,” the Fletcher Trust archives say.
In the 80s Fletcher Challenge (as it was then called after mergers) really hit its straps, taking in forestry, paper, pulp, meat processing, gas distribution and fisheries businesses and led to the conglomerate we see today. In 2001 Fletcher Challenge was dismantled and Fletcher Building was created so it could get back to basics. Now, some people expect the company may sell off its construction arm – could Fletcher’s dominant position atop our building industry be coming to an end?