Fletcher Building (ASX:FBU)

Ross Taylor
CEO
Market Cap (AUD): 4.22B
Sector: Materials
Last Trade (AUD): 4.78 -0.15 (-3.24%)
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1. About

Fletcher Building is dually listed on the NZX and ASX and operates through eight divisions – Building Products, Distribution, Concrete, Steel, Residential and Land Development, Construction, Australia and its offshore Formica and Roof Tile Group businesses.

The Company employs over 20,000 people across the globe. In New Zealand, the Company employs over 10,000 people across almost every region of the country and make a significant contribution to both the national economy and many regional economies. In Australia, the Company has significant operations in the manufacture and distribution of building products, employing over 5,500 people across the country. The Company also has operations spanning Europe, the USA, and Asia.

2. Business model

 

The Company operates the following divisions:[1]

 

Divisions

Revenue (NZ$M)

% of Revenue

% of Profit (before Int & Tax)

Profit drivers[2]

Building Products

$764

7.4%

18.6%

  • The Building Products division reported gross revenue of $764 M, an increase of 3% from FY17, as the majority of businesses achieved price increases and benefited from elevated demand
  • Revenues increased, operating earnings before significant items decreased 13% to $132 M due to the highly competitive market, increasing input costs, one-off costs due to natural events, provisions for obsolete stock

Distribution

$1,530

14.9%

14.6%

  • The Distribution division reported gross revenue of $1,530 M, an increase of 1% from FY17, as it benefited from increased housing investment across the country and market share gains in the small-medium enterprise sector

Steel

$532

5.2%

6.9%

  • The Steel division reported gross revenue of $532 M, an increase of 8% from FY17, as it benefited from strong demand within the construction and infrastructure markets
  • Easysteel achieved revenue growth of 15%, due to the full-year impact of the acquisition of the Calder Stewart Roofing business and a 3% increase in core structural steel volumes. Pacific Coilcoaters and Fletcher Reinforcing maintained stable revenues

Concrete

$812

7.9%

12.7%

  • The Concrete division reported gross revenue of $812 M compared with $781 M in the prior year. The 4% increase has resulted from improved sales volumes across all business units
  • Cement revenue was consistent with the prior year driven by domestic sales where volumes grew 4% on the prior year. This was supported by a 3% increase in manufacturing volumes to set a new production record, and market share continued to be strong

Residential and Development

$575

5.6%

19.2%

  • The Residential and Development division reported gross revenue of $575 M, an increase of 37% from FY17, driven by higher unit sales in Auckland and Christchurch and several significant land sales. This translated to operating earnings of $136 M, an increase of 5% from FY17
  • Residential operating earnings were $85 M, an increase of 12% from FY17. This was driven by an increase in completed homes sold, from 499 in FY17 to 714 in FY18

Construction

$1,685

16.4%

7.3%

  • The division reported gross revenue of $1,685 M, down 25% on the previous year
  • Operating earnings before significant items were a loss of $608 M, compared with a loss of $204 M in FY17. This includes a loss in B+I of $660 M, which reflects provisions taken on a number of major projects during the year, offset by the earnings for the rest of the division

Australia

$3,076

30.0%

16.1%

  • The Australian division reported gross revenue of $3,076 M, an increase of 8% from FY17
  • Building Products Australia delivered gross revenue growth of 9% from FY17, driven by strong performances from Laminex Australia, Iplex Australia and Fletcher Insulation

Formica and Roof Tile Group

$1,177

11.5%

9.2%

  • The Formica and Roof Tile Group division reported gross revenue of $1,177 M, an increase of 5% from FY17, which was driven by positive performances from Formica in North America and Asia
  • This was offset by difficult trading conditions in Formica Europe and a number of Roof Tile Group export markets, with operating earnings before significant items down 18% from FY17 to $65 M
  • Formica achieved gross revenue of $1,030 M, an increase of 8% from FY17, which translates to an increase of 4% in domestic currencies. Formica’s operating earnings before significant items were up by 1% to $75 M

Divested business

$108

1.1%

1.8%

N/A

Other

$8

0.1%

(6.3%)

N/A

3. Strategy

 

Key strategies include:[3]

 

Refocus on the core

Its new vision is to be the undisputed leader in New Zealand and Australian building solutions with products and distribution at its core. The Company will defend and grow its New Zealand building products and distribution businesses and leverage its positions in concrete and residential, which are complementary to its core and strong performers in their own right. With only a 15% share of the New Zealand market, there is plenty of opportunities to deliver more from its existing operations and grow into adjacent sectors.

 

Stabilise Construction

The Company will stabilise the Construction division by closing out its remaining B+I projects within its provisions and then growing its infrastructure and roading businesses. The Company has already made progress here, with seven of its 16 key loss-making B+I projects now completed.

 

Strengthen Australia

In Australia, the Company is targeting a significant improvement in the operating and financial performance of its existing businesses. The Company has just a 1% share1 of the Australian market and the majority of its businesses hold number one or two market positions – therefore the Company has a strong base to build from and the Company does not believe there are any structural reasons that will prevent us from getting its portfolio performing. In time, the Company will seek to expand its portfolio as the Company has done in New Zealand through targeted acquisitions.

 

Exit non-core businesses

With a new vision and focus, the Company will exit non-core businesses and divest Formica and Roof Tile Group

To support the strategy the Company has also made changes to how the Company works and are now very clear on the enablers of successful execution.

There are six key enablers of its strategy:

  • The Company will continue to increase the engagement and capability of its people to deliver results for its customers
  • The Company has introduced a simpler and leaner decentralised operating model
  • The Company will increase its focus on innovation, to achieve continuous improvement and take advantage of global trends
  • The Company will seek disciplined performance improvements in safety, sustainability, procurement and its operations
  • The Company will direct its capital into strategically important, high-returning businesses that align with its vision and what the Company was trying to achieve
  • The Company will fill gaps in its portfolio or move into adjacent categories both organically and through acquisition

4. Markets

 

The Company operates in markets including:[4]

 

Industry (Australia)

Industry Revenue

Growth Rate (annual 13-18)

Plastic Flooring and Other Polymer

$1 billion (2018)

0.6%

Glasswool, Stone and Non-Metallic Mineral

$2 billion (2017)

1.3%

Gravel and Sand Quarrying

$665 million (2018)

2.4%

5. Competition

 

Major competitors include:[5]

 

  • Boral Limited (ASX:BLD)
  • CSR Limited (ASX:CSR)
  • Lafargeholcim Ltd (SWX: LHN)

6. History

 

1909[6]

James Fletcher, a recent immigrant from Scotland, won the contract to build a double bay villa in Dunedin, New Zealand

 

1925  

The company headquarters was moved to Auckland, and through the depression, the firm continued to build some notable landmarks including the Auckland University College Arts Building, Auckland Civic Theatre, and the Wellington Railway Station

 

1981  

The merger of Fletcher Holdings, Challenge Corporation, and Tasman Pulp and Paper created Fletcher Challenge, a multi-national corporation with construction, forestry, building, and energy businesses

 

2000  

Fletcher Building Limited incorporated

 

2001  

Listed on the New Zealand Stock Exchange

 

2002  

Acquired Major Australian Building Products Group

 

2005  

Acquired Amatek Holdings Limited, including Rocla Pipeline Products, Rocla Quarry Products, Stramit and Insulation Solutions

 

2007  

Formica Group of companies was acquired by Fletcher Building. The acquisition resulted in the creation of the world’s largest manufacturer of decorative surfaces and high-pressure laminate

 

2010  

Fletcher Building acquired Australian Construction Products Pty Ltd

 

2012  

Formica Group established HPL manufacturing base in India

 

2014  

Fletcher Building completed sale of Pacific Steel’s New Zealand business to BlueScope Steel

 

2015  

Fletcher Building sold Rocla Quarry Products business

Fletcher Building Limited announced that its subsidiary, Fletcher Construction, has entered into a conditional agreement to construct a new office building in Auckland’s Wynyard Quarter

 

2016  

Fletcher Building announced the completion of divestment of Rocla Quarry Products assets to Hanson Construction Materials Pty Ltd

Created a 50-50 joint venture between its Fletcher Aluminium windows and doors business and NALCO

 

2017  

Fletcher Building announces additional bank funding of NZ$345million

 

2018  

Fletcher Building successfully completes entitlement offer

7. Team

 

Board of Directors[7]

 

Bruce Hassall – Chairman and Independent Non-Executive Director

Martin Brydon – Independent Non-Executive Director

Antony Carter – Independent Non-Executive Director

Barbara Chapman – Independent Non-Executive Director

Rob McDonald – Independent Non-Executive Director

Doug McKay – Independent Non-Executive Director

Cathy Quinn – Independent Non-Executive Director

Steve Vamos – Independent Non-Executive Director

 

Management Team

 

Ross Taylor – Chief Executive Officer

John Bell – Chief Information Officer

Claire Carroll – Chief People and Communications Officer

Wendi Croft – Chief Health and Safety Officer

Steve Evans – Chief Executive Residential and Development

Dean Fradgley – Chief Executive Australia

Francisco Irazusta – Chief Executive Formica and Roof Tile Group

Ian Jones – Chief Executive Concrete

Michele Kernahan – Chief Executive Building Products

Hamish Mcbeath – Chief Executive Steel

Bruce McEwen – Chief Executive Distribution

Bevan McKenzie – Chief Financial Officer

Peter Reidy – Chief Executive Construction

Charles Bolt – Group General Counsel and Company Secretary


read more

8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2017/18 (ended 30 June):[8]

 

Division

Revenue (NZ$M)

% Change

Profit (before Int & Tax) (NZ$M)

% Change

Building Products

$764

2.6%

$132

(13.2%)

Distribution

$1,530

(0.7%)

$104

0.0%

Steel

$532

8.4%

$49

(9.3%)

Concrete

$812

4.0%

$90

(20.4%)

Residential and Development

$575

36.9%

$136

4.6%

Construction

$1,685

(25.0%)

$52)

(40.9%)

Australia

$3,076

7.6%

$114

(4.2%)

Formica and Roof Tile Group

$1,177

5.1%

$65

(17.7%)

Divested businesses

$108

38.5%

$13

62.5%

Other

$8

(11.1%)

($45)

(50.0%)

Total

$10,267

0.0%

$710

(13.1%)

9. Risk

 

Foreign currency risk[9]

Currency transaction risk

Currency transaction risk arises from committed or highly probable trade and capital expenditure transactions that are denominated in currencies other than the operation's functional currency. The objective in managing this risk is to reduce the variability from changes in currency exchange rates on the operation's income and cash flow to acceptable parameters. It is Group policy that no currency exchange risk may be entered into or allowed to remain outstanding should it arise on committed transactions. When exposures are incurred by operations in currencies other than their functional currency, foreign exchange forwards and swaps are entered into to eliminate the exposure. The majority of these transactions have maturities of less than one year from the reporting date. Cash flow hedge accounting is applied to forecast transactions. The Group designates the spot element of foreign exchange forwards and swaps to hedge its currency risk and applies a hedge ratio of 1:1. The forward elements of foreign exchange forwards and swaps are excluded from designation as the hedging instrument and are separately accounted for as a cost of hedging. The Group's policy is for the critical terms of the foreign exchange forwards and swaps to align with the hedged item. The main currencies hedged are the Australian dollar, the United States dollar, the Japanese yen, the Euro and the British pound. The gross value of these foreign exchange derivatives at 30 June 2018 was $379 million (June 2017: $434 million).

Currency translation risk arises from net investments in foreign operations. It is the Group's policy to hedge this foreign currency translation risk by borrowing in the currency of the asset in proportion to the Group's long-term debt to debt plus equity ratio. This reduces the variability in the debt to debt plus equity ratio due to currency translation. Where the underlying debt in any currency does not equate to the required proportion of total debt, debt derivatives, such as foreign exchange forwards, swaps and cross-currency interest rate swaps are entered into for up to 11 years. Net investment, cash flow, and fair value hedge accounting are applied to these instruments.

Interest rate risk

Interest rate risk is the risk that the value of a financial instrument or cash flows associated with the instrument will change due to changes in market interest rates and arises primarily from the Group’s interest-bearing borrowings. The Group manages the fixed interest rate component of its debt and capital notes obligations and aims to maintain this ratio between 40% to 80% and at 30 June 2018, the Group was within the range at 56% fixed (June 2017: 44% fixed). The position in this range is managed to depend upon underlying interest rate exposures and economic conditions. Cross currency interest rate swaps, interest rate swaps, forward rate agreements, and options are entered into to manage this position. The financial instruments entered into are in Australian dollars, United States dollars, Japanese Yen, and New Zealand dollars and will mature over the next 12 years. Hedge accounting is applied to these instruments for floating-to-fixed instruments as cash flow hedges or for fixed-to-floating instruments as fair value hedges. The Group applies a hedge ratio of 1:1. The Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the reference interest rates, tenors, repricing dates and maturities and the notional amounts. The Group assesses whether the derivative designated in each hedging relationship is expected to be effective in offsetting changes in the fair value of the hedged item using the hypothetical derivative method.

 

Commodity price risk

Commodity price risk arises from committed or highly probable trade and capital expenditure transactions that are linked to traded commodities. Where possible the Group manages its commodity price risks through negotiated supply contracts and, for certain commodities, by using commodity price swaps and options. The Group manages its commodity price risk depending on the underlying exposures, economic conditions and access to active derivatives markets. There is a hedge ratio of 1:1 for commodity hedges. Cash flow hedge accounting is applied to commodity derivative contracts. Ineffectiveness is only expected to arise where the index of the hedging instrument differs to that of the underlying hedged item. The average hedge price for 2018 was NZ$/MWh 75 (June 2017: NZ$/MWh 77).

 

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. To the extent the Group has a receivable from another party, there is a credit risk in the event of non-performance by that counterparty and arises principally from receivables from customers, derivative financial instruments and the investment of cash.

 

Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in meeting its financial commitments as they fall due. The Group manages its liquidity risk by maintaining a target level of undrawn committed credit facilities and a spread of the maturity dates of the Group's debt facilities. The Group reviews its liquidity requirements on an ongoing basis.

 

Capital risk

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns to shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group monitors capital on the basis of a through-the-cycle net debt to net debt plus equity ratio (gearing) and net debt to EBITDA ratio (leverage). The target gearing ratio range is 30 – 40%. The target leverage ratio range is 1.5 to 2.5 times. It is intended that the Group will not be materially outside the target gearing and leverage ratio ranges on a long-term basis.

References

  1. ^ Annual Report 2018, P. 63
    https://www.listcorp.com/asx/fbu/fletcher-building/news/fletcher-building-limited-2018-annual-report-1956174.html
  2. ^ Annual Report 2018, P. 25-36
    https://www.listcorp.com/asx/fbu/fletcher-building/news/fletcher-building-limited-2018-annual-report-1956174.html
  3. ^ Annual Report 2018, P 10
    https://www.listcorp.com/asx/fbu/fletcher-building/news/fletcher-building-limited-2018-annual-report-1956174.html
  4. ^ https://www.ibisworld.com.au/industry-trends/market-research-reports/manufacturing/polymer-rubber-product/plastic-flooring-other-polymer-product-manufacturing.html
    https://www.ibisworld.com.au/industry-trends/market-research-reports/manufacturing/non-metallic-mineral-product/glass-wool-stone-non-metallic-mineral-product-manufacturing.html
    https://www.ibisworld.com.au/industry-trends/market-research-reports/mining/gravel-sand-quarrying.html
  5. ^ http://www.hoovers.com/company-information/cs/company-profile.fletcher_building_limited.ea9f15fcf6690612.html
  6. ^ https://fletcherbuilding.com/about-us/our-history/
    http://www.asx.com.au/asxpdf/20050302/pdf/3pzg2xjthvhxr.pdf
    http://www.asx.com.au/asxpdf/20070703/pdf/3137vv9whcgpkp.pdf
    http://www.asx.com.au/asxpdf/20100820/pdf/31rzz1v7b2vnrp.pdf
    http://www.asx.com.au/asxpdf/20121112/pdf/42b41l0qyc501k.pdf
    http://www.asx.com.au/asxpdf/20140616/pdf/42q761q988tl08.pdf
    http://www.asx.com.au/asxpdf/20150819/pdf/430lvwhg42fbzx.pdf http://www.scoop.co.nz/stories/AK1503/S00761/fletcher-construction-to-build-new-office-complex.htm
    https://fletcherbuilding.com/news/fletcher-building-completes-divestment-of-rocla-quarry-products/
    https://fletcherbuilding.com/news/fletcher-aluminium-joint-venture-to-create-new-windows-and-doors-business/
    https://www.listcorp.com/asx/fbu/fletcher-building/news/additional-bank-funding-of-nz-345-million-1677855.html https://www.listcorp.com/asx/fbu/fletcher-building/news/fletcher-building-successfully-completes-entitlement-offer-1886581.html
  7. ^ https://fletcherbuilding.com/about-us/board-and-management/
  8. ^ Annual Report 2018, P. 63
    https://www.listcorp.com/asx/fbu/fletcher-building/news/annual-report-to-shareholders-1659523.html
  9. ^ Annual Report 2018, P 79-84
    www.listcorp.com/asx/fbu/fletcher-building/news/fletcher-building-limited-2018-annual-report-1956174.html