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Fletcher Building didn't breach NZX rules in earnings downgrades, NZX finds

Thursday 18th January 2018

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The New Zealand stock exchange has found Fletcher Building did not breach continuous disclosure rules in relation to two forecast earnings downgrades last year.

In a statement published this morning, NZX Regulation said its investigation found the company acted promptly in releasing material information after management and directors became aware of it, in both March 2017 and July 2017.

On March 20, 2017, Fletcher cut its 2017 earnings forecast by $110 million, or about 15 percent, saying that its buildings and interiors business unit had seen weaker performance than it had previously understood. Trading in the stock was halted on March 17.

NZX Regulation said Fletcher had become aware there was a material risk it would miss guidance on the evening of March 16 and applied for the trading halt while it sought further information. The timing and duration of the trading halt were appropriate and the disclosure prompt, NZX Regulation said. 

On July 20, 2017, Fletcher again slashed its full-year earnings forecast by between $85 million and $125 million, or 14 percent to 19 percent, saying operating earnings for the financial year ended June 30 were about $525 million. It also dumped chief executive Mark Adamson. 

NZX Regulation found Fletcher had become aware it would miss guidance on the evening of July 19, and "that awareness arose when information was provided to FBU executive officers as a result of regular project reviews, regarding projected losses in various of those projects." The board discussed the issue with management and its auditors before releasing the announcement the next morning.

The investigation found Fletcher had given particular attention to the B+I unit after the March downgrade, but "events accelerated in July 2017", leading to the material information coming to light on July 19. The board first became aware of issues in the unit in late 2016 following a monthly operational review of its construction division, with the review continuing through the first quarter of 2017. 

The regulator said information about the losses within the B+I unit was not separate material information for Fletcher, as market expectations of the company's financial performance were set by the published group level earnings forecasts.

NZX Regulation said the case highlights a number of matters which issuers should be aware of, including the importance of systems and processes to identify risks and enable issues to be escalated.

"There has been significant public discussion regarding FBU’s commercial judgement in respect of the construction division and whether issues were appropriately escalated within the business," the regulator said. "We have also previously observed this kind of speculation in respect of disclosures by other issuers. Information provided by FBU indicates that it was cognisant of ensuring timely escalation within the business and has processes in place to address this including within the construction division."

The report also says that a number of articles published by New Zealand media about issues within the B+I unit, which began after the March downgrade, did not create a disclosure obligation on Fletcher within the NZX's listing rules, and it found no evidence Fletcher's management or directors had any material information as a result of media speculation.

"Rumours relating to progress on the status of particular FBU projects are not the same as rumours about FBU’s financial performance at a group level," NZX said. "Rumours about financial performance measures must have a sufficient degree of credibility, specificity and certainty, in order to give rise to potential disclosure obligations."

Fletcher shares rose 0.4 percent to $7.74 in early trading this morning following the report's release. They dropped 29 percent last year, plunging after each downgrade.


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