UPDATE: Fletcher chair Norris hints at board refresh after year of nil return to shareholders

Wednesday 16th August 2017

(Adds investor comment, updates shares)

Fletcher Building chairman Ralph Norris says the board will be refreshed as part of the normal rotation of directors and appointees will be sought with construction experience but he stopped short of accepting responsibility for losses in construction projects and said chief executive Mark Adamson was dumped after an abusive email to staff.

Norris fronted a conference call with interim CEO Francisco Irazusta and chief financial officer Bevan McKenzie. He said a recent internal survey had shown that Adamson was rated "very highly" by his immediate reports and had actually done "a very good job improving the culture of the organisation".

"The issue with Mark - in frustration he wrote an email that was not appropriate and that caused some concern in B + I. Mark and I had a discussion and we came to the view this was inappropriate," Norris said. Adamson had been considering his future anyway, with his term coming up. "Mark will tell you he's 100 percent accountable for the result - the good and the bad." B + I is the building and interiors unit of its construction division that is incurring losses on major projects.

Adamson was dumped last month when the company slashed its forecast for full-year operating earnings to $525 million from the $682 million it reported in 2016. It confirmed the figures today. Impairments and other one-time charges amounted to $252 million, including $69 million against its building products division and $153 million against distribution. Group sales rose 4 percent to $9.4 billion.

Fletcher shares rose 1 percent to $8.28. They were as high as $11.14 last September but went into decline about the time the first-half results were released in February and it first flagged losses on a major construction project in B + I. The slump steepened in March when it slashed earnings guidance and gave more details about losses in B + I. Before the results today, the stock was rated a 'buy' based on the consensus of a Reuters poll.

"It looks like nothing has blown up any further" with the release of the full-year results today, said Paul Richardson, chief investment officer at Mint Asset Management. "There's no guidance for the future year. That suggests there's still some moving parts." Investors may be in a holding pattern pending the company's next disclosures and the appointment of a new CEO, he said.

The company said it would give earnings guidance at its annual meeting in October, as it usually does. Last year was the exception, when it gave guidance for the year ahead with its annual results.

It did say that operating cash flows would improve in 2018 and there would be a rebound in earnings from B + I. It will pay a fully imputed final dividend of 19 cents a share, taking the total for the year to 39 cents, in line with its 2016 payout. It expects to fully impute its 2018 payments. Taking together the dividend payments and the drop in Fletcher shares, shareholders got a nil return from 2017.

Norris said the board deemed B + I a "one-off" and looking through its impact on the results and the performance expected of the company in 2018, directors determined that the dividend payout could be sustained. Asked whether Fletcher was complying with NZX disclosure rules, which include being mindful of consensus analyst forecasts, the company said that it was.

Construction reported a loss on an earnings before interest and tax basis of $204 million, mainly reflecting a B + I operating loss of $292 million, while revenue climbed 36 percent to $2.2 billion.

The backlog of work for construction was about $2.5 billion as at June 30, of which about $1.3 billion was in the B + I unit. Of that, 68 percent was concentrated in the five largest B + I projects including "Project 1", valued at $261 million and slated for completion this September At year end it was 93 percent complete with $18 million of work pending. The forecast margin was described in Fletcher's presentation as a "large negative".

"Project 2", a contract valued at $476 million and scheduled to be completed in June 2019. Just 22 percent of that project had been completed by June 30 this year, with a forecast negative margin and $372 million of work yet to be completed. Project 3, valued at $427 million, was also due for completion in June 2019. It was 24 percent complete at balance date with a $323 million backlog and a "positive" margin.

Other projects totalling $1.49 billion had $559 million of work to complete and were described as "break even" on a margin basis.

Norris was pressed about the board's performance and said the directors had taken "an exhaustive approach" and that he personally felt more like an executive than a director, given "the amount of time I have spent in this business this year."

New managers had been put in place across the construction business and he was confident the board was fully informed about Fletcher's operations.

"The board is provided with ongoing management updates on all sections of the business, including B + I," he said.

Fletcher's group operating margin fell to 5.6 percent from 7.6 percent in 2016 while cash flows from operations tumbled 63 percent to $243 million.

(BusinessDesk)

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