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Opinion: Fletcher Building enjoys a wonderful problem

By Simon Louisson of NZPA

Friday 13th August 2004

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Fletcher Building this week produced "an unambiguously good" result and its Australian-born boss Ralph Waters exuded positivity that put many of his kiwi counterparts to shame.

Numerous business leaders reacted to Tuesday's figures showing unemployment had hit a 17-year low by moaning about the prospects of higher interest rates, skill shortages and higher wages.

Waters, who came from Australian metals and appliances company Email in 2001, was aghast.

"Of course there are skill shortages, but I don't think this should get out of proportion - this is a wonderful problem to have," he said in an interview with Radio New Zealand yesterday.

"We are always wanting to complain about things. Are we going to complain because we have got 4% unemployment?"

Events over the next few weeks in Athens are likely to reveal what results Australians' positive attitudes can bring.

Waters has been taken aback in past by New Zealand's negativity. He could hardly believe investors' and analysts' reaction to the Building's half year result in February when the company posted a 34% profit lift and its sixth consecutive dividend hike, and the shares fell 1%.

"New Zealand is the most unusually pessimistic environment I have ever encountered. I don't think we're ever going to change it," he said at the time.

While economists are all busy forecasting an economic slowdown - something they have been mis-calling all this year - and broking analysts are suggesting this is as good as it gets for most companies, Waters is promising bigger and better profits.

He acknowledges that with immigration easing and interest rates rising, the company cannot defy gravity.

But the company, which posted a 43% lift in net profit to $240 million, was not simply riding the housing boom. It is extracting productivity gains and it had other revenue streams.

Non-housing construction is on the up, particularly as a result of Auckland and the Government's big spending plans for infrastructure.

"The main message we've had to investors... is to look at the totality of the construction market that we serve and including the spend on non-residential construction, we don't see the totality as being in decline at all.

"We see a fairly robust outlook for the foreseeable future."

Unlike some of the whingeing New Zealand bosses, Waters's company is doing something about skill shortages and capacity constraints. Fletcher Building is spending $100m to remove capacity bottlenecks that have been holding back company growth against robust demand.

It has been recruiting overseas for the past two or three years, has 20 job offers on the table in England and is talking to people as far afield as India and Peru.

"I think the only frustration that was expressed by one of my people is that since we have an extensive graduate training programme, since we have been recruiting from overseas, and we haven't been complaining that we need any help from government, we get frustrated when someone comes along with a chequebook because they're short - those who haven't been doing those things and pinch some of our good people to meet their own needs. But that's life in the cut and thrust of business," he said in the radio interview.

Instead of viewing capacity shortages as a problem, Waters views it as "our real opportunity for the next year or two".

Building was spun off as a separate company when Fletcher Challenge was broken up in early 2001.

Instead of being sold in a trade sale as Fletcher Energy and Fletcher Paper were - each for $5 billion - there were no acceptable bids for the cinderella building unit at the time.

There were rumours that the Fletcher Challenge board rejected a bid at $3/share against its then price of $2. Outspoken fund manager Simon Botherway said at the time he would be "absolutely dismayed" if he discovered that was the case.

The shares jumped 10% in the two days after the result to $5.25. Building's market capitalisation is around $1.4 billion above its $860m level it was at at the time of the Fletcher break-up. Sometimes the powers that be make the right decision.

In the June 2001 year, Building reported a $272m loss as it indulged in the traditional blame-the-previous-owners-write-down of assets.

It quit non performing assets in South America and Hawaii, and sold its construction, aluminium and power assets in Australia.

Having done that Waters was anxious not to tie the company's fortunes too tightly to the domestic New Zealand economy.

In September 2002, the company purchased Australia's Laminex Group for $A645 million ($NZ740.61million) and then a year ago it paid $A230 million to buy Tasman Building Products. To help pay for Laminex, Building made a 43.7 million share placement which interestingly went at a premium to the prevailing price.

Waters is still looking for offshore assets to diversify the earnings base. He indicated on Wednesday he was close to buying a $15m roof tile manufacturer in Malaysia to service unquenched Japanese demand.

The company's gearing has dropped from 53% shortly after it bought Laminex, to 43% today, so it is well placed to make other purchases. However, Waters said the focus would be more on internal growth than external.

"We have a lot of businesses that are capacity constrained, and that is a lovely problem to have."

Building's share price got a boost last month when the Government announced it would be relaxing restrictions on immigration. Immigrants need to be housed and that gives a lift to the construction industry, but Building gets another boost in that it helps alleviate labour shortages.

When Waters promised another good year for 2004/5 at Wednesday's results briefing, you can be pretty sure he will deliver.

One of the reasons why the graph of Building's shares, since it became a stand-alone company, has shown such a consistent escalation, is that it has under-promised and over-delivered - something analysts and investors love.

"I think it's building the wall, and every year there are more bricks in the wall," explained Waters.

"There was a lot of scepticism of the first year of a good result, they thought we would go down. The second year there were a few more believers. I'm hopeful that after today most of that scepticism has disappeared because we haven't let the market down at all. We have never not made the promises that we have given to the market."

And to those nay-sayers who say it can't last, Waters also had an answer.

"There may be some justification because the business was so dependent on New Zealand and the New Zealand economy really jerked around in the past, and so people are not used to the success that the country is enjoying. But they are only enjoying what a lot of other Western countries have been used to enjoying. I think we have got to get used to it."

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