Friday 27th April 2018
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Fletcher Building chief executive Ross Taylor says restructuring the company’s Australian operations and pushing up margins across the Tasman is one key to growth over the whole business.
He says profit margins on Fletcher Building’s Australian operations are only 3-4 percent, compared with 8-9 percent in Fletcher’s New Zealand building products division, and 8-10 percent profitability at Australian competitors like CSR and Boral.
Taylor should know about the potential of the Australian market. The Aussie-born CEO led two major engineering and construction companies in Australia (UGL and Tenix) before taking the top job at Fletcher Building in November. Massive losses in several big construction projects forced the resignation of his predecessor Mark Adamson.
“We have to drive Australia,” Taylor says. “Laminex and Stramit [steel products] are performing well, but there are a bunch we need to focus on. Businesses like Tradelink [bathroom and plumbing supplies], Iplex [pipes and fittings], Rocla [concrete], and Fletcher Insulation are showing some positive signs. The opportunity is if we focus on those businesses we can drive performance.”
Last year, Fletcher Building announced it was writing down the value of its Iplex Australia and Tradelink business units by $220 million.
Taylor says one of the mistakes his Fletcher predecessors made in the past was focussing on too many countries and too many different businesses. That took a toll.
“We didn’t have enough management and capital capacity to deal with everything. We have to focus on the bets we can succeed in.”
The company has announced that as part of its restructuring and debt repayment it will be selling its two main businesses outside Australasia - Formica and the Roof Tile Group. In 2007, then Fletcher CEO Jonathan Ling paid almost $950 million to buy the previously-bankrupt Formica Group from two private equity firms, trumpeting the acquisition as a chance to "establish a truly global laminates platform and significantly increase the geographic diversity of our earnings exposure". Then came the GFC and the US-based Formica business has dogged Fletchers ever since, sucking up management time and funds.
Taylor is now left having to reverse Ling's expansionist strategies.
He says another problem with the Australian businesses is the way the company is structured makes it difficult to see clearly what contribution they are making.
“The $3.3 billion revenue has been divided up and run through three divisions - international, distribution and building products.”
One of the focuses of the strategic review will be bringing Australian operations into one group under one yet-to-be-decided boss. Announcements are expected in June, after the end of the present round of capital raising and debt restructuring.
Taylor says he's not ruling out growing the business in Australia by acquisition, as well as organically, in the future.
“We’ve got a fair bit to do in the next 12 months - sorting debt, selling businesses, and setting the focus. Once we’ve got that done, we will have the balance sheet capacity to buy assets given the right opportunity."
Meanwhile, Taylor says there are unlikely to be any announcements about a successor for Fletcher Building chairman Ralph Norris or other board members before June. He says it’s hard to have conversations with potential candidates when there is a capital raising going on, partly because of the risk of revealing confidential information at a sensitive time for the market.
Taylor also says there are no plans at the moment to re-enter the vertical construction market, although he’s not ruling it out “if the market becomes saner”. In February, the company announced its Buildings + Interiors division had racked up $660 million in losses from cost overruns on major projects like the Auckland-based International Convention Centre, the Commercial Bay development, and Christchurch’s Justice Precinct.
“We’ve stopped bidding and are focused on finishing projects. There is no value in taking high risk for low margin, and we won’t continue in that space unless the risk-reward get back to something sensible - something more aligned to what happens in other infrastructure projects. We haven’t seen that change yet.”
However, Taylor says that there are often vertical components in so-called “horizontal” infrastructure developments - a waste treatment plant for example in a big water project. So the company will still be keeping its hand in.
Fletcher Building's share price closed at $6.24 yesterday, fractionally down on the day. The stock is down almost 20 percent since the beginning of the year and is just under half its value in those giddy pre-GFC days of 2007.
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