Tuesday 20th November 2018
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The reaction of Fletcher Building’s shareholders was emphatic to the dismal news that core first-half profit operating earnings will be about 10 percent lower than in the previous first half.
The shares fell as low as $5, their lowest level since February 2009 in the depths of the global financial crisis, and down 55 cents, or almost 10 percent, on Monday’s close.
If the share price was the score card for managing director Ross Taylor, in the top job for almost exactly a year, you’d have to say it’s a fail.
The shares are down almost 25 percent from $6.64 on the day before he started, although that does include the $750 million capital raising earlier this year – the theoretical ex-rights price was $6.
Earnings before interest and tax for the year ending June 2019 are expected to be $630-680 million before any “significant items,” compared with $710 million in the year just ended, which excluded $660 million of losses from high rise builder Building + Interiors.
The expected poor first-half and annual outcome comes on top of several other missteps from Taylor.
They include announcing that Fletcher had withdrawn from bidding on any more high-rise projects, thus ensuring it would be that much harder and more expensive to retain staff needed to complete the projects already underway.
Shareholders can be thankful for small mercies in that the B+I losses remain within existing provisions – as one analyst previously put it, Taylor had “kitchen sinked” the B+I provisions.
And then there was the ill-considered and failed Steel & Tube takeover which appeared at odds with Taylor’s stated strategy to focus on bolt-on acquisitions only.
The company is still arguing that the latter was actually on-strategy and, speaking after the annual shareholders’ meeting, Taylor insists that it was.
“I would emphatically say it was on-strategy.” It is a smaller business than Fletcher’s own steel business – it would have increased the business by about 30 percent – and was complementary to it, he says.
The $1.90 per share offer that Steel & Tube’s board rejected as being too low valued that company at $315.4 million.
Taylor says Fletcher’s decision to walk away was proof of another promise: “the other thing we needed to display was deal discipline.”
He similarly brushes away the poor ongoing earnings as being due to factors outside his control: a breakdown at the Golden Bay Cement plant and the resulting four-week outage, which will shave $8-11 million off first-half earnings, and “the Australian residential market is softening faster than anybody thought.”
That should have come as no surprise because a number of Fletcher’s competitors have already made similar comments, Taylor says.
“It would be nice to say there were no market issues anywhere in the business, but there’s little I could’ve done about those – I can only react to them appropriately.”
The Steel & Tube bid needs to be seen in the context of Fletcher’s history of making poor acquisitions and one of those, Formica bought in 2007 for $960 million, is now up for sale.
After years of under-performing, the company says Formica is now performing strongly. Analysts have estimated Formica might fetch $1-1.3 billion.
Taylor says the Formica sales process is on track and the company now has a short list of bidders. “It’s at the pointy end of that process” and the sale should be announced well within the 18-month framework he set in April.
At the AGM, five new directors brought on board since the B+I debacle began to unfold sought to answer criticisms levelled at the company by the New Zealand Shareholders’ Association for not choosing more people with relevant industry experience.
Martin Brydon, managing director of Australian-listed Adelaide Brighton talked about his 40 years in the building products industry.
Rob McDonald, former chief financial officer at Air New Zealand and now chair of Contact Energy, told shareholders he began his career in the 1980s with “a leading Australasian building company.”
Former ASB chief executive Barbara Chapman and now Genesis Energy chair and a director of New Zealand Media and Entertainment extolled her “extensive commercial experience.”
Cathy Quinn, a commercial lawyer who used to chair MinterEllisonRuddWatts, said much of her 33-year career had included working on mergers and acquisitions, experience she will be able to bring to bear on Fletcher’s future acquisitions.
Doug McKay, the one director that the association voted against because he appears to be over-committed, said he had stepped down from Ryman’s board and so had sufficient time to devote to Fletcher Building.
“In my view, workload is half the story. The other half is ambition, work ethic, drive, capacity and resilience and I have all of those in spades,” McKay told shareholders.
In his former executive career – he’s a former chief executive of Lion Nathan, Carter Holt Harvey, Goodman Fielder, Sealord and Independent Liquor – he had been accustomed to work 60 to 70 hours a week. Now he is working 30-35 hours a week in governance roles, allowing plenty of spare time to deal with any crises Fletcher might encounter, he said.
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