Fletcher first-half profit drops 26% on impairments, full-year outlook dims

Wednesday 18th February 2015

Fletcher Building shares dropped 4.5 percent after the construction and building products company posted a 26 percent drop in first-half profit, omitted franking credits on dividend payments to Australian investors and said full-year earnings would be at the lower end of guidance.

The second-largest firm on the NZX 50 Index declared a first-half dividend of 18 cents a share, unchanged from a year earlier except for the lack of Australian franking credit, compared to a full-franked payment 12 months earlier. That means Australian investors have to pay tax on what has become a 'gross' payment. The change reflected a reduction in Australian earnings it said.

Profit fell to $114 million in the six months ended Dec. 31, from $154 million a year earlier, the Auckland-based company said in a statement. Sales rose 1 percent to $4.3 billion while the cost of goods sold climbed 2.2 percent to $3.3 billion, resulting in a 1.5 percent decline in gross margin. Earnings included pretax charges of $66 million, made up of $34 million for the closure of Crane Copper Tube business and manufacturing plants at Stramit, Humes Pipelines and Tasman Insulation, and a $32 million writedown on goodwill at Forman Distribution, reflecting "the future earnings prospects of the business."

Operating earnings before one-time items rose 3 percent to $290 million and were broadly in line with some analyst expectations. as strong demand in New Zealand was partly offset by the impact of a downturn in mining investment and reduced government spending on infrastructure projects in Australia. The company said today that operating earnings for the full year would be toward the lower end of the $650 million to $690 million guidance it gave in October, "due to the rapid deterioration in the mining and infrastructure sectors in Australia." That would still be up from 2014's $624 million.

First-half earnings "were slightly disappointing in a number of areas," said James Lindsay, who helps manage $400 million at Nikko Asset Management. The first-half "hits expectations but was a relatively low-quality result."

Lindsay expects analysts to downgrade their forecasts for full-year earnings, because consensus currently is for Fletcher to reach the middle of its guidance range.

The stock fell 38 cents to $8.36 and have declined 13 percent in the past 12 months, while the NZX 50 Index gained 17 percent. The stock is rated a 'hold' based on the consensus of 10 analysts polled by Reuters, with a median price target of $9.10.

The company's heavy building products division had a 9 percent decline in first-half sales to $863 million. Operating earnings tumbled 46 percent to $49 million, including one-time items of $25 million. Excluding charges, earnings fell 18 percent, led by declines in Australian concrete and quarry products.

Light building products lifted sales by 1 percent to $601 million and earnings declined 18 percent to $42 million, including charges of $9 million. Earnings were unchanged at $51 million before charges. The laminates & panels division reported a 4 percent gain in sales to $904 million and an 8 percent increase in earnings to $57 million.

New Zealand distribution sales rose 8 percent to $780 million while earnings declined 34 percent to $27 million, including charges of $16 million. Excluding charges, earnings rose 5 percent to $43 million. Australian distribution posted a 6 percent drop in sales to $446 million and a 25 percent decline in earnings to $6 million.

The construction division recorded an 11 percent gain in sales to $733 million and a 13 percent gain in earnings to $63 million, including charges of $16 million.

Operating earnings before one-time items in New Zealand climbed 20 percent to $200 million, while earnings from Australia dropped 36 percent to $49 million and the rest of the world fell 11 percent to $41 million.

"Our New Zealand businesses have continued to perform well and we've enjoyed strong demand for our products driven by the buoyant construction market," said chief executive Mark Adamson. "Other markets have been more mixed," he said. While the Australian business benefited from a resurgent residential market, reducing mining and infrastructure spending "continued to have a negative impact on our results."

Further afield, earnings continued to grow from its Formica business in North America, while the company faced increased competition in China and Europe "continued to be challenging," Adamson said.

BusinessDesk.co.nz

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