Fletcher Building 2008 ASM
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Fletcher Building Limited (FBU) | 10:06 am, Wednesday 12 November 2008 | FBU | 6.540 |
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Fletcher Building Limited 2008 ASM
Chairman and CEO’s Presentation
Chairman’s Address
FLETCHER BUILDING LIMITED
Annual Shareholders’ Meeting 2008
Good morning Ladies and Gentlemen. Welcome to the eighth annual shareholders’ meeting of Fletcher Building Limited.
I advise that a quorum is present and the meeting is duly constituted.
This year, for the first time, the meeting is being webcast via the Internet. I extend a warm welcome to those who are watching proceedings online.
Before commencing the business of the meeting, let me introduce my fellow directors.
Paul Baines has broad experience as a director with a range of business and other organisations, including The Todd Corporation, the Reserve Bank of New Zealand and the New Zealand Institute of Economic Research.
Hugh Fletcher has had a lifelong association with the company. His other directorships include Vector, Insurance Australia Group, Rubicon and the Reserve Bank of New Zealand.
He is also Chancellor of the University of Auckland.
John Judge was appointed to the board during the year. He has considerable experience in Australasian business, and until his retirement last year was the Chief Executive of Ernst &
Young New Zealand. He is Chairman of Te Papa Tongarewa and a member of both the Auckland and Otago University Business School advisory boards.
Jonathan Ling has been Chief Executive Officer and Managing Director since September 2006. He joined the company in 2003, having previously held senior management roles with Pacifica, Visy, Nylex and Laminex.
Geoff McGrath has had extensive experience in the building products industry, including 10 years as Managing Director of GWA International. He is now a non-executive director of GWA, and also chairman of Campbell Brothers.
Sir Dryden Spring is chairman of the ANZ National Bank and a director of several other companies, including Port of Tauranga, Sky City Entertainment Group and Northport. He previously had a long career as a leader in agribusiness, in which he served on the boards of a wide range of industry and government organisations.
Kerrin Vautier is a research economist who specialises in competition law and economics, a part-time senior lecturer at the University of Auckland, and a lay member of the High Court
under the Commerce Act. She is also chair of the Advisory Board of the New Zealand Asia Institute, and adviser to the Partnership Board of Deloitte.
Ralph Waters is our former Managing Director, and became a non-executive director on his retirement in 2006. He is also a director of Fisher & Paykel Appliances Holdings, Fonterra
Co-operative Group and Westpac New Zealand.
On my immediate right is Martin Farrell, our Company Secretary and General Counsel.
As is our custom, I will shortly give you my overview of the company’s performance and the key areas of board focus during the 2008 financial year. Jonathan Ling will then address you
about the operations of the company.
After that, we will take the opportunity for questions and discussion from the floor. I will outline the procedure for that part of the meeting as we reach it.
The formal proceedings this year comprise five resolutions, which are outlined in the notice of meeting. The resolutions will be decided by poll, and any questions from the floor will be
dealt with before they are voted on.
The directors standing for re-election will also speak briefly before the relevant votes are conducted.
Overview remarks
We are meeting today in a period of profound economic and financial upheaval worldwide. We are witnessing great disturbances in global financial markets, and we are seeing this
impact significantly on the economies in which Fletcher Building operates. This year, in addition to discussing the performance of the company for the year ended 30 June 2008, we would like to provide some comment on how we assess current trading conditions across the business and our view of the immediate prospects for the performance of Fletcher Building.
We will try to leave you with a balanced picture of the strengths and strategies of the Group, and the way we are moving forward in what are unusually challenging times.
I will come back to that after a brief review of the past year.
Financial results
As I have indicated in the annual review, Fletcher Building had its ability to continue to achieve earnings growth well and truly tested in the 2008 year. Economic conditions deteriorated sharply in some of our markets, and noticeably in most others. In these
circumstances, we were satisfied with the overall performance of the company in achieving record operating and net earnings excluding unusual items.
Group sales were up from $5.9 billion to $7.1 billion, with most of the rise attributable to the newly-acquired Formica Corporation.
When unusual items are included, the 2008 net profit was down slightly on the previous year, from $484 million to $467 million. As you might recall, the previous year’s result included
unusual items totalling $85 million, of which $80 million was tax related.
When the results are normalised by excluding these unusual items, net profit after tax and minority interests was up from $399 million to $467 million in the latest year. Earnings per
share on that basis were up from 84 cents to 93.2 cents.
The major variance against our expectations for the 2008 year was the performance of Formica, which was profitable at the operating level but well below expectations. As we have reported, Formica’s performance was seriously affected by the downturn in the US housing and residential markets, and by manufacturing reorganisation costs in the US. Much work has been done to address the factors within our control and we have seen production performance improve markedly in the US. Apart from Formica North America, the overall financial performance of Fletcher Building was pleasing, with three of the five divisions
increasing their earnings.
Shareholder returns
The 2008 result represented a 19 percent return on both average equity and average funds employed, which would generally be regarded as a strong performance.
It is a measure of our confidence in the overall positioning and financial strength of the Group that the board declared a final dividend of 24.5 cents per share. This increased the total
dividend for the year from 45 to 48.5 cents per share, representing the 7th consecutive annual increase.
On the other hand, as with most listed companies, shareholders have suffered a substantial reduction in the value of their shares in the market place. For the first time in several years,
the Fletcher Building share price finished the year well below its starting point, and this drove the total shareholder return into negative territory after a long sequence of strong
performances. This is disappointing. However, it is in line with the share price movement of our peer companies operating in Australasia, reflecting the tougher conditions in the building
products sector. All share markets have suffered major declines.
From an internal perspective there is not a significant difference between the Fletcher Building that traded in excess of $13 per share in June last year and the one that is currently
trading at under $6. The principal change is in the external environment. The extreme volatility in global financial markets and the associated negative impact on economic activity
has adversely affected actual and expected demand for building materials, products and services.
Markets and strategy
A company such as Fletcher Building operates in an environment which is the result of both national and international influences.
On the national front, New Zealand had a period of rapid productivity growth from the late 1980’s until the early 2000 period. But of more recent times, a series of problems have
accumulated as a result of - New Zealand becoming gradually less competitive internationally on the taxation front;
- government spending rising rapidly and the previous fiscal surpluses being eroded to the point of elimination;
- debt levels rising too rapidly and inflation re-emerging as a major issue;
- the balance of payments current account deficit remaining obstinately high, indeed at a level which is one of the worst in the western world;
- numerous regulatory initiatives by the Government which while they may have been well meaning, have vastly increased the costs and complexity of doing business within New Zealand, in many cases for little apparent benefit; and
- the result of these problems has been that the New Zealand economy has less adaptability than previously and productivity growth has now sadly ground to a halt.
On the international front, the world credit crisis, of a scale unprecedented in our life times, has resulted in widespread interventions by many governments to prop up their banking
systems and stimulate their economies. The results of these endeavours remain uncertain although it is now apparent that we are in the midst of a worldwide recession. New Zealand
has been inevitably caught up in this turmoil and we now have many financial institution deposits guaranteed by the Government. While this was perhaps inevitable given the actions by the international community and in particular Australia, the distortionary effects are likely to be very severe and take time to play out. We have already seen the extension of the
guarantee to bank wholesale borrowing, much of which is from offshore.
For companies like our own, this leaves major question marks over the role and competitiveness of the previously highly efficient corporate bond market which many companies rely on heavily. Many corporate bonds have risk profiles and interest rates which
sit between those of banks and finance companies but that profile has now been distorted.
These changes also leave much uncertainty around the potential severity of the economic slowdown we are now experiencing.
So how is the Group adapting and adjusting to the environment in which it is now operating? Jonathan will talk about this in more depth. But suffice for me to say that we are very
conscious of the need to be prepared for ongoing demanding times by reducing costs vigorously; constraining capital expenditure; emphasizing the vital importance of cash flow;
and maintaining a conservative balance sheet. With gearing around the 40 percent level and continuing strong cash flows, we retain the financial capacity and flexibility to invest in future
growth but we will be suitably careful in the assessment of these opportunities.
Our strategic base is also sound – with excellent market positions, geographical and segmental diversity, a strong leadership team and a wealth of operating experience among
our 18,500 employees. I have every confidence that, when the economic storm clouds pass, the group will be ready and able to prosper.
Governance and reporting
As indicated in the notice of meeting, two directors retire by rotation this year and are offering themselves for re-election. One director, John Judge, was appointed during the year and
thus offers himself for election at this meeting. These matters will be dealt with under the formal agenda later in the meeting.
As noted in the annual review, it is likely there will be further changes to the board in the near future as we implement our plans to replace directors as they come to the end of their terms
of appointment. We have had a stable and successful board, but we support the view that some change is desirable in the interests of introducing new talent and ideas.
Detailed commentary on our governance regime is available in the annual report and on our website. There has not been any significant change to governance practices during the latest
year.
Employees
I would now like to thank the employees of the Group as a whole. It is through their enthusiasm and professionalism that we have been able to achieve the strong performance of the past year. We are conscious of the ongoing effort that will be required as the company faces the present difficult and uncertain operating conditions. I would like to place on record our warmest appreciation, for the diligence, commitment and performance of all our employees.
We will continue to take an active approach to fostering high levels of performance and employee welfare. The provision of safe working environments and the continued deepening of our talent pool are key priorities.
Outlook
Turning now to the outlook for the current year, it must be acknowledged that no-one can say how economic conditions will develop, or to what extent the worldwide slowdown will have
further impacts on our markets.
Residential housing markets are in recession all over the developed world as we make the adjustment downward from a long boom driven partly by high levels of debt. As an example,
housing consents in New Zealand in the past quarter were running at their lowest level in 25 years. Some of the slack might be taken up by housing alterations and additions, but this
does not seem a strong prospect at a time when credit is tight. Australia has been similarly adversely affected and there is a real prospect of a continuing contraction in housing construction.
Commercial construction activity has also been affected in most of our markets, although not to the same extent yet as the housing sector. In New Zealand, we expect to see some
contraction in the market overall from 2008 levels.
The key drivers in Infrastructure are longer-term in their nature – the need to cater for population growth and replace essential facilities, along with the availability of government
funding. These have been strong in both New Zealand and Australia over recent years.
Forward commitments and ongoing public sector demand suggest that the outlook for this segment of our business remains relatively healthy for the next few years at least.
While our strategy of diversifying risk has been quite successful, the current reality is that just about all markets in the developed world are weak. Analysts who follow the Group are
predicting a tougher trading environment, which is consistent with current conditions and with our own view.
Looking at the prospects for the year on a divisional basis, we expect Building Products and Distribution to report lower operating earnings than last year due to the slowdown in the
residential housing market.
Infrastructure is also expected to report lower earnings, due principally to the NZ$80 million of property related gains which were achieved in the past year, which will not be repeated in
the current year.
In the year to date, the Steel division has been performing strongly, reflecting the more favourable conditions in that market.
In the Laminates and Panels division, we anticipate an improved operational performance by Formica North America being offset by weakness in demand across most regions.
Current analysts’ forecasts for net earnings after tax excluding unusual items for the full year are in the range from $289 million to $354 million. If current trading conditions were to be
maintained throughout the remainder of the year then net earnings for the full year should be within this range. This spread is not unreasonable given the significant level of uncertainty in
New Zealand and Australia and around the world.
It is the Board’s present intention to maintain the dividend at the same cents per share rate as for the past year. However, this will clearly be subject to the financial outturn for the year
as a whole.
Shareholders can be assured that your Board and management are focused on ensuring the company continues to meet the challenges of the current cyclical downturn. Our geographical and portfolio diversification, coupled with a strong balance sheet, should serve us well in the coming year, and leave us well placed to continue to grow our business in the future.
On that note I conclude my comments and thank you for your attendance.
CEO’s Address
FLETCHER BUILDING LIMITED
Annual Shareholders’ Meeting 2008
Thank you Roderick, and good morning ladies and gentlemen.
It has indeed been a busy and challenging time since I stood here last year to report to you. As the chairman has outlined, we have had a strong operating performance, at a time when conditions have been mixed... and more recently we have seen momentous events in the
global economy that will have a significant influence on the environment we operate in over the next few years.
I will talk firstly about the group’s performance in the year under review, and then look at the way we are adapting to the changes going on in our markets. Lastly I will touch on what
Fletcher Building is doing around sustainability.
Results overview
Our strategy of diversifying geographical and segmental exposure served us well again in the latest year.
Conditions in the New Zealand residential market softened throughout the year, while the commercial and infrastructure markets held up well. The group’s Australian markets were
softer overall, reflecting a general slowdown in the second half and ongoing weakness in New South Wales.
The sub-prime mortgage crisis in the United States had a well-documented effect on the US domestic housing market, and this had a marked impact on the newly-acquired Formica
operations. Performance in North America was below our own expectations, exacerbated by the manufacturing issues in our Evendale plant. Formica’s key European markets in the UK
and Spain also softened, but there were better conditions in Central Europe, and the Nordic and Eastern European markets. The Asian markets remained in solid shape overall.
So it would be fair to describe the economic backdrop as a mixed bag... nevertheless, as the Chairman has already mentioned we turned in a record performance in terms of both net profit (excluding unusual items) and operating earnings.
Let me now comment briefly on the performance of each of our five divisions:
Building Products
The Building Products division lifted sales by 6 percent to $739 million, and operating earnings 5 percent to $148 million. That was despite its heavy weighting to residential markets, rising input costs – for example, for steel, aluminium and energy – and a negative impact from exchange rates.
Earnings from Insulation were up by 12 percent, including a full year’s contribution from Forman Insulation. The metal roof tiles business lifted earnings 16 percent despite a rise in steel prices. Both the wallboards and aluminium windows and doors businesses saw declines in earnings driven by the downturn in the residential sector, while the sinkware and access flooring businesses performed well.
Capital investment included the start of construction of the new metal roof tiles plant in Hungary, and the acquisition of the DVS home ventilation business in New Zealand.
Distribution
PlaceMakers is highly correlated with the New Zealand housing market so it was not surprising to see its earnings affected by the residential slowdown, particularly in the second half of the year.
Sales continued to grow, but at a lower rate - 2 percent for the year compared to 11 percent in the previous year. Sales growth was supported by PlaceMakers’ continuing store upgrade programme, but this also increased operating costs. Rising energy and labour costs coupled with margin pressure from heightened competition in the face of the declining market meant that operating earnings fell by 9 percent from $80 million to $73 million.
Infrastructure
Infrastructure increased its earnings for the seventh year in succession – by 14 percent to $308 million – despite a slight reduction in sales due to lower demand for building products in
New Zealand.
Earnings from property-related activities were $80 million compared with $49 million in the previous year.
Lower demand in New Zealand impacted a number of the division’s businesses – cement, aggregates, readymix concrete and masonry all recorded lower earnings due to volumes being down. The residential business had a major decline in earnings due to the drop in house sales.
Pleasingly, the New Zealand pipe business improved its earnings, with market development initiatives in precast concrete products producing a 24 percent growth in volume The construction business continued to grow strongly, lifting operating earnings and finishing the year with a work backlog of $1.3 billion, up from the already healthy level of $775 million at the end of the previous year. Major contracts won in New Zealand included the Mount Eden Prison upgrade, the Eden Park redevelopment, the Manukau Harbour Crossing and the New Lynn Rail Trench.
In Australia, the concrete products and quarry businesses performed well, lifting their combined operating earnings from $47 million to $59 million.
Infrastructure invested $158 million in a wide range of capital projects with a strong emphasis on organic growth, and included land for a new cement port facility in Auckland, new quarry
land, and new and upgraded plant across its businesses.
Laminates & Panels
Results from Laminates & Panels were impacted by the Formica acquisition at the start of the year. The acquisition doubled our revenue to $2.1 billion, while operating earnings from
the division were up by 8 percent overall to $141 million.
The performance of Formica North America was impacted by two key issues. Firstly, US housing starts were 28 percent lower than in the 2007 financial year, and the customary offset from increased refurbishments did not eventuate. The US commercial sector was
reasonably strong in the first half of the year, but fell away in the second half. So there was a big reduction – 9 percent – in Formica’s sales of high-pressure laminates in the US market.
Compounding that, the rationalisation of Formica’s North American manufacturing facilities – in which a plant in California was closed and its volume shifted to a refurbished Ohio plant –
did not go according to plan, resulting in materially greater costs during the period.
These two factors, weak US demand and difficult plant rationalisation, had a significant impact on Formica North America’s profitability.
It is important, though, to recognise that Formica North America is but one of our four high pressure laminate geographies. The other three – Europe, Asia and Australasia – all performed near expectations in the 2008 financial year.
We have made a series of management and other changes including the closure of Formica’s corporate office in the US and the restructure of several business functions, with total savings of about US$10 million per year. I am pleased to report that the Ohio plant is now operating much better and closing in on the benchmarks we have set for that operation.
The European business performed well despite a reduction in volumes in Spain and flat conditions in the United Kingdom. Performance was stronger in the other parts of Europe
where we operate.
The business also performed well in Asia, with volumes in Thailand and Taiwan in line with expectations, and continued strength in China ahead of the Olympics.
Laminex earnings in New Zealand and Australia were down as I have already mentioned.
Sales grew, but the gains were offset by margin pressure and increased costs for manufacturing inputs and distribution.
New Zealand sales were constrained by the impact of one-off events – the closure of the Penrose hard board and soft board facility and the closure of the Taupo plant after the fire in
2006. MDF export volumes from Australia to South East Asia were down due to the rise in value of the Australian dollar against the US dollar.
Both Laminex and Formica have very strong emphases on product development, and this was again the main focus of investment across the division. New product launches included laminates with enhanced wear, structural properties and aesthetic qualities, along with fashionable designs and finishes.
Integration across the Laminex and Formica production base enabled substantial and ongoing efficiencies to be gained. The Formica plant in China took on production of high- pressure laminates previously sourced from Papakura, New Zealand. Just after the end of the year, the Formica product range was relaunched in Australasia.
Steel
The Steel division had a very good year, with sales up by 10 percent to $1.3 billion and operating earnings by 26 percent to $101 million. Results improved significantly in the second half, assisted by steel prices as well as the exit of unprofitable businesses, acquisitions in the Australian rollforming business and one-off gains on the sale of scrap.
The long steel business was affected by record price levels for its key raw material, ferrous scrap – only partly recovered through product price rises, but the Sims Pacific Metals joint
venture lifted its operating earnings by 30 percent due to the high scrap prices.
The rollforming business had a good year in both New Zealand and Australia. New acquisitions Eziform Sheetmetals and Fair Dinkum Homes and Sheds performed well.
Elsewhere earnings were impacted by market competition and restructuring costs. The Steel division invested further to improve production at the Auckland steel plant, and made acquisitions in rollforming in Australia – Garage World and Shed Boss – towards the end of the year.
Current operating climate
That brings me to a close on last year’s operating performance... I want to spend some time now on the ongoing task of positioning the group strategically, and especially on dealing with the changes in the current market environment.
As an international manufacturer and distributor of building materials and products, our businesses compete in markets that are very sensitive to changes in economic conditions.
We operate cyclical businesses, the performance of which will vary depending on where they are in the cycle. That means we must constantly be aware of the group’s competitive positioning, the strategies we are operating to and the way we are executing them.
Geographical and business diversification
In recent years, as you know, we have reshaped our strategic position by broadening the portfolio of businesses, with greater earnings reliability as the goal. This has been a deliberate policy to lessen our exposure to any one business or geography. As a result of the investments we have made over the past seven years, we now have a good balance between residential, commercial and infrastructure end markets, and a much broader geographical balance. This is illustrated by the graph up on the screen that shows that our estimated exposure to the New Zealand residential market, in terms of operating earnings, was just over a quarter at 26 percent, for the 2008 financial year.
Furthermore, you can see in this next graph that in the past financial year almost half – 49 percent – of our revenues came from outside New Zealand. That is up from 40 percent for the 2007 financial year.
Financial strength
The second point I would like to stress is the strength of Fletcher Building’s overall financial position.
As the Chairman has indicated, we have initiated more conservative settings with regard to financial management and investment going forward. We will be maintaining the strength of
our cash position, seeking to reduce working capital and capital expenditure. These are sensible adjustments in a market environment that is relatively volatile, but which no doubt
will improve in time.
Importantly, we have a strong balance sheet with low levels of gearing – at 30 June 2008 our debt to debt plus equity ratio on a book basis was 40 percent – and interest cover for the same year was over 7 times. Furthermore, we have a debt maturity profile that extends out to the year 2020. As you can see from this next graph, our refinancing requirements in the next two years are modest, and we anticipate can be readily met by undrawn bank facilities, which stood at NZ$377 million as at 30 June 2008.
Responding to the current economic situation
So the group’s fundamentals are strong. Fletcher Building is built on strengths and capabilities that have been tested through various economic cycles. Nonetheless, we have been actively pursuing cost savings across the business in response to the changes in volumes we are seeing. We have already undertaken a number of initiatives to ensure our business remain strong through the next challenging period. By way of example:
- We have reduced the number of shifts and staffing levels at plants where there has been a significant reduction in volumes;
- Increased raw material and transportation costs are being reflected in our product prices;
- Capital expenditure projects have been prioritised to ensure that only those with early paybacks and high certainty of returns under the current market conditions are invested in;
- We are aggressively managing our inventory levels across our various businesses;
- Other areas to reduce costs across the business are being pursued.
We have seen the total number of employees reduce since July. This has been achieved for the most part through natural attrition, reductions in temporary and casual staff, and
reductions in overtime worked by permanent staff, but regrettably with some redundancies.
We have also implemented an external hiring freeze, and are focused on filling vacancies that arise from within the Fletcher Building group.
At this point I would like to join with Roderick in thanking all of our people across the Fletcher Building Group for their efforts over the past year, in helping us achieve such a strong
financial result, and for their continued commitment in these difficult times.
Investing for the future
While conditions across the world are demanding at present, we will continue to explore opportunities to invest further to expand our operations and grow our earnings. Indeed, we
expect the next several years to produce some interesting opportunities and we will continue to assess areas of future growth and investment.
Sustainability
We have already commented on financial sustainability, now I’d like to share some thoughts with regard to the physical environment.
Our primary environmental focus is on CO2 emissions, and we have increased our focus on that issue over recent years. There is a range of very strong reasons for that – one being the
ethical requirement to play our part in tackling the issue of climate change, another being the opportunity for product innovation to address market opportunities, another being to improve environmental performance in the context of plant upgrades that also benefit production and efficiency levels, and yet another being the need to adjust for regulatory changes.
In September, the New Zealand Government passed legislation introducing an emissions trading scheme (ETS). However, this may change with the election of the new government.
As presently legislated our businesses will be affected by the scheme from 2010 in three different ways:
- Golden Bay Cement and Pacific Steel will have a legal obligation to acquire and surrender emission units to cover their direct greenhouse gas emissions.
- Because these businesses are exposed to international trade, they will receive an allocation of free emission units to compensate for some of their increased costs.
- Other business units will simply be subject to increased energy costs, some of which they may be able to pass on.
Earlier this year, the Australian Government released a “Green Paper” on its proposed ETS, called the Carbon Pollution Reduction Scheme. This is also proposed to come into effect in 2010, although the proposals have not yet been set out in legislation.
We are well-advanced in our preparations for these regimes. For the last three years, we have reported our company-wide emissions to the Carbon Disclosure Project. For the last two years, these reports have been independently verified. We are also participating in the Australian Energy Efficiency Opportunities programme. We have a clear understanding of our emissions profile, and options for further reductions.
We have recently established a Climate Change and Environmental Sustainability Council. I chair this Council and members include the Divisional Chief Executives and other senior executives. The Council will ensure that we continue to set targets and develop further programmes for emissions reductions, as well as ensuring that we have appropriate strategies in place for purchasing carbon units as required.
These schemes will impose additional costs on our businesses from 2010. However, I am confident that there are opportunities for further emission reductions to be made, that will minimise these costs, and may in fact facilitate new initiatives and innovations within our business.
Let me conclude by reiterating a couple of key points.
First, we are operating in markets that are considerably tougher than they were a year ago, and this has meant that in some parts of our business we have had to size our operations in
response to lower volumes. This is not unexpected given that we are a cyclical business. On the other hand, we do expect that our diversified portfolio of businesses and broad geographical exposure will stand us in good stead as we ride through the bottoming of the current cycle.
Second, we have a strong balance sheet and substantial long-term financing arrangements.
Coupled with our strong cash flow, we are confident that we have the financial resources to be able to invest and grow our businesses. We will continue to look for selected opportunities
to expand, reflecting the confidence we have in the long-term future of our industry.
That concludes my review of the fundamentals of our business and I will now hand you back to the chairman.
Thank you.
Full details can be viewed on the Fletcher Building website at
http://www.fletcherbuilding.co.nz
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