Fletcher Building makes after-tax loss of $120 million for the half year and won't pay a dividend; puts Australian Tradelink subsidiary up for sale after a $122 million writedown; warns on potential 'material' impact of Australian leaky pipes problem

Ailing construction giant Fletcher Building [FBU] has announced that both its chairman Bruce Hassall and chief executive Ross Taylor are quitting.

This comes as the company has reported an after-tax loss for the first half of the financial year of $120 million, decided to not pay a dividend, and again denied culpability for a leaky pipes problem in West Australia - but on which it has nevertheless made a warning comment about the potential "material" impact this could have on Fletcher.

The shares in Fletcher Building, which were put into a trading halt on Monday, recommenced trading at 12.30pm on Wednesday and were, a short time afterwards, changing hands for $3.49, down 67c, or 16.1%, on the Monday closing price.

Fletcher told the NZX that Taylor has a six-month notice period and will serve this in full "if required". Hassall will stand down at the company's annual meeting in October and hand over to a yet to be appointed new chair at that point.

Former ASB chief executive Barbara Chapman, who is a Fletcher non-executive director, will lead the search process for a new CEO, which the company says will be an "international and domestic" search.

Fletcher had previously advised of $180 million of provisions in this result, including a further $165 million on the troubled NZ International Convention Centre in Auckland, bringing the number of provisions on that project to $420 million over the past year.

However, the $122 million provision that Fletcher has now made for the Australian Tradelink plumbing business had not previously been disclosed. Tradelink has now been put up for sale.

Much of the presentation material accompanying the result announcement concentrates on the issue Fletcher's Iplex Australia subsidiary is having in relation to leaky pipes in West Australia.

Fletcher has to date strongly denied culpability for the problem, blaming it on poor installation.

However, in a detailed note on the subject in the half-year report, Fletcher makes this key comment:

"Ultimately, if Iplex® Australia is ordered to compulsorily recall the product or it is found or agrees to bear full or part responsibility for this issue, the cost to it in performing the order or rectifying homes with Pro-fit installed, as well as to meet any damages claims, fines and other costs, could have a significantly material impact on the Group’s financial position. Disclosure of any possible impact would be materially prejudicial to the Group’s commercial interests."

This is the board and management change announcement:

Fletcher Building Ltd (“Fletcher Building” or “the Company”) today announces that Group Chief Executive Officer (CEO) Ross Taylor has given notice to the Board of his retirement and that as part of a Board renewal review being undertaken, Chairman Bruce Hassall will step down from the Board at the Company’s Annual Shareholders Meeting later this year.

An international and domestic search for a new Group CEO will be progressed, leveraging the Company’s succession plan. The search process will be led by Non-Executive Director Barbara Chapman who Chairs the Company’s People and Remuneration Committee.

Mr Taylor has a six-month notice period, which he will serve in full if required, to facilitate an orderly handover to his successor.

Fletcher Building Chairman Mr Bruce Hassall said, “The Board, Ross and I believe it is in the best interests of the business and the team that he handover to a new leader and that I hand over to a new Chair at the time of the ASM in October.”

The Board thanks Bruce and Ross for their leadership and contribution since 2017. During this period, they have led the turnaround of Fletcher Building which has seen the core businesses becoming more focused and profitable, with improved earnings, margins and returns. The Company has a growth strategy in place and is focussed on progressing the close out of construction legacy projects and developing an industry solution for the Perth plumbing issue.

Mr Taylor said, “Fletcher Building is a great business, and it has been an honour and pleasure to have the opportunity to work with such a committed team of people. I remain committed to the business and facilitating a smooth and orderly transition to my successor who will be able to focus on leading the organisation through the next strategy cycle and beyond.”

This is the result announcement from Fletcher:

• Revenue of $4,248 million, down 1% from $4,284 million in HY23
• EBIT before significant items of $264 million, down 27% from $360 million in HY23
• EBIT margin of 6.2%, down from 8.4% in HY23
• Net Loss After Tax of $120 million (incl. $180 million flagged legacy provisions and $122 million non-cash write-down on Tradelink) compared to Net Profit After Tax of $92 million in HY23
• Underlying trading cash flows robust on good working capital management offset by legacy cash impact

Fletcher Building chief executive Ross Taylor said: “Against the backdrop of materially weaker trading conditions, particularly in the NZ residential sector where volumes declined 20%, Group revenue of $4,248 million was in line with the prior period’s $4,284 million. EBIT before significant items was $264 million, compared to $360 million in the prior period. The Group reported a net loss after tax of $120 million, compared to a profit of $92 million in the prior period. Disappointingly, the result was heavily impacted by the $165 million significant items provision on the New Zealand International Convention Centre announced on 5 February and a $122 million non-cash impairment and write-down on the Tradelink Australia business.”

In New Zealand, revenue for the materials and distribution divisions (Building Products, Concrete and Distribution) was 8% lower than HY23. However, this compares to overall market volumes which were 15% lower compared to HY23. The market decline was driven primarily by the residential sector, which weakened by around 20%, to which these divisions have a 60% exposure.

Mr. Taylor said: “In a more challenging trading environment, the New Zealand materials and distribution divisions performed solidly. Gross margins remained robust at 29.3% (HY23: 30.3%), with the reduction versus HY23 primarily due to a shift in revenue mix towards the lower-margin commercial and infrastructure sectors. The divisions proactively managed price and costs to help offset increased competitive intensity and ongoing inflationary pressure.

“For our Residential and Development division, the house sales market was a relative bright spot in New Zealand, with improved buyer activity, especially first-home buyers, and a stabilising of house prices after 18 months of decline. Fletcher Residential increased EBIT to $41 million (HY23: $33 million), with 419 units taken to profit compared to 189 in HY23.

“A particular highlight of the half was the performance of the Australian division which delivered EBIT and EBIT margin broadly in line with HY23 despite a softer market. Effective price disciplines and a shift toward higher-margin products saw the gross margin lift to 33.1% (HY23: 31.9%) and overhead costs were 3% lower than the prior period.

“A full review of the Australian Tradelink® business over the half year combined with disappointing results led to a $122 million non-cash impairment and write-down in its carrying value. We have concluded that whilst we believe there is a compelling opportunity for Tradelink, further ownership of the business is not in line with the strategic objectives of Fletcher Building. Consequently, we intend to commence a divestment process for Tradelink shortly.

“Cash flows from operating activities for the Group were an outflow of $126 million, compared to an outflow of $203 million in the prior period. The materials and distribution divisions produced strong first half trading cash flows of $253 million compared to $206 million in HY23, driven by good working capital management and despite the lower earnings.

“Regarding the ongoing Perth plumbing issues, our testing and expert reports on causation continue to show that that the leaks are caused by installation failures and that there is no manufacturing defect. We remain committed to developing a workable and appropriate industry solution.

“Given the current market conditions, the expected legacy cash outflows and in line with the Company’s dividend policy, the Board has made the prudent decision to not declare and pay an interim dividend in order to maintain our balance sheet settings.

“As we look ahead to the remainder of the year, we expect FY24 Group EBIT before significant items to be in a range of $540 million to $640 million, with the mid-point assuming a continuation of current market conditions for the balance of FY24.”

“Finally, I would again like to express my appreciation to our dedicated team for their hard work and commitment, to our customers for their trust and loyalty, and to our shareholders for their ongoing support.”

This is the company's results presentation.

This is the company's half-year financial report.