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Fletcher Challenge Building - Company Result

FINANCIAL RESULTS
YEAR ENDED 30 JUNE 2000

Result

 Earnings before interest, tax and unusuals rose strongly to $170 million ($121 million last year) assisted by a robust New Zealand market and the impact of cost reduction and productivity initiatives.
 Woodpanels delivered a much improved result, recording earnings from operations of $11 million compared to a $3 million loss last year.
 Steel operating earnings of $29 million also recovered well compared with $8 million last year.
 New Zealand & Pacific construction and property had a good year, delivering operating earnings of $18 million.
 South American operations disappointed, with results being impacted by a severe economic contraction in the region.
Outlook
 Whilst non-residential building activity remains quite firm in New Zealand, the residential sector is contracting and recovery is unlikely before the end of the calendar year.
 The outlook for product prices including woodpanels, plasterboard and steel, is stable to positive.
 Our Construction business commences the year with an excellent backlog supported by a significant number of new major projects.
 South American operations should deliver improved returns when the Peruvian and Bolivian economies recover from the recent downturn.
Results

Year Ended: Jun 00 Jun 99 Jun 98
Operating Revenue (NZ$ million) 2,380 2,665 3,015
EBIT before unusuals (NZ$ million) 170 121 177
Cash Flow from Operations (NZ$ million) 172 142 203
Net Earnings before unusuals (NZ$ million) 106 72 134
Return on Permanent Capital (%) 16.0 11.0 16.2
Basic EPS before unusuals (cents) 27.5 17.6 37.1
EBIT = Earnings before Interest and Taxation
Return on Permanent Capital = EBIT before unusuals/Net Debt less Deferred Income Tax Benefit plus Equity and Capital Funds at Book Value
Earnings from operations = EBIT before unusual items

Stock Exchange Listings: New Zealand (FLB), Australia (FLCBS), New York (FLB)


Chief Executive’s Review

Financial Results

Fletcher Challenge Building recorded net earnings (excluding $43 million of unusual losses) of $106 million compared to $72 million in the previous year. The result reflected higher earnings from operations ($170 million compared to $121 million in the previous year) offset in part by a higher tax expense ($31 million relative to $16 million in the previous year). Funding costs fell $1 million to $34 million.

Our domestic businesses benefited from strong residential construction activity, particularly in the first half of the financial year, and exports were supported by high levels of building activity in Australia. However, higher demand for most construction products was tempered by ongoing price competition in readymix concrete and concrete pipes and a slower than expected recovery in steel prices. Earnings were enhanced as the benefits of a broad range of performance improvement programmes flowed through to our results. The results of our South American operations reflected depressed market conditions there.

A $43 million unusual loss was reported during the period. An earnings write off of $30 million was recorded (offset by a nearly matching increase in capital) as the Fletcher Challenge Employee Educational Fund was split into four Divisional trust funds and ceased being an accounting subsidiary. As a result of the political and economic disruption in Fiji we have written down the carrying value of our operating assets there by $10 million. A further $3 million of expenditure was incurred in relation to Fletcher Challenge Building’s share of the costs recorded to date in dismantling the Group’s targeted share structure.

In addition, losses of approximately $10 million were recorded in settling a number of long standing claims in our Australian construction operations and exiting our Chinese steel operation. In New Zealand, the sale of Fletcher Aluminium’s Hamilton production facility resulted in a write off of $3 million.

Capital expenditure for the period was $115 million and working capital increased by $39 million due to higher levels of activity. We generated $30 million of cash flow from divestments in the period and a further $60 million of non-core properties are earmarked for sale over the next three years. Net debt rose by $36 million, reflecting in part a reduction in Capital Notes outstanding of $14 million. Subsequent to balance date we received $50 million cash from Fletcher Challenge Paper in consideration for Australian tax losses generated by Fletcher Challenge Building and utilised by Fletcher Challenge Paper.

While Fletcher Challenge Building’s ratio of debt to total capitalisation (debt to debt plus equity and capital funds at book value) rose to 33.4% from 32.4% at 30 June 1999, interest cover excluding unusual items was strong at 5 times compared to 3.5 times last year.

The Division’s return on permanent capital (excluding unusual items) improved from 11% to 16% and earnings per share (excluding unusual items) improved from 17.6 cents to 27.5 cents.


Strategic & Operational Developments

Our focus over the past year has been on completing the restructuring of our international construction operations (the sale of our construction activities in Hawaii and Guam was completed in the period), repositioning several of our domestic businesses to improve their operating performance (for example, the consolidation of Fletcher Aluminium’s operations onto one site at Auckland), and repositioning our South American operations to match resources with what was a contracting market.

We also gave priority to a number of cross-business initiatives such as procurement and IT infrastructure management aimed at reducing costs across Fletcher Challenge Building. These together with good domestic markets and other cost and capital productivity initiatives saw our Return on Permanent Capital improve to 16% from 11% last year.

Going forward we see the potential to further enhance returns through further gains in procurement and logistics, lower working capital utilisation, the release of cash from our non core properties ($60 million), and reducing our stay-in-business capital expenditure. We set ourselves a target of reducing stay-in-business capital expenditure to 60% of Fletcher Challenge Building’s depreciation charge, and substantially met that target in the year to June 2000.

The priorities for the current year are to ensure our South American operations deliver returns commensurate with the nature of the investment and to continue to progress revenue and productivity enhancement strategies in our mature domestic operations. Technological innovation, including the new roller compaction technology introduced in our Humes pipe business, the special performance plasterboards developed at Winstone Wallboards and our new Môde concrete house strategy at Firth, will play a significant part in delivering this outcome.

On a broader front we see several potential opportunities to add value for shareholders as the Australasian building materials industries consolidate and reshape themselves over the next few years. We believe that further consolidation will improve operating efficiencies in a number of product areas through plant, brand and overhead rationalisation. We intend to be an active participant in this process.

Outlook

The trading outlook for the next twelve months is mixed.

Non-residential building activity remains quite firm, supported by a significant number of major infrastructure and commercial projects, increased Government spending, particularly in the hospital sector, and strong growth in the rural and manufacturing export sectors of the economy.

However, the residential sector has clearly turned down and is unlikely to resume a growth trend until later in the fiscal year.

In South America the Peruvian economy is now showing clear signs of recovery, but Bolivia remains depressed. These operations should deliver improved returns as their economies recover from the recent downturn.

Overall we expect earnings for the current year to be underpinned by moderate growth in the non-residential sector of the New Zealand economy, and a recovery in residential building activity in the second half of the fiscal year. The outlook for product prices, including wood based panel products, plasterboard and steel is stable to positive.

Looking forward, our strong market positions in New Zealand coupled with our tight focus on operational performance and commitment to product innovation should enable us to continue delivering attractive returns on capital.

Fletcher Challenge Separation Programme

On 3 April 2000, the first major step in the dismantling of the Group’s targeted share structure took place with the announcement of the agreement to sell Fletcher Challenge Paper to Norske Skogindustrier ASA. The transaction was subsequently approved by shareholders and the sale successfully completed on 28 July 2000.

Good progress is being made on the separation proposals for the three remaining Divisions – Building, Energy and Forests. A full range of options for each Division is being explored, including listings as separate “stand-alone” companies or sale to third parties.

The Board remains committed to delivering the best value outcomes in the separation process, and will keep shareholders informed of progress.

Dividend

Unless the separation process results in a third party sale recommendation, the Directors intend that Fletcher Challenge Building will declare a final dividend of 8 cents per share (record date 29 September 2000). If the dividend is declared and paid it will bring the total dividend for the year to 16 cents per share, representing a 33% increase over the previous year. The dividend will carry full tax credits.
Building Products

Revenues from Building Products were $299 million compared to $262 million last year, an increase of 14%. EBIT increased by $22 million to $54 million from the $32 million earned in the previous year. The improved result was primarily due to stronger residential construction activity throughout New Zealand and better market conditions for wood based panel products in the region, particularly Australia.

Winstone Wallboards benefited from the lift in residential construction activity and posted a strong result with EBIT $11 million higher than last year. Domestic demand for plasterboard was strong with sales volumes 14% higher than the previous corresponding period. Sales of higher margin performance boards grew 17% by volume and represented 35% of total board sales. Export sales volumes were 1.1 million square metres compared to 900,000 square metres last year and a number of operational improvements reduced production costs. Employee productivity continues to climb and our plants are recording world class recovery rates in excess of 96%. A drier upgrade and other initiatives should enhance our operational performance in 2001.

Fletcher Wood Panels recorded an $11 million profit at the EBIT level, an increase of $14 million from the $3 million loss last year. The business benefited from a significant increase in sales volumes of medium density fibreboard and particleboard into Australia and a continuing recovery in regional prices. A stronger residential construction sector in New Zealand, a weakening exchange rate and a $1 million reduction in central office costs also contributed to the earnings recovery.

The installation of a low pressure melamine press in Brisbane in July 2000 will improve Fletcher Wood Panel’s ability to service customers in Australia and free up capacity to meet market requirements in New Zealand. Plans are well advanced for the rejuvenation of some key hardboard/softboard product lines and a number of further product development initiatives are planned for 2001.

Fletcher Aluminium recorded operating EBIT for the year of $3 million, the same as last year. A stronger New Zealand market saw domestic sales volumes recover to 1998 levels. Domestic prices were higher but increased metal prices resulted in margin erosion of approximately $2 million. Prices into export markets were lower as competition remained intense. Some recovery is expected in 2001.

During the second half of the year Fletcher Aluminium’s Hamilton plant was sold and our manufacturing operations were amalgamated in Auckland. The sale will reduce industry extrusion capacity by 10,000 tonnes. This move and a number of product development initiatives resulted in approximately $1 million of extra costs, the benefit of which will be recorded in future periods.

Plyco Doors benefited from earlier plant rationalisations and stronger demand, particularly in the first half of the year, recording a strong result. New products improved Plyco’s sales mix and the business was able to hold average prices in the face of intensifying competition from both imports and local producers.

Building Products Production
Year Ended: Jun 00 Jun 99 Jun 98
Medium Density Fibreboard (000m3) 124 96 108
Particleboard (000m3) 92 71 74
Hard/Softboard (000m3) 25 24 29
Gypsum Board (million m2) 25.5 21.7 22.6
Aluminium Extrusion (000 tonnes) 8.7 8.4 9.3
Wooden Doors (000’s) 330 301 339

Distribution

PlaceMakers delivered a strong performance assisted by good market conditions.

Revenues (100% of all outlets) were 11% higher than the previous year at $616 million and EBIT was $4 million higher. Revenue and margin growth was also assisted by a number of successful product range, pricing and marketing initiatives.

The Building Depot’s revenues increased by 20% primarily due to the opening of a new store in Wellington which is trading well. Despite margin pressure, EBIT was 50% higher due to a number of operational initiatives including better cost control.

Scott Panel and Hardware’s revenues grew by 15% over the previous year, exceeding $100 million for the first time. EBIT increased by 31% compared to last year. Strong building activity and the benefits flowing from Scott’s exclusive brands and services were the prime contributors.

Concrete

New Zealand Operations

Revenues increased by 6% from $344 million to $366 million and EBIT rose to $67 million from the $57 million earned in the previous year. Stronger demand and lower costs drove the improved earnings.

Golden Bay Cement achieved EBIT of $39 million compared to $32 million last year. Higher domestic cement consumption, a recovery in export markets and lower manufacturing costs were the main reasons for the improvement. Sales volumes to export markets increased by 30,000 tonnes to 100,000 tonnes, the highest level on record.

Golden Bay’s prices were stable and manufacturing costs per tonne of production declined as a result of a number of productivity initiatives.

Winstone Aggregates recorded EBIT of $15 million, $2 million less than last year. Higher aggregate sales volumes were achieved as both building and roading markets strengthened but margins were lower as selling prices declined and production costs rose. Winstone Aggregates made good progress towards the commissioning of new quarry capacity in the wider Auckland region, to replace the Lunn Avenue resource as it reaches the end of its useful life. New capacity is about to be commissioned at Hunua and the environmental consents required for a new quarry at Pokeno, south of Auckland, are expected to be issued this year.

Firth's EBIT recovered from $6 million earned last year to $9 million due to a significant reduction in overhead costs. Sales volumes for most product groups were higher but competitive pressures saw readymix prices decline in a number of areas and some operational expenses, including fuel and road user charges, increased. The masonry business made major gains in the segmental retaining wall range with volumes 67% up on 1999 and reduced its manufacturing and distribution costs to record an improved result. Stresscrete recorded a loss despite significant efforts to improve its performance. Further initiatives are in train and we remain confident that the performance of this business unit can be restored to acceptable levels.

Humes’ EBIT increased to $4 million from the $2 million recorded in the previous corresponding period. Further improvements in earnings are anticipated as the benefits of the plant rationalisation undertaken over the past two years are realised and Humes captures the full benefits of its recent investment in new roller compaction technology.

Concrete pipe sales volumes improved by 12% on 1999 but margins remained under intense competitive pressure. Humes grew its presence in the rural reticulation and irrigation markets and continued to expand its involvement in the distribution of plastic pipe. Demand for foundry products was down on last year but tight cost control and an improved operating performance produced a better contribution for the year.

New Zealand Concrete Production
Year Ended: Jun 00 Jun 99 Jun 98
Aggregate (million m3) 4.3 4.1 4.0
Cement (000 tonnes) 595 510 549
Readymix Concrete (000 m3) 828 812 855
Masonry Product (million m2) 1.6 1.6 1.7

International Operations

South America

Our operations in Peru and Bolivia experienced extremely weak market conditions for most of the year resulting in a loss at the EBIT level of $11 million. The construction sectors of both economies contracted sharply as economic growth turned negative in both markets and financial liquidity tightened considerably. In Bolivia we have responded by reducing staffing levels substantially and approximately $1 million of redundancy costs were incurred in the period.

The Peruvian economy is now recovering and our ready-mix, aggregates, bagging and cut and bend operations all had their highest sales volumes on record in June. This trend has continued into the new financial year. In Bolivia the markets have continued to suffer from the impacts of the liquidity squeeze which started to suppress demand in the first half, and no recovery is yet evident.

During the year we acquired the minority interests in our Bolivian operations (all activities in South America are now 100% owned), at a cost of $14 million, commissioned a centrifugal pipe plant, progressed the development of our cement business and recently signed a strategic alliance with a clay brick and ceramic roofing tile manufacturer to jointly distribute each others products.

In Peru the development of our aluminium joinery fabrication facility is progressing, work is ongoing on a programme to supply bagged concrete, and we are evaluating the possibility of introducing chip-seal to the Peruvian roading market. We are currently progressing the acquisition of a new quarry, La Gloria, at a cost of $9 million which is a significant step toward the development of a major presence in the Lima aggregate market.

The immediate priority in South America is to lift earnings to acceptable levels. Further growth in the region will be conditional upon achievement of this goal.

India

In India (Bangalore and Hyderabad) our 50% joint venture with Pioneer (now Hanson) recorded strong growth in readymix sales.

Steel

EBIT before unusual items improved by $21 million to $29 million. The improved result reflected a more buoyant domestic trading environment, the benefit of a range of product development and productivity improvement initiatives and the sale of our Chinese steel business. Steel prices were significantly lower than the previous year but showed some signs of recovery late in the period as international markets strengthened and the New Zealand dollar weakened.

Upstream Operations

At Pacific Steel EBIT was similar to last year as significantly lower steel prices eliminated the positive impact of increased sales and an improved manufacturing performance at both the steel plant and the rolling mill. Sales of rolled product increased by approximately 20,000 tonnes but prices were nearly $150 per tonne lower due to lower regional prices and an unfavourable sales mix. Domestic demand for most products weakened late in the year and production was diverted to lower margin export markets. Pacific Steel significantly improved its manufacturing performance resulting in cash costs per tonne of rolled product $70 below last year.

The rolling mill in Fiji recorded a small operating profit for the year but as a result of the political and economic upheaval in Fiji in recent months we have closed the operation.

The domestic market remained difficult for Pacific Wire & Cyclone and their contribution was similar to last year.

The Sims Pacific Metals joint venture saw scrap prices increase by 23% leading to a 66% increase in earnings at the EBIT level.

Downstream Operations

Dimond Industries' revenue increased 8% and EBIT was $2 million higher than last year due primarily to increased sales of roofing and structural products. Sales of roofing products were 6% higher and, despite margin erosion particularly in the commercial market, Dimond recorded an increased contribution from roofing. Sales of structural products increased by 15% and margins improved as markets were developed for new products. An ongoing focus on product development should enhance returns further.

At Fletcher Easysteel sales increased by 4% resulting in a 13% increase in earnings at the EBIT level. Higher contributions from merchant bar, special steels and plate processing were the main drivers of the improved profitability. A number of marketing promotions were successfully completed including those for the new Easyweld and Easycote product ranges. A second merchandising brand was established with the opening of The Steel Store Cash N Carry business aimed at the do it yourself (DIY) and small business sector of the market. Competitive pressures remain intense but market share and earnings have improved as a consequence of these and other initiatives.

Pacific Coilcoaters recorded EBIT 63% higher than last year. Sales of residential grades into the local market slowed in the second half of the financial year but overall sales volumes were still 17% higher. Stronger residential construction activity and the successful introduction of new premium products were the main reasons for increased earnings. Export sales were 26% higher than last year with good growth in Australia and the Pacific Islands. Margins were particularly strong in the first half but weakened in the second half as the cost of steel coil rose. Sales volumes are likely to be lower in 2001 as the full impact of a softening residential construction market makes itself felt.

CSP Pacific’s revenue and EBIT increased by 12% and 21% respectively over last year. Increased activity by our galvanising operations, higher roading spend, particularly by the forestry industry, and ongoing operational improvements, were the main reasons for the improved level of earnings.

China

In China, the Xinda steel plant (58% owned) in Shanxi Province was sold and we incurred $2 million of costs associated with the exit from this operation.

Steel Activity
Year Ended: Jun 00 Jun 99 Jun 98
Billet (000 tonnes) 175 135 165
Bar (000 tonnes) 68 70 84
Rod (000 tonnes) 83 60 44
Merchandising (000 tonnes) 89 86 86
Roofing (000 tonnes) 21.8 20.6 21.7


Construction Property & Housing

Construction & Property

Revenue of $735 million was down 33% on the previous corresponding period due primarily to the sale of our North Pacific construction operation.

EBIT of $18 million from our NZ & Pacific operations was adversely impacted by an $8 million loss incurred in Australia in settling a number of long-standing claims. The NZ & Pacific operations included earnings from the development and sale of properties of $9 million. During the period we sold Fletcher Pacific as a going concern at book value and this completed our exit from the USA.

Our mainland US operation (now exited) contributed $2 million of EBIT as residual contracts were finalised.

Backlog as at 30 June 2000 was significant at $565 million. The position is especially strong in New Zealand given this figure does not include the Auckland Hospital Acute Services project ($150 million) which is due to commence in November and some $85 million of other projects which have been won since balance date.

Construction Backlog
($NZ million)
As at : Jun 00 Jun 99 Jun 98
Australia 112 188 160
NZ & South Pacific 448 386 573
USA 5 345 343

Housing

Fletcher Residential earned $6 million at the EBIT level compared with $4 million in the previous corresponding period. Strong trading conditions, particularly in the first half of the year, assisted the business in achieving 472 sales compared to 447 sales for the same period last year. Market conditions softened noticeably in the second half of the year but earnings were assisted by land sales. Overhead costs were reduced further during the period.

Details on Fletcher Challenge Building and its operations for the year ended 30 June 2000 can be viewed at the Fletcher Challenge World Wide Web site, at: http://www.fcl.co.nz/building

Information on the financial performance and position of the Fletcher Challenge Group (including the Financial Statements) is contained in the Fletcher Challenge Group Results Announcement.

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