UPDATE: Fletcher shares gain on five-year strategy

UPDATE: Fletcher shares gain on five-year strategy to chase sales, margin growth

(Recasts to reflect company briefing, share price and investor comment)

By Jonathan Underhill

June 21 (BusinessDesk) - Fletcher Building stock rose after chief executive Ross Taylor set out his five-year strategy to refocus on core businesses, stabilise the construction division, expand in Australia and exit non-core operations.

The shares rose 2.1 percent to $6.74. They have underperformed the S&P/NZX 50 Index in the past five years, falling 15 percent while the benchmark index climbed 102 percent.

Taylor today set out his plans to restructure the business into seven new divisions, from five currently, effective July 1, including a stand-alone unit in Australia which could grow over the next five years to equal or exceed the size of Fletcher's New Zealand operations. He named Dean Fradgley, currently head of distribution, as CEO for Australia

The company will include restructuring charges of $85 million to $95 million in its result for the year ending June 30 as it moves to a decentralised operating model and will also write down the value of its Rocla and Roof Tile businesses. Taylor expects to slash $30 million from annual overheads through the changes, which will see about 90 jobs eliminated, a process that started three months ago. At an operating level, Fletcher's 2018 forecasts were unchanged. Group earnings before interest and tax, excluding B+I and significant items, was reiterated at $680 million to $720 million and the B+I ebit loss was affirmed at $660 million.

"A pared down and simplified company will allow management to focus on running Fletcher Building’s market-leading businesses to their full potential, something that eluded previous management," said Josh Wilson, a portfolio manager at NZ Funds, which holds Fletcher stock. "This offers the potential for meaningful earnings upside."

Wilson said Fletcher stock is valued about 25 percent below its Australian peers "reflecting the turmoil at the company over the last year. With no further construction losses announced and a sensible strategy finally in place, we expect the market to take heart and this gap to close. Taylor has put the expected strategy in place, now the challenge is to execute on it."

Taylor's strategic review leaves Fletcher's executive team virtually intact although in new roles. Placemakers general manager Bruce McEwen will become CEO of Distribution New Zealand which includes the Mico chain. GBC Winstone manager Ian Jones is promoted to CEO of Concrete, which includes Golden Bay Cement, Winstone Aggregates and Firth, and Hamish McBeath, now manager of Fletcher Steel, becomes CEO of Steel.

Other roles remain intact. Michele Kernahan continues as CEO of construction, Steve Evans as chief of Residential and David Thomas as interim CEO of Building Products. The only departure is Francisco Irazusta, who was head of International, which is being disestablished with the planned sale of its Formica and Roof Tile businesses. Macquarie Group has been hired to advise on the Formica sale.

Irazusta had been acting chief executive of the company after former boss Mark Adamson was sacked last year. In February, chair Ralph Norris announced his departure in the wake of further losses at the company's Building + Interiors unit. The company said it would announce further changes to its board tomorrow. Its 2018 results will be released on Aug. 22.

"The move to decentralised operations and executive responsibility by product category reverses the changes of the previous CEO, which never delivered on their promise," NZ Funds' Wilson said.

Taylor said today that the new operating model would "empower businesses at the front line and deploy a new divisional structure that will align businesses to the new strategy."

He said given the relative size of the Australian economy there were likely to be more opportunities to grow in that market and replicate some of its New Zealand operations. "You've got to say that's on the agenda. We're going to get Australia to perform and grow."

Currently, Fletcher gets about 30 percent of revenue in Australia, based on its first half accounts. It plans to double Australian ebit by 2023, having posted earnings across the Tasman of $119 million in 2017.

"The substantive improvement is expected from modernising manufacturing capabilities, optimising the property and fleet network and driving overhead improvements," Fletcher said in a presentation to investors and analysts. Another slide was titled: "Lifting margins and returns in Australia will be key to driving group performance" and showed that Australia is forecast to generate an ebit margin of 4 percent in 2018, weaker than other businesses, while return on funds employed at 7 percent is less than a third of the ROFE on NZ building products and distribution. It is aiming to lift its ebit margin in Australia to about 7 percent in 2023.

The five-year strategy allocates 30-35 percent of group capital expenditure to Australia, behind NZ building products and distribution at 45-50 percent.

Taylor said the company doesn't intend to go on an acquisition spree again even though today's presentation to investors says Fletcher will "pursue new adjacencies" and identifies 12 sectors in New Zealand and 18 in Australia where it has little or no presence, including paint, glass, electrical and floor coverings.

"There are opportunities out there and what's not to say we will take them," he said. "With successful implementation of the strategy we aim to deliver above-market revenue growth and improved operating margins over the medium term."

In terms of timing, he said, the focus for 2019 will be in stabilising and turning around existing businesses while shedding Formica and Roof Tile Group. "By FY20 we should be well positioned to deliver solid performance across the portfolio, and from FY21 onwards we want to be achieving strong revenue and earnings growth year on year."

Under Taylor, Fletcher has moved to strengthen its balance sheet with a $1.25 billion refinancing plan including a deeply discounted offer to shareholders to raise $750 million and renegotiated lending terms.

(BusinessDesk)

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