Fletcher Challenge Building Results

RESULTS ANNOUNCEMENT AND OPERATING REVIEW
SIX MONTHS ENDED 31 DECEMBER 2000

Result

„h Earnings before interest, tax and unusuals were $37 million ($81 million in the previous corresponding period).
„h Earnings declined sharply due to weaker residential construction activity in New Zealand, lower product prices, higher transport costs and depressed market conditions in Peru and Bolivia.
„h Despite weaker earnings, free cash flow was positive.

Outlook
„h Recent economic activity indicators suggest that a recovery in the New Zealand economy will not occur before the end of this financial year.
„h The outlook for product prices is reasonably positive.
„h Our Construction business commences the year with a very strong backlog.

Dividend
„h The Directors have declared a fully tax credited interim dividend of 6 cents per share.
Results
Six Months Ended: (NZ$ million) Dec 00 Jun 00 Dec 99
Operating Revenue 1,093 1,105 1275
EBIT before unusuals 37 89 81
Free Cash Flow 3 39 (61)
Net Earnings before unusuals 8 60 46
Net Earnings (41) 17 46
Interest Cover 4.2 7.6 7.4
EBIT = Earnings before Interest and Taxation
Free Cash Flow = Net Cash from Operating Activities and Net Cash from Investing Activities and Sale of Tax Benefits to Fletcher Challenge Paper less Dividends and Distributions Paid to Fletcher Challenge Building Stakeholders.

Stock Exchange Listings: New Zealand (FLB), Australia (FLCBS), New York (FLB)
Interim Chief Executive¡¦s Review

Financial Results

Fletcher Challenge Building recorded net earnings, excluding $49 million of unusual losses after tax, of $8 million compared to $46 million in the previous corresponding period. The result reflected a deterioration in EBIT before unusual losses to $37 million, compared with $81 million in the previous corresponding period, and higher funding costs which increased by $3 million to $19 million. Our tax expense decreased by $16 million to $3 million. The business recorded a net loss including unusual items of $41 million for the period. Free Cash Flow was stronger than the previous corresponding period, mainly because of the $60 million received from Fletcher Challenge Paper for tax losses attributed to Fletcher Challenge Building.

Our businesses suffered from depressed conditions in most markets. In New Zealand, trading conditions were very difficult particularly for those businesses exposed to the residential construction sector where building consents fell approximately 30% compared to the previous corresponding period. In Australia, Peru and Bolivia the economic downturn has been more broadly based with all construction activity particularly weak. Most of our businesses experienced lower demand and, in addition, weaker prices were recorded for aggregates, cement, steel, and residential housing, compared with the previous corresponding period. A number of businesses incurred downsizing and restructuring costs in the period and the construction operations have provided for further costs and losses on long outstanding claims in Australia.

A $56 million unusual loss at the EBIT level was recorded during the period. A provision of $25 million has been established for a dispute in respect of construction co-generation plants in Australia. A write-down of $11 million has been taken with respect to the value of Auckland properties. The restructuring of parts of the concrete business results in a charge of $8 million. A further $12 million of expenditure was incurred in relation to the dismantling of the Group¡¦s targeted share structure.

Free Cash Flow after distributions to Fletcher Challenge Stakeholders, was $3 million up $64 million over the previous corresponding period. Capital expenditure for the period was $58 million including approximately $25 million on expanding our operations. Working capital increased by $5 million compared to an increase of $69 million in the previous corresponding period. Fletcher Challenge Building received $60 million from Fletcher Challenge Paper for tax benefits and $3 million was generated from the divestment of fixed assets.

Fletcher Challenge Building¡¦s ratio of debt to total capitalisation (debt to debt plus equity and capital funds at book value) improved to 31.6% from 33.4% at 30 June 2000. Interest cover (EBITDA/Interest) excluding unusuals was 4.2 times compared to 7.5 times for the year ended 30 June 2000.

The Directors have declared a fully tax credited interim dividend of 6 cents per share compared to 8 cents per share for the previous corresponding period. Fletcher Challenge Building¡¦s dividend policy is to payout 60% of fully taxed earnings but Directors have declared a higher dividend than that calculated strictly in accordance with the policy because earnings and cash flow should improve once the New Zealand economy recovers.

Outlook

Since 30 June 2000 there has been a significant softening in the residential construction markets throughout New Zealand. Although this has been partly offset by an increase in the non-residential construction markets, the overall impact is negative. Most forecasters are predicting that the current depressed residential activity levels will continue at least through the remainder of this financial year.

While the decline in the NZ dollar has provided a catalyst for export-oriented industries, the domestic economy remains relatively flat. Fletcher Challenge Building considers the key to a sustained uplift in the domestic economy is the continued flow through of export earnings into the domestic sector and, more importantly, a lift in business and consumer confidence.

In Australia, activity in the construction sector (both residential and commercial) has softened. This is expected to lead to more competitive pricing pressure for Fletcher Challenge Building¡¦s businesses exporting into this market and possibly more competition for our businesses in New Zealand.

With respect to Fletcher Challenge Building¡¦s South American operations, the business activity level in Peru is expected to improve, assuming a continued stabilisation of the political situation. In Bolivia the economic conditions have deteriorated significantly during the calendar year 2000 and the short-term outlook is uncertain.

As previously announced Fletcher Challenge Building is currently conducting a full strategic review of its operations. As part of this process it is highly likely that there will be a realignment of Fletcher Challenge Building¡¦s existing portfolio of businesses. Management expect to make an announcement by late April regarding the outcome of the strategic review.

Fletcher Challenge Separation Programme

In December 1999, the Board of Fletcher Challenge Limited announced a decision to dismantle the Group's targeted share structure for its four Divisions: Building, Energy, Forests, and Paper. In April 2000, the Board announced that it had reached agreement to sell Fletcher Challenge Paper to Norske Skog, a global publication paper producer based in Norway. The Transaction was approved by shareholders in July 2000 and the sale concluded on 28 July 2000.

In October 2000, separation recommendations were announced for the remaining Divisions: Building, Energy and Forests. The recommendations are:

„h Fletcher Challenge Building will become a stand-alone company called Fletcher Building Limited;

„h Fletcher Challenge Forests will remain as the only Division of Fletcher Challenge Limited and Fletcher Challenge will be renamed Fletcher Challenge Forests Limited;

„h Fletcher Challenge Energy will be sold to Shell and Apache Corporation; and

„h The creation of a new company, Rubicon Limited.

Separation documentation relating to the recommendations was mailed to shareholders in mid February 2001, following submission to the regulatory authorities and receipt of the Initial Court Orders. These recommendations will be voted on at a Special Meeting of Shareholders on 6 March 2001. If the recommendations are approved, the Effective Date is expected to be 23 March 2001. Detailed information on the recommendations is published on the Fletcher Challenge Limited web site on www.fcl.co.nz (Separation Update page).

Building Products

Revenues from Building Products were $148 million compared to $155 million in the previous corresponding period and EBIT fell to $25 million from $30 million. These falls were primarily due to the softening in residential construction activity throughout New Zealand and Australia and increased costs flowing from a weaker currency.

Winstone Wallboards recorded an EBIT $4 million lower than the same period last year. Domestic demand for plasterboard declined by 13% due to softening residential construction activity. Winstone Wallboards market share increased as the weaker currency reduced the volume of imports and the penetration of performance board improved to 39% from 35%. Product prices were higher following increases in November 1999 and 2000. The cost of imported raw material increased because of the weak New Zealand dollar. Marketing and overhead costs were similar to the same period last year.

Fletcher Wood Panels recorded EBIT of $4 million, $1 million less than the previous corresponding period. Sales volumes were lower as demand from both the New Zealand and Australian markets deteriorated with residential construction activity. The business benefited from higher prices for most products and a number of product development initiatives. Resin and shipping costs increased with the weaker currency while overhead costs were similar to the previous corresponding period.

Fletcher Aluminium¡¦s trading earnings for the period were breakeven at the EBIT level, $3 million lower than the same period last year. The business experienced a significant downturn in the NZ market with sales volumes to NZ franchisees 22% below the same period last year. Sales to other customers also experienced a downturn with volumes down 12%. Internationally, the Australian market was weaker while exports to other destinations were at a similar level to last year. Prices were higher but increased metal prices could not be fully passed on to customers. Overhead costs increased by approximately $1 million with the acquisition of the Australian fabrication business and the roll-out of the new window and door suite of products.

Plyco Doors experienced weaker market conditions and intensifying competition. Volumes declined by 10% and average prices were down 4% despite product mix improvements. Margins were also adversely affected by increased raw material costs.

Building Products Production
Six Months Ended: Dec 00 Jun 00 Dec 99
Medium Density Fibreboard (000m3) 61 55 69
Particleboard (000m3) 50 49 43
Hard/Softboard (000m3) 11 12 13
Gypsum Board (million m2) 12.5 11.3 14.2
Aluminium Extrusion (000 tonnes) 3.8 3.6 5.1
Wooden Doors (000¡¦s) 168 145 185

Concrete

New Zealand Operations

Revenues at $177 million were the same as last year while EBIT, excluding unusuals, fell to $16 million from $30 million in the previous corresponding period. The weaker result was primarily due to softer levels of demand for aggregates and concrete pipes, price erosion in aggregates, increased costs associated with the change in quarry mix in the Auckland market, higher distribution costs and redundancies.

Golden Bay¡¦s contribution of $17 million EBIT was $1 million lower than the previous corresponding period. Domestic cement sales for the period were 3% higher than the previous corresponding period. Sales volumes into export markets were 55,000 tonnes compared to 50,000 tonnes. Domestic prices were 1% lower while prices in export markets were 16% higher. Cash costs of production were higher due to lower kiln run times. Shipping and distribution costs were higher due to the impact of higher fuel costs. The business benefited from ongoing cost reduction initiatives reducing overheads by $1 million.

Winstone Aggregates recorded a breakeven result at the EBIT level before unusual items, $7 million lower than the previous corresponding period. Softer markets, particularly Auckland, the runout of the Lunn Avenue quarry and higher distribution costs were the main contributors. Sales volumes declined by 6% and the average selling price per tonne of product fell 9% compared to the same period last year. Production and distribution costs increased as volumes from Lunn Avenue declined and the cost of fuel increased. Winstone Aggregates is planning to cease production at the Lunn Avenue quarry by the end of 2001 when we will see a corresponding lift of production in the Hunua and Pukekawa quarries. The Pokeno quarry consents are now before the Environment Court and a hearing and decision is expected before the end of the year.

Firth contributed $2 million EBIT before unusual items compared to $4 million in the previous corresponding period. Sales volumes and prices were slightly higher for most product groups. Operational expenses, particularly transport costs, road user charges and environmental compliance costs were higher than the previous corresponding period. In addition Firth spent approximately $2 million more on restoration work, restructuring costs and market development. Stresscrete recorded another disappointing result losing $2 million at the EBIT level, before unusual items, during the period. A restructuring plan has been put in place which should improve the operating performance of this business.

Humes recorded a $1 million loss at the EBIT level following a contraction in the drainage and watermain market. Concrete pipe sales revenue declined by 13% compared with the same period last year. Margins remain under intense competitive pressure and higher distribution costs were also incurred. Manufacturing costs per tonne rose due to lower production levels. The roller compaction pipe plant was commissioned to full range with all North Island Councils accepting this pipe. During the period a small plastic pipe manufacturing business was acquired.

New Zealand Concrete Activity
Six Months Ended: Dec 00 Jun 00 Dec 99
Aggregate (million m3) 1.9 2.3 2.0
Cement (000 tonnes) 295 293 302
Readymix Concrete (000m3) 412 417 411
Masonry Product (000m2) 829 783 835

International Operations

Market conditions in Peru and Bolivia were very weak and the business recorded a loss at the EBIT level of $8 million compared to a $4 million loss in the previous corresponding period.

In Peru the economic slowdown dramatically reduced concrete volumes which were 28% below the same period last year while prices were similar. Cost reduction programmes saw costs per unit held at last year¡¦s levels. Sales volumes of aggregates increased by nearly 80% with the acquisition of additional resource. Pre-stress and masonry products continued to gain market acceptance with sales volumes increasing 226% and 93% despite very depressed market conditions. The steel cut and bend and aluminium distribution operations have not been successful and were closed at a cost of approximately $1 million during the period.

During the six month period we invested a further $10 million expanding our Peruvian aggregate operations, purchasing equipment and a 10 year right to operate the La Gloria quarry in Lima. We also completed the required consents for quarries in the North and South of Lima. The process is now in place to bring these quarries into production.

The Bolivian operations underwent significant restructuring during the period in the face of a very weak economic environment. Staff numbers were reduced by over 200 and further restructuring is planned. The economic downturn was accompanied by a credit squeeze that affected the construction industry. The civil unrest in September and October delayed any recovery. Ready mix and concrete product volumes were down nearly 50% on the previous corresponding period.

In India (Bangalore and Hyderabad) our 50% joint venture continued to experience a growing market for readymix concrete.

Steel

Revenue increased by $20 million to $224 million due to increased sales into export markets. EBIT fell $9 million to $7 million due to the decline in domestic activity, lower steel prices and higher US dollar input costs. Recent price increases should improve performance in the second half of the financial year.

At Pacific Steel lower steel prices and higher raw material costs resulted in a loss at the EBIT level of $5 million for the period. Domestic sales volumes of rolled product fell by 4% to 61,000 tonnes and selling prices were nearly $50 per tonne lower than the same period last year. Export sales of 29,000 tonnes were achieved compared to 8,000 tonnes in the previous corresponding period but again at lower prices. Scrap prices and the cost of additives increased by approximately $50 per tonne but conversion costs per tonne of product were slightly lower than last year.

The domestic market improved throughout the period for Pacific Wire and Cyclone as the rural sector benefited from better market conditions. However costs increased as the currency weakened and the business lost $2 million at the EBIT level for the period.

The Sims Pacific Metal Industries joint venture recorded similar sales volumes at higher prices which resulted in EBIT 53% higher than the previous corresponding period. The dividend from Sims was $6 million compared to $4 million for the same period last year.

Dimond Industries' revenue and EBIT were similar to the previous corresponding period. Sales volumes were 6% higher but prices were lower due to competitive pressures in the weaker residential construction market. Price increases of 6% were implemented in early calendar year 2001. Margins increased due to an improved sales mix. Overheads were $1 million higher due to the restructuring of the roofing business.

At Fletcher Easysteel revenue was 3% lower due to softer market conditions but EBIT was $1 million higher than the same period last year. The business benefited from earlier margin management initiatives to record a higher contribution on lower sales. Overheads were similar to last year.

Pacific Coilcoater¡¦s EBIT at $4 million was $2 million lower than the previous corresponding period. Sales volumes into the local market were 5% higher while sales into export markets were 4% lower than the previous corresponding period. Prices were approximately 2% higher but the cost of coil increased by 11%. Margins may improve in the second half of the financial year as the impact of a recently announced price increase and a possibly stronger NZ currency (potentially lower steel coil costs) are recorded. Overhead costs were similar to the same period last year.

CSP¡¦s revenue and EBIT declined slightly as a softer market reduced sales and the impacts of higher imported costs also reduced earnings.

Steel Activity
Six Months Ended: Dec 00 Jun 00 Dec 99
Billet (000 tonnes) 97 85 90
Bar (000 tonnes) 37 31 37
Rod (000 tonnes) 51 49 34
Merchandising (000 tonnes) 42 44 45

Construction, Property & Housing

Construction & Property

Revenue of $288 million was down 36% on the previous corresponding period. The business recorded $5 million earnings at the EBIT level from ongoing operations. However two long outstanding disputes in Australia continue as a drag on earnings with $33 million of losses recorded during the period. In addition the business incurred $3 million of restructuring costs as it commenced the downsizing of its property operations and provided $11 million for the write-down in value of property.

The New Zealand construction operations recorded a profit of $3 million at the EBIT level despite continued difficult conditions on the Manapouri project. A dispute with the client relating to ground conditions is due to be heard by a Disputes Review Board in the first half of the year. The tunnel itself is expected to hole through in late March this year.

In the South Pacific market conditions remained subdued. While turnover in Fiji has fallen significantly this has been compensated for by a higher degree of building activity in Papua New Guinea.

The ongoing commercial building operations in Australia earned $2 million at the EBIT level.

Backlog as at 31 December was very strong at $917 million and should ensure that the business is well placed for the balance of the calendar year.

Housing

Fletcher Residential experienced very soft trading conditions and recorded an EBIT of $1 million, down $3 million on the same period last year. House sales for the period were 223 compared to 249 in the previous corresponding period and selling prices were lower as the business met the market. Overhead costs were 9% lower than last year. The usual spring uplift in activity failed to materialise and it seems unlikely that market conditions will improve significantly before the start of the new financial year.

Distribution

Overall market conditions for the Distribution operations were more difficult resulting in sales (100% of all outlets) approximately 5% and EBIT,at $4 million, $2 million lower than the same period last year. Margins declined as higher fuel costs and the lower exchange rate increased the cost of imported product. Some price increases were implemented late in the period. Branch operating costs were similar as service levels needed to be maintained in a weaker and more competitive trading environment. Despite these difficult market conditions Scott Panel and Hardware¡¦s revenue and EBIT grew by 3% and 8% respectively compared to the previous corresponding period last year. The company¡¦s brand development and sales management growth initiatives were the prime reasons. PlaceMakers and the Building Depot continued their product range, pricing and marketing initiatives;however a number of company owned branches are not performing and are subject to review with one closure completed late in January 2001.

Details on Fletcher Challenge Building and its operations for the six months ended 31 December 2000 can be viewed at the Fletcher Building World Wide Web site, at: http://www.FletcherBuilding.com

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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