Chief executive's review

Group results

Operating earnings (that is, earnings before interest and tax) were $703 million, including $5 million of unusual gains, compared to $675 million in the 2006 year. This 4 percent increase reflected the benefits of acquisitions, ongoing productivity improvements and the unusual gains, offset by the more difficult market environment.

This increase in operating earnings, in a softer trading environment, provided further validation of the group’s strategy to build earnings reliability. The balance of exposures between different geographical regions and market sectors has served us well. All our divisions have performed well in the market conditions applying to them. At the same time we have been successful in further implementing our strategic objective to increase the earnings diversity of the company and provide a wider range of growth options, manifested through the acquisition of Formica Corporation.

The $5 million unusual gain includes the $14 million net benefit of the insurance claims for damage to the Taupo medium density fibreboard plant and the Pacific Steel plant, as advised in May 2007. Offsetting this gain were the write-down of the investment in the Penrose hardboard mill, as the costs of meeting environmental compliance rendered the plant non-viable, and the write-down of the value of Australasian high pressure laminate assets following the Formica Corporation acquisition.

Divisional results reflected the mixed operating environment, with earnings increases in Infrastructure, Distribution and Laminates & Panels more than offsetting decreases in Building Products and Steel.

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Infrastructure lifted operating earnings from $255 million to $271 million, with all key businesses improving earnings, despite a small fall in cement volumes and very weak market conditions in New South Wales. Distribution’s operating earnings increased from $75 million to $80 million despite a very significant increase in retail competition. Laminates & Panels increased from $116 million to $131 million, with margin pressure in the Australian business offset by expense control, and improved earnings in New Zealand despite the closure of the Taupo medium density fibreboard plant following the fire.

Building Products’ operating earnings declined slightly to $141 million with key factors being flat conditions in residential new-build segments in New Zealand and lower activity on the east coast of Australia. Steel’s operating earnings declined $13 million to $80 million, with an unprecedented increase in raw material costs. Both divisions were affected by the high level of the New Zealand dollar, limiting export earnings and the scope for domestic price increases.

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The group is in a sound financial position, with excellent operating cashflow and gearing within the policy guideline. Gearing was 22.2 percent at balance date and 41.1 percent after settlement of the purchase of Formica Corporation, supplemented by a $321 million equity raising. Interest cover improved from 9.3 to 9.8 times over the course of the year and is expected to reduce to around 7.0 times after the acquisition of Formica Corporation.

Left to right:

Back:
Chris Ellis,
Bill Roest,
Mark Binns,
Peter Merry

Middle:
Paul Zuckerman,
David Edwards,
Frank Riddick

Front:
Martin Farrell,
Jonathan Ling,
David Worley

New management team

There has been significant change in the senior management team, creating opportunities for divisional chief executives to broaden their experience and for other executives to move up to divisional roles.

My former role as Chief Executive, Laminates & Panels was filled by David Worley, who had previously headed the Distribution division. David Edwards, formerly a senior executive in Laminates & Panels, was appointed to the Distribution role. The resignation of the Chief Executive, Building Products resulted in the appointment of Chris Ellis, formerly General Manager of Winstone Aggregates, to that position.

The Steel division created through the split from Building Products is headed by Paul Zuckerman, who was recruited from BlueScope Steel, where he was responsible for operations in China. The Infrastructure division and the newly acquired Formica Corporation continue to be headed by Mark Binns and Frank Riddick, in roles they have performed with distinction for six and five years respectively. The senior management team is rounded out by Martin Farrell, Peter Merry and Bill Roest in the senior functional roles they have each performed for several years.

The team includes a strong mix of management and functional talent with a blend of long-standing and recently-introduced experience. The Formica Corporation acquisition and the recruitment of Paul Zuckerman have also increased the breadth of experience of the team. We have strong experience in every operating arena, a mix of nationalities, and a number of executives who have carried out leadership roles in more than one geographical market. This is a strong basis for continued learning, improvement and development.

Formica Corporation’s North American corporate office. This is also the location of the main North American HPL plant.

Acquisition of Formica Corporation

The Formica Corporation acquisition is a major advance in the group’s development, increasing our international profile and serving our strategic objectives at a number of levels. It increases the size of Fletcher Building, adding approximately $1 billion of sales, or about 17 percent on the existing base. With this acquisition, Fletcher Building has become the largest listed building materials company based in Australia and New Zealand.

Formica Corporation is a recognised leader in innovation in high pressure laminate products, through continuous development of new colours, designs, textures, materials and concepts. Like Laminex, it offers a wide variety of visual effects, retaining the high performance and durability characteristic of laminate products.

Formica Corporation meets all the criteria Fletcher Building employs to assess potential acquisitions – being complementary to existing operations, holding leading market positions and recognised brands, operating within a favourable industry structure, having strong management in place and creating a positive financial impact on the group.

We expect the Formica Corporation acquisition to have an immediate positive financial impact, increasing normalised earnings per share from the current year. Perhaps most importantly, Formica Corporation presents further opportunity for growth and development based on the juxtaposition with our existing laminates and panels business – for example:

  • It is a logical extension to our existing business, with the opportunity to establish a truly global laminates platform. Formica Corporation’s high quality Asian manufacturing facilities will enable us to achieve global lowest cost competitiveness in Australasia, and its distribution network provides a strong platform to distribute Laminex products into Asian growth markets.
  • The complementary nature of Formica Corporation's product offering and manufacturing capabilities will enable significant synergies to be achieved, expected to be approximately $13 million in the current financial year and $24 million in 2009.
  • Formica Corporation has a series of earnings enhancement projects in North America, including the consolidation of manufacturing sites for high pressure laminates and other supply chain optimising initiatives scheduled to be completed by June 2008.
  • While markets for high pressure laminates are generally mature, growth opportunities exist in Formica Corporation's Asian and Eastern European businesses, where increased demand is expected.

Formica Corporation’s strong track record of success in change projects, along with Fletcher Building’s experience, underpins our confidence that the expected earnings improvement will be achieved. We are delighted that the key members of Formica Corporation’s management team have committed to stay with the company under Fletcher Building’s ownership and contribute to the next phase in Formica Corporation's development.

Strategic agenda

The company continues to focus on earnings reliability as an important factor in generating good shareholder returns. Key factors include the balance of exposures to different market sectors and geographical regions. In respect of the former, it is close to the desired balance of an even split in revenue between the residential, commercial and infrastructure sectors. In respect of the latter, it has achieved a significant gain through the Formica Corporation acquisition. It has also completed a number of smaller acquisitions to enhance existing market positions or introduce new products. While the company has increased its exposure to the laminates markets this is not seen as signalling a change in the strategy of product and geographic diversification.

With continuing strong cashflows and financial ratios, the company is well positioned to make further acquisitions to enhance its overall position. It will do so where strategically compelling opportunities are available and these meet its established acquisition criteria.

Growth will also continue to be sought from internal sources. In the latest year the company invested $225 million of its $346 million of capital expenditure on small “bolt-on” acquisitions and internal growth projects. It will continue to invest in the current year, with key projects including the final stage of the particleboard capacity upgrade in Western Australia; increased MDF capacity at Gympie; a metal roof tile plant in Eastern Europe and ongoing upgrades to the steel mill. Support for programmes to promote innovation as a generator of earnings growth will also be provided.


Top and middle: Since the The Manager’s Toolkit was launched in February 2006, 396 people managers have participated. The programme is a series of 30 workshops that cover Managing Yourself, Managing Others, Managing the Business and Managing Risk.

Bottom: A Fletcher Aluminium cross-functional team meeting to discuss process improvements.

People

The group has steadily increased the level of resources and focus devoted to leadership development. Our key objectives in this regard are to build individual leadership capability, drive high team and individual performance and foster the visibility and development of key management talent.

Some courses are offered in conjunction with major universities, and two are accredited and thus lead to formal academic qualifications. The group has particularly strong relationships with the University of Auckland Business School and the Melbourne University Mt Eliza Centre for Executive Education. Since 2001, 33 senior managers have attended programmes in the United States, the United Kingdom and Australia. We are currently sourcing similar programmes with an Asia-Pacific focus. Further information on leadership development is included in the People section in the annual report.

The company’s leadership development and executive education programmes are also supported by the Fletcher Building Employee Educational Fund which supplemented expenditure by the company. Funding of $5.1 million was approved by the Fund in the 2007 year.

The company has provided early support for the introduction of the New Zealand government’s KiwiSaver retirement saving scheme, committing to provide a voluntary employer contribution to employee accounts from the date of the scheme’s introduction. This voluntary contribution will reduce as the introduction of compulsory employer
contributions is implemented over the ensuing years.


Courtney Gould lifts sheet steel in preparation for wrapping and strapping at the Auckland, New Zealand, coil division of Fletcher Easysteel.

Health and safety

Our highest priority is to provide safe working environments across all our operations. Our safety performance has improved at a group level, evidenced by a 32 percent decline in the lost time injury rate in the latest year, from 9.67 to 6.53 per one million hours worked. While we have made progress in this regard, we are seeking continued improvement.

Business units are required to prepare annual health and safety plans and assessments of safety performance and programmes are included in all business unit operational reviews. Managers are fully accountable for ensuring that hazards are identified and properly addressed, and the board receives regular reports on all aspects of safety performance.

All employees are required to keep themselves safe and help their colleagues to do the same. We accept our responsibility to ensure this is understood and that full compliance is achieved. Education and training programmes are in place throughout the group for this purpose.

A more comprehensive review of safety performance and initiatives is available in this year’s annual report.

Pacific Steel is New Zealand’s principal recycler of scrap steel, which it uses to manufacture wire rod and reinforcing bar at its plant in Otahuhu, New Zealand.

Finished Pink Batts come off the production line at Fletcher Insulation’s plant in Dandenong, Victoria, Australia.

Environmental sustainability and climate change

Fletcher Building continues its active engagement and leadership in sustainability issues. This drive to be environmentally sustainable has a number of dimensions, including our ongoing programmes to reduce carbon dioxide emissions, the development of building designs, products and services that enhance both our competitiveness and environmental performance, and our compliance with regulatory requirements.

In the last year a number of initiatives were completed that have reduced carbon dioxide emissions and improved energy efficiency. These include the new power transformer at Pacific Steel, the new drier at Laminex’s Dardanup particleboard plant, the new furnace at the Victorian insulation factory and the upgrade of Golden Bay Cement mill.

In the coming year, new projects that will improve energy efficiency include the new furnace shell at Pacific Steel, the new furnace at Tasman Insulation in Auckland and the new heat plant at Laminex’s Gympie MDF mill.

Our manufacturing operations also contribute to reduced environmental effects and greenhouse gas emissions through the use of materials that would otherwise be sent to landfill. Our use of recycled materials makes Fletcher Building the largest recycler in New Zealand. Examples include:

  • Golden Bay Cement uses flyash as a supplementary cementitious raw material.
  • Pacific Steel uses more than 200,000 tonnes of scrap steel in the electric arc furnace. The electric arc furnace process used to produce steel from scrap is significantly less energy and carbon dioxide intensive than the integrated process required when using iron ore as raw material.
  • The Laminex Group uses 250,000 green tonnes of biomass waste in the manufacture of its panels. This biomass waste would otherwise generate carbon dioxide/methane emissions from landfills. The Laminex Group is the only composite wood panel manufacturer in New Zealand to develop the manufacturing processes required to use such volumes of biomass wood waste.
  • Recycled glass makes up 80 percent of the raw material required to manufacture glasswool insulation.
  • Winstone Aggregates has initiated a project to use 50,000 tonnes per annum of steel mill production waste in producing road materials.

Our manufacturing operations also produce and use significant quantities of renewable energy. Golden Bay Cement and Laminex’s board plants, for example, use waste wood to generate energy.

Fletcher Building is also participating in a number of organisations that are contributing leadership to sustainability practices and policies, such as the Green Building Councils in Australia and New Zealand.

Environmental issues, and in particular those relating to climate change, will retain a very high level of management focus as we go forward. A more comprehensive review of the company’s environmental programmes is included in the Environmental Sustainability and Climate Change section of the annual report.

Summary

The 2007 year has been an important one for Fletcher Building – a year of management change and significant repositioning. It is the beginning of the next phase in increasing the geographic diversity of the company and providing a wider range of growth options. But, just as pleasing, it has been another year of good operating performance and record earnings.

Jonathan Ling Chief Executive Officer and Managing Director Back to top