Chief Executive's review
In a difficult year, the focus of the group has been on maximising cashflow and restructuring the cost base. While operating earnings before unusual items fell from $768 million in 2008 to $558 million, cashflow from operations was 23 percent higher than for 2008 at $533 million.
The Steel division increased operating earnings before unusual items by 52 percent to $154 million for the full year, due to a strong first half driven by high demand, steel supply shortages and robust price increases. The downturn at the end of October saw the market change quickly with weaker demand, excess supply throughout the distribution chain, significant inventory overhang and falling prices, mitigated in part by positive currency impacts. A highlight for the year was the generation of $182 million of operating cashflow of which a reduction in working capital contributed $22 million.
Sales in the Building Products division increased four percent to $771 million, but operating earnings excluding unusual items were down 28 percent to $106 million. This was due to deteriorating residential housing markets, and higher input costs, particularly in relation to imported products as the New Zealand and Australian currencies weakened.
Distribution had sales fall by 18 percent for the year due to the decline in residential building activity in New Zealand. Operating earnings excluding unusual items were 59 percent lower at $30 million with margins affected by competition and lower turnover. The New Zealand building materials market was significantly impacted by the decline in residential building consents which were 39 percent lower than the prior year.
In the Infrastructure division, sales for the year were up 11 percent due to significantly increased construction activity offset by lower concrete sales. Operating earnings excluding unusual items declined by $105 million to $203 million with the most significant component being the decline in earnings from property-related activities to $18 million. Last year these activities, comprising the residential business, quarry end use, and surplus asset sales, earned $80 million. Operating earnings from the New Zealand concrete business were 28 percent lower. In Australia, the pipeline and quarry businesses performed very well, recording combined operating earnings of $64 million compared with $59 million for the previous year.
Operating earnings excluding unusual items for Laminates & Panels were $74 million, compared with $141 million in the previous year on three percent lower sales of $2,076 million.
Laminex’s operating earnings before unusual items were $56 million compared with $125 million in the prior year. Market conditions in Australasia were tough with a number of factors negatively impacting earnings. Volumes were down on the prior year in both Australia and particularly New Zealand due to the slowdown in both economies, although market shares were maintained. Significant cost increases were also incurred.
Formica’s operating earnings before unusual items for the year were $18 million, up 11 percent on the prior year. Sales in domestic currencies in which Formica operates were down by 14 percent. Sales performance reflected the weak United States economy and the rapid and significant deterioration in demand in Europe.
Formica Asia recorded another year of solid growth in revenues and earnings. While volumes were lower in some regions, with Taiwan, Hong Kong and parts of mainland China showing reductions in demand, in Thailand and the Asean countries demand remained firm.
Resolution of key manufacturing issues which severely impacted performance at the company’s Ohio based manufacturing facility in the prior year resulted in a substantial improvement in performance in North America. This was achieved against a backdrop of a further weakening housing market and a rapid slowing of non-residential activity across the United States. Activity in this latter sector, where Formica has strong exposure, recorded falls of over 15 percent on the prior year while residential activity was down by over 30 percent on the prior year.
Back to topRestructuring costs
All divisions undertook business rationalisations in response to reductions in demand. The total labour force across the group fell by approximately 2,500 to 16,500 through the year. Rationalisations include the closure of the door manufacturing business in New Zealand; an 18 percent reduction in employee numbers in the concrete businesses; a 15 percent reduction in employees at both Laminex and Formica; three branch closures in the steel rollforming and coated steel businesses; and the opening of a manufacturing and distribution centre in Melbourne for Stramit with the consolidation of three sites into one. A company-wide freeze on salaries and directors’ fees was implemented for 2010.
Back to topCapacity reduction initiatives
Following a review of manufacturing capacity and assessed likely future demand, the closure of the Laminex particleboard plant at Kumeu in Auckland and the medium density fibreboard (MDF) plant at Welshpool in Western Australia were announced.
An extensive review of Formica’s European operations determined that there was a need to reduce total capacity in that region given significantly reduced demand levels. The decision was taken to downsize the operations at the plant in Bilbao, Spain. In addition, an assessment of Formica’s product profitability and customer cost-to-serve in all regions identified opportunities to streamline the product portfolio and reduce distribution costs, resulting in inventory reductions to align with the revised product suite and service model.
The reduction in manufacturing capacity will help to ensure that the business is well placed to benefit from a recovery in markets, with efficient manufacturing operations scaled appropriately from a capacity perspective, and lower unit costs.
Back to topAdjustments to asset carrying values
The annual appraisal of balance sheet carrying values identified certain tangible and intangible assets, which have been permanently impaired to a total of $194 million. Most of this potential impairment charge arises in the Laminates & Panels division, including a reduction in the book value of goodwill associated with the acquisition of Formica and the write-down of certain fixed assets within Formica Europe. A charge was also taken for the write down of assets in the Distribution division, arising from the decision to suspend the implementation of a new retail management information system.
The adjustments to the carrying values are non-cash in nature and represent three percent of the group’s total assets as at 30 June 2009.
Back to topTax benefit recognition
At the time of the Formica acquisition in 2007, the value of tax losses available to the businessin the United States and certain other jurisdictions was recognised. Due to the market outlook for Formica’s operations, the realisation of the benefit of those tax losses is likely to be significantly delayed. In accordance with NZ Generally Accepted Accounting Practice, the company has written off NZ$60 million of the carrying value of those tax benefits. Notwithstanding the write-down (which is entirely of a non-cash nature), the benefit of these tax losses is expected to be realised in future years as taxable earnings are generated.
Back to topFinancial position
The balance sheet was strengthened during the year with the issuance of $131 million of capital notes to provide a longer debt maturity profile, and $526 million of new equity, the proceeds from which were used to reduce debt levels.
The group had over $1 billion of un-utilised debt facilities as at 30 June 2009. Debt requiring refinancing within the next 12 months is around $110 million, including $75 million of capital notes subject to interest rate and term reset, and $25 million of expiring undrawn facilities.
With strong operating cashflow, gearing at 31.1 percent, and interest coverage at 4.0 times, the group remains in a sound financial position.
Back to topCashflow
Cashflow from operations was $533 million compared with $434 million in the prior year. The strong improvement in cashflow was largely attributable to a focus on working capital management, with $203 million in cash generated from reduced debtors and $101 million from lower inventory levels. Cashflow also benefited from the sale of the head office building in Auckland for $36 million.
Capital expenditure for the year was $289 million compared with $349 million in the prior year. This level of expenditure reflected the carry-over of $168 million of projects from the prior year, with $121 million of new capital expenditure approved during the year. Significant projects included construction of the new metal roofing plant in Hungary; the new port cement facility in Auckland; installation of the redeployed high pressure laminate (HPL) press in Formica Finland; and the purchase of additional sand and quarry reserves in Australia by Rocla Quarries.
Back to topPeople
At 30 June 2009, the group employed some 16,500 people in workplaces across New Zealand, Australia, the Americas, Asia, Europe and the Pacific Islands. Fletcher Building is the second largest commercial employer in New Zealand and a significant employer in many communities further afield.
Regrettably, about 2,500 people left the business in the year due to the restructuring of our operations. Decisions that affect our people’s lives are not taken lightly, and where redundancy has been necessary, we have sought to comply with our values, communicate fully and treat our people fairly and with integrity and respect. Every effort has been made to place them in alternative employment.
The group has maintained a structured approach to people management, with the key areas of focus being: talent identification; attraction and recruitment; leadership and management development; performance assessment; succession planning; diversity management; and benefits and reward. With increasingly international operations, the implementation of people development programmes has been decentralised on a regional basis, but with policies and practices consistent across the group.
In the senior management team, John Beveridge was appointed Chief Executive of the Distribution division in August, replacing David Edwards who has returned to Australia.
Back to topHealth and safety
The company has a vision, policy and standards that explicitly state expectations for health and safety, and drive continual improvement towards leading industry practice. The vision of Zero Harm is based on the principle that all accidents are preventable. Business units are required to prepare annual health and safety plans reflecting the Zero Harm vision and addressing the hazards inherent in their operations. Assessments of safety performance are included in all business unit operational reviews and the resulting experience and solutions are shared among the business units whenever appropriate.
The approach to health and safety is multi-faceted and this has been effective in reducing the injury rate across the group. Most business units have shown consistent improvement. This year, the group introduced Total Recordable Injury Frequency Rate per million hours (TRIFR) as its primary performance indicator for safety. It has defined “Recordable Injuries” as both lost time and medical treatment injuries. The group’s TRIFR this year was 23.41 compared with 27.76 in 2008. Its Lost Time Injury Frequency Rate (LTIFR) was 5.31, compared with 5.74 in 2008.
Back to topEnvironmental sustainability and climate change
Addressing climate change is one of the biggest challenges facing our generation. At Fletcher Building, sustainability means maintaining the long-term viability of its businesses by minimising their impacts on the natural environment. Our sustainability objectives are also furthered when our products and services lead to better environmental efficiency in our customers’ buildings and infrastructure, when we eliminate or minimise waste from our products, services and workplaces, and when we find and implement economic energy-efficient solutions.
The company has a range of strategies to enhance its sustainability profile, including the use of recycled materials as raw materials and fuels, the use of renewable energy — particularly biomass — and the introduction of new technologies to provide energy to industrial processes. Greater energy efficiency through improvements in plant and equipment is also being achieved.
During the year the Climate Change and Environmental Sustainability Council was established to assist the executive committee and the board to fulfil their responsibilities in relation to management of these issues. The Council is focused on providing direction and co-ordination to the group’s continuing efforts to reduce its environmental footprint and to improve effectiveness and communications on these issues. A major focus is to reduce operating costs by improving energy and resource efficiencies.
The group has also set a target to reduce its CO2 emissions in 2012 to five percent below its 2008 level on a normalised basis. This builds on reductions achieved in earlier years. In particular, the upgraded cement manufacturing plant at Portland is achieving its designed efficiency and capacity improvements. Emissions trading schemes are being developed in both New Zealand and Australia, and it is anticipated that the achievement of this target will offset any additional costs that will be imposed when the schemes are established.
Fletcher Building also participates in the Australian Energy Efficiency Opportunities programme. This requires all companies using more than 0.5 petajoules of energy to work through a programme of energy efficiency audits for major energy-using sites in Australia. It is also preparing to participate in the National Greenhouse and Energy Reporting programme.
Fletcher Building participated in the Carbon Disclosure Project for the fourth time this year. This requires a complete inventory of all our 2008 CO2 emissions and a report describing how the company manages the risks and opportunities from future climate change. All NZX50 and ASX100 companies are asked to participate.
Back to topStrategy
Whilst Fletcher Building operates in cyclical markets it has followed a strategy to improve the reliability of its earnings; maintain and improve its internal capabilities; and take up any acquisition opportunities where these meet its investment criteria.
The downturn in construction markets around the world has meant that growth in earnings has not been achievable in the 2009 year, and lower levels of construction activity may be ongoing in many of its key markets for some time. Consequently the immediate focus is to ensure that all parts of the group are able to operate profitably during this period of subdued economic activity, and manufacturing capability is optimised in the context of significantly lower activity levels. In this regard a number of work streams are under way in the Laminates & Panels division examining product profitability, customer cost-to-serve, procurement and logistic costs. Significant progress is expected to be achieved in 2010 as these businesses implement a range of measures to lift operational efficiency and lower the cost base.
In this environment, capital expenditure will be reduced in the 2010 year. However, the group will continue to look for opportunities to invest in areas of organic growth and where appropriate acquisition opportunities are identified. Acquisitions will need to be able to be comfortably accommodated within capital and financial parameters, and expectations of future returns must realistically reflect current and likely future trading conditions. Australasia continues to be the principal area of focus for further expansion.