Chairman's review

The past year has been a challenging one because of the impacts of the global financial crisis on most of our major markets. Yet Fletcher Building has performed well in these conditions.

Part of this stems from the geographic and business diversification that has been a strategic priority since 2001. It is also due to the restructuring initiatives that we undertook in 2009. As a result, we have come through the economic downturn with our businesses leaner and more efficient, and poised to capitalise on improving market conditions when they return.

Operating performance

For the year ended 30 June 2010, the group recorded net earnings before unusual items of $301 million. The result compares with $314 million recorded in the previous year.

Operating earnings (earnings before interest and tax) before unusual items were $521 million compared with $558 million in the previous year. Cashflow from operations was $522 million compared with $533 million in 2009.

The result was driven by improved performances within a number of business units as a result of the cost reduction initiatives implemented during the year, and improved trading conditions in the New Zealand and Australian residential housing markets. Operating earnings in the Laminates & Panels division almost doubled to $141 million. The Steel division had lower operating earnings following a record earnings result in the prior year, and reduced concrete product volumes adversely impacted the Infrastructure division's earnings.

While the underlying earnings figure is in line with last year's, the composition is quite different, reflecting the significant changes we have seen in our markets in the past year. Residential markets in Australia and New Zealand have shown modest recovery, but they remained weak in Europe and North America. Government funded infrastructure spending in New Zealand and Australia has continued to underpin results, but commercial construction activity in most of our key markets remained subdued. The result is therefore a strong one in the context of these mixed market conditions.

You will find details of the performance of each of the businesses in the divisional reviews on the following pages.

Back to top Shareholder returns 

Earnings per share excluding unusual items were 49.7 cents, compared with 59.7 cents in the previous year.

Total returns to shareholders were 24.5 percent, compared with 14.1 percent in the prior year, with strong share price appreciation during that period. Return on funds employed improved to 12.7 percent from 11.9 percent in the prior year, excluding unusual items.

Back to topUnusual items

As indicated in June, an unusual tax expense of NZ$29 million was incurred in the financial results for the year ended 30 June 2010. The unusual expense arises from the significant taxation changes announced by the New Zealand Government in its budget in May 2010. These include the elimination of depreciation on buildings for tax purposes, and a reduction in the corporate taxation rate from 30 percent to 28 percent, both with effect from 1 July 2011.

Based on a review of our future tax obligations in the light of these changes, we have determined that we need to increase the provision for deferred tax by NZ$29 million. The increased provision is a one-off accounting entry that is non-cash in nature and it has not affected underlying profitability or the dividend payout in respect of the 2010 financial year. Whilst the recognition of the deferred tax liability is non-cash in nature, the elimination of the tax deductibility on buildings will result in a small increase in future income tax payments.

Back to topDividend

A final dividend of 15.0 cents per share will be paid on 20 October 2010, bringing the total dividend for the year to 29 cents per share. It remains the board's intention to maintain a steady and ever increasing dividend, in line with the group's earnings performance.

For New Zealand resident shareholders, the dividend has been imputed at a 30 percent tax rate to the extent of 3.2143 cents per share. The final dividend is not franked for Australian tax purposes. To maximise the value of available franking credits the group's policy is to accumulate them and attach these to dividends only when the franking percentage is at or near to 100 percent, rather than spreading them over every dividend.

In view of the group's strong balance sheet and low level of gearing at present, the dividend reinvestment plan will not be operative for this dividend payment.

Back to top Balance sheet 

We have continued to maintain the prudent balance sheet parameters that we established last year with the equity raising. As such, our gearing, net debt as a percentage of net debt plus equity, was 26.8 percent. This is well below our target range of 40 to 50 percent. The board feels that is prudent to maintain a low gearing level while there continues to be uncertainty in the international banking environment and where the availability of funds at reasonable cost cannot be wholly assured.

Back to topPeople

Our people have worked exceptionally hard in the past year in the face of a difficult and demanding economic climate. The fact that the group has survived the economic downturn in such good shape has been due in no small measure to the efforts and focus of our people.

Last year saw significant restructuring undertaken across the business, with significant reductions in our total employee numbers. As economic conditions have improved we have seen staff numbers stabilise. Against this difficult backdrop, it has been especially pleasing to witness the dedication and resourcefulness of our people and their commitment to helping the group meet or exceed its financial and operational goals.

Also pleasing has been the progress we have made in further developing our senior managers. This has been part of an ongoing programme designed to ensure that Fletcher Building has the appropriate talent pool within its ranks to succeed and lead in the future.

Back to topBoard changes

At the end of March, Roderick Deane retired as Chairman of Fletcher Building. Roderick was the inaugural chairman of Fletcher Building and made a significant contribution to the growth of the company. Roderick, who joined the board of Fletcher Challenge in 1994, successfully steered the Fletcher group of companies through the restructuring a decade ago, and was instrumental in the creation of Fletcher Building. Under Roderick's leadership Fletcher Building has grown to become the largest building materials company in Australasia. On behalf of the board I would like to extend here our sincerest appreciation and best wishes to Roderick for the enormous contribution he made to Fletcher Building in his long association with the company.

Further changes were announced during the year to the composition of the board, in accordance with the company's succession arrangements for directors.

Mr Tony Carter was appointed to the board as an independent director with effect from 1 September 2010. Tony will bring an important perspective to the board with his extensive background in distribution and retailing and his familiarity with the broader New Zealand business environment, and we look forward to working with him.

Also during the year, we announced that Sir Dryden Spring will retire from the board with effect from 30 September 2010. I would like to record here the board's thanks to Sir Dryden for his involvement with the board of Fletcher Building. Sir Dryden first joined the board of Fletcher Challenge in 1999, and helped to oversee the evolution of Fletcher Building. He has made a significant contribution as a director to the growth of Fletcher Building through the quality of his strategic insights and operational experience, and as Chairman of the Remuneration Committee.

Back to topOutlook

Caution is required in formulating an outlook for the current year. With the effects of the global financial crisis still being felt around the world, there continues to be uncertainty around the timing and pace of a recovery in economic activity.

In New Zealand, the residential market is expected to continue a slow and gradual recovery in new building activity, albeit remaining below mid-cycle levels. Removal of the present monetary policy stimulus is expected to constrain the rate of growth in new housing starts. Commercial construction activity is expected to remain at very low levels throughout 2011.

The volume of government funded infrastructure projects is expected to reduce in 2011, with a number of large projects scheduled for completion later in the current calendar year. A rebound is anticipated in the 2012 year with several significant new projects scheduled to commence.

In Australia, the rebound in residential activity seen in 2010 is expected to continue in the current year. Government infrastructure spending should remain strong, but this will only partially offset weakness in the commercial construction sector. The Australian insulation business will need to work through high inventory levels following the abrupt termination of the Australian government insulation scheme, but with improved manufacturing efficiency it is strongly positioned once that process has been completed.

Trading conditions in both North America and Europe continue to remain uncertain and no recovery of significance is expected in these markets in the near term. Markets in China, South-East Asia and Taiwan are exhibiting growth which is expected to continue throughout the current year.

Despite these mixed market conditions, and the risk of further economic deterioration in some parts of the world, the group is focused on growing earnings and continuing to generate strong returns to shareholders. With our robust balance sheet and excellent portfolio of businesses, the group is very well placed to deliver on this.