The benefits
of diversity

Chief Executive's review

This year's result again demonstrates the benefit of the Fletcher Building group's diversity. While conditions in our markets have varied widely, and the effects of the global financial crisis have been felt around the world, we have been able to deliver a strong result.

Volumes in most of our businesses have been lower but we have seen excellent outcomes from the cost reduction initiatives we have undertaken. This has ensured that we are appropriately scaled in terms of our manufacturing capacity to optimise earnings with lower activity levels. This, coupled with our strong balance sheet, positions us well for the future, and will allow us to pursue further growth opportunities.

A summary of the performance of each of our business divisions is set out below. Unless otherwise stated, the divisional commentaries exclude unusual items from the prior year's results.

Building Products recorded eight percent growth in operating earnings to $114 million. Key factors affecting earnings were the benefits of cost rationalisation and restructuring, a strengthening of residential construction markets, the impact of the New Zealand government insulation scheme, and reduced raw material prices in the roof tiles business. These were partially offset by the impact of the termination of the Australian insulation scheme, and weakness in the New Zealand non-residential construction sector.

PlaceMakers' sales were in line with the prior year, but with a noticeable increase in residential building activity in New Zealand emerging in the latter part of the year. Operating earnings were 28 percent higher at $38 million driven by reduced costs and steady margins. A 13 percent increase in New Zealand residential building consents from 2009 assisted the results.

The building materials market has, however, continued to be impacted by the low level of residential building consents and the decline in non-residential consents.

Total sales for Infrastructure were down two percent with lower sales for most construction materials products in New Zealand and Australia; however, billings in the construction business were up on last year. Operating earnings declined by $39 million to $164 million as market activity weakened. In New Zealand, the significant decline in commercial construction activity and recent completion of a number of large infrastructure projects were only partially mitigated by an increase in residential construction activity. Operating earnings at Golden Bay Cement were down 40 percent due to reduced volumes. In Australia, the pipeline products business experienced weaker demand for most products while the quarry business recorded a solid result despite a noticeable slowdown in building activity.

The backlog of construction work is currently $930 million, with approximately $450 million worth of further work where the group is either the preferred bidder or in final contractual negotiations. The backlog at the same period last year was $1.1 billion, and the decline is due to the completion of several large projects and fewer major contracts secured during the year. Government funded work remains strong, however, and currently accounts for most of our construction backlog.

Earnings from Fletcher Residential increased by $6 million to $18 million with higher average margins due to a favourable sales mix and stronger demand for houses in Auckland.

Laminex's operating earnings were $107 million for the year which included $16 million of one-off gains from the closure and sale of the Welshpool and Kumeu sites. Australian domestic revenues were marginally higher, driven by improvements in the new housing and alterations and additions sectors, while conditions in the commercial sector remained constrained. Partly offsetting this was a decline in Australian export sales due to the closure of the medium density fibreboard facility in Western Australia, and tight conditions in the commercial market. New Zealand revenues were below the prior year due to the continued slowdown in the commercial sector.

Formica's operating performance for the current year improved substantially over the previous year. Operating earnings were $34 million, compared with $18 million in the prior year, including $7 million of redundancy costs. Volumes in North America were down by a further five percent on the prior year, and while activity in the new housing sector showed some recovery in the USA, this was from a low base. Commercial markets in North America continued to contract during the year. The main markets in Northern Europe showed some improvement, Central Europe and the UK remained relatively flat, but Southern Europe including Spain was lower. Markets in Asia have remained solid with volumes up by six percent on last year. A moderate pick up in volumes in China and Thailand was achieved after last year's slowing in activity levels, while conditions in Taiwan and other Asian markets have also been firm.

Steel's operating earnings for the year were $82 million, which was 47 percent lower than the prior year's record levels. Prior year earnings were driven by historically high steel prices and very strong demand in the first half of the year. The global financial crisis subsequently resulted in the steel industry reducing global inventories in response to lower demand. Accordingly, 2010 was a difficult operating environment characterised by uncertain demand and declining prices.

Back to topFinancial position

The balance sheet continued to be strengthened during the year with positive operating cashflows used to further reduce debt levels. Our gearing continued to reduce, down from 31 percent to 27 percent.

The group had total available funding of $2,349 million as at 30 June 2010, of which $1,130 million was undrawn. Debt requiring refinancing within the next 12 months is very low at approximately $116 million.

Interest coverage for the year was 4.9 times and represents a further improvement on the 4.0 times for the prior year.

Back to topCashflow

Cashflow from operations was $522 million compared with $533 million in the prior year. The continued strong positive cashflow was driven by our ongoing focus on tight working capital management and a reduction in capital expenditure. We expect that cashflow from operations will be negatively impacted by increasing inventory and debtor levels as sustained market growth emerges.

Capital expenditure for the year was $191 million compared with $289 million in the prior year. Of this, $137 million related to 'stay-in-business' capital expenditure, and $54 million to new growth initiatives. Significant projects included completion of Golden Bay Cement's new cement storage facility in Auckland; the upgrading of the Laminex MDF plant in Queensland, and the Fletcher Insulation plant investment in Victoria. Divestments for the year totalled $38 million compared with $52 million in the prior year. 

Back to topPeople

As at 30 June 2010, Fletcher Building employed some 16,000 people in business units worldwide. This number was similar to that recorded at the December half year, and is indicative of the fact that most of the restructuring work has now been completed and the workforce stabilised. Regrettably, redundancies were necessary in Fletcher Insulation following the sudden termination of the Australian Government's insulation scheme in February 2010.

Despite the difficult economic conditions of the past year, all learning and development programmes were maintained. Through their capability, performance and diversity our employees differentiate our group, deliver value to our shareholders, customers and communities and are the foundation of the group's future success.

Back to topHealth and safety

We have a strong commitment to health and safety. This commitment starts at the top, with an executive-led Health and Safety Council and senior management participation in safety education and training programmes. The group has a vision of zero harm based on the principle that all accidents are preventable.

As a result, significant progress has been made in the last year. The group's primary performance indicator for safety, Total Recordable Injury Frequency Rate per million hours (TRIFR) defines recordable injuries as both lost time and medical treatment injuries. In the last year, this rate has dropped to 11.24, from 23.79 in 2009. Its Lost Time Injury Frequency Rate (LTIFR) was 3.42, compared to 5.81 the year prior.

This year, we have also introduced a wellbeing programme to streamline initiatives across the group and ensure it is an important part of each business unit's health and safety plan.

Despite our progress, fatalities and injuries still occur. An employee of Fletcher Construction (South Pacific) lost his life in the last year at a construction site in Apia, Samoa and is a tragic reminder that we must remain proactive in our quest for zero harm. 

Back to topEnvironmental sustainability and climate change

The New Zealand government introduced its Emissions Trading Scheme on 1 July 2010 and as the group's cement and steel manufacturing operations emit process CO2 they are directly affected. These operations are emissions-intensive, trade-exposed industries and will receive free allocation of emission units to offset these increased costs. Fletcher Building's initiatives to reduce emissions and improve energy efficiency will also ensure the costs are further reduced.

Fletcher Building is committed to ensuring its use of natural resources, including the emissions of CO2 from operations, products and services, are reduced.

The group has set a target to reduce its CO2 emissions in 2012 to five percent below the 2008 level on a normalised basis. By 31 December 2009, the group was two years into the five-year policy and had decreased its absolute emissions by 18 percent.

Back to topStrategy

The strategy for the Fletcher Building group is centred on improving the reliability of our earnings through geographic and industry expansion to counter the effects of industry cycles. In addition, we seek to maintain and improve our internal capabilities through business transformation initiatives and growth-oriented capital expenditure, and to pursue any acquisition opportunities which meet our investment criteria.

The past two years have seen us focus on conserving cash and strengthening the group's financial position. However, in the year ahead capital expenditure is expected to increase as we look to strongly position our businesses to capture the benefits from improved economic conditions.

Beyond stay-in-business investment, we will pursue opportunities to invest in areas of organic growth and potential acquisition opportunities where appropriate. Australasia continues to be the principal area of focus for further expansion.

The strategic priorities for each of our divisions can be summarised as follows:

  • For Building Products, increased focus is being given to innovation and new product development, with the goal of achieving sustained organic growth and expansion into adjacent product and service areas.
  • Distribution's strategy is focused on growing market share by better servicing of the trade builder segment, and leveraging the strength of the joint-venture partner network.
  • Infrastructure will continue to develop organic growth opportunities where high returns are achievable in existing or adjacent product areas.
  • Laminates & Panels will maintain a focus on further improvements in operational performance and capability, emphasising service and product innovation especially in mature markets. Growth opportunities in Asia and other developing markets will be actively pursued.
  • Steel will continue to explore high-return growth opportunities. Improving the resilience of the business for the longer term remains an overarching objective.