Infrastructure

The Infrastructure division is a vertically integrated business supplying aggregates, cement, readymix concrete and a range of concrete products in New Zealand; and concrete pipeline products and a range of aggregate sands throughout Australia. It is the largest construction contractor and residential builder in New Zealand.

Performance overview

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 private 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 from the New Zealand and Australian concrete businesses declined by $37 million to $105 million. Sales volumes of most products in New Zealand were significantly below last year. Cost savings could not mitigate the impact of the substantial declines in volumes and an increasingly competitive environment. In Australia, concrete sleeper and pipe related volumes were down, and the market for sand in New South Wales was more difficult than anticipated. Construction activity remained strong but earnings declined by $4 million while property and residential operations improved by $2 million.

Operating earnings from the cement business were $12 million lower primarily due to reduced volumes. In New Zealand, volumes were nine percent lower and, while export sales volumes and prices increased, export margins remained low. Domestic prices were flat while production and distribution unit costs increased. Manufacturing performance was excellent with the best continuous run time since the upgrade was completed. The new cement storage facilities on the Auckland waterfront were commissioned in December 2009.

Aggregates sales volumes were 16 percent lower than last year and 31 percent below peak cycle volumes. The business continued to make significant progress in lowering its costs as the market deteriorated but earnings declined by $5 million. A new construction and demolition waste recycling facility in Auckland will be commissioned in October 2010.

Readymix and masonry operating earnings were 26 percent lower. Sales volumes of concrete dropped by ten percent as a number of large infrastructure jobs were completed in the year. Masonry sales volumes were similar to the previous year due to the increased volumes as a result of the Stevenson masonry business acquisition in March 2009.

The concrete pipe and precast markets softened throughout the year resulting in overall earnings 27 percent below last year. Concrete product sales volumes (pipe and precast products) declined by ten percent in the year. Overall margins were lower, due to mix, competitive pricing and slightly higher input costs. Some recovery was seen in the latter part of the year, and forward orders are seven percent higher than last year although overall margins are lower.

In Australia, the pipeline and quarry businesses performed well, in the economic environment, with combined operating earnings of $52 million compared with $64 million in 2009. The pipeline products business experienced weaker demand for most products, with operating conditions being the most difficult since the business was acquired in 2005. Orders on hand are 16 percent lower than at the same time last year. The quarry business recorded a solid result despite a noticeable slowdown in building activity and particularly weak demand in New South Wales.

Construction's operating earnings were $39 million compared to $43 million in the previous year. The backlog of construction work is currently $930 million. The group is either the preferred bidder or in final contractual negotiations for approximately $450 million worth of further work. 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 commitment to infrastructure investment should provide opportunities across the New Zealand-based operations but the lead time is such that conditions in the construction market will remain challenging in the short term.

Earnings from property related activities include those from quarry end use and the residential business. Earnings from Fletcher Residential increased by $6 million to $18 million with higher average margins due to a favourable sales mix and stronger demand in Auckland. Property sales earned $2 million compared to $6 million last year and market conditions are not expected to improve materially in 2011.

Back to topLooking ahead

The division continues to experience very weak demand in New Zealand and the economic outlook is uncertain in the short term. The Australian businesses expect underlying demand to remain stable. There has been significant cost rationalisation over the last two years and further business improvement initiatives will be implemented this year. These will mitigate, to some extent, the impact of any further downturn in activity should that eventuate. The division has significant operating leverage which places it in a very good position when market conditions improve.

In the meantime the division will also continue to explore high-returning organic growth initiatives. In August, Australian Construction Products was acquired, which is a market leader in the supply of road barriers and associated roading products in Australia.