Chairman's review.

The past year has been one of significant challenges in New Zealand and Australia.

The Canterbury earthquakes, which devastated Christchurch, have had a significant impact on our people and businesses in the region and further afield. All of New Zealand has been affected by the terrible loss of life and damage sustained in New Zealand’s second largest city.

In Australia, Queensland, New South Wales and Victoria were hit by some of the most severe flooding seen in a generation. The widespread damage caused significant disruption to communities across the east coast of Australia.

Economic conditions have also been challenging, demanding a high level of focus on operational performance across our divisions.

A significant development was the acquisition of Crane Group Limited (“Crane”), which we completed in May of this year. With the addition of the Crane businesses, Fletcher Building now has annualised revenues of approximately NZ$10 billion and employees in excess of 20,000. The integration of Crane has gone very well, and we have been delighted with the positive response of the Crane employees to being part of the larger Fletcher Building Group.

The effects of the global financial crisis continued to be felt in the current year and we have had to manage the impacts of the major natural catastrophes and the acquisition of Crane in an environment of continued economic uncertainty. In New Zealand, an increase in housing consents early in the year ebbed away. By the end of the year the rate of consents was at near historic lows. The commercial market stabilised but at low levels. Government infrastructure spending helped to underpin the market. In Australia, the new housing market cooled in the second half of the year, and as in New Zealand, commercial construction activity remained subdued. There is evidence in both countries of households reducing their debt levels, and this has had a flow-on effect in the new housing market.

In the US and Europe, conditions remained difficult and no recovery was seen in these markets. Asia, however, has continued to perform strongly.

Back to topOperating performance

Given difficult conditions in our Australasian home markets, I am pleased to be able to report net earnings before unusual items of $359 million for the year ended 30 June 2011. The result compares with $301 million recorded in the previous year.

Operating earnings (earnings before interest and tax) before unusual items were $596 million, up 14 percent on the $521 million achieved in the previous year. These results include three months of operating earnings from Crane. Consistent with the announcement in March net earnings were approximately $20 million lower than earlier market guidance than they might otherwise have been, due to the disruption caused by the earthquakes in Canterbury.

Unusual items after tax totalling $76 million were incurred during the year. These relate to costs associated with the acquisition and restructuring of Crane, inventory and goodwill write-downs in the Australian insulation business, and adjustments to the carrying value of other assets.

Net earnings were $283 million compared with $272 million in the previous year.

The result was driven by strong performances in our Infrastructure, and Laminates & Panels divisions, together with the initial contribution from Crane. Most divisions reported stronger trading performances from their Australian operations. Formica also reported good growth from its Asia operations and a strong improvement in North American earnings despite flat volumes in that market.

Businesses exposed to the New Zealand market generally reported flat or lower earnings, as a consequence of the slowdown in construction activity seen during the course of the year and also as a result of the significant disruption from the earthquakes in Canterbury.

Back to top Shareholder returns 

Earnings per share excluding unusual items were 57.1 cents, an increase of 15 percent on the 49.7 cents in the previous year. Total returns to shareholders were 14 percent, compared with 24 percent in the prior year. This was a combination of dividend yield and share price appreciation, and in the context of difficult trading conditions was a good outcome.

Back to topUnusual items

Unusual items after tax totalling $76 million were incurred during the year. These relate to costs associated with the acquisition and restructuring of Crane, inventory, equipment and goodwill write-downs in the Australian and New Zealand insulation businesses, and adjustments to the carrying value of O’Brien’s, the residential bench-top business.

The inventory, equipment and goodwill write-offs in the Australian insulation business are due to the significant disruption in the market since the Australian government’s insulation retrofit scheme was terminated in February 2010. In New Zealand, the DVS home heating business which is part of the insulation group, and O’Brien’s, have been adversely impacted by the slowdown in new residential house building activity.

Back to topDividend

The board has approved a final dividend of 17.0 cents per share. With the interim dividend of 16.0 cents, this brings the total dividend for the year to 33.0 cents per share, up from 29.0 cents in the previous year. The final dividend will be paid on 19 October 2011.

In February, we announced a revised dividend policy. Under the new approach, we intend to alternately frank and impute successive dividends to the maximum extent possible. In practice, this means that all interim dividends will be fully franked with Australian tax credits, or franked to the maximum extent possible; and all final dividends will be fully imputed with New Zealand tax credits, or imputed to the maximum extent possible.

If any surplus Australian or New Zealand tax credits are still available after fully franking the interim dividend or fully imputing the final dividend for that year, these will also be distributed to shareholders as circumstances permit.

The new approach will improve the tax effectiveness of the company’s dividend, and help to minimise the wastage of tax credits for shareholders. It will also provide shareholders with greater certainty in relation to the company’s tax crediting.

In line with this new tax crediting policy, the final dividend will carry full New Zealand imputation credits. The dividend will not be franked for Australian tax purposes, with the interim dividend of 16 cents per share paid in April carrying full franking credits.

The dividend reinvestment plan will be operative for this dividend payment. There will be no discount to the price applied to ordinary shares issued.

Back to top Balance sheet 

We have maintained a conservative approach to the company’s balance sheet, due to continuing uncertainty in world financial markets. The acquisition of Crane was funded partly through the issue of further shares and partly through bank borrowing. At balance date our gearing, that is interest bearing net debt as a percentage of interest bearing net debt plus equity, was 33.8 percent compared with 26.8 percent at 30 June 2010. Despite the increase, this level remains comfortably below our target gearing range of 40 to 50 percent. The board continues to believe that a conservative stance is warranted in the current economic climate.

Back to topPeople

This year has been an especially challenging one for our people, particularly due to the natural disasters in New Zealand and Australia. On behalf of the board, I would like to express our appreciation for the dedication and professionalism of our people as they coped with the aftermaths of the earthquakes, floods and cyclone. I would particularly like to acknowledge those who suffered loss of life amongst family and friends, or sustained significant damage to their homes and property. Your commitment to returning to work to help your customers and communities has been an inspiration to all of us.

To the wider Fletcher Building family, I also extend our thanks for the extra efforts you made to support your colleagues in the affected regions.

In support of our many affected employees and customers, directors agreed to donate $6 million towards the recovery and reconstruction efforts across Canterbury. This includes supporting the Christchurch Arts Festival, and the construction of the Westpac Business Hub. Other projects we are supporting include heritage building restoration and the repair of community facilities.

I would like to acknowledge the contribution all our people have made to our financial performance in the context of challenging economic conditions in most of our markets.

On behalf of the board, let me also welcome the 4,000 staff members from Crane who have now joined the Fletcher Building team. We are delighted to have been able to add Crane to our portfolio and to have gained your expertise and commitment to serving your customers.

Back to topBoard changes

In accordance with the company’s succession arrangements for directors, Kerrin Vautier has retired from the board. Kerrin has served on the board of Fletcher Building since the company was separately listed in 2001. Prior to that Kerrin had been a director of Fletcher Challenge Limited since 1986. On behalf of the board I extend my thanks for the many years of dedicated service Kerrin has given to Fletcher Building, and for the enormous contribution she has made to the performance and governance of the company. An additional director will be appointed in due course.

Back to topOutlook

In New Zealand, the outlook is for a very gradual improvement in housing starts, but from a very low base. The rebuilding of Canterbury is expected to gain momentum in the latter part of the year and this will boost the construction industry. The commercial outlook remains patchy with increased activity in some sectors, but limited growth likely in aggregate. Infrastructure-related demand is expected to be underpinned by central government spending.

In Australia, the housing, and alterations and additions sectors are weakening in the short term. The short term outlook for the commercial sector is also subdued. The continued activity in the mining sector, and ongoing government investment, should underpin infrastructure spending.

Trading conditions in both North America and Europe continue to remain flat with no recovery of significance expected in these markets in the near term. Recent economic forecasts have been downgraded and expectations and timing of any recovery continue to remain uncertain. Conversely, China, South East Asia and Taiwan are exhibiting growth and the outlook remains positive for this region.