Chief Executive's review.

This has been another milestone year. The successful acquisition of Crane Group Limited ("Crane") during the year has seen Fletcher Building become the largest building materials company in Australasia.

The addition of Crane is consistent with the strategy established ten years ago when Fletcher Building was first listed as a separate entity. This entailed diversifying geographically and through the mix of businesses and products. The addition of Crane will see total revenues generated in Australia exceed those derived from within New Zealand. This diversification has ensured stable operating earnings despite the slowdown in the New Zealand economy over the past year.

A year ago, the Canterbury region suffered the first in a series of earthquakes that have extracted a terrible toll in lives lost, and buildings and livelihoods destroyed.

Following the first major earthquake on 4 September 2010, Fletcher Building was appointed to project manage the repair to homes covered by the Earthquake Commission. The second and more damaging earthquake on 22 February 2011 saw the focus switch temporarily to emergency repair work and the installation of alternative winter heating sources.

We are committed to playing our part in rebuilding New Zealand’s second largest city.

Back to topReview of business performance

Set out below is an overview of the group’s performance for the year. You will find more detailed information on each of our divisions elsewhere in this report.

Net earnings were $283 million, compared with $272 million in the 2010 year. Unusual items of $76 million after tax were incurred. These related to costs associated with the acquisition and restructuring of Crane, inventory and goodwill write-downs in the Australasian insulation businesses, and adjustments to the carrying value of other assets. Net earnings before unusual items increased to $359 million from $301 million in the previous year.

Operating earnings before unusual items increased to $596 million, from $521 million in the 2010 year. Cashflow from operations was $402 million compared with $522 million in 2010.

For the year to 30 June 2011, total sales for the group were nine percent higher at $7,416 million including sales of $623 million for Crane for the period since its acquisition. Excluding Crane, total sales were in line with those recorded in the previous year.

Revenue performance in New Zealand was mixed, with growth in concrete products and residential house sales but lower sales in most other building products, steel, and construction. Many businesses were affected by disruption to trading following the Canterbury earthquakes.

In Australia, the group recorded revenue growth in most businesses with stronger growth in concrete and quarry products, particleboard, and coated steel. Revenues were significantly down, however, in the Australian insulation business as a result of the termination of the government’s insulation retrofit scheme. Formica continued to generate strong sales growth in Asia, while North American revenues were flat and European revenues fell further.

Building Products operating earnings, excluding unusual items, were down three percent to $111 million. Plasterboard volumes reduced due to the decline in the New Zealand residential construction in the second half. Costs increased due to the Canterbury earthquakes and input pricing pressures.

Operating earnings before unusual items for the insulation business were down 26 percent partly due to the continuing impact of the withdrawal of the Australian government’s insulation subsidy scheme in February 2010. The continued industry-wide over-supply of insulation products has adversely impacted price and manufacturing efficiencies.

Volumes in the roof tiles business were up in Africa, Europe and Asia despite difficult global trading conditions, but down in the key New Zealand and US markets.

For the three months since acquisition, Crane had revenues of $623 million and operating earnings before unusual items of $29 million.

Corporate cost savings originally identified in the acquisition have largely been achieved.

Sales in the Distribution division declined by three percent as residential and commercial building activity reduced in the second half. Operating earnings rose by three percent to $39 million, driven by planned cost reductions and a focus on protecting product margin.

Infrastructure’s operating earnings, including its property activities, increased by $21 million to $185 million, up 13 percent on the previous year. The result was driven by operational improvements and efficiency gains across the business, and higher earnings from house sales.

The New Zealand and Australian concrete businesses earnings increased by $19 million to $124 million. Sales volumes of most products in New Zealand were lower for the third year in succession. Reduced costs and improved operational efficiency mitigated the impact of the softer demand. A focus on product pricing and operational enhancements contributed to improved margins. Construction earnings declined from $39 million to $37 million with activity softening during the year. The property and residential operations improved by $4 million to $24 million, and homes in the Stonefields subdivision in Auckland continued to sell well.

Operating earnings for Laminates & Panels before unusual items were $168 million, compared with $141 million in the previous year. Sales were three percent higher at $1,979 million.

Laminex’s Australian revenues were up eight percent on the prior year. Revenues in the first half were up strongly, driven by improvements in new housing and the government education building investment programme. In the second half of the year housing starts slowed and the education building programme was completed. Activity levels in the commercial sector were lower than previous years.

Laminex’s New Zealand revenues were marginally lower than the prior year with the economy continuing to remain subdued, although margins remained consistent.

Formica’s operating earnings were $56 million, 65 percent higher than the prior year. The improved result was due to further operational improvements and efficiency gains in all key areas of the business.

Volumes in North America were down three percent. Activity in the US residential sector showed minimal growth from an extremely low base. Non-residential activity continued to decline in the first half, with little recovery seen in the second half.

In Europe, volumes were down six percent and domestic currency revenues down five percent as demand in the major economies in Western Europe continued to decline. Other European markets generated revenue growth, however, and new markets were developed with the commencement of exports to South Africa and the establishment of operations in India.

Activity levels in Asia were strong with revenue up by nine percent in domestic currency terms. All the key markets performed well.

The Steel division operating earnings of $83 million were in line with the prior year. Demand was weak with overall volumes declining three percent during the year. Sales for the year were slightly ahead but declined in the second half of 2011.

In the rollforming and coated steel businesses, operating earnings improved by 32 percent to $58 million, despite volume declines in both Australia and New Zealand. Market conditions in long steel were difficult, and earnings declined 61 percent to $12 million. Volumes were seven percent lower, with New Zealand domestic demand down 19 percent. Earnings in the distribution and services businesses rose 86 percent.

Back to topCashflow

Cashflow from operations was $402 million compared with $522 million in the prior year. Working capital increased by $148 million due to increases in inventory and debtors, and a reduction in creditors.

Capital expenditure for the period, excluding the acquisition of Crane, was $307 million, up from $191 million in the prior year. Of this total, $200 million was for stay-in-business capital projects, $51 million was for new growth initiatives, and $56 million was for the acquisition of new businesses. Significant investments during the period included the acquisition of Australian Construction Products, and the expansion of the Laminex decorated board plant in Queensland.

Back to topEnvironment

Our goal is to reduce our CO₂ emissions by five percent by 2012 and work to achieve this is continuing.

Our business units are making steady progress towards achieving greater energy efficiency. Golden Bay Cement, for example, which is responsible for 45 percent of the company’s emissions, is progressively increasing the level of biomass fuel it uses for the production of cement at its Portland plant and in 2010 this grew to 28 percent.

The Australian government has announced it will introduce its Clear Energy Future Plan, which includes a carbon pricing mechanism, from 1 July 2012. Our efforts to continually reduce emissions and improve energy efficiency will help to ensure that these costs are minimised.

Back to topPeople

Following the acquisition of Crane, Fletcher Building employee numbers have  increased to over 20,000 people in over  50 business units across more than 40 countries. 

To encourage employees to share in the company’s success, we launched in March a global employee share scheme, FBuShare. Participation by employees exceeded expectations with thirty percent of eligible employees joining the scheme.

Back to topHealth and safety

We have made good progress in further reducing injuries.

Total Recordable Injury Frequency Rate (TRIFR) for employees and contractors reduced significantly over the last year, from 14.09 to 10.57. Similarly, the lost time injury frequency rate has also reduced from 5.04 to 4.11.

Back to topStrategy

Ten years on from its separate stock exchange listing in 2001, Fletcher Building is today a portfolio company that creates value through applying its operating model to attractive industry positions in Australian and New Zealand light and heavy building materials markets. This strategy has delivered improved earnings reliability for the group through geographic and end market diversification.

Fletcher Building continues to see good opportunities across Australia and New Zealand to invest in new businesses and bolt-on acquisitions, and for organic growth of its existing businesses. Fletcher Building’s primary exposure outside Australia and New Zealand is through Formica.

For the next few years the company will continue to focus on opportunities across Australasia, and on growing the Formica business, particularly in Asia.