Fletcher shares tumble as construction woes cut guidance $110m

Fletcher Building chief executive Mark Adamson

Fletcher CEO fronts up to analysts after shock loss announcement

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Fletcher Building shares tumbled 12% after the company cut its full-year earnings guidance by about $110 million because of complexity and delays with a major development that showed up during a review of its construction division.

The stock fell $1.12 to $8.10 and earlier touched a six-month low of $8.035 when it resumed trading after being halted on Friday pending the announcement. Full-year operating earnings before interest, tax and significant items are expected to be $610-650 million, compared with previous guidance of $720 million to $760 million.

The downgrade comes less than four weeks after Fletcher affirmed its earlier guidance with its first-half results, which included just a $1 million contribution from its New Zealand construction business, despite gross revenue from construction soaring 54% to $1.15 billion in the first half. The slump reflected losses incurred on a major construction project, which it didn't identify, and it kept the identity of the project secret today, citing client confidentiality.

Fletcher Construction's major projects include the $300 million Justice and Emergency Services precinct in Christchurch, which was due to be handed over at the end of this month but according to a Ministry of Justice spokesman quoted by The Press is now not expected to open until the third quarter of 2017 after the company put the handover date back to June 30. The spokesman described the precinct as "the largest multi-agency government co-location project in New Zealand's history."

Chief executive Mark Adamson said it was "extremely regrettable" the profitability in the buildings and interiors unit of the construction business had worsened since the first-half announcement. "It is very disappointing that the review of the B&I (buildings and interiors) business unit has found weaker performance than we had previously understood."

The company was scheduled to hold a conference call this morning.

In its statement, Fletcher indicated there may have been issues in its bidding for major projects, a process which has now been overhauled.

Fletcher has completed a "thorough review" of its construction division which started in late 2016 and found the major contract was likely to face bigger losses, which represents about half of the downgrade, while another major project has attracted provisions for losses due to significantly higher costs needed to complete it, and a number of smaller jobs also faced lower earnings.

One of the projects was expected to be completed within the next few months and the other has a target date for the 2019 financial year. Fletcher said the main problems were in the complexity of design, subcontractor management and building programme delivery, which delayed the projects and led to higher costs.

As a result, Fletcher has appointed a chief operating officer and a new head of risk and governance for the construction division, while a new general manager of the B&I unit will start soon.

"We have new finance leadership and processes along with the recent implementation of a new financial management reporting system," the company said. "The criteria for bidding major construction projects have been made more stringent, and internal review processes for proposed and existing projects have been strengthened."

As one of the country's biggest building firms, Fletcher participates in many major development projects.

It has a construction backlog of about $2.7 billion of which about $1.5 billion is in the B&I business. All but one of its major projects under way in B&I is either a "fixed price lump sum" or "guaranteed maximum price" contract, which was standard practice in the commercial construction industry, it said today.

The company said growth in the B&I business wasn't driven by a deliberate strategy to boost volume growth for its building products division, which traded with the construction division on an arm's length basis.

Other major construction projects include Auckland's convention centre and Hobson St hotel, a $700 million contract, the $425 million Commercial Bay development in Auckland for Precinct Properties, and roading work including the Waterview Connection, and Puhoi to Warkworth.

(BusinessDesk)


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What makes this issue worse is that Fletchers also work off about a 30% advantage to other construction companies by owning most of the building products manufacturing units and distributors that supply the raw material for these projects - so its probably 30% worse than $110M

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How do you figure 30% worse? Would have thought even though they make a loss on the construction side, they are still making money from products and distribution?

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How do you come to that conclusion - the overall company is writing down another $110M - not just the construction division

That is my point - they would have made another 30% in from the products division so it's really a $145ish write down from the construction arm of the business - net $110M

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Not a good sign when your nations biggest construction company fails to capitalise on both a rebuild in CHCH and a property boom in Auckland. Share price has basically done nothing for 5 years now, other than some short-lived troughs and gains.

One-off, or sign of worse to come?

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or is that loss still to come?

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Intriguing to see where this will go. Understanding in the construction sector is Fletcher has several major projects in trouble; Justice Precinct, Auckland International Airport, Paremoremo Prison and NZICC. Worse is surely to come.

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Can someone please help me with the continuous disclosure rules? My current understanding is that if something has the potential to impact performance by + or - 5% then it must be disclosed to the market immediately. FBU must have known the potential downside much earlier than last week, so why was it not disclosed?

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There has been some job losses over this.

What about the guy at the top? There is such a thing as internal reporting, and if its not adequate enough then who''s fault is that!! Big hits like this shouldnt come as a surprise.

Might be a good idea for the FMA to check who's sold shares lately.

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When I see year after year, tens of $millions of plant and machinery parked up and laying idle for weeks on end; contractors not making most of daylight hours and working after 5pm, Sundays and Public Holidays and, seemingly every "worker" continuously on their Iphones, then this is how I would describe my observations of the North Western motorway project non a daily bases over the last 5 years . What a shambles. Could have been completed in a fraction of the time by the Chinese. No wonder Fletchers are losing money

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There is the steel mesh certification issue, other steel certification issue and subsequent extra strengthening of government projects using that steel (I think a bridge and a large sludge storage tank) plus the effect of reworking around 20,000 (check this figure) Canterbury Home Repairs due to lack of quality and supervision at the time the jobs were first done.
Possibly there is no company in NZ that lobbies government more than Fletchers, including cigarettes, alcohol and drugs companies. They have won the contract for the East Frame in Christchurch despite the excessively poor record of completion of the above CHRP projects in Christchurch, a very weak reason given for them winning the contract and a number of other quality submissions with potentially more integrity.
Talk to old tradesmen and you will hear stories of government building supplies deliveries being ticked off at one gate and driven out another to supply another Fletchers job. Like selling a dog that runs home to be resold! Many similar stories have been related from 40 years ago - and suspect activities are still happening without consequence.
Every dog has it's day. Crime doesn't pay. Power corrupts and absolute power corrupts absolutely. What goes up must come down. However 110 million is probably only 2% of market cap, so it's like losing your second car if you have a half million dollar house.
In any regard it is gross mis-management for so much to go wrong at once! Supposedly with no warning!

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As a shareholder I am entitled to a more comprehensive explanation for the losses sustained on the two unspecified major contracts. These losses must have been anticipated much earlier. If not, then Fletcher management is inept. The Board must be aware of management's shortcomings and must to make changes without delay.
The Board has not met its obligations to shareholders in providing them with a full and comprehensive report on how this situation has arisen. It is not sufficient for the CEO to report when, in fact, he is the responsible party.
I expect a Board report soon.

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