Patchy Aussie leaves NZ and cost control to drive Fletcher earnings

Fletcher Building [NZX: FBU] says the outlook in Australia is uncertain after a strong kiwi dollar exacerbated a drop in first-half earnings across the Tasman, leaving New Zealand and the company's cost-cutting programme as key profit drivers.

Shares of New Zealand's largest construction and building products group fell 2.9 percent to $9.44, paring an earlier decline to as low as $9.39 after the company posted a 5 percent gain in net profit in the six months ended Dec. 31 to $154 million.

That missed some analyst estimates as the company recognised $20 million of restructuring costs and saw some $206 million sliced off revenue when it was translated into kiwi dollars. Sales fell 2 percent to $4.27 billion.

Among the positives though, was a 1 cent lift in first-half dividend to 18 cents, a revised annual benefit from its FBUnite cost control programme of $100 million from a previous range of $75 million to $100 million, and confirmation of guidance for full-year earnings before interest, tax and significant items of $610 million to $650 million.

"Net-net if you take out the restructuring costs and currency effect, it's not as bad as the headline number suggests," said Slade Robertson, a portfolio manager at Devon Funds Management. "New Zealand looks like it has been quite good and that's where the positive story is coming from."

Operating earnings grew 7 percent to $262 million in the first half, driven by a 35 percent improvement from its New Zealand operations. Australian earnings fell 27 percent to $77 million and the strong kiwi against the Australian dollar turned a 1 percent gain in sales across the Tasman into a 10 percent decline to $1.7 billion in NZ dollar terms.

The outlook in Australia "remains uncertain (with) variation in activity levels continuing across each of

the states," the company said in a presentation released for a conference call. While some improvement in housing construction is expected, to date this has been weighted toward multi-unit developments, rather than stand-alone houses that consumer more of Fletcher's products.

The outlook for commercial construction remains subdued, state governments are spending less on infrastructure and mining activity is "depressed," the company said.

"Australia is clearly looking better than it was 12 months ago," chief executive Mark Adamson said on the call. "New South Wales seems to be leading that charge and there are pockets of improvement in Queensland as well."

Adamson said he was able to tighten the target for the FBUnite programme as the company developed detailed plans against each of its businesses.

Revenue in New Zealand rose 3 percent to $2 billion and operating earnings lifted to $167 million as the company benefited from rising housing construction, repairs and rebuilding work in Canterbury and demand for housing in Auckland.

The 'rest of the world' segment posted a 4 percent gain in revenue to $541 million and a 16 percent gain in operating earnings to $37 million, with a pickup in North America activity, where earnings rose 21 percent, and flat activity levels in Europe.

Of Fletcher's six divisions, only construction managed to increase sales in the first half - up 6 percent to $648 million and contributing to a 51 percent increase in operating earnings to $56 million.

The company had a construction backlog of about $1.6 billion as at Dec. 31, up from $1.19 billion a year earlier.

For infrastructure products, Fletcher's largest business, sales fell 1 percent to $1.04 billion and earnings slipped 6 percent to $96 million. Within infrastructure, cement, concrete and aggregates earnings climbed 26 percent to $39 million, while concrete pipes and products posted a 29 percent drop to $20 million, largely due to lower Australian pipe volumes. Earnings at Iplex and Crane Copper Tube fell 37 percent to $19 million on rivalry and one-time costs. Steel earnings rose 38 percent to $18 million.

The building products division lifted earnings by 9 percent to $61 million as sales fell 6 percent to $657 million. Plasterboard lifted volume on steady market share, insulation earnings fell by $4 million and earnings from roll-forming, roof tiles and coated steel rose 8 percent to $26 million.

Laminates and panels had a 2 percent decline in sales to $866 million while operating earnings rose 4 percent to $53 million.

Distribution in New Zealand, the Placemakers and Mico Plumbing chains, had a 4 percent drop in sales to $582 million and a 56 percent jump in earnings to $25 million. The revenue decline reflected the sale of the Corys Electrical business while Placemakers lifted sales by 10 percent, the company said.

In the Australian Tradelink and Hudson Building Supplies businesses, sales fell 10 percent to $476 million and earnings rose 14 percent to $8 million. The currency impact eroded what was a 40 percent earnings gain in Australian dollar terms.

(BusinessDesk)