UPDATED: Fletcher Building profit up 8%, outlook mixed

Fletcher Building says it is on track to meet analyst’s full year earnings forecasts after posting a net profit of $166 million for the six months to December, up 8% on the same previous period.

Operating earnings of $285 million compared with $271 million in the first half of the 2010 year. Fletcher shares fell 6c to $8.15 in early trading as investors reviewed the result.

Chief executive Jonathan Ling said it was a strong result given mixed market conditions.

“In New Zealand the recovery in residential house building activity has stalled, but high infrastructure work levels and good cost containment aided earnings growth," Mr Ling said.

"The stronger Australian economy has meant that most of our businesses there have achieved pleasing earnings growth. Beyond Australasia, Formica has continued to lift its earnings through continued growth in Asian revenues and higher North American margins despite flat volumes in that market."

Fletcher Building, which has made a takeover offer for Australia’s Crane Group, said the Canterbury earthquake and after shocks had negatively impacted business here although it expected a positive impact as repair and reconstruction gained momentum.

The company was appointed project manager of the Earthquake Commission claims for residential damage.

Likewise the Queensland and Victoria floods had disrupted Fletcher’s business in Australia but activity was expected to pick up in the second half as rebuilding got underway.

The company declared an interim dividend of 16c-a-share – fully franked for Australian tax purposes but no imputation credits for New Zealand tax purposes.

In announcing the half year result the company indicated it was on target to meet analysts’ expectations of $313 million-$396 million net earnings for the full year to June, with an average of $354 million.

"Assuming no further deterioration in New Zealand construction volumes, robust economic performance in Australia and Asia, and stable markets in aggregate across Europe and North America, we expect net earnings to be within this range of analysts' expectations, and broadly in line with the average of analysts' consensus estimates," Fletcher said.

Key drivers
Fletcher’s total sales were 2% higher at $3.47 billion. Cashflow from operations was $202 million compared with $317 million in the first half of the 2010 financial year as a result of increasing inventory levels in preparation for an upturn in activity levels.

The result was driven by a strong performance in the group’s Australian businesses, particularly in Laminates and Panels and steel products.

“Volumes were mixed across the New Zealand businesses, but revenues in the distribution and construction businesses were higher and Fletcher Residential house sales were up strongly.”

Operating earnings for Laminate & Panels were $80 million, up 14% from $70 million in the previous same period.

Laminex contributed $57 million, up 27%.

Formica continued to achieve good sales growth in Asia but European volumes declined further, Fletcher Building said.

Formica reported operating earnings of $23 million, up 130% on the same period last year, despite revenue dipping by 6% largely due to adverse foreign exchange movements.

Laminates & Panels - region by region
Asia performed well with operating earnings of $19 million, up 19% on last year. Revenue from China was up 15%. Fletcher said prices and margins remained strong across the region.

North America was relatively flat with volume down 3% but operating earnings from the region were up from $4 million to $11 million, driven by logistics, warehousing and distribution.

Markets in Europe and the UK remained particularly tough, with the exception of Russia and other ex-Soviet countries where strong growth was recorded, Fletcher said.

The company is pursuing expansion into Africa and India. 

Steel
Fletcher’s steel business posted operating earnings of $43 million, slightly up on the $42 million of a year ago. While most steel businesses saw better returns the long steel business had a tough first half with earnings down 50% due to low volumes and low margins.

Infrastructure
Operating earnings from infrastructure projects for the first six months were $90 million, up 20% on the same period a year ago. Major projects won in the period included the ASB head office in Auckland and the Earthquake Commission contract.

Crane acquisition and global strategy
Last week Crane Group’s directors recommended shareholders accept Fletcher’s $A10.07-a-share offer for the pipe maker.

The deal would give Crane shareholders one Fletcher share plus $A3.50 cash for each Crane share.

Fletcher said today the proposed acquisition of Crane was part of its strategy to grow its building products and construction materials.

“Australia remains the key geography for pursuit of the group’s growth strategy.

“[Crane’s] businesses are complimentary to Fletcher Building’s and successful completion of the transaction will see an extension to the group’s range of building products and expansion of its distribution footprint across Australia and New Zealand.”