Fletcher Building : 2018 Annual Results Management Commentary Download

Reported results	Year ended 30 June
NZ$m (except where noted)	2018	2017	Change %
Total revenue	9,471	9,399	1%
Operating earnings before significant items1	50	525	(90)%
Significant items2	(168)	(252)		(33)%
Operating earnings (EBIT)	(118)	273		NM
Funding costs	(157)	(111)		41%
Earnings/(loss) before taxTax benefit/(expense)	(275) 96	162(57)		NMNM
Earnings/(loss) after taxNon-controlling interestsNet earnings/(loss)	(179) (11) (190)	105(11) 94		NM 0% NM NM
Net earnings/(loss) before significant items	(60)	321
Basic earnings per share (cents)	(25.5)	13.5		NM
Dividends declared per share (cents)	0.0	39.0		NM
Cash flows from operating activities	396	243		63%
Capital expenditure	304	319		(5)%
Operating earnings before significant items1	50	525		(90)%
Building + Interiors (B+I)	(660)	(292)		NM
Operating earnings (excluding B+I) before significant items3	710	817		(13)%

1Operating earnings before significant items is a non-GAAP measure used by management to assess the performance of the businessand has been derived from Fletcher Building Limited's financial statements for theyear ended 30 June 2018.

• 2Details of significant items can be found in note 4 of the financial statements.

• 3Measure excludes the impact of the Building + Interiors (B+I) business unit

• Revenue for the period of $9,471 million was $72 million, or 1%, higher when compared with the prior year;

• Operating earnings before significant items were $50 million, which included the impact of losses in the Building +Interiors ("B+I") businessof $660 million as announced in February 2018;

• Operating earnings (excluding B+I) before significant items of $710 million were within earnings guidance, and were $107 million, or 13%, lower than the prior year;

• A charge of $168 million was recognised in significant items (2017: a charge of $252 million) relating to group restructuring charges, gains on divestments, and certain asset impairments;

• A cash inflow from operations of $396 million was $153 million, or 63%, higher than the prior year.

• Net earnings were a loss of $190 million, down from a profit of $94 million in the prior year;

• In line with the Company's Dividend Policy, the Board has determined that it will not declare a final dividend.

Financial Results

Year ended 30 June
Revenue
NZ$m	2018	2017	Change
Building Products	764	745	3%
Distribution	1,530	1,519	1%
Steel	532	491	8%
Concrete	812	781	4%
Residential and Development	575	420	37%
Construction	1,685	2,246	(25%)
Australia	3,076	2,858	8%
Formica and Roof Tile Group	1,177	1,120	5%
Divested businesses	108	78	38%
Other	8	9	(11%)
Gross revenue	10,267	10,267	0%
less intercompany sales	(796)	(868)	(8%)
Group external revenue	9,471	9,399	1%
Year ended 30 June
Reported operating earnings			Operating earnings before significant items and B+I1
NZ$m	2018	2017	Change	2018	2017	Change
Building Products	132	152	(13%)	132	152	(13%)
Distribution	101	104	(3%)	104	104	0%
Steel	41	54	(24%)	49	54	(9%)
Concrete	73	113	(35%)	90	113	(20%)
Residential and Development	136	130	5%	136	130	5%
Construction	(613)	(204)	NM	52	88	(41%)
Australia	65	(132)	NM	114	119	(4%)
Formica and Roof Tile Group	8	79	(90%)	65	79	(18%)
Corporate	(111)	(31)	NM	(45)	(30)	(50%)
Divested businesses	50	8	NM	13	8	63%
Total	(118)	273	NM	710	817	(13%)
Funding costs	(157)	(111)	(41%)	(157)	(111)	(41%)
Earnings/(loss) before tax	(275)	162	NM	553	706	(22%)
Tax benefit/(expense)	96	(57)	NM	(127)	(164)	(23%)
Earnings/(loss) after tax	(179)	105	NM	426	542	(21%)
Non-controlling interests	(11)	(11)	0%	(11)	(11)	0%
Net earnings/(loss)	(190)	94	NM	415	531	(22%)

1Operating earnings before significant items and B+I is a non-GAAP measure used by management to assess the performance of the

business and has been derived from Fletcher Building Limited's financial statements for theyear ended 30 June 2018. Details of B+I and significant items can be found in notes 3 and 4 of the financial statements respectively.

2Financial results are presented under the new divisional structure, as announced on 21 June 2018.

Geographic segments

Year ended 30 June

Gross revenueNZ$m

Externalrevenue

New Zealand Australia2Rest of World

Total

2018	2017	Change	2018	2017	Change
5,867	6,126	(4%)	5,220	5,381	(3%)
3,120	2,853	9%	3,018	2,766	9%
1,280	1,288	(1%)	1,233	1,252	(2%)
10,267	10,267	0%	9,471	9,399	1%

Geographic segments

Year ended 30 June

Operating earnings before significant items1

NZ$m

New Zealand Australia2Rest of World

2018(172)

Total

123 9950

2017282 120 123525

Change

NM

3%

(20%)

(90%)

Geographic segments in local currency

Gross Revenue

Year ended 30 JuneExternal revenue

2018

2017

Change

2018

2017

Change

Australia (A$m)2Rest of World (US$m)

2,877 913

2,701 918

7% (1%)

2,783 879

2,619 892

6% (1%)

Geographic segments in local currency

Year ended 30 June

Operating earnings before significant items1

2018	2017	Change
Australia (A$m)2	113	114	(1%)
Rest of World (US$m)	70	88	(20%)

1Operating earnings before significant items is a non-GAAP measure used by management to assess the performance of the businessand has been derived from Fletcher Building Limited's financial statements for theyear ended 30 June 2018. Details of significant items can be found in note 4 of the financial statements.

2The Australia geographic segment includes corporate costs and Land Development operations in addition to that of the Australia division.

• External revenue of $9,471 million was $72 million or 1% higher than the prior year. New Zealand revenue decreased by $161 million or 3%, but increased by $251 million or 7% excluding the Construction division. Australian revenue increased by $252 million or 9%, and in local currencies revenue increased by 6% in Australia and decreased by 1% in the Rest of World.

• InNew Zealand,market conditions were robust with flat to low single digit growth compared to the prior year.

  • The distribution and materials divisions showed modest to strong revenue growth compared to the prior year, driven by both volume and pricing gains. However, this was offset by increases in input costs (especially energy), which could not be fully recovered through price increases; higher supply chain costs to alleviate capacity constraints; changes in product mix, and certain one-off costs.

  • The Residential and Development division performed strongly, with the Residential business benefiting from the number of units available to sell as subdivisions came to market as well as robust selling prices in Auckland, and the Land Development business recognising the sale of the first site at Wiri North.

  • The Construction division saw mixed results as the prior year included the finalisation of significant projects in the Infrastructure business. Higgins continued to perform strongly through participation in large scale roading projects. Revenue in B+I decreased from the prior year as projects were re-phased based on the additional provisions recognised during the year.

• InAustralia, market conditions were mixed, with robust activity in Victoria and South Australia offset by continued challenging trading conditions in Western Australia. Victoria has overtaken New South Wales in the number of building consents issued. Most Australian businesses were impacted by increased input costs, particularly resin and energy, which could not be fully recovered through price increases. A contribution of $15 million from the Land Development business in Australia led to operating earnings increasing by 3% in New Zealand dollars overall compared to the prior year.

• In theRest of World, earnings were mixed, with a strong performance from Formica in North America and Asia offset by earnings decreases in the Roof Tile Group and Construction South Pacific, due to difficult trading conditions in a number of export markets for the Roof Tile Group and a roll-off of major projects in South Pacific.

• The significant items charge of $168 million for the year related to restructuring costs of $91 million and impairment charges of $114 million, offset by gains on business divestments of $37 million. The restructuring costs and business divestments were as a result of the implementation of the new Group strategy announced on 21 June 2018.

• Funding costs of $157 million increased from $111 million in the prior year. This reflected a $16 million increase in the impact from derivative valuations compared to the prior year, an increase in interest costs from debt levels and mix, and penalty interest and fees paid on some tranches of debt following covenant breaches.

• The tax benefit of $96 million reflects the loss for the year, with the B+I loss provisions expected to be deductible in future periods.

• Earnings per share were (25.5) cents compared with 13.5 cents per share in the prior year.

• A cash inflow from operations of $396 million compared with an inflow of $243 million in the prior year. The improvement was driven primarily by higher cash conversion in the Residential business and improvements in working capital management across the Group.

  1

In certain sections of this commentary the Group has chosen to present certain financial information exclusive of the impact of Significant Items and / or the results of the Building + Interiors (B+I) business unit, consistent with previous market guidance. Where such information is presented, it is clearly described and marked with an appropriate footnote. This allows the readers of this commentary to better understand the underlying operations and performance of the Group.

Segmental Operational Review

The following sections provide commentary on individual division results for the year ended 30 June 2018 based on the new divisional structure announced on 21 June 2018.

Building Products

Winstone Wallboards; Laminex New Zealand; Tasman Insulation; Humes; Iplex New Zealand; CSP Pacific; Altus

Year ended 30 June
NZ$m	2018	2017	Change	Change %
Gross revenue	764	745	19	3%
External revenue	613	589	24	4%
Operating earnings	132	152	(20)	(13%)
Funds	494	489	5	1%
Trading cashflow	142	143	(1)	(1%)

The Building Products division reported gross revenue of $764 million, an increase of 3% compared with $745 million in the prior year. The division's operating earnings were $132 million, compared with $152 millionin the prior year, a reduction of 13%.

The increase in Building Products revenues was driven by higher price and volumes in selected products offsettingweaker volumes of other products. Iplex NZ's sales volumes were up 15% year on year, the price of standard andperformance wallboards increased modestly and domestic glasswool selling prices were up 6%. However, domestic wall board sales volumes and glasswool tonnage sold were both down 1% and concrete pipe volumes were 9% lower than a year ago.

Demand was consistent across all sectors of the market, however, regional performance was mixed as the rate of growth in Auckland slowed and demand in Christchurch continues to rebase following higher activity levels during the earthquake rebuild period.

The contraction in operating earnings for the year is largely as a result of cost pressures, and in particular:

• Higher energy, raw material, and supply chain costs, primarily in Iplex New Zealand and Winstone Wallboards, which could not be fully recovered through price increases.

• One-off costs incurred due to storm damage in Winstone Wallboards, a fire event at the Humes Penrose site, and provisions made in the division for obsolete stock and historical claims.