Fletcher Building Limited

Annual Report 2020

Contents

Welcome to our FY20 Annual Report, which describes our business operations, approach to doing business, performance for the year and focus for FY21. As with our previous reports, we include commentary on our strategy, governance, environmental and social performance of our business as well as our financial results. We welcome questions, comments or suggestions about this report to

investor.relations@fbu.com.

This report and our previous reports and presentations are available at fletcherbuilding.com.

Our Year

01

At a Glance

02

Chair's Report

04

CEO's Report

06

Our Strategy

07

Our Sustainability Aims

08

Sustainability Performance

10Supporting our people and communities

14Careful management of our resources and emissions

17Better products, houses and infrastructure

Performance

20

Group Performance

Divisional Review

24Building Products

26Distribution

28Concrete

  1. Residential and Development
  1. Construction
  1. Australia

Governance

36

Board and Executive Team

39

Corporate Governance

  1. Sustainability Materiality Assessment
  2. Remuneration Report

Financial Report

  1. Trend Statement
  2. Financial Statements
  1. Notes to the Financial Statements
  1. Independent Auditor's Report

Other Disclosures

  1. Statutory Disclosures
  1. Corporate Directory

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This Annual Report is dated 19 August 2020 and is signed on behalf of the Board by:

Bruce Hassall

Robert McDonald

Chair

Director

When used in this Annual Report, references to the 'Company' are references to Fletcher Building Limited. References to 'Fletcher Building' or the 'Group' are to Fletcher Building Limited, together with its subsidiaries and its interests in associates and joint ventures. All references to financial years (e.g. FY19 and FY20) in this Annual Report are to the financial year ended 30 June. References to $ and NZ$ are to New Zealand dollars unless otherwise stated.

In certain sections of this report 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 report to better understand the underlying operations and performance of the Group.

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At a Glance

People in New Zealand,

Australia and the South Pacific

Operating sites

15,000+

650+

Revenue

Net (loss)/earnings

- reported

$7,309m

($196m)

2019 $8,308m

2019(2) $164m

EBIT before

Cash flows from

significant items (1)

operating activities

$160m

$410m

2019 $549m

2019 $153m(2)

Earnings per share

Leverage ratio

(economic net debt/EBITDA)

(23.5¢)

0.9x

2019 28.8¢

2019(2) 0.4x

EBIT margin before

Total dividend

significant items (1)

nil

2.2%

2019 23 cps

2019 6.6%

Safety TRIFR (3)

5.7

2019 5.0

Employee engagement

71%(4)

2019

Carbon Emission

1,132,416 tCO2e

2019 1,298,266 tCO2e

Customer NPS (5)

39

2019 39

  1. Measures before significant items are non-GAAP measures used by management to assess the performance of the Group and have been derived from Fletcher Building Limited's financial statements for the year ended 30 June 2020.
  2. The 2019 number includes discontinued operations which were divested during the year.
  3. Total recordable injury frequency rate. Measured by the number of recordable injuries per million hours worked. TRIFR does not include restricted work injuries.
  4. Note that the employee engagement survey did not take place as originally planned in March 2020 because of the COVID-19 crisis.
  5. Net Promoter Score is a measure of how satisfied our customers are with our business. Prior years have been restated to reflect inclusion of all business units in NPS programme.

Fletcher Building Limited Annual Report 2020

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Chair's Report

Bruce Hassall, Chair.

Dear Shareholders

OVERVIEW OF FY20

This has been an extraordinary and challenging year for Fletcher Building and for our shareholders. The unprecedented events of COVID-19 required decisive action and strong governance to ensure the Group was positioned for both the immediate impacts and the ensuing economic downturn. Importantly, the Group balance sheet has remained very strong.

Ahead of COVID-19, the Group was in a good position to deliver on its goals and execute its strategy. However, the impact of the stringent shutdown requirements in New Zealand as well as the health and safety measures required in Australia due to the COVID-19 pandemic, resulted in the Group delivering a loss attributable to shareholders of $196 million in FY20 compared to a profit of $164 million in FY19. We had to make some very difficult decisions this year which unfortunately included cancelling our interim dividend and not declaring a final dividend.

As the COVID-19 pandemic unfolded in March, the Board turned very quickly to addressing the immediate challenges of the rapidly evolving situation. We provided oversight and support to the executive team as they focused on the health and operational situation affecting our people, our customers and our suppliers. In New Zealand, we shut down almost all of our operations for a five- week period in an unprecedented country-wide lockdown.

We then shifted to preserving the strong balance sheet and liquidity positions we had established, as well as sizing the Group for the lower market outlook and we took decisive action to reduce costs which affected almost all our stakeholders. This included suspending our on-market share buyback programme, reducing capital expenditure, effective management of creditors and debtors and stopping all non-essential expenditure. We also reduced remuneration across the Board, executive team and general managers, placed employees on the 'Bridging Pay Programme', removed STI bonuses and unfortunately, given the uncertainty of the situation, cancelled our interim dividend. In addition, we negotiated more favourable terms on our lending agreements allowing us to rely on more favourable debt covenants. We are grateful to our shareholders, customers, suppliers and other stakeholders for their support. Because of these actions, our strong balance sheet withstood the uncertainty of the crisis and ended the year with net debt of $497 million and liquidity of $1.6 billion (adjusting for the repayment of debt on 29 July 2020 the Group's liquidity at 30 June 2020 would have been $1.3 billion). We have not needed to

raise capital.

While we took decisive action, we were unable to prevent a material earnings impact, and unfortunately, we decided to increase our provisions across our Buildings and Infrastructure projects in our Construction division by $150 million. The majority of the provisions were as a result of impacts from COVID-19 shutdowns and productivity losses which will affect FY20 and beyond. Importantly we are now well through the legacy work left to complete across buildings and infrastructure and at the same time we have successfully bid and won new work that is of much higher quality and importantly at a significantly lower risk than the legacy work we have just about completed. The margins and contract terms have been strictly controlled through the bid processes to ensure they are more balanced and appropriate. While the additional provisioning on historical projects is disappointing, Fletcher Construction is increasingly well set-up to deliver sustainable earnings in the future.

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At the same time, we were also focused on ensuring Fletcher Building is effectively set up for the inevitable lower market activity that will play out in FY21. This has resulted in the recognition of significant items in FY20 of $276 million, the majority of which relate to the difficult but necessary decisions to permanently reduce our cost base including property footprint reduction, rationalisation across our supply chain, logistics and procurement activities, and regrettably a reduction in our workforce by approximately 12%. We are also recognising impairments and restructuring costs to the Rocla business that is being divested and the early repayment of the some of our most expensive debt resulted in a one-off payment of $30 million, albeit saving $17 million in interest per annum.

OUR PEOPLE

We are very proud of our Fletcher Building people who worked with commitment to meet the Government requirements of the various lockdown levels in New Zealand, as well as meeting the rules in Australia, with social distancing, personal protective equipment and contact tracing.

We responded rapidly and effectively to the impact of COVID-19, sadly losing some talented and hard-working people through the resizing of the business. On behalf of my Board colleagues, I would like to express our sincere appreciation for the continued dedication and efforts of the Group's workforce during FY20; especially for their focus on rising to the new challenges and during a period of signifiicant uncertainty.

As part of the multi-year reset of the Protect safety programme, the Board are resolutely behind the belief that all injuries are preventable, and the work being done by the Group to embed this and the aim to have zero injuries every day. Fletcher Building is heading in the right direction, driven by strong and compassionate leadership, with no deaths and fewer serious injuries this year. A slight increase in the Total Recordable Injury Frequency Rate, while disappointing, means that we will continue to drive improvement in this area and ensure our workplaces are safer.

BOARD DEVELOPMENTS AND GOVERNANCE

During the year, there were a number of changes to the Board.

Tony Carter retired from the Board at last year's Annual Shareholders' Meeting (ASM) while Steve Vamos resigned from the Board

in March. We thank both Tony and Steve for their considerable knowledge, experience and contribution over their 10 and 5-year respective tenures.

We welcomed Peter Crowley to the Board who was appointed as an independent non-executive director in October. We continue to look to renew and refresh the Board's mix of skills and experience from a broad stakeholder point of view.

ANNUAL SHAREHOLDER MEETING

This year's ASM will be held in November 2020. We look forward to shareholders taking the opportunity to ask questions.

LOOKING AHEAD

The Board remains firmly focused on achieving the Fletcher Building strategy, sustainability targets and continuing our focus on the Protect safety programme. We are confident that Fletcher Building is well- positioned for the new market reality.

We are dedicated to improving profitability in our businesses so that we deliver shareholder value and we continue to deliver on our aspirations in the building solutions sector in New Zealand

and Australia.

Bruce Hassall

Chair

Fletcher Building Limited Annual Report 2020

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CEO's Report

RossTaylor, CEO.

Fletcher Building's FY20 performance was characterised by the impacts of COVID-19 and the actions we took to ensure we were well positioned to successfully navigate the market uncertainty in FY21 and beyond.

An unwavering commitment to health and safety was a hallmark for the year overall. As the risk of COVID-19 emerged, we moved quickly to adopt rigorous hygiene, distancing and contact tracing protocols. We continued our focus on the multi-year reset of our safety programmes across the entire business. We are driving positive change in our safety culture through our company values and a genuine belief that all workplace injuries are preventable. In FY20, in our drive towards zero injuries we were pleased to see we had no fatalities and total serious injuries reduced from 15 to 8. While our Total Recordable Injury Frequency Rate (TRIFR) 5-year trend continues to show progress, our FY20 rate was slightly up from last year. This only moves to strengthen our commitment and focus on preventing all injuries.

OPERATIONAL PERFORMANCE

When we updated shareholders at the half-year, we were trading to expectations, making good progress with operating efficiencies, and had solid investment plans to drive growth.

Then, as COVID-19 crossed New Zealand and Australian borders through March 2020, the resulting reduction in trading levels and productivity had a significant impact on revenue and profitability.

In New Zealand, we had a period of nearly five weeks in March-April where a Government-imposed 'Level 4' lockdown required almost all our business to be shut down with trading restricted to essential services only. The exceptional response of our people meant we shut down some 400+ sites, safely, and in just three days. Revenue from our New Zealand operations during this period was almost nil.

In Australia, the country took similar protective measures to keep its people safe, resulting in lower revenues and productivity levels, and higher operating costs, in the context of uncertain trading conditions.

As this was unfolding, we moved quickly taking all measures we could to reduce costs: Board and senior management pay cuts, $70 million reduction in capital expenditure, reduced spending in areas such

as marketing and introduced a 12-week 'Bridging Pay Programme' for employees.

As a result of our pragmatic and decisive action we have preserved our operating cash flow and strong balance sheet, despite materially reduced earnings.

FLETCHER CONSTRUCTION

We have continued to make good progress in working through the historical construction projects, with only $0.6 billion of the original $2.2 billion from 2018 remaining. At the same time, we have also progressively rebuilt the operations and skills of this business.

An important part of this was the reset of our bid margins and disciplines, and the risks we would accept on projects. Since this reset, we have successfully won new work comprising a forward order book of approximately $2.4 billion with a materially better margin outlook and lower risk profile.

Through the FY20 year-end process we decided to increase the provisions to complete our historical construction projects by $150 million. This addresses three main issues that emerged: COVID-19 costs and productivity losses which we have not been able to claim under our contracts with clients, issues arising from a handful of historically completed projects and a prudent risk allowance across the legacy work left to complete.

While the need for additional provisioning is disappointing, I believe Fletcher Construction is now increasingly well positioned to focus on its future, and a sustainable and profitable earnings outlook.

FY20 OPERATING PERFORMANCE

For FY20, Group revenue was $7,309 million, down from $8,308 million in FY19.

Operating earnings before significant items from continuing operations was $310 million and accounting for the construction provisions reduced to $160 million compared to $549 million in FY19. Pleasingly, cash flows from operating activities were well managed through the COVID-19 impacts and strong at $410 million.

4 Fletcher Building Limited Annual Report 2020

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SETTING UP THE COMPANY FOR THE

NEW MARKET REALITY

As trading and movement restrictions eased in late April, while uncertainty remained, expert forecasts pointed to a meaningful market decline and reduced customer demand across all our businesses. While no one can be certain exactly how our markets will perform in FY21 it was important to adopt a base case scenario to plan for.

In New Zealand our baseline planning is for residential consents to decline by around 30% from peak levels in FY20 and non-residential activity to be impacted by a reduced private sector project pipeline. Infrastructure shows promise of a lesser decline owing to the Government's commitment to 'shovel-ready' projects. In Australia, a similar trend is expected though with a lesser decline in the residential sector, given the already low level of activity by historical standards.

Accordingly, we have reset the cost base and cash burn of the business. This meant reducing our annual capital expenditure, retiring our most expensive debt lines, taking operational efficiencies in our supply chains and property footprint, forfeiting Short-Term Incentive (STI) payments and salary increases across the Group, and regrettably, reducing our workforce by around 1,500 positions. While these moves were necessary, there is no doubt that this has been a challenging time for our people. Throughout, our people have done an exceptional job of serving our customers, safely managing our operations, and resetting the business. We recognise their hard work and valuable contribution to the Group in FY20.

This reset will achieve permanent annual cost savings of approximately $300 million per annum but incurred one-off restructuring costs contributing to significant items of $276 million. This translated to a net loss for the Group of $196 million, compared to a profit of $164 million in FY19.

CAPITAL MANAGEMENT

Our balance sheet remains strong with a Group leverage ratio (net debt/EBITDA) below the bottom end of our target range and we have total available funding of $2.1 billion as at 30 June 2020. Of this, $525 million was undrawn with $1.1 billion of cash on hand, meaning total liquidity for the Group was $1.6 billion. In early June we preemptively renegotiated our lending covenants which will enable the Group to rely on more favourable terms for covenant testing through to the end of 2021. Since balance date, we made an early repayment of US$200 million and AU$99 million of USPP notes, our most expensive form of debt, meaning the Group's liquidity at 30 June 2020 would have been $1.3 billion.

The share buyback continues to be suspended, having acquired

29.1 million shares for a total consideration of $147 million, representing 3.4% of issued capital.

STEADFAST FOCUS ON STRATEGY

Notwithstanding the uncertainty and disruption in our markets and the broader economy, we remain on track and committed to executing our strategy and achieving our vision to be the undisputed leader in New Zealand and Australian building solutions - with products and distribution at our core.

FY20 saw continued progress on enabling our strategies through investments and innovation across our business. We opened Clever Core, New Zealand's largest offsite home manufacturing facility, which brings unprecedented pace to Fletcher Living's ability to deliver housing to its developments. We were the first building materials and construction company in New Zealand and Australia to commit to a Science-Based Target (SBT) for carbon emissions and were included for the first time in the DJSI Australia index, one of only five New Zealand business in either the Australia

or Asia-Pacific indices. We opened a new concrete plant in Mt Maunganui, committed to developing our new Winstone Wallboards facility in nearby Tauranga and completed the retail precinct at the iconic Commercial Bay development, which will transform Auckland's CBD. Following a brief pause, the sale process for Rocla continues in a market of improving investor sentiment and is targeted to be completed in FY21.

Looking ahead, we will continue to focus on investing significantly in our digital and innovation strategies, while also looking for opportunities to grow our market share either in our existing product lines or in logical adjacencies. With our strong balance sheet position, we expect the coming tougher market environment will afford us even better opportunities to achieve our aspirations and overall strategies.

CONCLUSION

Recognising the unexpected events of FY20 and ongoing uncertainty in our markets, we made some difficult but necessary decisions under challenging circumstances. This has ensured a strong balance sheet for short-term market conditions and a business positioned to help rebuild the New Zealand and Australian economies in the longer-term; just as we have done for more than 100 years.

I want to thank our shareholders, people, customers and suppliers for their trust and support in our business and look forward to our next update.

RossTaylor

CEO

Fletcher Building Limited Annual Report 2020

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Our Strategy

Vision: To be the undisputed leader in New Zealand and Australian building solutions - with products and distribution at our core.

There are four key focus areas to our strategy:

1.

Strengthen

2.

Profitable growth

3. ConstructionStabilise

and grow the

in Residential and

New Zealand core

Development

4. Turnaround and grow Australia

We are continuing our focus on operational excellence and driving profitability.

We will complete the fix of underperforming businesses. We will target market share growth through customer service performance, product innovation and adding logical adjacencies.

We will continue our strong performance across the residential business. We will aim to progressively build apartment capability and volumes. Clever Core will grow through adding external customers and a broader product range. Meanwhile we have a solid pipeline of industrial land development which will support a minimum of circa $25 million p.a. ongoing profits.

We are focused on completing the historical Construction order book. Meanwhile we continue to build out the "go forward" lower risk/higher margin order book across all Construction business units. We will continue to upskill the business and improve overall operating disciplines and consistency.

We are rationalising our portfolio and associated business sales. We have a strong focus on driving top line growth, operational performance and margin improvements. We aim to grow market share through customer service performance, product innovation and adding

logical adjacencies.

There are six key enablers of our strategy:

Strong safety culture

Fit for purpose systems and next-generationdigital capabilities

Customer intimacy

through channel ownership

Disciplined

performance improvement

and capital allocation

Engaged and capable people, with a lean operating model

Leading innovation

anchored in

environmental

consciousness

6 Fletcher Building Limited Annual Report 2020

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Our Sustainability Aims

To support our strategy, we continue to focus on sustainability.

As a large business, we recognise our operations have an impact on many people. Our sustainability strategy is based on what is most important to our business, people, communities, customers, investors and key stakeholders. Our strategy addresses the areas where we have the most impact, and our aims and targets focus on where our actions will lead to meaningful change - these are our Material Issues.

The table below shows how the aims of our sustainability strategy align to our Material Issues and the Sustainable Development Goals most relevant to these aims. We have noted which divisions have the most impact on achieving the aim, and we report on performance against each aim in the following Sustainability section of this report on pages 8-18. Page 49 of this report summarises how we assessed our Material Issues.

Sustainability aims

Material issue

Divisions with most impact

Be the leader in making

-

The environmental footprint of our products

Building Products, Distribution,

sustainable building products

-

Customer engagement

Concrete, Australia

-

The health, safety and wellbeing of our

Corporate, Building Products, Distribution,

Support our people and

people and supply chain

Concrete, Residential and Development,

Construction, Australia

our communities

-

Our people and culture

  • Our role as a large employer

Build healthy homes

-

Building design and construction

Building Products, Distribution,

Concrete, Residential and Development,

and deliver sustainable

-

Customer engagement

Construction, Australia

infrastructure

-

Product innovation

Careful management of our resources and emissions

- The resources we use as a large

Building Products, Distribution,

manufacturer and our impact on those

Concrete, Residential and Development,

resources (energy, water and materials)

Construction, Australia

  • Our carbon, water and waste emissions

Partner with our supply chain to deliver sustainable outcomes

  • Our supply chain practices and performance
  • Marketing and communications
  • How we work with government and with industry partners

Corporate, Building Products, Distribution,

Concrete, Residential and Development,

Construction, Australia

Transparent environmental, social and governance reporting

-

Our governance structures, ethics and risk

Corporate

management, including supply chain

-

Financial performance and return to

our shareholders

SUSTAINABLE DEVELOPMENT GOALS

The Sustainable Development Goals are a global set of goals adopted by New Zealand, Australia and all United Nations member states that support strategies to improve health and education, reduce inequality, and spur economic growth while tackling climate change and working to preserve our oceans and forests. Fletcher Building's sustainability aims support the following eight United Nations Sustainable Development Goals.

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Sustainability

FIRST

Sustainability

Performance

Our aspiration is to be the New Zealand and Australian leader in sustainable building materials, construction and distribution. We've been making meaningful and consistent changes so our business thrives and we play our part in a sustainable future.

to set a Science Based Carbon Target in our Sector, in New Zealand and Australia

Our sustainability strategy deepens our commitment to our people, sustainable products, carbon emission reduction initiatives and transparent reporting.

As part of this, we are focused on increasing the level of transparency and disclosure within our operations and supply chain. We have had a Code of Conduct for our people for some years, and in FY20 we published our supplier Code of Conduct. This requires all our suppliers to demonstrate transparency in the way they work, how they treat their employees and suppliers, and their environmental protection measures.

In FY20 we added to our governance policies by publishing our Human Rights Policy. This includes our commitment to put processes in place to prevent unethical practices in our operations and supply chains.

Fletcher Building has commenced the implementation of a comprehensive Modern Slavery Compliance Programme, which addresses our obligations.

We are initially adopting a risk-based approach to implementation, focusing on specific industry and geographical segments. We will comply with annual modern slavery reporting obligations, which will commence from 31 March 2021.

We also continue to proactively participate in the Carbon Disclosure Project and the Dow Jones Sustainability Index (DJSI). We use the insights from these indices to inform and improve our governance and sustainability performance. Our increased focus on sustainability was recognised this year with the inclusion of Fletcher Building in the DJSI Australia index, one of only five New Zealand businesses in either the DJSI Australia or DJSI Asia-Pacific indices.

In our FY19 report, we noted six significant initiatives for FY20. We provide an update on these initiatives in this report.

Significant initiatives in FY20

Information in this report

Protect safety

p 11

Reduce the environmental impact of our products

p 17, 18

Put a gender pay parity plan in place

p 10, 11

Set group wide Science-Based Target for carbon reductions

p 16

Implement supplier Code of Conduct

p 8

Move to full Environmental, Social and Governance reporting

Coverage of this report

8 Fletcher Building Limited Annual Report 2020

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To be part of a sustainable future, we are working on six aims:

BE THE LEADER IN MAKING SUSTAINABLE BUILDING PRODUCTS

  • Reduce the environmental impact of our products
  • Gain sustainability product certifications

TRANSPARENT

ENVIRONMENTAL, SOCIAL AND

GOVERNANCE REPORTING

- Improve environmental, social and governance reporting across our business

SUPPORT OUR PEOPLE AND

OUR COMMUNITIES

  • Protect our people from harm
  • Improve diversity, equity and inclusion in our workplace
  • Provide world-class learning and development opportunities
  • Measure the impact and opportunities we provide in the

communities where we build

BUILD HEALTHY HOMES AND DELIVER

SUSTAINABLE INFRASTRUCTURE

- Meet a consistent sustainability standard for our construction projects

- Understand what matters to our customers and lead in providing sustainable solutions

- Innovate to sustainably grow revenue, margin and markets

CAREFUL MANAGEMENT OF OUR RESOURCES AND EMISSIONS

  • Reduce carbon emissions in line with a below 2oC future

PARTNER WITH OUR SUPPLY CHAIN TO DELIVER SUSTAINABLE OUTCOMES

  • Improve environmental, social and governance reporting within our supply chain

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Sustainability

FY20

Total Recordable Injury Frequency Rate (TRIFR)

5.65

Supporting our people and communities

Our first priority is always the health and safety of our people and everyone we work with. This year we built upon our safety focus and began a multi-year programme to improve safety in our workplaces driven by the belief that all injuries are preventable.

FY19: 5.00

FY20

Serious Injury

Frequency Rate

0.17

FY19: 0.34

Our senior leaders are engaging directly with our people to establish the change we need. We continue to set clear expectations on role modelling safe behaviours and performance against these expectations is linked to senior leader remuneration. Across the business, our people have been positive and open to their role in how we can all make our workplaces safer.

Over the coming years, we will continue to improve our practices in assessing and managing critical risks within our operations.

We continue to use Radar, an enterprise-wide risk management tool, to record and monitor our health and safety performance. For FY20, our overall Total Recordable Injury Frequency Rate (TRIFR) increased slightly from last year. We have also provided further transparency by reporting separate employee and contractor TRIFR rates. This year, serious and fatal injuries were significantly lower. While any injury is unacceptable, a drop from five fatalities and 15 serious injuries (combined total 20) in FY19 to zero fatalities and eight serious injuries in FY20 indicates that we are heading in the right direction.

Close to 10,000 of our people across the Group took part in safety training programmes this year. We also focused on supporting and developing our people in other areas. The wide range of learning and development programmes we offer include safety leadership and compliance training, sales and customer service programmes, Rainbow Tick training for leaders and core management and leadership skills. As part of providing great career opportunities for our people we offer leadership development programmes for all levels from emerging leaders to executives. This year we have had

We are heading in the right direction with safety.

a greater focus on female leader development opportunities, improving how we induct new employees into Fletcher Building, and redesigning our core leadership programmes to include a range of online and in-person approaches to deliver programmes for a variety of learning styles. We have increased the level of feedback from participants and track outcomes to understand the impact and effectiveness

of these programmes. We want our business to be inclusive for everyone. We track the diversity of our workforce at all levels and report our diversity metrics. This includes reporting progress on the diversity of people in leadership roles to our Board. In FY20 we developed a company-wide Inclusion and Diversity strategy which will drive our progress in this area. We have three areas of focus: fostering an inclusive workplace culture, increasing the representation of women across all parts of the business, and increasing leadership opportunities for groups that are currently under-represented: women,

-

Maori, Pasifika and indigenous people.

In FY20, we undertook a detailed analysis of pay and implemented gender pay parity reporting processes across the Group. This has enabled us to gain understanding, self-monitor and report to the Board. Alongside this, we took part in Global Women's Champions for Change pilot programme for gender pay gap reporting. This pilot provided a broad cross-industry review of male versus female pay and is being used to develop a framework for comparable

10 Fletcher Building Limited Annual Report 2020

and meaningful reporting. Fletcher Building Chair Bruce Hassall, director Barbara Chapman and CEO Ross Taylor are three of the 55 chairs and CEOs involved in Champions for Change, which aims to advance inclusion and diversity in New Zealand, through identifying initiatives and actions in this space such as closing the gender pay gap.

We recognise that women are under-represented in our industry and are actively working to promote careers for women. In 2020 we became corporate members of the National Association of Women in Construction and teamed up with GirlBoss NZ to run the first 'speed internship' week for young women interested in careers in science, technology, engineering and mathematics.

TRIFR (1)

6.7

6.9

5.76

5.1

5.0

5.65

5.26

FY16

FY17

FY18

FY19

FY20

Total

Employees

Contractors

Serious Injuries (2)

33

25

21

20

8

FY16

FY17

FY18

FY19

FY20

  1. Total recordable injury frequency rate. Measured by the total number of recordable injuries per million hours worked. TRIFR does not include restricted work injuries.
  2. Serious Injury includes immediate treatment as an in-patient at hospital for more than 24 hours or immediate treatment for a serious injury or illness as defined by Safe Work Australia.

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Study Case

Protect Reset

This year we reset our commitment to health and safety and started on our multi-year safety culture change programme.

Following the reflections of a deep assessment of the culture and performance of our businesses, we developed a roadmap to help us realise a future where zero injuries everyday is possible. The roadmap includes five focus areas:

  1. Shifting mindsets
  2. Developing our leaders
  3. Enabling our frontline
  4. Managing our critical risks
  5. Driving accountability

The journey this year began with senior leaders reflecting on our own leadership and challenging our safety beliefs. As part of this, we agreed that safety needed to be integral to everything we do. We reset 'Protect' as a Fletcher Building company value along with refining behaviours which support the value and establish the belief: all injuries are preventable. The link between safety performance and senior leader remuneration was also strengthened this year. All senior leaders are required to complete a set number of safety leadership walks for STI eligibility.

Each division now has plans to implement the roadmap in a way that is line-led by operational chief executives, general managers and management. This is supported by EHS partners, and focused on critical risks as well as driving our TRIFR down. Some of the activities already underway include a safety leadership programme (for all levels from frontline supervisor to executive), the development and launch of life saving rules and active risk containment activities across all our sites.

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Supporting our people and communities (Continued)

Case Study

Future workforce matched with future-focused manufacturing

Our latest startup Clever Core used Fletcher Building's own recruitment platform Switch Up to employ people entering the workforce for the first time or people wanting to retrain for a career in manufacturing and construction. Our people at Clever Core have gained skills in the growing field of offsite manufacturing and have opportunities to move into management and specialist roles.

It is really exciting to see our latest venture come together, being expertly guided by a team of highly motivated young people keen to use new skills gained through specialist training they wouldn't get anywhere else. We are proud to match this future-focused manufacturing facility with our future workforce.

- Ross Taylor.

Switch Up is an award-winning recruitment tool developed by Fletcher Building to transform the way we attract, select and develop first-time job seekers. It is designed to engage young people and simplifies the application process. Job descriptions are provided by videos from current employees describing their lives on the job. Instead of creating CVs, applicants create job-seeker profiles and answer employer questions that are designed to give applicants insight into employment and the skills required for the job. All applicants receive feedback, and Switch Up directs unsuccessful applicants to resources that will help them to fill the gaps in their profile and develop the necessary skills to be successful.

The programme excited participants by what our business and industry has to offer through site tours, networking and a 'Dragon's Den' style idea pitching event. We are a finalist in the 2020 Diversity Awards NZ for this initiative and five of the GirlBoss participants will take part in paid internships with us in FY21.

Within Fletcher Building we have targeted recruitment, training and retention policies for bringing young people

-

into our business, and for supporting our Maori and Pasifika workforce.

We work with the Ministry of Social Development, Work and Income NZ, Te Puni Kokiri, The Southern Initiative, Kiwis Can Do, The Solomon Group, South Pacific Indigenous Engineering Students Network and TupuToa to support

-

career pathways for Maori and Pasifika people.

Our Whakatupu programme has been running for more than five years. This programme was developed with our people and is specifically aimed at providing leadership pathways

-

for our Maori employees and to bring initiatives from the Whakatupu cohorts into our workforce. After completing Whakatupu, 93% of participants we surveyed reported higher engagement at work. Participants also reported improved business skills and a stronger connection to their role in the business.

We provide our people with the opportunity to be nominated for Connect - an award-winning youth focused development and mentoring programme targeted at those new to working or with less than 18 months work experience. The

-

programme is founded on Maori and Pasifika values. While

-

Connect is for all employees, it recognises that Maori and Pasifika people are under-represented in leadership positions and aims to build a pipeline of talent for future promotion.

TupuToa is an innovative internship programme creating

-

pathways for Maori and Pasifika university students into careers in the corporate and professional sectors. We are proud to be a principal sponsor of the programme and this year we supported eight internships and five interns have taken permanent roles in our business.

This year, Fletcher Building also provided 35 additional construction internships and 40 graduate positions in finance, technology, construction and sustainability roles across the business.

We have been a principal sponsor of First Foundation for

20 years. The programme is designed to give young people the opportunity to achieve their dreams, irrespective

of socio-economic status, through financial support for education and work experience. Often the students are the first in their family to attend university. We provide scholarships to five students each year. Sponsored students receive $22,000 over three years towards university costs and take part in five weeks' paid work experience per annum to develop skills and people networks.

12 Fletcher Building Limited Annual Report 2020

We are proud to have maintained our Rainbow Tick certification. This year we supported Pride events in Auckland, Wellington and Queenstown and expanded our Pride network to our Australian businesses. We also adjusted our HR systems to include a wider range of gender and pronoun options.

Employees in New Zealand, Australia and the South Pacific Islands have access to financial support through the Fletcher Building Employee Educational Fund (EEF). Between 1 April 2019 and 31 March 2020, the EEF assisted 644 employees and dependants with further education and tuition, and a further 182 dependants with development initiatives, such as Spirit of Adventure and Outward Bound adventures. Support totalled over $5.8 million. Employees in New Zealand can also access the Fletcher Building Employee Welfare Fund (EWF) which supports our people in the event of death, disability or financial hardship resulting from unexpected medical events. This year, hardship applications relating to COVID-19 were also considered. In total, the fund supported our people to a total of more than $352,000 between 1 April 2019 and 31 March 2020 and a further $152,000 in response to COVID-19 hardship situations. The EWF also provided $446,500 to support Employee Assistance Programme services and Health and Wellbeing initiatives for employees. Both the EEF and EWF are independent entities of Fletcher Building. We sincerely thank both the EEF and EWF for their generosity and support which make a substantial difference to our people.

In FY20, over

10,250

of our people took part in around

75,800

hours of learning

7.4

hours of training per person

View contents page

Supporting our

people's health &

Case

wellbeing during

Study

COVID-19

The past year brought us a new common challenge in health and wellbeing: COVID-19. Our people responded quickly, restricting travel and large gatherings by early March, and implementing self-managed isolation protocols for returning travellers and individuals potentially exposed to the virus.

A critical risk approach was taken, with all businesses implementing mandatory controls and routinely evaluating their implementation and effectiveness. We achieved 99% verification that all businesses and sites had the required controls in place which included contact tracing, provision for distancing, robust cleaning and hygiene practices and educational systems. In addition, we monitored and supported over 400 of our people who had potential exposures and possible symptoms from March through to June 2020 and continue to mitigate our risk in line with Government recommendations.

We were also acutely aware of the effects of the New Zealand lockdown and economic uncertainty in New Zealand and Australia from COVID-19 on mental health and wellbeing.

In response, we launched a mobile phone COVID-19 Support Hub app. The Hub app was downloaded by over 7,000 of our people. It proved a valuable communication tool providing an easy place to find business updates, payroll help, financial help, and general wellbeing advice, particularly while New Zealand was in lockdown and workplaces were shut. The Hub app was also used to connect people to government help lines, expert advice or simply a volunteer to talk through what they were experiencing. The

app is generously funded by the Employee Welfare Fund and we plan to adapt it as a one-stop shop for company information and real-time updates for our people.

Alongside this, we provided everyone at Fletcher Building access to former All Black and mental health champion Sir John Kirwan's mental wellbeing app 'Mentemia'.

Fletcher Building Limited Annual Report 2020

13

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Sustainability

Careful management of our resources and emissions

As a leading construction, building products manufacturing and distribution business, a key aim of our sustainability strategy is careful management of our resources and emissions.

39%

Waste percent diverted from landfill

We understand the urgent need to address carbon emissions, and as part of that commitment we are the first company in our sector in Australasia to publish a Science-Based Target (SBT) for carbon reduction for scope 1 (direct) and scope 2 (indirect) emissions. Our target was independently verified by the SBT Initiative in December 2019. We report our carbon emissions every year to the Carbon Disclosure Project (CDP).

In FY20, scope 1 and scope 2 carbon emissions were 847,643 tCO2e and 284,773 tCO2e, respectively. The combined total of 1,132,416 tCO2e is a reduction of 1.3% from FY19. FY19 emissions were low due to a six-week mill breakdown at Golden Bay Cement, which represents around 50% of Fletcher Building's emissions. In FY20, emissions from our

New Zealand businesses were unsually low due to the COVID-19 'Level 4' lockdown and operating restrictions in April and May in other New Zealand

operations. The Australia division, which largely continued operating as normal, had an overall reduction of 2.3% from FY19 largely through site consolidation and energy efficiency.

We assess our Greenhouse Gas emissions using the Greenhouse Gas Protocol Corporate Accounting Standard, in accordance with international best practice. Using this methodology, we estimate that our scope 3 emissions were 848,025 tCO2e. These are the emissions associated with the manufacture of materials we have purchased, and services supplied to us. Our FY20 emissions will be externally verified in FY21.

Reducing waste to landfill remains an area of focus, and in particular reducing waste from construction and demolition activities, which is a significant component of landfill waste in both New Zealand and Australia. Reducing the waste we generate and applying 'circular economy' principles to use waste from one industry as

a raw material input for another will be key to overall waste reduction.

Combined scope 1 and 2 carbon emissions

1,400,000

e)

1,200,000

2

(tCO

1,000,000

800,000

Emissions

600,000

400,000

200,000

0

FY16

FY17

FY18

FY19

FY20

Combined scope 1 & 2 emissions

Scope 2 emissions

Scope 1 emissions

*Figures exclude International Division.

We put these principles into place in the design of our new Winstone Wallboards plant which is planned to reduce manufacturing waste by 90%. We continue to have zero waste to landfill from our Oliveri business and we worked collaboratively with other New Zealand businesses as part of the XLabs Circular Economy Lab, organised by Auckland Tourism, Events, and Economic Development (ATEED).

At XLabs we focused on taking waste out of the life cycle of medium density fibreboard (MDF). MDF is strong, inexpensive material made from waste wood fibre and is commonly used in making kitchen, bathroom and office furniture, but it is not easily reprocessed. We are now pursuing a number of options with our Innovation team.

In FY20 our waste to landfill was 26,442t and diversion from landfill was 16,787t. This equates to 39% diversion from landfill which exceeds our target of 30%. Further waste reduction is a goal for FY21.

14 Fletcher Building Limited Annual Report 2020

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Study Case

Our response to water and fire crises in Australia and New Zealand

We responded to the devastating impact of bushfires in Australia with direct donations exceeding $280,000 to the Rural Fire Service (NSW), Country Fire Authority (VIC), Red Cross (NSW Bushfire Appeal) and Salvation Army (Disaster Appeal). We provided paid time off work for our people to volunteer in rural firefighting and other emergency crews to help their communities in affected areas. In addition staff at our Rocla Wodonga site worked over the Christmas break to supply power poles to reconnect electricity to several communities across New South Wales and Victoria.

In Auckland, we implemented water saving measures in response to severe drought conditions in summer 2019-2020. Fletcher Construction's Infrastructure and Higgins teams have installed rainwater capture and collection systems and the Pipeworks team

are now using UV light instead of hot water to cure pipes, saving an estimated 160,000L of water for one pipeline installed as part of a major transport project. A number of our businesses including Tasman Insulation and Winstone Wallboards already use bore water, and we are exploring how we can supply any excess non-potable water we have to others.

Fletcher Living and Winstone Aggregates have been working with Auckland's Watercare to supply non-potable groundwater from Three Kings quarry to construction businesses, sites and projects around Auckland.

Fletcher Living and Winstone Aggregates have been working with Auckland's Watercare to supply non-potable groundwater from Three Kings quarry to construction businesses, sites and projects around Auckland.

Other steps are being taken to prepare for future droughts and increase water conservation across Fletcher Building including investigation of closed-loop water systems in manufacturing plants and increased rainwater storage across the Group.

Fletcher Building Limited Annual Report 2020

15

View contents page

Case Study

Science-Based Targets

In December 2019, Fletcher Building became the first building materials and construction company in New Zealand and Australia to attain an independently verified Science-Based Target (SBT) for carbon emissions reduction. SBTs are important because they are based on robust climate science, and the strict verification process ensures that the decarbonisation target set by a company is meaningful in a global context. SBTs also drive innovation, increase competitiveness and demonstrate climate leadership.

Fletcher Building's SBT is a public commitment that we will reduce direct and indirect carbon emissions by 30% by 2030, from 2018 as a baseline year. Our target is in line with the Paris Agreement to limit global warming to well below 2°C and ensures Fletcher Building takes responsible action towards its contribution to climate change.

We have developed carbon reduction roadmaps that identify key initiatives over the next 10 years for all business units and are actively tracking progress of each business unit. Some of the first carbon reduction activities are to increase energy efficiency in new facilities through use of renewable energy and by transitioning our vehicle fleet to include more hybrid and electric vehicles. In FY20, there were a number of

In December 2019, Fletcher Building became the first building materials and construction company in New Zealand and Australia to attain an independently verified Science-Based Target (SBT) for carbon emissions reduction.

significant ongoing projects: alternative fuels and lower carbon materials in cement manufacture at Golden Bay Cement, the design of our new Winstone Wallboards facility which is planned to significantly reduce carbon emissions; and ongoing LED lighting replacement

for Tradelink stores which will reduce electricity consumption and associated emissions by more than 40% over the next six years.

16 Fletcher Building Limited Annual Report 2020

View contents page

Sustainability

Better products, houses

and infrastructure

Published EPDs

09

EPDs in development

05

AUSTRALASIA

Furniture, Fitting

As part of our aim to be the New Zealand and Australian leader in sustainable building materials, we are increasing the number of products we manufacture that hold Environmental Product Declarations (EPDs) and other sustainability certifications.

EPDs assess the environmental impact of

a product across the entire product lifecycle. EPDs provide a verifiable and transparent product assessment against an international standard and empower our customers to make an informed choice about the environmental impact of the products they choose. We have nine EPDs already published in Australia and New Zealand and five more underway. You will find these green products in our Fletcher Living homes.

A number of our products also hold other sustainability certifications such as Declare labels and Environmental Choice certifications that are recognised within green building standards

including Green Star and Homestar. Our environmental certifications are disclosed on our businesses' websites.

We are active members of sustainable construction organisations including the Sustainable Business Council, the Sustainable Business Network, the New Zealand Green Building Council and the Infrastructure Sustainability Council Australasia. We have been working closely with these industry bodies and Government to embed more sustainable methods into construction as part of post COVID-19 recovery packages for the construction industry.

Fletcher Building Limited Annual Report 2020

17

View contents page

Case Study

With the EPD, we are able to demonstrate that Golden Bay Cement has significantly lower carbon emissions than our competitors.

- Simon Harper.

Greener materials for homes and infrastructure

Golden Bay Cement's EversureTM and EverfastTM cements and Winstone Wallboards' plasterboards GIB® were three of our earliest products to have their full environmental impact assessed.

All hold Declare labels, Environmental Choice New Zealand, Good Environmental Choice Australia (GECA) or Global GreenTag certification, and an EPD.

Declare labels are part of one of the world's most stringent sustainable building certification programmes, the Living Building Challenge.

A Declare label shows, in a simple and transparent way, several product properties including where the product is made, its end-of-life options, and the list of ingredients used to make it. The label also shows whether the product is "Red List Free", meaning that it does not contain chemical substances known to be harmful to the environment or to the people using them.

Environmental Choice New Zealand and Global GreenTag are independently-run ecolabels identifying the most environmentally friendly products, and

are recognised within both the New Zealand and Australian Green Building Council's rating system.

The latest addition to the certification for Golden Bay Cement is the EPD. Simon Harper, National Sales and Marketing Manager said: "With the EPD, we are able to demonstrate that Golden Bay Cement has significantly lower carbon emissions than our competitors when measured against the same criteria. This transparency now allows the industry to be confident that cement from Golden Bay Cement is utilised on their project that it results in the lowest carbon concrete available".

Winstone Wallboards has held an EPD for GIB® plasterboard for several years and used its existing EPD as a robust baseline to design improvements for its new Tauranga production facility that will further reduce the environmental impact of its products.

18 Fletcher Building Limited Annual Report 2020

View contents page

Performance

Fletcher Living Waiata Shores

Fletcher Building Limited Annual Report 2020

19

View contents page

Group Performance

Year ended

Year ended

June 2020

June 2019

Reported results

NZ$M

NZ$M

Change %

Total revenue

7,309

8,308

(12%)

EBIT before significant items (1)

160

549

(71%)

Significant items (2)

(276)

(94)

(194%)

EBIT

(116)

455

(125%)

Lease interest expense

(69)

-

NM

Funding costs

(80)

(116)

31%

Earnings/(loss) before tax

(265)

339

(178%)

Tax (expense)/benefit

81

(80)

201%

Earnings/(loss) after tax

(184)

259

(171%)

Non-controlling interests

(12)

(13)

8%

Net earnings/(loss)

(196)

246

(180%)

Basic earnings per share (cents)

(23.5)

28.8

NM

Basic earnings per share before significant items (cents)

0.4

36.7

NM

Dividends declared per share (cents)

-

23

NM

Cash flows from operating activities (3)

410

153

168%

Capital expenditure

232

285

(19%)

Year ended

Year ended

June 2020

June 2019

Revenue

NZ$M

NZ$M

Change %

Building Products

1,173

1,314

(11%)

Distribution

1,471

1,596

(8%)

Concrete

740

802

(8%)

Residential and Development

466

639

(27%)

Construction

1,318

1,702

(23%)

Australia

2,802

3,024

(7%)

Other

10

11

(9%)

Continuing operations

7,980

9,088

(12%)

Less: intercompany revenue

(671)

(780)

(14%)

Group external revenue

7,309

8,308

(12%)

  1. Measures before significant items are non-GAAP measures used by management to assess the performance of the Group and has been derived from Fletcher Building Limited's financial statements for the year ended 30 June 2020.
  2. Significant items relate principally to restructuring charges recognised. Further details of significant items can be found in note 2 of the financial statements.
  3. The 2019 number includes discontinued operations which were divested during the year.

20 Fletcher Building Limited Annual Report 2020

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Building Products

EBIT* 2020

$87m

EBIT 2019

$167m

(p)(48%)

Distribution

EBIT* 2020

$85m

EBIT* 2019

$115m

(p)(26%)

Concrete

EBIT* 2020

$74m

EBIT* 2019

$89m

(p)(17%)

Residential and

Development

EBIT* 2020

$65m

EBIT* 2019

$137m(p)(53%)

Construction

EBIT* 2020

($147m)

EBIT* 2019

$51m

(p)(388%)

Australia

EBIT* 2020

$33m

EBIT* 2019

$77m

(p)(57%)

* Before significant items.

EBIT

EBIT before significant items(1)

Reported

Reported

Reported

Pro forma

Reported

20R vs

Year ended

Year ended

Year ended

Year ended

Year ended

19P

June 2020

June 2019

Change

June 2020

June 2019

June 2019

Change

NZ$M

NZ$M

%

NZ$M

NZ$M

NZ$M

%

Building Products

68

150

(55%)

87

167

160

(48%)

Distribution

67

104

(36%)

85

115

104

(26%)

Concrete

61

84

(27%)

74

89

84

(17%)

Residential and Development

64

137

(53%)

65

137

137

(53%)

Construction

(160)

47

NM

(147)

51

47

NM

Australia

(133)

(21)

NM

33

77

57

(57%)

Corporate

(83)

(46)

(80%)

(37)

(38)

(40)

3%

Continuing operations

(116)

455

(125%)

160

598

549

(73%)

Divested businesses

-

(58)

(100%)

-

82

82

(100%)

Total

(116)

397

(129%)

160

680

631

(76%)

Lease interest expense

(69)

-

NM

(69)

(64)

-

NM

Funding costs

(80)

(118)

32%

(80)

(118)

(118)

32%

Earnings before tax

(265)

279

(195%)

11

498

513

(98%)

Tax benefit/(expense)

81

(102)

179%

4

(133)

(133)

103%

Earnings after tax

(184)

177

(204%)

15

365

380

(96%)

Non-controlling interests

(12)

(13)

8%

(12)

(13)

(13)

8%

Net earnings

(196)

164

(220%)

3

352

367

(99%)

  1. Measures before significant items are non-GAAP measures used by management to assess the performance of the Group and has been derived from Fletcher Building Limited's financial statements for the year ended 30 June 2020.

Fletcher Building Limited Annual Report 2020

21

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Group Overview

The key feature of the Group's FY20 result was the significant impact of the COVID-19 pandemic in the latter part of the financial year. Trading levels, operating productivities and earnings were materially affected across the Group from March to June as governments put in place measures to contain the spread of the virus. Positively, cash flows were well-managed and strong through this period, and as a result the Group has maintained a strong balance sheet and liquidity position at year-end.

In FY20 the Group reported external revenue from continuing operations of $7,309 million, compared to $8,308 million in the prior year. EBIT before significant items from continuing operations was $160 million, compared to $549 million reported in the prior year. Group net earnings from continuing operations were a loss of $196 million, compared to a profit of $246 million reported in the prior year. Cash flows from operating activities were $410 million, compared to $153 million in the prior year.

Prior to March, the Group had traded largely in line with expectations, with good performances in several businesses (especially Concrete, core Building Products, Residential & Development, and Laminex Australia) offset by weakness in Steel and in the pipes businesses in both New Zealand and Australia.

In New Zealand, a 'Level 4' lockdown to control COVID-19 required the Group to close almost all of its local operations from 25 March to 28 April. The Group moved rapidly to reduce costs and preserve cash flow and balance sheet strength, with measures including: reducing Board and executive remuneration; cutting non-essential spend in areas such as travel and marketing; establishing a 3-month 'Bridging Pay Programme' for employees, supported by the government wage subsidy; daily monitoring of cash collections; reducing FY20 capital expenditure by approximately $70 million; and deferring some residential land purchases. With almost no revenue, the

cost control measures enabled the Group to reduce its loss in New Zealand in April from an ordinary monthly cost run-rate of approximately $100 million to an unaudited EBIT loss before significant items of $55 million.

As COVID-19 restrictions eased through May and June, the New Zealand businesses experienced a gradual ramp-up of operations and mixed levels of trading activity, with revenue generally between 80% and 100% of pre-COVID-19 expectations. Those core businesses exposed to the residential finishing trades generally performed better in the ramp-up period than those focused on earlier stage civil and infrastructure work. Residential house sales were strong through May and June, though with settlement dates generally scheduled for FY21. Productivity on construction projects were adversely impacted, especially on commercial sites, due to social distancing health measures.

In Australia, while there was no hard lockdown, activity levels were also impacted by government-imposed measures to contain the spread of the virus. This resulted in revenue at around 90% of pre-COVID-19 expectations through 4Q20, which adversely impacted productivity and together with additional costs impacted margins across the division's manufacturing and distribution operations.

Overall, the reduced trading levels and lower productivity resulting from the pandemic restrictions had an adverse impact of approximately $200 million on EBIT before significant items.

In addition to this, the FY20 result was impacted by a $150 million increase in provisions on the historical construction projects. Three factors led to the increased provisions. Around 50% was due to reduced productivities on key legacy projects, which were significantly disrupted by COVID-19 in FY20, and with ongoing challenges expected in FY21 across supply chains and project resourcing. Around 20% of the additional provisions was due

to issues which have arisen on a small number of historically completed projects. The final 30% consists of a prudent risk provision across the portfolio of legacy work.

While this additional provisioning is disappointing, the division continues to make progress in its reset. The costs to complete the legacy project work across the Buildings and Infrastructure businesses has reduced from approximately $2.2 billion in February 2018 to approximately $600 million currently, and the division's forward order book has been rebuilt to comprised $2.4 billion of new work with a materially better margin outlook and significantly lower and more appropriate risk profile.

In response to an expected market downturn arising from the COVID-19 pandemic, the Group moved to decisively reset its cost base in FY20. This included a reduction in its operational footprint, including the exit of some offices, warehouses, and manufacturing sites, and ceasing some unprofitable product lines. Regrettably, an expectation of lower market activity also resulted in a reduction of Group headcount by around 1,500 roles. This, together with the completion of the Australia 'P100' cost-out programme, significant manufacturing site closures associated with the disposal of the Rocla business, and make whole costs from the early repayment of USPP notes has resulted in total restructuring costs for the Group (recognised as significant items) in FY20 of $276 million.

22 Fletcher Building Limited Annual Report 2020

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The Group's funding costs for the year decreased by 32% to $80 million, resulting principally from lower debt levels following $650 million of debt repayments since June 2018. A tax benefit of $81 million in FY20 compared to a tax expense of $102 million in the prior year.

Basic earnings per share from continuing operations were (23.5) cents in FY20, compared to 28.8 cents in the prior year. Adjusting for the impact of significant items, earnings per share from continuing operations were 0.4 cents, compared with 36.7 cents in the prior year.

GROUP CASH FLOWS

Cash flows from operating activities were $410 million, compared to $153 million in the prior year. The cash flow result was achieved despite a material reduction in earnings as a result of COVID-19. This reflects the Group's ongoing focus on working capital efficiency

as well as the specific cash preservation measures undertaken through the final quarter of the year. Close management of customer collections resulted in a $95 million inflow from receivables for the year, partly offset by a $67 million reduction in creditors positions.

In Construction, the ongoing cost of completing the legacy Buildings projects resulted in trading cash outflows of $213 million in FY20 compared to outflows of $257 million in the prior year.

Capital expediture cash flows from continuing operations were $240 million in FY20, compared with $285 million in the prior year. The lower level in FY20 reflects a decision to reduce capital expenditure in the fourth quarter of the year by $70 million relative to pre-COVID-19 expectations. The Group's focus on cash and balance sheet also resulted in a reduction of residential land purchases relative to pre-COVID-19 expectations.

FUNDING

Total available funding as at 30 June 2020 was $2,126 million. Of this, $525 million was undrawn and there was an additional $1,104 million of cash on hand, meaning total liquidity for the Group at 30 June 2020 was $1,629 million.

On 30 June 2020, the Group announced its intention to make an early repayment of US$200 million and AU$99 million of USPP notes. The repayment was on 29 July 2020 from the Group's cash reserves and reflected a decision to retire the Group's most expensive source of debt. Repayment of the notes will reduce the Group's funding costs by $17 million in FY21. After taking account of foreign exchange and interest rate derivatives held in respect of these notes, the repayment amount made was $350 million. Adjusting for this prepayment, the Group's liquidity at 30 June 2020 would have been $1.3 billion.

The Group's gearing at 30 June 2020 was 12.3% compared with 7.2% at 30 June 2019.

The Group's leverage ratio (net debt / EBITDA) at 30 June 2020 was 0.9 times compared with 0.4 times at 30 June 2019.

The average maturity of the Group's debt at 30 June 2020 is 4 years (excluding the USPP notes prepaid on 29 July 2020) and the hedged currency split is 36% Australian dollar; 63% New Zealand dollar; and 1% spread over various other currencies.

Approximately 46% of all borrowings have fixed interest rates with an average duration of 2.2 years. Inclusive of floating rate borrowings, the average interest rate on the debt (based on year-end borrowings) is 3.7%.

NZ IFRS 16

For the year ended 30 June 2020, the Group's financial statements are prepared in accordance with the new lease accounting standard NZ IFRS 16, adopted from 1 July 2019. In prior years, lease costs were fully reported in EBIT. Under NZ IFRS 16, the two components of lease costs are reported separately: (1) the depreciation of right-of-use assets is reported in EBIT and (2) the deemed interest portion of the lease liability is reported in lease interest expense. The pro forma effect of NZ IFRS 16 in the prior year was a $49 million favourable impact on EBIT and a $15 million adverse impact on net earnings. Financial tables in this Annual Report (where indicated) show both the reported result for the prior year, as well as a pro forma restatement of the prior year to illustrate the impact of

NZ IFRS 16 had it been applied and to allow for a like-for-like comparison. Commentary on the divisional operating performance compares principally with the pro forma results for the prior year.

OUTLOOK

The Group has undertaken a thorough cost reset process to prepare for an expected market downturn of c25% in New Zealand and

c20% in Australia. The first half of FY21 is expected to be stronger than the second half of the year, as the economic impact of the COVID-19 pandemic flows through to activity levels. However, the outlook is uncertain, and the Group will remain vigilant to macro factors and movements in forecasts. The Group has a strong balance sheet and is well-positioned to implement its strategy with the ability to react to market activity as needed.

Fletcher Building Limited Annual Report 2020

23

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Divisional Review

Winstone Wallboards

Laminex New Zealand

Tasman Insulation

Iplex New Zealand

Humes

Fletcher Steel

Altus JV

% of Revenue

15%

REVENUE

$1,173m

Building

Products

The Building Products division reported gross revenue of $1,173 million, which was 11% lower than the prior year. EBIT before significant items was $87 million, compared to $167 million in the prior year.

Prior to March, the businesses primarily selling into residential finishing trades (Winstone Wallboards, Tasman Insulation, Laminex) were trading at or near record volumes, and delivering year-on-year margin improvements. The Steel and Pipes businesses had experienced softer volumes, driven by subdued infrastructure sector activity combined with aggressive competition in key product categories. Margins in the Steel business were further impacted by significant inventory devaluations due to declining global steel prices.

The Building Products businesses almost entirely ceased operations during the COVID-19 'Level 4' lockdown, resulting in a $22 million loss in April. In May and June, volumes returned strongly in the residential finishing trades, driven by pent up demand from work ceased during the lockdown, while volumes in other segments settled at around 80% of pre-COVID-19 Levels.

The division recognised $19 million in significant items in the year, reflecting headcount reductions and rationalisation of certain sites and product lines to prepare for an expected lower level of market activity.

Trading cash flow for the division of $125 million was $32 million lower than the prior year.

Capital expenditure in the year was $53 million, in line with the prior year spend of $55 million.

$22 million of the FY20 spend related to the initial investment in the new Wallboards plant in Tauranga.

Future Focus

The division's focus continues to be in four key areas: product innovation and adjacencies; improvements in customer experience; operating efficiencies and enhanced pricing disciplines.

The division has continued to invest in ensuring its manufacturing facilities are the most efficient in market, including material investments in the first phase of the new Wallboards facility and the commissioning of a HDPE mobile extrusion pipe plant in Iplex. Expanded product ranges were introduced in Pipes, Easysteel and Laminex, and Dimond launched an innovative mobile roll-to-roof system. New products introduced in prior years continue to deliver growth, with GIB Weatherline, GIB Barrierline, PVC-O, and Tasman Insulation's building wraps range all trending well.

Several digital initiatives have been launched to improve efficiency and customer experience, notably in Winstone Wallboards and Laminex, while Tasman Insulation continues to introduce new channels to market. The division's pricing capability and discipline continues to improve, with the Pipes and Steel businesses exiting FY20 with stronger margins as a result of initiatives to address areas of price leakage.

24 Fletcher Building Limited Annual Report 2020

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Building Products

Financial Summary

Year ended 30 June

Reported

Pro forma

Reported

20R v 19P

2020

2019(1)

2019

Change

NZ$M

NZ$M

NZ$M

%

Gross revenue

1,173

1,314

1,314

(11%)

External revenue

922

1,013

1,013

(9%)

EBIT before

87

167

160

(48%)

significant items(2)

Significant items(3)

(19)

(10)

(10)

(90%)

Funds

678

692

723

(2%)

Trading cash flow

125

157

157

(20%)

Capital expenditure

53

55

55

4%

Building Products

EBIT before significant items(2)

Year ended 30 June

Reported

Pro forma Reported

20R v 19P

2020

2019(1)

2019

Change

NZ$M

NZ$M

NZ$M

%

Building Products

101

132

127

(23%)

Steel

(14)

35

33

(140%)

Total

87

167

160

(48%)

  1. The pro forma figures for the year ended 30 June 2019 have been restated for comparative purposes to include the impact from NZ IFRS 16.
  2. EBIT before significant items 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 the period ended 30 June 2020.
  3. Details of significant items can be found in note 2 of the financial statements.

Fletcher Building Limited Annual Report 2020

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Divisional Review

PlaceMakers

Mico

Forman Building Systems

% of Revenue

18%

REVENUE

$1,471m

Distribution

The Distribution division reported gross revenue of $1,471 million, which was 8% lower than the prior year. EBIT before significant items was $85 million, compared to $115 million in the prior year.

Prior to March, the division was delivering revenue growth of 2% above the prior year. Gross margins were steady despite continued competitive intensity especially in large commercial projects. PlaceMakers was growing in all geographical segments, except for the Lower South Island. Mico experienced growth across their three key customer segments; Commercial, Group Home Builders and SME.

Both the Mico and PlaceMakers businesses were deemed essential services during the COVID-19 'Level 4' lockdown with the businesses selecting branches in larger centres or those servicing essential projects to remain open at significantly reduced capacity. Trading volumes were limited with April revenue down 86% on the prior year, resulting in an $11 million loss in April. In May and June, the businesses experienced mixed volumes, with declines in the Auckland and Christchurch regions while other regions were steady on the prior year.

The division recognised $18 million in significant items relating to redundancies, the closure of the PlaceMakers Antigua Street (Christchurch) and Helensville (Auckland) sites and associated fixed asset impairments. Prior to March, the businesses had begun a workforce optimisation initiative that was accelerated in May and June to ensure staffing levels in the branch network and support offices were both efficient and sized for expected future market conditions.

Trading cash flows for the division was $117 million, $19 million up on the prior year. This was the result of reduced working capital, with tight management of both inventory and debtors throughout the year.

Capital expenditure in the year was $21 million, compared to $23 million in the prior year, with investment centred on property upgrades and digital innovation.

Future Focus

Ensuring competitive customer offerings, ease of doing business and market leading service remain core to the division's strategy.

PlaceMakers released its Trade App in April, allowing customers greater flexibility in how they choose to interact with PlaceMakers, including the ability to order product on line, through click and collect and select enhanced delivery options. Further development of our digital capability remains a key priority with further e-commerce offerings, including the trade portal and refreshed consumer e-commerce platform, to be launched in FY21.

PlaceMakers have also begun grouping branches into regional hubs, with these structures now in place in mid Canterbury, Christchurch, Nelson-Marlborough and North Auckland. Hubs will provide greater consistency for customers who transact with multiple branches and enable efficient delivery via a combination of centralised distribution centres and branch deliveries.

26 Fletcher Building Limited Annual Report 2020

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Distribution

Financial Summary

Year ended 30 June

Reported

Pro forma

Reported

20R v 19P

2020

2019(1)

2019

Change

NZ$M

NZ$M

NZ$M

%

Gross revenue

1,471

1,596

1,596

(8%)

External revenue

1,440

1,552

1,552

(7%)

EBIT before

85

115

104

(26%)

significant items(2)

Significant items(3)

(18)

-

-

NM

Funds

209

251

300

(17%)

Trading cash flow

117

98

98

19%

Capital expenditure

21

23

23

9%

  1. The pro forma figures for the year ended 30 June 2019 have been restated for comparative purposes to include the impact from NZ IFRS 16.
  2. EBIT before significant items 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 the period ended 30 June 2020.
  3. Details of significant items can be found in note 2 of the financial statements.

Fletcher Building Limited Annual Report 2020

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Divisional Review

Winstone Aggregates

Golden Bay Cement

Firth Industries

% of Revenue

REVENUE

$740m

9%

Concrete

The Concrete division reported gross revenue of $740 million, 8% lower than the prior year. EBIT before significant items was $74 million, a decrease of $15 million or 17% compared to the prior year.

Prior to March the division was tracking strongly with revenue growth of 2% and earnings in all businesses tracking ahead of the prior year. Firth saw a strong lift in sales price, combined with a gain in market share. In Golden Bay Cement, domestic cement volumes lifted following the exit of a competitor from the imported cement market. Winstone Aggregates earnings were up year on year due to strong price increases and a favourable shift in product mix. The Tamahere quarry purchased in March 2019 completed its first full year of operations under our ownership with a strong EBIT return.

The Concrete businesses ceased operations during COVID-19 'Level 4' lockdown. This resulted in lower earnings in March and a $13 million loss in April. The division experienced a strong recovery of activity in May and June across all segments and products, with revenue up 2% on the prior year.

The division recognised $13 million of significant items reflecting headcount and property rationalisation decisions in line with our expectations of lower future business volumes. These initiatives include a refinement of our quarry network and the right-sizing our ready-mix network.

Trading cash flow for the division was $100 million, compared with $136 million in the prior year, reflective of lower earnings during the final part of the financial year, while working capital management remained solid.

Capital expenditure for the division was $50 million. Investment in the year included further quarry resource development to meet forecast demand, additional heavy mobile equipment for both quarries and the cement operation, while Firth continued its programme of ready-mix truck and plant replacement.

Future Focus

The division's strategic focus continues to be on projects that support long-term capability, reduce carbon emissions, improve customer service experience - especially through digital connectivity - and ensure cost competitive manufacturing and supply chain positions.

Firth is now progressing with a digital channel to market and we expect initial implementation in FY21. Masonry will further rationalise its manufacturing network to drive efficiencies in line with plans already in progress. Product development continues in masonry with new sized paving options and more environmentally friendly honed surface finishes.

Golden Bay Cement's major cost reduction initiative - the Tyre Derived Fuel initiative - a project in conjunction with Ministry for the Environment, enabling energy cost improvements and reduction in carbon emissions will complete the construction phase in January 2021 with the first tyre derived fuel to be generated in February 2021. The business continues to work on the development of a low carbon and sustainable cementitious material which will reduce the carbon footprint for Concrete.

28 Fletcher Building Limited Annual Report 2020

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Concrete

Financial Summary

Year ended 30 June

Reported

Pro forma

Reported

20R v 19P

2020

2019 (1)

2019

Change

NZ$M

NZ$M

NZ$M

%

Gross revenue

740

802

802

(8%)

External revenue

503

549

549

(8%)

EBIT before

74

89

84

(17%)

significant items(2)

Significant items(3)

(13)

-

-

NM

Funds

607

646

656

(6%)

Trading cash flow

100

136

136

(26%)

Capital expenditure

50

65

65

23%

  1. The pro forma figures for the year ended 30 June 2019 have been restated for comparative purposes to include the impact from NZ IFRS 16.
  2. EBIT before significant items 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 the period ended 30 June 2020.
  3. Details of significant items can be found in note 2 of the financial statements.

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Divisional Review

Residential

Land Development

Clever Core

% of Revenue

REVENUE

$466m

6%

Residential and

Development

The Residential and Development division reported revenue of $466 million, which was 27% lower than the prior year. EBIT before significant items were $65 million, compared to $137 million in the prior year. The decline in both revenue and EBIT was largely due to a reduction in houses sold and less properties taken to profit in the Development business.

The Residential business experienced a mixed market throughout FY20. Activity was slow during the first quarter of the financial year, but from mid-October until mid-March there was a notable increase in sales demand and firmer pricing in both the Auckland and Christchurch markets.

The Development business completed the first of two transactions on the former Crane Copper Tube site in Sydney contributing EBIT of $12 million, with the second site transaction being delayed until 1H21.

Clever Core, the division's new panelisation business, officially opened in October 2019. The plant has produced 40 panelised houses for Fletcher Living's developments in Auckland. The production and installation rate of panels achieved late in the year are trending well for the future success of

this business.

From March until early May, house sales were negatively impacted by the COVID-19 'Level 4' lockdown. The absence of sales during these important sales months, as well as delays in the completion of houses, led to 666 units being taken to profit in FY20 compared to 755 units in the prior year.

May and June house sales activity was strong, although most of these sales will settle in the new financial year. The demand for Auckland houses in the $600k - $900k price range remains especially strong, reflecting interest from both first-time buyers and investors.

Trading cash flow for the division was $118 million compared to $95 million in the prior year. Cash flow in the current year included a $50 million receipt related to the Wiri land development sale that was completed in FY19, and which offset the lower FY20 earnings.

Funds employed reduced from $651 million at 30 June 2019 to $604 million, mainly due to the Wiri settlement. Land stocks in the division has remained constant, with a total of 2,596 lots (either finished sections or development land) held on balance sheet at the end of FY20. The business has a further 1,323 residential lots under unconditional purchase agreements to be delivered over the next four years.

Future Focus

We continue to focus on delivering houses at mid-market price points in Auckland across a range of developments and have a commitment to continuing to broaden the types of homes offered, including more apartments. In Christchurch the near-term focus is increasingly on the One Central development and supplementing it with opportunities in growth corridors.

Clever Core will increase the volume of houses it supplies into Fletcher Living and look to commence sales to external customers in FY21.

The Development business has a good pipeline of Fletcher Group land available for industrial development that has arisen from recent restructuring decisions, including the divestment of the Rocla business in Australia.

30 Fletcher Building Limited Annual Report 2020

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Residential and Development

Financial Summary

Year ended 30 June

Reported

Pro forma

Reported

20R v 19P

2020

2019 (1)

2019

Change

NZ$M

NZ$M

NZ$M

%

Gross revenue

466

639

639

(27%)

External revenue

460

639

639

(28%)

EBIT before

65

137

137

(53%)

significant items(2)

Significant items(3)

(1)

-

-

NM

Funds

604

651

651

(7%)

Trading cash flow

118

95

95

24%

Capital expenditure

3

7

7

57%

Residential and Development

EBIT

Year ended 30 June

Reported

Pro forma Reported

20R v 19P

2020

2019 (1)

2019

Change

NZ$M

NZ$M

NZ$M

%

Residential

63

84

84

(25%)

Land Development

6

56

56

(89%)

Clever Core

(4)

(3)

(3)

(33%)

Total

65

137

137

(53%)

  1. The pro forma figures for the year ended 30 June 2019 have been restated for comparative purposes to include the impact from NZ IFRS 16.
  2. EBIT before significant items 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 the period ended 30 June 2020.
  3. Details of significant items can be found in note 2 of the financial statements.

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Divisional Review

South Pacific

Brian Perry Civil

Higgins

Buildings

Infrastructure

% of Revenue

REVENUE

$1,318m

17%

Construction

The Construction division reported gross revenue of $1,318 million, 23% or $384 million lower than the prior year. EBIT before significant items of $(147) million compared to $51 million in the prior year.

Prior to March, Higgins was trading well with expectations of a strong finish to the year. Brian Perry had a slow start to the year but was benefiting from demand for urgent Watercare work with respect to the Auckland drought and urgent runway work at Auckland Airport. Completion of the legacy Buildings and Infrastructure projects was continuing to expectations and within the provisions set in February 2018. Rebuild work had commenced on the New Zealand International Convention Centre, which was affected by a fire in October 2019, with insurance responding to loss and damage on this project.

The 'Level 4' lockdown significantly impacted all of the division's businesses as paving, civil and building works ceased. This included the Commercial Bay project in downtown Auckland, which was within days of meeting agreed opening dates on the retail and office precincts. COVID-19 also resulted in the cancellation of Auckland Airport's Domestic Jet Facility project, where Fletcher Construction had been part of a successful joint venture bid. Construction activities resumed under 'Level 3' in late April, however productivities were impacted by a gradual ramp-up in site work as well as social distancing protocols, especially on commercial building sites.

Through the year-end review process, it was decided to increase provisions to complete the historical construction projects by $150 million. Three factors led to the increased provisions. Around 50% was due to reduced productivities on key legacy projects, which were significantly disrupted by COVID-19 in FY20, and with ongoing challenges expected in FY21 across supply chains and project resourcing. Around 20% of the additional provisions was due to issues which have arisen on a small number of historically completed projects. The final 30% consists of a prudent risk provision across the portfolio of legacy work.

While this additional provisioning is disappointing, the division continues to make progress in its reset. In February 2018, the division had work to complete of approximately $2.2 billion for major projects across the Buildings and Infrastructure businesses, almost all of which comprised large, higher-risk, fixed price projects. Currently, approximately $600 million of this work remains to be completed. Over this period, the division has also rebuilt its forward order book to comprise $2.4 billion of new work with a materially better margin outlook and lower and more appropriate risk profile. This order book includes primarily: smaller, self-perform work in Higgins and Brian Perry; national and local maintenance contracts; a strong pipeline of road pavement work; and the 10-year Watercare Enterprise Framework Agreement, providing an estimated $1.3 billion backlog of work for Brian Perry and Infrastructure over 10 years.

In FY20, the division recognised $13 million of significant items, consisting mainly of redundancy and property rationalisation costs.

Trading cash flow for the division was an outflow of $148 million in FY20, compared to an outflow of $210 million in the prior year. Cash outflows for the Buildings and Infrastructure legacy work were $186 million, compared to $270 million in the prior year. Excluding the legacy work, trading cash for the division was an inflow of $38 million, compared to an inflow of $60 million the prior year, with Higgins performing strongly.

The division invested $32 million in capital expenditure in FY20. Consistent with the prior year, the focus of investment continues to be in the manufacture and supply of bituminous products in Higgins and in plant for foundations in Brian Perry Civil.

Future Focus

The priorities will continue to be to complete the remaining legacy projects within provisions, leverage a strengthened set of project and risk management capabilities in winning and delivering new work effectively, and bring innovative solutions to bear for key customers, with a strengthened leadership team in place.

The division remains well positioned to tender and deliver work in the significant pipeline of Infrastructure work announced by the Government in the transport sector and in the growing remedial and new works in the water sector.

32 Fletcher Building Limited Annual Report 2020

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Construction

Financial Summary

Year ended 30 June

Reported

Pro forma

Reported

20R v 19P

2020

2019 (1)

2019

Change

NZ$M

NZ$M

NZ$M

%

Gross revenue

1,318

1,702

1,702

(23%)

External revenue

1,261

1,622

1,622

(22%)

EBIT before

(147)

51

47

(388%)

significant items(2)

Significant items(3)

(13)

-

-

NM

Funds

50

38

48

32%

Trading cash flow

(148)

(210)

(210)

30%

Capital expenditure

32

31

31

(3%)

Construction

EBIT

Year ended 30 June

Reported

Pro forma Reported

20R v 19P

2020

2019 (1)

2019

Change

NZ$M

NZ$M

NZ$M

%

Higgins

14

39

36

(64%)

Infrastructure, South

(94)

12

11

(883%)

Pacific, Brian Perry

Civil & FC Buildings

Total

(80)

51

47

(257%)

B+I Legacy

(67)

NM

Total

(147)

51

47

(388%)

  1. The pro forma figures for the year ended 30 June 2019 have been restated for comparative purposes to include the impact from NZ IFRS 16.
  2. EBIT before significant items 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 the period ended 30 June 2020.
  3. Details of significant items can be found in note 2 of the financial statements.

Fletcher Building Limited Annual Report 2020

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Divisional Review

Building Products Australia:

Laminex Australia

Iplex Australia

Rocla

Fletcher Insulation

Distribution Australia:

Tradelink

Oliveri Solutions

Steel Australia:

Stramit

% of Revenue

35%

REVENUE

$2,802m

Australia

The Australian division reported gross revenue of $2,802 million compared with $3,024 million in the prior year. EBIT before significant items was $33 million, compared to $77 million in the prior year.

The performance in the division was mixed through the year, with most businesses impacted by the sharp decline in the residential market, which saw commencements down approximately 20% on the prior year.

Building Products Australia saw continued strong turnaround momentum in the Laminex and Fletcher Insulation businesses, both of which grew earnings despite subdued market activity. Laminex revenue declined 7%, however EBIT increased by 5% due to market share gains driven by new product ranges, growth in volumes transacted through the business's ecommerce platform, and the benefit of cost-out initiatives. In the Pipelines businesses (Iplex-Rocla), revenue declined due to delays in key infrastructure projects and subdued residential subdivision activity, resulting in a loss of c$15 million in these businesses. A decision was taken through the year to divest the Rocla business, with completion of this transaction expected in FY21.

Distribution Australia revenue was down 4% while Steel Australia revenue increased 4% with share gains in the distributor and commercial segments. However, both businesses reported reduced earnings, as competitive intensity placed ongoing pressure on price and margin, and Stramit was impacted by lower sales in the shed segment. Tradelink's focus on the small to medium network customer segment (SME) continues to provide increased stability in revenue, despite the residential downturn. Tradelink has largely completed its store footprint expansion, and is now focused on the showroom and branch refurbishment programme. Stable earnings in Oliveri continued in the year as a result of favourable margin mix changes to the bathroom product range.

The division recognised a $166 million charge to significant items during the year, relating to costs associated with the rationalisation of its property footprint and fixed cost base, along with the reduction of headcount.

Capital expenditure in the year was $65 million, with key investments focused on automation and capability improvements in the manufacturing businesses and system upgrades in the distribution business.

Trading cash flow of $49 million compared to $57 million in the prior year, reflecting the cash impact of restructuring costs recognised in FY19. Excluding the cash impact of significant items, FY20 trading cash flow was $92 million, compared to $71 million in the prior year, reflecting focused improvements in inventory management and debtor collections.

Future Focus

With a healthy pipeline of product and service innovation, including through improved digital capabilities. The cost-out programme is now largely complete with focus now on key growth initiatives. Enablers of growth include: new digital offerings through expanded digital presence and platforms, which will build off the success of the Laminex eCommerce platform that has now delivered >$100 million of online sales in <12 months; acceleration of new product adjacencies, including a focus on architectural offers in Stramit, Design by Tradelink, and compact range enhancements in Laminex; as well as a continuation of customer focus with refined value propositions.

34 Fletcher Building Limited Annual Report 2020

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Australia

Financial Summary

Year ended 30 June

Reported

Pro forma

Reported

20R v 19P

2020

2019(1)

2019

Change

NZ$M

NZ$M

NZ$M

%

Gross revenue

2,802

3,024

3,024

(7%)

External revenue

2,723

2,933

2,933

(7%)

EBIT before

33

77

57

(57%)

significant items

(NZ$m) (2)

EBIT before

31

72

53

(57%)

significant items

(A$m) (2)

Significant items (3)

(166)

(78)

(78)

(113%)

Funds

1,494

1,602

1,735

(7%)

Trading cash flow

49

57

57

(14%)

Capital expenditure

65

91

91

28%

Australia

EBIT

Year ended 30 June

Reported

Pro forma Reported

20R v 19P

2020

2019 (1)

2019

Change

NZ$M

NZ$M

NZ$M

%

Building Products

26

47

40

(45%)

Australia

Distribution Australia

7

15

8

(53%)

Steel Australia

5

16

11

(69%)

Divisional costs

(5)

(1)

(2)

NM

Total

33

77

57

(57%)

  1. The pro forma figures for the year ended 30 June 2019 have been restated for comparative purposes to include the impact from NZ IFRS 16.
  2. EBIT before significant items 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 the period ended 30 June 2020.
  3. Details of significant items can be found in note 2 of the financial statements.

Fletcher Building Limited Annual Report 2020

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Our Board

BRUCE HASSALL

BCom, FCA (CAANZ)

Chair and Independent Non-Executive Director

Term of office: Appointed director 1 March 2017, last elected 2017 annual meeting.

Board committees: Chair of the Nominations Committee and Member of the Remuneration Committee.

Bruce Hassall has had a distinguished career with broad and deep commercial and strategic experience, and connections across the New Zealand economy, including in the small medium enterprise (SME), commercial, government and export sectors. As former senior partner and CEO of PwC New Zealand he has extensive advisory background and knowledge of the corporate environment. Bruce is the Chair of The Farmers' Trading Company Limited and Prolife Foods Limited and is a director of Bank of New Zealand and Fonterra Co-operative Group Limited.

MARTIN BRYDON

MBA, FAICD, FAIM, Dip Elect Eng, Dip Elron Eng

Independent Non-Executive Director

Term of office: Appointed director 1 September 2018, last elected 2018 annual meeting.

Board committees: Member of the Nominations Committee and Member of the Safety, Health, Environment and Sustainability Committee.

Martin has more than 40 years' experience in the Australian building products sector, having started his career as an indentured engineering cadet with BHP. He joined Cockburn Cement Limited in 1981, where he then served as CEO from 1998-1999. Following Cockburn Cement's merger into Adelaide Brighton in 1999, he held a number of senior management roles before his appointment

as CEO and managing director in 2014. Martin retired following a distinguished 30-year career with Adelaide Brighton in January 2019.

BARBARA CHAPMAN

CNZM, BCom, CMInstD

Independent Non-Executive Director

Term of office: Appointed director 1 September 2018, last elected 2018 annual meeting.

Board committees: Chair of the Remuneration Committee and Member of the Nominations Committee.

Barbara brings extensive and diverse trans-Tasman executive experience to the Board having served as CEO and managing director of ASB Bank for seven years and having held a number of senior executive roles responsible for marketing, communications, human resources, life insurance and retail banking in New Zealand and Australia. She has an extensive list of professional achievements to her credit, including being named New Zealand Herald's 2017 Business Leader of the Year. In 2019, Barbara was made a Companion of the New Zealand Order of Merit for services to business. Barbara is the Chair of Genesis Energy Limited and NZME (New Zealand Media and Entertainment) Limited, and deputy Chair of The New Zealand Initiative. She is also Chair of the APEC 2021 CEO Summit.

36 Fletcher Building Limited Annual Report 2020

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PETER CROWLEY

BEcon, BA, FAICD

Independent Non-Executive Director

Term of office: Appointed director 1 October 2019, last elected 2019 annual meeting.

Board committees: Member of the Audit and Risk Committee, Member of the Nominations Committee and Member of the Safety, Health, Environment and Sustainability Committee.

Peter Crowley has over 35 years of experience in the construction materials and building products industries across Australia, New Zealand, Asia, Europe and North America. From 2003-2015, he served as managing director and CEO of GWA Group Limited, a leading Australian supplier of building fixtures and fittings to households and commercial premises. He also spent 18 years in the cement industry, including various chief executive roles with the Rugby Group plc and a variety of managerial roles with Queensland Cement and its parent company Holcim. Peter is a director of Barrambin Trading Company Pty Ltd, The Riverside Coal Transport Company Pty Ltd and Wesley Medical Research Limited.

ROB MCDONALD

BCom, FCA

Independent Non-Executive Director

Term of office: Appointed director 1 September 2018, last elected 2018 annual meeting.

Board committees: Chair of the Audit and Risk Committee, Member of the Nominations Committee and Member of the Remuneration Committee.

Rob McDonald's finance career spans over 30 years with a strong track record in financial and risk management, developed over two decades with Air New Zealand. As the airline's chief financial officer, he received a number of accolades during his career, including CFO of the Year in the Deloitte Top 200 in 2015 and the Fairfax Media New Zealand CFO of the Year award in 2010. Rob is the Chair of Contact Energy Limited and is a director of AIA New Zealand Limited and the Chartered Accountants of Australia and New Zealand.

DOUG MCKAY

ONZM, BA, AMP (Harvard), CMInstD

Independent Non-Executive Director

Term of office: Appointed director 1 September 2018, last elected 2018 annual meeting.

Board committees: Chair of the Safety, Health, Environment and Sustainability Committee, Member of the Audit and Risk Committee and Member of the Nominations Committee.

Doug brings considerable business leadership and commercial experience, as the former CEO of major manufacturing and distribution businesses in New Zealand and Australia, such as Lion Nathan, Carter Holt Harvey, Goodman Fielder, Sealord and Independent Liquor. He was the inaugural CEO of the amalgamated Auckland Council until the end of 2013. In 2015, Doug was made an Officer of the New Zealand Order of Merit for services to business and local government. Doug is the Chair of Bank of New Zealand and Eden Park Trust Board and is a director of Genesis Energy Limited, IAG New Zealand Limited and National Australia Bank.

CATHY QUINN

ONZM, LLB

Independent Non-Executive Director

Term of office: Appointed director 1 September 2018, last elected 2018 annual meeting.

Board committees: Member of the Audit and Risk Committee, Member of the Nominations Committee and Member of the Safety, Health, Environment and Sustainability Committee.

Cathy practiced as one of New Zealand's foremost commercial and corporate lawyers for over 30 years. In 2016, Cathy was made an Officer of the New Zealand Order of Merit for services to law and women. Cathy is a director of Rangatira Limited and Tourism Holdings Limited, and a Board member of New Zealand Treasury and chairs Fertility Associates Holdings Limited.

Fletcher Building Limited Annual Report 2020

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Executive Team

ROSS TAYLOR

BEVAN MCKENZIE

ANDREW CLARKE

Chief Executive Officer

Chief Financial Officer

Group General Counsel and

Company Secretary

DANIEL BEECHAM

CLAIRE CARROLL

WENDI CROFT

Chief Information Officer

Chief People and Communications Officer

Chief Health and Safety Officer

STEVE EVANS

DEAN FRADGLEY

IAN JONES

Chief Executive Residential and

Chief Executive Australia

Chief Executive Concrete

Development

HAMISH MCBEATH

BRUCE MCEWEN

PETER REIDY

Chief Executive Building Products

Chief Executive Distribution

Chief Executive Construction

For the full biographies of our Executive Team, please see our website.

38 Fletcher Building Limited Annual Report 2020

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Corporate Governance

The Board is committed to ensuring that Fletcher Building has appropriate corporate governance arrangements in place that are consistent with the size and nature of the Group's operations.

At Fletcher Building, governance is about creating a strong and principled ethics-based culture, where accountability and transparency improve the quality and clarity of decision-making within the Group. The primary objective is to create and adhere to a corporate culture that is open and transparent, develops capabilities, and identifies opportunities to create value for our stakeholders.

The Group's approach to applying the principles and recommendations outlined in the NZX Corporate Governance Code ("the Code") is set out below (including where its practice materially differs from the Code). The Group's constitution, the Board and committee charters, code of conduct and policies referred to in this statement are available to view on our website at fletcherbuilding.com/investor-centre/corporate-governance

This governance statement is current as at 30 June 2020 and was approved by the Board on 18 August 2020.

Principle 1 - Code of Ethical Behaviour

"Directors should set high standards of ethical behaviour, model this behaviour and hold management accountable for these standards being followed throughout the organisation."

CODE OF CONDUCT

The Group has a written Code of Conduct with which all directors, senior executives and employees are required to comply. The Code of Conduct documents minimum standards of ethical behaviour and the Group's expectations on loyalty and conflicts of interest, insider trading, holding of offices in another Company or public office, intellectual property and misconduct.

In addition, the Group has a written Anti-bribery and Corruption Policy, which provides for a zero-tolerance approach to bribery and corruption, whether in the private or public sector anywhere in the world. The policy also sets out expectations around giving and receiving gifts, political and charitable donations and dealings with business partners. All Fletcher Building personnel must adhere strictly to the requirements of this policy.

Fletcher Building has a free phone and online service ("FBuCall") that can be used by any Fletcher Building personnel to report suspected unacceptable, unethical or illegal behaviour in the workplace. This service is operated by external providers, who act as an independent third party to ensure calls are kept anonymous.

Fletcher Building is also committed to upholding Human Rights across all its business operations. Human Rights are fundamental civil, political, economic and social rights and freedoms that every human is entitled to without discrimination and include the right to be treated decently at work, to express opinions and beliefs without fear of recrimination, to have privacy, and to be free from harassment, abuse or discrimination. In December 2019, the Board adopted a Human Rights Policy, which describes how Fletcher Building will uphold and monitor human rights within its business operations.

The Modern Slavery Act 2018 is an Australian Commonwealth Act which commenced on 1 January 2019. Our updated Human Rights Policy includes the statement that Fletcher Building prohibits the use of all forms of forced labour, including indentured labour, bonded labour, prison labour, modern forms of slavery and any form of human trafficking within our supply chain. The first of the annual statements are required to be reported to the Australian Border Force by 31 March 2021. The statements will be published on an online portal controlled by the Australian Border Force.

SECURITIES TRADING POLICY

The Group has a policy that applies to all directors, employees and contractors of Fletcher Building Limited and its subsidiaries ("Fletcher Building Personnel"), as well as trusts, companies, persons and other entities controlled by Fletcher Building Personnel. Persons also covered by the policy are any secondee, adviser or contractor who is in possession of material information that is not available to the market and who intends to trade, or advise or encourage others to trade, in listed securities of Fletcher Building or any of its subsidiaries.

The policy employs the use of blackout periods to restrict persons covered by the securities trading policy who are likely to have knowledge of, or access to, inside information from trading. This group of personnel must notify the Group Secretary of their intent to trade. In addition, through our share registry, Computershare Investor Services Limited (Computershare), we actively monitor trading in Fletcher Building shares by senior personnel.

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Corporate Governance (Continued)

Principle 2 - Board Composition and Performance

"To ensure an effective Board, there should be a balance of independence, skills, knowledge, experience and perspectives."

BOARD'S ROLES AND RESPONSIBILITIES

The role of the Board is to provide overall strategic guidance and effective oversight of management for the purposes of protecting and enhancing the value of Fletcher Building assets in the best interests of the Group. The Board has statutory responsibility for the affairs and activities of the Group, which in practice is achieved through delegation to the CEO who is charged with the day-to-day leadership and management of

the Group.

The Board's roles and responsibilities are formalised in a Board charter, which is available on the Group's website. The Board charter sets out those functions that are delegated to management and those that are reserved for the Board. Under the Board charter, the Group Secretary is secretary to the Board and accountable directly to the Board, through the Chair, on all matters to do with the proper functioning of the Board.

NOMINATION AND APPOINTMENT OF DIRECTORS

Procedures for the appointment and removal of directors are governed by the Group's constitution. The Nominations Committee makes recommendations to the Board in respect of Board and committee composition and, when required, identifies individuals it considers to be qualified to become Board members.

Before a person is appointed to the Board, checks as to the person's character, experience, education, criminal record and bankruptcy history are conducted. Each director receives a letter formalising his or her appointment. That letter outlines the key terms and conditions of his or her appointment, including Fletcher Building's expectations of the role of director, and is required to be countersigned confirming agreement.

DIRECTOR INDEPENDENCE

The Group acknowledges the importance of having independent directors, ensuring it has the correct balance of skills to optimise the financial performance of the Group and maximise returns to shareholders.

The Board currently comprises seven directors, with a wide range of skills and experience. The qualifications and experience of each of the directors, including length of service, are set out in "Our Board" section on pages 36 and 37.

The factors that the Board will consider in whether a director is 'independent' are set out in Appendix A of the Board charter. Any director who has a change in relevant circumstance to any of the factors listed in Appendix A must immediately notify the Chair of that change so that his or her independence can be re-assessed. If there is a change in the Board's determination, it will be announced to the market. The Board considers all the current directors as at 30 June 2020 to be independent.

The Chair is an independent director and is not the CEO. In addition, the Chair of the Audit and Risk Committee is not the Chair of the Board, and pursuant to its charter all members of this committee are non-executive and independent directors.

DIVERSITY POLICY

Fletcher Building has a Diversity Policy, which is available on the Group's website. The Remuneration Committee reviews progress against diversity initiatives developed by the Group to deliver outcomes against the Policy. Further information on diversity initiatives can be found in "Supporting our People and Communities" section on pages 10 to 13.

The Board is satisfied with the initiatives being implemented by the Group and its performance with respect to the Diversity Policy. The policy does not currently include a requirement for the Board (or a committee) to set measurable objectives for achieving diversity (as is recommended by the NZX Corporate Governance Code), as the Board has considered diversity outcomes can be achieved without measurable objectives. Fletcher Building developed a Diversity and Inclusion strategy during the 2019 calendar year. Implementation of this strategy will include the establishment of targets, reporting and governance. We are currently updating our Diversity Policy as an output of this work and the new policy will be implemented in the 2020 calendar year.

Additionally, as members of the Champions for Change network in New Zealand, Fletcher Building has provided diversity reporting as input into the Champions for Change Annual Diversity Report 2020, providing benchmark against appropriate external comparators as per current policy requirements.

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The numbers and proportion of male and female within Fletcher Building as at 30 June 2020 are set out in the table below.

2020

2019

Women

Men

Women

Men

Board of directors

2

(29%)

5

(71%)

2

(25%)

6

(75%)

Executive committee

2 (17%)

10

(83%)

2 (17%)

10

(83%)

Senior management (1)

17

(25%)

51

(75%)

16

(25%)

48

(75%)

All employees

21%

79%

20%

80%

  1. Senior management for these purposes includes any person who reports to a member of the executive committee.

BOARD SKILLS MATRIX

The Board has adopted a skills matrix which takes account of the breadth of the Group's business interests and the nature of the Group's strategic focus. Skills and diversity that are relatively underweight are considered in making appointments to the Board. The matrix shows the representation of expertise among the current directors.

Business context

Capability

Key elements

Director expertise

Construction and infrastructure / Manufacturing and

Product and market Industrydistribution / Land and property development knowledge

New Zealand / Australia building products sector

Financial expertise

Prior CFO, ARC Chair experience, Financial risk management

Commercial depth

Business operations at scale Commercialisation of research-based innovation

Technology and digital

Cybersecurity, data analytics, disruptive

innovation

technology, digital platforms

Sales and go-to-market

Marketing, retail, service delivery, customer

engagement, omnichannel

Functional Expertise

M&A, divestments,

M&A, divestments, corporate and balance

corporate restructuring

sheet structuring

Government, legal,

Engagement with government stakeholders, legal,

policy and regulatory environments, NZX/ASX

regulatory, governance

experience, ESG, Shareholder engagement

Health and safety

Safety standards and best practice

People, culture

Leading transformation / cultural turnaround,

transformation

talent management and remuneration

Key:

Very strong

Strong

Solid

Some gaps

This Key represents the assessment of the strength of the skills and experience of the Board as a whole.

DIRECTOR INDUCTION AND PROFESSIONAL DEVELOPMENT

The Board conducts induction and continuing professional development for directors, which includes visits to Group operations and briefings from key executives and industry experts. Directors are provided with material health and safety information relevant to the business.

The Safety, Health, Environment and Sustainability Committee maintained regular meetings throughout the year and conducted targeted site visits (where COVID-19 travel restrictions permitted) to observe first-hand the business response to critical safety issues.

BOARD PERFORMANCE

Reviews of the performance of the Board and individual directors are carried out regularly to ensure the Board as a whole and individual directors are performing to a high standard.

The Board carried out a comprehensive review of its performance and of the committees during FY20, with the assistance of an independent consultant Propero Consulting Limited. The collective results of the review were then reported to the Board by the Chair and discussed with directors. The Board is focused on implementing the recommendations that came out of this review in FY21.

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Corporate Governance (Continued)

Principle 3 - Board Committees

"The Board should use committees where this will enhance its effectiveness in key areas, while still retaining Board responsibility."

In accordance with the Board charter, various committees have been set up to enhance the Board's effectiveness in key areas, while still retaining overall responsibility. As at 30 June 2020 the Board committees were:

  • Audit and Risk Committee
  • Nominations Committee
  • Remuneration Committee
  • Safety, Health, Environment and Sustainability Committee

Each committee is governed by a charter setting out its roles and responsibilities (a copy of which is available on the Group's website). Committees do not take action or make decisions on behalf of the Board unless specifically mandated by prior Board authority to do so. Employees only attend meetings of the Audit and Risk Committee and Remuneration Committee at the invitation of the particular committee. From time to time, the Board may create ad-hoc committees to examine specific issues on its behalf.

Comittee

Role

Members as at 30 June 2020

Audit and Risk Committee

The role of the ARC is to advise and assist the Board in discharging

(ARC)

the responsibilities with respect to external financial reporting, internal

control environment, internal audit and external audit functions, and risk

management practices.

Rob McDonald (Chair)

Peter Crowley

Doug McKay

Cathy Quinn

Nominations Committee

The committee's role is to identify and recommend individuals to the Board

for nomination as members of the Board and its committees and the terms,

if any, of such membership.

All non-executive directors are members of the Nominations Committee.

Bruce Hassall (Chair)

Remuneration Committee

The principal role of the committee is to oversee and regulate compensation

Barbara Chapman (Chair)

and organisation matters affecting the Group, including remuneration and

Bruce Hassall

benefits, policies, performance and remuneration of the Group's senior

(effective 1 July 2020)

executives, management development and succession planning of the CEO

and his direct reports.

Rob McDonald

Safety, Health,

The role of the committee is to assist the Board to provide leadership and

Doug McKay (Chair)

Environment and

policy for SHES management within Fletcher Building. The committee

Peter Crowley

Sustainability Committee

focuses on compliance with legislative and regulatory requirements and the

(SHES)

promotion of good SHES governance.

Martin Brydon

Cathy Quinn

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ATTENDANCE AT BOARD AND COMMITTEE MEETINGS

The table below shows directors' attendance at the Board and committee meetings during the year ended 30 June 2020.

Safety, Health,

Environment and

Audit and Risk

Nominations

Remuneration

Sustainability

Board

Committee

Committee (1)

Committee

Committee

Number of meetings held

17

4

3

6

4

Bruce Hassall (Chair) (2)

17

3

3

5

1

Martin Brydon

17

3

4

Antony Carter (3)

5

2

1

2

Barbara Chapman

17

3

6

Peter Crowley (4) / (5)

15

2

2

2

Rob McDonald (6)

17

4

3

4

Doug McKay

16

4

3

4

Cathy Quinn

16

4

3

4

Steve Vamos (7)

8

2

3

  1. All non-executive directors are members of the Nominations Committee.
  2. Bruce Hassall attended all committee meetings in an ex officio capacity, excluding his attendance as Chair of the Nominations Committee.
  3. Antony Carter retired from the Board on 28 November 2019 following conclusion of the Annual Shareholders' Meeting.
  4. Peter Crowley was appointed to the Board on 1 October 2019.
  5. Peter Crowley was appointed member of the Audit and Risk Committee and Safety, Health, Environment and Sustainability Committee, each effective 20 December 2019.
  6. Rob McDonald was appointed member of the Remuneration Committee effective 20 December 2019.
  7. Steve Vamos resigned from the Board effective 30 March 2020.

TAKEOVER PROTOCOLS

The Board has established detailed protocols that set out the procedure to be followed if there is a takeover offer for the Group, including any communication between Group insiders and the bidder.

Principle 4 - Reporting and Disclosure

"The Board should demand integrity in financial and non-financial reporting, and in the timeliness and balance of corporate disclosures."

CONTINUOUS DISCLOSURE

Fletcher Building is committed to ensuring that all of our investors have timely access to full and accurate material information about the Group. Our Continuous Disclosure Policy sets out the internal processes designed to ensure that the Group complies with the disclosure obligations of the NZX and ASX. The Board has adopted this policy, which applies to all members of the Board and executive, all employees of Fletcher Building and its affiliated entities, as well as consultants, contractors and other service providers where they have a relevant contractual obligation to Fletcher Building or one of our businesses. The Continuous Disclosure Policy is available on the Group's website.

Directors formally consider at each Board meeting whether there is relevant material information which should be disclosed to the market.

DISCLOSURE OF CODES AND CHARTERS

All of our key governance documents (including the Code of Conduct, key corporate policies and Board and committee charters) are available on our website at fletcherbuilding.com/investor-centre/corporate-governance.

SAFEGUARDING INTEGRITY IN FINANCIAL REPORTING

The Audit and Risk Committee oversees the accounting and internal control systems, policies and procedures to ensure compliance with the legal requirements, in respect of accounting policies, financial reporting, internal control, external audit and environmental regulation in all jurisdictions in which the Group operates.

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Corporate Governance (Continued)

In addition, prior to approving the full year financial statements, the Board received from the chief financial officer a declaration that, in his opinion, the financial records of the Group have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the Group and that the opinion has been formed on the basis of a sound system of risk management and internal control that is operating effectively.

SUSTAINABILITY

The Sustainability section on pages 8 to 18 discusses non-financial focus areas for our business, including environmental, economic and social matters. The Board and executives recognise that sustainability is critical to Fletcher Building's success.

Fletcher Building is committed to building strong relationships with our stakeholders. At the local level, our businesses thrive on regular engagement with customers, suppliers, neighbours and local communities. At a Group level, we engage with Government and regulatory authorities. We are members of the following environment and sustainability organisations:

-

Infrastructure Sustainability Council of Australia

-

Sustainable Business Council

-

Lifecycle Association of New Zealand

-

Sustainable Business Network

-

NZ Green Building Council

Further sustainability information can be found on the Group's website at fletcherbuilding.com/about-us/environment-and-sustainability/.

Principle 5 - Remuneration

"The remuneration of directors and executives should be transparent, fair and reasonable."

Fletcher Building's remuneration strategy is designed to attract, retain and motivate high calibre people at all levels of the organisation with remuneration programmes that are market-competitive, flexible and affordable, provide incentive to drive for both annual and long-term results, and maximise shareholder value.

Our practices for setting remuneration are detailed in our Remuneration Policy. The policy is governed by the Remuneration Committee in line with its charter, which is available on the Group's website.

The 'Remuneration Report' on pages 50 to 59 outlines in detail the remuneration framework of Fletcher Building, as well as the remuneration of the directors, the CEO and other executives and senior management. This includes a discussion on share-based remuneration.

Principle 6 - Risk Management

"Directors should have a sound understanding of the material risks faced by the issuer and how to manage them. The Board should regularly verify that the issuer has appropriate processes that identify and manage potential and material risks."

RISK FRAMEWORK

The purpose of the risk management framework of the Group is to ensure that the key risks faced are identified, assessed, controlled, monitored and reported so that the Group can achieve its objectives and protect its people, customers, financial results and reputation.

The Fletcher Building risk management framework is based on a three lines of defence model as set out below. This starts - and operational accountability ultimately rests - with the managers in the individual business units and the divisional chief executives. Our risk management and assurance processes support this through our Group functions and are overseen by the Board and executive team, with a dedicated internal audit team which takes a risk-based approach to auditing key business activities and reports directly to the Audit and Risk Committee. Risks identified through other business wide processes, such as the materiality assessment described on page 49, are used to inform the risk management framework and where material are included in risk management processes.

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3rd Line of Defence:

FBU Board

Board, Executive and

Internal Assurance

ARC

Internal Audit

Executive Committee

2nd Line of Defence:

Finance

Group Functions

Legal

Group

Property

Risk

People

IT

EHS

1st Line of Defence:

Division

Division

Operating Units

BU

BU

BU

BU

As part of its risk management responsibility, the Audit and Risk Committee receives regular reports of the material, emerging and existing key risks, the current and target risk ratings, and the measures in place to mitigate the risks.

The Fletcher Building risk management framework provides a consistent framework for the management of risk, ensuring the alignment with strategy, business processes and technology. The Group's approach aligns with the international risk management framework as established under the International Organisation for Standardisation (ISO) ISO31000:2018 Risk Management - Principles and Guidelines.

ACTIVITY IN FY20

In FY20 Fletcher Building reviewed and refreshed both its risk management policy and risk management framework. This review enabled both the policy and framework to be refreshed to reflect the updated ISO31000:2018 Risk Management - Principles and Guidelines as well as internal developments within the Group.

Both the updated risk management policy and risk management framework were reviewed by an external party to ensure that these documents were pragmatic, clearly understood and representative of current good market practices.

Additionally, through the year there were risk workshops including individual business units' managers and the Group Risk team reviewing the specific business unit risk registers. This is an integral part of the risk management framework at Fletcher Building and helps form part of the updates provided to the Audit and Risk Committee.

Fletcher Building also utilised external experts in the provision of the risk engineering programme. This programme covered 22 key sites in FY20 and the resulting risk engineering reports provide valuable insights to both management as well as our insurers.

COVID-19 RESPONSE

In FY20, like many businesses, Fletcher Building was materially impacted by COVID-19. The Group's response began in late January 2020 with a focus on monitoring our supply chain, particularly with respect to the potential disruption in China. This risk was well managed by the Group through strong supplier relationships and proactive management of existing resilience stock levels. Regular reporting to both senior management and the Board occurred during this period.

As COVID-19 developed into a global pandemic the response by the Group focused on keeping its people safe from the developing health and safety risk and ensuring that our business units could continue to operate in a normal manner. The Group's Crisis Management Team was mobilised and through this period met 29 times between February and April 2020. Additionally, during this period the Board met on a regular basis to be updated on the COVID-19 response by the business.

In Australia, this focus resulted in the majority of our businesses being able to operate with relatively few restrictions through this period.

In New Zealand, our operations were required to cease during COVID-19 Alert 'Level 4' as most operations were deemed to be non-essential services. This resulted in the temporary closure of over 450 sites and the requirement for ~9,400 of our people to either work from home or enter the Group's 'Bridging Pay Programme'. This period saw a robust response by the Group, leveraging its business continuity and IT recovery plans to manage the business through this event.

With the transition in New Zealand from COVID-19 Alert 'Level 4' to Alert 'Level 3' in late April, the Group was able to execute the 'Return to Work' plans that the business unit managers and divisional lead teams had developed. Most of our operations were able to recommence in Alert 'Level 3' to respond to the requirements of our customers and help the rebuilding of the New Zealand economy. The Group utilised innovative solutions in this period such as the in-house development of a contact tracing system.

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Corporate Governance (Continued)

KEY RISKS

The Fletcher Building risk management framework is focused on the 10 key commercial (non-Health and Safety) risks that the Group faces across its business. These risks are dynamic and during the course of FY21 new risks and uncertainties may materialise owing to changes in economic conditions, regulatory environment and other factors.

The 10 key risks, their potential impacts and how they are managed by the Group are:

Description

How this risk may impact

How we manage this risk at

Fletcher Building

Fletcher Building

Business Resilience

The occurrence of a disruption

Business units have business continuity plans in place to address

A disruption to business processes,

event at a key site could lead to

the identified operational continuity risks as well as to enable

an extended operational interruption,

preventative measures to be undertaken.

in particular the loss of key assets,

which may negatively impact the

Regular monitoring of the risk environment occurs to ensure that

may lead to an inability to undertake

financial performance of the business

the activities of a business unit or

key risks are appropriately covered by insurance (where practical

unit and ultimately the Group.

the Group.

and cost effective).

An established independent risk engineering review programme is

in place for our key sites.

We review long-term risks associated with climate change and

resource availability at Group level to assess our resilience and the

risk horizon.

Economic and

The failure by the Group to identify

Senior Leadership teams of business units and divisions monitor

Construction Downturn

early and respond to cyclical downturns

their key markets and are supported by the Corporate centre with

The building and construction

may impact financial results and

in-depth market analysis.

operational performance by business

industries in which the Group

Monthly operational reviews are undertaken by the CEO and

units and the Group.

operates are fundamentally

executives with business units and divisions, as well as the Board

cyclical and are impacted by the

undertaking business unit deep dives.

macroeconomic conditions within

Strong focus on working capital, capital expenditure and balance

both the New Zealand and

Australian economies.

sheet management.

Regulatory and Legal

With the Group operating in a number of different business sectors as well as countries it is subject to a wide range of regulatory requirements and jurisdictions. These regulations and jurisdictions can be complex and subject to change and may affect the Group's operations.

Additionally, we recognise that failure to adhere to, or monitor changes to the various regulatory requirements may lead to the imposition of penalties, operational disruption or reputational damage. Fletcher Building is committed to complying with legal and regulatory requirements across all our operations.

  • The Group has developed a broad range of policies that address the regulatory and legal risks that are faced by the business.
    A number of these policies are located at fletcherbuilding.com/ investor-centre/corporate-governance/
  • A key development in recent years is the establishment of commercial Golden Rules, which provide a framework for all staff on the type of contractual risks that the Group is prepared to accept and/or how they should be managed commercially.

Product Quality

The structures constructed or

• Robust product quality control systems and processes exist within

The Group constructs, manufactures

products manufactured, supplied

our businesses to manage this risk.

and/or purchased may not meet

Supplier vetting and reviews are undertaken by both our

as well as sources from third

relevant international or local standards

parties a range of structures and

businesses and where appropriate by third parties.

and regulations may lead to product

building products that are required

External experts provide independent audits on business units'

recalls, remediation costs and/or

to meet local and international

financial penalties.

manufacturing and product quality control processes.

standards and regulations.

Supply Chain

Disruption to business unit or

• Business units have business continuity plans in place that address

Disruption to business unit operations

Group operations through the

the identified supply chain issues.

ineffective coordination, and

Where possible business units look to establish contingent

through the ineffective coordination,

control of the organisational supply

and control of the organisational

supply agreements across material/product suppliers and

chain may result in operational

supply chain. The Group's supply

logistical providers.

disruption, negatively impact financial

chain may face a variety of challenges

performance, imposition of penalties

such as pandemics, logistical and

and reputational damage.

public infrastructure constraints or

disruption to key suppliers.

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Description

How this risk may impact

How we manage this risk at

Fletcher Building

Fletcher Building

People

The failure of the current processes

The People and Performance function within the Group supports

The failure of the Group to

to attract and retain talented staff

business units by providing advice, tools, processes and policies to

can have a negative impact on the

drive employee, team and business performance.

attract, retain and support our

functioning of a business unit and

With a core value of the Group being, Better Together, the Group is

people (including engagement

the Group.

with collective representation

committed to driving greater diversity in all parts of the business.

groups) negatively impacting

Additionally, industrial action by

Please refer to pages 10 to 13 of this report for further details on

business units or the Group.

collective representation groups can

the Group's focus on People and Communities.

cause operational disruption.

The Group continues to focus on identifying and developing talent,

leveraging its world-class leadership programmes to grow the

Group's emerging and established leaders.

FBuSay, the Group wide employee engagement survey provides

valuable insights on staff engagement.

Environment

Failure to comply with the

Business units that have potential environmental impacts have

Business unit operations may cause

environmental laws, resource

Environmental Management Plans in place and have monitoring

consents and regulations may result

processes in place for resource consents.

environmental damage through the

in imposition of penalties and

At both Group and business unit level we engage with regulators

failure to comply with the required

reputational damage.

environmental laws, resource

on proposed changes to standards and regulations.

consents and regulations.

Additionally, the inability to achieve

The Group has a stated sustainability strategy and accompanying

the Group's sustainability objectives

Additionally, failure to execute the

annual targets. Please refer to pages 8 and 9 of this report

may result in decreased demand

for further details on the Group's sustainability strategy

strategic initiatives required for

from customers for the Group's

and performance.

the Group to achieve its objective

services and building materials.

of being the New Zealand and

Australian leader in sustainable

building materials, construction and

distribution, in particular, achieving a

30% reduction of carbon emissions

by 2030.

Technology Resilience

Failure to provide reliable, resilient,

Continued capital expenditure investment in technology systems

Fletcher Building is dependent on

adaptable, and efficient technology

across the Group to support our operations.

infrastructure may cause operational

Development of IT disaster recovery plans for each business unit.

information technology systems to

disruption, reputational damage to

maintain its operations.

A dedicated team within Group Technology to address the

business units or the Group.

Failure to provide reliable, resilient,

Failure to safe-guard confidential

ever-evolving cyber security threats that the Group faces.

adaptable, and efficient technology

Group-wide education and awareness training in relation to

information may also result imposition

infrastructure may impact the

cyber-threats.

of penalties and reputational damage.

operations of the business units or

the Group.

Additionally, the Group is

also exposed to threats by third

parties that can create operational

disruption or result in the loss

of confidential data.

Contractual

The execution of onerous contracts

The Group has established delegated financial authorities

The Group has a diverse portfolio

may have the potential to negatively

('DFA's) that business units and the Group must adhere to.

impact financial performance or

The Group has developed commercial Golden Rules which

of business units and the execution

the reputation of a business unit

of onerous contract(s) by any one

govern the way we contract with external parties.

of the business units may result in the Group incurring liabilities or performance under contracts that are commercially adverse.

or the Group.

Corporate Reputation and Social License to Operate

The Group appreciates the privileged position it has in the communities it operates in as a Company and the social responsibility that it has to

a wide range of stakeholders. In a diverse and ever-changing economic and social environment, the Group needs to consider its operations to ensure that it continues to address the interests of all its

key stakeholders.

The failure to act in a way which supports a strong corporate and social reputation for the Group with its key stakeholders (government, investors, customers and communities) may result in adverse commercial, reputational or regulatory outcomes leading to negatively impacting the financial performance of a business unit or the Group.

  • Engagement with the communities and how we work with stakeholders takes different forms for each business unit and project.

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Corporate Governance (Continued)

RISK CAPTURE AND REPORTING

The risk and uncertainties that are faced by the individual business units are captured in the enterprise-wide risk management tool, Radar. The information captured in Radar enables risk management information captured at the business unit level to be disseminated at higher levels of the organisation. The Group has also increased the cadence of operational risk reporting through business unit operations reviews. This allows the Group to see where decisions are regularly being made when assessing risk in implementing the business strategy and to understand how different risks affect different parts of the business.

HEALTH AND SAFETY

Fletcher Building has a health and safety management framework called Protect. Management of health and safety risks is discussed in more detail on page 11. Health and safety risks are captured within Radar.

Principle 7 - Auditors

"The Board should ensure the quality and independence of the external audit process."

The Audit and Risk Committee performs an annual performance assessment of the external auditor to ensure ongoing quality and effectiveness. EY is our external auditor.

The Auditor Independence Policy includes requirements for the rotation of external audit engagement partners. The Auditor Independence Policy is available on our website. In addition, the policy covers the provision of non-audit services by the Group's auditor. Auditor's fees and expenses paid to EY are presented within note 6 of the Group financial statements included in this Annual Report. The other work performed by the external auditor beyond the statutory audit was pre-approved in accordance with the policy and is not considered to compromise independence as the services did not constitute material sums of money or relate to strategic matters affecting the Group.

Representatives from EY attend Fletcher Building's Annual Shareholders' Meeting each year, where they are available to answer questions from shareholders relevant to the audit.

INTERNAL AUDIT

Fletcher Building has an internal audit function, which evaluates and improves the effectiveness of key risk management, control and governance processes. Internal audit develops an annual internal audit plan for approval by the Audit and Risk Committee and is accountable for its implementation. To provide for the independence of the internal audit function, internal audit reports functionally to the Audit and Risk Committee and administratively to the chief financial officer.

Principle 8 - Shareholder Rights and Relations

"The Board should respect the rights of shareholders and foster constructive relationships with shareholders that encourage them to engage with the issuer."

COMMUNICATING WITH SHAREHOLDERS

Fletcher Building maintains a website, which includes information about Fletcher Building's financial performance, operational activities, corporate governance and other information of specific relevance to investors and stakeholders. Core requirements on communicating with shareholders are formalised in a Shareholder Communications Policy, which is available on the website.

The Group operates an investor relations programme, which includes scheduled interactions with institutional investors, analysts and other market commentators. Presentations are also disclosed on the Group's website and the NZX and ASX announcement platforms. The Chair meets with major shareholders in New Zealand and Australia on an annual basis as well as on an ad-hoc basis. The CEO and chief financial officer attend an analysts' and investors' call after release of the interim and full year results and answer questions raised by analysts and investors. The Board also annually obtains research on the perceptions that the New Zealand and Australian investment community has of the Group, management and performance.

ELECTRONIC COMMUNICATIONS

Shareholders have the option to receive communications from, and send communications to, Fletcher Building in electronic form. Shareholders are actively encouraged to take up this option.

SHAREHOLDER VOTING

Major decisions that may change the nature of Fletcher Building are presented as resolutions at the Annual Shareholders' Meeting and voted on by shareholders. There have been no major decisions made during the year which would change the nature of Fletcher Building and which would require shareholder approval.

ANNUAL SHAREHOLDERS' MEETING

All shareholders are entitled to attend the Group's Annual Shareholders' Meeting, either in person or by representative. Resolutions at shareholders' meeting are by way of a poll, where each shareholder has one vote per share. Fletcher Building encourages shareholders to ask questions in advance of the meeting, to encourage further engagement with the Group and provide management with a view of the concerns of the Group's shareholders. Our notice of meeting is sent to all of our shareholders and posted on our website at least 20 working dates prior to the meeting.

The Group is closely monitoring the COVID-19 situation and the travel restrictions it has caused. As a result, the Group may elect to hold the Annual Shareholders' Meeting in 2020 as a virtual meeting.

48 Fletcher Building Limited Annual Report 2020

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Sustainability Materiality Assessment

As a large business, we recognise our operations have an impact on many people. Our sustainability strategy is based on what is most important to our business, people, communities, customers, key stakeholders and investors. Our sustainability strategy addresses the areas where we have the most impact, and our aims and targets focus on where our actions will lead to meaningful change.

In FY18 we commissioned independent experts to carry out a materiality assessment to inform the development of the sustainability strategy for Fletcher Building. The materiality assessment identified the key issues stakeholders want Fletcher Building to address and was designed and executed in line with the AA1000SES internationally recognised standard for stakeholder engagement.

The assessment identified 28 aspects of sustainability that are material for Fletcher Building. We ran a series of internal workshops to identify which aspects were most material in the immediate future, and which aspects were most material for a ten-year horizon.

We then validated the assessment in FY19 through interviews with a number of our major institutional investors who have committed to the UN Principles of Responsible Investment framework. We also reviewed our FY18 performance, regional and international trends and disruptors for our market sector, the components of leading sustainability indexes, the performance of leading peers in our market sectors, surveys of attitudes and concerns around sustainability from Colmar Brunton in New Zealand and the Lowy Institute in Australia, and the UN Sustainable Development Goals (SDGs).

The information from these interviews and reviews was used to validate our materiality assessment. The material issues identified underpin the six core aims of our sustainability strategy, which we first published in our FY19 Annual Report and can be referred to in this report on page 9.

Two of our most significant material issues in both time horizons are safety and carbon emissions/climate change. In FY20, we kicked off a multi-year cultural change safety reset with the inclusion of Protect as a core value and the establishment of Safety Leadership Walks as a gateway to leadership incentive schemes in addition to the targets for all of our senior leaders to reduce recordable injuries (TRIFR). We include targets for carbon reduction in plans for all our business units and in remuneration incentives for senior managers in areas of the business with the most impact on our carbon emissions and climate change.

We recognise that because the issues that matter to our business and our stakeholders will change over time, the issues that are

material for our business will change. We will look to carry out a review of our material issues in FY21 and FY22 as part of our current plan to move to integrated reporting.

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Our remuneration strategy aims to attract, retain and motivate high calibre people at all levels of the organisation, to support our vision and strategy.

BARBARA CHAPMAN

Remuneration Committee Chair

Remuneration

Report

Message from the Remuneration Committee Chair

Dear Shareholders

On behalf of the Board, I am pleased to present Fletcher Building's Remuneration Report for the financial year ended 30 June 2020.

Over the year we have seen some significant events impacting our business and people, starting with the fire at the New Zealand International Convention Centre in October, the bushfires in Australia through December / January, and ending with the global pandemic of COVID-19 from March of this year. Our people have demonstrated great resilience and an ongoing dedication to their customers, team and the Group. Through this, our focus has remained on our people, customers and shareholders as we have navigated through these challenges and made the decisions needed for the longer-term health of the Group.

Details on some of the decisions we have made in response to these events are provided below, as well as an overview of changes we have made relating to our safety approach in our short-term incentives, and our new look remuneration report.

Strengthening our safety approach in our short-term incentives

As a company we have placed significant investment in strengthening our safety governance, practice and culture. Although our overall Total Recordable Injury Frequency Rate (TRIFR) remained relatively unchanged from FY19, serious injuries were significantly lower, and most importantly there were no fatalities in FY20. While every injury is unacceptable, we are demonstrating solid progress in enhancing our safety culture. This is evidenced through the genuine and committed approach our people are taking in building on the positive progress we are making with our safety beliefs, values and behaviours.

To emphasise its importance, safety is a gateway into our short-term incentive (STI) plan. This requires all senior leaders in the business to complete a set number of safety leadership walks before any STI payment is made, irrespective of whether financial or individual performance has been achieved. Safety leadership walks are an essential lead indicator that allows us to better understand where greater safety focus is needed and sets the business up to be accountable for taking action where necessary. The leadership walks play a vital part in further reinforcing a leadership safety culture through creating important safety conversations, providing visibility of our senior leaders and the importance they place on safety, as well as providing a fresh set of eyes across our critical risks.

New look remuneration report

We have made changes to our remuneration report this year, so our remuneration frameworks and approach to rewarding for performance are more transparent and better understood. We have included additional graphics to support that understanding, which enable us to more simply demonstrate the clear link we require between performance and remuneration outcomes.

This remuneration report includes: a summary of our remuneration governance approach; the impact business performance for FY20 has had on incentives; and our remuneration framework and how that links to our strategy. We have also added a more detailed overview of the CEO's remuneration outcomes for FY20.

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COVID-19 and the impact on our businesses and people

This financial year, COVID-19 provided a significant challenge to our organisation with almost all of our New Zealand businesses shut down during 'Level 4' lockdown, excluding a small number of essential services. In addition Australia, while continuing to operate, was impacted by reduced trading and COVID-19 safety protocols during H2. The revenue our businesses were able to generate during this period was significantly reduced. As a result, we put in place a number of remuneration strategies as part of managing the Group's immediate financial position and to prepare for the longer-term impacts of COVID-19 on the economy.

As we thought through these strategies, we looked to balance the needs of our shareholders, customers and people during a time of significant uncertainty.

At the end of March, we put in place a 'Bridging Pay Programme' for our people not working over the lockdown period in New Zealand. This involved stepped down pay reductions over a period of 12 weeks. Our aim was to provide certainty around pay and working arrangements so our people could plan their finances as best as possible. We also launched a mobile app which enabled us to answer questions around leave and pay entitlements, and to provide financial and wellbeing support tools for our people while they were not at their workplaces. Additional funding was also provided to the Fletcher Building Employee Welfare Fund (EWF). Those people facing genuine hardship during the lockdown were able to apply for COVID-19 financial hardship grants through the EWF.

Owing to the impact of the COVID-19 lockdown on revenue, we were eligible for $68 million in wage subsidies from the New Zealand Government, which was passed on in full to employees in accordance with the scheme. Our most senior people in New Zealand who continued to work through the shut down which included the Board directors, CEO, chief executives and other senior leaders, also took temporary pay cuts. The cuts were 30% for the directors, CEO and chief executives; these remain in place for the directors and CEO through to end of Q1 FY21 (30 September 2020). Senior people who were not required to work through the shut down were placed on the 'Bridging Pay Programme'.

With expectations that COVID-19 will lead to a downturn in FY21 and potentially beyond, it was imperative that the Group reposition its cost base and operating model. This has meant making some very difficult decisions, including reviewing the number of people we employ. In May we entered into a consultation process to reduce the number of people we employ in both New Zealand and Australia, by approximately 1,500 roles. We supported these people with career advice and wellbeing support, as well as ensuring every permanent employee leaving Fletcher Building would receive a payment of no less than four weeks' base salary to recognise the exceptional circumstances.

Short-term incentives and application of discretion

Further, even though some businesses performed sufficiently well to trigger eligibility for incentive payments, and in some cases performed well above target (in the case of operating cash), the directors exercised their discretion to determine that no STI payments for performance in FY20 would be made across the Group irrespective of performance levels. Total estimated STI payments that would have been paid

is circa $13 million. I am confident this was the right thing to do in light of the remuneration strategies in place across the Group, and cancellation of the FY20 interim dividend.

This means for FY20, the CEO and executive will receive no STI payments. Last year the CEO and executives' STI payments ranged from 4% to 146% of their STI target.

And finally, to further contain labour costs, we made the decision that no remuneration review would take place for FY21.

We appreciate the resilience of our people in supporting these decisions, which is a testament to the culture that Ross and his team are building.

The decisions around jobs and pay, while necessary to manage our costs, in no way reflect the performance of our people in what has been a unique and challenging environment; we value our people highly and are grateful for their efforts. In a year that has provided a number of challenges, the response of our people has been exceptional, and I am very proud of the dedication shown by them.

I invite you to review the full remuneration report.

Barbara Chapman

Remuneration Committee Chair

Fletcher Building Limited Annual Report 2020

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Remuneration Report (Continued)

The role of the Remuneration Committee

The principal role of the Remuneration Committee is broader than purely remuneration matters. Its role is to oversee and regulate remuneration and organisation matters affecting the Group, including remuneration and benefits policies, performance and remuneration of the Group's senior executives, development and succession planning for the CEO and direct reports to the CEO, and major organisation changes.

The Remuneration Committee is kept apprised of relevant market information and best practice, obtaining advice from external advisors when necessary.

Key decisions made by the Remuneration Committee during FY20 included: approval of FY19 STI payouts (which were made in September following completion of the financial year), review and approval of base salaries for the CEO and chief executives and the STI framework for senior leaders for FY20, pension plan governance matters, people and remuneration strategies put in place in response to COVID-19 - including the decision to apply discretion to determine that no STI payments would be made for FY20, and a review of the Group's remuneration disclosures with resulting changes made to this remuneration report.

Performance and the impact on incentives

Short-term incentives (STI)

EBIT performance during FY20 was below target levels for the CEO, chief executives and the majority of senior management resulting in most not meeting the performance thresholds required for eligibility for payment on EBIT or individual goals. Cash performance during FY20 was in some cases well above target performance levels, resulting in eligibility for payment for some executives and senior management. However, the Board exercised its discretion to determine that no STI payments for performance in FY20 would be made across the Group irrespective of performance levels. This decision was made having regard to the impacts of COVID-19, the impact of the Group performance on shareholders - which included the cancellation of the FY20 interim dividend, and the critical management of cash.

Long-term incentives

The July 2016 long-term share scheme grant (specifically the remaining relative total shareholder return tranche, which was within the 12-month retest period up to 30 June 2020), was below the minimum threshold performance levels and therefore was forfeited. The July 2017 long-term share scheme grant was below minimum threshold performance levels, and has therefore entered the 12-month retest period.

Further details on each of these incentive schemes are provided on the following pages.

Executive and senior management remuneration strategy and framework

Fletcher Building's remuneration strategy aims to attract, retain and motivate high calibre people at all levels of the organisation, to support our vision and strategy.

Total remuneration is comprised of three elements - fixed remuneration, a short-term variable incentive, and a long-term share scheme.

Remuneration levels are reviewed and benchmarked annually for market competitiveness, and alignment with strategic and performance priorities. A peer group comprised of New Zealand and Australian companies generally comparable in size, complexity and industry is used to benchmark executives. The benchmarking peer group was reviewed and refreshed in 2019, to ensure it included companies that displayed similar characteristics by way of industry/sector, market capitalisation, revenue, geographic scope and employee numbers, and so it reflected where the Group wins and loses talent from. In light of no remuneration review taking place for FY21, this benchmarking exercise was not undertaken in FY20.

Fixed remuneration

Fletcher Building's policy is to set fixed remuneration based on capability, performance, size of role, and industry benchmarks in the country in which the employee is located. Participation in retirement savings plans is made available to employees as required by remuneration practices in relevant countries.

Short-term variable incentive (STI)

STIs are designed to incentivise the Group's earnings, operating cash and those measures that drive sustainable business performance by rewarding employees' performance against both financial and individual goals. Participation in the STI plan is by annual invitation at the discretion of the Group. Target levels of STI opportunity range from 20% to 100% of base salary depending on the role. For the CEO the target STI opportunity is set at 100% of base salary.

52 Fletcher Building Limited Annual Report 2020

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At Risk and Subject to Performance Outcomes

Vision

To be the undisputed leader in New Zealand and Australian building solutions - with products and distribution at our core

Governance

Our Board is responsible for the Group's remuneration policy, with the Remuneration Committee assisting in the conduct of its responsibilities. The principal role of the committee is to oversee and regulate remuneration and organisation matters affecting the Group

Remuneration Principles

(a full set of our remuneration principles are available in our remuneration policy)

Shareholder

Our People

Strategy

Risk

Focus on creation

Attract and

Focus on key

Encourage con-

of shareholder

retain high calibre

company goals

duct that does not

value - short and

people, rewarding

and objectives -

expose the Group

long-term

high standards

short and

to inappropriate risk

of performance

long-term

and promotes high

and values

standards

Remuneration Framework and How it Supports the Strategy

Remuneration

Element

Performance

Relationship

Element

Delivery

Measure

to Strategy

Fixed

Remuneration

Attract and

Executives are

Includes base

Set based

retain key talent

benchmarked against

salary and any

on capability,

to drive the delivery

a peer group comprised

non-cash benefits and

performance, job

of the Group

of New Zealand and

superannuation/

size, and industry

strategy. Rewards

Australian companies

KiwiSaver

benchmarks

ongoing performance

generally comparable

in role

in size, complexity

and industry

Short-Term

Retains and

motivates key talent,

Incentives

Annual cash

Rewards for financial,

and drives alignment

Recognises, on a

payment following

individual and safety

by rewarding for

discretionary basis,

final audited

performance measured

achievement of

achievement of

financial year

using a balanced

the Group goals

the Group and individual

results

scorecard

and creation of

performance objectives

shareholder value

Supporting the

Long-Term

Allocation of

alignment of our most

Fletcher Building

senior people with

Incentives

shares, with vesting

Relative Total

shareholder interests

Aims to drive

ensuring value is only

after 3 years, based

Shareholder Return

long- term,

on achievement of

referenced to an

created for our people

where relative total

sustainable

shareholder return over

industry comparator

shareholder return is

results and creation

this period. Allocation

peer group

realised. Encouraging

of shareholder

is made using face value

long-term sustainability

value

at the time of grant

and achievement of

the Group strategy

Fletcher Building Limited Annual Report 2020

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Remuneration Report (Continued)

Financial targets

For the CEO and senior management roles in Corporate, the financial target is based on the Group EBIT and operating cash. For those senior management roles operating in specific divisions or business units, the financial target is based on their own division/business unit EBIT and operating cash or working capital depending on the business' priorities. Each of these financial measures are assessed separately at the time of determining STI payments. To ensure an appropriate balance between focusing on individual division/business unit financials and that of the Group or respective division that the business unit operates in, a multiplier (either up or down) is applied based on achievement of Group EBIT, or division EBIT targets.

Financial targets are set at three levels: a threshold level, which must be met before any STI is paid, a target level, and a maximum level that reflects stretch performance. For FY20, the financial threshold level was set at 90% of target. The maximum financial level is generally set at 110% or 120% of target.

The CEO, chief financial officer, and operating roles have 70% of their STI opportunity based on financial measures, with the remaining 30% on individual goals. As functional roles have a greater ability to directly influence company performance through their individual goals, 50% of their STI opportunity is based on individual goals with the remaining 50% on financial measures.

Individual goals

Individual goals for the executives and senior management are aligned to the different priorities and development phases in which their businesses are operating. This may include above plan growth, gross profit margin expansion, talent, diversity and innovation, and other strategic goals that drive performance beyond the current financial year. The executives' objectives were reviewed by the Board, and in the case of the CEO were approved directly by the Chair.

The performance range for individual goals is between 0% and 100%, with no opportunity for stretch performance. If the threshold EBIT target is not met, no individual component of the STI is payable.

Achievement against each executives' individual goals is reviewed by the Board at the time of reviewing and approving STI payouts.

Safety performance

To reinforce a line led safety culture, and to place emphasis on the importance of active and authentic leadership for safety on site, safety leadership walks are a gateway for any STI payment to be made. The number of safety walks required to be completed differs by role with operating roles and EHS roles completing no less than 12 per year.

In addition, a multiplier of between 0.9 and 1.1 is applied to the overall STI outcome based on achievement against TRIFR targets. Injury reduction targets (i.e., reduction in TRIFR) are set for each business and tracking of this important measure provides us with year on year comparisons of actual safety performance. TRIFR is used as a common measure for injury performance globally and, as such, enables external benchmarking which we use to understand how our safety performance compares to other companies.

In the event of a fatality or serious injury, the Board has the discretion to adjust any or all of the STI payment and in doing so will consider the leader's length of time in role (and therefore ability to influence), their demonstrated leadership prior to the incident as well as the quality of the leader's response post-incident. The Board recognises the importance of this discretion and has and will continue to adjust outcomes where it considers appropriate.

Clawback

The Board also has the discretion to require repayment of an employee's STI for a period of up to three years where the Group's financial statements were incorrectly reported, there is misconduct that causes a financial trading loss that has not been taken into account in the STI calculations or an error or misstatement has resulted in a material overpayment.

Long-Term Share Scheme

A long-term performance incentive scheme designed to align employee remuneration with sustainable financial outcomes for shareholders over the longer term is in place. The Group has a share based executive long-term share scheme (ELSS) which is offered to certain senior employees, including the executives and senior management. The scheme is a share-based scheme except in circumstances where, due to regulatory requirements, employees cannot participate fully or at all by way of shares. In such circumstances, the employee receives an equivalent economic entitlement which is paid partially or fully by way of a cash bonus entitlement. This non share-based scheme will no longer operate from FY21, as no employees remain on this scheme. Participation in any year is by annual invitation at the discretion of the Group.

Under the ELSS, participants purchase shares in the Group at the offer price with an interest-free loan. The offer price is established at market value at the commencement of the three year restrictive period. The shares are held by a trustee on behalf of participants until the end of that three year restrictive period. The performance criteria comprises a relative total shareholder return (TSR) measure, and the restrictive period is extended by up to twelve months if the TSR criteria is not met at the end of the initial three year restrictive period.

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Provided the nominated share performance criteria are met and participants remain employed with the Group throughout the restrictive period, a cash bonus is paid to meet the repayment of the interest-free loan and legal title in the shares is then transferred to the participants. To the extent that the share performance criteria are not met or the participant ceases to be employed by the Group, the shares are forfeited and the proceeds used to repay the interest-free loan. Exceptions to this are considered in the case of redundancy, retirement or being an executive with five or more years of service.

Performance criteria for 2019 ELSS grant

The sole performance criteria for the 2019 ELSS grant is relative TSR. TSR performance is determined by benchmarking, by way of percentile ranking, the TSR performance of the Group against the TSR performance for the same period of a comparator group. The comparator group used for the 2019 offer comprises Adelaide Brighton, BlueScope, Boral, Brickworks, CSR, GWA Group, James Hardie, Metro Performance Glass, Reece and Steel & Tube.

The relative TSR performance and resulting vesting entitlements are set out below:

Relative TSR percentile

Percentage vesting entitlement

Below 51st

Nil

At 51st

50%

Above 51st to below 75th

51% - 99% linear pro-rata

At 75th or above

100%

The Board has the discretion to determine the extent to which any shares held in the ELSS should be transferred in any takeover, merger or corporate restructure.

Vesting and forfeiture history

Prior to 2017, the ELSS performance criteria consisted of both relative TSR and an earnings per share (EPS) target. The vesting and forfeiture of shares (due to failure to meet performance criteria) over the last five years is set out in the following table:

Date of grant

Shares granted

% vested

% forfeited

EPS Target

July 2019

1,386,100

N/A

July 2018

1,041,605

In-Flight

N/A

July 2017

890,075 (1)

N/A

July 2016

905,211

0%

100% (2)

70.1 - 76.3

October 2015

3,208,083

0%

100%

67.1 - 73.1

  1. FB's TSR did not meet the minimum vesting threshold for the three years ended 30 June 2020 for the 2017 issue. Therefore, the restrictive period has been extended to 30 June 2021.
  2. The 2016 EPS tranche was forfeited in August 2019 and the restrictive period for the TSR tranche was extended for 12 months until 30 June 2020. FB's TSR did not meet the minimum vesting threshold for the period ended 30 June 2020. Therefore, the remaining 50% shares in the 2016 issue will be forfeited in August 2020.

In addition, in 2019 the Board granted a special retention in the form of a one-offshare-based arrangement to the value of $1,000,000 to the CEO as disclosed in the 2019 Annual Report. This arrangement will vest 30 June 2022, subject to him remaining employed with the Group.

Minimum shareholding requirement

Over time, executives and senior managers must acquire and maintain a holding in the Group's ordinary shares until such time as the greater of the sum invested or the market value of their shareholding exceeds 50% of their base remuneration. The Group believes this shareholding requirement strengthens the alignment of executives and senior management with the interests of shareholders and puts their own remuneration at risk to long-term Group performance.

In addition, for the CEO and his direct reports, if at the time of appointment to an executive role, the greater of the market value or cost of the individual's shareholding is less than the value of 10% of their base remuneration, the executive is required to apply no less than 25% of the after-tax value of any STI payment to acquire shares in the Group on or before 31 March of the following financial year. This requirement applies for the first two years of employment as an executive.

As at 30 June 2020, the CEO had a holding in the Group's ordinary shares equal to 57% of his base remuneration. This has been calculated in accordance with the minimum shareholding requirement methodology, which uses the greater of the sum invested or the market value of the shares.

FBuShare

FBuShare is Fletcher Building's employee share plan available to all permanent employees. The plan aims to connect our people with our performance, and to promote employee engagement and retention. Employees acquire shares in the Group and, if they continue to be employed after a three year qualification period, they become entitled to receive one bonus award share for every two shares purchased in the first year of each qualification period and still owned at the end of that period. FBuShare does not require any performance criteria to be met. FBuShare has a minimum contribution rate of NZ$500 per annum and a maximum contribution rate of NZ$5,000 per annum (or the equivalent currency in other countries). Directors are not eligible to participate in FBuShare.

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Remuneration Report (Continued)

CEO'S REMUNERATION

Ross Taylor's annual base salary as at 30 June 2020 was $2,050,000 (1), with an on-target STI of 100% of base salary and LTI of 100% of base salary.

The current mix of remuneration components for the CEO is set out below, and clearly shows the significant weighting of variable pay (at risk), which is subject to achievement of short-term and long-term strategic goals.

Variable Pay (at risk)

LTI*: Long-term incentive

STI*: Short-term incentive

BR*: Base Remuneration

33%

33%

28%

28%

CEO on

LTI*

CEO

BR*

LTI*

BR*

Target

Maximum

Performance

Performance

Pay Mix

Pay Mix

1%

Other

1%

Benefits

33%

Other

42%

Benefits

STI*

STI*

The remuneration received for FY20 is significantly lower due to the 30% pay reduction due to COVID-19, and no FY20 STI payment made. The remuneration Ross Taylor received for FY20 and FY19 comprised of the following:

FY20

FY19

Base remuneration

$1,903,302

$2,050,248

Other benefits (2)

$61,802

$106,503

Short-term incentive accrued in the financial year, payable in September of the following

$0

$1,095,819 (5)

financial year

Received (3)

$1,965,104

$3,252,570

Shares granted

Long-term incentive - number of shares granted

196,495 (4)

263,628 (5)

Long-term incentive - face value of grant

$2,050,000

$2,050,000

Refer above for details of the STI and ELSS.

  1. A 30% pay reduction due to COVID-19 on this value is in place from Q4 FY20 through to end of Q1 FY21.
  2. Includes KiwiSaver and medical insurance premium.
  3. This table sets out remuneration awarded for the relevant financial year. The table on page 58 shows remuneration received during the year, which includes amounts relating to prior years but paid in the year due to timing differences.
  4. Based on a share price of NZ$6.99, being the volume weighted average price for the five business days prior to 1 July 2018.
  5. Based on a share price of NZ$5.21, being the volume weighted average price for the five business days prior to 1 July 2019.

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CEO'S REMUNERATION

For FY20, the following financial and non-financial measures were considered by the Board to be key to incentivise earnings and operating cash, and to drive sustainable business performance. The table below summarises performance against targets for each of these measures under the CEO's FY20 STI.

In addition to the measures set out below, considerable focus during the last half of FY20 has been on responding to and leading through the COVID-19 global pandemic and preparing the Group for an economic downturn. Although the shut down and COVID-19 had a material impact on achievement of EBIT, positive gains were made controlling cash at a time when the Group's ability to generate revenue was significantly impacted.

Scorecard

Weighting

'Target'

Actual

Measure

(payout

range)

Outcome Comment

Safety Gateway

Gate for any

Provided active and authentic leadership for safety on site through safety

payment

leadership walks.

FinancialTargets

The EBIT loss of $(116) million did not meet the threshold target level set

as it was impacted by both the COVID-19 market impacts (which included

FB Group EBIT (gateway

50%

an almost complete shut down of the NZ businesses), and increase in the

provision envelope to complete the remaining legacy construction projects.

to individual goals)

(0%-76%)

This resulted in no payment for this measure. As EBIT is also the gate to

eligibility for payment against individual goals, no payment for individual goals

was made irrespective of achievement against some of these goals.

20%

Cash flow performance for the FY20 year was materially above budget. This

FB Group Cash

was achieved from strong cash disciplines across the business which were well

(0%-30%)

maintained through the COVID-19 shut down, and enhanced by decisions to

restrict both capital expenditure and residential land purchases through the year.

Individual Goals

Australian division has momentum

10%

The Australian business did not meet its budget targets as a result of the

market slowdowns from the COVID-19 impacts. While the business was reset

for the turnaround and is set up to

(0%-10%)

through the year to ensure it was set up on a go forward basis to deal with

achieve growth in FY21

this - goal was not achieved.

Gross profit margin uplift for NZ

The NZ businesses did not achieve the targeted profit levels for FY21 as a

Core, and deploy strategies and

5%

result of the shut down and market contraction resulting from the impacts of

operating disciplines to ensure set

(0%-5%)

COVID-19. While the business was reset through the year to ensure it was set

up to achieve FY21 gross profit

up on a go forward basis to deal with this - this goal was not achieved.

margin uplift beyond current plan

Growth and innovation initiatives

identified, and plan being

5%

A suite of potential growth initiatives are identified with plans in place, that

implemented that credibly point

align with the overall Group strategy. These will be progressively implemented

(0%-5%)

to EBIT uplift between FY20 and

over the coming years.

FY23 Forecast

Construction division strategy and

5%

organisation set up with a credible

and robust plan to implement

(0%-5%)

through FY21

FCC reset continuing to plan across; order book, team and skills rebuild, robust and consistent bid and delivery disciplines, appropriate project risk profiles and the continuing completion of legacy and historical projects. Unfortunately, we decided to increase our provisions across our Buildings and Infrastructure projects in our Construction division by $150 million, the majority of which were as a result of impacts from COVID-19 shutdowns and productivity which impacted both in FY20 and beyond.

Senior leadership fit for purpose.

5%

Senior Leadership team in place, working effectively, and appropriate

Capabilities assessed with agreed

(0%-5%)

development plans in place.

actions delivered

Safety

Group Total Recordable Injury Frequency Rate (TRIFR) for FY20 was 5.7

Multiplier

(a slight increase from FY19's TRIFR of 5.0). As such the targeted improvement

Safety Performance

of between

was not achieved. Of note however was the significant decrease in serious

0.9-1.1

injuries (down from 20 in FY19 to 8 in FY20). Critical risks and reducing

serious/fatal harm were the primary safety focus of the business.

100%

Even though performance against the FB Group cash measure would have

FY20 STI Outcome

0%

triggered eligibility for an incentive payment for this component, the directors

(0%-150%)

exercised their discretion to determine that no STI payment would be made

for performance in FY20.

Key:

Above Target Achievement

Full achievement against target

Partial achievement against target

No achievement against target

Fletcher Building Limited Annual Report 2020

57

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Remuneration Report (Continued)

EMPLOYEE REMUNERATION

Section 211(1)(g) of the Companies Act 1993 requires disclosure of the number of employees or former employees of the Group whose remuneration and any other benefits received by them during the year in their capacity as employees, was equal to or exceeded $100,000 per annum and to state the number of such employees or former employees in brackets of $10,000. These amounts are included below and include all applicable employees or former employees of Fletcher Building worldwide. The remuneration amounts include all monetary amounts and benefits actually paid during the year, including redundancies and the face value of long-term incentives vested.

New Zealand

International

business

business

From NZ$ to NZ$

activities

activities

Total

100,000 - 110,000

507

411

918

110,000 - 120,000

373

322

695

120,000 - 130,000

300

257

557

130,000 - 140,000

214

181

395

140,000 - 150,000

140

144

284

150,000 - 160,000

118

101

219

160,000 - 170,000

102

88

190

170,000 - 180,000

77

68

145

180,000 - 190,000

66

45

111

190,000 - 200,000

56

38

94

200,000 - 210,000

42

24

66

210,000 - 220,000

28

28

56

220,000 - 230,000

43

28

71

230,000 - 240,000

21

14

35

240,000 - 250,000

17

16

33

250,000 - 260,000

19

8

27

260,000 - 270,000

20

8

28

270,000 - 280,000

18

12

30

280,000 - 290,000

15

7

22

290,000 - 300,000

8

4

12

300,000 - 310,000

14

7

21

310,000 - 320,000

6

2

8

320,000 - 330,000

4

3

7

330,000 - 340,000

9

8

17

340,000 - 350,000

4

6

10

350,000 - 360,000

1

2

3

360,000 - 370,000

5

3

8

370,000 - 380,000

0

2

2

380,000 - 390,000

2

2

4

390,000 - 400,000

2

0

2

400,000 - 410,000

7

3

10

410,000 - 420,000

3

1

4

New Zealand

International

business

business

From NZ$ to NZ$

activities

activities

Total

420,000

-

430,000

2

1

3

430,000

-

440,000

3

1

4

440,000

-

450,000

1

0

1

450,000

-

460,000

1

2

3

470,000

-

480,000

1

0

1

480,000

-

490,000

7

0

7

490,000

-

500,000

2

1

3

500,000 - 510,000

0

2

2

510,000 - 520,000

3

0

3

530,000

-

540,000

1

0

1

540,000

-

550,000

3

0

3

550,000

-

560,000

2

0

2

560,000

-

570,000

1

0

1

570,000

-

580,000

0

1

1

580,000

-

590,000

1

0

1

590,000

-

600,000

0

1

1

600,000 - 610,000

1

1

2

610,000 - 620,000

2

1

3

630,000

-

640,000

1

0

1

640,000

-

650,000

2

0

2

700,000 - 710,000

1

0

1

730,000

-

740,000

1

0

1

750,000

-

760,000

0

2

2

790,000

-

800,000

1

0

1

800,000 - 810,000

1

0

1

830,000

- 840,000

1

0

1

1,140,000 - 1,150,000

2

0

2

1,400,000 - 1,410,000

1

0

1

1,520,000 - 1,530,000

1

0

1

1,730,000 - 1,740,000

0

1

1

3,060,000 - 3,070,000

1

0

1

2,285

1,857

4,142

This table is required by law and sets out remuneration that has been received during this year, and so includes amounts that relate to prior periods (due to timing of payments).

58 Fletcher Building Limited Annual Report 2020

View contents page

DIRECTORS' REMUNERATION

The current total directors' remuneration pool approved by shareholders in 2011 is $2 million per annum. Directors receive remuneration determined by the Board on the recommendation of the Nominations Committee. Remuneration must be within the aggregate amount per annum approved by shareholders. There are no schemes for retirement benefits for non-executive directors. Information of directors' holding of securities is set out on page 117.

As a result of COVID-19, effective 1 April 2020 the Board agreed to a reduction of 30% to the Chair and non-executive directors fees to remain in place through to the end of September 2020. Subsequently in June 2020, the Nominations Committee considered the appropriateness of current fee levels in light of COVID-19 and its impact on the Group's future performance and recommended to the Board no increase to the directors' fees for FY21, which remain at the current fee levels of FY20.

The remuneration scale for directors is outlined below:

Remuneration scale (1)

Position

FY20

FY21

Board of directors

Chair (2)

$367,200

$367,200

Non-Executive director

$142,800

$142,800

Audit and Risk Committee

Chair

$37,000

$37,000

Member

$19,000

$19,000

Remuneration Committee

Chair

$28,000

$28,000

Member

$14,000

$14,000

Nominations Committee

Chair

-

-

Member

$8,000

$8,000

Safety, Health, Environment and

Chair

$28,000

$28,000

Sustainability Committee

Member

$14,000

$14,000

Non-vouchable expense allowance

$5,000

$5,000

Overseas based directors travelling allowance

$18,000

$9,000

  1. This table shows fees before the application of 30% reduction in Board fees referred to above.
  2. No additional fees are paid to the Board Chair for committee roles.

Fees to directors for unscheduled, additional work required for the Group is time based, payable at $1,200 per half day. No payments for this work were made in FY20 and none are budgeted for FY21. Directors do not receive any further remuneration for also being directors of Fletcher Building Industries Limited, the NZX listed issuer of the Group's capital notes. Directors' fees exclude GST, where appropriate. In addition, Board members are entitled to be reimbursed for costs directly associated with carrying out their duties, including travel costs.

Details of the total remuneration received by each Fletcher Building director for FY20 (i.e. after including the 30% reduction in Board fees from 1 April 2020) are as follows:

Overseas

Audit

Safety, Health,

based

Environment and

Non-vouchable

directors

and Risk

Nominations

Remuneration

Sustainability

expense

travelling

Total

Directors

Board Fees

Committee

Committee (1)

Committee

Committee

allowance

allowance

Remuneration

Bruce Hassall

$339,660.00

$ -

$5,000.00

$344,660.00

(Chair)

(Chair)

Martin Brydon

$132,090.00

$8,000.00

$14,000.00

$5,000.00

$18,000.00

$177,090.00

Antony Carter (2)

$58,594.57

$7,796.20

$3,282.61

$5,744.57

$2,051.63

$77,469.58

Barbara Chapman

$132,090.00

$8,000.00

$28,000.00

$5,000.00

$173,090.00

(Chair)

Peter Crowley (3) / (4)

$96,390.00

$10,119.57

$6,000.00

$7,456.52

$3,750.00

$13,500.00

$137,216.09

Rob McDonald (5)

$132,090.00

$37,000.00

$8,000.00

$7,456.52

$5,000.00

$189,546.52

(Chair)

Doug McKay

$132,090.00

$19,000.00

$8,000.00

$28,000.00

$5,000.00

$192,090.00

(Chair)

Cathy Quinn

$132,090.00

$19,000.00

$8,000.00

$14,000.00

$5,000.00

$178,090.00

Steve Vamos (6)

$107,100.00

$6,000.00

$10,500.00

$3,750.00

$127,350.00

Total

$1,262,194.57

$92,915.77

$55,282.61

$51,701.09

$63,456.52

$39,551.63

$31,500.00

$1,596,602.19

  1. All non-executive directors are members of the Nominations Committee.
  2. Antony Carter retired from the Board on 28 November 2019 following conclusion of the Annual Shareholders' Meeting.
  3. Peter Crowley was appointed to the Board on 1 October 2019.
  4. Peter Crowley was appointed member of the Audit and Risk Committee and Safety, Health, Environment and Sustainability Committee effective 20 December 2019.
  5. Rob McDonald was appointed member of the Remuneration Committee effective 20 December 2019.
  6. Steve Vamos resigned from the Board effective 30 March 2020.

Fletcher Building Limited Annual Report 2020

59

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Financial

Report

60 Fletcher Building Limited Annual Report 2020

View contents page

Trend Statement

June

June

June

June

June

June

June

June

June

June

2020*

2019

2018

2017

2016

2015

2014

2013

2012

2011

Notes

  1. (1)

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

Financial performance

Operating revenue

7,309

9,307

9,471

9,399

9,004

8,661

8,401

8,517

8,839

7,416

Earnings before interest and taxation (EBIT)

(116)

397

(118)

273

719

503

592

569

403

492

Net earnings

(196)

164

(190)

94

462

270

339

326

185

283

Cash flow from operations

410

153

396

243

660

575

489

559

448

402

Earnings per share - basic (cents per share)

(23.5)

19.2

(25.5)

13.5

67.0

39.2

49.3

47.6

27.2

45.0

Dividends for the period (cents per share)

0.0

23.0

0.0

39.0

39.0

37.0

36.0

34.0

34.0

33.0

Return on average funds (%) (3)

(2.7)

7.4

(2.2)

4.9

13.4

9.6

11.7

10.8

7.4

10.6

Return on average equity (%) (4)

(5.1)

4.0

(5.2)

2.5

12.4

7.7

9.9

9.4

5.2

8.2

Financial performance - before significant items

Earnings before interest and taxation (EBIT)

160

631

50

525

682

653

624

569

556

596

Net earnings

3

367

(60)

321

418

399

362

326

317

359

Earnings per share - basic (cents per share)

0.4

43.0

(8.1)

46.3

60.6

58.0

52.7

47.6

46.5

57.1

Return on average funds (%) (3)

3.7

11.8

0.9

9.4

12.7

12.5

12.3

10.8

10.2

12.8

Return on average equity (%) (4)

0.1

8.8

(1.7)

8.7

11.6

11.3

10.5

9.4

9.0

10.4

Balance sheet

Current assets

3,824

4,121

3,944

3,419

3,222

3,272

2,958

2,868

3,112

3,104

Non-current assets

4,954

3,589

4,601

4,254

4,045

4,229

3,983

4,257

4,367

4,388

Total assets

8,778

7,710

8,545

7,673

7,267

7,501

6,941

7,125

7,479

7,492

Current liabilities

2,385

2,330

2,356

1,996

1,997

1,947

1,596

1,557

1,936

1,700

Non-current liabilities

2,858

1,207

2,047

2,097

1,557

1,844

1,891

2,014

2,091

2,092

Total liabilities

5,243

3,537

4,403

4,093

3,554

3,791

3,487

3,571

4,027

3,792

Capital

3,280

3,427

3,425

2,678

2,650

2,633

2,624

2,606

2,582

2,553

Reserves

220

714

693

878

1,041

1,050

795

913

838

1,113

Minority equity

35

32

24

24

22

27

35

35

32

34

Total equity

3,535

4,173

4,142

3,580

3,713

3,710

3,454

3,554

3,452

3,700

Total liabilities and equity

8,778

7,710

8,545

7,673

7,267

7,501

6,941

7,125

7,479

7,492

Other financial data

Total shareholders return (%) (5)

(21)

(29)

(6)

0

11

(3)

9

51

(27)

14

Net tangible assets per share ($)

2.87

3.53

2.85

2.70

2.87

2.80

2.60

2.61

2.65

2.71

Gearing (%) (6)

12.3

7.2

23.5

35.3

27.3

31.8

32.3

33.5

37.4

34.3

Leverage (%) (7)

0.9

0.4

4.8

2.7

1.6

2.0

2.0

2.3

2.6

2.4

* June 2020 includes the impact of NZ IFRS 16 - Leases and incorporates right-of-use asset, right-of-use liability, right-of-use asset depreciation and lease liability interest expense.

  1. The Crane Group was acquired with an effective acquisition date of 28 March 2011.
  2. The June 2012 balance sheet has been restated following revisions to IAS 19 Employee Benefits adopted by the Group.
  3. EBIT to average funds (net debt and equity less deferred tax asset).
  4. Net earnings to average shareholders' funds.
  5. Share price movement in year and gross dividend received, to opening share price.
  6. Net debt to net debt and equity.
  7. Net debt to EBITDA.

Fletcher Building Limited Annual Report 2020

61

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Consolidated Income Statement

FOR THE YEAR ENDED 30 JUNE 2020

2020

2019

Continuing operations

Notes

NZ$M

NZ$M

Revenue

3

7,309

8,308

Cost of goods sold

(5,496)

(6,025)

Gross margin

1,813

2,283

Selling, general and administration expenses

(1,660)

(1,748)

Share of profits of associates and joint ventures

7

14

Significant items

2.1

(276)

(94)

Earnings before interest and taxation (EBIT)

(116)

455

Lease interest expense

27

(69)

Funding costs

15

(80)

(116)

Earnings before taxation

(265)

339

Taxation benefit/(expense)

24

81

(80)

Earnings after taxation

(184)

259

Earnings attributable to non-controlling interests

(12)

(13)

Net earnings/(loss) from continuing operations

(196)

246

Net loss from discontinued operations net of tax

(82)

Net earnings/(loss) attributable to the shareholders

(196)

164

Net earnings per share (cents)

5

Basic

(23.5)

19.2

Diluted

(23.5)

19.0

Net earnings per share from continuing operations (cents)

Basic

(23.5)

28.8

Diluted

(23.5)

27.7

Weighted average number of shares outstanding (millions of shares)

5

Basic

835

853

Diluted

835

951

Dividends declared per share (cents)

17

23

The accompanying notes form part of and are to be read in conjunction with these financial statements.

On behalf of the Board, 19 August 2020

Bruce Hassall

Robert McDonald

Chair

Director

62 Fletcher Building Limited Annual Report 2020

Consolidated Statement of Comprehensive Income

View contents page

FOR THE YEAR ENDED 30 JUNE 2020

2020

2019

NZ$M

NZ$M

Net earnings/(loss) attributable to shareholders

(196)

164

Net earnings attributable to non-controlling interests

12

13

Net earnings/(loss)

(184)

177

Other comprehensive income

Items that do not subsequently get reclassified to income statement:

Movement in pension reserve

(17)

(25)

(17)

(25)

Items that may be reclassified subsequently to income statement:

Movement in cash flow hedge reserve

(6)

(6)

Movement in currency translation reserve

35

(34)

29

(40)

Items that have been reclassified to income statement during the year:

Reclassification from currency translation reserve

7

7

Other comprehensive income

12

(58)

Total comprehensive income/(loss) for the year

(172)

119

Total comprehensive income/(loss) for the year arises from:

Continuing operations

(172)

178

Discontinued operations

(59)

(172)

119

The accompanying notes form part of and are to be read in conjunction with these financial statements.

Fletcher Building Limited Annual Report 2020

63

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Consolidated Statement of Movements in Equity

FOR THE YEAR ENDED 30 JUNE 2020

NZ$M

Total equity at 30 June 2018

Total comprehensive income for the year

Notes

Share capital

Retained earnings

Share-based payments reserve

Cash flow hedge reserve

Currency translation reserve

Pension reserve

Total

Non-controlling interest

Total Equity

3,425

875

9

(157)

(53)

4,099

24

4,123

164

(6)

(27)

(25)

106

13

119

Movement in non-controlling interests

19

(5)

(5)

Dividends paid to shareholders of the parent

18

(68)

(68)

(68)

Reclassification of pension reserve on disposal

(73)

73

of business

Movement in share-based payment reserve

2

2

2

Movement in treasury stock

18

2

2

2

Total equity at 30 June 2019

3,427

898

11

(6)

(184)

(5)

4,141

32

4,173

Change in accounting policies

27

(183)

(183)

(183)

Adjusted equity at 30 June 2019

3,427

715

11

(6)

(184)

(5)

3,958

32

3,990

Total comprehensive income/(loss) for the year

(196)

(6)

35

(17)

(184)

12

(172)

Movement in non-controlling interests

19

(9)

(9)

Dividends paid to shareholders of the parent

17

(128)

(128)

(128)

Movement in share-based payment reserve

1

1

1

Repurchase of shares

18

(147)

(147)

(147)

Movement in treasury stock

18

Total equity at 30 June 2020

3,280

391

12

(12)

(149)

(22)

3,500

35

3,535

The accompanying notes form part of and are to be read in conjunction with these financial statements.

64 Fletcher Building Limited Annual Report 2020

Consolidated Balance Sheet

View contents page

AS AT 30 JUNE 2020

2020

2019

Assets

Notes

NZ$M

NZ$M

Current assets:

Cash and cash equivalents

7

1,104

1,372

Current tax assets

24

66

66

Contract assets

3

69

40

Derivatives

16

125

5

Debtors

8

1,041

1,298

Inventories

9

1,215

1,340

3,620

4,121

Assets classified as held for sale

2.5

204

Total current assets

3,824

4,121

Non-current assets:

Property, plant and equipment

12

1,555

1,754

Intangible assets

13

1,133

1,129

Right-of-use assets

27

1,413

Investments in associates and joint ventures

20

158

152

Inventories

9

301

264

Retirement plan assets

25

42

61

Derivatives

16

67

108

Deferred tax assets

24

285

121

Total non-current assets

4,954

3,589

Total assets

8,778

7,710

Liabilities

Current liabilities:

Creditors, accruals and other liabilities

10

1,098

1,254

Provisions

11

251

346

Lease liabilities

27

172

Current tax liabilities

24

5

5

Derivatives

16

7

4

Contract liabilities

3

223

119

Borrowings

14

581

602

2,337

2,330

Liabilities directly associated with assets held for sale

2.5

48

Total current liabilities

2,385

Non-current liabilities:

Creditors, accruals and other liabilities

10

60

84

Provisions

11

26

18

Lease liabilities

27

1,549

Deferred tax liabilities

24

2

Derivatives

16

13

8

Borrowings

14

1,210

1,095

Total non-current liabilities

2,858

1,207

Total liabilities

5,243

3,537

Equity

Share capital

18

3,280

3,427

Reserves

220

714

Shareholders' funds

3,500

4,141

Non-controlling interests

19

35

32

Total equity

3,535

4,173

Total liabilities and equity

8,778

7,710

The accompanying notes form part of and are to be read in conjunction with these financial statements.

Fletcher Building Limited Annual Report 2020

65

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Consolidated Statement of Cash Flows

FOR THE YEAR ENDED 30 JUNE 2020

2020

2019

NZ$M

NZ$M

Cash flow from operating activities

Receipts from customers

7,512

9,139

Dividends received

1

6

Payments to suppliers, employees and other

(6,957)

(8,836)

Interest paid

(146)

(128)

Income tax paid

(28)

Net cash from operating activities

410

153

Cash flow from investing activities

Sale of property, plant and equipment

5

5

Sale of subsidiaries/investments

1

1,320

Sale of cash in subsidiaries

(37)

Purchase of property, plant and equipment and intangible assets

(240)

(348)

Purchase of subsidiaries/businesses

(26)

Net cash from investing activities

(234)

914

Cash flow from financing activities

Issue of capital notes

100

100

Drawdown of borrowings

401

Repayment of borrowings

(269)

(199)

Principal elements of lease payments

(171)

Repurchase of shares

(147)

Repurchase of capital notes

(220)

(181)

Distribution to non-controlling interests

(9)

(7)

Dividends

(128)

(68)

Net cash from financing activities

(443)

(355)

Net movement in cash held

(267)

712

Add: opening cash and cash equivalents

1,372

665

Effect of exchange rate changes on net cash

(1)

(5)

Closing cash and cash equivalents

1,104

1,372

The accompanying notes form part of and are to be read in conjunction with these financial statements.

66 Fletcher Building Limited Annual Report 2020

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Notes to the Financial Statements 2020

1. Statement of accounting policies

General information

The financial statements presented are those of Fletcher Building Limited (the Company) and its subsidiaries (the Group). The Group is primarily involved in the manufacturing and distribution of building materials and residential, commercial and infrastructure construction. Fletcher Building Limited is domiciled in New Zealand. The registered office of the Company is 810 Great South Road, Penrose, Auckland.

The Company is registered under the Companies Act 1993 and is a Financial Markets Conduct Act 2013 reporting entity in terms of the Financial Reporting Act 2013. The Group is a for-profit entity.

Basis of presentation

These financial statements have been prepared in accordance with Generally Accepted Accounting Practice in New Zealand, which is the

New Zealand equivalent to International Financial Reporting Standards (NZ IFRS). They also comply with International Financial Reporting Standards.

These financial statements are presented in New Zealand dollars ($), which is the Group's presentation currency and rounded to the nearest million unless otherwise stated.

The consolidated financial statements comprise the income statement, statement of comprehensive income, statement of movements in equity, balance sheet, statement of cash flows, and statement of accounting policies, as well as the notes to these financial statements.

Changes in presentation

The Group has restated the comparative information included in the disclosure notes for significant items (note 2.1), earnings per share (note 2.4) and segmental information (note 4) to exclude the results of Formica and the Roof Tile Group discontinued operations. The comparative financial information for each business, including financial performance, cash flow performance, and assets and liabilities is disclosed as part of discontinued operations in the Group's consolidated financial statements for the year ended 30 June 2019.

Accounting convention

The financial statements are based on the general principles of historical cost accounting, except that certain financial assets and liabilities, as described below are stated at their fair value.

The accounting policies have been applied consistently by all Group entities throughout all periods presented, except as disclosed below, "Changes in accounting policies".

Accounting policies are disclosed within each of the applicable notes to the financial statements and are marked with this icon.

Critical accounting estimates and judgements

The preparation of financial statements in conformity with NZ IFRS requires the directors to make estimates and judgements that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. The estimates and assumptions are reviewed on an ongoing basis.

The estimates and judgements that are critical to the determination of the amounts reported in the financial statements have been disclosed with the relevant notes in the financial statements are marked with this icon, or where applied to the financial statements as a whole, are detailed below.

COVID-19

On 11 March 2020, the World Health Organisation officially declared COVID-19, the disease caused by novel coronavirus, a global pandemic. COVID-19, as well as the measures introduced to slow the spread of the virus, have since had a significant impact on the global economy and the markets the Group operates in. The Group has considered the impact of COVID-19 and associated market volatility in preparing its financial statements.

New Zealand

In March 2020, the New Zealand Government announced the COVID-19 alert system (Levels 1-4) which specified the level of risk and restrictions that were to be followed. New Zealand entered alert 'Level 4' lockdown on 25 March 2020, which required mandatory nationwide suspension of all non-essential services. In full compliance with the 'Level 4' restrictions, the Group suspended almost the entirety of its business activities.

On 27 April 2020, New Zealand moved to alert 'Level 3', permitting the Group to resume general operations with the requirement to comply with the Government's social distancing directions and guidelines still in place. The Government subsequently announced the move to alert 'Level 2' on 13 May 2020 and then alert 'Level 1' on 18 June 2020 with all restrictions on business activities removed.

Australia

On 22 March 2020, the Australian Government introduced social distancing measures aimed at stopping the transmission of COVID-19. Under the regime introduced, construction and construction related activities were permitted to operate subject to compliance with physical distancing requirements. As such, the Group continued its operations in Australia while complying with the Australian Government's social distancing and safety requirements.

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Notes to the Financial Statements 2020 (Continued)

Impact of COVID‑19 on the macroeconomic outlook

Forward-looking information, including an explanation of the scenarios considered in determining the Group's forward-looking assumptions for the purposes of its impairment and expected credit loss assessments, ('ECL') have been provided in notes 2.2 and 16.3 respectively. Noting the wide range of possible scenarios and macroeconomic outcomes, and the relative uncertainty of how COVID-19 and its social and economic consequences will flow, the Group considers that these scenarios represent reasonable and supportable forward-looking views as at the reporting date.

Key statements of balance sheet items and related disclosures that have been impacted by COVID-19 are as follows:

Category

Assessment

Notes

The Group undertook a review of its trade debtor portfolio and applicable ECL provisions. The review

Debtors

considered the macroeconomic outlook, customer credit quality and the effect of payment deferral options

2.1, 16.3

as at the reporting date.

Goodwill and brand

The Group has considered the impact of COVID-19 on New Zealand and Australian macroeconomic outlook.

Relative uncertainty around the short and long-term impact of the pandemic has been incorporated in the

2.1, 2.2

impairment

Group's forward looking assumptions.

Finite life non-

Finite life assets, including property, plant and equipment, intangible assets and right-of-use assets,

have been assessed for indicators of impairment. This assessment incorporated a consideration of

2.1

financial assets

COVID-19 as an indicator.

Inventories

The Group has performed a review of its inventory ranges and categories and how adverse

2.1

macroeconomic outlook impacts realisability of inventory and its net realisable value.

The Group has assessed the impact on its current and forecast performance against its debt covenant

Debt covenants

metrics. No covenant breaches have been identified as at 30 June 2020 nor at the time at which these

14

financial statements were authorised for issue.

Long-term

The Group has considered the impact of COVID-19 on the status of its long-term construction contracts,

construction

including the impact of restrictions introduced by the New Zealand Government in the period of March

2.6

contracts

to June 2020 on the projects' progress and contract position as at the balance date.

Rent abatements

The Group has elected to adopt the COVID-19-Related Rent Concession practical expedient issued

2, 2.1

by New Zealand External Reporting Board in June 2020.

The Group received the funds from the New Zealand Government's wage subsidy scheme, income from

Government grants

the wage subsidy has been accounted for under NZ IAS 20 - Accounting for Government Grants and

2.3

Disclosure of Government Assistance.

Basis of consolidation

The consolidated financial statements comprise the Company, it's controlled entities and its interest in associates, partnerships and joint arrangements. Intercompany transactions are eliminated in preparing the consolidated financial statements.

Subsidiaries

Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are included in the consolidated financial statements using the acquisition method of consolidation, from the date control commences until the date control ceases.

Foreign currency

Translation of the financial statements of foreign operations

The assets and liabilities of the Group's overseas operations are translated into New Zealand currency at the rates of exchange prevailing at balance date. The revenue and expenditure of these entities are translated using an average exchange rate reflecting an approximation of the appropriate transaction rates. Exchange variations arising on the translation of these entities and other currency instruments designated as hedges of such investments are recognised directly in the currency translation reserve. The cumulative exchange variations would be reclassified subsequently to earnings if the overseas operation to which the reserve relates were to be sold or otherwise disposed of.

Foreign currency transactions

Transactions in foreign currencies are translated at exchange rates at the date of the transactions.

Monetary assets and liabilities in foreign currencies at balance date are translated at the rates of exchange prevailing at balance date.

Foreign exchange gains and losses resulting from the settlement of such transactions are recognised in earnings, except where deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.

Non-monetary assets and liabilities in foreign currencies are translated at the exchange rates in effect when the amounts of these assets and liabilities were determined.

68 Fletcher Building Limited Annual Report 2020

Note Description

Financial Performance

Note 2 Key estimates and judgements

Note 3 Revenue from contracts with customers

Note 4 Segmental information

Note 5 Net earnings per share

Note 6 Income statement disclosures

Working Capital Management

Note 7

Cash and cash equivalents

Note 8

Debtors

Note 9

Inventories, including land and developments

Note 10

Creditors, accruals and other liabilities

Note 11

Provisions

Long-term Investments

Note 12 Property, plant and equipment

Note 13 Intangible assets

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Note

Description

Funding and Financial Risk Management

Note 14

Borrowings

Note 15

Funding costs/(income)

Note 16

Financial risk management

Group Structure and Related Parties

Note 17

Dividends and shareholder tax credits

Note 18

Capital

Note 19

Non-controlling interests

Note 20

Investments in associates and joint ventures

Note 21

Related party disclosures

Other Information

Note 22

Capital expenditure commitments

Note 23

Contingent liabilities

Note 24

Taxation

Note 25

Retirement plans

Note 26

Share-based payments

Note 27

Impact of NZ IFRS 16 and other reclassifications

Note 28

Subsequent events

2. Key estimates and judgements

This section provides details of the key estimates and judgements undertaken when preparing these financial statements.

Changes in accounting policies

The following sets out the new accounting standards and amendments to standards that were applicable to the Group from 1 July 2019.

NZ IFRS 16 Leases

NZ IFRS 16 is effective for the Group from 1 July 2019 and sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. NZ IFRS 16 replaces NZ IAS 17 and the related interpretations.

The Group adopted the modified retrospective approach on transition which resulted in a cumulative catch-up adjustment to equity as at 1 July 2019.The comparative information presented for the year ended 30 June 2019 has not been restated and therefore continues to be shown under NZ IAS 17.The Group's activities as a lessor are not material and therefore the Group has not recognised any changes to lessor accounting as a result of the transition to NZ IFRS 16.

Under NZ IFRS 16, a single lessee accounting model requires right-of-use assets and lease liabilities to be recognised in the balance sheet for most lease contracts at the lease commencement date.The lease liabilities are initially measured at the present value of the lease payments that are not yet paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Generally the Group uses the incremental borrowing rate as the discount rate and this rate is determined on a portfolio basis, in relation to asset type, location and duration of obligation.

Lease liabilities are subsequently measured at amortised cost and are increased by the interest charged and decreased by the lease payments made. Lease liabilities are remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a renewal or purchase option is reasonably certain to be exercised or a termination clause is reasonably certain not to be exercised. The Group has applied judgement to determine the discount rate applicable to each lease and the lease term for those lease contracts that include a renewal or termination option.The assessment of whether the Group is reasonably certain to either exercise a renewal option or not exercise a termination option significantly impacts the value of lease liabilities and right-of use assets recognised on the balance sheet.

Right-of-use assets are initially measured at cost, which is an amount equal to the corresponding lease liabilities adjusted for any lease payments made at or before commencement date, less any lease incentives received. Right-of-use assets are subsequently measured at cost less any accumulated depreciation and impairment losses, adjusted for certain remeasurements to the lease liabilities. Depreciation is calculated on a straight-line basis over the expected useful economic life of a lease which is taken as the lease term.

The Group applies both the short-term and low-value lease exemptions allowed under NZ IFRS 16 which recognises payments for leases of 12 months or less or leases of a low value on a straight-line basis as an expense in the income statement.The Group also adopted the following transition reliefs to:

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Notes to the Financial Statements 2020 (Continued)

  • exclude the initial direct costs in the measurement of the right-of-use asset as at the date of initial application;
  • use the benefit of hindsight to assist in the assumptions and judgements regarding renewals; and
  • rely on previous assessments on whether leases are onerous.

Refer to note 27 for further information on the adoption and impact of NZ IFRS 16.

COVID-19-Related Rent Concessions

In June 2020, the New Zealand Accounting Standards Board provided a practical expedient to NZ IFRS 16.The expedient permitsTier-1 and Tier-2 reporting entities not to assess whether rent concessions that occur as a direct consequence of the COVID-19 pandemic and meet specified conditions as lease modifications and, instead, to account for those rent concessions as reassessments.The Group has elected to adopt the expedient.

NZ IFRIC 23

NZ IFRIC 23 is effective for the Group from 1 July 2019. NZ IFRIC Interpretation 23 "Uncertainty over income tax treatments" clarifies the recognition and valuation principles applicable to income tax risks.These risks arise when there is uncertainty related to a tax position adopted by the Group that could be challenged by the tax authorities.The Group has not identified any material impact to the financial statements at 1 July 2019 following the implementation of NZ IFRIC 23.

There are no other new standards, updates and interpretations published and effective whose impact could be significant for the Group.

2.1 SIGNIFICANT ITEMS

In reporting financial information, the Group presents non-GAAP performance measures, which are not defined or specified under the requirements of NZ IFRS.

The Group believes that these non-GAAP measures, which are not considered to be a substitute for or superior to NZ IFRS measures, provide stakeholders with additional helpful information on the performance of the business.The non-GAAP measures are consistent with how the business performance is planned and reported within the internal management reporting to the Board and Audit and Risk Committee.

The Group makes certain significant item adjustments to the statutory profit measures in order to derive many of these non-GAAP measures. The Group's policy is to exclude items that are considered to be significant in both nature and/or quantum and where treatment as an adjusted item provides stakeholders with additional useful information to assess the year-on-year trading performance of the Group. On this basis, the following items were included within significant items for the year ended 30 June 2020:

  • Restructuring and other associated costs arising from significant strategy changes that are not considered by the Group to be part of the normal operating costs of the business.
  • Impacts of significant one-off adverse events that have material effect on the Group's financial performance and financial position.
  • Impairment charges and provisions that are considered to be significant in nature and/or value to the trading performance of the business.
  • Net gains and losses on the disposal of properties where a commitment to close has been demonstrated.

As a direct consequence of COVID-19 and its impact on the New Zealand and Australian business activities, the Group has undertaken a number of initiatives to prepare for an expected downturn in market conditions in FY21 and potentially beyond. An announcement was made to the market on 20 May 2020 outlining restructuring plans. Implementation of the programme in May and June 2020 resulted in the Group incurring restructuring and property rationalisation costs and asset impairment charges, these have been classified by the Group as significant items, as outlined below:

Restructuring

Property

Impairment of

activity (1)

rationalisation (2)

assets (3)

Total

2020

NZ$M

NZ$M

NZ$M

NZ$M

Building Products

(6)

(3)

(10)

(19)

Distribution

(9)

(3)

(6)

(18)

Concrete

(5)

(5)

(3)

(13)

Residential and Development

(1)

(1)

Construction

(8)

(3)

(2)

(13)

Australia

(32)

(33)

(101)

(166)

Other

(32)

(1)

(13)

(46)

Total significant items before taxation

(93)

(48)

(135)

(276)

Tax benefit on above items

24

15

38

77

Total significant items after taxation

(69)

(33)

(97)

(199)

70 Fletcher Building Limited Annual Report 2020

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(1) Restructuring activity

Business restructure ($63m)

The Group announced its restructuring strategy in New Zealand and Australia on 20 May 2020, implementation of the restructure plan has resulted in the Group recognising a $63 million provision in relation to redundancy and other associated costs.

Funding restructure ($30m)

On 29 June 2020, the Group provided notice to the US private placement noteholders ('USPP') of the intention to prepay A$99 million and US$200 million of notes on issue with original maturities of 2022 and 2024. The prepayment of the private placement borrowings is part of a revised funding strategy reflecting the requirement to reduce funding costs as the Group enters a period of uncertainty. The Group recognised a significant item cost of $30 million in the income statement related to the make whole component of the prepayment as governed by the private placement borrowing agreement. This cost is partially offset by the impact of related debt hedging activities. The USPP make whole (net of hedging benefits) has been included as a significant item on the basis that it is a transaction resulting from a change to the Group's funding strategy which has had significant impact on the Group's profit.

(2) Property rationalisation

As part of its organisational reset process, the Group has reviewed its operational property footprint, with an intention to identify and exit office, warehouse and depot leases in order to rationalise property requirements. Property rationalisation costs primarily relate to recognition of impairment on right-of-use assets, make good costs and losses incurred on early termination of leases. Property rationalisation costs were partially offset by gains recognised on COVID-19 related rent concessions.

(3) Impairment of assets

The Group has recognised a number of charges in the year associated with reductions to the carrying values of the following asset categories:

Property, plant and equipment and intangible assets ($97m)

Uncertainty in the market conditions has been determined as an indicator of impairment for the Group's property, plant and equipment and finite life intangible assets. For such assets, testing has been performed to assess the recoverability of the asset values. Impairment charges were recognised where the recoverable value of the assets did not support their carrying value. Details of impairment charges recognised in the year are disclosed in notes 12 and 13.

Inventory ($32m)

The Group has recognised charges in the year associated with the write down of inventory. These write downs relate to the discontinuation of certain product ranges and disposal of inventory held at closed sites, distribution centres and warehouses.

Expected credit losses ($6m)

The Group estimated its ECL as at 30 June 2020 based on a range of forecast economic conditions. COVID-19 has had a significant impact on economic scenarios used by the Group to determine the ECL, with the probability of an adverse economic scenario in the near term estimated as high. As such the Group recognised a significant item charge of $6 million that reflects expected deterioration of its customers' portfolio credit quality.

For more details on key assumptions and estimates used in the ECL assessment, please refer to note 16.3.

Restructuring

activity

Total

2019

NZ$M

NZ$M

Building Products

(10)

(10)

Australia

(78)

(78)

Corporate

(6)

(6)

Total significant items before taxation

(94)

(94)

Tax benefit on above items

27

27

Total significant items after taxation

(67)

(67)

Restructuring activity

The Group had recognised a charge of $94 million for restructuring costs, $78 million of which is in Australia, associated with the restructure of various businesses across the Group as an extension of the strategic reset that began in FY18. The restructuring includes redundancies and property exit costs, as well as associated advisory costs incurred.

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Notes to the Financial Statements 2020 (Continued)

2.2 INTANGIBLE ASSET IMPAIRMENT TESTING

Goodwill and brands were tested for impairment in June 2020. Each cash generating unit (CGU) that carries goodwill or brands is valued on a value-in-use or fair value less costs of disposal basis using a discounted cash flow model. Management has used its past experience of sales growth, operating costs and margin, and external sources of information where appropriate, to determine their expectations for the future.

These cash flow projections are principally based on the business units' forecast five year plan, which are risk adjusted where appropriate. Cash flows beyond five years have been extrapolated using estimated terminal growth rates, which do not exceed the long-term average growth rate for the industries and countries in which the business units operate. The terminal growth rate used was 1.75% (2019: 2.5%).

COVID-19

In response to COVID‑19 the Group undertook a review of key assumptions in estimating carrying values of relevant CGUs.The review considered the impact of the COVID-19 pandemic on overall macroeconomic outlook, the Group's market segments and projected discount and growth rates as at the reporting date. While these model inputs, including forward-looking information, were revised overall, valuation methodology remained consistent with prior periods.

New Zealand and South Pacific CGU's

The goodwill and brand balances for the 15 New Zealand and South Pacific CGU's represent 46% of the total balance for the Group. The cash flows are discounted using a nominal rate specific to each business and jurisdiction. New Zealand businesses have employed discount rates between 8.0% and 10.0% (2019: between 8.0% and 9.0%), and the South Pacific business has employed a discount rate of 18.5% (2019: 18.5%), reflecting the risk profile of each business and for the regions in which the CGUs operate.

Sensitivity to reasonably possible changes in assumptions

The impairment assessment confirmed that, for these business units, the recoverable amounts exceed carrying values as at 30 June 2020. Based on current economic conditions and performances of New Zealand and South Pacific CGUs, no reasonably possible change in a key assumption used in the determination of the recoverable value of CGUs would result in a material impairment to the Group.

Australia CGU's

The goodwill and brand balances for the four Australia CGU's represent 54% of the total balance for the Group. The cash flows are discounted using a nominal rate specific to each business. Australian business units employed a discount rate of 8.1% (2019: between 8.0% and 9.0%), reflecting the risk profile of each business and for the region in which the CGUs operate.

Sensitivity to reasonably possible changes in assumptions

Throughout the current financial year the Australian economy, particularly the residential market, has experienced a significant downturn. The Laminex Australia and Tradelink business units have been particularly impacted by this downturn, which has impacted the forecast cash flows used to assess the carrying value of each CGU.

Group and divisional management completed a comprehensive strategic review of the Australia division during the year and identified a number of strategic initiatives for the near to medium term to set the business units up for long-term margin growth. A number of these initiatives have been implemented during the current financial year, however, the benefits of these will be achieved over the longer-term and are, in part, dependent on the recovery of the Australian economy and residential market.

The key assumptions used in the impairment tests for the significant business units of Laminex Australia and Tradelink are outlined below.

No impairment was recognised during the financial year, however, a change in any of the key assumptions would lead to the elimination of the excess of recoverable amount over carrying amount.

Laminex Australia (representing 28% of Group goodwill and brands balances)

Key assumption

Value attributed

Sensitivity (absolute movement)

Revenue growth (5-year Cumulative Average Growth Rate (CAGR))

5.0%

Decrease by 1.2 ppts

EBIT margin (5-year average)

7.0%

Decrease by 0.3 ppts

Terminal growth rate

1.75%

Decrease by 1.0 ppts

Discount rate

8.1%

Increase by 0.8 ppts

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Tradelink (representing 11% of Group goodwill and brands balances)

Key Assumption

Value attributed

Sensitivity (absolute movement)

Revenue growth (5-year Cumulative Average Growth Rate (CAGR))

4.70%

Decrease by 4.6 ppts

EBIT margin (5-year average)

2.40%

Decrease by 0.4 ppts

Terminal growth rate

1.75%

Decrease by 1.2 ppts

Discount rate

8.10%

Increase by 1.3 ppts

Other CGU's

Based on current economic conditions and CGU performances, no reasonably possible change in a key assumption used in the determination of the recoverable value of Australian CGUs would result in a material impairment to the Group.

2.3 SUPPLEMENTARY DISCLOSURES: GOVERNMENT GRANTS

On 17 March 2020, the New Zealand government announced the implementation of a wage subsidy scheme. The Group met the eligibility criteria requirements of the scheme and $68 million was received by the Group for the period from March to June. The funds received by the Group were used to mitigate employee-related costs during the eligibility period through the Group's 'Bridging Pay Programme'. Over 8,600 employees participated in the 'Bridging Pay Programme' which is more than 90% of the Group's New Zealand-based employees.

Funds received as part of the wage subsidy scheme have been accounted for in line with NZ IAS 20 - Government Grants and Disclosure of Government Assistance. The Group has elected to present income received from the wage subsidy as an offsetting deduction to its employee costs. Funds received as part of the scheme have no unfulfilled conditions or other attached contingencies as at 30 June 2020. The Group had not materially benefitted from any other forms of government assistance during the reporting period.

2.4 SUPPLEMENTARY DISCLOSURES: EARNINGS PER SHARE

Earnings per share is disclosed in full in note 5. The below disclosure has been included to provide additional useful information by removing the impact of significant items in the current and prior year, and the resulting impact on the earnings per share measure.

The effect of significant items on earnings per share from continuing operations is as follows:

2020

2019

NZ$M

NZ$M

Net earnings/(loss) after taxation from continuing operations

(196)

246

(as per income statement)

Add back: Significant items after taxation (note 2.1)

199

67

Net earnings before significant items

3

313

Net earnings per share before significant items from continuing operations (cents)

0.4

36.7

Net earnings per share - as per income statement (cents)

(23.5)

28.8

2.5 ASSETS HELD FOR SALE

Rocla Pty Limited

On 19 February 2020, the Group publicly announced the decision of its Board of directors to sell the Rocla pipes and precast business, a wholly owned subsidiary reported under the Australia segment. The divestment process was suspended on 25 March 2020 as a response to COVID-19, and was recommenced on 1 June 2020. The sale of the Rocla business is expected to be completed within a year from the reporting date. At 30 June 2020, the Rocla business was classified as a disposal group held for sale, therefore depreciation of the assets held for sale ceased from 1 June 2020. The summary of the Rocla business assets included as held for sale and liabilities included as associated with held for sale as at 30 June 2020 are presented below:

2020

Assets

NZ$M

Property, plant and equipment

118

Right-of-use assets

6

Inventories

50

Debtors

30

Assets held for sale

204

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Notes to the Financial Statements 2020 (Continued)

2020

Liabilities

NZ$M

Creditors, accruals and other liabilities

28

Provisions

13

Lease liabilities

7

Liabilities directly associated with assets held for sale

48

Net assets directly associated with disposal group

156

2.6 SUPPLEMENTARY DISCLOSURES: CONSTRUCTION ACCOUNTING

The Construction division is engaged by customers to construct and maintain buildings and infrastructure across New Zealand and the South Pacific. The Group recognised significant provisions within the division as a number of these construction contracts were loss making. These projects were determined to be onerous contracts and the related provisions are disclosed in note 11.

Construction projects are inherently more uncertain earlier in their lifetime, which leads to a number of significant estimates and judgements being made at these early stages.The Group's policies for accounting for such projects are outlined below, and demonstrate the significant judgements made. Contract assets and liabilities arising from construction work in progress at year end are disclosed below.

A summary of total contracted work under construction and details of the major construction projects and their approximate stage of completion is disclosed to demonstrate the uncertainty that remains on these projects.

Construction accounting policies

Revenue recognition

Construction contract revenue

The Group derives revenue from the construction of building and infrastructure projects across New Zealand and the South Pacific. Contracts entered into may be for the construction of one or several separate inter-linked pieces of large infrastructure. While it is uncommon, contracts can be entered into for the building of several projects. Where this occurs, the Group will identify the single or multiple performance obligations and allocate the total contract price across each performance obligation based on stand-alone selling prices.The contract price is normally fixed at the start of the project.

The nature of construction projects leads to variations in the project size and scope. It is also normal practice for contracts to include bonus and penalty elements based on timely construction or other performance criteria known as variable consideration, discussed below.

The performance obligation is fulfilled over time and as such revenue is recognised over time. As work is performed on the assets being constructed they are controlled by the customer and have no alternative use to the Group, with the Group having a right to payment for performance to date.

Generally, contracts identify various inter-linked activities required in the construction process. Revenue is recognised on the measured output of each process based on appraisals that are agreed with the customer on a regular basis.

Maintenance contract revenue

Services revenue is primarily generated from maintenance services supplied to roading assets owned by local or central Government in New Zealand and the South Pacific.This revenue also arises in respect of infrastructure assets previously constructed by the Group where maintenance was included in the contract.The service contracts are typically determined to have one single performance obligation which significantly integrated and is fulfilled over time.

Variable consideration

Revenue in relation to variations, such as a change in the scope of the contract, is only included in the contract price when it is approved by the parties to the contract, the variation is enforceable, or in certain circumstances when the amount becomes highly probable and is approved by the Board of directors.

Construction work-in-progress - Contract assets, contract liabilities, and provisions for onerous contracts

Earnings on construction contracts (including sub-contracts) are determined using the percentage-of-completion method and represent the value of work carried out during the year, including amounts not invoiced. Costs are recognised as incurred and revenue is recognised on the basis of the proportion of total costs at the reporting date to the estimated total costs of the contract. Estimates of the final outcome of each contract may include cost contingencies to take account of specific risks within each contract that have been identified.The cost contingencies are reviewed on a regular basis throughout the contract life and are adjusted where appropriate. However, the nature of the risks on contracts are such that they often cannot be resolved until the end of the project.

Margin on the contract is not recognised until the outcome of the contract can be reliably estimated.The Group uses its professional judgement to assess both the physical completion and the forecast financial result of the contract. When a contract is identified as loss- making, a provision is made for estimated future losses on the entire contract.

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Construction work in progress is stated at cost plus profit recognised to date, less progress billings. Cost includes all expenditure directly related to specific projects and an allocation of fixed and variable overheads incurred in the Group's contract activities based on normal operating capacity.

Estimates and judgements are made relating to a number of factors when assessing construction contracts.These primarily include the programme of work throughout the contract period, assessment of future costs after considering changes in the scope of work, maintenance and defect liabilities, expected inflation (for unlet sub-trades) and performance bonuses or penalties.

The significant judgements inherent in accounting for the Group's most material construction projects are:

  • The extent to which a project progresses in line with the complex project programme and timetable previously formed and the resulting impact of any programme delays or gains on project costs, especially project overheads (preliminary and general costs) and any liquidated or other damages;
  • Sub-contractorcost, in particular cost that is yet to be agreed in scope or price (including inflationary pressures) or that relating to programme prolongation;
  • The outcome of ongoing commercial negotiations, including elements of variable consideration and changes in project scope; and
  • Future weather and ground conditions.

Status of construction projects (> $200 million original contract value) as at 30 June 2020:

Percentage of

Forecast

Business unit completion (% cost)

completion

Commercial Bay - Fixed price contract

Buildings

96%

2020

NZICC - Guaranteed maximum price and fixed price contract

Buildings

82%

2023

Puhoi to Warkworth - Fixed price contract (Public Private Partnership)

Infrastructure

63%

TBC

Hamilton City Edge Expressway - Alliance contract

Infrastructure/Higgins

76%

TBC

Peka Peka to Otaki Expressway - Fixed price contract

Infrastructure/Higgins

55%

TBC

Revenue Backlog by Business unit as at 30 June 2020:

Current Revenue Backlog

Top 5 projects as a % of

NZ$M

Revenue Backlog

Buildings

352

100%

Infrastructure

1,156

46%

Brian Perry Civil

762

8%

Higgins

545

33%

South Pacific

114

83%

2,929

N/A

Revenue backlog refers to the level of construction work the Group is contracted to but is not yet complete at year end. This represents the performance obligations that are yet to be completed for the construction contracts active at the end of the year. The long-term nature of the contracts held by the Buildings, Infrastructure and Higgins businesses will see these performance obligations be completed over a period generally between one to five years, although some may extend longer. The Buildings, Infrastructure, Brian Perry Civil, and South Pacific businesses have contracts that are either short-term in nature or are nearing completion with those performance obligations likely to be settled within the next 12 months.

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Notes to the Financial Statements 2020 (Continued)

New Zealand International Convention Centre (NZICC)

On 22 October 2019 there was a significant fire at the NZICC project construction site causing damage to both the International Convention Centre and Hobson Street Hotel.

Contract Works andThird-Party Liability insurances are in place on the project, and the Fletcher Construction Company Limited is an insured party under these policies.

TheThird-Party Liability insurance policy is responding where legal liability exists and cases are being reviewed and approved for payment on a claim-by-claim basis.There are no legal proceedings in respect of this matter that require additional provision in these financial statements.

The NZICC project continues to be accounted for under NZ IFRS 15: Revenue from Contracts with Customers and NZ IAS 37: Provisions, Contingent Liabilities and Contingent Assets.

The Group has assessed all relevant known facts and circumstances related to the estimation of cost to complete and insurance recoveries and concluded based on current information that there is no impact to the NZICC forecast project loss as a result of the fire.The assessment required key judgments and estimates (including an assessment of the cost to complete remediation, the likelihood of receipt of insurance recoveries and quantification of any claims and costs that it is probable insurance will not cover) and as such is subject to change as the project progresses.

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Financial Review

This section explains the results and performance of the Group, including the segmental analysis, details of significant items, and earnings per share.

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

  • The Group revenue is derived from the following streams:
  • Sale of building products and materials
  • Development and sale of residential property
  • Construction of building and infrastructure projects (refer to note 2.6)
  • Maintenance service contracts (refer to note 2.6)

Revenue from contracts with customers is recognised when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services.The Group has generally concluded that it is the principal in its revenue arrangements, because it typically controls the goods or services before transferring them to the customer.

Building products and distribution divisions

Sale of building products and materials

The materials and distribution businesses within the Group recognise revenue when control of the goods has passed to the customer, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and there is a high probability that a significant reversal in the revenue recognised will not occur. Revenue is measured net of returns, trade discounts and volume rebates.The timing of the transfer of control varies depending on the individual terms of the sales agreement. For most sales, this occurs when the product is delivered to the customer.

Residential and Development division

Development and sale of residential projects

Through the Residential and Development division the Group derives income from the sale of completed houses, construction type projects for enabling or utilities works for large developments, and the sale of development sites surplus to Group requirements. Revenue is recognised when control passes to the customer for each type of transaction. House sales are commonly recognised at the time of settlement, when title passes to the customer and payment is received. Enabling or utilities works are recognised over time using a percentage of completion method. Land development sales are recognised in line with the requirements of the specific sale and purchase agreement.

Performance obligations vary between the types of transactions.The sale of a completed house from Group inventory to a customer is a single performance obligation, as houses are not constructed under contract from a customer. For works contracts and development sales, the division reviews the terms of the sale to determine whether the performance obligations are distinct and separately identifiable.

Sale of

Development

Building

and Sale of

Construction

Maintenance

Products and

Residential

Contract

Contract

2020

Materials

Properties

Revenue

Revenue

Total

Goods and services transferred

5,588

460

6,048

at a point in time

Goods and services transferred

760

501

1,261

over time

Total revenue from contracts

5,588

460

760

501

7,309

with customers

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Notes to the Financial Statements 2020 (Continued)

Sale of

Development

Building

and Sale of

Construction

Maintenance

Products and

Residential

Contract

Contract

2019

Materials

Properties

Revenue

Revenue

Total

Goods and services transferred

6,047

639

6,686

at a point in time

Goods and services transferred

1,095

527

1,622

over time

Total revenue from contracts

6,047

639

1,095

527

8,308

with customers

Contract assets

The gross amount of Construction and Maintenance work in progress consists of costs attributable to work performed and emerging profit after providing for any foreseeable losses. In applying the accounting policies on providing for these losses, accounting judgement is required.

Construction contracts with cost and margin in advance of billings are presented as part of Contract Assets for all contracts in which costs incurred plus recognised profits exceed progress billings. If progress billings and recognised losses exceed costs incurred plus recognised profits, then the difference is presented as Contract Liabilities.

Contract liabilities

Construction contracts where the total progress billings issued to clients (together with foreseeable losses if applicable) on a project exceed the costs incurred to date plus recognised profit on the contract are recognised as a liability

2020

2019

NZ$M

NZ$M

Construction contracts with cost and margin in advance of billings

69

40

Contract assets

69

40

Construction contracts with billings in advance of cost and margin

223

119

Contract liabilities

223

119

4. SEGMENTAL INFORMATION

Segmental information is presented in respect of the Group's industry and geographical segments.The use of industry segments as the primary format is based on the Group's management and internal reporting structure, which recognises groups of assets and operations with similar risks and returns. Inter-segment pricing is determined on an arm's length basis.The results of the previous Steel division have been consolidated into Building Products division as announced during the year ended 30 June 2019.

Industry segments

2020

2019

2020

2019

NZ$M

NZ$M

NZ$M

NZ$M

Gross revenue

Gross revenue

External revenue

External revenue

Building Products

1,173

1,314

922

1,013

Distribution

1,471

1,596

1,440

1,552

Concrete

740

802

503

549

Residential and Development

466

639

460

639

Construction

1,318

1,702

1,261

1,622

Australia

2,802

3,024

2,723

2,933

Other

10

11

Group

7,980

9,088

7,309

8,308

Less: intercompany revenue

(671)

(780)

Group external revenue

7,309

8,308

7,309

8,308

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2020

2019

2020

2019

NZ$M

NZ$M

NZ$M

NZ$M

EBIT before

EBIT before

significant items

significant items

Funds*

Funds*

Building Products

87

160

678

723

Distribution

85

104

209

300

Concrete

74

84

607

656

Residential and Development

65

137

604

651

Construction

(147)

47

50

48

Australia

33

57

1,494

1,735

Corporate

(37)

(40)

(107)

60

Group

160

549

3,535

4,173

  • Funds represent the external assets and liabilities of the Group and are used for internal reporting purposes. Group balances such as borrowings and taxation are allocated to Corporate as these are managed at a Group level. Funds are managed at a divisional level.

Depreciation,

Depreciation,

depletion and

depletion and

amortisation

amortisation

Capital

Capital

expense

expense

expenditure

expenditure

Building Products

53

17

53

55

Distribution

47

10

21

23

Concrete

74

50

50

65

Residential and Development

3

3

7

Construction

40

21

32

31

Australia

135

62

65

91

Corporate

18

14

8

13

Group

370

174

232

285

Geographic segments

EBIT before

EBIT before

External revenue

External revenue

significant items

significant items

New Zealand

4,466

5,220

110

467

Australia

2,740

2,944

42

54

Other jurisdictions

103

144

8

28

Group

7,309

8,308

160

549

Significant items (note 2.1)

(276)

(94)

Earnings before interest and taxation (EBIT)

(116)

455

Non-current

Non-current

assets+

assets+

Funds*

Funds*

New Zealand

2,836

1,895

2,221

2,405

Australia

1,670

1,359

1,495

1,752

Other

53

45

83

85

Debt and taxation

(264)

(69)

Group

4,559

3,299

3,535

4,173

  • Excludes deferred tax assets, retirement plan surplus and financial instruments.
  • Funds represent the external assets and liabilities of the Group and are used for internal reporting purposes. Group balances such as borrowings and taxation are allocated to Corporate as these are managed at a Group level.

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Notes to the Financial Statements 2020 (Continued)

Description of industry segments

Building Products

The Building Products division is a manufacturer, distributor, and marketer of building products used in

the residential and commercial markets in New Zealand.

Distribution

The Distribution division consists of building, plumbing, and pipeline distribution businesses in New Zealand.

Concrete

The Concrete division includes the Group's interests in the concrete value chain, including extraction of

aggregates, and the production of cement and concrete. The division operates in New Zealand.

The Residential and Development division operates both in New Zealand and Australia and involves

Residential and Development

building and sale of residential homes in New Zealand and development and sale of commercial and

residential land in Australia and New Zealand. Development activity includes sale of land property

portfolio which are surplus to the Group's operating requirements.

Construction

The Construction division is a builder and maintainer of commercial buildings and infrastructure across

New Zealand and the South Pacific.

Australia

The Australia division manufactures and distributes building materials for a broad range of industries

across Australia.

5. NET EARNINGS PER SHARE

Earnings per share is the portion of a company's profit allocated to each outstanding ordinary share and is calculated by dividing the earnings attributable to shareholders by the weighted average of ordinary shares on issue during the year excluding treasury stock. Capital notes and options are convertible into the company's shares and may therefore result in dilutive securities for purposes of determining the diluted net earnings per share. Fletcher Building may, at its option, purchase or redeem the capital notes for cash at the principal amount plus any accrued but unpaid interest.

2020

2019

Net earnings per share from continuing operations (cents)

Basic

(23.5)

28.8

Diluted

(23.5)

27.7

Numerator (continuing operations)

NZ$M

NZ$M

Net earnings/(loss) from continuing operations

(196)

246

Numerator for basic earnings per share from continuing operations

(196)

246

Dilutive capital notes distribution

17

Numerator for diluted net earnings per share

(196)

263

Denominator (millions of shares)

Weighted average number of shares outstanding (refer to note 18)

835

853

Conversion of dilutive capital notes

98

Denominator for diluted net earnings per share

835

951

6. INCOME STATEMENT DISCLOSURES

2020

2019

NZ$M

NZ$M

The following items are specific disclosures required to be made and are included within

the income statement:

Net periodic pension cost

2

1

Employee related short-term costs (1) (2)

1,332

1,604

Other long-term employee related benefits

58

57

Research and development expenditure

1

5

Amortisation of intangibles

24

19

Bad debts written off

5

6

Donations and sponsorships

1

2

Maintenance and repairs

143

171

  1. Short-termemployee benefits for the executive committee included in the above is disclosed in note 21.
  2. Employee related short-term costs include offsetting income from government grants, as disclosed in note 2.3.

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Auditor's remuneration

NZ$000's

NZ$000's

Audit and review of the financial statements (1)

2,858

3,132

Audit services associated with Formica sale process

770

Total audit and assurance services

2,858

3,902

Tax services

369

Other non-assurance services

14

23

Total non-assurance services

14

392

Total auditor remuneration

2,872

4,294

  1. The audit includes fees for both the annual audit of the financial statements and the review of the interim financial statements.

Working Capital Management

This section provides details of the key elements of working capital which includes cash, receivables, inventories and short-term liabilities.

7. CASH AND CASH EQUIVALENTS

Cash and cash equivalents comprise cash and demand deposits with banks or other financial institutions and highly liquid investments that are readily convertible to cash.

Cash and cash equivalents include the Group's share of amounts held by joint operations of $102 million (2019: $28 million).

At 30 June 2020, approximately $19 million (2019: $30 million) of total cash and deposits were held in subsidiaries that operate in countries where exchange controls and other legal restrictions apply and are not immediately available for general use by the Group.

2020

2019

NZ$M

NZ$M

Cash and bank balances

503

189

Contract retention bank balances

24

23

Short-term deposits

577

1,160

1,104

1,372

Reconciliation of net earnings to net cash from operating activities

2020

2019

NZ$M

NZ$M

Net earnings

(196)

164

Earnings attributable to minority interest

12

13

(184)

177

Add/(Less) non-cash items:

Depreciation, depletions and amortisation

370

199

Other non-cash items

240

108

Taxation

(81)

74

Loss/(gain) on disposal of businesses and property, plant and equipment

7

(1)

536

380

Net working capital movements

Residential and Development

50

(26)

Construction

(19)

(276)

Other divisions:

Debtors

95

26

Inventories

(1)

(69)

Creditors

(67)

(59)

58

(404)

Net cash from operating activities

410

153

Fletcher Building Limited Annual Report 2020

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Notes to the Financial Statements 2020 (Continued)

8. DEBTORS

Debtors are amounts due from customers for goods sold or services performed in the ordinary course of business.They are generally due for settlement within 30 to 90 days and are therefore all classified as current. Debtors are recognised initially at the amount of consideration that is unconditional, unless they contain significant financing components, when they are recognised at fair value.The Group holds the trade receivables with the objective of collecting the contractual cash flows and therefore measures them subsequently at amortised cost using the effective interest method. Details about the Group's impairment policies and the calculation of the loss allowance are provided in note 16.3.

2020

2019

NZ$M

NZ$M

Trade debtors

746

834

Contract debtors

69

209

Contract retentions

35

42

Less provision for doubtful debts

(25)

(15)

Trade and contract debtors

825

1,070

Other receivables

216

228

1,041

1,298

Current

739

919

0 - 30 days over standard terms

75

121

31 - 60 days over standard terms

6

14

61+ days over standard terms

30

31

Provision

(25)

(15)

Trade and contract debtors

825

1,070

Fair values of debtors

Due to the short-term nature of the current receivables, their carrying amount is considered to be the same as their fair value. Impairment and risk exposure

Information about the impairment of trade receivables and the group's exposure to credit risk and foreign currency risk can be found in note 16.3.

9. INVENTORIES, INCLUDING LAND AND DEVELOPMENTS

Raw materials, work in progress and finished goods

Raw materials and stores, work in progress and finished goods are stated at the lower of cost and net realisable value. Cost comprises direct materials, direct labour and an appropriate proportion of variable and fixed overhead expenditure, the latter being allocated on the basis of normal operating capacity. Cost includes the reclassification from equity of any gains or losses on qualifying cash flow hedges relating to purchases of raw material but excludes borrowing costs. Costs are assigned to individual items of inventory on the first-in,first-out basis. Costs of purchased inventory are determined after deducting rebates and discounts. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Land held for resale

Land held for resale is stated at the lower of cost and net realisable value. Cost is assigned by specific identification and includes the cost of acquisition and development costs during development.

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2020

2019

NZ$M

NZ$M

Raw materials

364

472

Work in progress

377

216

Finished goods

736

877

Consumable stores and spare parts

39

39

1,516

1,604

Inventories held at cost

1,192

1,325

Inventories held at net realisable value

324

279

1,516

1,604

Current portion

1,215

1,340

Non-current portion

301

264

1,516

1,604

Inventory classified as non-current

The non-current portion of inventories relates to land and developments that are expected to be held for greater than 12 months (current portion of $367 million, 2019: $408 million).

The Group also has unconditional commitments for the purchase of land to be used for residential construction totalling $257 million (2019: $257 million), of which $77 million is expected to be delivered in the year to 30 June 2021 (June 2019: $71 million).

10. CREDITORS, ACCRUALS AND OTHER LIABILITIES

Trade creditors and other liabilities are stated at cost or estimated liability where accrued. Employee entitlements include annual leave which is recognised on an accrual basis and the liability for long service leave which is measured as the present value of expected future payments to be made in respect of services provided by employees.

Assumptions in determining long service leave relate to the discount rate, estimates relating to the expected future long service leave entitlements, future salary increases, attrition rates and mortality.

2020

2019

NZ$M

NZ$M

Trade creditors

609

761

Contract retentions

30

37

Accrued interest

30

29

Other liabilities

326

319

Employee entitlements

154

184

Workers' compensation schemes

9

8

1,158

1,338

Current portion

1,098

1,254

Non-current portion

60

84

Carrying amount at the end of the year

1,158

1,338

The non-current portion of creditors and accruals relates to long service employee entitlement obligations and unconditional deferred land payments.

Fletcher Building Limited Annual Report 2020

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Notes to the Financial Statements 2020 (Continued)

11. PROVISIONS

Provisions for restructuring, service and environmental warranties, and other provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of management's best estimate of the expenditure required to settle the present obligation at the end of the reporting period.The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.The increase in the provision due to the passage of time is recognised as an interest expense.

Restructuring

Restructuring provisions are recognised when the Group is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan. Costs relating to ongoing activities are not provided for.

Warranty & Environmental

Warranty provisions represent an estimate of potential liability for future rectification work in respect of products sold and services provided. Environmental provisions represent an estimate for future liabilities relating to environmental obligations.

Onerous contracts

An onerous contract is a contract under which the unavoidable costs (i.e., the costs that the Group cannot avoid because it has the contract) of meeting the obligations under the contract exceed the economic benefits expected to be received under it.The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it.The cost of fulfilling a contract comprises the costs that relate directly to the contract (i.e., both incremental costs and an allocation of costs directly related to contract activities).

Other

Other provisions relate to miscellaneous matters, across the Group, none of which are individually material.

Warranty &

Onerous

Restructuring

environmental

contracts

Other

Total

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

2020

Carrying amount at the beginning of the year

32

34

264

34

364

Currency translation

Charged to earnings

75

2

150

33

260

Settled or utilised

(45)

(10)

(252)

(20)

(327)

Released to earnings

(1)

(4)

(2)

(7)

Classified as held for sale

(13)

(13)

48

22

162

45

277

2019

Carrying amount at the beginning of the year

30

39

497

45

611

Currency translation

(1)

(1)

(2)

Charged to earnings

22

12

15

49

Settled or utilised

(12)

(10)

(233)

(21)

(276)

Released to earnings

(5)

(4)

(2)

(11)

Disposal of business

(2)

(2)

(3)

(7)

32

34

264

34

364

2020

2019

NZ$M

NZ$M

Current portion

251

346

Non-current portion

26

18

Carrying amount at the end of the year

277

364

During the year the Group utilised $45 million (2019: $12 million) in respect of restructuring obligations at certain businesses. The remaining balance is expected to be utilised within the next 12 months. Warranty and environmental provisions are expected to be utilised over the next three years.

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Long-term Investments

This section details the long-term assets of the Group including Property, Plant and Equipment and Intangible Assets.

12. PROPERTY, PLANT AND EQUIPMENT

Land, buildings, plant and machinery and fixtures and fittings are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.The cost of purchasing land, buildings, plant and machinery, fixtures and equipment is the value of the consideration given to acquire the assets and the value of other directly attributable costs which have been incurred in bringing the assets to the location and the condition necessary for their intended service, including subsequent expenditure. Assets are reviewed annually for impairment indicators.

Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably.The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred.

Depreciation of property, plant and equipment and amortisation of definite life intangible assets are calculated on the straight-line method. Refer to note 13 for details of intangible assets. Expected useful lives, which are regularly reviewed, typically range between:

Buildings

30-50 years

Plant and machinery

5-15 years

Fixtures and equipment

2-10 years

Intangible assets, including software (note 13)

5-15 years

Resource extraction assets are held at historic cost and depleted over the shorter of the life of the site or right to use period. Site development costs incurred in order to commence extraction are capitalised as resource extraction assets.

An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss.

Plant &

Fixtures &

Resource

Leased

Land

Buildings

Machinery

Equipment

Extraction

Assets

Total

2020

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

Carrying value at 1 July 2019

181

204

1,074

162

95

38

1,754

Additions

8

10

131

33

12

194

Disposals

(1)

(11)

(12)

Depreciation expense

(10)

(111)

(28)

(12)

(161)

Impairment

(12)

(57)

(6)

(75)

Transfer of assets to inventory

(5)

(5)

Transfer of assets to right of use

(38)

(38)

Assets held for sale

(50)

(37)

(25)

(6)

(118)

Currency translation

3

3

8

2

16

Carrying value at 30 June 2020

136

158

1,009

157

95

1,555

Represented by:

Cost

137

283

2,214

412

125

3,171

Accumulated depreciation and impairment

(1)

(125)

(1,205)

(255)

(30)

(1,616)

136

158

1,009

157

95

1,555

Fletcher Building Limited Annual Report 2020

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Notes to the Financial Statements 2020 (Continued)

Plant &

Fixtures &

Resource

Leased

Land

Buildings

Machinery

Equipment

Extraction

Assets

Total

2019

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

Carrying value at 1 July 2018

255

320

1,368

171

77

40

2,231

Additions

8

11

238

33

15

305

Acquisitions

4

14

18

Disposals

(6)

(19)

(25)

Depreciation expense

(12)

(125)

(30)

(11)

(2)

(180)

Transfer of assets to inventory

(19)

(3)

(22)

Disposal of business

(51)

(88)

(397)

(9)

(545)

Currency translation

(6)

(5)

(14)

(3)

(28)

Carrying value at 30 June 2019

181

204

1,074

162

95

38

1,754

Represented by:

Cost

182

330

2,280

422

132

43

3,389

Accumulated depreciation and impairment

(1)

(126)

(1,206)

(260)

(37)

(5)

(1,635)

181

204

1,074

162

95

38

1,754

As at 30 June 2020 property, plant and equipment includes $133 million of assets under construction that are not depreciated until they are commissioned and brought into use (2019: $145 million).

13. INTANGIBLE ASSETS

Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangibles are carried at cost less any accumulated amortisation and accumulated impairment losses.

The Group's Intangible assets with indefinite useful lives are not amortised but are tested for impairment annually, either individually or at the cash-generating unit level. Intangible assets with a definite life are amortised on a straight-line basis.

Goodwill is stated at cost, less any impairment losses. Goodwill is allocated to cash-generating units (CGUs) and is not amortised but is tested annually for impairment, and when an indication of impairment exists. Brands for which all relevant factors indicate that there is no limit to the foreseeable net cash flows are considered to have an indefinite useful life and are held at cost and are not amortised but are subject to an annual impairment test.

For the purposes of considering whether there has been an impairment, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. When the book value of a group of assets exceeds the recoverable amount, an impairment loss arises and is recognised in earnings immediately.

Assessing the carrying value of goodwill and indefinite life brands requires management to estimate future cash flows to be generated by the related cash-generating unit.The key assumptions used in the value in use models include the expected rate of growth of revenues and earnings, the terminal growth rate and the appropriate discount rate to apply.

Other

Goodwill

Brands

Intangibles

Total

2020

NZ$M

NZ$M

NZ$M

NZ$M

Carrying value at the beginning of the year

711

278

140

1,129

Acquired during the year

39

39

Impairments in the income statement (Note 2.1)

(10)

(1)

(11)

(22)

Amortisation expense

(24)

(24)

Currency translation

7

4

11

708

281

144

1,133

Represented by:

Cost

708

360

333

1,401

Accumulated impairment / amortisation

(79)

(189)

(268)

Carrying value at the end of the year

708

281

144

1,133

86 Fletcher Building Limited Annual Report 2020

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Other

Goodwill

Brands

Intangibles

Total

2019

NZ$M

NZ$M

NZ$M

NZ$M

Carrying value at the beginning of the year

1,085

451

160

1,696

Acquired during the year

7

43

50

Disposed of during the year

Impairments in the income statement (Note 2.1)

(3)

(3)

Amortisation expense

(19)

(19)

Disposal of business

(369)

(165)

(37)

(571)

Currency translation

(12)

(8)

(4)

(24)

711

278

140

1,129

Represented by:

Cost

711

357

294

1,362

Accumulated impairment/amortisation

(79)

(154)

(233)

Carrying value at the end of the year

711

278

140

1,129

As at 30 June 2020 other intangible assets include $26 million of assets being developed (2019: $39 million).

2020

2019

Goodwill

Brands

Goodwill

Brands

NZ$M

NZ$M

NZ$M

NZ$M

Significant intangible balances within cash generating units (CGUs)

Laminex Australia

154

122

154

119

Higgins New Zealand

114

19

114

19

Iplex New Zealand

105

7

105

7

Stramit

61

41

66

41

Tradelink

61

51

60

50

Other

213

41

212

42

708

281

711

278

The goodwill allocated to significant CGUs accounts for 70% (2019: 70%) of the total carrying value of goodwill. The remaining 'other' CGUs,

which comprise 14 (2019: 14) in total, are each less than 7% of total carrying value. The significant brand assets account for 85% (2019: 85%)

of the total carrying value of brands. The remaining 'other' brand assets are each less than 5% of total carrying value (2019: 5%).

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Notes to the Financial Statements 2020 (Continued)

Funding and Financial Risk Management

This section includes details on the Group's funding and outlines the market, credit and liquidity risks that the Group is exposed to and how these risks are managed, including the use of derivative financial instruments.

Capital risk management

The Group's objectives when managing capital are to provide returns to shareholders and benefits for other stakeholders and to maintain an optimal capital structure that safeguards the Group's ability to continue as a going concern. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce net debt.

The Group monitors its capital requirements using various measures that consider debt facility covenants. A key measure is a through-the- cycle net debt to EBITDA ratio (leverage). Net debt represents the value of the Group's drawn borrowings adjusted for debt hedging activities and available cash funding. During the year, the target leverage ratio range was adjusted to reflect the impacts associated with the inclusion of debt hedging activities and the adoption of NZ IFRS 16. The adjusted target leverage ratio range is 1.0 to 2.0 times (2019: 1.5 to 2.5 times). It is intended that the Group will not be materially outside the target leverage ratio range on a long-term basis.

On the 10 June 2020, the Group agreed amendments to its syndicate and private placement borrowing arrangements which will enable the Group to rely on more favourable terms for covenant testing for the period June 2020 to December 2021 (inclusive). Under the agreement, the Group may elect to rely on a level of Total Interest Cover ratio of 1.5 times (normally 2.0 times) and a level of Senior Interest Cover ratio of 2.25 times (normally 3.0 times). The Group has agreed that, should it need to rely on the more favourable covenant levels, it will not pay a dividend until it returns to compliance with, and agrees to be tested by, normal covenant levels.

The Group was in compliance with all debt facility financial covenants as at the balance date.

The Group has not sought and does not hold a credit rating from an accredited rating agency.

14. BORROWINGS

The Group borrows in the form of private placements, bank loans, capital notes and other financial instruments. Funding costs associated with the Group's borrowings are shown in note 15.

Borrowings are initially recognised at fair value net of attributable transaction costs, and are subsequently measured at amortised cost using the effective interest rate method. Any borrowings that have been designated as hedged items (USD and any other foreign currency borrowings) are carried at amortised cost plus a fair value adjustment under hedge accounting requirements. Borrowings denominated in foreign currencies are retranslated to the functional currency at each reporting date.

Economic debt represents the face value of drawn borrowings adjusted for foreign currency movements hedged with derivative instruments. The Group uses cross currency interest rate swaps, interest rate swaps and foreign forward exchange contracts to manage its exposure to interest rates and borrowings sourced in currencies different from that of the borrowing entity's reporting currency. Details of debt hedging activities and instruments used are included in note 16.

Reconciliation of liabilities arising from financing activities

The table below details changes in the Group's net debt arising from financing activities, including both cash and non-cash changes.

Other non-cash

movements

Reclassified

(including

2019

Currency

to lease

hedge

2020

NZ$M

Cash Flows

translation

liabilities

accounting)

NZ$M

Private placements

886

(8)

35

88

1,001

Bank loans

258

142

400

Capital notes

485

(120)

365

Other loans

68

2

(2)

(44)

1

25

Carrying value of borrowings

1,697

16

33

(44)

89

1,791

(as per balance sheet)

Less: value of derivatives used to

manage changes in hedged risks on

(107)

(4)

(22)

(57)

(190)

debt instruments

Economic debt

1,590

12

11

(44)

32

1,601

Less: Cash and cash equivalents

(1,372)

267

1

(1,104)

Net debt

218

279

12

(44)

32

497

88 Fletcher Building Limited Annual Report 2020

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Other non-cash

movements

Reclassified

(including

2018

Currency

to lease

hedge

2019

NZ$M

Cash Flows

translation

liabilities

accounting)

NZ$M

Private placements

1,181

(334)

6

33

886

Bank loans

97

165

(4)

258

Capital notes

566

(81)

485

Other loans

94

(30)

3

1

68

Carrying value of borrowings

1,938

(280)

5

34

1,697

(as per balance sheet)

Less: value of derivatives used to

manage changes in hedged risks on

(61)

12

(25)

(33)

(107)

debt instruments

Economic debt

1,877

(268)

(20)

1

1,590

Less: Cash and cash equivalents

(665)

(712)

5

(1,372)

Net debt

1,212

(980)

(15)

1

218

Carrying value of borrowings included within the balance sheet as follows:

2020

2019

NZ$M

NZ$M

Current borrowings

581

602

Non-current borrowings

1,210

1,095

Total borrowings

1,791

1,697

Less: Cash and cash equivalents

(1,104)

(1,372)

Net debt (as per balance sheet)

687

325

At reporting date, the Group had the following funding facilities:

Utilised facilities

1,601

1,590

Unutilised syndicate bank loan facilities

525

667

Total facilities

2,126

2,257

Private placements

Private placements comprise loans of AUD99 million, USD446 million, CAD15 million, EUR41 million and GBP10 million with original maturities between 2022 and 2028.

On 29 June 2020, the Group provided notice to private placement noteholders to prepay AUD99 million and USD200 million of notes on issue with original maturities of 2022 and 2024. As a result, $470 million of private placement notes are classified as current at 30 June 2020. The Group recognised a significant item in the income statement related to the USPP make whole component of the prepayment (including the impact of debt hedging activities) as governed by the private placement borrowing agreement.

At 30 June 2019, as a consequence of the Formica divestment in the prior year, the Group was required to make a mandatory prepayment offer on a rateable portion (33%) on all senior debt including private placement noteholders. As a result, $292 million of private placements were classified as current at 30 June 2019. In July 2019, $8 million of private placement notes with original maturities between 2026 and 2028 were prepaid.

Capital notes

At 30 June 2020 the Group had issued $365 million capital notes to retail investors (2019: $385 million) and had fully repaid unlisted capital notes issued to institutional investors. The capital notes do not carry voting rights and do not participate in any change in value of the issued shares of Fletcher Building Limited.

Listed capital notes

Listed capital notes are long-term fixed rate unsecured subordinated debt instruments that are traded on the NZDX. On election date, holders may choose either to keep their capital notes on new terms or convert the principal amount and any interest into shares of Fletcher Building Limited, at approximately 98 per cent of the current market price. If the principal amount of these notes held at 30 June 2020 were to be converted to shares, 101 million (2019: 81 million) Fletcher Building Limited shares would be issued at the share price as at 30 June 2020, of $3.70 (2019: $4.85).

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Notes to the Financial Statements 2020 (Continued)

Instead of issuing shares to holders who choose to convert, Fletcher Building may, at its option, purchase or redeem the capital notes for cash at the principal amount plus any accrued interest.

As at 30 June 2020, the Group held $135 million (2019: $115 million) of its own capital notes.

Bank Loans

At 30 June 2020 the Group had a $925 million syndicated revolving credit facility on an unsecured, negative pledge and borrowing covenant basis. The funds under this facility can be borrowed in United States, Australian and New Zealand dollars.

On the 22 July 2019 , the Group refinanced its $925 million syndicated revolving credit facility which resulted in two tranches, $525 million maturing in July 2022 (Tranche 1), $400 million maturing in July 2024 (Tranche 2). The refinanced syndicated revolving facility is with ANZ Bank New Zealand Limited, Bank of China (New Zealand) Limited, Bank of New Zealand, China Construction Bank (New Zealand) Limited, Citibank N.A., MUFG Bank Limited, The Hongkong and Shanghai Banking Corporation Limited and Westpac New Zealand Limited.

Other Loans

At 30 June 2020 the Group had unsecured loans of $25 million (2019: $24 million) some of which were subject to the negative pledge. Other loans include bank overdrafts, short-term loans, working capital facilities and amortising loans. As part of the adoption of NZ IFRS 16,

the Group reclassified $44 million of other loans to lease liabilities, refer to note 27.

Negative pledge

The Group borrows certain funds based on a negative pledge arrangement. The negative pledge includes a cross guarantee between a number of wholly owned subsidiaries and ensures that external senior indebtedness ranks equally in all respects and includes the covenant that security can be given only in very limited circumstances. At 30 June 2020, the Group had debt subject to the negative pledge of $1,230 million (2019: $1,062 million).

The impact of debt hedging activities on borrowings is represented in the table below:

2020

NZ$M

Underlying borrowing exposure

Economic debt exposure

Impact of

Currency of borrowings

Fixed rate

Floating rate

hedging

Fixed rate

Floating rate

% Fixed

New Zealand Dollar

365

405

246

415

601

41%

Australian Dollar

118

6

447

317

254

56%

British Pound

20

(20)

0%

Canadian Dollar

17

(17)

0%

Euro

73

(73)

0%

United States Dollar

773

(773)

0%

Other

14

14

0%

Total

1,366

425

(190)

732

869

46%

2019

NZ$M

Underlying borrowing exposure

Economic debt exposure

Impact of

Currency of borrowings

Fixed rate

Floating rate

hedging

Fixed rate

Floating rate

% Fixed

New Zealand Dollar

385

269

237

535

356

60%

Australian Dollar

104

100

437

310

331

48%

British Pound

20

(20)

0%

Canadian Dollar

18

(18)

0%

Euro

70

(70)

0%

United States Dollar

717

(673)

44

100%

Other

14

14

0%

Total

1,314

383

(107)

889

701

56%

90 Fletcher Building Limited Annual Report 2020

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Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in meeting its financial commitments as they fall due. The Group manages its liquidity risk by maintaining a target level of undrawn committed credit facilities and a spread of the maturity dates of the Group's debt facilities that it reviews on an ongoing basis.

The following maturity analysis table sets out the remaining contractual undiscounted cash flows, including estimated interest payments for non-derivative financial liabilities and derivative financial instruments. Creditors and accruals are excluded from this analysis as they are not part of the Group's assessment of liquidity risk because these are offset by debtors with similar payment terms.

2020

Contractual

cash flows

Up to 1 Year

1-2 Years

2-5 Years

Over 5 Years

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

Bank loans

400

400

Capital notes

365

100

100

165

Private placements(1)

1,001

470

531

Other loans

25

11

14

Borrowings - Principal cash flows

1,791

581

100

579

531

Gross settled derivatives - to pay

906

447

105

354

Gross settled derivatives - to receive

(1,096)

(566)

(109)

(421)

Debt derivatives financial instruments - Principal

(190)

(119)

(4)

(67)

cash flows

Total principal cash flows

1,601

462

100

575

464

Contractual interest cash flows

175

49

37

60

29

Lease liability

2,317

244

226

564

1,283

Total lease cash flow

2,317

244

226

564

1,283

Total contractual cash flows

4,093

755

363

1,199

1,776

  1. On 29 June 2020, the Group provided notice to private placement noteholders to prepay AUD99 million and USD200 million of notes on issue. As a result, $470 million of private placement notes are classified as current.

2019

Contractual

cash flows

Up to 1 Year

1-2 Years

2-5 Years

Over 5 Years

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

Bank loans

258

85

173

Capital notes

485

200

100

185

Private placements

884

292

269

323

Other loans

68

25

1

1

41

Borrowings - Principal cash flows

1,695

602

274

455

364

Gross settled derivatives - to pay

907

337

208

362

Gross settled derivatives - to receive

(1,012)

(338)

(299)

(375)

Debt derivatives financial instruments - Principal

(105)

(1)

(91)

(13)

cash flows

Total principal cash flows

1,590

601

274

364

351

Contractual interest cash flows

323

72

59

111

81

Total contractual cash flows

1,913

673

333

475

432

  1. At 30 June 2019, bank loans of $85 million and private placements of $292 million were classified as current as the Group was required to make a mandatory disposition prepayment offer on a rateable portion (33%) on all senior debt as a consequence of the Formica divestment.

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Notes to the Financial Statements 2020 (Continued)

15. FUNDING COSTS/(INCOME)

Interest expense and income is recognised on an accrual basis in the profit or loss using the effective interest method.

Funding costs also include the changes in fair value relating to derivatives used to manage interest rate risk, and the associated changes in fair value of the borrowings designated in a hedge relationship attributable to the hedged risk.

2020

2019

NZ$M

NZ$M

Interest income

(9)

(4)

Interest on borrowings and derivatives

65

106

Interest expense other

5

4

Net Interest expense

61

106

Changes in fair value relating to:

Borrowings designated in a hedging relationship

(50)

33

Derivatives designated in a hedging relationship

(50)

(33)

Total changes in fair value

Bank fees, registry and other expenses

10

5

Line fees

7

9

Other (gains)/losses

2

(4)

Funding costs

80

116

Included in interest on borrowings is the net settlement of the Group's interest derivatives. This consists of $39 million of interest income and $35 million of interest expense (2019: $44 million interest income; $43 million interest expense). Bank fees, registry and other expenses include one-off costs in relation to the amendment waiver fees paid during the year. Other (gains)/losses includes credit valuation adjustment (CVA) / debit value adjustment (DVA) on derivatives.

Interest rate risk

At 30 June 2020, 46% of the Group's debt was subject to a fixed interest rate (2019: 56% fixed).

(i) Interest rate repricing

The following tables set out the interest rate repricing profile of interest bearing financial liabilities assuming floating rate facilities are utilised to maintain debt levels.

2020

2021

2022

2023

2024

2025

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

NZ$M

Fixed financial liabilties

732

526

315

299

80

Floating financial liabilities

869

1,075

1,286

1,302

1,521

1,601

Economic debt

1,601

1,601

1,601

1,601

1,601

1,601

% Fixed

46%

33%

20%

19%

5%

0%

The Group's overall weighted average interest rate (based on year end borrowings) excluding fees is 3.67% (June 2019: 5.03%). The Group's overall weighted average interest rate (based on year end borrowings) excluding private placement borrowings to be prepaid and fees is 3.30%.

(ii) Interest rate risk

It is estimated a 100 basis point increase in interest rates would result in an increase in the Group's interest costs by approximately $8.7 million pre-tax on the Group's debt portfolio exposed to floating rates at balance date (2019: $7.0 million) assuming that all other variables remain constant.

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16. FINANCIAL RISK MANAGEMENT

Exposures to credit, liquidity, currency, interest rate and commodity price risks arise in the normal course of the Group's business. The principles under which these risks are managed are set out in policy documents approved by the Board. The policy documents identify the risks and set out the Group's objectives, policies and processes to measure, manage and report the risks. The policies are reviewed periodically to reflect changes in financial markets and the Group's businesses. Risk management is carried out in conjunction with the Group's central treasury function, which ensures compliance with the risk management policies and procedures.

Derivative financial instruments, including foreign forward exchange contracts, interest rate swaps, foreign currency swaps, cross currency interest rate swaps, options, forward rate agreements and commodity price swaps are utilised to reduce exposure to market risks. All the Group's derivative financial instruments are held to hedge risk on underlying assets, liabilities and forecast and committed trading and funding transactions. The Group policy specifically prohibits the use of derivative financial instruments for trading or speculative purposes.

The table below summarises the key financial market risks to the Group and how these risk are managed:

Financial risk

Description

Management of risk

Foreign currency trade

Arises on the conversion of a business unit's

It is Group policy that no currency exchange risk may be

transaction risk

foreign currency revenue and expenditure to

entered into or allowed to remain outstanding should it arise

(note 16.1(i))

its functional currency, such that a material

on committed transactions. The Group uses foreign currency

loss or a gain may be incurred. This covers

forward contracts and foreign currency options to manage the

imports, exports, capital expenditure, and

risk on firm commitments and recognised material trade related

foreign currency bank accounts balances that

exposures. Majority of these transactions have maturities of less

are not in a business unit's functional currency.

than one year from the reporting date.

Foreign currency balance

Arises due to the translation of the Group's

It is the Group's policy to hedge this foreign currency translation

sheet translation risk

foreign denominated assets and liabilities,

risk by borrowing in the currency of the asset in proportion to the

(note 16.1(i))

overseas operations and subsidiaries to the

Group's long-term debt to debt plus equity ratio as approved by

Group's functional currency of NZD, such that

the Board.

the Group's reporting of financial ratios would

Where the underlying debt in any currency does not equate to

be materially affected.

the required proportion of total debt, debt derivatives, such as

foreign exchange forwards, swaps and cross currency interest

rate swaps are entered into. These are designated as net

investment hedges where the borrowings or contracts are in a

different currency to that of the business in which they

are recognised.

To manage the net exposure to foreign currency borrowings, the

Group enters into cross currency interest rate swaps (CCIRS).

CCIRS are used to manage the combined foreign exchange risk

and interest rate risk as they swap fixed rate foreign currency

borrowings and interest payments into equivalent New Zealand

dollar-denominated or Australian dollar-denominated amounts of

principal with floating interest rates.

Interest rate risk

The risk that the value of borrowings or cash

The Group manages the fixed interest rate component of its

(note 14 & note 16.2)

flows associated with the borrowings will

borrowings by entering into CCIRS, interest rate swaps, forward

change due to changes in market rates.

rate agreements and options. It aims to maintain fixed interest rate

borrowings between certain ranges over specific time periods.

Commodity price risk

Arises from committed or highly probable

trade and capital expenditure transactions

that are linked to traded commodities.

The Group manages its commodity price risks through negotiated supply contracts and, for certain commodities, by using commodity price swaps and options. The Group manages its commodity price risk depending on the underlying exposures, economic conditions and access to active derivatives markets. Cash flow hedge accounting is applied to commodity derivative contracts. In the current year, the Group used commodity price swaps to hedge electricity prices and diesel prices. The average hedged electricity price for 2020 was NZ$/MWh 118 (2019: NZ$/ MWh 78). The average hedged diesel price for 2020 was NZ$/ litre 0.73 (2019: N/A).

A 10% increase in the New Zealand electricity spot price or the New Zealand diesel spot price at balance sheet date would not have a material impact on the Group's earnings or equity position.

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Notes to the Financial Statements 2020 (Continued)

Disclosure about the credit risk associated with financial instruments and fair value measurement of financial instruments is included in note 16.3 and 16.4.

Derivative financial instruments and hedge accounting

Derivatives are initially recorded at fair value and are then revalued to fair value at balance date with the resulting gain or loss on remeasurement recognised in the income statement unless the derivative is designated into an effective hedge relationship as a hedging instrument, in which case the timing of recognition in the income statement depends on the nature of the designated hedge relationship. For a derivative instrument to be classified and accounted for as a hedge, it must be highly correlated with, and effective as a hedge

of the underlying risk being managed.This relationship is documented from inception of the hedge.The fair values of derivative financial instruments are determined by applying quoted market prices, where available, or by using inputs that are observable for the asset

or liability.

  • The Group may designate derivatives as:
  • Fair value hedges (where the derivative is used to manage the variability in the fair value of recognised assets and liabilities);
  • Cash flow hedges (where the derivative is used to manage the variability in cash flows relating to recognised liabilities or forecast transactions); or
  • Net investment hedges (where borrowings or derivatives are used to manage the risk of fluctuation in the translated value of its foreign operations).

The Group holds derivative instruments until expiry except where the underlying rationale from a risk management point of view changes, such as when the underlying asset or liability that the instrument hedges no longer exists, in which case early termination occurs.

Fair value hedges

Where a derivative financial instrument is designated as a hedge of a recognised asset or liability, or of a firm commitment, any gain or loss on the derivative (hedging instrument) is recognised directly in the income statement, together with any changes in the fair value of the hedged risk (hedged item).

Cash flow hedges

Where a derivative financial instrument is designated as a hedge of the variability in cash flows of assets or liabilities, or of a highly probable forecasted transaction, the effective part of any gain or loss is recognised directly in the cash flow hedge reserve within equity and the ineffective part is recognised immediately in the income statement. The effective portion is reclassified to the income statement when the underlying cash flows affect the income statement.

Net investment hedges

Where the derivative financial instruments are designated as a hedge of a net investment in a foreign operation, the derivative financial instruments are accounted for on the same basis as cash flow hedges through the foreign currency translation reserve (FCTR) within equity.

Cost of hedging

The forward elements of foreign exchange forwards and swaps are excluded from designation as the hedging instrument and the foreign currency basis spreads of CCIRS are separately accounted for and recognised in other comprehensive income as cost of hedging.

Derivatives that do not qualify for hedge accounting

Where a derivative financial instrument does not qualify for hedge accounting, or where hedge accounting has not been elected, any gain or loss is recognised directly in the income statement.

16.1 Foreign currency risk

(i) Currency transaction risk

Cash flow hedge accounting is applied to forecast transactions and short-termintra-Group cash funding. The Group designates the spot element of foreign exchange forwards and swaps to hedge its currency risk and applies a hedge ratio of 1:1. The Group's policy is for the critical terms of the foreign exchange forwards and swaps to align with the hedged item. The main currencies hedged are the Australian dollar, the United States dollar, the Japanese yen, the Euro and the British pound. The gross value of these foreign exchange derivatives at 30 June 2020 was $570 million (2019: $448 million).

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(ii) Currency translation risk

The effect of the Group's hedge accounting policy in managing foreign exchange risk related to the Group's net investments in foreign operations is presented in the table below:

2020

NZ$M

Carrying amount

Notional Amount

Hedge effectiveness

Net investment

hedge

Change in

gain/(loss)

value used for

recognised

Amount of

Foreign

calculating

in other

Hedged investments

investment

currency

Foreign currency

hedge

comprehensive

and hedging instruments used

hedged

borrowings

forwards

ineffectiveness

Income

Australia Dollar-denominated

Maturity of forward contracts: 0-4 months

235

(235)

2

(2)

235

(235)

2

(2)

2019

NZ$M

Carrying amount

Notional Amount

Hedge effectiveness

Net investment

hedge

Change in

gain/(loss)

value used for

recognised

Amount of

Foreign

calculating

in other

Hedged investments

investment

currency

Foreign currency

hedge

comprehensive

and hedging instruments used

hedged

borrowings

forwards

ineffectiveness

Income

Australia Dollar-denominated

Maturity of forward contracts: 0-4 months

230

(230)

(2)

2

230

(230)

(2)

2

It is estimated a 10% weakening of the New Zealand dollar against the major foreign currencies the Group is exposed to on the net assets of its foreign operations would result in an increase to equity of approximately $138 million (2019: $135 million) and no material impact on earnings.

The Group applies hedge accounting to foreign currency denominated borrowings that are managed by CCIRS. The hedge ratio applied is 1:1. The hedge relationship may be designated into separate cash flow hedges and fair value hedges to manage the different components of foreign currency and interest rate risk:

  • fair value hedge relationship where CCIRS are used to manage the interest rate and foreign.
  • currency risk in relation to foreign currency denominated borrowings with fixed interest rates.
  • cash flow hedge relationship where CCIRS are used to manage the variability in cash flows arising from interest rate movements on floating interest rate payments and foreign exchange movements on payments of principal and interest.

The Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the currency, reference interest rates, tenors, repricing dates and maturities and the notional amounts. The Group assesses whether the derivative designated in each hedging relationship is expected to be effective in offsetting changes in the fair value of the hedged item using the hypothetical derivative method.

In these hedging relationships, the main sources of ineffectiveness are:

  • changes in counterparty credit risk and cross currency basis spreads which are not reflected in the change in the fair value of the hedged item; and
  • differences in repricing dates between the cross currency interest rate swaps and the borrowings.

Fletcher Building Limited Annual Report 2020

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Notes to the Financial Statements 2020 (Continued)

The effect of the Group's hedge accounting policies in managing both its foreign exchange risk and interest rate risk related to borrowings denominated in foreign currency is presented in the table below.

2020

NZ$M

Hedging

Hedging

Change in

(gain) or loss

(gain)

Fair value

Nominal

value used for

recognised

or loss

hedge

amount of

Accumulated

calculating

in other

reclassified

(income

the hedging

Carrying

cost of

hedge

comprehensive

to income

statement)

Hedge type

instrument

amount

hedging

ineffectiveness

income

statement

(gain)/loss

Cash flow hedging and

fair value hedging

Cross currency interest

rate swaps

USD denominated

383

63

(8)

43

(4)

(39)

borrowings

Maturity: 73-97 months

Weighted average

interest rate: floating

Weighted average NZD/

USD exchange rate:

0.7055

USD denominated

312

121

(1)

10

(7)*

(11)

borrowings

Maturity: 18-42 months

Weighted average

interest rate: floating

Weighted average AUD/

USD exchange rate:

1.0082

CAD denominated

17

borrowings

Maturity: 25 months

Weighted average

interest rate: floating

Weighted average NZD/

CAD exchange rate:

0.8795

EUR denominated

73

3

(1)

(1)

borrowings

Maturity: 25 months

Weighted average

interest rate: floating

Weighted average NZD/

EUR exchange rate:

0.5994

GBP denominated

20

1

borrowings

Maturity: 25 months

Weighted average

interest rate: floating

Weighted average NZD/

GBP exchange rate:

0.5419

805

188

(10)

52

(4)

(7)

(50)

*As a consequence of the prepayment notices issued to private placement noteholders on 29 June 2020, a portion of the related cross currency interest swap designated in a cash flow hedge relationship was ineffective and subsequently reclassified to the income statement and recognised net of the make whole significant item.

96 Fletcher Building Limited Annual Report 2020

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2019

NZ$M

Change in

Hedging (gain) or

Hedging (gain)

Nominal

value used for

loss recognised

or loss

Fair value

amount of

Accumulated

calculating

in other

reclassified

hedge (income

the hedging

Carrying

cost of

hedge

comprehensive

to income

statement)

Hedge type

instrument

amount

hedging

ineffectiveness

income

statement

(gain)/loss

Cash flow hedging

and fair value

hedging

Cross currency

374

6

(9)

35

1

39

interest rate swaps

USD denominated

borrowings

Maturity: 85-109

months

Weighted average

interest rate: floating

Weighted average

299

102

(2)

26

15

NZD/USD exchange

rate: 0.7055

USD denominated

borrowings

Maturity: 30-54

months

Weighted average

interest rate: floating

Weighted average

AUD/USD exchange

rate: 1.0082

673

108

(11)

61

1

54

16.2 Interest rate swaps

The Group applies hedge accounting to the borrowings and the associated interest rate swaps, for movements in benchmark market interest rates. Hedge accounting is applied on these instruments for floating-to-fixed instruments as cash flow hedges or for fixed-to-floating instruments as fair value hedges. The Group applies a hedge ratio of 1:1.

The Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the reference interest rates, tenors, repricing dates and maturities and the notional amounts.

The Group assesses whether the derivative designated in each hedging relationship is expected to be effective in offsetting changes in the fair value of the hedged item using the hypothetical derivative method.

In these hedging relationships, the main sources of ineffectiveness are:

  • the effect of the counterparty and the Group's own credit risk on the fair value of the interest rate swaps which is not reflected in the change in the fair value of the hedged item; and
  • differences in repricing dates between the interest rate swaps and the borrowings.

Fletcher Building Limited Annual Report 2020

97

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Notes to the Financial Statements 2020 (Continued)

2020

NZ$M

Hedging

Carrying

Change in

(gain) or loss

Hedging

Nominal

amount -

value used for

recognised

(gain) or loss

amount of

derivative

calculating

in other

recognised

the hedging

assets/

hedge

comprehensive

in income

Hedge type

instrument

(liabilities)

ineffectiveness

income

statement

Cash flow hedging

Interest rate swaps - NZD borrowings

50

(2)

Maturity: 21 months

Weighted average interest rate: 3.10%

Interest rate swaps - AUD borrowings

211

(10)

(4)

4

Maturity: 18-42 months

Weighted average interest rate: 1.87%

261

(12)

(4)

4

2019

NZ$M

Hedging

Carrying

Change in

(gain) or loss

Hedging

Nominal

amount -

value used for

recognised

(gain) or loss

amount of

derivative

calculating

in other

recognised

the hedging

assets/

hedge

comprehensive

in income

Hedge type

instrument

(liabilities)

ineffectiveness

income

statement

Cash flow hedging

Interest rate swaps - NZD borrowings

150

(2)

(1)

1

Maturity: 5-33 months

Weighted average interest rate: 2.48%

Interest rate swaps - AUD borrowings

206

(6)

(6)

6

Maturity: 32-56 months

Weighted average interest rate: 1.87%

356

(8)

(7)

7

There was no hedge ineffectiveness recognised in profit or loss during the year.

16.3 Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. To the extent the Group has a receivable from another party, there is a credit risk in the event of non-performance by that counterparty and arises principally from receivables from customers, derivative financial instruments and the investment of cash.

(i) Impairment of financial assets

The Group has a credit policy in place under which customers are individually analysed for credit worthiness and assigned a purchase limit. If no external ratings are available, the Group reviews the customer's financial statements, trade references, bankers' references and/or credit agencies' reports to assess credit worthiness. These limits are reviewed on a regular basis. Owing to the Group's industry spread at balance date, there were no significant concentrations of credit risks in respect of trade receivables. Refer to note 8 for debtor balances and ageing analysis.

The Group has two types of financial assets that are subject to the expected credit loss model:

  • Debtors (including trade debtors, contract debtors and contract retentions) (note 8)
  • Construction contract assets (note 3)

While cash and cash equivalents are also subject to the impairment requirements of NZ IFRS 9, the identified impairment loss was immaterial.

98 Fletcher Building Limited Annual Report 2020

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Fletcher Building Ltd. published this content on 18 August 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 18 August 2020 20:59:00 UTC