Fletcher Building first-half profit jumps 41%; outlook 'very strong'

Wednesday, 16 February 2022

Fletcher Building reported an improvement in its first-half profit.

Fletcher Building first-half profit rose 41 per cent even as the country’s biggest construction firm was hurt by Covid-19 disruptions.

Net profit rose to $171 million in the six months to the end of December, from $121m in the same period the previous year, the company said. The latest profit included a one-time charge of $43m, compared with a charge of $86m a year earlier. Revenue rose 2 per cent to $4.1 billion.

Chief executive Ross Taylor has trimmed down the business to make it more profitable since he took over in late 2017 after it lost millions on major construction projects. He is at the helm at a time when the construction industry is running hot, which is putting pressure on the availability of building materials and labour, already in short supply due to disruptions caused by the Covid-19 pandemic.

“With improved operational performance and cost disciplines now embedded across the business, we were able to deliver a strong (first-half) performance,” Taylor said. “This was despite the first quarter being heavily impacted by the up to five week-long Covid-19 stringent lockdown in New Zealand and local lockdowns in Australia.”

**READ MORE:

Shipping gridlock, empty shelves, a depleted workforce, record building permits and the rise of house prices have shaped the building industry. (First published December 14, 2021)

* Fletcher Building says strong trading, high vaccination rates, should offset Covid impacts

* Fletcher posts $305m profit, sees 'stronger for longer' building activity

* Fletcher Building lifts first-half profit 48%; pays dividend

Fletcher Building chief executive Ross Taylor says the company is in a “very strong position” as its markets look robust.

Covid-19 lockdowns cost the company about $105m in pre-tax profit in the first quarter.

Fletcher Building shares closed up 6.7 per cent to $6.70, making them the biggest gainer on the NZX. The shares are up 8.3 per cent over the past year.

Taylor said the second half of the year is expected to be “very solid”.

Fletcher expects to report full-year pre-tax profit before one-time items of about $750m. That’s up from $669m last year. It excludes the potential impact of the Covid-19 Omicron variant spreading through New Zealand, which could cost it between $25m and $50m as productivity is impacted by people and supply absences.

Fletcher Building expects construction to remain elevated as a backlog of orders and consents worked through the industry.

The company’s strong pricing disciplines are expected to cover any inflation increases, he said. Prices for building products were up about 5 to 10 per cent, reflecting increased costs, and would probably rise by a similar amount over the next 12 months before easing, he said.

Fletcher gets about 47 per cent of its New Zealand revenue from the residential market and Taylor said building consent levels may have peaked this year at an annual level of about 50,000 as interest rate increases and lending restrictions start to bite.

Construction would likely remain elevated as a backlog of orders and consents worked through the industry. Fletcher estimated New Zealand had capacity to build between 35,000 to 40,000 homes a year.

“In New Zealand, residential consents have been running ahead of industry capacity for some time,” he said.

“There has been a build-up or backlog of work to do that the industry simply hasn’t had the capacity to get through. We expect the impact of this backdrop to materially extend the high levels of work to get through across the industry.

“This represents a very strong outlook for the industry and Fletcher Building.”

There weren’t enough tradespeople, the supply chain was difficult, and building product manufacturing couldn’t keep up, he said.

Fletcher needed more truck drivers and skilled construction workers, which was slowing things down, but that should improve as the border opened up, he said.

“It's going to stay difficult for probably the next 12 months and then start to ease.”

Fletcher’s home builder customers were generally now placing orders for their customers 12 to 18 months in advance and the infrastructure sector also continued to have a strong growth outlook on the back of committed and planned government projects, he said.

“Fletcher Building is in a very strong position; our markets look robust, we expect to not see the significant impacts of lockdowns to reoccur,” Taylor said.

Fletcher is the country’s largest integrated manufacturer and distributor of building supplies.

To help alleviate supply shortages, the company had changed its manufacturing processes to reduce switching between products which improved productivity but meant longer lead times, he said.

The company is investing to significantly increase its manufacturing capacity across plasterboard, insulation and wood fibre-based products, expanding its PlaceMakers brand in regionally important areas, and driving product and market growth with its low-carbon cement and concrete.

In its residential and development businesses, Fletcher is growing its annual sales volumes by about 500 houses a year through its larger core housing offer, by scaling its apartment business and through its new Vivid Living retirement offer.

“As we look beyond this financial year, the group is very well positioned to drive growth,” Taylor said.

Fletcher’s pre-tax profit margin before one-time items lifted to 8.2 per cent in the first half, from 8.1 per cent a year earlier. In the second quarter the margin was 11.8 per cent. In the second half, it expects a margin of 9.5 per cent and said it is on track to further improve its margin to 10 per cent in its 2023 financial year.

The company will pay a first-half dividend of 18 cents per share, up from 12 cents a year earlier.