Fletcher Building lowers annual profit forecast, citing market slowdown, wet weather 'misery'

Wednesday, 21 June 2023

Fletcher Building pulled back its profit forecast to the bottom of its range, citing the impact of wet weather and a slowing housing market.

The building supplies and construction company lowered its expectation for operating profit in the year to June 30 to about $800 million. That’s down from its February forecast of $800m to $855m, and an earlier estimate for at least $855m. The forecast excludes significant one-time items.

The latest profit forecast would still be ahead of the $756m operating profit the company reported the previous year.

Fletcher had already paused some of its residential developments as the housing market slowed after two years of strong growth, and had warned that trading would be impacted by the extreme weather over summer when New Zealand was buffeted by Cyclone Gabrielle, just weeks after torrential rain inundated Auckland and the northern North Island.

“Since we last updated the market in February, the second half wet weather misery in New Zealand has continued, although not quite as severe as the first two months,” chief executive Ross Taylor told an investor day briefing in Auckland on Wednesday.

Taylor said residential market weakness was starting to impact demand across the company’s building products and distribution businesses, with volumes down between 5% to 7% from their peak and expected to fall a further 8% next year.

Fletcher expected to sell about 650 houses in the current year to June 30, below its target of 800 houses which analysts had warned would be “a challenge”.

“While this is down on our forecast, it remains a strong result in what has been a tough market,” Taylor said.

“While we expect to see further declines in volumes across our materials and distribution businesses, we are seeing some signs that the New Zealand housing market itself is starting to stabilise,” he said.

Fletcher is targeting between 700 and 800 house sales next year.

Taylor said cost inflation and tighter house sale prices were likely to compress margins in the company’s residential development business in the coming 2024 financial year, although he expected that to start recovering through the 2025 financial year.

Economists say house prices have now probably bottomed out, as interest rates neared their peaks and the resurgence in migration provided a fresh source of demand.

Taylor said the housing market appeared to be at the middle of the cycle, and sentiment appeared to be stabilising as people felt interest rates were getting to a peak and prices were at a trough.

He said the company was leaning into the challenge to ensure it didn’t give up too many of the performance gains it had made over the last few years.

Fletcher’s operating margins have showed steady improvement from 7.2% in 2019 to 8.9% last year, and were expected to be above 9% in the current year.

Taylor said the company was continuing with growth investments to ensure it was well positioned to grow irrespective of the cycle.

“We like the isolation and smaller relative scale of the New Zealand and Australian markets, as this allows for local players to be highly competitive against importers, and to be leaders in disruptive innovation,” he said.

Fletcher’s Winstone Wallboards unit holds a big share of the plasterboard market with its Gib product, and it came under fire during the Covid pandemic for failing to keep up with the surge in demand coming out of lockdowns, causing a construction bottleneck and stress for builders and the wider industry.

Taylor acknowledged the company’s customer satisfaction levels dipped through the Covid supply chain disruptions, falling to 36 in 2022 from 41 in 2021. As at the end of May, the level had lifted to 40.

“While this is an ‘okay’ level, and it's now trending back up in the right direction, we remain well off where top quartile is which is above 55,” he said. “This is a huge opportunity for us, as our industry is generally poor at customer service with very few performing well.”

He said initiatives such as online sales were helping improve customer service, with online sales expected to grow from about $900m a year to about $1.5 billion in 2025.

Taylor said the sector's long term growth outlook across Australia and New Zealand was “very robust”.

“This comes from a combination of strong ongoing population growth, but it's compounded by an infrastructure deficit across both countries that requires major capital catch up expenditure,” he said.

The company’s shares slipped 0.8% to $5.17 in midday trading on the NZX, and have gained 14% this year.