Fletcher Building takes multi-million hit from leaky pipes crisis

Friday, 30 August 2024

There has been an agreement in the Western Australian leaky pipe problem, but its set to cost Fletcher Building A$155 million.

Fletcher Building is facing costs of over $150 million as part of the fall out from the Western Australian leaky pipe crisis, the company said on Friday.

Last year Fletchers announced that 1200 of 15,000 houses constructed in Western Australia using its pro-fit pipes had experienced leaks between mid-2017 and mid-2022, when its Iplex Australia unit stopped selling the product.

Australian homebuilder BGC was one of the largest users of pro-fit pipes in the state, and earlier this year it said there had been just over 3000 total bursts in 1500 Perth homes built by the company.

Since the scale of the problem emerged, Fletchers has been in mediation with key stakeholders, including the Government of Western Australia.

On Friday morning, Fletchers put its shares in a trading halt pending an announcement from the Western Australian Government.

Fletcher Building takes companies to court after convention centre fire.

Now, the Western Australian Government has announced it has secured an in-principle agreement between Fletchers’ subsidiary Iplex Australia and several builders to assist homeowners impacted by leaky pipes.

It would contribute A$30 million (NZ$32.5m) to address the problem, and builders will be able to sign up to the agreement to access funding to fix pipes in the homes they built or renovated.

While the government fund would be capped, the industry response would not be capped in time or cost, and Iplex Australia and builders would have to meet remaining uncapped costs.

Iplex Australia would also offer installation of a leak detection unit free of charge in all homes with the pro-fit Typlex 1050 pipes to reduce the risk of property damage, and legislation would be introduced to protect affected homeowners for 15 years.

Western Australia Commerce Minister Sue Ellery said the agreement was a great outcome and homeowners could be reassured they had a way forward in getting the works done in a timely and sustainable manner.

But the agreement comes at a cost to Fletcher Building.

In its response to the government announcement, Fletchers said that assuming the agreement was finalised, it expected to record pre-tax costs of A$155m in its 2025 financial statements.

That would be made up of A$120m for Iplex Australia’s share of costs to repair the affected homes, A$20m to install leak detectors in the affected homes, and A$15m in administration costs over the life of the agreement.

Fletcher Building has welcomed the Western Australia Government mediated leaky pipes agreement.

The pre-tax cash flows associated with the agreement were expected to be expended over at least five years, while the annual cash flows would be subject to the actual rate of leaks and the type of repairs undertaken, the company said.

“They are expected to be front-loaded due to the initial programme set-up costs, the need to re-pipe homes that have already been more extensively affected and installing leak detectors.

“If the provisioned amount is spent over the next five years, the company’s cash flows in year one of the agreement could be in the order of A$40m to A$50m, and in subsequent years in the order of A$15m to A$35m.”

BGC, which built about 50% to 60% of the affected homes and blames Fletchers for the problem, was not a part of the agreement. It recently initiated legal proceedings against Iplex Australia and is seeking a wide range of damages.

Fletchers said that all the other builders involved with affected homes were party to the agreement, and BGC had the option to join it and the costs had been sized to include it.

But if BGC opted to stay out of the agreement, the repair costs funded by Iplex AU were expected to be proportionately lower, it said.

Acting Fletcher Building chief executive Nick Traber welcomed the agreement, and acknowledged the Western Australian Government’s recognition that a product recall was not an appropriate response given the circumstances involved.

Former Fletcher Building chief executive Ross Taylor refuted BGC’s claims about the Western Australia leaky pipes problem last year.

“As we have said for some time, it is in all parties’ interests, as a first priority, to stand up a comprehensive response which remediates the plumbing issues in a timely and pragmatic way,” he said.

“Our work to date has shown that a rapid response to initial leaks, installing leak detectors and replacing ceiling pipes in homes that have suffered a plumbing failure is the most effective and homeowner-friendly way to mitigate future issues.”

The company saw the agreement as a sensible and practical result for all parties, he said.

It has already been a difficult year for Fletchers. In February, former chief executive Ross Taylor and chairperson, Bruce Hassall, announced they would step down after the company reported a $120m first half loss after tax.

That loss followed an earlier announcement that costs on the New Zealand International Convention Centre in Auckland and the Wellington International Airport car park building had swelled by $180m.

Since then the company’s chief financial officer and two directors have also resigned, and in August it revealed a $227 million loss after tax for the year to the end of June.