Life and times of Fletcher Building

Thursday, 15 February 2024

ANALYSIS: Here we go again, just six years after construction giant Fletcher Building reported a $120 million loss after major cost blow-outs, another chief executive and chairperson leave the company.

It is almost a repeat of events in 2018 when cost overruns on two landmark projects, the SkyCity New Zealand international convention centre (ICC) and the Christchurch justice and emergency services precinct, led to the departure of the chief executive.

The company breached its banking covenants and its shares were put in a trading halt.

Ross Taylor had just taken the helm, replacing Mark Adamson who left in July, shortly after the company's cost blow-outs were made public. Former head of the challenged buildings and interior business Greg Pritchard was reportedly 'released' the previous year.

Despite its set backs, there was little chance the company would fail with the business performing well across nearly all its various arms with the exception of one unit – the building and interiors division – which was responsible for delivering the biggest commercial projects.

Fletcher Building full-year profit jumped 42% to $432m in the year to June 30, 2022 and revenue was up 5% to $8.5 billion as the country’s largest integrated manufacturer and distributor of building supplies benefited from a strong construction market.

At the time Fletcher Building estimated it lost $300m in revenue and took a $100m hit to operating profit in its first quarter due to the impact of Covid-19 lockdowns. But the nation was in the midst of a construction boom coming out of lockdown and it was expected a backlog of work would continue to sustain the market.

“Our performance highlighted our ability to deal with a dynamic operating environment, while remaining focused on delivering long-term, sustainable growth,” Taylor said.

Further profit growth was forecast with a solid pipeline of work.

But the effects of the pandemic had disrupted supply chains and Fletcher’s Winstone Wallboard unit, which held a 94% share of the plasterboard market with its Gib product, was accused of failing to keep up with the surge in demand, slowing construction in the wider building industry and customer satisfaction took a hit.

Fletcher Building has a sizeable building supplies business, making and distributing the likes of Gib plasterboard, Pink Batts insulation, roofing, pipes and other construction and development related products.

The improved performance also saw Taylor’s pay package for the year increase 34% to $6.6m.

Fast forward and on Wednesday the company announced another stonking $120m loss for the six months to December 31, compared to a $92m profit after tax in the same period the previous year.

Taylor and chairperson Bruce Hassall have fallen on their swords, albeit slowly. Taylor leaves in six months, and the annual shareholders meeting later this year will be Hassall’s last.

There are calls for the entire board to humble themselves before shareholders at the meeting by putting themselves up for re-election, regardless of whether their term is up.

The loss is attributed to $180m in previously flagged legacy provisions for the International Convention Centre in Auckland and Wellington International Airport’s car park building, as well as a $122m non-cash write-down on its Australian Tradelink business, which the company now plans to sell.

Weakening trading conditions particularly in housing where volumes were 20% lower also also contributed.

Fletcher’s shares tumbled more than 15% shortly after a trading halt was lifted early afternoon.

In 2018 the company's big money was in building products, followed by its international businesses (including Laminex and Formica) and its distribution business.

At the time, as now, one of the industry's biggest challenges was finding skilled construction workers, managers, quantity surveyors and architects.

Another more general risk was the danger of cost-overruns and late penalties.

The buildings and interior business (B&I) division had caused the company 'a whole lot of grief' Norris told Stuff at the time, but he felt he had an obligation to fix what was one of the worst situations he had faced in his business career, rather then resign.

By 2019, having largely doused the fire in its commercial construction engine room, Fletchers was back in the black with an interim net profit of $89m after tax after suffering a $190m full year loss the previous year.

Shareholders have been on a rollercoaster ride since 2016, when shares hit a high above $11, to a low of $4.56 in December last year. On Wednesday they closed at $3.61, down 13.22%.

Key project failures

The 16 troubled construction projects that have left Fletcher Building with massive losses are a roll call of some of the highest profile developments in the country.

New Zealand International Convention Centre

Auckland's International Convention Centre, being built of SkyCity, continues to cause controversy, and is by far the biggest of Fletchers' problematic projects.

Six years ago, SkyCity's boss at the time Graeme Stephens said he expected legal 'argy-bargy' when the casino operator billed Fletcher Construction for losses incurred as a result of the late completion of the much vaunted conference centre.

The project's 'approximate project value' to Fletchers was supposed to be $400m to $500m, Fletchers said at the time.

But it was already forecasting a $410m loss from the project, indicating SkyCity shareholders had enjoyed a massive transfer of value from Fletchers.

The construction company was contracted in 2015 to deliver the convention centre, but a fire in October 2019, just six to nine months from completion, caused extensive damage which delayed the project and escalated costs. Fletcher Building now expects the project to be completed by early 2025.

Rebuilding the centre would cost it $150 million more than its insurance cover.

It also meant the centre would not be ready for conventions booked in 2021, including the planned Apec gathering – which was ultimately scuppered by the Covid pandemic and moved to an online event.

When completed, the conference centre is expected to handle events of up to 4000 people.

The firm previously said it was on track to complete the $703 million project by July 2019 but was later forced to push that back to December 2019.

In September 2018, the SkyCity group announced it was withholding $26.9m from the construction company due to delays on the project.

The expected losses of $660m from the Building & Interiors division ulitmately led Norris to resign, and resulted in Fletchers cancelling its first half dividend and breaching its banking covenants.

The company also stopped bidding for more of the giant construction projects, with Taylor telling media: 'The risk reward profile makes little sense.'

Margins were just too low, and the risk just too high, he said.

Building & Interiors’ projects included high profile developments such as the International Convention Centre and Precinct Property's Commercial Bay office and retail tower.

Christchurch Justice Precinct

Christchurch's law and order centre opened in 2018 but cost Fletchers $156m in losses. The approximate contract value was $200m to $300m, Fletchers said at the time.

Fletcher Construction was supposed to hand over the completed project in early February, ready for agencies to move in in June, but the precinct was officially opened in mid-September.

Commercial Bay

A massive new office and retail centre is rising in the heart of Auckland's CBD across the road from the historic ferry building, and the dock to which cruise ships moor was completed in 2020 with a contract value of $400m to $500m.

Commercial Bay was included with 13 other projects on Fletchers' watch list of troubled projects.

Iplex piping

Last year Fletcher Building set aside A$15 million (NZ$16m) to cover damage from leaky pipes in Australian homes.

The company said about 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.

A Western Australia group home builder was also conducting its own tests into the issue, it said.

Iplex Australia has proposed interim arrangements with two large group home builders in Perth who together constructed about 90% of the affected homes.

It involved the builders replacing ceiling product in homes that had leaked and repair damage as well as provide data to allow Iplex Australia and other stakeholders to develop a plan for a longer term solution.

Iplex Australia also set aside A$2m to reimburse costs for other Western Australian plumbers and builders who constructed affected homes.

The moves meant Iplex Australia would increase its provision for the issue to A$15m from A$2m.

A potted history

James Fletcher and his brothers started Fletcher Bros in 1915 building houses before moving on to larger projects, according to the company’s website.

Fletcher Challenge was created in the early 1980s, and the company went international via Asia, Europe and the UK and bought interests in forestry, paper, pulp, meat processing, gas distribution, and fisheries businesses.

“By the 1990s, the focus returned to the core business of building, building products, and home environments, leading to the divestment of many non-core businesses.”

In 2001, Fletcher Challenge was split into a number of specialist businesses and the parent company, Fletcher Building, listing on the New Zealand stock exchange.

Bios

Ross Taylor joined Fletcher Building as chief executive on November 22, 2017 after a stint as head of UGL, an international engineering, services, construction and product manufacturing business, operating across the rail, transport and technology systems, power, resources, water and defence sectors, and headquartered in Australia.

Prior to this he was managing director and chief executive of Tenix, a privately held engineering and construction services company and held senior leadership roles at Lendlease across a 23-year period.

Bruce Hassall is a former senior partner and chief executive of PwC New Zealand. He is the chairperson of The Farmers’ Trading Company and Profile Group Holdings, and is a director of Fonterra Co-operative Group.