Fletcher Building has again hit the earnings downgrade button, reflecting the woeful state of the construction sector which is showing few signs of any reignition.
Although Fletcher's revenue was boosted 30% beyond $4.5 billion from its acquisition of Australian Crane group, restructuring costs elsewhere saw it book a 13% decline in after-tax profit for the six months trading to December, down 13% from $166 million to $144 million.
It was a year to the day, yesterday, since Christchurch's most devastating earthquake, so Fletcher chief executive Jonathan Ling, as lead-contractor, paid tribute to the 185 killed, during a teleconference yesterday.
He said the rebuilding was "gaining momentum", but more slowly than anticipated because of further quakes last December. There were now 1000 contracting companies with 11,000 staff doing between $30 million and $50 million worth of work each month, he said.
Following the announcement Fletcher shares, which have shed billions of dollars in value in recent months, were trading down from $6.64 to $6.49. Fletcher announced an interim 17c per share dividend.
Going back to last October, Fletcher's issued its own profit and outlook warnings and highlighted the risk of further downgrades, those announcements followed by brokers' stock downgrades in November.
Since then, monthly and quarterly surveys on construction and housing delivered a stream of data reflecting the languishing construction sector in New Zealand and Australia; with Christchurch's full rebuilding effects being pushed out now to late 2012, or even early 2013.
Craigs Investment Partners broker Chris Timms said Fletcher's outlook "was not great" with the downgrade to full-year guidance.
"Before, Fletcher's was expecting full-year 2012 normalised after-tax profit around $359 million, similar to last year, but now its guidance is 5% to 14% lower at $310 million to $340 million; bleak. Bleak and getting bleaker," Mr Timms said.
Forsyth Barr broker Peter Young highlighted how several of Fletcher's divisions earnings before interests and tax reflected market conditions.
Its Steel division was down 44% at $24 million, Laminex was down 35% to $37 million (before a further $21 million in restructuring costs), while Building Products were down 30% to $39 million.
Fletcher's total operating revenue for the period was $4.509 billion, up 30%, while its operating surplus before unusual items and tax was down 13%, from $234 million to $204 million.
Fletcher's chief executive, Jonathan Ling, said the result was a creditable outcome, given the tough trading conditions and low volumes in most markets.
"As we outlined in October, earnings have been negatively impacted by low levels of activity in the New Zealand construction industry.
"This is particularly the case with new house building activity, with approvals in 2011 the lowest in the 46 years since records began," he said yesterday.
Australia was already slowing at the start of the year, and there had been a pronounced decline in new residential construction there during the past six months, Mr Ling said.
Mr Timms said it was a notable omission that there was no guidance given on United States work, suggesting Fletcher's was expecting few signs of recovery from that market this half.
Mr Ling later said in a teleconference he expected "some growth" in North America and Asia, but only "gradual" gains from New Zealand and Australia.
Mr Young said Fletcher's working capital, up by $103 million, "looks high" at $1.7 billion, lifting net debt to $2 billion and ahead of his estimate of $1.7 billion, but "pleasingly", working capital has already been pulled back into line since balance date.
While Forsyth Barr would be downgrading both full-year 2012 and 2013 forecasts, Mr Young said the focus remained on the positive medium-term outlook for a "substantial improvement" in earnings over the next few years and retains a stock "buy" recommendation, with the present share price already factoring in the near-term earnings risk.
For the six-month period, Fletcher incurred $21 million in restructuring costs for Laminex - forewarning the market up to a further $50 million in more restructuring costs would come in the present trading half - and offered full-year guidance in a range of $310 million to $340 million, compared with almost $360 million the year before.
Cash flow from operations for the period was $129 million, compared with $202 million in the first six months of the 2011 financial year, Mr Ling said.
"The reduction was due to a net increase in working capital, including cash payments for land purchases, along with higher funding costs and cash tax payments," he said.
Because of the low volumes and margin deterioration in Laminex, a "thorough review" is under way to determine how to achieve a change in the business' cost structure, including the profitability of ancillary activities and further product rationalisation, which are expected to return efficiencies in procurement.
"Fletcher Building expects to incur an additional $40 million to $50 million in unusual costs in Laminex in the second half of the 2012 financial year," Mr Ling warned.
Fletcher's was also undertaking a strategic review of its Australian and New Zealand insulation businesses which might result in additional costs being incurred to improve these, Mr Ling said.
"The sudden decision by the Australian Government two years ago to terminate the insulation subsidy scheme has been disastrous for the domestic insulation manufacturing industry," he said.
The "dislocation" of the industry could not have happened at a worse time, with the strong Australian dollar undermining the competitiveness of domestically manufactured product, he said.
