Fletcher Building has announced further losses in building and interiors (B&I) while maintaining earnings guidance for the remainder of the group. The B&I business is being refocused solely on the delivery of remaining projects – bidding for all vertical construction in New Zealand is to cease.
The company has made provision for expected losses in B&I of NZ$486m, leading to a total projected B&I loss in terms of earnings before interest and tax (EBIT) of NZ$660m in the 2018 financial year. Expected EBIT for FY18 for the Fletcher Building Group excluding B&I remains NZ$680m to NZ$720m.
Fletcher Building CEO Ross Taylor said the new provisions were informed by a review of 16 B&I projects, accounting for approximately 90% of the construction backlog, and incorporating external input from independent construction experts and KPMG.
The Justice & Emergency Services Precinct and the New Zealand International Convention Centre (NZICC) projects continue to be the main contributors to the losses.
“The provisions we have announced today are informed by a considerable amount of further project analysis, and while we continue to target agreed completion dates across the portfolio, we have factored in significant cost and timeline contingencies,” said Taylor.
Taylor said there are many nuances by project contributing to the losses, but three core drivers. “Following further project reviews we have taken a more pragmatic view on programme delivery and resulting cost contingencies. While we will pursue our contract entitlements vigorously, we have also taken a less optimistic view on client claims and variations. And lastly, since October we have seen further material price escalation across trade finishing costs, which have now been incorporated into cost forecasts.”
He said that the company’s focus is finishing our remaining B&I projects and to a high quality for our customers. “To achieve this, we are refocussing the entire B&I business on project delivery only, and ceasing all bidding on vertical construction projects in New Zealand. This will allow us to direct all resources in B&I to the completion of the current book.”
He added that, while our broader construction businesses continue to benefit from favourable market conditions and strong growth, the B&I market sector remains characterised by high contract risk and low margins. “Unless these dynamics change we will no longer work in this sector.”
The projected B&I EBIT loss has resulted in a breach of Fletcher Building’s financial covenants given to its commercial banking syndicate and US Private Placement (USPP) noteholders. However, the strength of the broader business and the phasing of the cash impact of the B&I provisions means the company remains well capitalised and solvent.
“We have strong and predictable cash flows across the Fletcher Building group,” he said. “While the B&I provisions are large, they are phased over a number of years and do not impact our ability to trade with our customers or suppliers or pay our bills.”
The company aims to complete renegotiations with all lenders by the end of March.
In a separate statement Fletcher Building chairman Sir Ralph Norris confirmed he will step down later than the 2018 annual shareholders meeting, allowing an orderly transition to a new chairman and the completion of the board refresh process already commenced.