KEY POINTS:
Fletcher Building is preparing for a worst-case scenario in the year ahead after a $17 million slide in profit.
Results released yesterday show annual profit fell from $484 million to $467 million in the year to June.
Factory closures, shift reductions and even sales are possible for one
of New Zealand's largest listed companies which has consistently driven up profit since listing in 2001 and been on an acquisition trail.
The result was at the upper end of Fletcher's profit guidance given this year of $450 million to $460 million.
Shares rose on the news and closed up 15c yesterday at $6.58.
The diversified buildings material distributor and manufacturer now faces tougher times and Deutsche Bank this month forecast the company would make as little as $378 million next year, highlighting the dangers of New Zealand's falling house-building market and the company's United States' exposure via its Formica.
Fletcher chief executive Jonathan Ling yesterday refused to give any firm profit guidance for next year, saying this would only come at Fletcher's annual meeting in Auckland in November.
But he outlined a bearish outlook. The company would focus on working capital and put a strong emphasis on costs, particularly labour.
"We're looking at structural changes including closing or rationalising sites and reducing the number of shifts in factories," he said.
Some closures were possible at Fletcher's national hardware chain, PlaceMakers, particularly smaller depots, Ling said.
Many closures or rationalisations had already taken place, he said, citing the shutting of Fletcher's Penrose hardboard/softboard plant, the closure of Laminex Group's 7.5ha manufacturing site at Papakura, put on the market in April, and the closure of the Taupo medium-density fibreboard plant, destroyed by fire in September 2006.
Ling also said Fletcher was in "negotiations or conversation" with the vendors of Formica over US$50 million ($68 million at the time of the deal last May) based on the business achieving specific performance milestones and due if restructuring was finished by June 30.
Ling said this was an issue which might head to court "if there's a dispute".
He cited tighter credit markets and tougher operating conditions but refused to acknowledge the $17 million profit slide even though it was declared in Fletcher's net earnings from its published accounts.
He said the $484 million net profit last year included $85 million in unusual items and he preferred to focus on the $399 million profit figure which stripped out extraordinary and other one-off items. He said that should be used for last year's result. That makes this year's declared $467 million more palatable.
"The nature of unusual items is just that. You can't expect to repeat that every year," he said.
Ling said operating earnings were up 10 per cent, despite the tougher markets.
"The performance of our New Zealand and Australian businesses and Formica's operations in Asia and Europe has been very pleasing.
"While the delay in capturing the operational improvements identified prior to Formica's acquisition has been disappointing, we are still confident that we will achieve a significantly improved operating performance in Formica's USA operations," he said.
Matt Henry of Goldman Sachs JBWere said the result was in line with expectations. Fletcher's profit warning issued in May had already told the market of the likely result, he said, and the business was cyclical.
"This underlines that the environment is pretty challenging and we would expect weakness next year."
Henry is forecasting $400 million in profit for the 2009 June year.
Hearing of closures and staff reductions was also no surprise, he said. Plant closures were part of a move to gain synergy benefits and a tougher business environment could lead to the loss of some part-time staff at businesses like PlaceMakers.
Fletcher will pay a final dividend of 24.5c per share with New Zealand and Australian tax credits, giving a total dividend of 48.5c per share.
Sales from its infrastructure division fell from $1.9 billion last year to $1.8 billion this year. But building product sales rose from $697 million to $739 million; laminates and panels from $1.05 billion to $2.1 billion; and steel from $1.1 billion to $1.2 billion.
Ling said Fletcher had a healthy $1.3 billion backlog of building work and the construction business had won several major projects, particularly in Auckland in recent months.
He told of a big land bank which Fletcher planned to sell, including quarries at Three Kings, Pokeno and in South Auckland.
He forecast a mixed market for New Zealand, saying house-building was expected to slow but commercial construction and infrastructure should be similar to this year. Australia's housing market was at a cyclical low and the US was not expected to improve quickly.
He was optimistic about Asia, saying the outlook was stronger, with good growth prospects for Formica plants in China, Taiwan and Thailand.
