Fletcher's Jonathan Ling: Rider on the storm

Jonathan Ling. Photo / Sarah Ivey

Jonathan Ling's windsurfing days ended when he left Australia four years ago.

Now, as an Auckland boatie, he has been enjoying the long summer on the harbour in his low, sleek 6.5m Haines Hunter.

"We take that out on the Waitemata, go over to Waiheke for lunch."

Fletcher Building - New Zealand's biggest listed company - was plain sailing in his first couple of years after taking over from Ralph Waters as chief executive in 2006.

Then things got choppy, the financial crisis hit and Ling has been forced to navigate stormy waters.

Fletcher has been through a sea change under his guidance, Ling having made big changes to the $5-billion business which has operations in Europe, Asia, North America and Australasia.

Asked how he coped with the crisis and its aftermath, Ling answers by taking a decade-long view.

"If we talk about the before and after: In 2001 our revenues were about $3 billion and in 2009 in the middle of the GFC [global financial crisis], we had revenues of $7 billion.

"In 2001, we had operating profits of about $94 million and in 2009 it was $558 million. The share price in 2001 was $2.25 and at the end of 2009 it was about $8.24.

"So for an investor shareholder who bought in 2001, they've still had a 540 per cent return on their money after the GFC and that equates to 26 per cent compound annual growth rate every year, including during the GFC. So we feel it's still not a bad story."

He said the financial crisis was no different for Fletcher than for a small business.

"The first thing we did was focus on cash and there were several parts to that. The first was generating operating cash flow and in the June 2009 year, that was a record $533 million. For the first half of the June 2010 year, it was $317 million."

Ensuring borrowings were long and favourable was another plank, mostly done during the crisis. Last April, Fletcher raised $526 million equity and by December had issued $131 million capital notes.

"What it meant was for most of the way through the GFC, we had completely paid off all our senior bank debt and we didn't need to do any more refinancing realistically until 2013/2014. So we were financially as strong as possible and there was absolutely no risk whatsoever of breaching banking covenants."

He also noted how Fletcher still had an extra $1.1 billion undrawn credit line, having drawn the exact same amount of $1.1 billion in net debt, down from a year ago when its borrowings were more than $2 billion. Ling rules out using existing loan facilities for purchases.

"If there was a sizeable acquisition, it would be highly likely we would be raising equity by issuing new shares. We like to raise equity when we do the big deals."

Average debt maturity is six years, average interest rate 7.49 per cent and 89 per cent of borrowings are at fixed rates with a syndicate of banks.

When Ling presented to institutional investors and analysts in London and New York during March, he highlighted the big restructuring undertaken.

Employee numbers were cut by 3000 to 16,000 worldwide: 2500 people were laid off in the June 2009 year and 500 this financial year.

The Plyco door factory in New Zealand was shut, along with a particle board plant here and a Perth medium-density fibreboard plant.

Laminex and Formica changed large parts of the way they operated, particularly on delivering goods. Capital expenditure was reduced to below rates of depreciation.

Fletcher's next and second most-important strategy was reshaping divisions which needed to rebalance manufacturing production and capacity with reduced demand.

"We had substantial excess capacity and our markets had dropped by 60 per cent," Ling said, referring particularly to New Zealand's 30,000 houses built at the peak of this decade, now down to about 14,000.

"So we had a big excess of manufacturing. We also took the view that the recovery would not be very fast, but slow and volatile and this is what we've seen."

During previous financial troughs, New Zealand manufacturers tended to mothball plants then reignite the old equipment, resulting in using technology sometimes up to 60 years out of date. Simply shutting such plants and reinvesting after the recovery was a better way to do business, Ling says.

"The third key thing was looking at opportunities at how we transform out businesses."

Ling cited Laminex where cost reductions led to product ranges and distribution systems being streamlined.

Formica's stock-keeping units, or number of products available, was chopped from 200,000 pre-crisis to about 30,000 and Laminex's from 40,000 to 30,000.

"We've rationalised our product ranges to more sensible levels so it costs less to make and store. We're doing it right across the group. The main objective was to do transformational work and restructuring so we could maximise our earnings as the cycle got better."

Ranges in the 63-store PlaceMakers have also been reduced and trade sales have become more of a focus, accounting for 85 per cent of all sales.

Redundancies upset Ling most.

"The hardest thing to do is reducing the manning levels. That has a very human impact to it. We do it with as much dignity and as humanely as possible. It's a really necessary but a very hard thing to do."

Ling criticised the Australian Government's lightning-strike end to its insulation stimulation in February.

Fletcher had expanded on both sides of the Tasman to meet Government insulation stimulus packages worth billions but Australia's sudden-end forced Fletcher to cut back production by a shift at its glass wool insulation plant at Dandenong and to shut Sydney's Rooty Hill plant where 120 people worked.

"It would have been better if they hadn't started the scheme in the first place," Ling said, referring to poor governance, the rise of "cowboys" in the insulation and import industry, bad products and the number of homes where subsidies were claimed but insulation never installed.

"It's a good example of how to destroy an industry, a situation where the unintended consequences were devastating for the industry," he said, referring to huge stockpiles.

"The scheme in New Zealand has got very good governance systems around it," he said, praising a lower level of subsidisation and consumer-contributions here.

On April 22, Fletcher said the insulation about-turn had massively hurt the business to the tune of about $28 million. Instead of making $23 million operating earnings from the Australian insulation business in the December half-year, Fletcher would make just $12 million. On top of that, redundancy and one-off costs from the fiasco amounted to $18 million.

Still, the board reaffirmed its stance that it was optimistic it could meet the consensus of analysts' forecasts and make $278 million to $303 million net after-tax profit for the June 30, 2010 year, a result due out in August.

Ling wants Fletcher less New Zealand-focused.

"We need to diversify our earnings," he said, referring to geographic issues and a heavy New Zealand bias.

"If we hadn't diversified, this last recession would have been very, very painful for us.

"In the first half of the June 2010 year, we made more profit in Australia than we did in New Zealand yet Australia represents only 35 per cent of our revenue and New Zealand 50 per cent. Australian markets didn't fall as much, they were more buoyant in the recession."

Fletcher aims to qualify in the next year for the S&P/ASX 300 Index and only liquidity issues stand in Ling's way. If that can be achieved, the giant Australian superannuation funds are bound to buy shares. Institutional shareholders on the register should rise.

"The share price is a pretty fair reflection of where we're at. We enjoy being No 1 by market cap in New Zealand, going past Telecom a few months ago was a milestone.

"This has been one of the least stressful times," Ling says, pointing to Fletcher being only six weeks away from balance date and appearing satisfied with the financials and the big changes he has steered the company through.

Research analysts still rate Fletcher well although many note how hard it has been hit by the downturn, particularly in New Zealand.

Expectations are that it will meet forecasts but analysts say the economic recovery has been exceedingly slow and this is still hampering new housing consents here.

That, combined with the disastrous axing of Australia's insulation scheme, will hurt this year's profit, they say.

Shares closed yesterday at $8.18, up 10c but still well down from their 2007 peak of $13.27.

Ling owns a house in Remuera, his children are both at university in Melbourne.

His next trip is to Formica's world headquarters in Cincinnati in the middle of our winter and by November, he will be at Fletcher's annual meeting which this year will be at Eden Park to show shareholders the finished sports building.

With the summer over, Ling is expecting fewer trips on the Waitemata but also a less choppy year ahead at the Fletcher helm.