Fletcher Buildings expects earnings could be up to $150m less than forecast

Fletcher Building chief executive Mark Adamson says it is very disappointing a review found one of its businesses was ...
CARYS MONTEATH/FAIRFAX NZ

Fletcher Building chief executive Mark Adamson says it is very disappointing a review found one of its businesses was weaker than understood.

People at Fletcher Building have lost their jobs over the possible $150 million profit hit caused by cost blowouts on two major projects.

Fletcher Building refused to say which two projects were behind the company's large profit downgrade, but chief executive Mark Adamson said on Monday "people did lose their jobs".

"It's inappropriate to mention names," Adamson said.

Adamson said on Monday the company started a review of its building and interiors (B&I) business, responsible for the losses, last year.

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"We brought the new people and processes in because we felt this business was off track and we needed to bring it back on.

"I'll be honest not in our wildest dreams back when we did this did we expect to find what we have found."

Adamson said the former head of B&I was "released" in September.

Greg Pritchard was the B&I managing director at Fletcher Building, where according to LinkedIn he worked for nearly 30 years, before departing last year.

Pritchard has not responded to requests for comment, and a Fletcher Building spokeswoman said the company did not comment on individual employment matters.

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But in November last year, the spokeswoman said Pritchard had left and been replaced by Dan Ashby in an acting general manager capacity.

Shares in the country's largest construction company fell 10 per cent on Monday after it warned its profits would be up to $150 million lower than the guidance it gave last month.

Adamson refused to name the projects, citing client confidentiality, but said one would be completed in a couple of months, while the other was due for 2019.

He said the company would seek compensation for the programmes coming off track, but the focus for now was on getting the jobs finished in better shape than they were now.

"But there is no doubt the board and I and others who are in the business are preparing for compensation, let's just leave it at that.

"We're not taking this lightly."

It was understood the Justice and Emergency Precinct in Christchurch and Auckland's Sky City International Convention Centre could be the projects.

Sky City spokesman Colin Espiner said the casino company had a mostly fixed price contract with Fletchers and that the project was "on time and on budget" to open in the first three months of 2019.

"We're not privy to the internal workings of Fletcher Building," he added.

Both the Minister of Justice's office and the Justice Ministry declined to comment on the Christchurch project, saying it was Fletcher's place to talk about its financial situation.

It was understood incorrect costings may have been carried out on that project to the tune of $40m.

Fletcher was also building the Commercial Bay project in downtown Auckland, which was also due to be completed in 2019 for Precinct Properties.

Precinct chief executive Scott Pritchard said the project was all on track with no delays, and was going "very, very well".

The country's biggest construction firm had gone into a trading halt on Friday, saying it was reviewing the financial performance of its construction division.

On Monday the company revealed losses on one major project had widened and losses were also now expected on another big construction project.

It said its profit before interest, tax and significant items was now likely to be between $610m and $650m for the 2017 year, down from previous guidance of between $720m and $760m, a possible drop of up to $150m.

After lifting the trading halt, the company's shares fell in mid-morning trading by $1.13 or 12 per cent to $8.09.

Last month the company flagged a loss on one major project but now said those losses would be greater, that it was making provision for losses on another project, and that some downside risks had been identified in smaller jobs.

On a conference call with analysts on Monday morning, Adamson said the problem contracts were two of its three largest projects in its building and interiors (B&I) unit. The third project was running profitably.

The B&I division controls up $1.5 billion of Fletcher's $2.7b order book, and the bulk of those jobs are in Auckland, including the SkyCity international convention centre.

Another project under Fletcher's B&I division is the Justice Precinct in Christchurch, a 40,000-square-metre building housing eight agencies including the Justice Ministry, Police and Civil Defence. Its completion date has been pushed back to the third quarter of the year.

Adamson indicated that one of the loss-making projects had had a major late change to the design brief, and one had posed big engineering challenges. 

Both were large and complex projects, and things had gotten away from management early on.

"We're finding the cost associated with the extension of project timelines and increases in project resources are far greater than previously expected," Adamson said.

The situation had been discovered after a review of the division, which began in November during a period of staff changes.

"We felt the business was off-track and we wanted to bring it back on. I'll be honest, not in our wildest dreams, back when we did this, did we expect to find what we have found."

But he stressed the company did not have the information it had now when it made its guidance forecasts last month.

"As we said at the half, we felt we'd captured most of it ... That clearly was not the case and we have to wear that."

Fletcher Building announced an after-tax profit for the six months to December 31 of $176m, up 2 per cent on the previous year.

Adamson said trading in Fletcher's other divisions was still in line with previous expectations, and it was comfortably within its banking covenants.

"We don't think these issues are systemic because they are primarily related to program and design challenges on a small number of major projects," the company said in a statement.

It had tightened its processes and bidding criteria. "We are very cognisant of pressure on labour and sub-contractor resource in the New Zealand construction industry at present, and need to ensure we manage this effectively in current projects and future bids."

One analyst, who asked not to be identified, said rumours of the losses had been flying around and were largely in line with Fletcher's estimates.

The dive in share price indicated many shareholders were surprised by the news so soon after the half-year result.

However, construction was a volatile industry and "obviously when constructions very buoyant, it's more difficult to manage costs."

Mark Lister of Craigs Investment Partners said the downgrade was significant, albeit one confined to the building division.

Fletcher had had a chequered few years and its shares were widely held, particularly in Kiwisaver portfolios.

So it was "certainly disappointing, but on the other hand, it's a tough game construction and there's a lot of these big projects which are exceptionally lumpy, and often fixed-price situations.

"You get over-runs, you get delays, you get other things crop up. That is part and parcel of that sort of industry."

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