What went wrong for Fletcher Building?

In what was probably corporate New Zealand's least surprising resignation, Fletcher Building chief executive Ross Taylor announced he was stepping down on Wednesday.

He also delivered news that the company had made a net loss of $120 million in the first half of its current financial year, and downgraded its earnings guidance for the full year to a range of $540 million to $640m, up to 20 percent below what the market was expecting.

The loss included a $165m provision for increased costs and insurance issues for the troubled New Zealand International Convention Centre project, announced on 5 February, and a $122m writedown on the value of its Australian Tradelink business.

So what has gone wrong for Fletcher, and can it turn it around?

Taylor blamed "materially weaker" trading conditions, particularly in the New Zealand residential sector.

He has given six months' notice - after telling the share market earlier in the week that he was considering his position. Board chair Bruce Hassall also resigned.

Fletcher's half-year update was presented with slides showing the company's experience of the market compared to what it had expected.

In New Zealand, the residential market was down about 20 percent compared to an earlier prediction of 12 percent. Commercial and infrastructure was down 7 percent compared to an initial outlook of 4 percent. Overall, the New Zealand materials and distributions market was down 15 percent compared to an initial outlook of 8 percent.

Michael Sherrock, equity portfolio manager at Nikko Asset Management, said he was surprised that Fletcher appeared to have been blindsided by the market conditions.

"You would think they were getting reasonable monthly accounts, divisions feeding information up to them. The fact they had a provision last week [relating to the extra costs for the convention centre] you would have thought through that process they would have had a pretty good feel for the first-half result. I don't know why the market could not have been updated then or earlier.

"Where are things breaking down in terms of communication through to senior management? What are the systems like for them to come out with the first-half result they have?"

Other commentators have criticised the company for drip-feeding its bad news to the market rather than providing a solid update.

Simplicity founder Sam Stubbs, who invests in Fletcher and is a customer via Simplicity Living, which is a builder, said the company should not be surprised by any market conditions.

"Their market intelligence must be better than anybody's. It must be better than the government's. If you were a small business bobbing around like a cork on the ocean, I would understand but Fletcher is the oil tanker. I don't buy that."

This is the latest in a run of bad news for Fletcher. In recent years, it has dealt with a Gib board crisis, when a shortage of plasterboard caused such headaches for the building sector that the Government was forced to step in.

It has dealt with problems with leaky pipes in western Australian homes and has had the construction of the convention centre set back years by an accidental fire in 2019.

Stubbs said the problems began over a decade ago but the company continued to find one-off events and issues to blame rather than confronting bigger concerns.

"When you talk about any specific project or macroeconomic event, yes, it can have influence. But with a rolling series of problems you have to look deeper, beyond any individual project into the culture of the organisation."

He said his business was not happy as both a shareholder and a customer, which was unusual.

"Usually if you're making tons of money for shareholders they're delighted even if you annoy customers. That speaks to the culture of the organisation. The culture is one of hubris not humility.

"The Gib crisis is a good example. Here is a company that has 95 percent market share and so it should be able to have very good clarity about what it needs to do to supply the market. It should be in a position to make an awful lot of money for it. But it undersupplied the market when it it needed it and now it's oversupplying when it doesn't.

"It ended up building a factory at the wrong time of the cycle. It speaks to a company that is operating out of a mentality of entitlement."

He said "two scalps would not be enough".

"The fact the board hasn't all offered themselves up for re-election when they lost shareholders so much money, including over a million KiwiSaver members, speaks to my mind that they still don't get it. They don't get they are playing dice with other people's money."

Shares were trading at $3.61 on Wednesday evening, down 20 percent over a year.

Sherrock said there seemed to still be a lot of uncertainty about the final result for the year, with such a wide range of guidance, and just four-and-a-half months to go.

"That highlights the uncertain environment."

Rohan Koreman-Smit, senior equities analyst at Forsyth Barr, said there would be a challenging 12 months ahead, and the macroeconomic environment had deteriorated more than Fletcher thought.

"But migration is strong, the housing market looks to be more stable. Hopefully there are some rate cuts eventually. But then you've still got an open question on the pipe issue, the convention centre to finish and a management transition to undertake, and a balance sheet that has gone from being very low levels of debt to much more geared."

John Tookley, a construction expert at AUT, said it was not healthy for New Zealand to have Fletcher struggling.

"It is indicative of wider problems associated with the building industry as a whole... it must always be remembered when you talk about these issues that all construction takes place with borrowed money... the cost of money goes up, interest rates go up, it will have inevitable consequences on the building industry as a result. All companies are subject to that and Fletcher is a bit more exposed."

But he said the company had a lot of strategic depth and could move money from different parts of the business to support others. "It will hold them in good stead and they have the capacity for sure to be able to come back from this."

This story was originally published on Stuff.