Fletcher Building : A solid foundation for the future

Fletcher Building Ltd's [FBU.NZ] results today were solid and as expected.

The after tax profit of $NZ 484 Million Dollars represents an increase of 28% over 2006 and excluding abnormals $399 M , representing an increase of 5% over last years $379 M.

All divisions showed strong growth except building products and steel and total revenue increased 7% to almost 6 Billion.

The recent purchase of the Formica Corporation looks to add to the strong showing in coming years, that Fletcher expects from their laminates and panels division which this year showed excellent growth.

The current slowdown in housing will affect FBUs' profit growth over the next few years, as wasteful Government spending comes home to roost with the resultant effects of high interest rates meaning less spending on house renovations and new home building.

Other Fletcher divisions look likely to help bolster profit going forward though.

Infrastructure spending on New Zealand roads, public transport and the Auckland Football Stadium are set to help FBU smooth out probable drops in other areas. With little sign of infrastructure spending showing a slowdown this division will likely be the star over the next 2-3 years.

Commercial construction will also likely take up some of the slack left by lower housing starts.

The general election will have a material effect on profit for Jonathan Ling and his management. It is likely that a probable National Government in 2008 will allow more Kiwis to keep their own money due to lower taxes and this will clearly stimulate a tired and crumbling economy.

Management have been diligent in keeping costs down while helping allay possible divisional downturns by broadening Fletcher's focus. With a now larger footprint offshore and a more multifaceted local offering FBU will be able to smooth out the normal economic cycles that the building sector has.

The outlook for the coming year profit wise looks good for a moderate increase barring any major meltdown of the global economy.

FBU shares were down by more than 3% today.


Disclosure: I own FBU shares

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Business Mis-Management

The recent and distant past of company management and its track record in New Zealand leave a lot to be desired.

While the calibre of management in selected companies listed on the NZX is clearly very good: Mainfreight Ltd [MFT.NZ], Pumpkin Patch, Michael Hill, Fletcher Building, Rakon among a shortlist, the great bulk of management is littered with far too many candidates for the top prize of mis-manager of the year.

On the negative side the list includes Feltex at the top followed by Restaurant Brands ,with Telecom, The Warehouse(previous Management)Tourism Holdings and Sky City all worth a mention.

The bottom rung seem to share some common traits. Basic bad decision making, at times it is part of the culture- Telecom, in Feltex Carpets case bad decision making was endemic and used to cover up problems, Restaurant Brands suffers from a culture of denial when it comes to decision making-witness the complete ignorance of store level service, Tourism Holdings simply couldn't make a decision as to what their problems were caused by and Sky City Ltd [SKC.NZX] has made a hastie decision to buy a cinema unit that drags down profit and is capital hungry for no return but they refuse to make the decision to let go and cut lose a bad business.

The Warehouse's woes were widely canvassed but they suffered from a man,Tindall, that rushed into a new business with too much confidence, ignoring basic differences in the shopping culture of 2 different countries.

Managers are paid to manage and that means, as much as possible, decisions being made at the right time and in the right direction as consistently as possible. When managers begin to garner a track record of bad decision making, it is time to look at the problem, fix it if possible or move that manager on if an easy fix isn't possible.

Shareholders need to have a means of making their opinions known to those who manage their investment in the company they have bought and apart from the likes of Bruce Sheppard from the Shareholders Association, the rest of us appear to be sheep when it comes to standing up for our vote on the board.

The buck stops with the person at the top rung of management but a clear stumbling block with our listed and private companies is the bottleneck of middle managers ,who often serve the purpose of mere relay people, of information from productive workers on the shop floor to those executives at the top. We could do with less of these people in our companies, in my humble opinion they can confuse the clear messages that must get through from upper management to shop floor and back in order for a company to function efficiently and competently.

Restaurant Brands suffers from this syndrome in spades. Store workers don't get to communicate clearly as to what is going on at store level directly to upper management, problems are filtered through a multifaceted layer of store, area and regional management before getting operating concerns to the top.

Of course RBD store managers often don't have the motivation to let upper management know if there are problems at store level anyway, lest they be in the gun themselves. This happens to a lesser extent in other New Zealand companies but is still clearly a problem. Telecom suffers badly from the same syndrome.

The solutions to our problems may lay in what Toyota calls the "Toyota Way" that is, where there is a free flow of reciprocal critical information between upper management and productive workers. In essence this means that a shop floor worker has access directly to upper management and vice versa.

Like a pyramid of cheerleaders whispering advice from the bottom of the pile to the top, by the time it gets there the message is often completely different from its original form. Remove the middle of the pyramid and it will collapse but remove middle management from the management pyramid and it will serve to make the company stronger.



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