Waters willing to make waves

Ralph Waters

Ralph Waters receives news he has been named the New Zealand Herald's Business Leader of the year with studied nonchalance. The Fletcher Building chief executive shows little enthusiasm for the award, does not query our judgment, but agrees to a meeting in his typical brusque, matter-of-fact tone.

Two days later, sitting in his sixth-floor office in Penrose, overlooking New Zealand's industrial heartland, he makes no secret of his pride, hammering home the key markers of his success.

Since taking over the reins in June 2001, he has turned a $272 million loss into a $240 million profit. Fletcher Building's shares, once languishing at around $2, were this week testing record highs of more than $6.50.

He has achieved what many New Zealand companies strive for but do not readily achieve - successful acquisitions in Australia. The $1 billion spent on wall-board manufacturer Laminex and the insulation and tile manufacturer Tasman Building Products are now producing more than $110 million of operating earnings a year and have weakened the link between the company's fortunes and the local construction and building cycle. More buys are on the horizon.

Fletcher Building is now New Zealand's third-largest listed company, up from eighteenth when Waters took over.

Waters, 55, pauses to pass credit to his wife, Helen, his partner of 33 years. "In fact, I should be giving her one hell of a lot more credit for all this. She keeps on looking at these articles, where I say all the management is great and thank everybody and continue to forget to mention it.

"I do not think I could have done it without a supportive wife."

The Queenslander has no leadership mantra and eschews an invitation to comment on business leadership in New Zealand. Instead, he points out the five key principles he believes have played a significant role in the turnaround:

* Clarity of purpose.

* Fostering a culture of accountability and self-sufficiency.

* Instituting an open and inclusive management style.

* Establishing a peer review process for capital expenditure.

* Establishing clear criteria for acquisitions.

They helped him rid the company of a culture where strategy was often determined by the executive who had greatest influence in the court of the former parent Fletcher Challenge.

He says he has replaced it with one where goals are clearly established and then enunciated by senior management and then enacted by those lower down the chain.

These goals were established in forums that encouraged managers to challenge and debate decisions. Waters says establishing this culture has been a key determinant of its success with acquisitions in Australia.

At the first strategy meeting in late 2001, the company had already decided it could not afford not to go to Australia, even though it recognised such a plan would be hard to sell to already gun-shy investors.

But instead of looking at takeover targets, executives nutted out a set of acquisition criteria. These included: a stable industry, buying the number one or two in the market, strong management willing to work with new owners, and paying a price that would allow the acquisition to earn its cost of capital after two years.

The process was new to the company and challenged Water's preconceptions as well those of his senior management team.

"I went to that meeting predisposed against Laminex. I did not have it anywhere near the top of the list.

"In fact, the first time the vendors came over here and wanted to talk to us about buying some of their businesses we did not even agree to talk. As it happened, it was a very good thing tactically later on, but it was not intended."

Waters also slashed costs, dumped a battalion of consultants, who had been sub-contracted to perform tasks he regarded as core skills of the company management.

Finally, management incentives were aligned with shareholders. He introduced a scheme requiring him and his top 50 managers to invest half of their incentive pay in Fletcher Building shares each year until their holdings were equal to their base salaries.

He is now sitting on well over $8 million of Fletcher Building shares, while several of his senior chiefs have holdings worth more than $1 million.

"There were some murmurs of concern, when it was introduced, because not everybody has that money spare," Waters said.

"We set the lead at head office. I said I would spend 100 per cent of my variable remuneration buying Fletcher Building shares and, without asking my executive committee to do the same, they have basically all followed that lead."

Waters believes Fletcher Building executives have now spent more of their own money in their own company than any comparable firm in New Zealand.

Such holdings focused minds, especially during discussion over acquisitions such as Laminex or Tasman Building products.

Waters, however, says he is not driven by money.

Instead, he says he is motivated by doing the job well. He credits these values to his strict-Baptist, working-class upbringing in Redcliffe, Queensland, a town then earning its living from the fishing and prawn industry.

He says his properties, including one in Sydney's Bellevue Hill, and personal superannuation in Australia are more valuable than his Fletcher Building shares.

"I come from a bloody working class family that had nothing and have now got more than I can spend in the rest of my lifetime. You do it for pride."

He credits those same values for his willingness to break ranks with New Zealand's business elite. (This despite his stated desire not to set himself up as a commentator.)

Last year he wrote to the National Business Review declaring Australians were taxed more than New Zealanders. Earlier this year, he told the Herald that New Zealand had a "serf mentality, where they think low wage costs is a comparative advantage".

"I do have a social conscience," he says to explain. "New Zealand is a less egalitarian society than Australia is. The top end of town does very well here and yet that is where you continue to hear the noise."

Ask investors and analysts about Waters and they describe him as analytical and tough, if occasionally less than personable.

"He is hard-nosed and he does not take any bullshit, which is exactly what you want when you are running a building materials business," said one investor, who also added Waters was very good at selling the Fletcher Building story.

However, almost without exception, they say the final test of his leadership will be how the company weathers an inevitable downturn in construction.

In the latest results, Fletcher Building said heavy investment in roads and other infrastructure would insulate it from a downturn in the housing market.

But even Waters admits the downturn must come - on present predictions in two years' time.

"I do not see the 2005 year as a major year, I see the 2006 year a more difficult year. But every year I have been here, I have said next year is okay; it is the year after that I have been worried about."

He is also anxious to dispel the less than charitable suggestions that he has succeeded only because his actions were supported by strong demand.

"It was not the market that actually made us find the right acquisitions, beat the opposition and not pay too much and make them successful at the end of the day.

"That is not the luck of the draw.

" I am confident to predict that at the bottom of the cycle, we will still be earning returns on total funds employed that is around what the industry is doing at the top of the cycle."

But will he be around to witness it? Talk is that he will present a paper to the board on his succession early next year, with his replacement named in the middle of the year. Divisional chiefs Mark Binns (construction and concrete), Andrew Reding (building products), David Worley (distribution) and Jonathan Ling (laminates and panels) are said to be the top contenders.

Waters says he is not intending to leave "anytime soon" but he refuses to dispel the belief his replacement will be an internal appointment.

"When I was appointed the guys who I have reporting to me were candidates. They were just a bit short on the experience curve to get up. But four to five years down the track as they are now, they have a few more runs under their belt."

When the time comes, he will not take another full-time role. Instead, he is hoping for more non-executive directorships to complement his seat on the Fisher & Paykel Appliances board.

Clearly, New Zealand investors will hear Ralph Waters' bark for some time yet.

RALPH WATERS

* Age: 55

* Married to Helen.

CAREER:

* Studied mechanical engineering under a Royal Australian Airforce cadetship.

* Joined Carrier Air Conditioning in Australia.

* Moved to Elliot Turbo-Machinery in England.

* Returned to Australia to work at appliance and metals giant Email.

* Moved to Auckland to run Fletcher Building.