Why Fletcher's $150m bottom-line hit could pay off in the longer-term

Net earnings fell 20 per cent to $270 million and earnings per share were down 20 per cent to 39.2cps. Photo / Natalie Slade

Fletcher Building's June 2015 annual result out today showed revenue climbed 3 per cent but net earnings fell 20 per cent, from $339 million to $270 million.

Ouch.

Investors like bottom line growth, not shrinkage. Businesses are bought with a vision of expansion, not closure. Shareholders want to buy into companies whose subsidiaries perform well, not get sold of, or even worse, written off.

So ouch again.

These are dark days for Fletcher, once with a previously internationally expansionist vision, now with a focus more on shedding, not buying.

But hard-nosed Fletcher chief executive Mark Adamson from Britain is doing the tougher job, closing loss-makers, selling them or writing down their value.

That makes him very different from former CEOs Ralph Waters and Jonathan Ling, both Australians, who led one of New Zealand's biggest companies through a big-buying phase where it sought to diversify earnings out of New Zealand because it was perceived to be too exposed to a single economy.

Get all the eggs out of one basket - seemed to make a lot of sense at the time. Buy businesses in Australia - ones the Aussies knew - and elsewhere and the company's earnings will be safer, went the thinking.

So Fletcher opened the bank account and went off across the Tasman, into businesses like Crane Copper Tube businesses and Iplex, giving it earnings diversification, giving it geographic safety. So went the thinking.

Now, $65 million of site closures included Crane and Iplex which turned out not to be the great buys expected and New Zealand has performed strongly and Australia not so much.

Today's $78 million impairment of goodwill related to Fletcher's Forman, Stramit, Tasman Insulation and Humes businesses.

Adamson's task right now is a challenging one, leading a company at a time when it disposes of assets or simply writes them off.

But he expects that strategy to pay off in the longer term. The capital management strategy is to "exit underperforming businesses, invest capex only where value is clear and drive efficiencies in working capital".

In the longer-term, that will hopefully make Fletcher a far better company: even if it is leaner, the aim is to make it fitter.

To soften today's bottom-line blow, analysts had anticipated some significant one-off costs, forecasting that the performance of Australian businesses could hurt the bottom line.

That certainly played out this morning, as the businesses summed up its $150 million hit as "significant items related to goodwill impairment, site closures and sale of businesses."

Or in plain language, just ouch.