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Fletcher Building
Annual Report 2016
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W u orking with yo

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and you
and you
and you
and you
and you
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and you
and you
and you
and you
and you
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and you

There’s no better way to know our customers than to be our customers.

Every day our people live in the houses and communities we create, frequent the iconic buildings we build, buy our products from the same places our customers shop at and use the roads and infrastructure we construct. This first hand understanding of the customer experience allows us to stay ahead of what customers and delivery partners really need.

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Working
harder here
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to make life easier here.

Contents

Strategy	06
Business overview	08	The directors are responsible for preparing the annual report, including
		the financial statements, and ensuring
Chairman and CEO's report	10	that the financial statements comply with generally accepted accounting
Business review	15	practices. The directors believe that proper accounting records have been
		kept which allow for the determination
Building Products	16	of the group’s financial position with reasonable accuracy and that the
		financial statements comply with
International	18	the requirements of the Companies
		Act 1993 and the Financial Markets
Distribution	20	Conduct Act 2013.
Construction	22	When used in this annual report, references to the ‘company’ are
		references to Fletcher Building
Residential and Land Development	24	Limited. References to ‘Fletcher Building’ or the ‘group’ are to
Board and management	26	Fletcher Building Limited, together with its subsidiaries and its interests
		in associates.
Focus areas	29
		All references to financial years
Customers	30	(e.g. FY15 and FY16) in this annual report are to the financial year ended
		30 June. References to $ and NZ$
People	32	are to New Zealand dollars unless otherwise stated.
Sustainability and environment	34	Any references to documents and
		information included on external
Health and safety	36	websites, including Fletcher Building’s website, are provided for
Community	38	convenience alone and none of the documents or other information on
		those websites is incorporated by
		reference in this annual report.
Governance	40	You can obtain an electronic
		copy of this annual report at
		fbu.com/investor-centre/reports
Financial review	44
Trend statement	54	The annual report is dated 17 August 2016 and is signed
		on behalf of the board by:
Independent auditor's report	55
Financial statements	56
Remuneration report	94	Sir Ralph Norris Chairman of Board of Directors
Regulatory disclosures	99
Investor information	106
Directory	107	Mark Adamson Managing Director

06 Fletcher Building Annual Report 2016

Strategy

How we are building a customer leading business

Our organisation is made up of 34 businesses that enable communities to grow, cities to prosper and countries to be more productive.

We manufacture, source and distribute a wide range of building products and we build all sorts of projects, big and small.

20,000+ People just like you

07 Fletcher Building Annual Report 2016

Strategy

Fletcher Building’s aspiration is to run the best building products and construction businesses, taking a customer first approach to ensure our businesses are worth more together than they are apart. We are committed to creating sustainable value for our key stakeholders and delivering reliable earnings growth and topquartile shareholder returns.

We deliver value through our strategic priorities:

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People

Building a great place to work, recruiting and developing the best talent and ensuring everyone goes home safe.

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Efficiency

Working better together to achieve excellence in sales, marketing and operations.

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Customer

Delivering what customers value through market-leading solutions and product innovation.

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Profitable Growth

Targeting growth investment in sectors with attractive long-term trends and where we have advantage through ownership of channels to market or customer relationships.

We have a clear view of where we will invest in the coming years and how we will manage our portfolio of businesses to deliver our aspiration.

Our businesses are supported by central functions and centres of excellence, including technology, people and communications, finance, strategy, property, marketing, procurement and operational excellence.

These central functions allow our businesses to leverage Fletcher Building's scale to make common practices more efficient and access specific capability to improve performance.

Everything we do is underpinned by our Fletcher Building values – Be Bold, Play Fair, Better Every Day and Customer Leading. We are guided by our vision of Building Better, Together.

08 Fletcher Building Annual Report 2016

The customer's view of our business

From the raw materials in the manufacturing process, to constructing houses and buildings and the amazing products that make them unique, right through to the largest infrastructure projects, our business starts and ends with the customer. This customer first approach means we help make, deliver and build the lives, communities and economies our customers need today and want tomorrow.

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BUILDING PRODUCTS

From our quarry operations to manufacturing plants, we supply high-quality, reliable building products.

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INTERNATIONAL

Our family of internationally recognised brands covers built environments from kitchens to commercial buildings, creating beauty inside and out.

09 Fletcher Building Annual Report 2016

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DISTRIBUTION

Our network delivers essential building, plumbing and steel products throughout Australia and New Zealand. From single nails to large scale reinforcing, we deliver for our customers.

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CONSTRUCTION

We have more than 100 years’ experience leading commercial and infrastructure projects across New Zealand and the South Pacific. Keeping people moving, business thriving and cities and countries growing.

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RESIDENTIAL AND LAND DEVELOPMENT

By developing and building housing and communities, we are helping a growing Auckland and creating a new way of living in Christchurch.

10 Fletcher Building Annual Report 2016

Chairman and chief executive officer’s report

A People Business

Employees and Customers First

Sir Ralph Norris CHAIRMAN Mark Adamson CHIEF EXECUTIVE OFFICER

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11 Fletcher Building Annual Report 2016

Dear shareholders,

We are pleased to present our report to you for the 2016 financial year. The theme of this year’s report is our customers and how we work with them. Increasingly, our success is being derived from our ability to provide our customers with end-to-end solutions. Our strategies are built around the manufacture and distribution of not only high-quality building materials but also the delivery of outstanding service propositions and whole-of-project building solutions. When we achieve these, we become a valued member of our customer’s supply chain rather than simply a product supplier or contractor.

In addition to this emphasis on building customer solutions, we have also had a particular focus on the following areas over the past year:

Ensuring our New Zealand businesses capture the growth in construction activity
Lifting the performance of our Australian businesses
Leveraging the capability we have built through FBUnite, augmented by additional capability, to deliver a sustained uplift in performance over the medium term
Continuing to build our people capability through ongoing recruitment and employee development and through entrenching the vision and values launched last year
Executing on our growth agenda through expansion of activities in our distribution, construction and residential development businesses
The business portfolio rationalisation with non-core businesses divested or otherwise restructured.

We have made substantial progress in all of these areas and detail below the key achievements in respect of each one.

FINANCIAL RESULTS FOR THE YEAR ENDED 30 JUNE 2016

Net earnings for the year ended 30 June 2016 were $462 million, compared with $270 million in the prior year. This year’s result included a net gain within significant items totalling $37 million. Net earnings before significant items were $418 million, 5% higher than the comparable figure of $399 million recorded in the 2015 financial year.

Operating earnings (earnings before interest and tax) were $719 million, compared with $503 million in the prior year. Operating earnings excluding significant items were $682 million, up 4% on the prior year and in line with the earnings guidance we provided at the annual shareholders’ meeting.

The increase in earnings was driven by the 29% uplift in operating earnings before significant items from our Australian businesses, coupled with strong growth in operating earnings in New Zealand in the Distribution, Residential and Construction divisions.

Operating earnings before significant items from our businesses beyond Australia and New Zealand were down 11%, owing mainly to performance issues with our Formica plant in the United Kingdom, which offset stronger reported earnings in North America and Asia. With a refreshed management team and good progress achieved during the year in improving manufacturing operations, we are confident of a significant turnaround in performance in 2017.

A highlight of the result was the increase in cash flow from operations, which was 15% higher at $660 million than the $575 million we achieved in the prior year. The increase was due to the growth in underlying operating earnings and reductions in working capital.

CAPTURING THE GROWTH IN THE NEW ZEALAND CONSTRUCTION MARKET

The past year has seen a continued uplift in construction activity levels in New Zealand, with all sectors – residential, commercial and infrastructure construction – showing strong growth. Total construction activity in New Zealand has now surpassed the previous peak level experienced in the mid-2000s, and we expect this heightened level of activity to continue for several years. New housing construction is responding to strong market demand, driven in part by the record net migration levels into New Zealand. Similarly, we have seen increased activity in the commercial sector across most building types, and government spending on core infrastructure, such as roads, education and health facilities, has continued apace.

In most of our New Zealand businesses, volume growth tracked the broader increase in overall construction activity. We experienced 7% growth in concrete volumes and 6% growth in cement volumes and plasterboard volumes were 11% higher.

Cash flow from operating activities $m

$660 2015[:] 575 ▲ 15%

Net earnings $m

$462

2015[:] 270 ▲ 71%

Revenue $m

$9,004 2015[:] 8,661 ▲ 4%

Operating earnings $m

$719

2015[:] 503 ▲ 43%

Total construction activity in New Zealand has now surpassed the previous peak level experienced in the mid-2000s, and we expect this heightened level of activity to continue for several years.

12 Fletcher Building Annual Report 2016

Chairman and chief executive officer’s report

What was equally pleasing was the continued growth in earnings from our New Zealand distribution businesses, which increased 16% on the prior year.

Earnings in our residential business were 12% higher, despite the reduction in contributions from the Stonefields development in Auckland. We have seen the efforts of the residential team in identifying and developing new sites successfully offset the impacts of the build out of Stonefields.

The New Zealand Construction division reported 29% growth in revenue, and a 13% increase in future contracted work, reflecting the strength of the domestic construction market, as well as success in delivering for customers and securing new work.

LIFTING THE PERFORMANCE OF OUR AUSTRALIAN BUSINESSES

Conditions in the Australian construction industry have been more mixed over the past year. While new housing construction has been running at record levels, the industry has had to digest the impact of the slow-down in capital expenditure in the mining and resources sectors and the negative impact on regional economies and governmentfunded infrastructure investment plans.

Despite the mixed economic backdrop in Australia, our focus on improving business performance has seen stronger earnings from our Australian portfolio of businesses. Operating earnings in Australia were 29% higher at $154 million. This strong performance was driven in part by the success of the turnaround of the Iplex plastic pipes business, which finished the year on a positive earnings run rate, having operated at a loss for most of 2015. Also contributing significantly was the Stramit steel roll-forming business, where earnings were 43% higher than for the prior year and Fletcher Insulation which more than doubled its operating earnings.

LEVERAGING OUR CAPABILITY TO FURTHER LIFT PERFORMANCE IN THE MEDIUM TERM

During the year, we undertook a substantial review to identify the potential to further grow shareholder value from our existing portfolio of businesses. Following on from this analysis, we developed a new approach that would enable us to deliver on the opportunity we had identified, over a three year timeframe and beyond.

Using the benchmarks refined following the initial assessment phase, targets have been established for each business unit, with the opportunities grouped under the following categories:

Commercial – revenue and product margin growth
Cost – both external expenditure and overhead costs
Manufacturing and operational efficiency – including manufactured products, distribution costs and construction-delivered margin.

Called Accelerate , the programme leverages the capability built under FBUnite, particularly around procurement, property management, information technology, manufacturing excellence and sales and marketing centres of excellence.

The initiatives identified within Accelerate are driven by the management teams in each business unit, supported by the centres of excellence. In addition, a Transformation Office has been established to oversee the governance of the Accelerate programme, provide support and tools to each business unit and coordinate resources. To date, more than one thousand initiatives have been started. These are captured in an online system that tracks their validation and delivery timeframe.

The success of the Accelerate programme will be reflected in the results of each business unit over the next three years with the aim of delivering higher revenue growth, market share gain, improved gross margins and lower operating costs.

BUILDING OUR PEOPLE CAPABILITY

To better serve our customers and grow returns to our shareholders, we understand that we must continue to invest in our people and capability. This past year has seen a continuation of our mission to make Fletcher Building a great company to work for. This means ensuring that our people go home safe every day, building deep leadership talent pipelines and investing to build capability across all levels of the organisation in an environment that fosters both high performance and high engagement across the workforce.

Our people strategy is formed around three key priorities: talent and leadership, workplace culture and capability. You will find more detailed discussion of our achievements in the past year further on in this report.

We were pleased to welcome 1,200 Higgins employees to Fletcher Building at the end of July, with the completion of the Higgins acquisition. Critical to the success of the Higgins business within Fletcher Building will be the integration of the newly acquired business with our existing construction and quarrying activities.

EXECUTING ON OUR GROWTH AGENDA

Last year we clearly outlined the areas we had identified as offering the most opportunity for growth. These were New Zealand residential development, construction in New Zealand and the South Pacific and trade distribution in New Zealand and Australia. In each of these businesses we have differentiated capabilities, cost positions, customer relationships and end-markets that offer substantial room for growth.

1. Residential

Fletcher Living, our residential development business, had a record year in 2016, with operating earnings of $74 million, which were up 12% on the prior year. This was driven by the strong increase in the number of homes we sold in the year, and also owing to the strength of house prices, particularly in Auckland.

We have ambitious plans to further expand this business, with the ultimate goal of lifting the number of homes we bring to market each year from an historical average of 300 to 1,500. To achieve this, we are working on three fronts.

13 Fletcher Building Annual Report 2016

The first is a continuation of our traditional activity where we buy completed lots from land developers. The second is the purchase of bare land for development with which we master-plan whole new communities. Third are our partnerships with the Government to develop existing land with increased density to cater for a wider range of housing needs.

The expansion of our

residential development business continues to require investment in land inventory to enable us to meet the goal of delivering 1,500 homes a year.

In 2016 we invested a further $89 million (net) in land and work in progress, and expect to invest a further $160 million in the 2017 financial year.

2. Construction

Fletcher Construction is continuing to build on its outstanding track record. With a number of new contracts secured during the year, its total contracted order book now stands at $2.7 billion.

We had signalled for some time our desire to extend our activities into the road construction and maintenance sector, where we have identified significant opportunity. With the completion in July of the acquisition of the Higgins contracting business in New Zealand and Fiji, we are now in a position to fulfil this aspiration. Higgins was a logical choice for Fletcher Building, as we have partnered with them on road construction projects for over 25 years and have forged a close working relationship.

The acquisition included the Higgins aggregates business in New Zealand, and the total purchase price was NZ$303 million.

We believe that a combination of Fletcher Building and Higgins will provide our customers with a stronger proposition for both new road projects and maintenance contracts.

We also see further benefits for a number of group businesses in being able to work more closely with Higgins and believe that we can derive further value from the acquisition through operational synergies.

Higgins has achieved strong growth in Fiji and this business complements our existing South Pacific construction activities. We will be looking to extend the sphere of operations beyond Fiji into other South Pacific territories over the next few years.

3. Distribution

The third area of growth is in our New Zealand and Australian distribution businesses. In New Zealand, we have seen PlaceMakers achieve record earnings, and Mico go from loss making two years ago to strongly profitable this year. In addition, we have seen further gains in the Steel Distribution businesses.

In Australia, we have continued to implement the turnaround of Tradelink. The focus has been on cost-effectively expanding the store footprint, implementing a service guarantee oriented around the core requirements of the trade plumber, and on lifting the capability of people within the business. There remains much to be done to get that business to acceptable returns but we are clear on our strategy and the early signs of customer acceptance are encouraging.

Across all our distribution businesses we have identified further organic growth opportunities, from improving our store footprint, developing complete customer solutions, expanding our product range into adjacent categories and expanding into entirely new but complementary categories. We will continue to invest in online platforms and increasingly leverage our procurement capabilities to further source from low-cost countries. Our portfolio of strong distribution brands provides us with the opportunity to drive deeper customer connections through the services and products we procure or supply.

REFOCUSING THE BUSINESS PORTFOLIO

Over the past two years we have been working to rationalise our portfolio of businesses and have actively sought to divest those businesses that we did not see as being core to our future. The most significant event during the year was the sale of the Rocla Quarries business for $212 million. This transaction gave rise to a one-off gain of $85 million. The Rocla Quarries business was a sound one but it was an isolated asset that was not integrated with the rest of our Australian portfolio and we were able to sell the business for greater value than it could add as part of Fletcher Building.

We have also combined the Fletcher Aluminium windows and doors business with Nalco in a new joint venture aimed at better serving the New Zealand market.

With these actions we have made significant progress in reshaping our portfolio, with non-core businesses divested and investments made where we see the strongest opportunity to further grow earnings.

REFINED DIVISIONAL STRUCTURE TO SUPPORT STRATEGY EXECUTION

As a result of these changes we announced a refined organisation structure in February. This new structure saw the company organised into five divisions, centred on the manufacture of building products, distribution, residential and land development, construction, and the group’s international businesses. The new structure accommodates the changes to the portfolio made over the past two years and at the same time allows like activities to be grouped together and operating efficiencies to be pursued.

A further change to the structure this year was the establishment of the role of chief transformation officer and the appointment of Lee Finney to the position.

With the creation of this role we now have a dedicated senior executive focused on supporting the Accelerate programme and overseeing the activities of the centres of excellence.

14 Fletcher Building Annual Report 2016

Chairman and chief executive officer’s report

Dividend per share cents

39¢ 2015[:] 37¢ ▲ 5%

Earnings per share before significant items cents

60.6¢ 2015[:] 58.0¢ ▲ 4%

Total shareholders’ return %

11% 2015[:] (3%)

DIVIDEND

The total dividend for the year increased to 39 cents per share, from 37 cents per share last year, and the increase is consistent with the growth in net earnings before significant items for the year. This corresponds to a pay-out ratio of 64% of net earnings before significant items, which is within the target pay-out range of 50% to 75%.

The dividend will be fully imputed for New Zealand tax purposes. For the 2017 financial year, we expect to be able to fully impute both the interim and final dividends for New Zealand tax purposes and for at least the next two years beyond 2017. We do not expect to be in a position to fully frank a dividend for Australian tax purposes in 2017.

TOTAL SHAREHOLDER RETURNS

The total return to shareholders for the year to 30 June 2016 was 11%, representing a combination of positive share price appreciation over the year and dividends paid. This past year has been one of exceptional volatility in equity markets which has at times impacted Fletcher Building’s share price dramatically despite a steady financial and operating performance.

BALANCE SHEET

An ongoing priority has been to manage the business so as to maintain a strong financial position at all times. We have continued to target financial metrics

that are consistent with an investment grade credit rating and that ensure we are in line with our industry peers.

As at our balance date of 30 June 2016, we had received the $212 million in proceeds from the sale of the Rocla Quarries business but had yet to settle the $303 million acquisition of Higgins. Consequently, we had relatively low net debt levels at year end, which resulted in gearing (measured by the ratio of net debt to net debt plus equity) being temporarily below our target range of 30% to 40%, at 27%.

OUTLOOK

For the 2017 financial year we expect operating earnings (earnings before interest and tax and significant items) to be in the range of $720 million to $760 million.

In New Zealand, we expect residential activity to peak in 2018 and then gradually slow to 2014 levels over the next three years. However, owing to the lag between consents being granted and work actually being undertaken, the peak in consents will continue to impact activity beyond 2017, prolonging the strength in the building market for at least another year.

Non-residential activity is forecast to remain relatively steady at elevated levels compared to the historical average. Infrastructure work undertaken is expected to maintain its upward trajectory over the course of 2017 and beyond.

The New Zealand dollar is expected to gradually weaken throughout the year against key currencies, particularly the Australian and US dollar.

Australian residential activity is expected to gradually decline over the next three years following its peak in 2016. Little growth is forecast in non-residential activity.

In Asia, the China market is expected to grow moderately but at lower rates than in recent years. Taiwan and South East Asian markets are expected to show modest growth.

North American market growth is expected to be relatively low but slightly higher in the USA than Canada.

Market growth estimates vary across continental Europe from negative in some markets to flat and low growth in others, while the UK is expected to show modest growth.

In terms of the outlook for each of our divisions:

Building Products: continued focus will be on further improving the performance of its Australian business units and ensuring the New Zealand businesses continue to capture the growth in volumes arising from the strong market conditions
International: the turnaround of Formica‘s European business, particularly in the UK market, will drive earnings uplift and all regions are targeting improved trading performances
Distribution: pursuing top line growth, particularly in higher margin product categories, will be key enablers for further earnings growth. The performance of Tradelink’s turnaround plan will require network plumber share gains, although the benefits will be partly offset by the operating costs from expansion of the branch network
Residential and Land Development: the acceleration of home building in Auckland and Christchurch, along with maximising development opportunities from industrial land holdings, will drive operating results for the year
Construction: continued strong revenue growth is expected, driven by the elevated levels of construction activity in New Zealand. Operating results will be positively impacted by the Higgins acquisition, offset in part by the wind down of the Canterbury Earthquake Recovery (EQR) home repair programme and a reduction in South Pacific activity.

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Sir Ralph Norris Chairman of Board of Directors

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Mark Adamson

Chief Executive Officer and Managing Director

BUSINESS REVIEW

Our people, across each of our five business divisions, are united in their commitment to driving ongoing operational performance improvements. As a result, we are delivering enhanced experiences for our customers and better outcomes for our communities and for our shareholders.

16 Fletcher Building Annual Report 2016

Business review

Building Products

During the year the Building Products division was formed under the leadership of Matt Crockett to bring together the group’s interests in manufacturing and distributing building materials, supplying a broad range of industries across Australasia.

The division comprises Firth, Humes, GBC Winstone, Iplex Pipelines (New Zealand and Australia), Rocla Products, Winstone Wallboards, Tasman Insulation, Fletcher Insulation and Fanalco.

HIGHLIGHTS

We have turned around performance in our Australian business units, while maximising the performance of the New Zealand businesses, delivering increased year-on-year earnings.

Solid progress was made in our Australian turnaround businesses. Iplex Australia is close to returning to profitability after the significant losses it sustained in the 2015 financial year and Fletcher Insulation more than doubled its earnings in this financial year.

In New Zealand, our market share in the concrete value chain was defended despite intensifying competition and while successfully executing a complex national cement distribution strategy following the end of the Holcim reciprocal arrangements. Our New Zealand building materials businesses had another strong year delivering significant earnings growth with superior customer value propositions and service. Volume growth reflected the increase in construction activity.

This year has also seen the completion of the successful divestment of the New Zealand Pacific Steel and the Australian Rocla Quarries businesses, resulting in a more focused portfolio.

FUTURE FOCUS

We will continue to focus on improving the performance of our turnaround Australian businesses (Iplex Australia, Fletcher Insulation and Rocla Products). We will grow market share with superior customer value propositions and service promises, while continuing to drive for further operational efficiencies. In New Zealand, we will defend share and optimise pricing and margins to ensure our businesses capture the growth in construction activity.

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GROSS REVENUE
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$2.5b

EBIT* $274m

PEOPLE 4,059

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PERCENTAGE OF GROUP EBIT+
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37[%] * EBIT excluding significant items + EBIT excluding corporate costs and significant items

17 Fletcher Building Annual Report 2016

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IPLEX PIPELINES AUSTRALIA / Australia's first plastic pipe manufacturer to publish Environmental Product Declarations (EPD's), committed to the environment and our customers.

18 Fletcher Building Annual Report 2016

Business review

International

The International division created during the year under the leadership of Francisco Irazusta, makes and delivers a range of laminates, decorative surfaces products and roofing materials.

The division comprises Formica, which manufactures its products in Europe, Asia and North America, Laminex which produces decorative wood panels and laminate, particle board, medium density fibre board and other decorative products in New Zealand and Australia, and the Roof Tile Group, which supplies pressed metal roof tiles in North America, Europe, New Zealand, Africa and Asia.

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HIGHLIGHTS

International continued to remain at the forefront of a highly competitive and cost-conscious market. We pursued the growth of the business through the development of new capabilities, enhancements of existing systems and processes and by continuing to improve our people capabilities. Key focus areas all aimed at making it easier and better for our staff to perform their roles, while at the same time increasing the emphasis on providing improved experiences and service for our customers.

The division continued its programme of manufacturing and supply chain excellence at its 20 major manufacturing sites across the world and continued the programme of upgrading its global ERP systems. This upgrade has revolutionised the way that our European business interacts with its customers and has led to significant improvements in service capability across the market.

In Asia our business improved efficiencies and increased capacity at the recently built high-pressure laminate factory at Jiujiang, which serves regional markets.

In addition, the business continues to focus on supplying new products with anti-microbial qualities into the growing hospital, healthcare and education sectors, as well as government projects with high hygiene expectations.

Our German metallic laminate business, Homapal, continued to expand its range of highly successful and innovative products. This range includes white and black magnetic boards, and continues to grow and prove successful in the education and commercial sectors.

FUTURE FOCUS

The division is focused on making capital investment and system improvements across the business to enhance competitiveness and also capture market opportunities. We are investing heavily in our European laminate business and will install upgraded modern state-of-the-art laminate manufacturing

equipment at our Newcastle laminate facility which will help to address the manufacturing issues encountered during the year. Focus will remain on optimising and fully loading our new laminate plant in China and our expanded roof tile facility in California. Optimising our manufacturing facilities in Asia and improving logistics and service, remain key initiatives for the coming year. We will continue with a programme of enhancing digital and ERP capabilities across the business. Extending product ranges and applications through innovation and new products remain the key priority, as we seek to drive revenue across all segments of the business.

GROSS REVENUE $2.1b

EBIT* $133m

PEOPLE 5,470

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PERCENTAGE OF GROUP EBIT+
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18[%] * EBIT excluding significant items + EBIT excluding corporate costs and significant items

19 Fletcher Building Annual Report 2016

FORMICA / As the world’s largest manufacturer of high-pressure laminate (HPL) our range is vast, including this Carerra Marble laminate below, well suited to commercial applications.

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20 Fletcher Building Annual Report 2016

Business review

Distribution

The Distribution division, under the leadership of Dean Fradgley, has marketleading positions in New Zealand and Australia thanks to its focus on customer service.

Distribution is a Trans Tasman portfolio of businesses, incorporating over 420 locations. PlaceMakers, Mico, Pacific Coilcoaters, Fletcher Reinforcing, Dimond and Easysteel operate in New Zealand, with Tradelink, Stramit and Tasman Sinkware operating in Australia.

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HIGHLIGHTS

Over the last year the Distribution division has combined the previously separate New Zealand and Australian Distribution divisions to drive greater alignment, synergistic strategies and further deploy to each business a tailored customer service promise with a differentiated service offering in the market.

This financial year saw record domestic sales levels and double-digit operating earnings growth at PlaceMakers, Mico, Pacific Coilcoaters and Fletcher Reinforcing. At the same time we saw material improvements in our customer service metrics, a direct output of our businesses and our people becoming increasingly more customer focused.

PlaceMakers took an industry-leading position to externally publish its customer service scores in trade publications, reinforcing the focus on putting the customer at the heart of our business. Following the transition of the Australian businesses into the enlarged Distribution division during the year, customer value propositions have now been deployed for these businesses as well.

The Distribution division continues to leverage its scale and operational efficiencies, with the co-location of eight branches in New Zealand, integrating Dimond into the operations of Easysteel, and further leveraging operational support and management functions, enabling synergy realisation and cost savings. The co-location programme also reduced carbon emission by almost 100 tonnes per year. Three new PlaceMakers branches, three new Mico branches and four new Tradelink branches were opened during the year making it easier for our customers to do business with us.

FUTURE FOCUS

Our customer leading focus is on implementing and evolving our differentiated service model, growing profitably, developing and extending categories for each business. For example, front-of-wall bathroom products for Mico and kitchens in PlaceMakers. Growth will be pursued in key sectors of the market, such as small medium enterprise and servicing the growing group home builder sector. Our growth strategy includes Tradelink opening a further 20 branches in the coming year.

GROSS REVENUE

$3.2b

EBIT*

$176m

PEOPLE

6,145

PERCENTAGE OF GROUP EBIT+

24[%] * EBIT excluding significant items + EBIT excluding corporate costs and significant items

21 Fletcher Building Annual Report 2016

PLACEMAKERS / Along with our other Distribution businesses, PlaceMakers makes sure our customers, be it trade or home, have what they need, when and where they need it.

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22 Fletcher Building Annual Report 2016

Business review

Construction

The Construction division under the leadership of Graham Darlow is a builder of commercial buildings and infrastructure across New Zealand and the South Pacific.

Projects range from New Zealand’s largest transport and commercial building projects through to small interior works and road improvements. Customers include New Zealand’s key infrastructure providers from the central and local government sectors, health and education providers, utilities and commercial property owners. The Construction division comprises:

Infrastructure, including Brian Perry Civil, Seovic, Pipeworks and Piletech
Building + Interiors, including Forman Commercial Interiors
South Pacific, operating in Fiji, Samoa, Tonga, American Samoa, Vanuatu, the Solomon Islands and Papua New Guinea
Canterbury Earthquake Recovery, responsible for organising the repair of earthquake damaged homes in that region.

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HIGHLIGHTS

The division’s backlog of work has continued to grow throughout the year – the value of work won and yet to be completed, increased from $2.4 billion in the prior year to $2.7 billion as at 30 June.

The division’s level of work, turnover and profitability have reached record levels, with Building + Interiors revenue up 32% and Infrastructure revenue up 28%.

The Building + Interiors business has been awarded over $1.4 billion of work in the last year and the Infrastructure business has begun works on the 21.8km Hamilton section of the Waikato Expressway, Waikato's largest roading project.

The Canterbury Earthquake Recovery business has been winding down its operations over the last year, as it completes its contractual arrangements with the Earthquake Commission.

South Pacific has turned over a similar level of work to the previous financial year, with the Momi Bay resort in Fiji the most significant project in progress. This year a significant highlight was securing wharf work in Vanuatu and American Samoa, as well as initial construction of the Star Mountain development in Papua New Guinea.

Work has continued on major infrastructure and commercial building and interiors projects. See map for Construction’s 24 key projects in New Zealand.

FUTURE FOCUS

With the largest pipeline of business on record, the Construction division remains focused on delivering excellence for our customers, finding innovative ways to increase efficiencies and making sure we have the right people, skills and processes to fit the future needs of our business and our customers.

In February the acquisition of Higgins was announced. Higgins is a New Zealand and Fiji road construction and maintenance business, operating a number of asphalt plants and quarries. The Construction

division will have responsibility for the construction and maintenance parts of the business including asphalt plants, while the quarries will be integrated into the GBC Winstone business. Higgins is recognised by infrastructure agencies for its expertise in road paving and maintenance, which will add to Fletcher’s transport project construction attributes.

The Higgins business acquisition positions the division well for the increasingly favoured ‘construct and maintain’ contractual arrangements used for transport projects. The acquisition of Higgins was completed on 29 July 2016.

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GROSS REVENUE
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$1.7b

EBIT $78m

PEOPLE

3,275

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PERCENTAGE OF GROUP EBIT+
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10[%] + EBIT excluding corporate costs and significant items

23 Fletcher Building Annual Report 2016

MAJOR CONSTRUCTION PROJECTS

Building for New Zealanders

$2.7b

AUCKLAND REGION

Commercial Bay for Precinct Properties
New Zealand International Convention Centre and Hotel
Auckland International Airport terminal upgrade
AUT teaching facility
Auckland Prison redevelopment
SH20A to Airport H

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Waterview Connection
Westgate Town Centre
TVNZ headquarters refurbishment
University of Auckland Science Centre

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New Fonterra headquarters

WAIKATO REGION

Rangiriri realignment H
Hamilton Section of the Waikato Expressway H

WELLINGTON REGION

Ngauranga to Aotea Quay project H
McKays to Peka Peka on the Kāpiti Coast H
Victoria University’s Gateway building
— Wellington International Airport car park building
National Biocontainment Laboratory

H work with Higgins

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WEST COAST

Grey Hospital upgrade

CHRISTCHURCH REGION

Christchurch International Airport Hotel
Christchurch SCIRT Alliance
Christchurch Justice & Emergency Services Precinct
Grand Central development
University of Canterbury Research Science and Innovation Centre

24 Fletcher Building Annual Report 2016

Business review

Residential and Land Development

In February 2016 the Residential and Land Development division was separated from the Construction division and is led by Steve Evans.

The newly created division expanded to include the development of Fletcher Building’s current property portfolio to its highest and best use. The division comprises two business units – Fletcher Living and Land Development.

Fletcher Living specialises in building master-planned residential communities in Auckland and Christchurch, being a vertically integrated builder, encompassing design through to sales.

Land Development’s business comprises a combination of residential and commercial land developments for on sale to third parties.

The division currently has 28 projects providing a secured pipeline of in excess of 6,000 dwellings.

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HIGHLIGHTS

Home building commenced at eight new locations during the year as the business transitioned from planning and consenting to execution in a number of areas. New developments include Beachlands, Hobsonville Point, Ormiston, Red Beach, Swanson, Waiata Shores, Tatua on Eden and Whenuapai in Auckland.

The division has a number of significant residential land developments undergoing infrastructure works in Auckland at the former Three Kings Quarry, Eugenia Rise and former Manukau Golf Course. These developments will provide the residential business access to lots in good locations at a reasonable cost for the next three years and beyond. Additionally, the business has a number of significant commercial subdivisions in progress.

During the year, major partnership arrangements were secured with the Government for the release of surplus Crown land in Auckland. The first of these projects, announced in June 2016, is an almost 200 dwelling subdivision at Moire Road in West Auckland.

In Christchurch, formal agreement was reached with the Government to develop 900 dwellings at East Frame over 10 years. Work is also under way on the Awatea, Atlas Quarter and 350 Colombo projects, all in partnership with the Government. These projects will see around 400 dwellings delivered between 2016 and early 2018.

FUTURE FOCUS

Creating communities is the vision that drives Fletcher Living. We consider the needs and desires of existing and new communities to make sure we build connected neighbourhoods that add life, soul and value to the land they occupy.

Today’s homes need to be designed around modern lifestyles. Our communities have varied architecture and housing types to meet the diversity of households and cultures that we sell to. At Fletcher Living we build homes from the inside out. Our customer proposition is to ‘create more space for living’ and in doing so we create more desirable homes and communities for the future.

Our focus for now and the future is to continue to execute on our three-prong strategy first presented to the market in June 2015, which you can find in the investor centre of www.fbu.com.

GROSS REVENUE $0.3b

EBIT $84m

PEOPLE

109

PERCENTAGE OF GROUP EBIT+

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EBIT excluding corporate costs and significant items

25 Fletcher Building Annual Report 2016

CHRISTCHURCH / The development of the East Frame will bring a new way of living for Christchurch. Vibrant, diverse central city living.

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26 Fletcher Building Annual Report 2016

Board profiles

Assured

Being a customer leading business means being clear about who the customer is. For the board, its primary customer is our shareholders. The directors bring a wealth of experience and passion, assuring shareholders that their needs drive all decision-making.

DIRECTORS

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SIR RALPH NORRIS FNZIM, HFIITP, KNZM, Hon.DBus (University of New South Wales)

Independent Chairman Chairman of the Nominations Committee and member of the Remuneration Committee

FIRST APPOINTED 1 APRIL 2014

Sir Ralph Norris retired as managing director and chief executive officer of the Commonwealth Bank of Australia in November 2011 following a 40 year career in the banking sector in Australia and New Zealand, including as chief executive officer of ASB Bank. He is a former chief executive officer of Air New Zealand. Sir Ralph is chairman of Contact and RANQX Holdings and a director of SouthPark Corporation, the Advisory Board of New Zealand Treasury and Fletcher Building Industries. He is a member of the NZ Olympic Advisory Committee, the Juvenile Diabetes Research Foundation Advisory Board, The University of Auckland Council and trustee of Business Mentors New Zealand. He also served as an independent nonexecutive director of Fletcher Building from 2001 to 2005.

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MARK ADAMSON BA (Hons), ACA, ATII

Non-independent Executive Director

FIRST APPOINTED 1 OCTOBER 2012

Mark Adamson is chief executive officer and managing director of the company. He joined the Formica Group in 1998 as chief financial officer of the European division, followed by the role of managing director UK and Eire, and in 2004 became president of Formica Europe. He became the chief executive of Formica Corporation in 2008 and of the Laminates & Panels division in 2011. Prior to joining Formica he was financial controller of the pharmaceutical company GlaxoSmithKline. Mark is a member of the Institute of Chartered Accountants in England and Wales and Chartered Institute of Taxation and a director of Fletcher Building Industries.

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ANTONY CARTER BE (Hons), ME, MPhil (Loughborough)

Independent Non-executive Director

Member of the Remuneration and Nominations Committees

FIRST APPOINTED 1 SEPTEMBER 2010

Tony Carter was previously managing director of Foodstuffs (Auckland) and Foodstuffs (New Zealand), New Zealand’s largest retail organisation, and a director of a number of related companies. He has extensive experience in retailing, having joined Foodstuffs in 1994 and from having owned and operated several Mitre 10 hardware stores, and was a director and later chairman of Mitre 10 New Zealand. Tony is chairman of Fisher & Paykel Healthcare, Air New Zealand and the Blues LLP, a director of ANZ Bank New Zealand, Fletcher Building Industries and Avonhead Mall, and a trustee of the Maurice Carter Charitable Trust.

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DR ALAN JACKSON

BEng (Hons), PhD (Auckland) MBA (IMD Management Institute)

Independent

Non-executive Director

Chairman of the Remuneration Committee and member of the Safety, Health, Environment and Sustainability and Nominations Committees

FIRST APPOINTED 1 SEPTEMBER 2010

Dr Alan Jackson was until 2009 chairman Australasia, senior vice president and director of The Boston Consulting Group. He has been an international management consultant since 1987 with The Boston Consulting Group and has proven experience at the most senior levels of international and government business. Alan has worked across a range of industries, including resources, diversified industrials, building products and construction sectors, including as chairman of the Housing Corporation of New Zealand. Alan is a fellow of the Institution of Professional Engineers. He is a director of Delegat’s Group, Fletcher Building Industries and chairman of New Zealand Thoroughbred Racing.

27 Fletcher Building Annual Report 2016

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JOHN JUDGE BCom, FCA, MPP, FInstD

Independent Non-executive Director Chairman of the Audit and Risk Committee and member of the Nominations Committee

FIRST APPOINTED 9 JUNE 2008

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KATHRYN SPARGO LLB (Hons), BA

Independent Non-executive Director

Chairman of the Safety, Health, Environment and Sustainability Committee and member of the Audit and Risk and Nominations Committees

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CECILIA TARRANT BA, LLB (Hons), LLM (Berkeley)

Independent Non-executive Director

Member of the Audit and Risk, Safety, Health, Environment and Sustainability and Nominations Committees

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STEVEN VAMOS BE (Hons)

Independent Non-executive Director Member of the Audit and Risk and Nominations Committees

FIRST APPOINTED 6 JULY 2015

FIRST APPOINTED 10 OCTOBER 2011

John Judge has considerable experience in Australasian business and brings financial and analytical knowledge to the board. His career includes various roles within Ernst & Young culminating in the position of chief executive of Ernst & Young New Zealand. He is chairman of ANZ Bank New Zealand and the Auckland Arts Festival Trust, a director of Fletcher Building Industries and The New Zealand Initiative and a member of the Otago Business School Board of Advisors.

FIRST APPOINTED 1 MARCH 2012

Kate Spargo has extensive business experience from advisory roles on strategic and governance issues following a career in legal practice in both the public and private sectors. She is the chairman of ASX listed company UGL and a director of Adairs, Sigma Phamaceuticals, Sonic Healthcare, SMEC Holdings (Australia) and Fletcher Building Industries. She is also a member of the Geelong Football Club board. Kate is a fellow of the Australian Institute of Company Directors.

Cecilia Tarrant has over 20 years of experience in international banking and finance, having worked first as a lawyer and then as an investment banker in New Zealand, the USA and Europe. Prior to returning to New Zealand, she was a managing director at Morgan Stanley in London. She is a director of Fletcher Building Industries, Annuitas Management and Payments NZ and deputy chairman of the Government Superannuation Fund Authority. Cecilia is also an executive-in-residence at The University of Auckland Business School.

Steve Vamos has more than 30 years’ experience in the information technology and online media industry. His previous executive roles include, vice president, Worldwide Sales and International Operations for Microsoft Corporation Online Services Group, chief executive officer of Microsoft Australia and New Zealand, chief executive officer of ninemsn and senior executive roles at Apple and IBM. He is a non-executive director of Telstra and Fletcher Building Industries and is a member of the Advisory Board of the University of Technology Sydney Business School.

28 Fletcher Building Annual Report 2016

Management team

Experienced

Fletcher Building is led by an experienced and expert team, that is passionate about the business and our customers.

MORE INFORMATION ONLINE AT

fbu.com/about-us/executive-management