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Why the Boral share price is down 10% today

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The Boral Limited (ASX: BLD) share price has fallen more than 10% today following the downgrade of FY20 expected profits and a leadership change.

The company provided an update on 1HFY20 results and the investigation into the troubled North American Windows business, while also announcing the retirement of CEO and Managing Director Mike Kane. 

Retirement of Mike Kane

CEO and Managing Director Mike Kane has announced his intention to retire after delivering the FY20 full-year results. Kane has presided over four profit downgrades over the last couple of years while taking home a US$1.4 million salary and hefty bonuses. Boral profits slid from $473 million in FY18 to $440 million in FY19, and are expected to fall further to in FY20. 

Kane commented, “I firmly believe that Boral is a far better, more focused business today than it was in 2012 when I became CEO. While we have faced some challenges, the strategies we’ve implemented have put the company on the path to deliver stronger financial returns through the cycle. I genuinely believe that the benefits of the strategies we’ve implemented will be seen in the years and decades to come.”

North American windows business 

Boral announced the discovery of financial irregularities in the North American windows business in December. These included misreporting in relation to inventory levels and costs associated with raw materials and labor.

At the time, it was anticipated that there would be a one-off impact on earnings before interest, tax, depreciation and amortisation (EBITDA) of US$20 million to US$30 million. Boral retained lawyers and forensic accountants to undertake a confidential investigation. 

The investigation has now been substantially completed and has determined that finance personnel within the Windows business manipulated accounts and financial statements to artificially inflate the profitability and health of the Windows business.

The misconduct occurred over the 20 month period to the end of October 2019. No evidence was found that the manipulations were aimed at hiding theft of raw materials or finished inventory. Boral has confirmed that the financial misreporting is limited to the Windows business.

Implications on financial results

The impact of the misconduct is that pre-tax earnings were overstated by US$24.4 million between March 2018 and October 2019. The costs of the investigation were around US$1 million.

Boral will restate comparative financial information to incorporate the correction of Windows earnings in underlying results. Historical pre-tax earnings will be reduced by US$22.6 million, with US$18.8 million relating to FY19 and US$3.8 million relating to FY18. 

Personnel changes

The employment of the Vice President Finance and Financial Controller in Windows has been terminated.

Joel Charlton, President of Light Building Products, has been appointed to lead Windows. A search is in progress for a new finance lead at Windows, with Alan Spear, Vice President Corporate Development for Boral North America, working as Acting Vice President Finance for Boral Windows in the meantime. 

The Windows business is expected to deliver only low single digit EBITDA margins for FY20. Under Charlton, the team is establishing a plan for the business to return to acceptable margins. The margin recovery plan is expected to see the business achieve double digit margins in the medium term. 

1H FY20 results 

Boral also provided an update on its first-half results which take into account the financial impact of the accounting irregularities and underlying performance of the Windows business.

Boral’s net profit after tax (NPAT) before significant items for the six months ending 31 December 2019 was a weak $156 million. This is more than 18% below Boral’s restated 1HFY19 NPAT of $192 million.

Group revenue for 1HFY20 was $2.96 billion, up 2% from $2.9 billion in 1HFY19. 

Overall EBITDA for continuing operations was 6% lower than the restated prior year. The result is broadly in line with guidance of around 5% lower earnings prior to the impact of Windows.

Boral Australia revenue fell 2% to $1.75 billion from $1.79 billion in the prior corresponding period (pcp). This was attributed to the continued slow down in housing starts and 7% lower concrete volumes.

Bushfire related disruptions cost around $1 million. However, a more pronounced impact on earnings is expected in the second half due to a related slowdown in sector activity since January and higher costs associated with the bushfires. Interruptions to infrastructure work already experienced have been exacerbated by the bushfires. 

Boral North America revenue was up 9% to $1.21 billion from $1.1 billion in 1HFY19. Light Building Products delivered revenue growth of 7%, Roofing earnings were broadly steady, and a 10% decline in volume was recorded in Stone. 

FY20 guidance 

Boral expects EBITDA to be down in FY20 relative to FY19 in all three divisions (Australia, North America, and USG). FY20 NPAT is expected to be around $320 million to $340 million. Restated FY19 NPAT was $420 million after adjusting for the Windows misreporting. 

The dividend reinvestment plan is being reinstated to reinforce Boral’s balance sheet while it pursues opportunities for divestment of non-core assets.

The sale of the Midland Brick business is expected to complete in the second half of FY20. Additionally, Boral is currently waiting on regulatory approval to complete a transaction with Knauf which will expand USG Boral in Asia. If approved, Boral will need to supply US$335 million in funding. 

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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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