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Edited Transcript of SKL.NZ earnings conference call or presentation 17-Feb-21 9:30pm GMT

·44 min read

Half Year 2021 Skellerup Holdings Ltd Earnings Call Auckland Feb 18, 2021 (Thomson StreetEvents) -- Edited Transcript of Skellerup Holdings Ltd earnings conference call or presentation Wednesday, February 17, 2021 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David William Mair Skellerup Holdings Limited - CEO & Executive Director * Graham R. Leaming Skellerup Holdings Limited - CFO ================================================================================ Conference Call Participants ================================================================================ * Christian Bell Jarden Limited, Research Division - Research Analyst * Guy Edward Harding Hooper Forsyth Barr Group Ltd., Research Division - Analyst of New Zealand Equities ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Skellerup Holdings Half Year Fiscal 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to CEO, David Mair. Please go ahead, sir. -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [2] -------------------------------------------------------------------------------- Thanks, Karina. First of all, welcome, everyone. As I look out the window, and it's a stunning blue sky in Auckland, and we're at the level 2. So good news for us in Auckland. I'll go through the slides easily so if you could turn to Slide #1, which was the Skellerup key points for the Half Year '21. I'm really pleased that the fantastic result due to the efforts of our team worldwide as in challenging environment. So net profit after tax $19.5 million, up 61% on the prior corresponding period. You can read the bullet points. For second and third bullet points, just about the 2 divisions, the record Agri division EBIT of $15.3 million, up 56% on the prior corresponding period; and a record Industrial Division EBIT of $15.5 million, up 53% on prior corresponding period. I'm really pleased that this is a broad-based improvement in the business. And almost all parts of the business contributing, and we're slower, there's still great opportunities. So overall, it's been an fantastic effort on behalf of all the teams. We've had a record operating cash flow of $35.1 million, up 33% on the prior corresponding period. It's funded dividends, CapEx and a significant reduction, indeed. It's a reflection of the strength of their OEM customer base that can pay us and the essential consumable nature of many of our products, which means repeat business. The directors have determined that they've increased interim dividend at $0.01 to to $0.065 per share paid on 18th of March 2021 and imputed this previously to 50%. I'm sure there'll be an opportunity to discuss the guidance. Guidance previously was $30 million to $35 million. We've increased that to a range of $33 million to $37 million. Just to note on COVID. It remains a significant issue for many of our people in Europe, in the U.S., in particular, and -- sorry, in Europe and the U.S. in particular. And until recently, Victoria and now, of course, we've had a little blip in New Zealand, again, and that will continue to cause disruption through this year. But overall, our leaders and teams are managing the impact that COVID can have on logistics and operations very well. And we'll come back with some of the issues that we see going forward, but I'm very confident that we have the team to deal with those issues. But we move to the next slide, Slide 2. This is the financial highlights for half year '21. You know the revenues EBIT impact, and as I said, that this reflects the broad-based gains we've been making. I've talked about the dividend. A little bit more on the operating cash flow. You remember last year, the full year operating cash flow was $48 million. For the half year, this year is $35.1 million. CapEx, net of disposals of $2.3 million, dividends of 14.6%. Quite a few of lease liability payments of $2.2 million and key production at $15.5 million. I think the cash flow helps emphasize again the value of our locate model where, in many cases, customers contribute to the development of our new products. And we've been doing some work on we talked about new products and some of the feedback has been, what does that actually mean? That for the first half year we first half result in '21 -- FY '21, it's 21% of our revenue comes from new products. Now it's important, we define new products in a way that there's, for example, we have a product that has a new compound that needs to standards that considered a new product and product enhancements are considered new products. If we include recent acquisitions, for example, Silclear, that means that the percentage of revenue from new products over a 3-year period, and if the revenue in the half year '21 will be 25%, that kind of gives you a feeling about the rate of innovation of products, which I know has been a particular -- of particular interest. Moving on, we had the bridge, which sort of explains the change between, obviously, half year '20 and half year '21. And if we go left to right, the first 2 are really growth in contribution from sales and, of course, Silclear. So that's a large part of the Agri growth. Silclear is going well. It's contributing in line with our expectations. We've had gains in coatable water and market share in the U.S., Asia and Australia. I just pick out, you might wonder why did we mention Asia. And previously, when we talked about the growth with Mullins and the U.S. and we have good growth opportunities, not only with Mullins, but particularly with Mullins into China, so that's where the -- prpbably the rest of Asia comes from. We've made good gains in Australia. We've had a very good leader in Australia driving through possible implications for effectively infrastructure pipelines in Australia, but it's going very well. And another highlight has been, we talked about the phone business at the annual meeting. There were some good examples of some of the unique product in particular, and we've had high-growth for Udit materials slowly. So that's a fantastic product, and we're seeking to maximize the revenue and earnings from that particular product. There's been sustained demand for footwear in New Zealand I think in New Zealand, one of the areas of interest has been our competitors have struggled to get supply. We have struggled to keep up because, of course, I believe we've been gaining market share, and just the logistics challenges have made it difficult. Having said that, we're in very good shape. I look at the window and hope that we won't have any kind of weather incident later in the year. But we're on a very good path for having a good year and full year. This includes government graphs and -- sorry, government grants includes the forgiveness of the BBB loans in the U.S. and Australian job entertainment. And in some ways, that gain has been -- one way of thinking about it is it's being offset by the corporate costs, and then they're not related, but increase in provision or for defending a claim against the business. And this particular comment around that in the release. This goes back to 2008. The business was not listed 2008. To be honest, we don't know the full detail. So we've provisioned really our expected legal costs. But over time, as we get a clearer understanding of the position of course, we'll make that clear to everyone. If we go into the 2 divisions. We'll start with the Agri Division, so at Slide 4. You can see where we believe our sales are up in all of the markets, notably Europe. And simply, its performance is very good. Remember, the prior corresponding period was only 2 months, and we've had good games operationally. These gains in operations have really come mainly at Wigram, not only Wigram, but mainly at Wigram. And it's a combination of focusing on cycle time improvements. We've reorganized the ship. Some of that was caused by COVID, but we've also reviewed the allocation of people to particular areas of the business. And consequence of that is we had far bear inventory management and an improved lead time. So what that's doing is in a speed, lowering our cost of production, but giving us capacity for free, which is helpful as our volume goes up. So in other words, we believe the operational gains are keeping up with the need for capital investment. In other words, the capital investment will be very low. But probably at sales growth, you can see it's up 16% in New Zealand, both rural and hardware channels. International was interesting. It's up in the U.S. due to the dielectric boots and down in Europe, partly, I think, because it's just very confusing time with Brexit and a number of other issues. But the operational performance of the footwear, of course, predominantly it's maven China has been very -- and I previously referred to Martin Lee and his team, they've done a fantastic job. The next slide is just a reminder of some of the products that we have focused on. So what we do in Agri, there's no loose, there's no page number on the slide. But the addition of the silicon tubing, silicon tubing, it's interesting when we acquired Silclear, our target was our key customer GEA in the U.S., we still haven't won their business. But what's interesting is, in February, I mean in Red Band from Silclear, has actually grown the business well. It's not that we don't have the opportunity with GEA U.S.A., and we went on-farm testing and everything like that. It's just that they become very preoccupied with what's happening in the U.S. related to COVID. But of course, there's a point where that will flow through. We're very confident that the quality of Silclear tubing will give us who their opportunities in the future. Just picking on one part, for example. Okay. Onto the Industrial Division. So you can see that revenue is up 7% and EBIT is up 52% against prior corresponding period. We've had good growth from potable water and waste water applications and good market share gains, we believe, in Australia and the U.S. I mentioned the product in particular. It's significantly up in all markets. We've had very good growth from our BICS roof and ceiling products in Australia, in the U.S. and Europe. And overall, our margin and cost improvements, it's been interesting, in particular, in Melbourne, where the team a large part of our BICS roof products in Australia. We've had our team and locked in for up to 6 months. And at that time they focused on the logistics improvements, a series of small improvements that are sustainable and showing a better way of running the business. So that's been a fantastic gives. The pipeline of new products is good. And so we have good deep things at Red, and so we're confident of continuing to grow our business. I mentioned the PPP loans and the document substitutes. So really the next slide is what we do, Industrial. You can see the U-Dek product on the left, I'm sure many of you have seen that. Potable water needs are going to keep increasing. We see the back trends for both the industrial products, potable water, in particular, but also going back to dairy. You've all seen the milk pricing even the demand for protein remains strong. Turning to all or a couple of them, and then we would welcome questions. I should have mentioned, I have Graham Leaming with me, of course, and he's the CFO of Skellerup. And he'll, I'm sure, provide more detail as we need it. Just if we look at what opportunities have come up. The first thing, I think, is that, as I said, the strong backwinds for protein mean that the Agri business, the Dairy business, which is really about milk and protein, still has a long way to go. It's not that we don't see issues in the future. It's just that the demand for protein means, if you took a 3 to 5-year view, it looks very strong. And opportunities are arising. I've mentioned this before from the DeLaval acquisition of Avon Milk Ripe. And of course, we've been developing the business with Silclear. So that has thrown up opportunities with key customers. It's in our hands to drive that through, but we still see growth opportunities through there as well as just the back wins of natural growth. That's some particular examples from Agri, not all of the examples. And then on the Industrial side, as I said, the potable water opportunity there, the infrastructure scheme that we've been waiting on for a long period of time. We're still not necessarily seeing a lot of that, but you can see that New Zealand and in other markets, infrastructure is breaking down. So it will happen, and we will benefit from that. But in particular, we have specific projects we've been working on that will turn into revenue in the latter part of this year and early next year. So the obvious question is, why have we why have we changed guidance? Well, we expect a better result. And just I rose note before, just to emphasize, we're not aiming for the midpoint. So the range reflects the uncertainty we face. So just the key issues that we face. First of all, this increasing disruption to logistics, in some cases, we sell on a delivered basis. So in the last month of the year, that can have a big impact on revenue. At this stage, we don't think so, and we think we're managing these risks well. But the point is we're trying to give guidance for the 30th of June now. And so in some areas, the uncertainty has increased, certainly around the logistics side. A couple of examples of things we've done. We've broken down large shipments into more frequent small shipments. We freighted in some cases where customers got in trouble. And usually, the the customer's cost. But of course, going forward, we need to be thinking better ways of doing that. There's been increasing costs, both related to freight, that's congestion charges, but also we're seeing the increase in key raw materials. And also recently, we started to see availability of raw materials as an issue. For example, Dow Jones, the large chemical company, has limited sales of certain products for the U.S. market to support U.S. customers. None of these are unusual. I just emphasize, we focus on these because these are things we can inhibit our business. But actually, we've been managing these things even before COVID. And we -- I think we've shown over a number of years, we actually manage these projects as well. So again that comes down to the strength of the team that we have and we have the skill set and the people that can actually solve physicians. So overall, I'm quite confident about that. And something I don't talk about a lot is the Kiwi dollar. Obviously, that can have an impact. So the volatility is the Kiwi dollar. Graham does a great job of our hedging program. But beyond that, we're really focused on our key customer growth and so the only concern I have in any way is simply the inability for me to travel, which can limit the opportunity for acquisition. But overall, we have a very strong balance sheet. We've increased the dividend, hopefully, shareholders. We can benefit from that, and the outlook is bright. That's as bright as looking out to window at the moment. I'll stop there and welcome questions. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And we'll go ahead and take our first question. -------------------------------------------------------------------------------- Guy Edward Harding Hooper, Forsyth Barr Group Ltd., Research Division - Analyst of New Zealand Equities [2] -------------------------------------------------------------------------------- Guy here from Forsyth Barr. Congratulations on a strong half result. First question for me, significant margin expansion across both divisions. Can you give us a sort of a sense of how much of that is driven by the operational gains you talked to versus changes in the product mix, particularly, I guess, in Industrial, you're seeing growth in construction and marine? -------------------------------------------------------------------------------- Graham R. Leaming, Skellerup Holdings Limited - CFO [3] -------------------------------------------------------------------------------- Yes. So you want to focus on Industrial. It is a combination of factors, Guy, and we talked about this yesterday with the Board, as a matter of fact. As you know, our Industrial business is a collection of different businesses. So in some instances, we've successfully deployed resources, deployed people to take costs out of the supply chain, to reduce freight costs. And some instances, we've continued to improve the product mix. So we've seen some gains there. And we've made some improvements in our manufacturing in areas where we manufacture our own products as well. So it really is a combination of factors. It's not one single factor, as David has already touched on. -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [4] -------------------------------------------------------------------------------- And similarly, in the Agri division, I guess, the improved margin splits, in my view, relatively close to 50-50 between greater volume and operational improvements. -------------------------------------------------------------------------------- Guy Edward Harding Hooper, Forsyth Barr Group Ltd., Research Division - Analyst of New Zealand Equities [5] -------------------------------------------------------------------------------- I guess part of the drive-home question is trying to understand what is an appropriate -- or how much of this margin expansions enduring going forward? I know you've previously talked targeting a 17% EBITD margin in the Industrial business, 18% in this period, obviously boosted by a couple of one-offs in the government grants. And the like that is that, have you revised those kind of EBIT targets or longer-term EBIT margin targets? -------------------------------------------------------------------------------- Graham R. Leaming, Skellerup Holdings Limited - CFO [6] -------------------------------------------------------------------------------- I think the first thing is, Guy, David's always targeted 20% of the Industrial business. We set a bit of a -- debate it over the years. So I mean there's no targets are still in place. So of course, it depends on what the mix of businesses at any point in time. But David commented on the potential headwinds that we have in terms of freight costs and raw material costs. We start to see those towards the end of the first half, and we see them in the second half. But we're not without the capability to find ways to deal with those as well. So we're not planning on shrinking our margins, perhaps as a best way to put it. -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [7] -------------------------------------------------------------------------------- I think if we can -- I'll skip -- sorry, if I can split them into 2 different businesses. They have slightly different dynamics. And so as you know, our main growth area is the U.S. market. And so we're very focused on the U.S. and thinking carefully about how we produce more in market to reduce geopolitical risk. So I think that's really important. And of course, that takes away some of the logistics issues that you're having. So we're giving we get a lot of thought at the moment, and we're developing our plans for taking advantage of that if that makes sense. The thing I'd say is that the Agri Division, in my view, has always had the potential through the -- we talked about the investment in Wigram. It was a large investment, over $68 million, including the land, and we're starting to realize some of those improvements. Those are sustainable going forward. The margin at the front end where if we are in a super commodity cycle and this effects industrial in the same way, it simply comes down to the ability to pass on raw material costs. And that's individual customer-by-customer question. At the same time, of course, they resist that at this far. And in between, you have a lag on raw materials. So the way I'd sort of summarize that is given our stock of raw materials, the impact of raw material price increases is not something I'm worried about for the end of the year result, but I'm thinking hard about it for the second and third year sort of out long years, we do have a choice. In many cases, of course, there are many new raw materials that come onboard. And if you get them fully tested, you can often engineer out the cost of all materials to some degree. And that's what we've shown we're very good at, whereas some of our competitors have outsourced to suppliers, that kind of thing. But just talking generally, from an Agri Division point of view, there are more gains to be had in terms of structuring our business to give shorter lead times to take away the treadstone with our key customers, particularly in the U.S. And I think on the Industrial side, we have similar opportunity. So we've been working very hard operationally for 3 years, and it's pleasing for me. We started to see it last year. As you can see that the operating cash flow quite quickly, and we think that will continue. So I'll stop there, so other people have a chance. But thank you. They're good questions. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- And we'll go ahead and take our next question. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [9] -------------------------------------------------------------------------------- It's Christian Bell from Jarden. Also, congratulations on the result. So I've got a few questions here. Sorry, this just be with me. How much was the pull forward from Brexit that you mentioned in the commentary at an EBIT level? -------------------------------------------------------------------------------- Graham R. Leaming, Skellerup Holdings Limited - CFO [10] -------------------------------------------------------------------------------- Yes, relatively small. I think we made comment on the commentary of, we believe, the first half was boosted by -- the impact by $0.5 million. And that's an aggregation of some deferral from the previous year, which we talked about at last year's year-end and a little bit of pull forward from Brexit. It's always hard to really accurately assess what might have been brought forward until you actually have 2 or 3 months down the track to see how your numbers have changed. So that portion primarily relates to the Agri business. And that is where where we noticed that both from a deferral from last year into the first half and it bring forward from the second half into the first half. That said, obviously, we're -- what are we 6, 7 weeks into the new year now. And is -- our results continue to trade pretty well in that first part of the period. So nothing particularly notable from Brexit, but there are still a lot of uncertainty there. And when we talk to our leaders, what works with one customer or one market is a little bit different somewhere else. So they are, I guess, daily issues that we're dealing with in terms of just trying to navigate this new era. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [11] -------------------------------------------------------------------------------- Yes, sorry, I didn't mention you say $0.5 million. -------------------------------------------------------------------------------- Graham R. Leaming, Skellerup Holdings Limited - CFO [12] -------------------------------------------------------------------------------- So at an EBIT level, $500,000, give or take. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [13] -------------------------------------------------------------------------------- Cool. Looking forward to the future. Where do you see yourself in 5 years' time? Like, say, FY '26, will $55 million of EBIT sound crazy? -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [14] -------------------------------------------------------------------------------- Graham's, passing the ball to me. I'm just thinking, finally enough, I don't think that's out of the question. Of course, the big question is acquisitions. Can we find aligned businesses, and we're spending quite a bit of time on that now because that's a -- I think the very small bolt-on acquisitions we've done, it shows the power of getting those kind of acquisitions right, and Silclear is one example. But Nexus performance funds performing in line. And even Sim Lim. Sim Lim is a capability that probably gives us our expansion opportunity in the U.S. quite quickly. And so we've been considering, for example, instead of making silicon tubing in the U.K., maybe we should set up a manufacturer or acquire a business that would have a customer base that's attractive in the US. So those are the kind of things we think about. But just -- if your question is around organic growth over that 5-year period. I see no reason. We have no shortage of key customer and key product opportunities to get through that kind of number. I mean, 5 years is a long way out, given a number of things happening in the world. We focus very hard on 3 years out, just to give you an idea. And so as I said, Graham and I are very focused on the next year. In some cases this year, we have orders through until June already. So in other words, we have a little bit more certainty about that. Now that's not taken into account the disruption and logistics I talked about. So we could have in 1 case, we have orders or for the end of June, but we could lose a month sales simply by not being able to get the product to customers. So putting all that together, we've given guidance for the in FY '21 full results, $33 million to to $37 million. But looking forward, we do have strong growth plans for the following 2 years. And that's why we'll keep reporting the percentage of new products as a percentage of our revenue. This is something relatively new for us, and we'll make a definition clear because it's all on the definitions, I'm sure you know. But really, Graham and I have been focused on the second year, so FY '22, that is where we need to demonstrate our ability to continue to grow the business. Acquisitions would be on top of that for Silclear. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [15] -------------------------------------------------------------------------------- Yes. Okay. So putting it another way, the target for '24, just the organic growth, you could get at least $45 million? -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [16] -------------------------------------------------------------------------------- Yes. The short answer is yes. We will do it, as you know. But short answer is yes. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [17] -------------------------------------------------------------------------------- Okay. Great. And what would that look like? Like, is the growth going to come from, like as the revenues going to be 50-50 Agri, Industrial? Are you able to talk at a little bit? -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [18] -------------------------------------------------------------------------------- well, the obvious place we are looking very hard -- we're not ignoring New Zealand because, obviously, we have a New Zealand shareholder base in -- by definition, we have more control in New Zealand than other markets. But the obvious market we're looking at is the U.S. U.S. has the largest scale-up opportunity. And previously, so just the one reason we're confident about growth in the U.S. is, I've mentioned in the past, a large private company, we're doing a lot of work on, there would be a big change, it's without executing. We have won the business and makes since. We just now need to start making the product and delivering it. And that was in the hand sanitize area. So I don't think even if COVID goes away, I think the -- we've seen that in New Zealand, the change in the nature of how we work means that hygiene, personal hygiene is going to be at a high level going forward without a doubt. Just getting read pilates talk about this. Anyway, the important thing there is that we -- that's one example. But even with our existing customers. So for example, we are now putting in place more tooling for mullen, both for the U.S. and for China, as I mentioned earlier. So it's a combination of both new products and new customers. But even with our existing customers, we're gaining market share in the markets. But our target is really the U.S. that doesn't mean we're not looking in Europe and Australia and places like that. But clearly, I've said this before, if we acquired a business or if we got a new customer, the scale of the U.S., you can just -- loosely, you can add at 0 to the numbers. So that is obviously our key focus. Remember, a lot of the development is done in New Zealand, particularly for the Industrial product. Well, actually, for Agri as well, what am I saying. It's really -- our focus on product development is really in New Zealand, and that's why I'm positive about our ability to continue to innovate because we have their hands around that and their sense. So I hope that gives you a sense of our confidence in that. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [19] -------------------------------------------------------------------------------- Sorry, like does that kind of mean, you expect pretty much strong growth across every single division? So necessarily, the split might not change apart from some particular divisions like hygiene. Is it kind of... -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [20] -------------------------------------------------------------------------------- Well, the Industrial Division by definition has roughly doubled the revenue. So there are more opportunities here. And if you think of the product base, Dairy is relatively narrow into liners and tubing and filters and things like that, whereas on the industrial side, you can take the same silicon tubing, and it has more application. So I think inevitably, there'll be a stronger shift towards the industrial division. But hey, I don't mind which way it goes. But the opportunities, I think, is going to be more strongly on the industrial side for growth in the U.S. market. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [21] -------------------------------------------------------------------------------- Okay. Cool. And so look, I know that you got -- if I indicate you're confident in those growth stories. But are there any particular projects or clients other than the hygiene line that you can provide examples of? -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [22] -------------------------------------------------------------------------------- I just gave one with Mullen, as an example. But of course, there are others. I don't usually go through project by project. I know that would help everyone understand what's happening. But remember, it's a capability thing that we do. And so for example, the similar acquisition is a number of mask opportunities, and they -- people could see those as flighty, I guess, is the way to say it. But we have meaty opportunities with Cola with Mullen. We're looking hard at the pipeline opportunities. We've announced one several years ago about that didn't really work in there. But it's not like we're not looking. But I guess the -- we're not relying on -- I guess what I'm trying to emphasize, we're not relying on one big opportunity to change the game. We have a series of opportunities, and they will -- they vary from more of the same that we control to completely use now completely new products for completely new customers is the highest risk area in terms of delays. So these are delays as opposed to boosting the business. So again, in the areas that we focused on, we very really lose business. We tend to gain market share. So when we started with Mullen, I can remember, it was USD 1.5 million. And it's grown considerably. Initial target was $3 million, and we're well beyond that now, and we're still seeing new opportunities. The similar opportunity was a material opportunity with liquid silicone. And I still think there's opportunity to be here. So instead of being sort of focused just on a particular growth market like potable water or Agri, underneath that this materials thing. We believe we have some of the best rubber chemos for black rubber. We believe we've shown we have capability in silicone, and we believe liquid silicone as part of that future. So you can kind of see a theme here as we evolve our understanding of what is really our strategy. So if we come back to our strategy, it's identifying customers with a problem who cannot solve with their existing suppliers, and they turn to us and that's where we get that first chance look at. And that's through a combination of our compound, that's through -- and the ability to create new compounds to meet increasingly strict standards. And it's the combination of the tooling, and it's putting all that together into a package and also remember giving the customers to contribute to that development. And often, that's significant, if that makes sense, which leads back to the low cat model so I believe it's not only just that we can achieve this growth. We can do it in a capable feature way. And you'll note 1 thing, Graham I focus very hard on is to make sure that capital allocation, which, for me, is people and dollars. So it's not just dollars, it's people and dollars, to the big opportunities. We would be spending more than half our development time on the industrial side, on the U.S. market. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [23] -------------------------------------------------------------------------------- Yes. Okay. Cool. And then just obviously, noting the fact that you've been seeing efficiency gains in your capital. How much actual capacity you have left with the current -- with your current -- within your operations to fulfill the growth explorations in the next year? -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [24] -------------------------------------------------------------------------------- Well, it's further than the 2 parts. One is if we take Silclear, we put on a second shift. And so round figures, we probably have another 40%. But again, with relatively little capital, we could increase the capacity it so clear. This is tubing really. And we could also use that capital to set up and use, but that's minor. When we take woodroom, round figures, we're running at about 75% of what I believe is capacity, and we can ramp up quite quickly. So in fact, our improvements effectively are giving us capacity for free. So as volumes go up, I think I've made the comment earlier that I believe we can, through efficiencies, not need to spend more capital. There's a minor amount in terms of changing the tools and things like that, but not much. So we could probably grow volumes, 30% to 40% for liners. We have 2 machines that made black rubber tubing. But I still believe that -- and so there's at least 50% to 80% more capacity on tubing in some of those critical other parts. But to give you a sense of that, if the growth were, I don't know, 15% a year compound on volume, we could probably keep up with that. The bigger question is going to be are markets going to allow us to manufacture in New Zealand and ship. So for example, as the U.S. is going to review where products come from. And that's probably the bigger issue. So we're very focused on thinking about the market supply, manufacturing supply. Sorry, Graham? -------------------------------------------------------------------------------- Graham R. Leaming, Skellerup Holdings Limited - CFO [25] -------------------------------------------------------------------------------- I'm just going to say, added, on the Industrial side, as you know, predominantly, we design and then we have our partners manufacture. So that's very scalable in terms of on occasions, that requires us to make some capital investment of a specific equipment. It's more general equipment in the capital investments made by our partners and our commitment is the tooling, which in some cases our customers are contributing to. So it's pretty scalable on the industrial side. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [26] -------------------------------------------------------------------------------- And if you were to have -- anymore bulk plants, is there any particular areas that you are focused on? Or is that -- do you think that is possible? -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [27] -------------------------------------------------------------------------------- When we find something, we'll let you know with everyone else. But look, it was -- I'll give you an example. When we realized there was probably a trend towards silicone, we scaled the world reviewing producers of silicon tubing. When I say silicon, mainly in because we didn't have an offering there a small 1 in New Zealand from a local manufacturer. But in general, we weren't in the game so we did our analysis. We found, round figures, 13 companies worldwide that produce a reasonable volume silicone tubing. We hit our rubber chemist to a full analysis of the quality. Out of that, we came up with 3 top companies to target. But this one was Silclear, and we've acquired it. We haven't forgotten the other companies. So there's potential in that area, that don't just focus on silicon. That's one example. And then if you take some of the things we do on the industrial division in the U.S., there's not only silicon opportunities here, and there are also liquid silicone opportunities here if that makes sense. But I guess, and we're not afraid of a large acquisition. So the fact that they've been small bolt ons. I think that's more because the nature of our competitors. Just like us. We seem to be a small part of the larger system. So our competitors are relatively small. They're obviously order, even a big one would be NZD 30 million to NZD 50 million, the acquisition cost. That's not for lack of one thing we're trying, and especially if you've got any suggestions, feel free. But again, without overlooking New Zealand, it helps if we acquire New Zealand because we pay tax here and it helps our imitation creatives and our shareholders. But I know that sounds very general. But as you can see, we're targeting the areas. So 1 obvious area we focused on was silicone. But there's also key suppliers. So I'm using that as an analogy of how we think about this. There are other key surprises of silicon. We thought we bought the best one, and we did a good job on that, objectively. So yes, there's still opportunities. There are still other suppliers for GEA USA as an example. So who are they? We know who they are? And of course, you need a willing seller. So we've identified companies, we might want to buy that until you now that there's a willing seller then you can't take it through them no matter how much you want to do that. That's why coming back to it. We're thinking about our expansion ourselves. But of course, that's slower. Acquisitions are faster, if you do them right. I hope that helps our philosophy about acquisitions. So.. -------------------------------------------------------------------------------- Christian Bell, Jarden Limited, Research Division - Research Analyst [28] -------------------------------------------------------------------------------- Yes, yes. No, no, that all gives me a sense. Yes. Sorry, I'm, obviously, a little bit new to the company, so I'm just trying to give an understanding there. No, that's super helpful. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- We'll go ahead and take our next question. (Operator Instructions) Caller, please, go ahead with your question. -------------------------------------------------------------------------------- Unidentified Analyst, [30] -------------------------------------------------------------------------------- It's Christian from Craig. Just a question on the dividend lift. Is there any reason why the dividend is on weighted percent and NPAT was up sort of 60%? Is that sort of highlighting those sort of margins, et cetera, sort of an indication and sustainability of those -- some of those unexpected? -------------------------------------------------------------------------------- Graham R. Leaming, Skellerup Holdings Limited - CFO [31] -------------------------------------------------------------------------------- Yes, Chris, I think if you look at our guidance, and if you compare our full year guidance impact for this year compared to what we achieved last year, obviously, the uplift for the full year is forecast where we are on the range to be more modest from what we've see in the half year. And typically, we pay a proportion of our dividend as an interim and a portion of the full. So yes, to answer your question, our guidance in itself provides perspective that we do not expect the second half to be as strong as the first half. It's also worth remembering the first half last year was down on what we've achieved in the half year '19 at an impact level. And when we reported that result last year, we highlighted how the January month had been very strong, which means on a year-to-date basis, we were kind of back on track. So I think it's kind of worthwhile noting as well as the half year last year was a little weaker from a timing point of view and a little weaker than it was in HY '19. -------------------------------------------------------------------------------- Unidentified Analyst, [32] -------------------------------------------------------------------------------- Okay. So -- sorry. Go ahead. Yes. -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [33] -------------------------------------------------------------------------------- Sorry, Chris, just to maybe answer a different way. The directors and we had a good discussion yesterday at the Board meeting, are always considering how we can return cash tax effectively to shareholders. So at this stage, clearly, the directors approved a $0.01 in increase in the dividend. We are considering other ways that we could do that. But it's not a lack of certainty of the cash flows, it's really important. So -- and of course, we will consider the dividend for the full year at later in the year when we understand how the business has gone. But at this stage, we're confident that the cash flows will continue to improve. Getting said that we have this inventory inventory thing at the moment. So we just -- when I say inventory, our inventory is probably lower in particular with footwear, for example, then I would like it to be. But net-net, we're improving the business faster than we're improving the business fast, and we continue to get the growth clearly, there'll be more cash coming through. -------------------------------------------------------------------------------- Unidentified Analyst, [34] -------------------------------------------------------------------------------- And where did you land on the most tax-efficient way to return capital? -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [35] -------------------------------------------------------------------------------- Well, we don't have -- so with our ASC, there are certain things we can't easily do tax effectively. So I guess, the obvious thing is there would be an on pack share purchase, but we haven't announced anything like that. And of course, the share price at the moment, it would have been greater in March or something to consider it. And we did to be fair. We did have a high level chat about how do we do this. At the reality is their options are quite narrow. So pressure is on Graham and need to do an acquisition, a new special netform, I guess. At the same time, we think hard of our shareholders in. If we do increase the dividend now, I mean that could cause issues with imputation. There was a number of factors that we have to consider. We consider those very -- I guess, what I'd say is this is a very deep interest to the directors and representing all shareholders, and we take that seriously. -------------------------------------------------------------------------------- Unidentified Analyst, [36] -------------------------------------------------------------------------------- Okay. And then into the first half -- I mean, sorry, the back to big margins, it's obviously a substantial uplift. But in terms of what's sustainable, I mean, are you confident you come through the first half next year and hit these margins as you or because of subsidies, we pull forward we should be looking at sort of somewhere in the middle, especially with like Agri, going up to sort of the 30% margin, is it more sustainable potential given efficiency and since you're making it? Will there be a separate and looking forward into the next first half? -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [37] -------------------------------------------------------------------------------- Where we have growth, I've tried to answer that. Let me go through it carefully. If we have further volume growth, the overhead stays near enough the same. So the margin drop through. So it's about 40%, I guess, on Agri, if that makes sense. So that's one way of thinking about that. Subsidies are almost irrelevant in terms of our thinking. -------------------------------------------------------------------------------- Graham R. Leaming, Skellerup Holdings Limited - CFO [38] -------------------------------------------------------------------------------- Yes. I think maybe the benefit of those subsidies and the PPP line, if people don't know of it is, it was a Payroll Protection Process in the U.K. -- sorry, in the U.S. And obviously that benefited the industrial business, and we would not expect to repeat in there. So as a one-off on the industrial side, you could probably Baalbek that out. But of course, the whole reason that subsidy existed was because businesses were suffering somewhat as a result of COVID. Now what happened was that money was funded back in FY '20 that the commission process, if you like, which was where the impact of COVID was born and the results of the Industrial division last year, you'll recall. But the opportunity to have those moneys Forgiven, obviously saline new financial periods. So perhaps the way of looking at the subsidy there is as they relate to the second half of last year rather than the first half of this year, when you're looking at the earnings impact for the Industrial Division. -------------------------------------------------------------------------------- Unidentified Analyst, [39] -------------------------------------------------------------------------------- Yes. All right. So we can take it that traditional 23% EBIT margin and 30% is in the norm? -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [40] -------------------------------------------------------------------------------- I don't know about the norm, but certainly, we are working very hard to deliver that on a full year basis. So you're right, if you go back over the last 5 half years, it's 22% to 23% or 23% to 22%, which is the way you look at it, and 30% is a significant change. And as I said, about half of that is sustainable through operational improvements. They're not deep. I mean, we're working very, very hard on operational improvements now. And what happens is if you get the growth in volumes, your top line margin improvement and you're improving your operational side, you get that double whammy gains given away a little bit with logistics, and most of our growth is overseas, as we pointed out, a lot in Europe. Those opportunities through the dealer or acquisition of milkrite will continue to provide backwinds certainly through this calendar year. But if we lock that in place, I don't think these people are switching just on price or anything like that. They're switching because they don't want -- for various reasons, don't want to deal with milkrite, where they were comfortable with milkrite. So they don't want to deal with the DeLaval, but they were comfortable with milkrite, and some of those switches are permanent. So -- and it's related to not just for liners, but the equipment that is used and things like that. So I think we're in a good position to -- it's not a given that it will be 30% in Agri or 18% in the Industrial, but our targets are higher than that. -------------------------------------------------------------------------------- Graham R. Leaming, Skellerup Holdings Limited - CFO [41] -------------------------------------------------------------------------------- Chris, I just want to add on the Agri Division. It's perfectly here, as you'll appreciate, a stronger weighting in the second half. And if you look at the full year EBIT percentage for the Agri Division last year, it was 27% versus the first half of December 23. So there's a couple of factors here. Obviously, we've made the acquisition of the Seller business, which is a high-margin business. That benefit, and we'll continue to realize their benefit. And when you lay it alongside some of the gains that we've made from an operational point of view, I think it's certainly fair to say that we would expect the EBIT percentage to continue to be higher than what it was in the preceding period. We highlighted there's a little bit of extra pull into the first half of this year's result for Agri. But I think the important point to say is we believe we've moved this to sustainably higher levels. -------------------------------------------------------------------------------- Unidentified Analyst, [42] -------------------------------------------------------------------------------- Yes. Okay. And can you -- how much increase in EBIT will Silclear provide this year for the extra to 4 months. Can you sort of disclose that? -------------------------------------------------------------------------------- Graham R. Leaming, Skellerup Holdings Limited - CFO [43] -------------------------------------------------------------------------------- Yes. So essentially, it's around about $800,000 compared to the contribution it made in the first half of last year. So just under $1 million. And to get your ruler out in my -- you should be able to see it. But yes... -------------------------------------------------------------------------------- Unidentified Analyst, [44] -------------------------------------------------------------------------------- I mean that, right? Yes. right, for the EBIT? -------------------------------------------------------------------------------- Graham R. Leaming, Skellerup Holdings Limited - CFO [45] -------------------------------------------------------------------------------- Yes. So just grow better because the U.K. tax rate is up below 20%. So... -------------------------------------------------------------------------------- Unidentified Analyst, [46] -------------------------------------------------------------------------------- Okay. That's great. And now a very good result, guys. It's as to be questioning would have been so sustainable after such a good result than the other way around. So well don. -------------------------------------------------------------------------------- Graham R. Leaming, Skellerup Holdings Limited - CFO [47] -------------------------------------------------------------------------------- Okay. Thanks. -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [48] -------------------------------------------------------------------------------- Thanks, Chris. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- And it appears we have no further questions. At this time, I'd like to turn the call back over to today's presenters for any additional or closing remarks. -------------------------------------------------------------------------------- David William Mair, Skellerup Holdings Limited - CEO & Executive Director [50] -------------------------------------------------------------------------------- Well, from my point of view, as always, I appreciate the efforts of our team. I'd like to thank the directors through tough times. We had a number of team's meetings, that's an interesting process, but I think we've had good support from the directors on the Board. And just a fantastic result, which I'm delighted, as I said, for the teams, who worked incredibly hard in difficult circumstances, and I appreciate the interest from the company. Thank you very much. And on behalf of Graham and me, thanks for the opportunity. If you would like to have a one-on-one or something, please reach out. Thanks very much. Thanks, Karima. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- Thank you. Once again, that does conclude today's conference. We do appreciate your participation. You may now disconnect your phone lines.