Schaffer Corporation Half-Year Results Presentation: Dec-06
A focus on creating long term shareholder value • Consistently earned a return on capital in excess of our target of 15% return on capital • Continue high ordinary dividend payout ratio of approx 75%* • Schaffer provides access to capital and leadership across all businesses Success driven by the Schaffer Approach … Strengthen core business Capture new opportunities for growth • Management experience • Leverage innovation to pursue • Efficient operations – New markets (local, nationwide and global) • Strong brand – New products • Integrate acquisitions – New customers – New channels • Acquisition and divestment opportunities • Downstream and upstream opportunities 2
Our performance is not dependent on one industry sector because our core businesses operate in different markets Business Market Customers Competitors Value proposition • Market leader • Premium product Building Products – $300m - $400m paving Fragmented Commercial / Residential • Strong brand Urbanstone products (national) Require capital and • Innovative innovation to match • National distribution network • Market leader • Vast raw material reserves $250m - $300m natural Building Products – and reconstituted Commercial / Residential Fragmented • Quality product Limestone Resources limestone (national) • Distributed through Urbanstone network • Market leader $50m - $100 pre-cast pre- Fragmented • Technically engineered Building Products – stressed concrete products Commercial / Residential Delta Require scale • Strong brand (WA) • Innovative • World low cost producer High barriers to entry due to strict quality control • Experienced management Approved: • Skilled workforce Automotive Leather $6b global market Audi, General Motors, Ford, Major competitors: Eagle • Premium quality leather Land Rover, Toyota, Mazda Ottawa, Seton, GST and • Local presence in US, Europe Boxmark and Asian markets • Acquire prestigious properties at below replacement value Property Fragmented Commercial / Residential • Refurbish and secure long term leases 3 • JV partners are industry experts
Profit rises on stable revenue % Half Year Ending 31 Dec (A$m) to Dec-05 to Dec-06 change Revenue 73.7 73.9 stable 12.4 EBITDA 9.3 30% 5.2 Net profit 3.6 44% EPS 0.26 0.37 42% ROCE 16% 18% Cash flow from operating activities 10.8 2.8 Cash reserves 10.4 4.7 Net interest cover (EBIT/Net Interest) 4.2 4.8 Net debt / equity 88% 116% Ordinary dividend $0.25 $0.25 4
Increased earnings in Leather supported by another strong performance from Building Products Operating EBIT (by Segment) 9.5 10.0 Other Investments 0.5 9.0 1.0 Investment Property 8.0 6.8 7.0 0.1 1.0 6.0 4.1 Leather $m 5.0 2.1 4.0 3.0 2.0 3.9 Building Products 3.6 1.0 0.0 Dec-05 Dec-06 5
Dec-06 Debt Position Non- Recourse Total Recourse 0.5 Building Products 0.5 0.0 Leather 0 40.8 40.8 3.6 Property Freehold 3.6 0.0 Property JV’s 2.1 17.5 19.6 Total Debt 8.3 56.2 64.5 Cash Reserves 4.7 59.8 Net Debt • Debt is largely non-recourse to the parent company • Cash reserves as at 30-Jun-06 were $13.6m. Applied during period to Limestone Resources business and UrbanStone Central property acquisitions • 31-Dec-06 undrawn debt facilities: $20m 6
SFC Group Gearing Structure Total Group Debt ($62.2m) F'Hold Prop & B'Products, $4.1 JV Property, $19.6 Subordinated Govt Debt - Leather, $38.7 Senior Debt - Leather, $2.1 • The Leather debt and JV Property debt are effectively ‘Structural’ debt with low financial risk to the Group • $38.7m of the Leather debt is a subordinated non-recourse Commonwealth Government loan with a weighted average interest rate of 6.5%. • The Government loan was initially provided as a grant in lieu of export expansion initiatives and was subsequently converted to a loan. – Interest only until Feb-2008; – $2m per annum principal payments from Feb-2008; – Facility Term – 2012 7
Why actual gearing is significantly less than it appears • Group gearing (Net Debt /Equity) per balance sheet @ 116%. Gearing overstated because properties are recorded at book value; not market value. Substituting Market Value for Book Value would show Group gearing @ 85%. Balance Sheet Properties Book value Market value Debt 8 Investment JV’s $16.0m $33.5m $17.9m 2 Subdivision JV’s $3.0m $6.0m $1.7m 5 Freehold $14.2m $20.5m $3.6m Total $33.2m $60.0m $23.2m • Reasons for not recording at market value – Obliged to take unrealised value uplift thru P&L – distorting operating earnings – Cost of valuations that would be required at least annually – Prefer to take a conservative position and inform the market of our approach • Debt against investment properties JV’s is specific to each property with debt reducing only when individual properties are sold outright. • Our Investment Property portfolio has a conservative loan to valuation ratio @ 51% - well below typical LVR’s of 65% to 70%. 8
Cash flow Half Year Ending 31 Dec (A$m) Dec-05 Dec-06 12.2 EBITDA 9.3 (2.0) Net interest paid (1.7) (2.7) Tax paid (2.4) (2.7) ALH change in trade working capital 7.2 Other changes in working capital (1.0) (1.2) Other (0.4) 0.0 Total cash generated 11.0 3.6 Debt reduction/(increase) 2.7 (6.3) 1.6 Capital expenditure 2.1 13.7 Acquisitions (L’Resources, Frobisher St, Canning Vale, Neerabup) 0 3.5 Dividends paid 8.5 Increase (decrease) in cash on deposit (2.3) (8.9) Total cash applied 11.0 3.6 9
Strong player pursuing profitable growth Building Products
Urbanstone, innovative national market leader commanding a brand premium • Unmatched plant & design flexibility to satisfy residential & commercial sectors • Embedded cost control culture • Owned national distribution network established since 1993 11
Strengthened by acquisition of Limestone Resources, a WA leader in natural and reconstituted limestone • Revenue contribution $12 - $14m per annum • Vast and centrally located reserves • Potential for significant operational improvement • Leverage Urbanstone national distribution network to drive sales 12
Delta, leading the way in technically engineered concrete products in WA • Low cost, profitable product • Strong industry relationships and distribution • Current projects include Bishops See, Century City and Ikea 13
Building Products continues to ride robust WA economy Building Products A$M Dec-05 Dec-06 % change Sales 20.8 27.0 +28% EBIT 3.6 3.9 +10% EBIT Margin 17% 15% • Sales grew with the first-time inclusion of Limestone Resources • Improvement driven by the continued strength in WA of resource-fuelled commercial and infrastructure projects where Delta is a major supplier 14
Opportunities to grow Building Products • Delta pursuing profitable, large scale, medium to long term projects • Urbanstone and Limestone Resources 4,800m2 prestige showroom in Osborne Park opening in May 2007. Osborne Park is one of Perth’s most central and popular home improvement retail destinations. • Investigate acquisition and divestment opportunities that satisfy criteria for long term shareholder returns 15
Leverage a solid foundation for growth Leather
Tough conditions in the automotive leather industry � demand from US customers facing intense competition from Japanese OEMs • • Loss of BMW as a customer due to South African industry support scheme • Production overcapacity within the industry • Widespread cost cutting programs at OEM level Ford and GM sales have dropped while Japanese OEMs gain market share in USA 6,000,000 5,000,000 # cars sold 4,000,000 3,000,000 2,000,000 1,000,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Ford General Motors Toyota Honda Nissan Source: National Automobile Dealers Association 17
In response, Howe changed strategy to remain globally competitive • Shifted labour intensive cutting operations to lower labour-cost countries of Slovakia and China and to be closer to growth markets of Europe and Asia through a local sales and service presence Manufacturing Sales Office Employees Commissioned Competitive advantages Australia has 4th largest cattle herd globally Rosedale 50 1996 Secure supply of disease-free hides (Preliminary processing) Range of hides to match customer needs Howe & Co (Finishing) 150 1996 Modern, global scale facility Mexico cutting plant 150 1996 Low labour cost Shanghai cutting plant 150 2005 State of the art design Slovakia cutting plant 250 2005 18
Strengthening our position in the growth markets of Europe and Asia Howe sales by region $42m $46m 100% 9% Australia 14% 30% Asia 75% 24% 50% 30% Europe 41% 25% 31% North America 20% 0% Dec-05 Dec-06 19
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