Skellerup Holdings Limited (SKL) Earnings Call Transcript & Summary

Okay. I hope everyone can see and hear me okay. I'm going to begin. Good morning, and welcome to our FY '21 results webinar. As you can probably see, we're having a slight technical issue. This is the first time we've done that, but hopefully, you can all see and hear me okay and you can see the first slide of the PowerPoint presentation that I'll be going through soon. I would like to begin by saying I'm extremely proud of the leaders throughout the Skellerup group and humbled by the extraordinary performance of the team, all the Skellerup people, in satisfying our customers through quite a tough year. And it's been a great result for all our staff and our shareholders. The overall growth in earnings is broad-based, and that's very satisfying, of course. It's an outcome of our focus on working closely with key customers. As an organization, I believe we are learning and getting better at applying our knowledge of material science and combining that with our understanding of tooling and process, and in that way, we're solving customer problems. At the same time, standards, in particular, potable water and food safety standards, are going up. And that combination is really a special source of our IP. I'm going to step through the slides one by one. It's very much the same format as previous years. And I'll make some additional commentary and then welcome questions at the end. I'll get Graham at the end to explain how you can wave your hand and ask questions. So if we just begin on Page 2, Skellerup key points. First of all, we had a record NPAT of $40.2 million. It's a 38% increase on the prior comparative period, and it's a result, as I said earlier, of the committed, talented and focused global team. I'll break down the 2 divisions later on, but it's a record Industrial Division EBIT of $32.7 million. As I said, it's broad-based. We have a bridge to show some of the -- where that growth has come from, but it includes the sale of a number of new products at higher margins. In particular, there's been strong growth in roofing and construction products, potable and wastewater, and marine has been particularly strong. And that's combined with our focus on operational improvements and tight control of indirect costs. It's a record Agri Divisional EBIT of $30.5 million. Good growth in sales of dairy rubberware to international customers, very strong growth in footwear sales, particularly in the New Zealand hardware channel and good operational gains at Wigram and other facilities. So the improvements are not just at Wigram, but Wigram has been a big part of it. Very pleasing to have record operating cash flow of $58.8 million. It's up $10.8 million or 22% on the prior corresponding -- prior comparative period, sorry, and also a new record -- sorry, that was a record as well. We've had strong earnings, obviously, and solid working capital management, and that's the translation into strong cash flows. And that's funded CapEx, high dividend payout and reduction in debt. And the directors are pleased to approve a final dividend payout of $0.105 per share, which brings the full year payout to $0.17 per share, up 31% on the prior comparative period. We have a very robust balance sheet. Net debt is now down to $8.7 million, which is 3% of total assets. If we move on to Slide 3, which is the 5-year financial highlights. I'm just going to pick on some of the highlights from that. First of all, revenue is up $28.1 million, 11% on pcp. It's pleasing to see double-digit growth here. We're very focused on future growth, and I'll come back to that later on. EBIT is up $13.9 million and 33% on pcp. The NPAT, as I said earlier, is up 38%, and that's up $11.1 million. The dividend of $0.17 per share is up $0.04 on the prior corresponding period. And the operating cash flow is up $10.8 million and 22% on the pcp. And that funded CapEx, $7.1 million, dividends of $27.3 million, lease liability payments of $4.5 million and net debt reduction of $19.8 million. Slide 3 -- sorry, Slide 4. This is the bridge, FY '20 to FY '21 NPAT. The first 3 parts of the bridge are really related to Agri, so I talked about dairy growth from increased sales and operational improvements. Footwear sales are up, particularly in the New Zealand rural market and hardware channels. And we have the benefit of the full year's earnings contribution from Silclear, which was acquired in November 2019. And the next few, going from left to right, the next few green boxes are related to the market share gains from the sale of existing and new products, so this is the Industrial side, of course. Existing and new products for potable and wastewater, we've made good gains for the year, roofing and plumbing and sport and leisure, in particular, and some appliance applications. We have a provision of $1.5 million for costs of defending a claim against the business divested in 2008. We had assistance, $1.2 million in COVID-related government assistance from mainly the U.S., but also Australia, not from New Zealand. The New Zealand dollar strengthened against all major crosses. We're a net exporter, so of course, that didn't help. But Graham has run a very good hedging program, so that's partly offset that impact. And obviously, the reduction in debt has driven lower interest costs, even though interest costs are relatively small. Moving on. Let's go into the Industrial Division. So one of the key measures I look at is EBITDA as a percentage of sales. Obviously, that's an outcome number, but it is one of the key things I think about in helping us to analyze down into the business. It helps us to focus on the products that are profitable and the products that aren't profitable, and then we can make good decisions about that. So the revenue was up 12%, and the EBITDA is up 57% against pcp. This was particularly pleasing. Of course, round figures, the Industrial Division is roughly twice the size of Agri, so you could argue we have twice the opportunity in that sense. Having said that, there's been a lot of work done in this area, particularly potable water and wastewater over the last few years. I encourage you to look at the CEO report in the annual report -- sorry, the annual report. We -- this time, for the first time in the CEO report, we have little pullouts or we highlight articles. And there's a good article explaining a reformulation in the Australian market, in particular, that has given us a great opportunity for future growth and infrastructure work there. So that's one example of how we do those things. And we have other good opportunities in the U.S. market, for example. Love to have opportunities in the New Zealand market as well. We've had very good growth from high-performance foam applications, in particular, Ultralon U-Dek sales are up significantly in all markets. I'm really pleased. That's been a hard slog that Paul Goddard, who runs this meeting, some of you have met him at the annual meeting, has developed a truly global product or material, and it is -- the feedback we get is it's the best in the world. The only issue we have at the moment is that it's difficult to continue to make enough. We've had significant growth. And so we're gearing up for more growth. But it is seen as the best in the U.S. market, in Europe and of course, Australia and New Zealand. So I'm very proud of the effort that Paul and his team have put in here, and the way they've managed to satisfy customers in a pretty tough market. We've had very good growth from DEKS roof and sealing products. And in particular, there's a call-out to the rapid-flash stick-type that was -- that's a lead-free product. We see a lot of opportunity to move into the lead-free roofing area, particularly where there's water harvesting. That's one example. There are many examples of new products, and we've had a very good execution. I mean DEKS in Australia is based in Melbourne. They've had particular issues with lockdown. And I think Kristian and his team have done a fantastic job. We also took the opportunity to exit some low-margin business in the U.S. We were supplying some so-called bonded washers to Atlas in the U.S. And we've replaced that volume with growth and more profitable products. Interestingly enough, after exiting the business with Atlas, a new opportunity has come up with a different washer at much better margins. So we constantly review, and I expect with the comment I made about EBITDA as a percentage of sales, we're constantly reviewing customers and products and deciding those that are marginal business, and we work with the customers to help improve things. Vacuum systems sales and margin are up following the COVID impact of FY '20. We see continued growth in system sales and winning first fitment with OEMs. Of course, this is mainly in the U.S., but we've also won some business in Europe recently. The oil and gas market is still relatively low. Remember, part of the vacuum systems sales is also into the main [ themes ] for other things, not just oil and gas. But at the same time, we are launching 2 key products. I've mentioned previously about the blower system. This is new for us, and we see that as having a big future. It's also far more environmentally friendly in the sense that traditional vacuum pumps expel some oil as part of the process, whereas blowers are oil-free in that sense. And we have also launched another high-end pump, targeting particularly the Texas area, and water, fresh water movement. So very pleasing results for the Industrial Division, and that's an area where we see not just vacuum systems. Right across the board, we see good growth going forward. We move on to the Agri Division. Excuse me for a minute, please. Sorry about that. Okay. The Agri Division, very pleasing. Our target EBIT for FY '21 was 30%. EBIT as a percentage of sales, we're a nudge off that sadly. But anyway, a great result and good growth in the business. Strong growth in Europe and Asia, particularly. Obviously, we've had an increase in silicone product sales, not only from Silclear, which is tubing, but also, we've seen growth in silicone liner sales. The New Zealand and Australian markets are up, and the North American market is solid. We still do see opportunities through the DeLaval acquisition of milkrite and the changes in the market. We're working hard on all those. It's always slower than you would hope. But overall, very good result. Again, with little international travel on my schedule, I've spent quite a bit of time on the operational process and efficiency gains in the team, particularly in Wigram, but also, in China, have done a very good job of reviewing business process, the operating levels. I use the expression mechanization. Some of you will recognize that. I'm not a big fan of just buying robots or cobots and throwing them in. You actually need to mechanize first and standardize the process. We're making some good progress there, but there's a lot more to do. And business systems, that's really the ERP systems. Again, I'll come back to that later. The really pleasing thing is the relatively low CapEx investments. We can increase production volumes quite a lot and reduce lead times, and reduced lead times within the manufacturing process obviously assists with the disruption that we're facing in shipping and logistics. There's been very strong demand in footwear sales so much that I got a phone call this morning, "I wanted to buy some Red Band gumboots and I couldn't buy them." It's come all the way through to me, which is a good sign. At least, the demand for Red Band and other high-end rubber boots in the New Zealand market is there. Obviously, we've struggled to get the product into the country, but regularly, containers are arriving. As soon as they arrive, they get booked on and go out. It is hand-to-mouth at the moment, but it's pleasing to see the loyalty and response from customers. We've had very good growth in the rural market and the hardware markets. And that is our priority market. We still have specialist boots, forestry boots, dielectric boots, and they're going into niche markets overseas. But our fundamental focus has been on the New Zealand market. And that's been helped because we do have competitors in the New Zealand market. But certainly early on, they failed to supply in many cases. So we had unexpected growth, and it stayed high. So I think some people made a switch and have stayed that way. But it's for us to solve. Again, even in footwear, we've had a strong focus on range standardization and rationalization. And I've seen good impacts there. That's not finished. We've got a lot more work to do in that area. And something we're all particularly proud of, Jane Boyd and the other team in Christchurch have done a fantastic job of the Pink Band promotion in support of New Zealand Breast Cancer. And also, I Am Hope, the company sponsored or provided a donation to I Am Hope. And overall, through pretty tough times, I think the engagement with our local community has been very good. On to Slide 7. All right, yes. Okay. This is relatively new, and there's more information in the annual report. So again, I would encourage you to look at the relevant pages in the annual report. But just one thing from my point of view, it's pleasing to show a proven track record of earnings and cash flow growth. And you can see it in the earnings per share there as well. So I think it's starting to show what we can do. Focusing on point 2. We have a track record now for rapid R&D. I've given examples in the past, but we've introduced over 700 products. It's slightly greater than 10% of our revenue at the moment, but I see that accelerating as we go forward. And of course, in general, when we introduce new products, the margin is always better than the average margin. So that's always positive from a return point of view. Again, I mentioned earlier, but that's a case of applying a material science and understanding customer issues and standards and solving their problems. So we're very much on the capability side of that. Our focus on our products in our key markets, I think the summary of that is simply saying our business strategy has been working. There's been a lot of work on OEM customers and talking about the relationships and things like that. But we have effectively implemented the business plan over the last 5 years, and it's pleasing finally to see some really good results. I think last year's result was credible given all the disruption that we had from COVID. But it's starting to show what we can do. And the most important thing, I believe, is that we are learning faster. We have a highly experienced technical team, and that's around the world. We have strong interactions with our key customers, and that's an area of growth for us. So we operate strongly in 6 countries. Obviously, we operate in more countries than that, but across 6 countries. And we have a team of 813 people, quite a large international group. So again, remember that 80% of our revenue approximately and 70% of what we make are done overseas. So it's something that I think about a lot. We are a global business, with global interactions in that sense. Point 5, I think the key thing here is not all of our customers are OEM, but a lot of the customers are. And they're great customers to have. In general, OEM customers tend to be big. They have the ability to pay. They -- often, our products are critical components or critical parts of their system. In some cases, we have a whole product. Like I mentioned, Paul Goddard's foam product, for example. But in many cases, some of the detailed parts, like the inserts for the taps for Moen, that's a critical part of the tap. Of course, Moen would say it's the feel of the faucet, they would call it. But anyway, the reality is we have to meet demanding and lifting standards for those critical components, and that offers a great future because we can change things, we can develop new products. And finally, we have strong relationships across global markets. I've given you the numbers, and we see that growing strongly. So one advantage, of course, is that if one particular market grows strongly, for example, if the U.S. market were to grow strongly, we can take advantage of that. We have people on the ground there, and we have a number of OEM customers. So overall, it's a very pleasing result given some of the disruption, not just in New Zealand, but throughout the world, that we've had. And I think as well as learning faster, we learn faster because we've got a stronger team. So a fantastic result for all people, including our shareholders, of course. And then talking about our people, we'll move on to Slide 8. Thanks, Graham. Just overall, we have 813 people as you know. Very pleasing results on health and safety. In a funny way, COVID helped us to focus in on some of the things that we might have taken for granted, but I've been delighted with the learning that has been applied, started in China, and some of you have heard this, then it went to Italy. And ultimately, we've taken the learnings from each of those places and rolled them through the other businesses. And that happened again in New Zealand. Just of course, the other day, we went to Level 4. It was really pleasing to see the level of preparedness. We were already operating at Level 3 in some instances. And everyone was fully inducted again, and we're back into the Level 4 process seamlessly. So through those processes of entry and induction, we've also reviewed critical processes and particularly our manufacturing sites, but also, our distribution sites because the biggest risk in New Zealand, from a health and safety point of view, has been hit -- or it's about fork trucks and lift trucks and things like that and hitting people. So we've spent a lot of time really focusing on our layout and things like that. So very pleasing to see our total injury rate coming down. We're very focused on education, not just cybersecurity. But one important thing that we keep getting reminded of is the importance of cybersecurity training for all. And we have particular engagement, regular updates, which, of course, I have to do, Graham has to do. And that's been quite enlightening because the first stage of weakness is someone, of course, clicking on a link on an e-mail. There's the gender diversity across the group. 48% female, 52% male. I guess it's obvious in some ways. And just a little bit about the years' service for staff. So we have had, in the past, a lot of long-serving employees. We still do in some places, but we have loyal staff. And I think the way I see this is we're building a stronger team. We are winning the hearts and minds of our team. The feedback I'm getting is fantastic. They feel part of something bigger. And it gives meaning and life when sometimes the external things get a bit more difficult. It's always difficult to talk about operational efficiency because if you go too far, customers see that as an opportunity to have price negotiations. But just to help you understand some of the metrics in general that we use, just focusing on Wigram for a second. We've had production volumes up 10%, but our staffing has increased only 2%. I know it's not like-for-like, but that's a good measure to help you understand. Footwear volume is up 14% in Jiangsu. And vacuum systems' volume is up 38% with no increase in staffing. So that is true productivity, the way I look at it. We've done 3 ERP upgrades. Again, there's a call-out in my CEO report, in particular, around 2. One was the upgrade of the ERP system in Wigram -- at Wigram called Project Vanilla. The naming was very clear that it was to be a standardized implementation, very little, if any -- and I mean, none, no specialization of the software and things like that. We have seen huge gains there. And then another example is -- and again, it's in the annual report, and I encourage you to read the detail. It may sound relatively small. It's significant for us. The elimination of cardboard packaging for vacuum systems. We've seen roughly 5,000 systems from China to the U.S. Of course, there's more than that, and we have eliminated completely cardboard packaging, which has been a huge saving, but also, very good to the environment, of course. And then focusing on the environment and the community. I mentioned some local things that we've done, but I know that other teams are involved in their local communities around the world. I mentioned the Pink Band. Fantastic success. I believe that the day before it officially got sold, we were sold out. It sounds very similar to our Red Band situation at the moment, which is a bit unfortunate. But also, it's a way of bringing our broader community together, which is not just our staff, but their family, their friends, and getting good commitment from them to what we are trying to do. Specifically, greenhouse gases emissions. So compared to FY '20, our greenhouse gas emissions have gone up. And -- but as you can see, our volumes have gone up a lot more on the left-hand side. So we are very focused on what we can do there. And also, our greenhouse gas emissions, as a percentage of revenue, is 8%. So we're measuring that now.

Yes.

Pardon -- 8% down, sorry. Yes, of course, a reduction. And water reductions. Now you may remember, several years ago, we pointed out that Wigram, near enough, recycles all the water that they use. We've been very focused in China because there's a big focus in China on water usage and everything. And so the water reduction at our Jiangsu facility is 55% down, and that's been well accepted by the local council. So of course, more as we go forward. I'll be talking more and more about the team and what they do and also, our impact on the environment. So I made a sequence now. Yes, what we do. Thanks, Graham. So people in many parts of the world, they touch or see or use their products, but they probably don't know it. So on a daily basis, this diagram is to help people understand many of the things we do. And again, it's more fully explained in the annual report. We're very proud of the annual report this year. Graham and the team have done a fantastic job with a whole lot of other things that we've been focused on to produce an explanation of kind of how our products are used. So for example, the blue pipes at the bottom are fresh water and the red pipes are waste water, those kind of things. So -- but it's just interesting. I've always found Skellerup a fascinating business. And I have to say, I've been CEO 10 years, I think now just over 10 years, and I'm stunned that almost every week, I find something new that's interesting about what we do. There's a lot of detail here. I'll leave you to read through that. And then, of course, we have the reconciliation of EBIT to group NPAT and that shows the 5-year trend. So look, overall, from my point of view, it's a very pleasing result. I'm pleased for our shareholders. And I think the dividend increase is very good and of course, sustainable. And I guess I would finally like to say just a couple of comments. One is we have a very small effective Board. We had a Board meeting yesterday, of course, to approve the results. I think we have very good skills and experience that certainly helped Graham and me as we manage the business. Again, the leaders have stepped up within the business, and I'm very grateful. Thank you.

Okay. We'll take some questions. Our plan had been to simply unmute you and allow you to ask a question, but we've had a few technical problems this morning. So I think the most effective way to do it would be for you to submit a question over the chat, we'll be able to read that, and then we'll give you a response. So apologies for that not playing out the way we had planned. [Operator Instructions] The first question we've got here, from Christian Bell of Jarden. The comment, Christian, you've asked is 15 of the top 20 customers were the same in FY '17, what was the earnings contribution of these customers. I'm not sure whether you mean is in terms of what was the earnings contribution in FY '21 versus FY '17, it's increased. So I'm not sure if that answers your question. In the annual report, we do disclose kind of the indication of the proportion of our customers and what revenue they comprise and the segment note. The next question we've got here is from Guy Hooper. Rising input costs and measures taken to offset that, have you increased prices to customers, or has it largely been offset by operational improvements.

I'll provide a bit more of a detailed answer to that. I guess I'll break down input costs into 3 areas. One is material, obviously. And in many cases, we are able to pass on material price increases to customers. But we have the fortunate position where we may not have full control of the ability to pass on those raw material prices, but we can often develop and certify new materials, particularly in areas where, for example, I mentioned the potable water standards, and so we have an ability to create new materials that other often competitors can't. So that's the material side. But in general, yes, we are able to pass on raw material price increases through the -- it does depend on the customer, of course. Labor increases and other input, I always think of labor increases, the only way you can afford to pay people more is through productivity gains. We're actually in a good position where I believe we're actually improving productivity faster than that, so that gives us a bit of a buffer. It's always a race because normally, I've said this before, the first price you get with OEM customers is the best. It's not always possible to put prices up. And there's usually a delay in putting prices up. But anyway, I expect productivity gains to make up for the labor side. So in other words, the material and labor added together, we have shown, I believe, over several years, our ability to maintain margins, if not improve them. There's a third thing, which you've heard us talk about earlier, about investment. So there was the ERP -- the large ERP reinstallation, but really like a new installation at Wigram, but also 2 others in the Industrial Division where systems can really reduce the need to increase your overheads. In other words, it enables you to scale particularly quickly by using those systems. Of course, that works a lot in distribution businesses. But the other advantage, in manufacturing businesses, if you have very good systems and you can use that to analyze your data clearly, then you can isolate customers and products that are not as profitable as others and you can make good business decisions about what you're going to do. So overall, collectively, I guess my message is we should be able to at least maintain margins.

Okay. The next question we've got is are we seeing any constraints in the supply of raw materials given there is a rubber shortage worldwide?

As always, the answer to a good question is it depends. Certain rubbers are in very dire shortage and things like that. Again, we've been lucky, or you can say it's actually one of the strengths of Skellerup, it's part of our IP in that sense, is we have the ability to reformulate and use other particular materials, but it's not just rubbers. We use quite a bit of plastics and specialist plastics and other. We combine materials a lot. So overall, yes, we are seeing constraints. And some of that, I think, is a way of getting prices up from some of the larger chemical companies, but that's just the nature of it. And as I said, it's -- the actual ability to supply is more of a concern than actually the inability to source sufficient raw materials.

Okay. Next question from Guy Hooper, market share gains made. Could you please elaborate a little? Is this new customer growth? Or is it existing customers reducing the number of suppliers?

Yes. That's a good question. Some of it is new customer growth, although a lot of the new customers are coming on in the future, and quite a bit is still existing customer growth. But the beauty of existing customer growth, in general, is that it's faster and easier to do. So I'll pick one example. When we started, I've said this before, our target with Moen was to be USD 3 million revenue, and we see we'll be hitting towards $5.5 million. Most of that growth is on things that we had already designed then for the $3 million, but there might have been some changes and things like that. So the really good thing about OEM customers is if they're growing, you get pulled through, but you also get the opportunity for new business. So I mentioned earlier that I framed it as greater than 10% of our revenue comes from new products. I didn't particularly talk about which customers I meant. But we have enough growth with existing customers to grow just with them. But of course, we have 1 or 2 really interesting new customers. And new customers come to us when they have a problem that their existing suppliers can't solve. And those are great opportunities for the capability that we have. So what's the question?

Okay. Our next question -- yes, next question came from [ Joshua Dylog ] and [ David Roken ], and I'll respond to that one. And the question was around the performance of Agri in the second half of the year and whether it normalized from the overly strong interim result. We did highlight at the time of the interim result last -- sorry, in February, when we released those results, that there was a little bit of carryover into the first half of last -- of the year we just finished, from the second half of FY '20. So there was, I guess you could call it, a little bit of anomaly. The other thing to consider is the growth in our revenue in the Agri business had mainly been from the international markets, which are not as seasonal as the New Zealand market. So the pattern of earnings in terms of the first half, second half is going to change a little bit from perhaps what we saw 3, 4, 5 years ago on the Agri side of the business.