Skellerup Holdings Limited (SKL) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and fellow shareholders. I'm Liz Coutts, Chair of Skellerup Holdings Limited. Thank you for joining us for the 2021 Annual Meeting of Skellerup Holdings Limited, albeit in different circumstances to how we normally convene. The Notice of Meeting and 2021 Annual Report have been circulated and made available to all shareholders. You can also access these at any time via our website. Today's meeting is being held online via the Computershare online meeting platform. If you were here, congratulations, you successfully negotiated entry. To begin, I would like to introduce your Board. First, Alan Isaac, John Strowger, David Cushing and Paul Shearer join us virtually. David Mair, Director and CEO; and Graham Leaming, CFO, are with me here in Auckland [indiscernible]. Also, in virtual attendance are representatives of our auditors, Ernst & Young, including our lead audit partner, Simon O'Connor and [indiscernible]. Finally, a number of our leaders across the Skellerup Group have also joined online. Welcome to you all. Before I summarize the order of things here today, I will explain how you may vote on resolutions and how you may submit questions. So voting today will be conducted by way of poll on all items of business. In order to provide you with enough time to vote, I will shortly open the voting for all resolutions. At that time, if you are eligible to vote at this meeting, you will be able to cast your vote under the Vote Tab on your screen. Once the voting has opened, the resolutions will allow votes to be submitted. To vote, simply select your voting direction and the options shown on screen. You can vote for all resolutions at once or each resolution in turn. Your vote has been cast when a tick appears. To change your vote, simply select Change Your Vote. You have the ability to change your vote up until the time I declare voting closed. You can submit the questions at any time. To do so, select the Q&A tab at the right half of your screen, type your question into the field and press send. Your question will immediately be submitted. [Operator Instructions]. Please note that while you can submit your questions from now on, I will not address them until the relevant time in the meeting. Please note that your questions may be moderated or, if we receive multiple questions on one topic, amalgamation together. Finally, due to time constraints, we may run out of time to answer all questions. If this happens, we will answer them in due course by e-mail. We will now move to the business of the meeting. I now declare voting open on all items of business. The resolutions will now be opened and voted. Please submit your votes at any time. I will give you warning before I move to close voting. I will shortly provide a summary of the Skellerup highlights and then hand over to David Mair to give a more detailed presentation on Skellerup. Following David's address, we will respond to questions from you on our presentations. I will then put the resolutions outlined in the notice of meeting to vote. We will cover each resolution in turn and respond to questions specific to each of those resolutions. Finally, I will provide a further opportunity for general questions on Skellerup as part of general business towards the end of the meeting. Well, good afternoon, and welcome to Skellerup's 2021 Annual Meeting, our first virtual one. I would love nothing more than to be celebrating in our traditional way over afternoon tea with the glass of wine, another record year. But with things being what they are, today's celebration is necessarily more muted. I'm nonetheless confident that when we get together next year, we cannot only make up for lost time, but we'll also have fresh goals to raise our glasses. But let's start on for now. We are now more than 18 months into the global pandemic and are living with the massive disruption that is created. And this has forced the value of having a solid foundation, one that has allowed us to adapt to the unique and complex challenges posed by the pandemic. The FY '21 result reveals that the continuing strength of our strategy and business model is our solid foundation. The leadership of our management team and the skill and adaptability of all our people, combined with the unrelenting customer focus, has allowed us to keep growing that foundation. It is, therefore, with real pride that Skellerup can report another big report here that report is across the board. Net profit after tax was $40.2 million, up 38%, which beats our recent record results. As a growth business, achieving a record operating cash flow of $58.8 million, up 22% from the prior record in FY '20. This also a stand-out measure of performance. This enabled us to fund our capital expenditure requirements, reduced debt; down $19.8 million to net debt of $8.7 million and substantially lift our final dividend. The final dividend [ implicit ] to 50%, increased from $0.075 to $0.105 per share and was paid to shareholders on the 15th of October 2021 with a record date of 1st of October 2021. This brought the total dividend payout for the financial year ended 30th of June 2021 to $0.17 per share, up 31% on the prior year. Rewarding shareholders is a vital metric for us. And over the last 10 years, the payout has almost tripled. The Board is delighted with this level of growth, and we are pleased your loyalty that Skellerup has definitely rewarded so well. Skellerup is a New Zealand success story and a global company with businesses in New Zealand, Australia, China, Italy, the United Kingdom and the United States. 80% of our revenue is derived offshore. With a strong domestic presence and global reach, comes great growth opportunities but also greater complexity. Our strong balance sheet has allowed Skellerup to take advantage of growth opportunities. And in August, we acquired Talbot Technologies, a 25-year-old well-established business that designs, develops and manufactures highly engineered plastic products for domestic and international markets. That acquisition strengthens and broadens Skellerup's capability with a proven expertise of the Talbot team, so it adds value to our business. Our growth business would face a [indiscernible] under benign conditions. But with the disruptions caused by the global pandemic, we and our workforce faced an enormously trying year. What last year seen novel and therefore turned with the challenge to overcome as well as a lot of uncertainty has given way to the sustained grind of the pandemic, both physically and psychologically. In some countries, the disruption has been extreme with long and more restrictive conditions for our people, prolonged periods of working from home and more recently, supply chain challenges, testing our relationships with customers. Our workforce has risen to the challenge, and we cannot speak highly of them. They have shown remarkable adaptability. We've supported their collective effort and responsibility to work safely. They have supported Skellerup by keeping it focused, notwithstanding the disruptive challenge faced in satisfying customers. Working closely with key customers is the foundation to Skellerup's success, the adaptability of our people to maintain that focus, be flexible in planning and be responsive to the changing needs of customers to ensure those needs are met as a testament to their tenacity and [ quality ]. Our record result this year is a result of the collective effort and we think [indiscernible] forward. Skellerup takes seriously its responsibility to grow our business sustainably, reducing waste and our environmental impact domestically and overseas was part of Skellerup's commitment to continuous improvement on sustainability. And because we review sustainability widely, that is working closely with customers, developing and investing in our people and minimizing emissions and waste as it's not an [indiscernible] proposition for us, growing a sustainable business is core philosophy to Skellerup. Our directors have also faced a challenge. I've spoken of the increasing complexity of the business, the Board has a wealth of commercial and governance experience. And we worked hard to ensure thorough oversight, visibility and provide strong governance to support David and his team. Despite being unable to travel to our international businesses, we have been active visiting our domestic sites to observe and understand our operating environments and meet with our people. We've also invited leaders in both our domestic and overseas businesses to join our virtual Board meetings to present and discuss the plans, risks and opportunities with us. The increase in workload and time commitment of directors, together with [ an age plan ] succession given the substantial institutional and industry knowledge of our long-sitting directors means the Board is considering both the size of the Board and the directors' skills needed to maintain strong [indiscernible] size in governance and to the future. Skellerup future is positive. Our strategy and business model were tested by the global pandemic, and they not just survived, they thrived as our report result shows. To reinforce our confidence and optimism, I'll make a comment on our current trading performance. We have made a strong start to FY '22. We have met continued good high customer demand despite the constraints of elongated shipping trends at times. We expect our net profit after tax for the first half of FY '22 to be in excess of 10% above the prior comparative period. And in closing, on behalf of the Board, I want to emphasize the Board's pleasure at the FY '21 result expresses our optimism for the future. I would like to thank David and his team and fully leadership. And most of all, I want to thank you, our shareholders, for your encouragement and support. David?

Thanks, Liz. Last year, I was proud of how well Skellerup managed to perform despite the disruption caused by COVID. The strength of our strategy and business model was tested as well as the resilience of our customer base. Skellerup rose to its challenge in past this test with record results. While a year on, I'm pleased with the excellent results our team has delivered and hugely optimistic about our future. The record result across the board is a testament to the skill and commitment to Skellerup's ambition for global leadership and the design, manufacture and distribution of precision engineered products. Record revenue, record earnings before interest and tax, record net profit after tax and record cash flow and dividends were not accidental. Though with the culmination of years of thinking hard about the essence of our business and years of managing deliberate choice to lay a solid foundation and build a stronger business and build it even stronger, we will because we are focused always on Skellerup's ongoing success. The COVID-19 marathon. One of the truisms that has emerged about COVID is they're responding to it as a marathon, not a sprint. A company with the history of Skellerup is built from the marathon running, the long haul, so our success in responding to the global disruption is not surprising. Over many decades, we've built our endurance and speed clocking up the miles, trending smart and often difficult conditions while we've worked on our right strategy. FY '21 is a testament to all the operation and hard work that has gone before. We've run a winning race, but I'm here to tell you today that our ambition is to keep performing, maintain our strategy and keep succeeding whatever the conditions. Also like a marathon runner, we couldn't have achieved our record result without our support team. Skellerup is essentially a people business. Our customers, suppliers, employees, the communities we influence and you, our shareholders, have all contributed to our success, it's your success too, and we thank you for your ongoing support and confidence in us. Skellerup is a great global growth-oriented business. Skellerup's business foundation, our strategy and business model is strong. The essence of Skellerup is combining deep material expertise that is hard to reverse engineer, strong product and full design capability and proven scalable manufacturing process knowledge. Our ability to deliver critical and essential products that often bundle multiple materials to meet demanding and ever-shifting regulatory standards is our competitive advantage and one, we believe, is not easily replicated. We have built on our foundation and competitive advantage through Skellerup's unwavering focus on our customers. Let me stay close to them so that we can understand the challenges and can respond with new approaches in innovative products that make a positive difference to their businesses. Our customers' needs are central to all our development work. We develop products for predominantly, original equipment manufacturers customers. From our technical salespeople to our engineers and chemists, we work closely with our customers to develop and deliver reliable products that meet their needs. As I said in the annual report, without the demanding customers, we have no business and no opportunities to develop new solutions. Maintaining our laser-light customer focus is good for them and good for Skellerup. In this same way, we strive to be the best supplier to our customers, we also want to be the best customer for our suppliers. We are demanding of them but fear. Skellerup is a global reach in the ambition. Approximately 80% of our revenue is generated in international markets, and 70% of our revenue is generated from products manufactured outside New Zealand. Our products are critical to the supply of safe potable water, the production of milk and milk products, the performance of appliances and home and workplaces, health and hygiene in hospitals, shops and homes, the safety and [indiscernible] sporting and leisure equipment and the integrity of roofing systems on homes and workplaces. We employ over 800 people spanning to 5 continents with businesses in New Zealand, Australia, China, Italy, the United Kingdom and the United States. As a growth-oriented international company, I'm especially pleased with our cash flow position, with net debt down $19.8 million to $8.7 million, our balance sheet is strong. One benefit of a strong balance sheet is being able to reward our shareholders by lifting dividends. A second benefit is enabling Skellerup's growth strategy. Since our annual report was published, and as Liz mentioned earlier, Skellerup acquired Talbot Technologies in August. Acquisitions are very carefully evaluate to ensure alignment with our business to enable Skellerup to enhance the value we deliver to customers. Talbot, with its demonstrated expertise in supplying plastic products for domestic and international companies specializing in health, technology and electronics applications, was a natural fit for us. The Industrial division. Results from our Industrial Division were outstanding, showing a revenue increase for the fifth consecutive year. Sales growth and gross margin improvements combined to increase earnings before interest and tax by a 57% to a record $32.7 million. That revenue growth was broad-based and across product lines and in different markets. Working closely with our customers to understand their needs and designing products they perform is the hallmark of our Industrial Division's businesses. Their focus, I should add, is paying dividends. One example, our expertise in deep material science is also paying off. During this last financial year, we completed a project to reformulate compounds for a range of potable water products in Australia. This project required a mix of deep material science, engineering, tooling and proceeds expertise. By working closely with our customer and regulators, we administrated their expertise. This enhanced customers' trust in our products and is resulting in further growth opportunities for Skellerup. Our Agri business. Earnings before interest and tax in our Agri Division increased by 20% to a record $30.5 million. This was on the back of both sales growth and gross margin improvements. We are the second largest manufacturer of food grade dairy, rubber wear globally. And while our strength remains in the U.S. and New Zealand markets, Europe and Asia were our fastest-growing regions last financial year. Continuous process improvement underpins our ability to meet our increasing demand without significant capital investment or increased operating costs. Now our people. Now people have risen magnificently to the challenges they've faced since COVID struck. They are spread geographically, so each has faced a different quality of disruption. It's humbling as Chief Executive to see their tenacity, adaptability and loyalty in the face of a disruption that severely impacted our people's working and personal lives. We acknowledge too their families in their support. They have shared in the sacrifices that have been made and we thank them for it. These qualities are irreplaceable and are further evidenced by Skellerup suffering no significant redundancies since COVID began over 18 months ago. In fact, we've grown our workforce 2% in FY '21. Skellerup leaders and their teams have performed with great skill and tenacity. We have supported them by investing significant financial and human capital in upgrading our information systems to help them work even better with our customers, to develop more innovative solutions and to drive greater efficiency. We have lifted our minimum wages for workers across several jurisdictions. We are proud to be able to reward our team well for the work they do. Our stable and focused team are a true asset of the business. In Skellerup, we regard health and safety as our highest priority. Skellerup site globally has an active health and safety committee that meets monthly. The Board has oversight of our health and safety programs. We report to it monthly. A collaborative approach works as evidenced by for the second successive year, no serious harm injuries. Because we are an international business, one working with a complex web of suppliers and customers around the globe, maintaining the highest standard of ethics is so important to us. We work with our leaders to discuss the behaviors required and outlined in our code of ethics. And as importantly, how they and we respond to any reported violations. I'm pleased to report we did not receive any reports in this regard in FY '21. As proud as I am of our performance last year, and I'm immensely proud that there's no time to rest on our laurels. We'll learn from our successes, but we are not just a customer-oriented business, we are also a future-oriented one. We have a lot of optimism about that future. We have proven confidence in the strategy and business model that has fueled our growth and performance. Our fundamentals are operating a sustainable business, working closely with customers and investing in our people are strong. Liz has commented on the strong start we have made to FY '22 and our expectation that NPAT for the first half of FY '22 will be an excess of 10% above prior corresponding period. Staying close to our customers and our suppliers and adjusting our actions in response to changes in -- the expected changes will be critical to achieving continued growth. In closing, I'd like to thank Liz and the Board for their ongoing support. Thanks again to the Skellerup team for their commitment and determination to making this a great global business. And thank you to you, our shareholders, for your support and confidence. We are optimistic about our ability to continue delivering strong returns. Thank you.

Thank you, David. We will now take questions from you on our presentation. Graham, is there any questions?

No questions at this time, Liz.

Thank you, Graham. We will now vote on the resolutions contained in the Notice of Meeting. We have 4 resolutions to be voted on today. The first 2 related to the reelection of John Strowger and Alan Isaac as directors and the third to directors' fees and the fourth being the auditors' fees. As noted earlier, in accordance with the NZX listing rules, voting will be by poll. A number of shareholders have cast a postal vote, we have appointed proxies to cast the vote ahead of today's meeting. I advise voters holding discretionary proxies that will be voted in favor of all resolutions. The results of the meeting will be published to the market later today. Resolution 1, reelection of John Strowger. In accordance with the company's constitution, John Strowger retires at this meeting and being eligible offers himself for the reelection. The Board recommends John to you as a Director of Skellerup and unanimously supports his election. Before we consider the resolution, I would like to invite John to briefly talk in support of his reelection. John?

Thanks, Liz. Good afternoon, everybody. Perhaps it's my function here to play for time to give Graham a chance to receive some questions that we can speak to later. But good afternoon to you all, hoping that you and all of your families are safe and well in these rather unique times in which we live. For those of you who don't know me, I am John Strowger, a commercial lawyer at a law firm Chapman Tripp, a national law firm, where I practice primarily in the corporate and commercial areas involving mergers and acquisitions, equity capital markets and private equity, also lead the firm's endeavors in relation to its China desk, trade both inbound and outbound with China. I find my astonishment, I've been doing this job for 35 years, probably closer to the end of my career on this figure that I am the start. I'd like to think that I've spent most of that time trying to ensure in practice that the lawyers function allowed us to facilitate transaction [indiscernible], get in the way of comments. And I'd like to thank that I, to some degree, at least bring that perspective to my role with Skellerup. You would have thought with a [ 105% ] increase in share price and 38% increase in NPAT in the last year I'd probably present to you with the benefit of a favorable wind. But I'm reminded of a couple of other truisms in live, which I think are particularly germane to Skellerup's current position in my candidacy. The first is that overnight success sure has held for a long time. As David said in his presentation, and it's almost like I read it first, the results we're enjoying this here and last have been the cumulative effect of a serious amount of perspiration and effort by particular our senior management team over a conservative period of time. There are no paradigm shifts at the Skellerup, it's the cumulative effect of a small number of incremental operational and market improvements, which you've seen us get to where we are today. So the phrase, I'm reminded of is that success has many parents. And again, David has rightly referred to the tremendous efforts of our staff and senior people operating in a difficult environment in the last 12 months, and that's entirely due to them that we find ourselves reporting to you today the results that we have. But if I reflect on where we are today and perhaps the [indiscernible] times are good, a Board should lead management alone and think about what the Board's function, as we sit here today, looking forward, really is that it's most critical to me, it is to ensure that we seize the momentum that we've achieved over the last couple of years, institutionalized a lot of the gains and practices and ensure that this business is not unique to any one individual but will continue in the marathon amongst us. Marathons amongst us have finished our runs, David. And the time comes for others to take the helm. I'm very interested to ensure that the benefits of the last few years are not lost and the momentum is maintained. Skellerup has had a long history, a proud history of entrepreneurialism and opportunism. We've been very light-handed and good, and I don't want us to lose that, but at the same time, I think we need to -- we are moving into a new phase in the organization where this is now a large institution. It's a group with a market cap of over $1 billion, and we may well start acting like we are. I'd like to think that if I'm favored with your vote today, I can make a continuing contribution to ensure that. Thanks for your time.

Thank you, John. I now move as an ordinary resolution that John Strowger be reelected as a Director of the company. Graham, are there any questions on this resolution?

No, Liz. There no questions in respect to this resolution.

Okay. Thank you. There's no questions. We'll move on to Resolution 2, reelection of Alan Isaac. In accordance with the company's constitution, Alan Isaac retires at this meeting and being eligible offers himself for reelection. The Board recommends Alan to you as the Director of Skellerup and unanimously supports his reelection. Before we consider the resolution, I would like to invite Alan to briefly talk in support of his reelection. Alan?

Thanks, Liz. Good afternoon, everyone, wherever you are today. I welcome the opportunity to speak briefly to you. By profession, I'm a chartered accountant, but I've had significant commercial experience with a number of leadership roles, both in New Zealand and internationally. I mentioned the commercial experience because, in my opinion, experience is being undervalued today in the interest of greater focus on diversity in many aspects of our life. I retired from KPMG in 2006 after leading the firm in New Zealand for 10 years and have been a professional company director since then. In my governance roles, I chaired a number of audit and risk committees, as I do -- sorry, as I do in my governance roles, I chaired a number of audit risk committees as I do at Skellerup. In addition to my other current listed roles, Oceania and Scales, I have in recent times been on the Board of other then listed companies, Opus [indiscernible] Hospital and Fliway. For the past 2 years, up until the end of July, I was the President of New Zealand Institute of Directors, which has facilitated me keeping up-to-date with many current and emerging governance issues. I'd also note that personally or through my family trust, I have an interest in 50,000 shares in Skellerup. I believe we have a great Board with a high level of trust and respect and each other, and I look forward to your support so that I can continue to add value to Skellerup, which, as David and Liz has mentioned, has a strong balance sheet and is well placed to achieve profitable growth. Thank you.

Thank you, Alan. I now move as an ordinary resolution that Alan Isaac be elected as a Director of the company. Graham, are there any questions on this resolution?

Again, Liz, no questions on this resolution.

Okay. Thank you, Graham. If there are no questions. I'll now move to Resolution 3, directors' fees. We now move to the resolution to increase the pool available for payment of directors' fees. It is proposed to increase the total pool of directors' fees by $100,000, from $550,000 to $650,000 per annum. The directors' pool -- fee pool was last reviewed in 2016. The Board seeks an increase in the total pool for the following reasons. The company has experienced significant growth and robust financial performance since the Director fee pool was last approved 5 years ago in 2016. Secondly, the company continues to grow in complexity and a significant global operations with a consequent increasing workload for directors, including the workload of those directors appointed to committees of the Board, directors workloads will increase with more legislation and regulatory changes being proposed, stakeholders' expectations increasing to consider and monitor a broader range of nonfinancial measures together with governing through the ongoing uncertainties of COVID. Thirdly, to ensure the company can offer competitive fees to attract and retain nonexecutive directors of a high caliber. And lastly, to allocate Board committee fees if and as required. The Board considers in light of the realities of the increased workload and responsibilities undertaken by the Board in consideration of the independent report, referenced in the notice of meeting and made available on our website that the proposed increase fees pool is fair and reflective of market conditions. The present and planned allocation of fees is shown in the notice of meeting. The directors recommend that shareholders vote to approve this resolution, however, directors and their associates will not be exercising their own voting -- their own shareholder votes or discretionary proxy votes on this resolution at the annual meeting and any such votes will be disregarded by the company. I now move that the directors' fees be increased from $550,000 to $650,000 per annum in the aggregate amount payable to all directors of the company for their services as directors of the company with such sum to be divided amongst the directors as the Board may, from time to time, determine. Graham, are there any questions on this resolution?

Liz, no questions on this resolution, either.

All right. Thank you, Graham. With that, I'll now move to Resolution 4, remuneration of the auditor. Ernst & Young are the existing auditors of Skellerup. Pursuant to Section 270 of the Companies Act, Ernst & Young are automatically reappointed as auditors for the ensuing year. The Board seeks the approval of shareholders to be authorized to fix the remuneration of Ernst & Young for the 2022 financial year. I now move as an ordinary resolution that the directors be authorized to fix the remuneration of the auditor for the year ended 30th of June 2022. Graham, are there any questions on this resolution, please?

No questions, Liz.

Thank you. We've reached the time in the meeting now. Just we will take any further questions on Skellerup's financial and operational performance and any other matters shareholders would like to raise. So Graham, do we have any other questions on any other matters?

Liz, there's still no further questions.

Okay. Well, look, I'm going to wait a little time before I close the voting. So I'm going to close the voting probably in about a minute. So please ensure you cast your vote on all the resolutions, and we'll just take a moment to pause. I want to make sure that you get plenty of time to do that. [Voting]

Well, hopefully, you've been able to navigate the voting system. So thank you for your attendance today. And hopefully, next year, we can resume having those -- are able to join us in person so that you can have the opportunity to meet our people, see and discuss our products and business we are so passionate about. I will now formally close the voting and declare the meeting closed. Thank you. We really appreciate your attendance.

Thank you.