Skellerup Holdings Limited (SKL) Earnings Call Transcript & Summary

Okay. Good morning, everyone. It's my pleasure to present the FY '24 -- sorry, half year '24 results for Skellerup. I'll introduce the people in the room. So, on my left is we have the privilege of having our Chair, John Strowger sitting in with us, giving us full moral support. Opposite me, we have Graham Leaming, who obviously, will be talking about later, that has been appointed CEO. Congratulations, Graham. And we have Tim Runnalls on diving, who is being appointed CFO. So, congratulations to Ben. So we'll follow the same format as normal. I'll talk through the slides, and we'll try to keep up on the screen to make sure we're talking about the right slide. [Operator Instructions]. So anyway, without further ado, let's get started. So if you go to first slide. Slide 2, Graham, please. Here we go. So just the key points. So as reported earlier today, the half year NPAT of $21.6 million was down 6% on the PCP. Clearly, we had strong industrial division returns, but the Agri division was impacted by customer destocking and customer order timing. We'll go through that in a bit more detail later. The group EBIT of $31.6 million was down 6% on the PCP. The Industrial division achieved a record result. We'll go through that in detail. Fifth consecutive record result. But Agri was well down on PCP. And as I said, we'll go through the detail of that later on. Very strong operating cash flow of $36.5 million, up 81% on PCP. We've tabled in the past, our focus on receivables and our focus on managing our inventory. It's not helped by the Red Sea and the Panama Canal, and a few other minor things. But in the scheme of things, I believe we have very effective working capital management, and our teams are very focused on this. And have been for a long time and will continue to be. So our strong cash flow is funded our CapEx needs, dividends, IFRS 16 lease payments, meaning net debts closed well down. So just from a balance sheet point of view, we have a very, very strong balance sheet, and it's a clean balance sheet, which I think is very important these days. I sort of skipped over the dividend. So the directors have approved an $0.085 per share dividend, that's an increase of $0.05 or 6% on PCP, and reflects our confidence on the performance of the business. Our guidance is we expect it to come in similar to our prior year record result, which was [indiscernible] in debt. And again, welcome questions on that. Really, it's a game of 2 halves. From my point of view, the Industrial division is sitting in exactly as we expected. And there have been some issues certainly highlighted in the first half of this year for Agri. But we'll give an update on our view on January performance, February, from what we can see, and also the outlook going forward later on. Please remember the guests on the right-hand side, the half year results year-on-year PCP, they're not full year-end. I know many of you will be doing a half year full year comparison. So, in essence, the key pads there needs to be a big uplift in Agri in the second half. We have a lot of confidence we're going to do that. Next slide. Please, Graham. So just the key financials. I think second -- there's not a lot of additional highlights in this slide. Again, I just point out the operating cash flow is strong. I pointed out what it's funded, but also the meat beat is down. And we have always had a strong focus on keeping our debt down. I previously have said many times that I'd like us to be in control of their banking situation. And so, I'm very pleased with the level of debt. It does give us the opportunity to consider opportunities that come along, and we'll get into this in more detail later. Next slide, Graham. The bridge, so the key drivers, it's kind of obvious looking at that. The increase in corporate costs is minor, but it's really, Agri and Sports & Leisure, both of them are suffering from overstocking by customers. In the Industrial division, we saw the overstocking play out in the second half of last financial year and sort of flush through, whereas for various reasons, particularly our European Agri customers have had issues, and the sport and leisure is very retail-based. So very strong in the U.S. So those are the 2 areas of key focus for us certainly over the next 6 months but going forward. There are a couple of minor things. As I said, the corporate costs are slightly different. But as I pointed out at the start, the Industrial division businesses other than Sport & Leisure are performing very much in line with how we expected them to perform. So slight changes. There's been the impact of favorable exchange rates on revenue eroded by the purchase costs and hedging program. We've had rising market interest rates. So if you think the tax rate has reduced so in balance through the change there. Thanks, Graham, on to the industrial business. So as you can see, 5 years of very, very good performance. So fifth consecutive very good half year result. I've often said, and I'm sure someone will throw back at me that the Industrial division was always capable of 20% EBIT as a percentage of sales in light of view. And it's pleasing even though it's a half year results. It's pleasing to see us actually, finally getting there. I believe it's worth, It is capable of more than that. It just seems to take a very, very long time, and some of it's -- the nature of the contract or the launch of new products, particularly in this uncertain time, but I'm very, very confident with our 3-year plans going forward. So I expect in the whole gram term accountable to delivering an even better EBIT result on the industrial side. So some of the highlights there. I guess, potable water and wastewater continues to grow. And we are strengthening our position in the markets, particularly Australia. The new customer in the hygiene sector, we talked about previously, they finally launched the product. The launch seems to be going very, very well. We have an additional project that we're working on for them. We need finalization. And part of our role is to ensure they pay. So we don't have a written contract, remember. We expect them to pay for a large part of the development. So we talk about customer lead development, that all means customers pay for a lot of the development to derisk our business. And so it's a very exciting opportunity mainly in the U.S. market. High-performance foam sales have been impacted sort of around the world. But one thing we know, our customers still say we have the best quality phone for the applications that are used, particularly in marine. And doesn't mind a comment about the New Zealand dollar weakness, obviously, translation of offshore earnings. So very pleased with the Industrial division in line with our expected results, and we don't foresee any issues really in the second half of the year. Of course, we have a particular focus on the marine farm Agri division. So dairy in particular, has been impacted by 2 factors in Europe, mainly destocking, so they were overstocked. And this is the typical pattern from -- and I've explained before the bullwhip, where they overorder, then they end up with too much inventory as shipping improves, and it has improved from the sort of the peak issues in COVID, during COVID. They realize they have too much inventory, just like us, they focus on reducing the inventory by selling it through. But the second main impact that we've seen from our European customers, and almost all our European customers for Agri has been -- they have a balance date of the 31st of December. So in November and December, in particular, they did not place orders. So this is a time where I want to talk about our Wigram facility, which is a large part of the Agri division. Now in January, we had an incredibly busy January. And in February, we have a lot of orders to produce. We have with revenue recognition for Europe, we really need to focus on getting the stuff on the water by the end of March. So, we actually have a very small window that affects our ability to influence the numbers out of Europe. Having said that, we have slightly longer for the U.S. market. And of course, the New Zealand market is very near normal terms, if that makes sense. So revenue recognition is effectively, it works for a lot of our products, not all of their products. So I think from my point of view, if I go back 1 year, we're in exactly the same position. We all -- I mean, it's obvious that we have an expected, very large uplift in the second half. It is bigger than it was last year. Interestingly, I do believe we have the opportunity to improve. There's one other thing for obvious reasons we didn't chat about it. But when the volumes went down, when the volumes went down and particularly in August, September, driven mainly from our European customers not ordering and even trying to cancel orders in some cases, we did do a restructuring in Christchurch that took some cost out, which affected, obviously, some of our staff. Very unfortunate thing. But we're through that now, and I can tell you I was in the Christchurch recently, where I was really impressed with how busy people were and how excited people were there to satisfy our customers going forward. So the quote from one of the leaders is this is the busiest she has ever seen Wigram, which is a great thing because people are confident about the future, and it seems maybe too much detail there. But from my point of view, another exciting thing about Agri, we've been spending a lot of time on developing our development team, and we have a number of exciting new products. They won't necessarily affect the next 6 months. But if you look forward out 3 years, they will have a significant impact on lifting our Agri performance. We haven't had that technical capability probably in the time I've been involved in Skellerup. So I'm very excited about that. And I'll come back to some of the leadership changes at the end. But just from an Agri point of view, it looks a big lift for the second half when you do the comparisons, we understand that. I still believe it's in our hand to deliver at least the same result as last year NPAT. Thanks, Graham. So the levers for growth. I've been talking a bit about the investment in people to strengthen market products and equipment, as well as our investment in the technical team, particularly at Wigram. We still have an amazing amount of productivity opportunities. We've also been spending quite a bit of capital on tooling capabilities, so that's CNC lathes and CNC mills, and things like that. So we have the new equipment that's installed. We needed to enhance our ability to coronate certain products, particularly for the U.S. market. So we've been investing in certainly where it makes sense, opportunities to capitalize productivity gains. And so interestingly, we're seeing those gains come through quite quickly, and we will see the benefit of that in the second half. I should mention that revenue, we saw some of the benefit of our pricing changes in the first half as volume picks up, of course, that will also help us in the second half. So in market manufacturing presence. I've talked a lot about the market manufacturing presence, but what's come up is that a number of customers, particularly global customers that have a presence both in Europe and the U.S., for example, GEA I've talked about in the past. They're very concerned about ongoing disruption to supply chain. So, what we've been doing is carefully working on proof of concept to manufacture and market. But without a doubt, we will speed up the supply to customers in market. And that's something we're very focused on at the moment and continue for the next, I would argue 2 years. We've continued, Graham and Tim, in particular, and the team have focused on our information systems. So we're just getting better and better with our information systems. I'll remind you that our total capital investment in the upgrade to JDE, our ERP system was $1.18 million, I think I'm correct, Graham, but anyway. Round figure is just over -- probably total $1.2 million. A lot of the time for our teams, but when we went live, we've seen the benefit of that. We are still upgrading the data structures within that system. But particularly, we've been rolling out another system needs suite among our businesses and our business leaders are finding it extremely helpful in reviewing both low-margin products and low-margin customers. And not just reviewing, taking action and dealing with that. I won't focus too much on the new products and new customers. I mean, the most exciting one has been our hygiene customer GOJO in the U.S., but there are a number of other projects. So I'm not concerned about the new projects drying up. And all of those levers for growth continue to deliver better returns for shareholders, and just as importantly, opportunities for our people. ESG priorities and performance, and I'd like to thank Graham and Tim, in particular, have done an awful lot of work on this. This is very important to us. In essence, of course, we are complying with our disclosure requirements. But at the same time, we've always taken a pragmatic view. So for us, I mean, I've talked in the past about we actively moved to change the boiler in China. It sounds minor, but we converted to natural gas early on from coal. Coal is a terrible fuel in that sense. These seem minor, but remember the strategy of Skellerup has been the accumulation of very small, almost perceptible changes and advances gives a very solid foundation. And we're continuing to do that. So we are driven a lot by common sense where it makes sense, we invest and we get the benefit of that quickly. We locked in our electricity a couple of years ago, Graham now for Wigram in particular, and we have a very large user of electricity in Christchurch. We did not put -- it's under review ways, but we did not resolve panels in place and things like that. But anyway, I mean, the rest of that is ongoing. Obviously, our big focus is on Scope 3 emissions. That's a more challenging one to get our flows right, but we have a great team. And we've actually strengthened the head office team to help Tim and Graham. So we can come back to detail on that if you like. But let's talk about the leadership changes because that's the one that I'm most interested. So from my point of view, it's been a fantastic time. I joined the Board in 2006, working with originally, Liz Coutts and then Selwyn Cushing, who really provided a great opportunity to survive the earthquakes and invest in Wigram. And we're still getting the benefits as you heard from there. So I've been CEO for 14 years, acting for 12 months. Our annual earnings have been up over 400% in their time. I'll let John make a few comments he wants to do later on. One of the things is I am continuing on the Board. So I am a Director, I will be continuing on the Board as a Director. I love this business. I'm very confident about the next 3 years, not any 6 months in particular. I'll go through some of the other people that we've developed. And then I'll talk a little bit about Graham and Tim. So I'm very pleased with our Board. I should start with our Board. So John took over from, 2 years John?

One and a half.

One and a half. And I think we have a very focused board. It can be challenging at times, which is a good thing. They understand. But in particular, when they agree with what we're doing, they enable Graham and me to get on with things. So I think Graham and I have worked very, very well together. I think we've been a fantastic team, a constant to the people that report to us. Paul Scheer and I, as directors, are going to provide a little bit more focus on in-market initiatives and things like that, but without giving the way of Graham and Tim, and the younger team. We have 3 key leaders that have come through and Graham is organizing for them, maybe in May, but we haven't seen a day year but they will provide a very short brief presentation to help people understand. We often get asked, okay, so we know Graham and we know you, David, and they've got to see Tim at the shareholders' meeting. But in reality, we have a strong bench. Of course, we are trying to make sure people don't get pinched, but we've done our best to lock them in with purpose, and they feel they're contributing and all those good things. And of course, we reward them well. But there are 3, in particular, just without going through the detail now. But the oldest is 39 years old. Pat Crotty, he's doing a fantastic job. He has taken over Ultralon. It's been a challenging business, but if anyone has the skill set to drive change and improve their business, he does. Some of you have heard me talk about Guy Muley, he's 38. Happily married with 2 lovely young daughters, but he is also in charge of the U.S. market and has very strong plans to grow the business there, but grow it profitably, of course. And we also have Dino Kudrass. He's relatively new. He took over the Agri division from Haley, and he's one of the best engineers I've ever met, but more than that, he's commercial. So I've enjoyed working with Dino closely over the last period of time. Okay. Just about Graham. He is my full support. This has been part of the plan. Graham's being very patient on a period of time. We did send him to Stanford. I've warned him not to use the word pivot, that annoys me, but anyway, 5 years ago almost. Yes, a long time ago. It was actually earlier than that But the point is this, and I will remind everyone, Graham has been a fantastic CFO, but I didn't hire him just to be the CFO. He has other skills that are worth considering. First of all, he had a strong operational view. He was COO at Raycom. That was one of the key things. And we worked together. We have a very similar view of how to improve the lever of productivity, and Graham is very good at making sure we get the accounting right to that. Because I'm often in a hurry and need to remind myself that we need to -- not so much the accounting, the thought about getting the information flows correct. More than that, a lot of companies have legal counsels and things like that, Graham's done a fantastic job of not only framing how we use our legal counsel, and funny enough, we use Chapman trip, but also, all over our other service providers. So Deloitte, and things like that. And one thing I learned from Graham, frame it, frame what you want to do and then ask them what the risk is. Don't ask them what to do to. So there's a hint for a few other people. Anyway, as I said, I have full confidence in Graham and also Tim. I've got to know Tim. I think he's a very clever guy. It will be interesting to see how much of the broader role that I've been explaining about Graham that he can take on. But again, he's been here barely 3 years. Saw the life change companies and came to a better company. And I'm sure that they will continue to improve the head office. Round figures in office costs are about $6.5 million annually. That includes all of the board, the annual report, the head office. I think Graham's intending to spend maybe a little bit of money on improving the office here, but it's a very tight small team. We have 2 part timers. We have 8 people in total. So what am I--?

Lean and Mean.

Yes. Lean and mean. Exactly. Thanks, John. The last thing I'd say, the thing I'm proud to stop, I think, is that we've all worked hard, that the Board is fully supported paying the lower paid people in the company, not just Wigram. I focused on Wigram because people can understand that and they can put it in context within New Zealand market. But the lowest paid people at Wigram are paid $60,000. There aren't that many of them. Most people have paid more. I'm sure you know the minimum wage is much lower than that. The so-called living wage is much lower than that. Go back 3 years, that wasn't the case. But it's not just Wigram, we've done the same in the U.K. It's been a bit more challenging there. We've done the same in all of our businesses around the world because we see ourselves as a family. We have a strong purpose. And from my point of view, that's what I'm proud about. Thank you.

Here really just to record the Board's gratitude in respect to David's contribution, stellar contribution over a sustained period of time. The numbers, as you can see on the screen speak for themselves that are going to be many chief executives that can boast, he won't, but he should, the 400% improvement in performance over as tenure. David brings us, most of you -- a number of you know, David, or know that he brings a passion and energy to the role. It's quite outstanding, quite remarkable. He's a 24/7 CEO, no doubt about it. And he'll be missed, of course, but we're not losing him. He will stay on the Board as he mentioned. And from our perspective, we're delighted that Graham could step up into this role. Graham is a very known quantity, to put it mildly. He's been with us for 11 years. It's already a lot more than a CFO, and the Board is extremely confident that this will be a very seamless transition. It's a credit to David that he leaves the company in great hands going forward. We've got every conference in the future, and we look forward to continuing to work with you, Graham. And with Tim, congratulations on your appointment. I should really ask you who you're supporting in the test match today after this call. And nothing to do with Skellerup, but we're delighted to have you on board too, Tim. Congratulations.

Thank you.

So we'll open it up for questions.

I think, Josh, you might be the first one with a question. So if you just like unmute yourself and fire away.

First of all, I just want to say well done on a fantastic run, David, and best of luck to you, Graham and also Tim, as you step up.

Thank you.

Thanks.

Just most of my questions really center on the Agri division, which was probably the most interesting part of the result. As you mentioned, it feels like a bit of days this year, given we saw a similar situation last year. I guess I'd be interested to know why is the same thing happening 2 years in a row? It feels like seasonality is being reintroduced back into the division. And as a point at what you think things will start to normalize and we get similar performance in both halls rather than a big divergence.

I'll start, and then I'm sure Graham's got a view. Thanks for the question. I highlighted that most of the volatility in Agri has been from European customers. So just to be clear, we used to get quite a bit of volatility out of the U.S. And we've worked hard there. And we have more visibility, as I've explained previously about what happens with stock levels at customers. I'm not sure, I think, certainly, the energy shock in Europe. We know that it's affecting a lot of German production and things like that at the moment. So I'd love to say, in a year's time, the 2 starts will be easily explainable. But we were expecting -- probably another way of saying it, I explained the bulwark, which COVID created. So customers had orders and they got worried. Shipping slowed down, became more expensive. So customers over ordered. And after a typical bullwhip, you always get a secondary one, about half the size. It's like a deep care bounce kind of thing in markets, and we saw that in the Industrial division and the latter half of last year, and that has washed through. So we don't see that issue in the -- sorry, the Industrial division. In the Agri division, we thought we saw it in the second half of -- the second half was, as you know, strong. It was stronger than we were expecting. And I think they overcut that. They overdid it. Indeed, certainly, in the first 6 months of this financial year, we saw the European customers for a number of reasons. And certainly, in November, December, the order pattern said they were not ordering. But then in January, we've had orders that we can't make bigger than we can make. So just to emphasize, one reason I'm confident about the second half for Agri is, January was bigger than we were expecting in some ways, but February definitely is going to be bigger, and we can see March, and that's kind of the European customers in that sense. Of course, we still rely on the European -- sorry, the U.S. customers staying strong, but all the signs at the moment are they will. So our key customer GEA in January had the biggest sales that I can report. Now, I talk volume yet because volume is the most important thing for our factory, particularly in Wigram. Our other dairy businesses are going well. The only other part of dairy that we always have to think about is actually the footwear part. And despite having a very good run over the last 3 years, we've had issues with inventory. We actually have inventory on hand in New Zealand and our Chinese, Chinese Martin Lee and our Chinese team have done a fantastic job of making sure we have the product. I have very little insight into how our foot wear will finish through May, June, but a lot of that depends on the weather. And I don't want to cause an issue with weather in New Zealand at the moment, we've got enough. But anyway, from my point of view, I'm very confident about where we are. I haven't seen as many outstanding orders. We just need that to carry on. So I'll let Graham talk a little bit about that as well.

Yes, not much to add really. I think certainly it's been exacerbated in this first half. Josh, it's pretty obvious in the numbers. And I think traditionally, has always been a bit of seasonality in the Agri results. And probably during that COVID period, that changed a little bit because of the fact that customers were building up inventory levels in response to mitigating and managing that risk. So I think we're likely to continue to see seasonality in the Agri results in particular. But I think the year that we're currently in has been exacerbated by the inventory correction. And as David says, our concern is always, customers run it down and then react and maybe order a little bit more. And so then there's a little bit of a ripple effect. And hopefully, that ripple effect is getting a little bit smaller, and we'll see a little bit more of a normalization. But I think you can anticipate that there'll be some seasonality in the Agri division results, whereby the second half will typically be stronger than the first half.

I should add one thing that may help. So one other reason I'm positive. We have won some new customers in Europe. We've done technical development, and we've sold some technical issues. And these customers, we've taken off Avon Milkrite, who, of course, have been relocating to Poland and the new plants. So there's one customer in particular, it could easily become our fourth largest European Agri customer. But the issue here, we have to work very, very quickly because, of course, if something happens that we can't supply, then they'll go back to on Milkrite. So the point I'm trying to make here is we do not believe we've lost market share in Europe. It's really important. So enough on that, but some other questions. Thank you.

Brilliant. That was really helpful. At the update you provided in October, you mentioned Agri sales were lower because your customers were in addition to the inventory movements also experiencing challenging market conditions, but there was no real mention of this in today's material. Have the market conditions for those customers changed or improved since your October update?

Well, I think if you look at -- I mean, I shouldn't, but I mean giving economic views, but dairy international, not dairy international, but the International dairy world has been suffering for a while because of China. Of course, that's mainly New Zealand for powder and things like that. But if you look at that, around the world feed costs like in the U.S., there have been issues, which pretty much have been resolved. So Dairy worldwide is starting to look stronger. And I mean, there's a whole lot of disruption for various reasons. But we actually think the back wins, if you like, are back to at least normal, if not slightly better. And certainly, the wash through of China, the worry about the lower birth rate then that drag in the year, so they're going to have 2 babies. I mean, look, there's always change. I guess the thing is, I always say, it's in our hands to change that. We have some exciting new products that we think, in some cases, I'm talking Agri specifically and especially for Europe. We have some interesting ideas. Dino, the person who's taken over, grew up in Germany, worked for a mixing company in Switzerland. He understands the dairy industry very, very well. And geez, clever and his team are producing new products at a fantastic rate. Now, of course, you can produce a product and no one wants to buy it. So we're working with customers. I've always talked about customer-led. So will we get there by June, I don't know. I give it 2 years. The Agri division is going to be significantly stronger than it is now. No doubt.

Christian, you're up if you'd like to go ahead.

Cool. Firstly, obviously, congratulations to both David on moving on to the Board and Graham on your move into CEO. And then just -- so I'll start my question. I've got a few questions, but I'll start off a couple and then maybe jump back in the queue. Just on the Agri line, yes, you've obviously indicated you need and are expecting the stronger second half for dairy underpinned by early trading. So at this point, based on current trading, should we be thinking about second half EBIT similar to second half last year, or if anything, it sounds like early trading is actually ahead of PCP? So are you actually expecting second half '24 to be ahead of second half '23?

Yes, we would anticipate it to be slightly ahead of the second half of '23.

Okay. And then so, I guess, on the other side of that, is there -- I guess that kind of implies a lower growth rate in industrial. So which look on sort of quickly looking at it looks like low growth in industrial into the second half. So are you able to sort of just call out the sort of key drivers in industrial sort of key growth drivers or maybe there's some offsets from headwinds and construction or something like that?

Yes. Construction is interesting, but I mean, in Australia, it's not very helpful at the moment. But look, from my point of view, other than the marine foam, I'm not concerned about our growth plans. I mean, it would be great if we could speed them up and things like that. But again, we have exciting products. There's -- I'll save it up for Guy Muley, but we're launching a new product for our vacuum systems. Now, I know that's a very small part of our business, but the value of this is incredible. So we are solving for all the pumper tracks, the #1 reason that they stop. And when I say solving, again, hopefully, in May, Guy can give an update. That's one of the number of initiatives there. So that's that side. But the bigger opportunity is golf, and golf now comes under Guy Muley, and he will bring his laser-like focus on to continuous improvement that is shown running Dex North America, which is doing very well in vacuum systems. He also runs Europe. So without a doubt, I believe the golf part of the Industrial Group is the biggest opportunity. And we have a number -- I mentioned earlier that there's a second product for our hygiene customer. There are other opportunities that we're realizing through the Whitewater facility in Northern Wisconsin. So from my point of view, the only reason we've been cautious about the industrial number really is uncertainty around our foam.

Yes. Maybe to add to that, if we think about the applications we sell into potable water, and wastewater is pretty solid, and we expect that to continue to grow. Not only in the U.S., but we've also got growth opportunities in Australia as well. As David said, the roofing construction, which is the second largest application we sell into the North American market is going pretty well for us, but not as strongly in Europe. And certainly, it's a pretty -- probably the best way you could describe Australia is flat. That's a pretty tough market at the moment. And that is our biggest market for roofing and construction. So it's not going to provide a big tailwind in the second half of the year. And in the mining area, which is a relatively small application that we sell into, we had a pretty strong first half. That demand tends to be pretty lumpy. So we won't see that repeat in the second half. So growth for industrial in the second half will come through potable and wastewater for sure. And through hygiene applications as we've talked about. But it's going to be a bit more of a grind into the roofing construction area.

Okay. Yes. So yes, so you're not kind of getting the same boost that you were getting in the first half from the likes of oil and gas and in Roofing & Construction. Is that kind of the--?

We didn't get a boost from roofing construction in the first half. We've got a little bit of lease mining that won't repeat. That will continue to get a momentum, and particularly the main application area of potable and wastewater, which, as you know, is our largest piece in our priority. And I think we'll continue to grow into hygiene, as well as the customer continues to farther product.

So on balance, a bit of a slowdown in second half growth. But I guess the key kind of growth areas are the ones that are actually going quite well, and then offset by some sort of -- yes, right. I guess the more sort of discretionary areas are a bit slow?

Yes. Year-on-year, we're expecting the Industrial division result to be up again.

Yes. It's really important on the industrial side. The nature of the products we develop and the customer relationship. I mean, Hygiene's one example, but even some of the other projects that don't get done within a financial year. So I mean, to me, I always think of the 3 years, sometimes we're a bit lucky, it happens, but faster COVID didn't help. So it slowed things down. Despite that, we've delivered good growth. So why I'm so confident about the next 3 years is not a particular project or a particular customer. It's more how our team are learning to do things faster, more effectively and make more money. So we're just getting better and better at doing that. And it is a combination of a series of small things, and 1 or 2 big ones. And so 1 or 2 of those big ones, I mean, the hygiene thing is one of the big ones. And that could be really big over the next 3 years. So I try not to be -- I mean, our job as senior support and as a senior management team is not to get too micro, accepting that we have to report.

Okay. Great. Sorry, I'll just squash in one more, and then I'll jump back in the queue. Just on Agri, again, sorry, there was obviously quite a large margin decline compared to the PCP, which was actually also kind of a weaker PCP. So could you just explain if that was all operating efficiency from lower volumes? And if you sort of expect that margin to return to normal in the second half?

Yes, it was. We didn't suffer. You don't get line of sight on the gross margins, but despite the lower volumes and therefore, lower revenues, we maintained and actually slightly improved their gross margins for the Agri division. So it's all an operating leverage basis when revenue drops to the extent it did. The indirect costs were actually pretty flat for the Agri division. So therefore, you see the fall-through when you look at EBITDA as a percentage of revenue. Okay. Rohan, you're up.

Thanks, guys. And thanks, David, for your time as CEO. You've done a fantastic job, as John pointed out, and it's sad to see you moving on, but welcome, Graham, to the big seat. I just had a couple of questions, and I know you're not a CEO yet, Graham, but David talked about costs and efficiencies, and you kind of see a baseline for 5% underlying growth over the next 3 years. Has he shared his thoughts with you on this? And is that still kind of the target that you kind of have in your head as well?

Yes, absolutely. I mean, Dave and I have worked together for 11 years. So we're closer together. So obviously, I share the same perspective on our opportunities that David does.

And just to be clear, I don't necessarily do it. I do get hands on, but that's why I do Judo. But anyway, that's a joke. The reality is our teams do it. So like I keep getting surprised at Wigram, because I remember way back when we first opened Wigram and people were expecting the gains to be had within a year on that. I'm always amazed at how many more opportunities there are. But remember, a lot of these opportunities come from the teams themselves. So one reason I'm so focused on some of these young leaders coming through like Guy Muley, Dino and Pat Crotty. But there are others, they drive those changes. So it's about us making sure that they're clear. Graham, I know has a similar view about how we can expect these kinds of changes from them. So I don't see that slowing down at all from my point of view. And of course, I remain on the board. So I'll be there to hold people accountable.

Thanks. And just around, I guess, strategy. Graham, is there anything that you're thinking of tweaking? I appreciate that you're still not yet CEO and David is in the room. But do you have any thoughts about things that you -- any different direction you may take?

No. Again, I think we've worked together for a long time. I think the opportunity we have or what we certainly, what we plan to do and what I plan to do, as David's highlighted, some people in the organization that have been developing and growing very well. And I think there's an opportunity to engage them in a slightly more broader sense to help develop the strategy we have. But the basics that we talk about in terms of the critical competencies of Skellerup. Other things we still have to capitalize on. And David and I have consistently talked about what they are in terms of our deep material knowledge of how to use the various materials we use, our ability and capability to tool, and therefore, mold products that deliver and pretty demanding applications. And then the process knowledge we have of how to make these things and how to improve these things. So, those are the deep competitive advantages that I believe we have that we continue to exploit. We're pretty focused. You know we've done some acquisitions over the years, and we continue to look for those, and we've been open and said we would like to find something larger that would be good to sync our teeth into. But from a point of view, the Agri business, we're rightly tightly focused on thickly the dairy market. We think we can broaden our product offering a little bit there to help their business grow. And the Industrial division, we play in ways we sell into a number of different broader applications, but we have some real priority areas where we believe what we can design and manufacture have some real value to customers, and so therefore, we get to create that value and we get to capture a fair share of it as well. So you shouldn't expect to see any major changes in direction, that's for sure.

I'll add. I'm relaxed if Graham does change the strategy quite a lot. I think the essence of Skellerup is the big material knowledge, all those things that we've explained, but also our purpose. So the glue that holds our alignment of people together is the purpose. That's what customers and I've been through there. But the point is, I don't think the purpose will change. But in some ways, that's very generic. You could argue that purpose applies to any company. What Graham will do, and I have no doubt as he will bring his view of the world and start to focus on other areas that may be I've overlooked. So, we're not focused on is probably a better way to say it. So we take a broad view, and I'm very confident that Graham will add to our strategy. Will be terrible to believe the strategy exactly is mine for the next 3 years. I don't see that the right way to think about it at all, and I'm not precious about it. So anyway, so look, I really -- I think the area that we've wrestled with... Okay. Anyway, so we struggled with Agri because although the numbers we're getting better, they were all or almost all operational. But it's products and customers that drive your business forward. So we were just fortunate that we're in a stronger position, but with the geopolitical change and that's going to change. So I'm looking forward to seeing how Graham does change the strategy with his direct reports. That's the right thing to do.

Yes, I think Christian has got his hand back up so far away.

I just had a question on Agri again. You sort of mentioned a new product that you -- or a new innovation in that space that you're confident on in the next 3 years. I mean, obviously, you probably can't provide too much detail. But can we essentially think of that as like in broad terms like a new generation of milk liner? Or just some sort of sense of what you're kind of talking about?

So the first thing is the ADF opportunity, their old liners that wouldn't fit. I've see the customers, haven't I? But the European fourth largest -- it could become our fourth largest European customer. But look, in some ways, it doesn't matter, but the existing product is not good. So it's an enhancement to a liner. But as Graham sort of hinted earlier, we're looking at other adjunct products to Agri. So there's one we don't want to discuss right now, but I'm very confident that we can, within 2 years, own that market completely. So it's not a one-shot thing on the Agri side. So generally, we're right in the middle of that at the moment. So I'll be unfair to talk about it. But those things are why I'm so positive about not just the next 6 months but going forward. But this European customer, if we can just -- so here's the issue, we've kind of got the deal done. We need talks. We've got some new machines to make the talks. How fast can we make the tools, get them in the machines? We've got capacity to bang, bang. Get them on a boat, get them to their customer in England, and still met the revenue recognition requirements. That's the key for the next 4.5 months. But of course, take a longer-term view, I'm very confident about what we're doing.

Cool. Thank you. That's just really useful context. And then just in terms of health and hygiene. Just to sort of help us sort of how to think about the growth target for that particular division. What would be a reasonable target? What would be a reasonable target for revenue? Like is it to sort of double, or can you give a sense of what a low, mid, high case might look like without giving numbers where it is? And what would be required to meet those? For example, new large customers or growth with existing customers. You kind of mentioned a new opportunity with the sort of the current large customer?

So you'd be able to derive the sort of contribution or the growth of that sector from the information we've been provided. So, I mean, the customer we're talking about launched their product in October. So that's delivered about $2 million of revenue to us in the year-to-date New Zealand dollars. When customers set out these projects, they always have pretty large numbers on what they perceive the opportunity will be. And typically, the ramp-up to that is slower than what they might predict. We're certainly confident, Christian, that there's very strong growth in that, well above the headline growth for the Industrial division. So I think we'd be disappointed if, and based on the customer projections that if we don't sort of double the current revenue rate over the next couple of years. And then the other product developments, these are things we've known about for some time, and we did some early work on them. But it now appears that one of those projects is likely to come forward, which would sort of add to that momentum. So, there's probably as much visibility as we've got on at the moment in terms of what that's likely to materialize, too, because they've only recently launched the product in the market. So I guess, the sell-through for them will dictate what our next 6, 12, 18 months look like.

Thing we have done. We've made sure that we have the capability that if it does go soon, we can keep up.

Yes, we have the capacity.

And then just sort of you mentioned in the sort of commentary that pressures and leisure were abating, I guess, from the second half. So are you able to sort of explain why those pressures are abating given it is sort of a more discretionary retail exposure? Yes.

Yes. So it's not assuming a big bounce back or a significant increase in demand in the market. But we know our customers, and we have some key customers in North America, in particular, for this product, this application. And we know they've been working through inventory levels, so we know where they have got to. And actually, the guy that David talked about before, Patrick, who is responsible for that business is in the U.S. this week now. So he's visiting with customers and going to a pretty significant marine show. So part of the reason that the customers had as much inventory as they did was we really improved our lead time through the first half of last year. So previously, they had been dealing with the fact that we had a much longer lead time. And as we managed to improve that, it ended up that they got their inventory a little sooner than they otherwise would have been anticipating. So in some respects, we're architects of the slowdown we experienced in the second half of last year and the first half of this year. The market is not as strong as it was. So we're not anticipating or weakening on a massive bounce spec, but we're expecting to see some improvement in the second half.

Awesome. And then sorry, just one final one for you, David. The sort of growth agenda that yourself and Paul, I'm sure we'll be working on. Are you able to sort of just elaborate on that a little bit more? Like what type of things will be? What exactly that sort of agenda will include, and maybe some sort of sense of metrics that you'll be measuring yourself against?

Sales and profit. Sales up profit up costs. I think the key is that -- I'll use one customer, so a German-based customer, but they have a big presence in the U.S. If they get too much uncertainty of supply into the U.S. market from us, and currently, we manufacture must not all their product in Christchurch and ship it there. And then if there's a shipping issue, or they are not really in control of their demand. So to explain this month, we've done 2-year rates that they have paid for. So interestingly, some of our staff say, well, that's okay, because the customer pays, but it's a grudge purchase. So we don't want them to have to hear freight to keep up with their customers. To be fair, we think they could manage their customer base. You got to be careful how you say that to customers. I mean, they can annoy them. But the point is it will be a lot easier if we were supplying in market. Now, when we talk about supply in the market, it doesn't automatically mean manufacture and market. We can take away the uncertainty of shipping by us carrying inventory in the market. There's a cost to doing that, I understand. But a person that I rate high, and I think good discussions with is Paul Scheer. So this is an example where I think that Paul and I, not as distracted by the day-to-day, week-to-week stuff that's happening. We can meet maybe 3 or 4 times a year, formerly frame an issue like supply and possibly manufacturing in the U.S. market and just have there as a theme, get the critical people together for 1 or 2 days. Graham, of course, will be there and Tim. And then actually, bring a stronger strategic focus and take advantage of the knowledge and experience that people like Paul Scheer has as an example. But we also see the same issue in Europe. Europe just looks messy. And when I heard one of our key staff say we have to wait until they get sorted out, and that's been more than 12 months. That's not going to look for us. So one of the key things from my point of view is there is an opportunity to solve some of those issues. The customers can't -- they're too close to it, in that sense. It's without interfering and management, I mean there's a lot for management to do anyway. But we just think that -- I mean, again, I'm giving a view, globalization kind of slowed down or died more than 10 years ago. It's become regional. So it's regional when the U.S. is a key market. We really need to think hard about manufacturing distribution in market, not -- I would argue adjacent like Mexico, for example. And of course, that depends on the presidents and things like that. One other key person I should have mentioned, Martin Lee in China has done a fantastic job. He's been promoted to, the title helps him to get access to things. He's CEO China, but it is a title, but he would be the best purchasing guy. We have a great opportunity on the purchasing side. It's an area that we can do a lot more. And so, he will take a broader view for all businesses in China, accepting that. So that's one side of it. The other side of it, to derisk, we should be doing less in China and more in the states or more in the market. So it's getting that balance right. And I just think that clear of other responsibilities, Paul and I can add to whatever the senior levers should then come up with.

Sorry. We've got time just for another couple of questions. DL which I'm guessing could be Dougie. If you go first, and then we've got one more from Rohan, and then we'll have to wrap it up.

Hey, first of all, I just want to reiterate what John said, Dave, as shareholders, just want to express our graduate to the shareholders. We've done a fantastic job and shareholders have been well rewarded. And congratulations, Tim and Graham. I think the analysts asked most of the good questions. So just a quick one. Was there any sort of one-offs in this half result, given there was some restructuring in [ Wigram? ]

Yes, there's a one-off cost of about NZD 600,000 in the first half result.

Given the staff numbers have dropped by about 50%, how should I think about that in terms of labor costs?

So some of our staff numbers, Dougie, we managed our production activities, I guess, with a mix of permanent staff and temporary staff. So that in part accounts for the reduction in EPM.

All right. Okay. Thanks. Thank you, everyone. It's been a good ride. The ride will continue. So I look forward to looking at it with a different lens. Not going anywhere. Thank you very much.

Thanks, everyone.

Thank you.

Cheers.