Skellerup Holdings Limited (SKL) Earnings Call Transcript & Summary

All right. Tim says it's close enough to 10:00, so we'll get underway. Good morning. Thanks for joining this presentation on Skellerup's FY '26 results. As most of you will know, I'm Graham Leaming, the CEO; and with me is Tim Runnalls, our CFO. As per normal, Tim and I will provide an overview of the business, and then we'll take questions at the conclusion of the presentation. [Operator Instructions] l'll move to Slide 2. As the trends on the graphs on this page demonstrate, we continue to achieve sustained revenue and earnings growth alongside excellent returns on investment. Over the past 7 years, compound annual revenue growth has been 7% and compound annualized normalized net profit after tax or NPAT growth stands at 12%. Over this period, we've continued to focus on precision engineered products for high performance and conformance applications. We consider this fundamental focus provides us with ample opportunity. We are investing in market development to ensure we understand needs and to grow our reach, and in technical capability to translate opportunity into products and in our manufacturing platform to productively deliver the growth. The timing of our investments in people and equipment continues to be robustly considered, planned and supported to maximize the likelihood and speed of success and maintain excellent returns on capital invested. As shown on the graph here in FY '26, our ROIC was almost 25%. So we'll move to Slide 3. Focusing now on FY '26, a very good year for us measured by both the financial outcomes and the progress we've made investing in future growth. Firstly, the numbers. Normalized EBIT was up 14% on the prior comparative period, which was the prior record. And as the graph shows over the past 7 years, as we typically do, we are reporting our compound annual growth rate, and that's sitting at 11%. Revenue growth was realized in all markets, most notably the U.S. and across a broad range of applications we are focused on. Gross margins improved as we overcame the impact of tariffs and in the second half, raw material availability and cost increases arising from the conflict in the Middle East. Normalized EBIT excludes a $4.8 million non-recurring gain that Tim will cover more on later. Operating cash flow, also a record at $83.6 million, reflecting both record earnings and a lesser investment in working capital in FY '26 than we made in the prior year when we were building up inventories in anticipation of U.S. tariffs. These financial results mean we've increased the full year dividend to an aggregate of $0.30 per share, up 18% on the prior comparative period, commensurate with the increase in net profit after tax. Importantly, in market, we've established a direct presence for our dairy consumables in China, that will enable us to grow in a substantial market. Also, we talked about last year how we were establishing a converting and distribution facility in the Netherlands for our marine foam market. That's well established now, and it provides a platform not only for that business, but also to sell more of our products in continental Europe. We've also continued to invest in our product development capability and our manufacturing platform, most notably at our largest facility in Wigram. I'll go into more detail at a divisional level shortly. But first, Tim will provide more detail on the group financials and the key drivers -- sorry, the key drivers of the growth in group NPAT for FY '26. Tim?

Thanks, Graham. Turning to the 7-year financials. Apologies if some of this is a bit repetitive. Revenue is a record and up 10% on the prior year or up 8% in constant currency terms. The increase is broad-based with growth in the Industrial division of 9% and the Agri division of 13%. Foreign exchange rates were favorable throughout the year with the impact being a tailwind on revenue of approximately $10 million or 3%. Gross margin is up 1 percentage point from the prior year at 44%. Growth in both the Industrial and Agri division showing improvements on the comparative period through a combination of price increases, cost out, inventory management initiatives and product and market mix. Indirect costs were up $7.7 million or 10% on the prior year. Spread evenly with a mix of impact of the New Zealand dollar on translation. Investments in people with headcount up 4% as well as an increase in incentive costs and the necessary increase in property, marketing and travel and related costs resulting from an increase in service to customers and markets. Overall, this meant normalized EBIT was up $11.2 million. I note Skellerup has a fairly strong natural hedge, but we also hedge our underlying net currency exposures. This meant that the revenue tailwind I mentioned earlier of circa $10 million at the EBIT line was relatively neutral. Talking briefly to the concept of normalized EBIT and to ensure comparability with prior years and appropriately evaluate underlying business performance, we've reported underlying or non-GAAP EBIT in FY '26. We've included a full reconciliation between the GAAP and non-GAAP measures at the end of this presentation and in the annual report. The largest nonrecurring item was a net insurance gain resulting to a fire which occurred in 1 of our 2 continuous vulcanization or CV lines in Wigram in August 2025. For context, the revenue earned from products made on these 2 lines is around $9 million, less than 3% of group revenue. We were able to restart operations on the second line promptly at an increased capacity and have not suffered any loss of customers or sales as a result. We expect to have the new line installed and commissioned by the end of FY '27. The net insurance gain recorded in FY '26 is approximately $6.3 million. Partly offsetting this gain is a $1.1 million impairment loss on a right-of-use leased asset that was surplus to requirements and could not be commercially sublet for a viable rental. The lease was assumed as part of the acquisition of a business in 2019 and the lease ends within the next 12 months. Lastly, a small asset transfer was made to a manufacturing partner in Vietnam to address a historical importation issue. So the net pretax gain of $4.8 million is excluded from our normalized EBIT of $89.3 million. Moving to finance costs. These were lower again by $800,000 through a combination of lower market interest rates and a lower average level of net debt. The tax expense reflects an effective tax rate of 25.5%, down 1 percentage point on the prior year and is reflective of the proportion of earnings earned outside of New Zealand, particularly in the U.S., which attract a lower statutory rate of tax. The relatively lower finance costs and effective tax rate mean we're reporting an 18% improvement in normalized NPAT to $64.2 million. GAAP or reported NPAT is up 24% to $67.7 million. As Graham mentioned, dividend per share up 18%, in line with the increase in after-tax earnings and 92% payout ratio in line with the prior year and with the group's dividend policy. Operating cash flow was up 26% on the prior year, driven by the higher after-tax earnings and a relatively lower investment in working capital, as mentioned previously. In FY '26, we funded capital expenditure of $15.1 million to continue to invest in the business for future growth as well as a record dividend payout to shareholders of $52 million. As a result, our net debt has continued to reduce by $10.4 million on the prior year and is less than $2 million at 30 June 2026 or less than 1% of total assets. Moving to Slide 5 and the earnings bridge. As we mentioned, the growth in the Industrial division was broad-based. We continue to see growth in earnings from the key potable water and wastewater applications, particularly growth in infrastructural pipe sealing and tapware products in the U.S., new pipe sealing and smart metering solutions in Australia and continued market and product expansion for vacuum systems in the U.S. Roofing and construction demand was driven strongly by growth in demand in the Australian and Asian markets and a continued strong presence in solar applications in the U.K. Pleasingly, we've seen returning growth for U-DEK marine foam products in the U.S., particularly in OEM channels, which drives the sport and leisure growth. All other industrial applications with the exception of automotive have shown growth over the prior year. Demand for dairy consumables remained strong throughout the year, particularly in international markets. Change in incoterms with a key customer at the start of the year provided a onetime boost to earnings of approximately 1%. Growth with existing and new customers has contributed positively. Expansion into new markets has commenced. Graham will touch more on this later. The footwear result was flat against the prior year as higher volumes and revenues were neutralized by higher raw material costs. FY '26 corporate costs were slightly above the prior year, but remained well controlled at less than 2% of group revenue. I've spoken briefly to the FX movement with pretax revaluation and hedging losses above the prior year, impacting unfavorably on the outcome by $1.2 million post-tax. I've previously touched on the favorable changes in interest and tax with the outcome being the 18% increase in normalized NPAT for the year. Graham will now cover off some more detail on our key markets and applications.

Okay. Thanks, Tim. So moving to Slide 6. This shows revenue by geographic market and highlights the international business that Skellerup is with more than 80% of our revenue generated from sales in international markets or outside of New Zealand in FY '26. All markets increased absolute revenue during the past year with the fastest growth achieved in North America, Asia and the U.K. and Ireland. North America edged up another percentage point in FY '26 to contribute 38% of group revenue. Potable water, wastewater, dairy, sport and leisure were the notable contributors. New Zealand remains the next largest market. Whilst down 1 percentage point in share, absolute revenue was up $3.7 million or 5% on the PCP, primarily from increased sales into the dairy sector. European revenue share was down a percentage point as growth from dairy was partially offset by lower sales into industrial applications, particularly automotive. The Australian market shows being down a percentage point, but that really is in the rounding. It went from 12.5% to 12.4%. Like New Zealand, the absolute revenue was up $4.3 million or 9% on the PCP, from increased sales into potable water and wastewater applications and a recovery in the roofing construction space. As noted earlier on, Asia revenue share increased with growth from sales into roofing construction and dairy. U.K. and Ireland share also increased for the same reasons, growth in sales in roofing construction and in particular, solar and in dairy. Moving now to Slide 7, which provides revenue cut -- the alternative way by market application. Our 2 largest application areas, dairy and water contributed a greater than average share to the increase in group revenue. All other applications with the exception of automotive and health and hygiene maintained relative share. Automotive was down due to the slowdown in Europe. Health and Hygiene was impacted by customer supply chain change in the first half of the year. That customer was back at normal operating levels in the second half of the year. So now moving on to Slide 8 and a bit more of a focus on the Industrial division. So FY '26 was our sixth successive year of Industrial division EBIT growth. And over this period, the compound annual growth rate has been 14%. Potable water and wastewater was the most significant contributor. In potable water, our share into U.S. ductile iron pipe grew, reflecting the quality and reliability of our supply. Demand for products into U.S. tapware customers recovered on the PCP. And as Tim noted, sales of check valves and smart metering applications in Australia are building. In wastewater, sales in Australia were strong with growing use of plastic pipe and waste applications. In the U.S. and to a lesser extent, Australia and Europe, we continue to win share with our vacuum system solutions. Our team do an excellent job with continual product enhancements, delivering high-quality product at industry best lead times. Roofing construction is the second largest application area for the Industrial division. Growth continued in the U.K., albeit not as rapidly as in the preceding 2 years. Asian demand increased. Australasian sales increased a little, but the U.S. was slower than planned as we delayed some new product launches due to tariff uncertainties. Health and Hygiene was down slightly due to the first half, as I noted, when our largest customer suspended delivery whilst it made changes to its assembly operations. We continue to realize growth in what we term industrial control applications, particularly in the U.S., where our products are used to control air and gases in a range of applications, HVAC, appliances, et cetera. Freight and tariff costs were higher, but the margin impact was mitigated by price improvements, cost reductions and new product introductions. So I'll move to Slide 9 and some discussion on Agri. FY '26, our second successive year of Agri division EBIT growth, an increase of 12% over PCP. But notably, in constant currency terms, the increase was 16% at the EBIT level. As Tim noted earlier, whilst revenue was boosted by a weaker New Zealand dollar, our natural hedge and hedging arrangements gated this at the EBIT level. Just as a reminder, the Agri division comprises our dairy and footwear businesses. Dairy contributes approximately 80% of the revenue and footwear 20% of the Agri division revenue. The main driver of the growth in the Agri division results in FY '26 was increased sales of dairy consumables into international markets. And international sales now comprise 70% of the Dairy Group revenue. Sales in New Zealand, though, were also up and increased 11% on PCP. The growth came from sales of new and existing products and came from both OEM customers and our own branded products. And those of you familiar will recognize the brands of Conewango, maybe less so Evolution and Reflex and more recently, Thriver. So growth across the portfolio of OEM customers and their own branded products. The investment we've been making in modernizing and boosting our manufacturing capacity, most notably in Wigram, meant we efficiently and effectively delivered the increased demand. In fact, we've continued to operate some older equipment than we had anticipated beginning to phase out to meet that demand. Footwear earnings were flat in '26. Higher sales of specialty footwear in the U.S. were offset by anticipated higher material costs, freight and tariff costs. Sales in New Zealand, which comprised 65% of footwear revenue were relatively flat. Moving on to Slide 10. Tim is just going to cover off an update on ESG matters.

Thanks, Graham. Skellerup's continued to report under the New Zealand Climate-related Disclosures or CRD regime. This has included the development of a further 4 emissions reduction plans for our major manufacturing and distribution sites during the year, bringing 63% of our Scope 1 and 2 emissions under such plans. We remain on track with these plans and are implementing commercially viable emission reduction initiatives across the group with several of these completed or underway. The measurement of greenhouse gas emissions continues to be an onerous task, particularly Scope 3 emissions. However, with investments in better utilization of our systems, we've made meaningful progress in streamlining this process. We continue to drive efficiency in this process to reduce the burden of this on our teams where this makes good commercial sense. Positively, our Scope 1 and 2 emissions continue to reduce. Relative to growth in activity of the group, these have reduced a further 14% on FY '25. Whilst we endeavor to reduce our consumption, it should be pointed out that these emissions are largely determined by the electricity grids in the countries in which we operate, and we're therefore somewhat unable to control the outcome. Pleasingly, in FY '26, we've also seen a successful trial of a used dairy rubberware recovery scheme in the North Island of New Zealand. The trial carried out in conjunction with ag recovery has proven successful and is moving forward into a commercialization phase, which will see used dairy rubberware diverted to be used as a feedstock for heat production in the production of cement. On the social side, very clear goals exist around health and safety, which is zero harm. We continue to maintain good processes, culture and focus across the group. Our total injury rate, apologies, shows that we must continue to get better as we continue to suffer both medically treated injuries and long-term injuries -- lost time injuries, sorry. Working arrangement flexibility continues to be a lever in retaining and attracting talent to Skellerup. The premise of this is that arrangements need to work for the business and for the employee. On the Board, the Board remains unchanged and is a highly valued mix of excellent skills, experience and tenure. Graham will now provide a future view of the group.

So looking ahead to FY '27 and beyond, there's no change in our fundamental business strategy and model. We continue to see this as scalable and a platform to deliver ongoing growth. So in that regard, we remain focused on precision engineered products for demanding applications. The opportunities we have in the markets and application areas we are focused on when we have conviction we can overcome the impact of economic cycles, although, of course, we're not completely immune to these. We've been investing and maintaining our expertise in our fundamental strengths of over and co-molding polymers with other materials. So the technical capability to perform these functions, including integrating more of these to give a higher value solution and proposition to customers, we continue to build those teams. And as I touched on earlier, we've been investing in manufacturing modernization and capacity in our facilities. An important thing I wanted to stress also is investing in our market presence. More than half of our people are based in international markets. And we're carefully expanding our teams in the markets that were strong. The gating factor for us in terms of making the decision to add more personnel is often ensuring our leaders and teams can support them to ensure and accelerate their success in roles. We're selling technical products, and it's not just a case of having another body to roll up into a customer and offer that solution to a customer. We're also expanding our presence in markets where previously our direct presence has been smaller, including China and Europe. For example, in the dairy space, we've set up our own small team in China now to capitalize on the opportunities we see there. And we're looking at adding some further personnel in Europe in that regard. Just a reminder, our business is a mix of OEM customers where we supply key products and components and brand, but also branded products. For OEM customers, we are focusing on deepening our relationship with existing customers and widening our reach with new customers in the application areas where we have strength. For branded products, we are privileged to have some long established and well-regarded brands, which provide us with the opportunity to carefully leverage for growth. You can see some images at the bottom of the page here and some of those may be familiar to you. On the left-hand side, there is a product, as I look at it, that we call the Battleship, which is going on to taller roofs in the U.K. We just launched that product, and that provides a really effective way for -- particularly around solar installations for cable entry into the application. Alongside that is a check cartridge that we released or began to manufacture this year for a large OEM customer in the U.S. and cleverly is provided to them inside a sleeve that you can see in the image there to make for an easy installation as both a new product, but also as a replacement product in heating and water control behind the wall in the U.S. for large residential and commercial buildings. Alongside that is the Thriver, which is our calf-feeding thing that we launched in FY '24 -- FY '20 -- sorry, FY '25. In FY '26, as the results went to plan, and we've doubled our revenue from sales of that product, both into domestic and international markets. And we continue to see significant opportunity for this product range because the nature of the product differs by the markets that we sell it into. It's a slightly different product in the U.S. and again, opportunities to customize that for the European market. In the middle there, we have the first of our shingle roof deck-type products that we've launched in the last quarter of FY '26, which will provide good opportunity for us going forward. And then alongside that, you see a milking liner that's just been launched into the U.S. market loaded in a recyclable shell. Alongside that, another pretty technical looking product that is supplied into the U.S. to an OEM customer that's used as a seal and gas regulation. And on the far right-hand side there, you see the Mio boots that we recently launched during the final quarter of FY '26. So that's our first foray, if you like, into the lifestyle market in New Zealand. That's been a successful launch for us. We've just taken delivery of further product because naturally, when you launch a new product in the market, you enter cautiously and don't build too much inventory in advance. We probably should have built a little bit more. So that product has gone well for us in the New Zealand market, and we will launch that into the U.K. in the autumn this year, the Northern Hemisphere autumn. So realizing growth as is evidenced from discussions we've had in the past and what I've just noted there and maintaining our increasing share depends on consistent high quality and delivery. It's a pretty easy-to-understand concept and arguably harder to differentiate with. We have something that was really notable to me through our business planning sessions this year was our leaders attributed to some extent, the growth of our business being linked to these simple and critical business essentials, consistent quality, reliable delivery, and we'll not lose sight of this. Ultimately, to pinch a phrase at one of our directors, growth comes from people and products. We have a very good team, and we're developing and manufacturing very good products, and we'll continue to invest in doing this well. Move to Slide 12, just to close. A question I was asked a few years ago was how people should think about Skellerup growth prospects and was GDP growth plus some delta a way to think about that. So I thought it was helpful just to show this graph shows the increase in our EBIT through the past 7 years, FY '20 and FY '26, mapped against GDP growth for our key markets and shows that our EBIT growth on a cumulative basis is well ahead of GDP growth over that period. So we're focused on continuing to design and manufacture great products to deliver excellent returns for shareholders. Thanks for listening. We'll take some questions. As Tim noted earlier on in the presentation, there are some additional slides, which will give you some further context around the results. But Tim, over to you, who are we going to go with first?

I think Rob had his hand up first pretty much as soon as he joined the call. So maybe, Rob, if you want to unmute your mic and go ahead.

Congratulations to both you and the wider team and that's a really good result. First question is on revenue growth. So it looks to me like the constant currency year-on-year revenue growth was about 7% in the first half, and that may be accelerated to something around 9% in the second half. Could we talk about the drivers of that acceleration and how sustainable it is?

Yes. In the first half of the year, Rob, you remember that the Agri result was in part boosted by a change in Incoterms. So the Agri revenue was the fastest-growing division in the first half. And in second half, we had a stronger contribution from the Industrial division. So I mean, 7%, 9% are pretty similar rates of growth. If you look at our revenue growth over a reasonable period of time there over a 7-year period, we've been at around about a compound annual growth rate of 7%. For the preceding 7 years, it's clear that the Industrial division is growing at a faster rate than Agri. But as we've highlighted in the last couple of presentations, we think with the portfolio of products and customers we have in the Agri business now that there's an opportunity to grow that at a faster rate going forward than what we have historically. So it's always difficult to sort of put a number on it. I think probably the best way to characterize it is we've talked about this goal of maintaining our compound annual growth rates for earnings of around that sort of 11% to 12%. And we talked about how we would need to have a slightly bigger contribution from revenue going forward to achieve that. And I think that's one of the things we've achieved in this year.

No, that's great. I guess what I was highlighting, as you say, they're similar numbers, but it's pleasing to see an acceleration and hopefully bodes well for the year ahead.

Yes. I think we highlighted in there, the demand across the board in the Industrial division has been strong. So potable water, wastewater, and that's both existing products and new products, our foam products in the sport and leisure sector, roofing construction. We actually had a revenue reduction in the North American market for roofing construction in FY '26, which is the first time in a number of years. And we would expect to certainly reverse that trend in FY '27.

But maybe put another way, you're not seeing things -- are you seeing things slow down in FY '27 to date or it's pretty similar to the second half?

Early days, we're 6 weeks into it. But no, we haven't seen any -- it's trading as we would expect. For example, in the dairy sector, there's a seasonal high in New Zealand, which runs through that sort of May, June, July period. So we're seeing normal tapering off there. And we continue to see strong demand in our North American markets and international markets across both dairy and industrial applications. So yes, we're seeing things pretty steady as she goes in that regard. No material change.

That's awesome. And apologies, it cut out a little bit when you guys were talking about there was this fire in Wigram. I think you said you had a few lines down in FY '26. So -- is it right for my takeaway to be that there might be a boost to the growth in FY '27 from those lines coming back online? Or is that not really a big deal?

No, no, not at all, Rob. We run 2 or ran 2 identical lines, and we used to run product down each. Both lines used to run for roughly 3 days a week, mix of products, et cetera. So both lines were down for a period. We didn't lose any orders at all. We managed to meet all customer orders through FY '26, and we're now running full noise on the single line until the replacement line arrives in FY '27. But we don't see any revenue growth of that product line at all. We lost nothing in FY '26. And outside of organic normal growth, we don't expect to see a sort of catch-up of demand per se.

I think there was an interruption for a short period. And frankly, our people did a superb job to get operating again on the alternate line and essentially run that line at a higher intensity and maintain all the business. So it wasn't a dip in revenue that will be offset and recovered in FY '27. All other things being equal, it would be similar, notwithstanding we're always targeting opportunities to grow, obviously.

Got it. Got it. And could you just give a high-level overview of your assumptions for the impact of tariffs and refunds in FY '27?

FY '27. So as you know, we've moved on to a 12.5% tariff regime under, I think it's called Section 103 across all of our markets. That's substantially lower than what we were facing at this time last year. And what we think is through the good work of our teams in market, both through price increases, cost-out activities and the launch of new products at better margins. We think the impact of tariffs in FY '27 will effectively be fully offset by the activities that we've taken. On the refund side, yes, we've submitted all our refunds for the IEEPA tariffs under the strangely named CAPE Portal. We've started to receive some of those refunds. It's very hard for us to speculate when we'll receive refunds. If we'll receive refunds, we understand certain of the refunds have been challenged through the courts still. So it's pretty -- I think it's quite hard for us to speculate what that number is going to be in FY '27.

The most important thing, Rob, is okay, the tariffs have just gone up a little bit again, obviously, from 10% to 12.5%. I'm remembering that on our products manufactured out of China, there were already tariffs from the first Trump term, which we changed. So we're paying tariff at a much higher rate than 12.5% out of that market. But I think the most critical thing is when we sat here 6 months ago, we said, we've made good progress in mitigating the impact of those tariffs. And just after our half year release, there was a reduction in tariffs. So we enter FY '27, whereby, as Tim said, net-net, we believe the tariffs that have been imposed in terms of where they sit now, we've offset the impact of those with pricing changes and cost reductions.

I'll slip one more in, if I may.

Sure.