Nylex LimitedTitle: Open Briefing. Nylex Ltd. MD on 2005 Interim...

Nylex Limited

Title: Open Briefing. Nylex Ltd. MD on 2005 Interim Profit Result
Record of interview:
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Nylex Limited recently reported a 19 percent increase in EBIT to $21 million and
a 43 percent increase in EBIT from continuing operating units to $20 million.
Your full year EBIT forecast at the AGM in November was a range of $32 million
to $34 million. Given you’ve already achieved 63 percent of your forecast, why
haven’t you lifted your target range for the full year?
MD Glen Casey
While we’re pleased with the performance and outlook for the continuing
businesses we are less certain in relation to the Automotive businesses undergoing
divestment. The first half operating profit from Automotive was $0.9 million and
the Automotive performance in the second half is less certain. Its contribution will
be impacted by the timing of the sale. Despite the uncertainty on Automotive we
expect full year EBIT to be at the upper end of the forecast range of $32 million to
$34 million.
In relation to net profit, we’ve reported $12.7 million in the first half year before
considering losses from divestments. This equals 84 percent of our previous full
year forecast of $14.4 million to $15.7 million, reflecting solid growth from the
continuing businesses and the lower effective tax rate.
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What tax rate do you anticipate in future?
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MD Glen Casey
We’re confident we’ll be able to take advantage of tax losses during the next two
years and are presently finalising our view on the quantum. A tax rate of between
zero and 10 percent is a reasonable indicative range over this period.
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You’ve provided for losses of $40 million for the sale of your Automotive
businesses. Why haven’t you achieved an exit from the Automotive business to
date?
MD Glen Casey
There are three major reasons for this.
Firstly, the increasing prices of raw materials from petrol-related component
suppliers has caused further deterioration in earnings. Secondly, the Mitsubishi
volume has reduced as a result of a slowdown prior to the start-up in August of
their new model production and the Holden volume has fallen in the last three
months as a result of operational problems at Holden. Thirdly, Ion Limited’s
collapse has further compounded the difficulties in securing buyers for our
Automotive businesses.
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What gross proceeds are you targeting from the sale of Automotive assets and
when are you likely to close a deal?
MD Glen Casey
There are interested parties presently progressing their due diligence and we think
we’ll sell the Automotive businesses prior to the end of the 2005 fiscal year. We
expect gross proceeds of approximately $50 million from the sale of these assets,
which should enable us to achieve our year end net debt target of $115 million,
and to fund our working capital requirements in our growth areas.
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If you complete the Automotive sales you’ve planned, what automotive exposure
will you retain? What annual revenues do you expect to generate from the retained
Automotive business?
MD Glen Casey
We’ll be focusing on the fuel tank for Holden as well as the moulded carpet for
Toyota. We expect our retained Automotive business to be profitable and aim to
be able to generate revenue of $80 million per annum.
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Nylex has been in restructuring mode for a few years. To what extent have you
progressed in the last six months?
MD Glen Casey
In terms of Plant Hire, we’ve increased EBIT by 82 percent as a result of three
factors. Firstly, we’re now realising the full benefit of a reduction in operating
costs. Secondly, the upgrading of the fleet has dramatically reduced repairs and
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maintenance costs. Thirdly, our focus on road highways and infrastructure has
enabled us to achieve strong benefits in Plant Hire.
In the case of Consumer Products, we’ve consolidated three businesses into one
which is now operating in a purpose-built site in Somerville. This contributed
about $800,000 in costs to the first half results. Consumer Products is wellpositioned
to take advantage of the benefits of these initiatives going forward.
Each of the Industrial Products businesses are performing in line with
expectations, with the exception of our Decorative business which is lagging. In
terms of our restructuring progress within the Industrial Products division, we
consolidated our manufacturing operations of Materials Handling and established
a focused Decorative Business which is still in the early stages of development.
We bought three water businesses, which we’ve already consolidated. We opened
our own facility in New South Wales, which is now fully operational and
performing in line with our expectations. We moved the petrol tank manufacture
into a new site next to Holden in Elizabeth, South Australia. We also are in the
process of signing a new joint venture agreement with a moulded carpets business
in China and expect to begin manufacture of moulded carpets in China in May.
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What will be the focus and strategy from the beginning of FY06?
MD Glen Casey
We will pursue growth markets in the three major streams of Plant Hire, Consumer
Products and Industrial Products, where we’ll provide branded products through
our sophisticated distribution network to the consumer sector or value added
products to the industrial sector. We’ll also be taking advantage of the significant
water opportunities through our Water Solutions business. Through Plant Hire,
we’ll focus on rental and leasing when pursuing roads and civil infrastructure
opportunities going forward.
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You’ve decided against declaring an interim dividend. What is your strategy in
terms of allocating capital resources?
MD Glen Casey
We won’t make a decision on a dividend policy until this fiscal year is completed
and until we have clarity on the proceeds from our divestments. When we
understand what our final operating results will be, we’ll then be able to determine
our dividend policy.
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In the latest six months, AH Plant Hire increased EBIT 82 percent to $5.1 million.
Do you see this sort of business being able to sustain this level of return?
MD Glen Casey
Yes we do. The road area which comprises the majority of our focus has $11.3
billion of government funding over the next four years that is directly related to the
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road network. Our focus is in the road network and the spend is clearly committed
over the immediate period.
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The Consumer Products division’s decreased EBIT 14 percent to $5.6 million.
Why aren’t you getting any positive traction within this division and what’s the
outlook?
MD Glen Casey
The sales revenue was impacted by Hose sales which were impacted by the rainy
season over summer, particularly in Victoria, and water restrictions. Esky and
Gardena sales were also impacted by the poor summer. Also, the restructure of the
business into a purpose-built facility and the establishment of a new computer
system cost $800,000 in the first half. The outlook is positive given our branded
products strategy and our strong distribution system.
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Industrial Products increased EBIT 12 percent to $15.3 million. What were the
factors which resulted in this improvement and what’s the outlook for this
division?
MD Glen Casey
The major improvements were driven by the Water Solutions business and
Materials Handling business, both achieving a significant improvement in
performance. Our core Automotive division was also up on the previous first half.
Although Decorative was down, the outlook for Decorative remains positive. The
outlook for our retained Automotive business is strong with moulded carpets to be
manufactured out of China from May onwards. And now that we’re operating a
new petrol tank manufacturing facility in South Australia, we expect to realise the
benefits of a lower cost structure in the second half. The outlook for Materials
Handling is also positive.
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Could you provide a general update on your Water Solutions business? How has it
tracked against your expectations since its launch in the first half and what
contribution are you targeting for the full year?
MD Glen Casey
We’ve built a purpose-built tank manufacturing facility in Sydney which is now
operational and supplying products. The Brisbane Water programme is on track.
We’ve secured a contract to supply 30,000 houses with Nylex Flomaster water
efficiency retrofits to the Gold Coast Council over the next three years. We’re also
in the process of finalising an exclusive supply agreement to supply products to
more than 200,000 water efficiency retrofits over the next three years in New
South Wales and Queensland. The full range of Nylex water products is now being
distributed by major resellers, including Bunnings and Mitre10.
We’re now starting to see more enquiries generated for future business from
builders as a result of the legislation in Victoria and New South Wales which will
take effect in July 2005, requiring all new homes to have a water tank. As a result
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of the launch of our water products on television during the Australian Open
Tennis, the Nylex website enquiries ran at over 35,000 in January.
We’re on target to achieve about $30 million in revenue from the Water Solutions
business in this fiscal period.
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How is the pilot water project for Brisbane Water progressing? When is it likely to
impact your results?
MD Glen Casey
We’ll have completed the first pilot houses for Brisbane Water by the end of next
week. Discussions for the full roll-out to 5,000 homes from May 2005 are
progressing positively. We expect it to impact our results from May.
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What is your strategy for implementing similar water programmes elsewhere?
MD Glen Casey
We’re in discussions for similar programmes in Sydney and Victoria, which are
progressing positively. We’re trying to duplicate the model in other States.
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Thank you Glen.
For further information on Nylex Limited visit www.nylexlimited.com.au or call
Glen Casey on (03) 9533 9333.
To read previous Nylex Open Briefings, or to receive future Open Briefings by email,
please visit www.corporatefile.com.au.
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